Wednesday, 21 January 2015

Our government should be borrowing more

In Low 10-year bond rates are the deal of the century but Abbott's not at the table Peter Martin writes that our Government is basically being offered free money.
The 10-year bond rate is the rate at which the government can borrow for 10 years at a fixed rate of interest. Right now it's just 2.55 per cent, an all-time low.

By way of comparison in the 1970s it exceeded 10 per cent, in the 1980s it passed 16 per cent, in the 1990s it passed 10 per cent, in the 2000s 5 per cent, and until now in this decade it has usually been above 3 per cent. It dived below 3 per cent at the end of last year and is now just 2.55 per cent, the lowest in living memory.

If Australia was to borrow, big time, for important projects that took the best part of a decade to complete, it would have no risk of ever having to fork out more than 2.55 per cent a year in interest. The record low rate would be locked in for 10 years.

Australia's inflation rate is currently 2.3 per cent. Although it will almost certainly fall in the wake of the collapse in oil prices when it is updated next week, the Reserve Bank has a mandate to keep the rate centred at about 2.5 per cent. That means that right now our government is being offered billions for next to nothing, billions for scarcely more than the expected rate of inflation.
Martin goes on to list any number of projects that could be funded this way. Martin does have a warning of us though:
The risk is that bad projects would be chosen over good ones and the money wasted.
He says even cheap money should be spent well

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