Going to the dogs…debt free
Is it a socialist philosophical legacy in our public education system that is thwarting Australia’s future?
If you have your kids in a public primary school, you might have observed that unless the school has the resources for a gifted/talented/enrichment program, everyone needs to wait until the slower students have ‘caught up’. I have heard many stories of the smartest and brightest kids being sent on errands for the teacher because they have already completed their work. In this, whether intended or not, there is an element of the socialist philosophy in the response and possibly the outcome.
Streaming classes is regarded by many, if not most, as politically incorrect. Again, the intended outcome is a hypothetical form of society that echoes the socialist political and social theory. These comments are not intended to detract from the very good and hard work our underpaid and under appreciated teachers put in, rather it is an indictment against a system that has been put in place that prevents teachers from having the maximum impact on their students because they are not able to leverage their skills.
But this is not a dissertation on education in our public system.
Our political and economic leaders, and many of their advisers, were educated in this system. And the problem is that it has not equipped them to make the right entrepreneurial investing decisions – that cost money now but produce long term benefits. Unwittingly, they are relegating Australia’s geopolitical stature to ‘the quarry at the end of the cul-de-sac’.
What I am talking about is our need to borrow money now to make serious infrastructure investments today. Inflation ensures that deferring projects makes them more expensive in the future – so while the government dithers, decades pass and the opportunity to fix, for example, the Spit Bridge, becomes unaffordable and is missed.
NSW won’t invest in serious infrastructure for fear of losing its coveted AAA credit rating. The Treasury proudly declares the rating on its website:
“New South Wales is rated Triple-A by the world’s three major credit rating agencies. Fitch confirmed NSW’s Triple-A credit rating with stable outlook on 21 March 2013 while withdrawing future coverage for commercial reasons. Standard & Poor’s (S&P) confirmed NSW’s triple-A credit rating, with the outlook revised to Negative on 25 October 2012. Moody’s reaffirmed NSW’s credit rating on 1 March 2012.”
So what if they borrowed money for 30 years? Their rating might drop to AA.
What’s the point of having an AAA rating if you never use it?
It’s never been cheaper to borrow.
Sure, government debt has grown over the years and we haven’t got a lot to show for it, but it is still a fraction of our GDP. According to some estimates, total net government debt (federal and state) in Australia is $330 billion – or 22% of GDP. That’s a bit like having a personal loan totalling $220,000 when you are earning $1 million a year. It doesn’t seem all that bad when you put it in those terms. And do you think that in four or five decade’s time $330 billion will seem like a lot of money? Business magazines will probably be lauding the world’s first personal trillion-dollar fortune by then.
One argument is that the private sector should make the investment. But they borrow at much higher rates, and while conventional wisdom suggests that they are more efficient operators, the reality is that if the government were to contract the construction it would be the very same companies doing the job. In any case, PPP don’t always deliver the best outcome either. Witness the current expansion of the M2 Freeway in Sydney. Is the owner disrupting traffic for years to build an additional two or three lanes in each direction in anticipation of much greater traffic in 30 years’ time? Of course not. The economic return comes from adding just one extra lane, ensuring that further disruption is guaranteed in a decade’s time when another lane is required.
Forget about the PPP model; simply pay the companies to do the construction work.
Another alternative is that the government does the borrowing and swaps it with the private sector – i.e. lends the funds to the private sector at a better rate than they could get themselves, and makes a better profit on the job than they would otherwise.
The point is that it needs to be done now while interest rates are low and the generational avalanche of baby boomers is fuelling demand for long-term stable income securities.
Pensioners and retirees are sick to death of the low returns available on bank deposits. They would throw money at a long-term infrastructure funding model. With rates historically low, now is the time for the government to borrow for 20 or 30 years. And by self-funding, it would have the further benefit of filling NSW coffers in the future with inflated dollar revenues that would more than offset the fixed rates on long term government bonds.
The socialist philosophy has been alive and well in our education system for decades, and our leaders are unwittingly perpetuating its impact because they are unable to break free from its framework – set in their minds four or five decades ago by ‘Mrs Robertson’ in Grade 4.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Kenneth Beer
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Roger, I’m disappointed you didn’t reply to Greg McLennan’s and my comment on your (dodgy?) analogy.
Roger Montgomery
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Sorry. I’ve moved on but take your point because it was a good one and well made. If we use tax revenue then we should also use interest payments on the debt rather than total debt.
brent bevan
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Agree with the sentiment roger… Although I would not want the job of the politician trying to sell any responsible policy today… Especially a debt funded one.
One point I will make however is re the debt level comparisons. Sure, by relative standards Australia is doing pretty good. At an absolute level we are not really an entity with $1m in income and a very cheap $220k personal loan. If anything that 1m you speak of is better thought of as corporate revenue, of which the govt is a shareholder, taking about 230k of that 1m ( tax revenues as. % of GDP) now it’s far from perfect, but debt to tax revenues would seem a far more realistic basis for comparison than assuming the govt can pocket 100% of GDP to cover operating expenses.
Roger Montgomery
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Good points Brent.
Peter Nicholson
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Roger great article and one solution to the finance issue could well sit with our super funds. Showing my age however I recall the time that SMSF’s were required under what dubbed the 30/20 rule to invest 30% of their funds in govt bonds of which 20% were federal and 20% were state.
so why not an infastructure bond where all super funds must invest a fixed % of their funds and it is govt backed with a min return to the investor ?
Peter
Andrew Legget
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Debt is now the economic boogyman. Australians are now afraid of it and there for the politicians are loath to use it.
I believe, as many people spent every cent they got and used credit for whatever was remaining in the lead up to 2008 people got themselves over their heads. This has seen Australians save considerably more and spending has slowed down as people de-leveraged themselves. In the meantime though, australians have begun to look at any type of debt as a dangerous thing as their own experience of getting themselves over their head was not so pleasant.
As always, anything in moderation can be a good thing. Debt is not the problem but how it is used but people just see it as something bad. It means that we are being spendthrift. I completley disagree, especially now as you say with cheap rates, debt can be a good way to pay for projects that need to be done. In Australia we let fear delay good projects for too long and then they become too expensive and put off even more. We are our own worst enemy.
Look at the NBN, i can see big benefits but instead of talking about these, everyone looks at the cost. An opposition takes an opportunity presented by this to attack it and come up with their own cheaper option which is low on ambition but high itself in price, just not as high as the other so it srapes though,
Your comment about what is the point of having a AAA rating if you are not going to use it is a very good one. The issue is the general public mainly do not understand what AAA means. It is now just a marketing tool to use like a gold star on a kids assignment. Look how good of a job we are doing.
It is funny that you started off talking about education, i think politicians need to spend more time educating people truly what a policy, spending decision etc means. Will it happen, probably unlikely but maybe i am just a bit cynical about politics in general.
There is so much that can be done to help us become a better economy, but it is hard to see that happening in the current state and federal political climates and the general economic sentiment of the public as a whole.
This is without touching on the politics of spending decisions, i used to live in the south west of Sydney and now live on the northern beaches so i have seen a remarkable difference in general infrastructure work. I also get a bus over the spit bridge every day. It is a bottleneck, but is a government really going to spend money to “help the rich of the northern beaches drive their BMW’s to work at the expense of those struggling families in western sydney?”. There are too many votes and more importantly swinging votes in th emore populated west where there is a diverse group of socioeconomic status than the north where it is less populated, tend to be safe seats and are perceived as being a rich enclave.
I agree Roger, i want some decisions to be made that will see infrastructure begun, the NBN for me is a good start and hopefully helps some technology professionals stay in Australia to create cutting edge products and services. A second airport in sydney should have been built ages ago with only politics preventing it. The list goes on…
xiao fang xu
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I am against any borrowing by government and if i can I would put law that is forbidden to do it.
This is reason why:
“There is nothing “wrong” with private debt.
In a free-market economy that respects property rights, the volume of private debt is self-policed by the necessity to repay the creditor, since no Papa Government is letting you off the hook. In addition, the interest rate a debtor must pay depends not only on the general rate of time preference but on the degree of risk he as a debtor poses to the creditor. A good credit risk will be a “prime borrower,” who will pay relatively low interest; on the other hand, an improvident person or a transient who has been bankrupt before, will have to pay a much higher interest rate, commensurate with the degree of risk on the loan.
Most people, unfortunately, apply the same analysis to public debt as they do to private. If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private?
The answer is no.
The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property.
But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours.
For unlike the rest of us, government sells no productive good or service and therefore earns nothing.
It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.”
There are some exceptions, of course, such as when the government sells stamps to collectors or carries our mail with gross inefficiency, but the overwhelming bulk of government revenues is acquired through taxation or its monetary equivalent.
Actually, in the days of monarchy, and especially in the medieval period before the rise of the modern state, kings got the bulk of their income from their private estates – such as forests and agricultural lands. Their debt, in other words, was more private than public, and as a result, their debt amounted to next to nothing compared to the public debt that began with a flourish in the late 17th century.
The public debt transaction, then, is very different from private debt.
Instead of a low-time-preference creditor exchanging money for an IOU from a high-time-preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state.
The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future.
This is the opposite of a free market, or a genuinely voluntary transaction.
Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people’s property, and both deserve the back of our hand.
The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.
Any melding of public debt into a private transaction must rest on the common but absurd notion that taxation is really “voluntary,” and that whenever the government does anything, “we” are willingly doing it.
Morality and economic utility generally go hand in hand.
Contrary to Alexander Hamilton, who spoke for a small but powerful clique of New York and Philadelphia public creditors, the national debt is not a “national blessing.”
The annual government deficit, plus the annual interest payment that keeps rising as the total debt accumulates, increasingly channels scarce and precious private savings into wasteful government boondoggles, which “crowd out” productive investments.
Establishment economists, including Reaganomists, cleverly fudge the issue by arbitrarily labeling virtually all government spending as “investments,” making it sound as if everything is fine and dandy because savings are being productively “invested.”
In reality, however, government spending only qualifies as “investment” in an Orwellian sense; government actually spends on behalf of the “consumer goods” and desires of bureaucrats, politicians, and their dependent client groups.
Government spending, therefore, rather than being “investment,” is consumer spending of a peculiarly wasteful and unproductive sort, since it is indulged not by producers but by a parasitic class that is living off, and increasingly weakening, the productive private sector. Thus, we see that statistics are not in the least “scientific” or “value-free”; how data are classified – whether, for example, government spending is “consumption” or “investment” – depends upon the political philosophy and insights of the classifier.
Deficits and a mounting debt, therefore, are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, “public” sector.
Moreover, whenever deficits are financed by expanding bank credit – in other words, by creating new money – matters become still worse, since credit inflation creates permanent and rising price inflation as well as waves of boom-bust “business cycles.”
It is for all these reasons that the Jeffersonians and Jacksonians (who, contrary to the myths of historians, were extraordinarily knowledgeable in economic and monetary theory) hated and reviled the public debt. Indeed, the national debt was paid off twice in American history, the first time by Thomas Jefferson and the second, and undoubtedly the last time, by Andrew Jackson.”
this is extract from longer article found on another blog
Robert Summers
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I’m not sure I follow the logic of how a so-called socialist bias within the education system leads to an inability of leaders to display long-term planning capabilities.
For starters, a true socialist philosophy would have those smarter students helping their peers – this ensures both the bright student and their ‘lesser peers’ benefit – and would instill values that lead to a focus of decision making for the collective good, rather than the pursuit of ‘rational’ self interest.
As an aside, why is it always assumed that a fast student is a good student? My impression is that a habit of long-term thinking is not developed by rushing through tasks.
I would argue that the short-term focus of policy decisions is one more of economic imperative for managers and decision makers than one of educational indoctrination (at least of a socialist bent). A minister will be around for a maximum of only a few years (and likely a lot shorter if the history of state governments is anything to go by), so what incentive do they have for solving long-term issues? Even if they do have good intentions, these are often waylaid by pragmatism and short-term political wrangling (in no part aided by the ever-shortening media-cycle and the increasingly vocal barrage of vested interests).
Likewise a business manager who is not also an owner is more susceptible to focus on maximising short-term benefits at the expense of long term shareholder value. Note that the reasons we like managers who are also owners is because in respect to fellow shareholders, they share a community of interests, and in that way tend to focus on the collective good (ie a socialist outcome, so to speak).
While I agree that we could be missing the chance to invest why we still can, I disagree with your reasons why we are missing out, and suggest that short-term thinking is a side-effect of the prevailing economic philosophy of the time (which I have come to think of as Lazy Capitalism).
I suspect with the end of the mining/energy investment boom presenting itself in the later parts of this year, and when the RBA’s dyke-plugging attempts to get housing off to the races don’t go so well (encouraging households to leverage into non-productive assets is surely an example of Lazy Capitalism at work), the growing economic malaise will surely shift political discourse towards public spending by the 2016 election…
Either that, or a raving austerity mindset will give us true cause for despair!
Kenneth Beer
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I don’t like your analogy: “…total net government debt (federal and state) in Australia is $330 billion – or 22% of GDP. That’s a bit like having a personal loan totalling $220,000 when you are earning $1 million a year…”
If you are going to use a personal debt to annual income analogy then work out what total net government debt (federal and state) in Australia is as a percentage of total annual federal and state taxation revenue.
Greg McLennan
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“According to some estimates, total net government debt (federal and state) in Australia is $330 billion – or 22% of GDP. That’s a bit like having a personal loan totalling $220,000 when you are earning $1 million a year.”
The trouble with that analogy is that the government doesn’t earn GDP, only the income it derives from relieving companies and individuals of a percentage of their hard earned. So comparing the government’s debt to the total production of the economy is not a good comparison, in my opinion.