Australia focus
Budgets, debt and magic tricks
Once a year on a cold Canberra Tuesday night in May, Australia’s treasurer ceases to be the overseer of the nation’s coffers and transforms himself into a magician.
The feats of sorcery the treasurers perform are a sight to behold. With the stroke of the pen, government debt is slashed; a sprinkling of optimistic economic assumptions transforms budget deficits into surpluses; and a change in accounting policy makes vast sums of cash magically appear in the budget papers.
The current Treasurer Scott Morrison is no exception. Tomorrow night, he’ll pull on his wizard hat and slice the government debt into two parts – good debt and bad debt.
As we learned about cholesterol a few years ago, it seems there is also “good” debt.
In a speech in the lead up to the budget, Morrison said good debt was used to finance spending that boosted productive capacity; bad debt financed recurrent expenditure such as health and welfare.
Morrison argued the government needs to “increase the visibility on good and bad debt”.
For the first time, the budget will start to split the debt across portfolios so voters can see which areas accumulate debt and why.
“These changes will make clearer the share of expenditure that is contributing to investment that increases productive capacity and produces future income, and the debt that is being incurred to deal with everyday expenditure,” Morrison said.
The concept of good and bad debt is relevant when it comes to household finances. “Good” debt is efficient debt that is used to create something or buy an asset, such as borrowing for education or buying a house. “Bad” debt is usually frivolous – a new speed boat or a credit card binge on the latest fashions.
But to divide the nation’s borrowings into debt that can expect a visit from Santa Claus and debt that’s too naughty for Christmas presents is nonsense.
Making land appear from nowhere is beyond the powers of even the most magical treasurer.
Ultimately it’s up to the government to decide which pot receives more of the government’s operating revenue and which pot increases its borrowings.
It won’t change the fact that government debt is ballooning towards half a trillion dollars. The money will still have to be paid back, regardless of what the government chooses to call it and ratings agencies won’t care too much about Morrison’s distinction.
The Treasurer says the change to the way debt is classified will give the government room to increase borrowing for big infrastructure projects.
This suggests that the government is planning an infrastructure spend up in the coming years. So far we know the budget will commit funds to building a second airport in Sydney and an inland rail link between Melbourne and Brisbane.
In fairness to the government, whatever it decides to call the debt used to fund these projects, there is no doubt they are worthwhile projects that should make for a more efficient economy.
Making housing affordable again
The budget is also likely to contain increased spending on roads and rail in our capital cities.
This looks like the most effective thing the government will be able to do to ease the housing affordability crisis besetting Sydney and Melbourne in particular.
There could be other budget measures, such as savings concessions for first home buyers and incentives for older people to move out of the large and largelyunused homes.
But the only way to really fix the housing crisis is to build more houses in places where people want to live. That means increasing the supply of land.
But making land appear from nowhere is beyond the powers of even the most magical treasurer.
This is where infrastructure spending comes in. In a way, new roads and rail make new land appear by opening up new areas to housing. A better road or train service means that people will be able to get to work more easily. Houses in that area therefore become more attractive, taking price pressure off existing housing.
Growth optimism
Many of the numbers in the budget will hinge on what some economists say will be overly optimistic growth forecasts.
Treasury is this week likely to forecast gross domestic product growth rebounding to over 3 per cent in coming years. This is important because the more an economy grows then the more personal and company tax the government collects and hence the budget position is stronger.
But economists wonder if a sustained growth rate of 3 per cent or more is realistic. Household consumption is soft and wages growth is weak. On top of that, iron ore prices have slumped in recent weeks and are down 17 per cent for the year. If the forecast growth turns out to be an illusion, then any return to surplus will be something for another government to magic away.