Mammoth debt? Relax, borrowing big is the right thing to do

After six years in the black, the coronavirus recession has pushed the NSW budget deep into the red.

The government’s net debt, which was at zero before the pandemic, will surge to $50 billion this financial year and peak at more than $100 billion in mid-2024.

NSW Treasurer Dominic Perrottet delivers the NSW budget to Parliament House in Sydney on Tuesday.Credit: AAP Pool

Coalition politicians have spent the past two decades warning us about the evils of debt and deficit. A lot of voters have been convinced that the only good budget is one in surplus.

But relax – borrowing big is the right thing to do.

The coronavirus pandemic has transformed the conventions of budget politics in Australia.

With interest rates close to zero, governments at both the federal and state level must take the lead in repairing the damage left by the pandemic.

In recent weeks Australia’s Reserve Bank and the International Monetary Fund have urged governments to spend more in a bid to boost demand for jobs. The fund’s chief economist Gita Gopinal said earlier this month government spending "will need to be the main game in town".

The NSW economy has had a miserable year. The latest figures show unemployment at a 22-year high of 7.2 per cent. More than 300,000 people in the state are looking for work and many more have simply dropped out of the labour force altogether.

Under these circumstances, the returns from government spending to improve the state’s social and physical infrastructure are much higher than usual.

At the same time, the cost of doing that is very low because borrowing is so affordable.

The average 10-year borrowing cost for NSW has fallen from more than 6 per cent a decade ago to about 1 per cent today.

The unique conditions on global financial markets have also allowed the NSW government to lock in those super low interest rates for longer than usual.

In his budget speech Treasurer Dominic Perrottet said despite the big increase in the state’s borrowings the cost of debt repayments would be largely unchanged.

"This budget includes borrowings around five times the 2010 amount – yet as a proportion of revenue, the cost of servicing that debt is almost the same," he said.

Despite the tough economic times, Mr Perrottet has used the budget to push for a phased withdrawal of stamp duty, an outdated and highly inefficient form of taxation.

He claims the overhaul will, over time, generate 75,000 new jobs and add an extra $3300 of income for every household in NSW.

Even so, replacing stamp duty – a large lump sum paid very occasionally by most – with a smaller annual land tax paid by many, would be a major political achievement.

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