Rare sense from the Coalition on borrowing

The Coalition made a great show of claiming the budget was in crisis for the last five years. While this was simply (bad) politics it has clouded the issue to a dangerous degree as people believed the propaganda.

Now the Government are considering the very sensible move of distinguishing between borrowing to fund investment and borrowing to pay everyday bills. This is quite normal in other countries.

The argument works like this. If you borrow money and buy ice cream then you are simply funding consumption today and will have to pay back later. But you have nothing to show for your borrowing except a bigger waistline.

If you borrow to buy a business then you are borrowing to fund future consumption. While you have to pay back the loan you have bought an income stream to do that and make a profit.

For the government it is a similar story. If they borrow to pay the wages of government employees and to subsidise prescription drugs then they are buying ice cream. It does somebody some good now but you have to pay it back later which means higher taxes.

When the government funds infrastructure spending through borrowing they are adding to the capital stock of the nation. It allows businesses to operate more efficiently and competitively. The government has given the economy the chance to grow more quickly than it otherwise would. The higher taxes paid by individuals and firms in the future pays back the borrowing.

The NBN, new railways and ports are all good examples of infrastructure spending, while higher spending on schools and universities adds to human capital. They all add to Australia's ability to produce goods and services at competitive prices.

From this it follows that borrowing for infrastructure is good, providing the benefits outweigh the costs. In a modern economy the government should always be in debt to fund infrastructure projects as part of a long term supply side policy.

Therefore the stupid contest between political parties to return to an overall surplus faster than the other is fundamentally flawed. The change to distinguishing between a deficit to fund current spending and capital spending needs to be done and Joe Hockey will have to explain this to the idiot Abbot in words of a few syllables.

The Financial review has the story here