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Debt is not a four letter word

Debt is not a four letter word. Address to Committee of Sydney Forum Professor Peter Abelson Applied Economics P/L. Main messages. The net operating balance (NOB) matters Public net worth matters Budget deficits generally do not matter if NOB is in surplus

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Debt is not a four letter word

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  1. Debt is not a four letter word Address to Committee of Sydney Forum Professor Peter Abelson Applied Economics P/L

  2. Main messages • The net operating balance (NOB) matters • Public net worth matters • Budget deficits generally do not matter if NOB is in surplus • Net debt does not matter if public net worth is sufficient

  3. National background • Budget surpluses have been common • Interest payments are down • Net worth is high and rising • But net debt is low and falling

  4. Figure 2.1

  5. Figure 2.2

  6. Figure 2.3

  7. Budget taxonomy with notional numbers Current expenses Goods and services 100 Transfers (including interest payments) 40 Depreciation 10 Total expenses 150 Current revenues 155 Net operating balance +5 Minus net capital investment Capital formation – depreciation (20 – 10) -10 Net lending (fiscal) balance -5

  8. Balance sheet implications Assets + 10 Liabilities (borrowing) + 5 Public net worth + 5 Net debt + 5 Note: • Positive NOB has produced increase in net worth • Borrowing has NOT reduced net worth • What matters is the productivity of capital formation

  9. NSW Treasury arguments against borrowing and debt are false 1. May increase borrowing rates 2. When revenue is unstable, debt may not be sustainable • Both arguments are false at current debt levels • NSW general government debt has fallen from 7% of gross state product in 1995 to about 1% of GSP today. In money terms, it has fallen from $12 billion to $3 billion. • On the other hand, state government net worth is $124 billion.

  10. Conclusions • NSW government’s policy (obsession) with avoidance of borrowing and with reducing net debt is unnecessary, expensive, inefficient and unfair • We have shown it is unnecessary • It is expensive because the government is not utilising its balance sheet and capital formation is funded in more expensive ways • It is inefficient because productive and necessary infrastructure is deferred because of false budget dictums • It is unfair because present tax payers are being taxed to finance capital formation to provide services to future residents

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