Why controlling debt still matters
“BLESSED are the young for they shall inherit the national debt.” So said 31st US President Herbert Hoover, somewhat satirically, in 1936 when referring to the massive expansion of US federal government spending under Roosevelt financed by debt. Despite a 50 per cent increase in debt in the three years from 1933 to 1936, the US economy remained mired in depression with unemployment remaining well above 10 per cent through the 1930s.
With the RBA lowering the cash rate to just 1.25 per cent this week, and the National Accounts showing Australia’s post-mining boom economy still weak, there are signs the Queensland Government will continue to load up on debt while money is “cheap’’.
This idea is misguided for three reasons. First, just because money is cheap doesn’t make a particular spending or infrastructure project a good idea. Individual projects must be assessed on their own merits. The main thing is whether Queensland gets a good return on its investment, whether that’s a commuter carpark or school or the $5.4 billion-plus Cross River Rail tunnel. Would you pay $50,000 for a 10-year-old Holden Commodore just because the bank offered you a low interest rate?
And here’s the kicker, you are on the hook for it. Why? Because government makes you, the taxpayer, finance its repayments. Governments use their ability to increase the tax you pay to borrow at interest rates lower than market rates. Annastacia Palaszczuk’s Labor Government has already introduced six new taxes and is hiking others just to prove the point.
Second, there are hard limits to the amount governments can borrow before a credit rating is downgraded and interest costs rise. Queenslanders remember when Labor lost our AAA credit rating in early-2009, a result of the Bligh Government’s massive increase in borrowings. Think of the $1.2 billion Tugun desalination plant on the Gold Coast.
Credit rating agencies such as Moody’s look closely at metrics such as total borrowings to gross state product and total borrowings as a proportion of revenue.
In both cases in Queensland, these metrics are forecast to get worse between 2018-19 and 2021-22.
History shows that even small reductions in economic growth can quickly lead to a sharp deterioration in fiscal positions, by simultaneously reducing the revenue base, increasing spending and raising interest costs.
In Queensland’s case, because of the volatility in our trade exposed sector (think coal prices and agricultural exports) as well as the effect of floods, cyclones and drought, we are especially vulnerable.
The third reason borrowing cheap money is misguided is that if a government is at or near a credit downgrade (which Queensland most definitely is), borrowing even more will severely limit its options when dealing with a global or domestic economic shock.
Queensland should establish a credible debt stabilisation program, driven by strong fiscal principles and not by “one-off” raids on state employee super funds and long-service leave provisions.
Prudent fiscal management underpins community and business confidence in the state, which will be undoubtedly adversely affected by any future credit rating downgrade.
Finally, borrowing only for worthwhile projects where benefits exceed costs (not because money is cheap) minimises interest expenses and maximises the amount available to spend on services and infrastructure.
If we do this, then the young will not be blessed with debt with little worthwhile to show for it.
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Originally published in the Courier Mail.