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

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

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

4. 4 Figure 2.1

5. 5 Figure 2.2

6. 6 Figure 2.3

7. 7 Budget taxonomy with notional numbers Current expenses Goods and services100 Transfers (including interest payments) 40 Depreciation 10 Total expenses150 Current revenues155 Net operating balance +5 Minus net capital investment Capital formation – depreciation (20 – 10)-10 Net lending (fiscal) balance -5

8. 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 Positive NOB has produced increase in net worth Borrowing has NOT reduced net worth Borrowing has NOT reduced net worth What matters is the productivity of capital formation What matters is the productivity of capital formation

9. 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. 10 Conclusions NSW government’s policy (obsession) with avoidance of borrowing and with reducing net debt is unnecessary, expensive, inefficient and unfairNSW government’s policy (obsession) with avoidance of borrowing and with reducing net debt is unnecessary, expensive, inefficient and unfair We have shown it is unnecessaryWe 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 waysIt 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 dictumsIt 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 residentsIt is unfair because present tax payers are being taxed to finance capital formation to provide services to future residents