More random thoughts on government debt

All Western nations - with the notable exception of Australia and Norway - have high levels of public debt that will inexorably erode any economic recovery over the next decade.

Back in 1996, the Howard government in Australia enacted all sorts of austerity measures to cut government spending. At the time they did this, unemployment was still relatively high at between 7 to 8 %. Within 10 years, all government debt had been paid off.

There is still some level of Australian government public debt - the market needs some sort of government backed securities to act as a benchmark for lending elsewhere - but this is balanced out by government investments in the market (called the future fund).

The advantage this has brought Australia is profound: 100% of government spending goes towards government programs and policies, rather than debt servicing.

Western nations, especially the PIGS (Portugal, Italy, Greece, Spain), all have very high levels of public debt, and that debt has meant that a huge proportion of government spending goes towards debt maintenance rather than on health, education, law and order, and so on. Paying off debt is essential to maintain quality government services.

A government won't collapse because of debt. If a government takes on too much debt they can simply choose to default. But the result of this default will be to strip investors (which includes the pension funds and savings of ordinary people) of their savings. In other words, the pain of the default is felt by the market and by households.

The other thing about debt is that indebtedness is a liability during an economic collapse while savings are an asset. As anyone knows, losing your job with $10,000 in the bank is better than losing your job with $10,000 owing on your credit card. So it is with governments.

Governments can and should run fiscal deficits during hard economic times - but these deficits must be balanced out by savings when economic times are good. The governments of both Australia and Norway had erased their public debt leading up to the global economic crisis, which has allowed both nations to enter the crisis in a strong fiscal position.

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