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Why the Morrison government debt plan is a bad idea
The Morrison government is about to lock future Australian tax payers into more than 30 years of extra government debt and 30 years of tax-payer funded interest payments that go with that debt.
Next week, the Australian Office of Financial Management will borrow money on behalf of the government that will not be repaid until February 2050.
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Many people not even born yet will have the burden of paying back that debt. Think of someone who will be born in 2025. They will be entering the workforce as a young person in about 2045 and then be saddled with the debt raised by the Morrison government in 2018.
It is unlikely that anyone will remember the time that money was borrowed.
It was five years ago that the Coalition swept to power on the promise of reducing and even paying off government debt.
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Recall the previous Labor’s government “debt and deficit disaster’?
The Coalition was going to fix it.
Labor left the Coalition with $273 billion of gross government debt. Today that figure is $534 billion, an increase of $261 billion in total or $52 billion a year.
The debt management of the Coalition government is all the more damning because in their five years in power, they have enjoyed the spin off from strong world economic growth, unlike Labor who had to manage the budget and the economy as the world slipped into the deepest slump since the 1930s Great Depression.
Under the Coalition, commodity prices have been strong, helping to deliver a river of revenue to the Treasury.
Alas, poor management of spending and the budget more generally has seen the debt burden rise continuously over the course of the last five years.
That said, there is at last some evidence that the move to a balanced budget and even small surplus is in the offing.
Such has been the recent strength in iron ore and coal prices, thanks again to the world economy and not any local policy changes, that the 2019-20 budget will likely to register a surplus. And if the economy can maintain an even keel over the medium term, there will likely to budget surpluses beyond that.
Which begs the question, why is the government today wanting to borrow money over a 32 year term?
Is it because it has little faith in the medium term budget numbers or is it meeting unquestioned market demand for such long duration government bonds?
Other countries have bonds of such duration, and even longer, but that is largely because their levels of government debt are many multiples of Australia’s and they need to lock in debt over such an extended period.
Australia simply does not need to borrow over such a time frame.
Of course, governments need to manage their debt. It is important that they borrow at the lowest possible interest rate and don’t borrow too much or too little.
In broad terms, government’s borrow money to cover the period of time when the budget is in deficit, but they also need to borrow to cover the refinancing of existing debt that falls due.
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This is how the AOFM and its predecessors have functioned for many decades. And it has worked well with generally prudent and careful borrowing programs.
Locking is debt for 32 years is testing this prudence.
It is not fanciful to think that the budget could be on the cusp of 5 or more years of decent sized surpluses, especially if Labor implement their policies in negative gearing, capital gains tax and dividend imputation.
A more prudent approach to government debt management would be to borrow over a somewhat shorter duration and avoid locking in too much debt for too long.
If, in the years to come, the budget balance falls short, then by all means add to the borrowing task. But in the mean time, the poor yet-to-be-born-kids will be paying off the debt the Morrison government is borrowing now.
