Wednesday, October 20, 2010

Gear up Australia. Our government needs more debt

Stephen Halmarick at Colonial First State:

- While Australia’s low net government debt position is seen as a strength, there exists a strong case for MORE government debt in Australia to help fund productivity enhancing infrastructure.

- Some estimates put the infrastructure shortfall in Australia at around $A600bn. The case could be made for the Commonwealth and States to increase their combined debt level by over $A200bn, which would increase net government debt from a projected peak near 16% of GDP to a still internationally low level of 30% of GDP.

- The increase in Commonwealth and State bond supply that this implies would likely be meet by strong international demand (especially from central banks) and the need for Australian banks to meet new global liquidity requirements.

- The increase in government debt would be unlikely to have a negative impact on Australian interest rates or ‘crowd out’ the private sector, while the positive benefits to the economy from a ramp up in infrastructure could be substantial.

Why Australia needs MORE government debt

In global financial markets, there is legitimate concern that the level of government debt in many countries is too high. These concerns are either currently impacting on markets, such as in the case of Greece and Ireland, or these concerns are raised in the context of longer-term structural issues, such as in the UK, US and Japan.

This is not the case in Australia. Indeed, we argue in this paper that Australia has a unique opportunity to INCREASE its level of net government debt, both at a Commonwealth and State government level, to help fund much needed productivity enhancing infrastructure.

As shown in Chart 1, Australia’s net government debt (ie. Commonwealth government gross debt less assets) is expected to peak at just on 6.0% of GDP in 2012/13 (or just under $A90bn). This level of net government debt compares with the expected OECD average of a peak of over 90% of GDP in 2015.

While it would be wrong to suggest that Australia’s net government debt level should be allowed to approach anywhere near the levels currently saddling many OECD nations, it seems clear that an opportunity exists for Australian governments, both Commonwealth and State, to increase their level of net debt to help fund part of the national need for a meaningful increase in productivity enhancing infrastructure and other assets.

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