Bad Debt? Good Debt? Complicated Mess!

via MacroBusiness via AFR

On Friday, The Australian Financial Review reported that Hockey was “mulling” the idea of separately classifying debt the federal government raises to invest in infrastructure projects from the debt required to finance the budget deficit.

Personally I did not understand a word of this when I read it for the first time.

The article goes on to argue that Hockey will draw a distinction between good debt and bad debt. The former being the self-liquidating kind that is repaid via improving productivity. And that Hockey will aim to split the debt into on and off balance sheet categories.

However, thanks to Richard Dennis of The Australia Institute, he makes it crystal clear:

After spending years deliberately conflating public sector debt and private sector debt in order to better scare the electorate, Hockey now wants us to distinguish between “good debt” which is used to fund infrastructure, and “bad debt” which is used for recurrent expenditure.

Infrastructure is one of those words that is easy to say and hard to define. Most people accept that roads are infrastructure, but is a highway to nowhere really a good investment? Implicit in Hockey’s language is the notion that it is OK for governments to borrow money to build big things made out of concrete but that we shouldn’t borrow for the delivery of government services. But what about education or preventative health?

One response to “Bad Debt? Good Debt? Complicated Mess!

  1. In strictly financial terms, good debt is something that will give you a financial return that is greater than the debt itself. Bad debt would be something you don’t see a financial return from.

    I think governments soften these definitions because things that may be viewed as good for the public are not necessarily good for the balance sheet.

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