7. Australia’s fiscal straitjacket

Fred Argy

Table of Contents

The medium term fiscal straitjacket
First myth — that ‘higher taxes are bad for economic growth’
Second myth — that a ‘public debt freeze is the key to sound public finance’
Third myth — that ‘the private sector is always a more efficient owner-manager of infrastructure than government’
Fourth myth — that ‘government borrowing for infrastructure investment puts upward pressure on inflation and interest rates’.
Fifth myth — that ‘if a particular infrastructure project cannot be sensibly financed by the private sector, revenue can fill the gap’
Sixth myth — that ‘there is no evidence that the fiscal straitjacket has impeded infrastructure investment’
Seventh myth — that ‘running structural fiscal surpluses is good for national productivity’.
Eighth myth — that 'the community prefers lower taxes and does not like the idea of governments borrowing’.
Why the present fiscal stance needs a rethink
A proposed new fiscal stance


State governments are finally waking up to the need to get more actively involved in financing of public infrastructure. But at the Federal level, with the current commitment of Coalition and Labor to zero net borrowing over the economic cycle, the public debt straitjacket is becoming even more entrenched. The notion that, over the medium/long term, all general government investment should be financed out of current revenue or through the private sector is plain silly. It is impeding the Government’s capacity to meet the nation’s infrastructure needs and forcing it to adopt financing options that are economically less efficient than borrowing. It is also contributing to the run down of social capital and denying Australians a genuine, well informed choice on the appropriate balance between public and private goods. The policy needs a rethink.