Australians can lay to rest concern over incurring and repaying government debt, as new research shows urgent spending required in response to the COVID-19 pandemic will not create a debt burden, and therefore should not provoke future austerity measures to 'repay the debt'.
The report, released today by the Australia Institute, reveals misunderstanding around how private and public finance works, and incorrectly extending private concerns to the public sector, have heightened misplaced fears around the sustainability of government debt.
Key findings:
- There is no evidence to suggest higher debt-GDP ratios are associated with adverse economic outcomes.
- Public and private finances have become confused in Australia, with debt concerns that apply to private finances being incorrectly extended to public sector finance.
- Every dollar of debt is matched by a corresponding dollar in financial assets which means the notion of intergenerational debt burdens is false. For example: One person's debt is another person's asset and that is as true today as it will be tomorrow - if tomorrow's debts are a burden, then tomorrow's financial assets must be equal and opposite - a negative burden.
- Additionally, any physical assets financed by government will remain as a net benefit for use in the future, such as Australia's iconic ocean pools, built during the Great Depression.
- Australia's debt figures are very modest when compared with Australia's own history or other OECD countries. Government debt is currently at 20% in Australia, while the rest of the OECD countries range from 50% - 150%.
"Confusion, misunderstanding, and at times purposeful obfuscation by those who should know better, leaves many questioning the sustainability of government debt," said Ben Oquist, executive director of The Australia Institute
"Australians need not worry about imposing burdens on future generations, particularly when interest rates are so low. If government uses the money to create long-term assets, as was done with the Sydney Harbour Bridge during the Great Depression, those assets can certainly be passed on to future generations and provide lasting benefits.
"People do not seem to mind receiving money from the government in exchange for selling things to it or working for the government, many would be interested to know these payments are government liabilities just like bonds - it is still debt incurred by government, that people are happy to hold as assets.
"Our research shows that fears over 'where the money will come from' and 'repaying debt' result from mixing up private and public finance principles - economists, commentators and public officials should see it as their responsibility to allay such misplaced fears, to stoke them is disingenuous."
