Did anyone else notice that Peter Costello has dubbed today “Debt-Free Day” from Sydney’s Shangri-La Hotel ? Are we entering an economic paradise?
Very handy timing that the big day has arrived just before the Budget. Nothing like looking economically responsible and dampening expectations simultaneously. Or is it that big a day – and just what is this Shangri-La that Peter Costello’s living in?
Debt isn’t necessarily a bad thing. Too much debt, debt incurred for the wrong reasons and debt we can’t service is, of course. But debt incurred for practical purposes that allows us to fund tangible assets – like our mortgages – is good.
PM had an excellent discussion of the economics of debt last night. “The end of Commonwealth debt isn’t all that it seems,” reporter Stephen Long said. “In reality, much of that debt has simply been pushed off the Government’s balance sheet, and transferred to the private sector, which borrows to build the assets Government used to own.”
Nothing wrong with that. We don’t live in a command economy. And there was this interesting interview with MacBank’s chief economist, Richard Gibbs:
GIBBS: Well I think the prudent management of debt should be welcomed by governments, certainly, but I am concerned about their zealotry in terms of debt busting and the total elimination of debt. There certainly is a role for the prudent use of debt in terms of financing particularly large intergenerational assets and infrastructure, and most well-run companies of course have a mix of capital from debt and equity, and that’s what actually gives them a lower cost of capital overall.
LONG: So is the flipside of eliminating debt that we’re not sufficiently investing?
GIBBS: Well, that’s right. I mean, you can actually be cutting back in curtailing capital expenditure in things that are going to make the economy more productive and sustained growth going forward, and so I think certainly the extent to which you’re short-changing that part of the economy, well then you’re not going to be able to grow your economy at its maximum level of efficiency or productivity.
PS Should that veteran IR warrior Peter Costello be scared of the headline in today’s Age “Worker ‘sacked for smirking’”?