Date posted: 26/10/2016 3 min read

Debt free notions threaten better policy

Unless the debate goes beyond "budget surplus good, budget deficit bad", the governments' capacity to improve the lives of all Australians could be needlessly constrained.

in brief

  • Australian taxpayers could be unwittingly risking their economic welfare by accepting the simplistic arguments of "budget surplus good, budget deficit bad" that are consuming the national debate on debt and deficits.
  • In the right circumstances, raising public debt can improve outcomes for individuals, businesses and governments – with benefits lasting for generations.
  • Without a change to the current fiscal strategy, fiscal rules and institutional framework, the risk is very real of poor policy decisions in the future.

What's the debate?

The Australian policy debate has become overly consumed by debt and deficits – and the size of government - at the expense of policy flexibility in addressing long-term economic challenges.

Without a change to the current fiscal strategy, fiscal rules and institutional framework, the risk is very real of poor policy decisions in the future.

The decisions we make today will have an impact on generations to come. The overemphasis on achieving surpluses and eliminating debt at the expense of sound policy may hinder governments' capacity to improve the economic welfare of Australians.

Our future[inc] paper Public Debt & Deficits highlights the tax cuts implemented during the temporary mining boom a decade ago and the stimulus measures passed at the onset of the GFC as examples of policies created with little regard as to their long-term fiscal impact.

“The legacy of these policies is evident in political debate today, which is too often consumed by debt and deficit to the exclusion of all else."
Rob Ward Head of Leadership & Advocacy at CA ANZ 

"It overlooks the fact that not all debt is bad and that some debt, if deployed well, can lead to better intergenerational equity outcomes in the future,” Mr Ward said. 

"Infrastructure is a good example - a huge debt was incurred in the 1920s to develop the Sydney Harbour Bridge, to create an asset that remains critical to Sydney’s economy today.” 

An agency independent of Treasury and other central agencies should be tasked with the role of defining the long-term structural budget balance (SBB) and assessing the impact of proposed policy measures over a 10-year timeframe.

The PBO is readymade for this role or a new body similar to Britain’s Institute for Fiscal Studies or the German Council of Economic Experts (Germany’s ‘Wise Men’) is an alternative.

Lacking the appropriate framework, it is not surprising that the public does not realise the limitations of focusing mainly on debt reduction. Only a public that is better informed about fiscal policy issues will change this situation. That will happen only if independent bodies provide sufficient oversight that helps ordinary citizens fully understand the longer-term consequences of big budget decisions.

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