Finance Finance News No need to worry about paying off government debt, says think tank
Updated:

No need to worry about paying off government debt, says think tank

australia-coronavirus-spending
Per Capita said public debt should be used to boost Australia's productive capacity. Photo: Getty
Share
Twitter Facebook Reddit Pinterest Email

Australians shouldn’t worry about rising public debt as the federal government can roll it over indefinitely, a think tank has said.

Instead, governments should be encouraged to borrow even more money to protect jobs and boost economic activity.

Using public debt to fund investments in critical infrastructure, as well as education and training, would boost the nation’s productive capacity and help it service the debt through stronger economic growth, argues progressive think tank Per Capita.

It says the “virtuous circle of public investment leads to higher wages and profits and thus to a broader tax base,” which allows government to either pay down the debt or keep investing in economic productivity.

Per Capita makes the case for sustained government spending in a new report that describes growing fears over how to pay for the government’s coronavirus support measures as “largely misplaced”.

Report authors Emma Dawson and Matthew Lloyd-Cape argue this is because the federal budget is not like a household’s, as governments borrow against the productive capacity of the economy, which unlike the working lives of home owners has an infinite lifespan.

This means governments never need to pay off their debts completely.

All that matters is whether they can meet their repayments.

“The virtuous circle of public investment,” according to Per Capita.

“Australia will never ‘retire’. It will continue to generate income through productive economic activity,” the authors wrote in the report’s introduction.

“Therefore, unlike a household, the federal government can roll its debt over indefinitely, provided the nation’s economic activity continues and Australia’s productive capacity operates to its full potential.”

Per Capita references research by the International Monetary Fund arguing that advanced economies “in good standing” like Australia can manage high levels of public debt as long as their economic growth is higher than the interest paid on their debt.

It comes after the Reserve Bank of Australia last month launched a form of quantitative easing to drive down interest rates on three-year government bonds to 0.25 per cent.

Nevertheless, Per Capita points out that Australia’s public debt-to-GDP ratio (roughly 20 per cent) is much lower than other advanced economies’.

And although future generations will inherit an economy with higher levels of public debt, Per Capita argues they need not suffer as a result, so long “as we prioritise the maintenance of economic activity to support the jobs and incomes our children need to build a good life”.

“During WWII, large parts of the economy were commandeered toward the war effort, and government, unions and the private sector all looked for ways to expand our economic capacity through innovation and large government investments,” write Ms Dawson and Mr Lloyd-Cape.

“This led to a tripling of public debt in just six years, to over 120 per cent of GDP by 1946 – its highest ever level.

“Yet Australians were not ‘paying off this debt for generations’. Rather, the debt was returned to pre-war levels in around a decade.”

Source: Per Capita

Per Capita’s release comes after reports suggesting Prime Minister Scott Morrison is considering passing big business tax cuts and industrial relations reforms to support the economic recovery.

The think tank said more tax breaks would be unhelpful as past experience suggests businesses would pocket the cash instead of investing it in technology or staff training – with labour productivity in Australia steadily falling since the 1970s despite a consistent decline in corporate tax rates.

It also argued against paying off the debt through cuts to social spending – describing the UK’s gamble with austerity as “an economic mistake that has caused social catastrophe”.

Future spending cuts unnecessary

Independent economist Saul Eslake said the fundamental premise of Per Capita’s report was sound and there was “no compelling requirement that [government] debt be paid off by some pre-determined date”.

He told The New Daily the federal government is under no compulsion to enact spending cuts after the crisis to pay for its virus spending spree as its debt is relatively small and interest rates are at all-time lows.

Mr Eslake warned, however, public spending was not “a magic bullet” and that over the long term “you would want household spending and business investment to be the primary drivers of growth”.

“I don’t think it’s the time for some of the other ideas that often pop up – like a jobs guarantee or a universal basic income,” he added, describing such policies as income-support measures rather than productivity-enhancing investments.

“But well-targeted infrastructure could make a useful contribution to sustaining economic growth when household spending might well be constrained.”