Political debate ignores role of debt in development

MUCH of the Western world is in a dangerous cycle that it can't seem to break out of. Populations are ageing, reducing productivity.

The likes of Japan and Italy are in particular trouble on this front, but Australia isn't immune either.

In order to improve productivity, investments in infrastructure and skills are necessary. But that requires injections of cash by the government. In the wake of the global financial crisis, few governments have the capacity to make such investments because debt is already so high.

Fiscal austerity is the new black.

In Australia, the national broadband network has the potential to open up a whole new wave of productivity, but that prospect isn't assured and can't be certain. We are putting an inordinate amount of money -- $43 billion -- into a venture without guaranteed benefits to follow.

It will therefore either be an expensive white elephant that constrains our ability to drive productivity in other areas, because of the opportunity cost of the spend, or it will give Australia an advantage over other parts of the world unable to afford such an investment and act as one of the solutions to the problems of the future. Time will tell.

Meanwhile, in most Western nations, populations keep ageing, productivity remains low and doing something about it is difficult, if not impossible.

Australia is both better and worse off than other Western powers when it comes to this vicious cycle. We benefit from the ongoing mining boom generated by China's thirst for energy, yet that reality also creates a two-speed economy as other industries struggle to keep pace. On the whole, it is a better problem to have than sagging growth as suffered by most Western nations, but it does cause problems when setting things like interest rates.

We also have significantly lower debt than most developed countries. Our debt is only 6 per cent of GDP, whereas in the US and parts of Europe it is nudging -- or in some cases, exceeding -- 100 per cent.

This means in theory that we can look to invest in nation-building programs without drastically harming the budget bottom line.

But Australia's political debate surrounding debt is woefully ignorant of the role that debt can play in assisting economic development. The Howard years have entrenched a false view that low debt automatically equals a strong economy. Not necessarily.

In fact, lower than necessary debt can hamper economic development, because it means we don't have adequate government investment in infrastructure and skills to lift productivity and to deal with ageing.

That was Labor's catch cry ahead of the 2007 election, when it argued that John Howard and Peter Costello had squandered the China boom.

The argument ended up falling short of the mark when Labor got into office and misused government money on wasteful programs such as the pink bats in roofs and the Building the Education Revolution rollout.

It was poorly targeted taxpayers' money rushed out to stave off a recession that never came.

Because of the waste, the debate in this county about debt reduction stayed the same as it was post-1996. Tony Abbott managed to nearly win an election on a promise of "paying back the debt".

Never mind that Australian government debt is low (certainly by world standards), more debt is needed to invest for the future, and the Coalition's assumptions about how it would return the budget to surplus were based on overly optimistic forecasts out of line with Treasury estimates (themselves overly optimistic about commodity prices), or misguided calculations such as continuing to include dividends from Medibank Private even though Coalition policy was to sell the asset.

While overseas nations have no choice other than to reduce government debt because it is so high, Australia -- were it not for the lowbrow debate in this country about debt and deficits -- should have more nuanced choices.

Now, though, because the public has lost confidence in the government's economic management credentials, it must fulfill its pledge to get the budget back into surplus in three years or it could fall. That means belt tightening to limit programs which, while expensive, might facilitate productivity gains.

It won't be enough for Labor to trim unnecessary fat in government spending (of which there is much).

One of the great myths of Labor's first term was the idea that Lindsay Tanner was an excellent finance minister. He didn't have the courage to cut spending in areas that Labor's union base might cry foul about -- not to any large extent, anyway.

Where we actually need to look to reduce debt, and fast, is on the private front.

Households are over their heads in debt and government policy is doing nothing to combat the problem. Again, weak politics is the reason.

In such a precarious political environment, no side of politics is willing to change rules like negative gearing for investment properties that encourage people to go into more debt. No government is willing to limit credit so that families can't use their credit cards to fund a lifestyle they ultimately cannot afford.

Perhaps Australia's greatest weakness when looking to combat the challenges of the future is the cultural attitudes of much of our citizenry.

The idea that government owes us a living and it is the government's role to fix every little problem has seeped into the national consciousness.

That leaves politicians trying to fix things they should probably stay out of, rather than invest for the long term.

It is the supreme paradox of modern society: our major problems have never been more long-term in their trajectory, yet our political system and the attitudes of the citizenry have never been more focused on the short term.