Watkin says borrow more

Tim Watkin blogs at Pundit:

it’s never been cheaper for the government to borrow money. Although we’ve come up from the all-time low of 3.75% in December, the government can borrow money – by issuing bonds – at  4%. That’s real cheap. Which is why it’s interesting to ask whether National’s missing a trick and its commitment to austerity isn’t coming at the cost of potential investment and growth.

Because really, government debt isn’t the problem; it may be an opportunity. You and I need to save more, that’s unquestioned. But what the country needs from the government and business is some demand side growth – creating value-added products, wagier jobs, and more exports.

Putting aside the quaint notion that the Government, rather than the private sector, creates products, jobs and exports, Tim overlooks what would happen if the Goverment said “Yes, we will be the only Government in the world that thinks it needs more debt, not less, and rather than aim to get back into surplus we will aim to grow debt faster. We are only paying 4% on out debt because of the commitment to get back into surplus. Throw that out the window and those interest rates will rise.

 You might have better ideas that me as to where money could be spent, but some joint venture building houses for first home buyers has been suggested (which could be a way of using the low government debt to help lower our high household debt that the credit ratings agencies are so anxious about)… there’s rail… R&D incentives and more money for the CRIs… export drives… things that will pay off in the long run.

Tim wants the Government to borrow more, to encourage more people to borrow money for homes. Have we learnt nothing from the global credit crisis? This must be the worst idea for sometime, I’m afraid. I’m amazed at how you can have such a relaxed approach to debt – a “Oh lets just borrow lots of money and spend it on nice things”. Would you run your own business like that? Fuck, no.

As for the other examples. The return on rail is basically negative – needs subsidies to be profitable. R&D incentives generally lead to legions of tax accountants reclassifying expenditure as R&D, and more money for CRIs has actually been happening anyway – science and innovation is one of the few areas not frozen for funding.

The reality is that every dollar we borrow means we have to spend more tax revenue on interest on that debt, rather than on stuff like schools and hospitals. Debt is a valid way of funding capital expenditure, but debt should not be used to fund operational expenditure – that is exactly how you end up in trouble.  Even when we back in surplus, the Government will still be borrowing for some capital requirements. But this notion of borrowing billions cheaply to encourage people into property ownership is exactly what caused the problem in the first place.