This is a submission to the Commonwealth Debt Management Review, in response to the discussion paper: Review of Commonwealth Government Securities Market of October 2002.
Consistent with its purpose as a non-profit association dedicated to public education, research and policy analysis, the Evatt Foundation has had a longstanding interest in government policies on public debt, particularly with respect to the relationship between public debt and investment in public infrastructure. The Foundation has published many studies on this and related issues, beginning with The Capital Funding of Public Enterprise in Australia (Evatt Foundation: 1988) and including Infrastructure, Superannuation and National Investment Strategy (EPAC: 1995).
Accordingly, on 19 November 2002 the Foundation convened a public seminar on the issues raised by the Commonwealth's recent discussion paper, held in the Macquarie Room of the Southern Cross Hotel in Sydney. The seminar was addressed by:
Professor Frank Stilwell Discipline of Political Economy School of Economics and Political Science Faculty of Economics and Business University of Sydney
Associate Professor Tony Aspromourgos Discipline of Economics School of Economics and Political Science Faculty of Economics and Business University of Sydney
Mr John R Rappell Director, Policy and Marketing Australian Financial Markets Association (AFMA)
Accompanying this covering letter are revised versions of the papers presented by Professor Stilwell and Associate Professor Aspromourgos. As you will appreciate, because he is a member of the Treasurer's Debt Review Reference Committee, Mr Rappell has had little opportunity to revise his paper for inclusion as part of this submission. He has, however, indicated that he hopes to complete this task after the AFMA submission has been forwarded, and we hope to forward his paper as a supplement at that stage.
Without limiting the substance of the accompanying papers, I highlight the following points:
As is implicit in Professor Stilwell's paper in particular, the Foundation believes that the question of eliminating the Commonwealth government securities (CGS) market should be considered within the wider context of government policy in relation to the costs and benefits of debt in general and public debt in particular.
The Commonwealth's discussion paper is seriously deficient in that it fails to consider the merits of public debt per se. As Professor Stilwell states "whether public borrowing is wise or unwise depends on the purposes for which the debt is used".
Both Professor Stilwell and Associate Professor Aspromourgos have raised serious concerns about the validity of the economics represented in the Appendix to the discussion paper. While Associate Professor Aspromourgos accepts that there can be circumstances where public debt levels can influence interest rates, he points out that "there is not likely to be any smooth continuous functions linking debt and interest, as employed in the Appendix". Professor Stilwell also points out that evidence "to support the existence of any such 'crowding out' effect is inconclusive." Furthermore, he points out that there are circumstances in practice where "there is stronger evidence of 'crowding in' because government spending (for example, on building roads, schools or hospitals) creates additional investment opportunities for the private sector (for example, for road, school and hospital construction companies)".
In any case, there is serious doubt about realising any macroeconomic benefits from further debt reduction. As Associate Professor Aspromourgos points out, with "Australian Commonwealth debt now so low relative to GDP, it's hard to imagine real benefits from going lower - other than political symbolism".
As Professor Stilwell points out, given the lack of political support for higher taxes, reduced government borrowing implies lower capital expenditure, and "the deterioration in public infrastructure - in the quality of 'public goods' in general - is a direct consequence of the commitment to debt reduction". This point is supported by Associate Professor Aspromourgos, who notes that "the appropriateness of using more or less long-lived debt to finance capital expenditures is well understood and appreciated".
More generally, as Associate professor Aspromourgos notes, many "issues could feed into a consideration of the costs and benefits of increasing the debt/GDP ratio". And as Professor Stilwell states, "whether the interest constitutes a 'burden' depends upon how it compares with the social benefits arising from government spending".
Associate Professor Aspromourgos has set out the economics of sustainable public debt and its relationship to economic growth, interest rates and deficit budgets. As he concludes, "'sustainable' public budget balances are consistent with a spectrum of debt values of which zero is merely one special case". Otherwise than in the case where a deliberate decision has been made that debt will be zero, it will only be in the case of the 'fluke' that the trend growth rate of the economy is equal to the average interest rate on public debt that the desirable long-run government deficit will be equal to zero.
Professor Stilwell considers that concerns about the relationship between foreign and public debt do not have a direct link. Associate Professor Aspromourgos accepts that low public debt may have counterbalancing effects, but suggests that this is "a complex matter" to which there can be no glib answer and, in any event, concludes "that it is extremely unlikely that the correct answer to what is the optimal value of debt will turn out to be the current Treasurer's very 'neat' solution, zero."
Associate Professor Aspromourgos criticises the brevity with which the discussion paper considers the complex implications of the government's zero debt policy for monetary policy, and suggests that "one would expect that as a matter of principle the RBA should make a submission to the Commonwealth Debt Management Review ... and release its submission as a public statement of its views".
Both papers have suggested the possibility that the government's policy in relation to public debt is driven by ideology or populist politics rather than the technical merits and the public interest.
I trust these papers will be useful in your deliberations. Should you wish any clarification or further information, the appropriate contact is Dr Christopher Sheil, School of History, University of NSW. Dr Sheil is a member of the Foundation's Executive Committee and can be reached on (02) 9385 9252(w) or 0419 43 6052(m).