In its 2017-18 Budget the Australian government identified "Ensuring the

Government lives within its means" as one of its primary policy

objectives (http://budget.gov.au/2017-18/content/glossies/overview/html/). To

achieve that end the Treasurer Scott Morrison re-labelled items in government

debt into either "good debt" or "bad debt". In a nutshell, "good debt" includes

government borrowing used to finance physical infrastructure whereas "bad

debt" refers to government borrowing used to fund welfare payments.

With this backdrop, use the income-expenditure analysis to compare and

contrast the effects of an increase in "good debt" (government spending) and

"bad debt" (transfer payments) on the short-run equilibrium output in Australia.

In your discussion, consider the effects of crowding out and marginal

propensity to consume on the equilibrium level of output

The objective of this paper is to analyze the affect of an increase in either “good debt

“ or “”bad debt”” to the Australian economy in general and to the Australian

Government budget in the short run.

Based on the official statistic provided by the ABS: Commonwealth of Australia [1],

the Australian Government budget is expected to incur a deficit of $29.4billion

forecast for 2017/2018, while the economy is expected to grow by 1.75% this year

and 2.75% next year, at the back drop of an uncertain world economy and suppress

commodity prices, the latter of which is the back bone of the Australian economy.
Spending using “good debt” in affect would help meeting the targeted GDP growth

for 2017 but would also set the foundation for future years GDP growth, as spending

on physical infrastructure tends to bring multi years benefits to the domestic

economy. For example, spending on a new free way project would help to improve

logistical efficiency and the same time create new economic opportunities .

In an essence, should the Australian Government opted to “increase the allocation of

“good debt “in the short run, it would create a good base for future economic growth

and lessen the effect of future export market volatility. On the flip side however, a

further increase of “good debt “ would sap away allocation for other vital social

welfare related payments and deprive the lower income group of many basic services.

There is also a potential risk that the potential economic benefits initially targeted

with the “good debt” may not yield the result as expected due to either pilferage or

other legal/economic reasons. In any case, should this happen, it would increase the

burden of debt servicibility to the Australian Government and may affect its current

AAA credit rating in the future.

According to the official statistic[2], Australia spends around $164.1 billion of

taxpayer moneys on social security and welfare that mainly benefited the less

fortunate such as the unemployed, minority groups and the lower income group. This

is a social responsibility that had been undertook by the Australian Government which

in an efficient market based economy would not be covered.

These payments are made with the view of providing the necessary assistance to the

targeted group in an expectation that they would improve their socio-economic

standing and later contribute back positively to the mainstream economy[3].

The lack of such effort by the government could lead to a negative effect on the

general society such as potential increase in crime or breakdown in social order

which ultimately would effect political and economic stability example that can be

seen in countries such as Venezuela or Zimbabwe.

Although these type of payments are deemed socially vital and politically favorable, it

will create a burden for the tax payers and the government especially if it requires the

government to continually borrowing to fund them. “Bad debt “ does bring some

economic relief to the local economy such as a payment for an unemployment benefit

would mitigate partially the loss of income from the affected person, it does not have

a wealth creation effect that could sustain it in the long run compared to further

issuance of “good debt”.

In summary, although “bad debt “ is deemed a necessity due to its social and

political impact, a further increase in allocation for this purpose could lead to future

debt serving problem and starved the future generation of the necessary physical

infrastructure and economic growth. The government need to invest responsibly using

“good debt “instrument but at the same time need to strike a balance with its social

responsibility and ensuring a comfortable level of debt servicing requirement.

References

References

[1,3] Craig, J. and Savanth, S. (2017). Australia's 2017/18 Budget. [online]

Commonwealth Bank of Australia. Available at:
https://www.commbank.com.au/content/dam/commbank/assets/personal/federal-
budget/2017/M170509A-CommSec-Research-budget-1718.pdf [Accessed 26
Aug. 2017].

[2] Budget 2017-18. (2017). Budget Overview. [online] Available at:

http://budget.gov.au/2017-18/content/glossies/overview/download/Budget2017-1
8-Overview.pdf [Accessed 26 Aug. 2017].