That’s the question we are posing in On Line Opinion’s May feature, and a recent news item might make it more newsworthy than I at first thought.
A 2010 paper by Harvard economists Reinhart and Rogoff was thought to show that growth suffers when a country has debt in excess of 90% of GDP. But the research was wrong, and the authors have admitted their mistake. (Bizarrely I discovered this fact at Climate Audit, a blog devoted to the statistics of climate change).
But does this really change anything?
I’ve always been skeptical that governments should always run surpluses and never have deficits. That’s not how I run my business. But then a business is not a government.
However, for businesses and for governments, it all comes back to one question – “If you have borrowed money, are you getting a higher rate of return on what you are using the debt for, than the interest on your borrowings, and is it enough to compensate you for your risk?”
In those terms the current Australian government debt doesn’t stack up. The money is being borrowed for living expenses, so there is no return on investment.
If it were being borrowed, at the depths of a recession, to put in place infrastructure for the next up-tick of the business cycle while contracting prices were at rock bottom, that would be another matter.
But we are at the top of the boom, and the largest bit of infrastructure they are building is the NBN, which is a totally unnecessary piece of infrastructure (and yes, I know it is an off-balance sheet item, however that doesn’t make their position any better).
Even so, I have no end of people trying to convince me that debt is not a problem for countries with a sovereign currency, because they can just print money to meet their obligations. While that might be true in the short-term, it can’t possibly be true in the long-term as repayment will have to be made via taxes, or inflation, or both.
So, while I share the majority view on Australia’s debt at the moment, in different circumstances I could be of an entirely different point of view.
I wonder where the balance will end on our feature?