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Governments should only be operating a debt of around 2-3% of GDP, not 30%.

[Shuz] wrote:Governments should only be operating a debt of around 2-3% of GDP, not 30%.

I think you're confusing debt and deficit. But even there, sticking to such rigid rules is a bad idea, as Europe demonstrates.

Aidan wrote:But in many cases the cost of not spending it woud also be high. Inadequate infrastructure is a much bigger impediment to business than government debt is, and is also a waste of time to people.

This.

And I'd add, a lot of the bother that SA finds itself in is not of State Government's making. It relates more to the inadequate revenue base that it and all other states in our federation have been dealt. Until the vertical fiscal imbalance is properly addressed, the states will struggle to meet the responsibilities that they have and we will suffer lacklustre infrastructure and services as a result. And yes, part of the solution should be more (and more efficient) taxes. But before you object to that, consider this infographic a friend of mine recently made:

Something's gotta give.

[Shuz] wrote:National Debt (as of 2011) is 30.3% of GDP.
Australia's GDP stands at $1.57 trillion (2012).
National Debt: $475b.
That's a debt of around $21,590 for every man, woman and child in Australia.

But it's only around $6500 for every sheep in Australia!

Of course the sheep don't have to pay off the debt, but nor do the men, women and children. Australia is financially sovereign, so there would be no benefit to the federal government from being debt free. Indeed there's no distinct benefit of being in surplus. Government borrowing does have an opportunity cost, because reducing it also reduces interest rates - but that's the same no matter which side of zero we are.

The surplus wasn't destroyed by economic mismanagement, it was destroyed by the Rudd tax cuts. But then the GFC hit and private borrowing declined sharply. It would have been grossly irresponsible to fail to run a big deficit to fill the gap. The problem is the dangerously hawkish Reserve Bank who have been sabotaging the government's efforts to revive the economy.

Interesting post, Aidan.

[Shuz] wrote:Governments should only be operating a debt of around 2-3% of GDP, not 30%.

Where did you pull this from? Who decided it, on what basis, and which countries are running such low debts?

rhino wrote:Interesting post, Aidan.

[Shuz] wrote:Governments should only be operating a debt of around 2-3% of GDP, not 30%.

Where did you pull this from? Who decided it, on what basis, and which countries are running such low debts?

I decided this. Maybe I shouldn't have pulled a figure out of thin air, but with debt, I believe that the best way to manage it is much like a credit card. The Government should be able to pay what they owe in full at the end of the monthly transaction period. If the Government were to borrow $5m, they should be paying that $5m by the end of the month. No ifs or buts about it. Governments just quite simply should never be allowed to accrue interest on any debt they owe.

Where does 2-3% come into it? Given the size of the Australian national economy ($1.57t) - 1% of that is $15.7b. That is still an enormous amount of money! At 2-3%, that gives a Government about anywhere from $31.4b to $47.1b to be able to fund crucial infrastructure and services where needed in times of economic downturns to support jobs, so long as such investments are made which provides a positive return to the Government (much like what Labor intends to do with the NBN, by selling it of at a higher value once completed to pay for the capital cost of investing in it. (I'd go one further in that instance, the return value should also include the cost of interest).

Shuz, your post makes sense from the point of view of a household budget, but I would hope that our treasurer does not run the state's budget like a household budget, which always has an end date - i.e. you know that you are not going to work forever, and by the time you are ready to retire you want to have no debt, and you prioritise accordingly, getting by without some of the things that would make life better/easier, because you want to be debt-free in your retirement.

Governments never retire. They are always working, and their thinking is that they will always have the ability to pay off debt. Often they pay interest only, and at the end of the term of the loan (say, 25 years), the principle is actually quite low by current standards (25 years after the initial borrowing) and is paid off as a lump, or rolled into a new loan. This idea of never paying off a loan may seem horriffic to some, but the longer the loan goes for, the less the money is worth - it's just small change that is worth paying on a regular basis to avoid paying the lump sum. Eventually the lump sum itself is small enough to pay out.

I have no doubt that if the Government paid off it's debt every month, nothing would be achieved, or very little at best.

[Shuz] wrote:

rhino wrote:Interesting post, Aidan.

[Shuz] wrote:Governments should only be operating a debt of around 2-3% of GDP, not 30%.

Where did you pull this from? Who decided it, on what basis, and which countries are running such low debts?

I decided this. Maybe I shouldn't have pulled a figure out of thin air, but with debt, I believe that the best way to manage it is much like a credit card. The Government should be able to pay what they owe in full at the end of the monthly transaction period. If the Government were to borrow $5m, they should be paying that $5m by the end of the month. No ifs or buts about it. Governments just quite simply should never be allowed to accrue interest on any debt they owe.

Where does 2-3% come into it? Given the size of the Australian national economy ($1.57t) - 1% of that is $15.7b. That is still an enormous amount of money! At 2-3%, that gives a Government about anywhere from $31.4b to $47.1b to be able to fund crucial infrastructure and services where needed in times of economic downturns to support jobs, so long as such investments are made which provides a positive return to the Government (much like what Labor intends to do with the NBN, by selling it of at a higher value once completed to pay for the capital cost of investing in it. (I'd go one further in that instance, the return value should also include the cost of interest).

Shuz, you shouldn't form your economic knowledge from news ltd or Alan Jones....

Interestingly the Euro rules state that deficits should be only 3% of GDP. That said, Greece was posting deficits many times that number and hiding it with tricky maths

Will, this is just my opinion on the subject matter. I certainly don't base it on what either News Limited or Alan Jones have to say. I don't even really know who the guy is, other than that he's "very right-wing". Even if I did share similar views, it's purely by coincidence.

This is the problem with a lot of comments on Government debt. Most people equate it to household debt and the two are not even close to being the same thing.

Excuse the short post, I'm going to issue some bonds now...

Here's a question to test your knowledge and impression of debt. Is debt good or bad?

AG wrote:Here's a question to test your knowledge and impression of debt. Is debt good or bad?

Neither. Your question is poorly formed.

monotonehell wrote:

AG wrote:Here's a question to test your knowledge and impression of debt. Is debt good or bad?

Neither. Your question is poorly formed.

Damn, I knew someone would get it!

[Shuz] wrote:

rhino wrote:Interesting post, Aidan.

[Shuz] wrote:Governments should only be operating a debt of around 2-3% of GDP, not 30%.

Where did you pull this from? Who decided it, on what basis, and which countries are running such low debts?

I decided this. Maybe I shouldn't have pulled a figure out of thin air, but with debt, I believe that the best way to manage it is much like a credit card. The Government should be able to pay what they owe in full at the end of the monthly transaction period. If the Government were to borrow $5m, they should be paying that $5m by the end of the month. No ifs or buts about it. Governments just quite simply should never be allowed to accrue interest on any debt they owe.

Where does 2-3% come into it? Given the size of the Australian national economy ($1.57t) - 1% of that is $15.7b. That is still an enormous amount of money! At 2-3%, that gives a Government about anywhere from $31.4b to $47.1b to be able to fund crucial infrastructure and services where needed in times of economic downturns to support jobs, so long as such investments are made which provides a positive return to the Government (much like what Labor intends to do with the NBN, by selling it of at a higher value once completed to pay for the capital cost of investing in it. (I'd go one further in that instance, the return value should also include the cost of interest).

Why manage it like a credit card, and not like a mortgage?