We’ve been told for years debt is bad but the RBA is calling for more infrastructure spending.
By Greg Jericho @GrogsGamut
The economy is slowing and things are grim.
Fortunately there is a solution available to the government. No it is not waiting for the Reserve Bank of Australia to cut interest rates, but rather that it should take advantage of the record low interest rates it already is able to pay.
Long time readers of this column will know I am not a fan of concerns about government debt. One of the more annoying things for me of the past three to five years has been watching the ALP act like the growing level of government debt was a bad thing.
I understand that it is infuriating that the Liberal party only really cares about debt levels when they are in opposition, and so I guess it was not surprising to see Chris Bowen and others during the election campaign noting that in the past six years the “Liberal government doubled the net debt. Labor will pay down the debt while still delivering important investments in our schools and hospitals”.
But had the ALP actually won the election I would be telling them, as I say now to the current government (and echoes my advice in one of my first ever column six years ago) – get into more debt!
First off let us admit that the economy is not doing well.
My favourite way to measure the general economy is to consider that both the government and the RBA are trying to get our economy to grow by between 2.75% and 3.25% every year and for inflation to grow by 2% to 3% each year. If we add those two figures together we get what I call the “sweet spot” of nominal economic growth of between 4.75% and 6.25%.
Above that level and the economy is probably overheating; below it then it is not growing fast enough to deliver what we would consider average benefits.
And right now we are heading away from the sweet spot:See: https://www.datawrapper.de/_/6l8ei/
In the 12 months to June, inflation grew by just 1.35%, so to get to the bottom of the economic sweet spot real GDP needs to grow by 3.4%. In reality the expected growth when the figures are released next Wednesday is below 1.8%.
So things are not good, and while the Reserve Bank next Tuesday (next week is a big economic week!) is expected to cut interest rates, it is worth noting that the governor of the RBA, Philip Lowe last week called for among other things “spending on infrastructure”.
And infrastructure requires the government borrowing money – something the government should not at all worry about having to do.
Well let me take you back to my article in June 2013 when I called for more debt and also let me admit to a rather large error.
Back then I wrote: “Our fear of debt, engendered by one side of politics and sections of the media, has blinded us to the opportunities available.” OK that is not wrong and, alas, stills hold, but I then concluded that “if you can afford it now, you’ll be kicking yourself if in five years’ time rates are double”.
Now the reason I suggested the government should go into debt then and worried about interest rates rising was because at the time the interest rate the government needed to pay to take out loans (through bonds) was at record lows:
But here is my mistake. Interest rates (or bond yields) have in no way doubled, they have actually more than halved:See: https://www.datawrapper.de/_/kbtim/
The current yield for a government 10-year bond is just 1.58% – compared with 3.44% on the day I wrote my article six years ago. And we can see in just the past year there has been a very strong slide in the interest rate the government is paying:See: https://www.datawrapper.de/_/cghlP/
So low are current bond yields that the rate for Australian government 10-year bonds has now been below that of US Treasury 10-year bonds for the past 15 months – a run so rare it last happened in 1973:See: https://www.datawrapper.de/_/NgF9k/
Now sure our total debt levels are high. But government debt, somewhat like household debt, is not really about the total, it is about the repayments.
The low interest rates mean the total amount of interest the government is paying on its debt is much lower than you would expect given of total debt level.
Consider that the budget forecasts in the next financial year the government will need to pay the equivalent of 0.4% of GDP on interest payments on net debt; that was the same level as was paid in 2002-03. And yet whereas next year total net debt is forecast to be 18% of GDP, in 2002-03 it was just 4.2%:
The picture on gross debt repayments and total levels is much the same:See: https://www.datawrapper.de/_/30c0D/
We are actually able to afford higher debt levels than in the past because the interest we pay is much less – in 2002-03 the yield on 10 year bond was around 5.4%.
The government should take advantage.
Imagine being able to get a loan to upgrade machinery and equipment for your business at 1.5% – lower than inflation! – and you didn’t take advantage because you have a theory about how debt is bad.
The interest rates governments have to pay are at record lows and at the same time the economy is slowing and the head of the RBA is calling for infrastructure spending.
The answer is clear. To the government I say be not afraid – borrow and build.
• Greg Jericho is an economist and a Guardian Australia columnist
First published at the Guardian Australia – Tuesday 28 May 2019. See: https://www.theguardian.com/business/grogonomics/2019/may/28/the-government-needs-to-get-into-more-debt-our-grim-economy-depends-on-it