Can our vulnerable public borrowing and investment program be protected from the evil Captain Zero?

Costello's zero public debt fetish

Frank Stilwell presents the big picture on debt policy.

Different dimensions of debt

By Frank Stilwell

Politicians in this neoliberal era are wont to boast of their commitment to the reduction of debt. Peter Costello is now talking of zero debt for the Commonwealth government, thereby effectively eradicating the market for Australian government bonds.

Meanwhile, other forms of debt - for housing and credit card purchases - are rising rapidly, apparently with the government's blessing. And the foreign debt continues to pump up the nation's current account deficit, widely regarded as a critical flaw in the performance of the national economy.

Many Australian people are understandably confused by all this. Is debt a problem or not? As a first step to sorting out the issues it is useful to distinguish the different dimensions of debt: personal debt, corporate debt, public debt and foreign debt.

Personal debt

Personal indebtedness typically arises when individuals spend on making purchases in advance of getting the income that would permit them to do so outright. Housing is the obvious example. Those who have not 'chosen their parents (or grandparents) wisely' nearly always need to obtain mortgage finance to purchase a home. The overall level of housing debt has climbed as house prices have escalated in recent years. Credit card debt is also escalating. The total personal debt in Australia now stands at $590 billion, rising by $22 billion in the three months to June 2002 - half of the increase being housing debt.

Whether incurring personal debt is wise depends on a variety of factors. Take the case of a carpenter or other tradesperson, borrowing money to buy good tools or a vehicle, for example. Those purchases enable the carpenter to earn income, to then pay off the interest and eventually, if work is plentiful, repay the principal. Debt in these circumstances is a sensible economic strategy.

Indebtedness to finance one's education has a similar logic, as witnessed by the failure of HECS to deter most students from undertaking university study. As for housing debt, people need to make decisions about the relative advantages of rental and purchase, depending on their individual circumstances, interest rates and assessments of future housing price trends and expected future income streams.

In other words, whether debt for these purposes is 'good' or 'bad' depends on complex judgements that properly vary from individual to individual.

In practice, the main social concern arising from personal debt is the interest rate burden, which is much higher for credit card debt than housing debt, of course. Going into debt to finance expenditures which have little prospect of generating income is particularly hazardous. Financing addictions to drugs or gambling in this manner is a major social problem. Having to borrow more to repay interest on past borrowings constitutes a disastrous outcome - a 'debt trap'.

Whether personal debt is wise or unwise for individuals, there is no doubt that it is central to the functioning of the economy. The buoyancy of the housing market depends on it. So, more generally, does the capitalist system as a whole. High and rising consumption spending is needed to absorb the economy's vast capacity to produce goods and services. The economic growth process is driven by commercial advertising and substantially financed by debt. It is a process that is enormously wasteful of resources and is not ecologically sustainable. This is the essence of modern capitalism. Peter Costello is not about to challenge that!

This is an era of rampant consumerism in which material aspirations are rising more rapidly than current incomes. It seems that (unlike Sydney Morning Herald commentator Ross Gittins) the people are not aware of the social-psychological evidence that more material possessions do not reliably create happiness! Personal debt has become an integral part of the spiral of want-satisfaction and want-creation, for better or worse.

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