Common Sense on Debt

I don't often wander through the business pages of the newspaper - mergers, buyouts and corporate crises just don't engage me.

However, this is one of the most common sense views of debt that I've read in a long time, and I'd like to reflect on it with respect to today's governments.

Especially here in Alberta, the terms "debt" and "deficit" have been badly mangled in their meanings, and most voters misconstrue them as simply being the "evil of bad government".

The article distinguishes between "good debt" and "bad debt" - basically low cost debt that is used to purchase something of value, and high cost (e.g. credit card) debt that is used to pay for "pleasure".

Looking at the concepts of good versus bad debt in the context of our government, we need to be a bit judicious. Governments, in general, do not exist to "make money". This doesn't mean that governments cannot have profitable investments, just that making money is not their primary goal.

Governments can, and do, take on good debt. These are generally debts incurred to finance large scale public projects. Building of roads, hospitals and schools come to mind as obvious examples. Financing a piece of infrastructure that is going to be around for multiple generations over 20 years or so isn't a big deal. Let's face it, most of us don't have a spare half-million to buy a house, and governments seldom have a spare "couple of billion" to build that new hospital.

A government incurring a debt for such a purpose has not by any means committed a real fiscal 'sin', instead they have taken a prudent step to ensure that public needs are met, and financed in a reasonable manner over time.

I worry when a government is incurring debt as a result of an "operating deficit" - taking on debt in order to pay for its operations. To me, this is similar to taking on credit card debt to finance a vacation - and paying it off over time. Operating deficits, especially when incurred over a long period of time (such as happened in Alberta during Don Getty's tenure), can be a very bad thing. That may mean that the government needs to re-evaluate its priorities - possibly postponing certain infrastructure projects for a while, or reducing non-critical programs.