Should the Federal Government take the step of capitalising on the split in the Democrats and proceed with the full sale of Telstra, Treasurer Peter Costello has indicated his preference for using the proceeds of the Telstra sale to retire all Federal Government debt.
Governments finance their debt by issuing bonds. There is nothing wrong with a degree of government debt when it is used for purposes such as long-term infrastructure investment. If, say, a new railroad is constructed, the cost can be spread over the generations of Australians who will benefit from the investment.
Today, the revitalisation of Australia infrastructure is badly needed. Our roads, rail, ports, water and telecommunications all need major government investment, which questions the wisdom of using any windfall in government revenue to retire debt instead of investing it in Australia’s future.
Also, government bonds have become an important form of secure investment for superannuation and mutual funds. But if the Treasurer retires all government debt, then the Federal government bond market will disappear.
Or will it only be a temporary disappearance?
Labor Shadow Treasurer, Bob McMullen is no fool. If Costello pays off all government debt, then McMullen knows there will be an opening for a future Labor Government to restart the government bond market, raising up to $50 billion.
That would give a future Labor Government the ability to undertake enormous investment in the economy, and a sizable war chest that would last for a number of election cycles.