Good Debt vs. Bad Debt

I actually like the Australian government’s idea of classifying its debt as either “good debt” or “bad debt”, rather than just total debt. While I appreciate the potential for debt classifications to be manipulated for political means, it is an important distinction. Especially for a country like Australia that could use a debt-financed infrastructure boost.

Debt is acceptable when incurred to finance one-off productive investments that will pay for themselves in the longer term via financial, economic and/ or social returns. This can include public transport, roads, bridges, schools, hospitals, etc. It can also be acceptable as a means of stabilising a short term crisis if pre-existing savings aren’t available – though ideally, this debt too could be spent on “good” investments, killing two birds with one stone.

Debt is less acceptable when used to finance ongoing expenditures such as wages and social welfare. This doesn’t mean these expenditures aren’t worth pursuing – they are often essential. But unless there is a crisis or a one-off productive investment, it must be financed with a similarly ongoing revenue source – taxes, not debt.