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Australia's Real Economic Woes Are Being Missed In The Surplus Of Debate About Good And Bad Debt

The real debt problem is the asset bubble which threatens the stability of the entire financial system.

One of the pillars of neoliberalism fell this week.

For the best part of the last 30 years, the disciples of free-market economics have talked into existence the idea that government debt is bad. Cutting debt stood alongside deregulation, privatisation and trade-liberalisation as a foundation of an economic orthodoxy that conquered the western world.

But as this order crumbles, even a government as retrograde as the Turnbull government has bowed to logic and accepted that government debt can be a good thing.

Don't get me wrong -- this is no conversion on the road to Davos. This is an acceptance of the inevitable.

Record-low interest rates have failed to stimulate demand. But they have helped fuel the mother of all property bubbles. Along with stagnant wage growth, this has worsened inequality, which then further reduces demand. Sooner or later this 'trickles up'. Businesses rely on demand. And this government listens to business.

From the Reserve Bank and beyond, economists have been screaming for the government to invest in infrastructure to bolster demand and to attract money away from housing. But if you're going to build infrastructure you need to borrow money. And so it was that Scott Morrison hit the detonator on government debt being bad.

Instead, he gave us 'good debt' and 'bad debt.' Debt for capital spending -- infrastructure -- being the good variety. And debt for recurrent spending -- service delivery -- being the bad.

To date, the federal government has not been doing what every state and local government does, and what every business does, which is to treat investment in assets with a long life as just that, and recognise the costs of borrowing as the annual cost that matters.

In federal politics, budget night has always been about the cash balance. This is like a household counting the total cost of its mortgage in its fortnightly budget, rather than the repayments. It has also allowed privatisation to be booked on the upside only and it has disguised the chronic level of underinvestment in public infrastructure.

This is just accounting, but accounting matters. Part of neoliberalism's debt fallacy relied on deliberately conflating and confusing the different nature of different government expenditure. Think Tony Abbott's 'debt and deficit disaster'.

For years successive Liberal governments and Oppositions have tried to establish the idea that the level of government debt is a proxy for good economic management, so it is bewildering to watch the ALP's response to Morrison's announcement this week.

Rather than seeing Morrison's back-down as an opportunity to call an end to an era, the ALP are trying to keep it standing. The ALP has adopted the language of neoliberalism and is talking up government debt as a problem.

The opposition's shadow minister for finance, Jim Chalmers, has been releasing a series of graphs showing the 'blow out' in government debt. Gross debt is up. Net debt is up. Interest payments are up. The message is clear: this is a bad thing. Bill's bus is overtaking the debt truck.

What on earth are they thinking? Are they that debased that they want to perpetuate a false fear right at the point that it is vanishing? And what about the real debt problem being the household debt that is giving banks record profits and threatening the stability of the entire financial system?

Yes, Morrison's language must not become an excuse with which to further attack welfare spending, or investment in health or education. But that's a constant. And separating out infrastructure spending will actually make it easier to highlight the shortfall in spending on social services. Transparency should be a tool of progressive politics.

And, yes, maybe Morrison's distinction between good and bad debt isn't as clear as he would have us believe it is. But let's go there. Let's talk about whether health and education should be seen as an investment, too. Let's talk about whether a recurrent surplus really is the Holy Grail.

Progressive forces should be looking to consolidate on the government's back down and use it to widen the discussion on the role of government. As Morrison has shown, when the free-marketeers' world comes crumbling down, even they turn to government.


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