Monday, 1 May 2017

Good Debt and Bad Debt

Scott Morrison has come up with the expression good debt and bad debt. It is not new.

I can recall back in the Whitlam years most economists saying recurrent expenditure should be matched by revenue and only investment by government should be why the budget deliberately goes into deficit. Government investment  being mainly infrastructure spending. It is a one-off and enables the budget to naturally go back into balance.

I actually agree with this and always have. This is why I heartily disagreed with the tax cuts of the Liberal Government headed by John Howard. Tax cuts not matched by expenditure cuts will always lead lead to revenue not matching recurrent expenditure which in english is creating a structural budget deficit. We can also see it in the Reagan and Bush years and now Trump wants to copy the record!

This is why most economists believe Infrastructure spending is the best way to boost a deficit as it not only boosts demand when it is lagging but also boosts the supply side as well.

This is why governments should always have on hand 'shovel ready' projects ready to go if it is needed when the economy is facing a liquidity trap for example.

Once the economy is back roaring away the budget needs larger and larger structural budget surpluses.

Next Tuesday will prove interesting