So I'm back after my hiatus and will hopefully pick up where I left off...
Public debt has become a hot issue in the last few years as governments rack up enormous budget expenditure and finance it by borrowing from the private sector. Unfortunately for some governments this debt load has become unsustainable and will inevitably lead to a default unless harsh austerity is embraced. Since austerity is the least politically feasible option, governments will either print money or default/restructure their debts.
Thankfully Australia is not in this predicament with an electorate that has been conditioned to fear public sector debt, and rightly so, which has led politicians to pledge returns to surplus and debt reduction. However, there have been calls from pundits and economists to deprioritise repaying the debt and returning to surplus since it is "manageable" at these levels. So who is right? Are the politicians bowing to popular opinion or are the economists right? I am firmly in the camp of reducing the debt as fast as possible because of the following problems:
Firstly, there are limited funds available for entities to borrow and when the government borrows over $100 billion it crowds out private activity by preventing businesses from accessing that capital and therefore increases the cost of borrowing economy wide.
Secondly, it is generally accepted that the larger the size of government, the more inefficiencies in spending (diseconomies of scale if you like).
The benefits of returning to surplus and repaying the debt:
More funds are available to businesses which will lower borrowing costs and raise profits allowing the business to expand by hiring more people, for example.
Inefficiencies are reduced for the government leading to an improvment in the expenditure quality as the government is forced to trim expenses with the most wasteful spending likely to be cut first. A good example of this is when the flood levy was established and the cash for clunkers scheme was abandoned.
Future taxes are lower since interest on the debt decreases as the debt is repaid.
Puts the government balance in a good position to respond to future crises such as natural disasters (QLD floods) or economic crisis (GFC).
Although both sides of government have committed to achieving surplus and paying back the debt only one has said firmly that they will reduce the size of government. This week Tony Abbott outlined his view of Australia and vowed to “permanently [reduce] the size of government”. This is clearly a good policy for all supporters of freedom and will lead to greater prosperity. (Edit March 2013: Labour has abandoned its pledge to return to surplus).
I will say upfront that I usually vote Liberal because they are reducing the size of government and are committed to a greater level of freedom for everyone. Labor unfortunately believes in big government and spending, which will send Australia down the path towards Greece, Portugal and other fiscally irresponsible nations. If Australia wants to remain strong it will pay off the debt and run budget surpluses.
Public debt has become a hot issue in the last few years as governments rack up enormous budget expenditure and finance it by borrowing from the private sector. Unfortunately for some governments this debt load has become unsustainable and will inevitably lead to a default unless harsh austerity is embraced. Since austerity is the least politically feasible option, governments will either print money or default/restructure their debts.
Thankfully Australia is not in this predicament with an electorate that has been conditioned to fear public sector debt, and rightly so, which has led politicians to pledge returns to surplus and debt reduction. However, there have been calls from pundits and economists to deprioritise repaying the debt and returning to surplus since it is "manageable" at these levels. So who is right? Are the politicians bowing to popular opinion or are the economists right? I am firmly in the camp of reducing the debt as fast as possible because of the following problems:
Firstly, there are limited funds available for entities to borrow and when the government borrows over $100 billion it crowds out private activity by preventing businesses from accessing that capital and therefore increases the cost of borrowing economy wide.
Secondly, it is generally accepted that the larger the size of government, the more inefficiencies in spending (diseconomies of scale if you like).
The benefits of returning to surplus and repaying the debt:
More funds are available to businesses which will lower borrowing costs and raise profits allowing the business to expand by hiring more people, for example.
Inefficiencies are reduced for the government leading to an improvment in the expenditure quality as the government is forced to trim expenses with the most wasteful spending likely to be cut first. A good example of this is when the flood levy was established and the cash for clunkers scheme was abandoned.
Future taxes are lower since interest on the debt decreases as the debt is repaid.
Puts the government balance in a good position to respond to future crises such as natural disasters (QLD floods) or economic crisis (GFC).
Although both sides of government have committed to achieving surplus and paying back the debt only one has said firmly that they will reduce the size of government. This week Tony Abbott outlined his view of Australia and vowed to “permanently [reduce] the size of government”. This is clearly a good policy for all supporters of freedom and will lead to greater prosperity. (Edit March 2013: Labour has abandoned its pledge to return to surplus).
I will say upfront that I usually vote Liberal because they are reducing the size of government and are committed to a greater level of freedom for everyone. Labor unfortunately believes in big government and spending, which will send Australia down the path towards Greece, Portugal and other fiscally irresponsible nations. If Australia wants to remain strong it will pay off the debt and run budget surpluses.
