On borrowing less, repaying deliberately and saving before the next crisis
By Jason Gay
Public debt is unusual because it allows one generation of voters to receive a benefit while part of the cost is carried into the future. That does not make borrowing inherently wrong. There are circumstances in which spreading costs across generations can be reasonable.
A railway that operates for a century is different from an electricity bill. Infrastructure can produce benefits long after the people who approved it have left office. Borrowing during a severe recession may also prevent deeper economic damage. During war or national emergency, governments may have little choice.
The problem comes when borrowing loses that distinction.
If debt finances ordinary recurrent expenditure year after year, the question is no longer whether future citizens should help pay for assets they will use. Future taxpayers are instead helping meet the cost of government services consumed before their time.
This is why debt should be treated as a financial tool rather than another form of revenue.
Australia’s present position demonstrates the importance of the distinction. The Parliamentary Budget Office forecasts national gross debt across Commonwealth, state and territory governments at about $1.7 trillion in 2026–27, rising to around $2 trillion by 2029–30. National public debt interest payments are forecast to rise from $54.2 billion to $77.2 billion over the same period.
Those interest payments matter because they represent choices already made. Money used to service yesterday’s debt cannot simultaneously provide today’s services, reduce today’s taxes or meet tomorrow’s emergency.
A fiscal constitution should therefore establish a principle that is strangely absent from much public discussion: debt incurred for exceptional circumstances should come with an expectation of repayment.
That does not mean driving public debt to zero at any cost. Economists reasonably debate the appropriate level of government debt, and debt sustainability depends upon economic growth, interest rates and the assets or policies financed by borrowing.
The more modest proposition is that debt should have a direction.
When a government borrows heavily during a crisis, the return to ordinary economic conditions should trigger a repayment phase. A defined proportion of revenue could be directed towards reducing debt before new discretionary expenditure is considered.
That creates a cycle of responsibility.
Borrow during genuine need. Stabilise the country. Then rebuild the balance sheet.
But repayment alone is defensive. A stronger nation would also save.
Australia already has considerable experience with government investment funds. The Future Fund was established in 2006 to strengthen the Commonwealth’s long-term financial position by providing for unfunded Commonwealth superannuation liabilities. The Commonwealth also operates specialised funds relating to medical research, housing, disability, drought resilience and disaster preparedness.
The question is whether this principle should be extended into a broader national reserve.
A National Resilience Fund could be built gradually over decades. Contributions would be required when fiscal and economic conditions met defined standards. Windfall revenue could partly flow into it rather than automatically becoming the basis for permanent new spending.
The fund should not become another account from which governments can make ordinary Budget announcements. Its value would depend upon making access difficult.
The purpose would be to create national financial capacity before that capacity was urgently required.
Major infrastructure is an obvious example. Instead of assuming every generation must borrow heavily whenever Australia needs a new national project, accumulated capital could meet part of the cost. During a severe national emergency, the fund could provide immediate resources without forcing all expenditure onto the national credit card.
Over a sufficiently long period, the investment returns themselves could become significant. If the fund grew well beyond the level required for resilience and infrastructure, Parliament could consider whether some investment income might be used to reduce the tax burden while preserving the underlying capital.
There are important objections.
Governments generally borrow at relatively low rates, and it does not automatically make financial sense to repay every dollar of debt before holding investments. A government investment fund also carries market risk. Poorly designed funds can hide expenditure from normal Budget scrutiny, encourage political interference in investments or create the illusion that money placed in a fund is somehow free.
The Department of Finance itself notes that establishing government investment funds requires a clear reason for placing resources outside the normal Budget process and careful consideration of investment management, liquidity and risk.
Those warnings should shape the proposal.
The fund should have a narrowly defined purpose, professional independent investment management and transparent reporting. Governments should not be able to direct individual investments for political reasons. Withdrawals should occur only under conditions defined in legislation.
Most importantly, it should not become an excuse to borrow money merely so that the government can say it is saving elsewhere.
The broader principle is one of intergenerational fairness. Future Australians will inherit the infrastructure we build and the institutions we maintain. They will also inherit our liabilities.
There is no reason they should inherit only the liabilities.
A prosperous country should try to leave behind assets as deliberately as it leaves behind obligations.
The fiscal question is therefore larger than whether next year’s Budget is in surplus or deficit. It is whether Australia is steadily increasing or reducing the financial freedom available to those who come after us.
Debt can sometimes purchase that freedom.
Savings can preserve it.
The responsibility of government is knowing the difference.
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