Debt phobia is doing long-term harm
The Coalition Government is still paying a heavy price for Tony Abbott's "ability" to simplify complex policy issues down into three-word slogans. His promise to "stop the debt" worked a treat for him in opposition but it made him look a failure as Prime Minister when debt grew rapidly on his watch.
[This article was first published in the Australian Financial Review - read here]
But the damage the "debt is bad" messaging has done to the Australian economy is of far more significance than the harm it did to Mr Abbott's ego. In the past 10 years Australia's population has grown by 3.7 million. But, as every commuter and small business knows, our spending on infrastructure is barely covering essential maintenance let alone growing rapidly to meet demand. We even slashed our planned investment in the NBN, not to make it better, but to make a political point.
Any business leader who actually believed that to borrow money is to live beyond your means should be sacked. But despite the absurdity of the claim the former head of the Business Council of Australia, Tony Shepherd, repeated the sentiment endlessly. Of course as chairman of Transfield, Shepherd oversaw a corporate debt increase of $600 million during his reign from 2005 to 2013.
Australia does face hard economic and financial choices, but scare campaigns about debt are now as ineffective as they have always been disingenuous. To soften the public up for welfare cuts Shepherd's "Commission of Audit" made dozens of references to the cost of population aging but it provided no analysis of the cost of population growth. Similarly, the intergenerational report has trained us for decades to fear the cost of older residents not the budgetary cost of providing infrastructure for the newer ones.
The fact that supporting rapid population growth costs a lot of money up front does not mean it is a bad investment. But like evaluating the long run returns on investment in education, preventative health care or R&D, evaluating the net benefits of rapid population growth requires a lot more subtlety than cheering when the budget's cash flow statement is in the black and booing when it is in the red.
Falling into same trap
Some business leaders embrace the econobabble of the "structural deficit" to suggest they have a more sophisticated view of fiscal policy than Shepherd, but econometric attempts to remove the impact of the business cycle on welfare spending and tax collections from this year's budget still fall into the same trap. If we build bridges, schools and sewers to cope with population growth those assets will last for 50 to 100 years. There is absolutely no economic reason why the cost of infrastructure that delivers benefits for a century should be repaid in the next year, or the next seven.
But there are political reasons. Conservative governments and the BCA have used the necessity to build new long lived infrastructure and the fiction that "debt is bad" to create a hammer and anvil designed specifically to crush public spending on services and welfare. The problem is that the business community never anticipated that it might be infrastructure spending, rather than welfare spending that would fall victim to the "budget emergency" they pretended to fear.
And now we have the spectacle of Scott Morrison trying to remind everyone that there's "good debt" and "bad debt". While his message is completely right, having cried wolf for five years, the salesman is completely wrong.
Australia is one of the richest countries in the world. We are not broke, as a nation we are richer than we have ever been. We can't afford to do everything we want, but we can afford to do anything we want. Australian voters are now more scared of burdening their children with crumbling infrastructure than they are of losing a AAA credit rating.
It is not just politicians who can be populist. Just as Tony Abbott used energy policy to score political points, the leadership of the Australian business community has feigned concern about debt in order to achieve cuts to services. Now the electorate has an unhealthy fear of debt, and it no longer trusts government or business leaders. It's obvious how we got into this mess but it is not obvious how we can get out. Fewer lies would be a good start.
Richard Denniss is the chief economist for The Australia Institute