By Anthony Element OAM
One accusation that is guaranteed to earn a company board a good smacking from shareholders, especially institutional shareholders, is to be accused of having a, “Lazy Balance Sheet”.
This is when a company has plenty of equity but isn’t borrowing enough. That’s right, when it isn’t borrowing as much as it should be.
This is because companies grow by borrowing to invest; maybe a takeover, a new product development, a new factory or launching into another market. Shareholders expect that their board will invest the borrowed money wisely, i.e. in ways that will enable the company to repay the debt with extra profit left over for dividends and even more growth.
A debt equal to 40% to 50% of equity, (assets), is considered healthy.
But imagine if a company decided to borrow a big lump of money and simply give the money to shareholders in the hope that it will stimulate said shareholders to buy more of the company’s products.
The board would be sacked before you could say, “Where’s my bonus?”
And yet, this is exactly what Right Wing governments do all the time. The current Turnbull government during a time when our government debt is rising, want to give tax cuts to the wealthy and corporations instead of investing borrowings wisely.
You may well ask why. Treasurer Scott Morrison would tell you that such tax cuts stimulate the economy.
That would be, oh, what’s the word I’m looking for? Oh, right, that would be a lie.
How do I know it’s a lie? Because all the evidence, not just some of it, all of it, tells us clearly that Trickle Down is what’s technically know as Bullshit, and corporate tax cuts do ZERO to stimulate the economy; they merely stimulate corporate profits.
But let’s look at what happens when a government increases debt, (always accepting that it remains within that healthy debt range), and instead of making a gift of it to corporate government sponsors, it does what companies – and btw, what you and I would do – use the money to invest in projects that will increase our country’s wealthy down the track.
If a government, especially during a time of economic challenge, instead of madly rushing to surplus or giving tax cuts to the rich, borrows for infrastructure projects:
Jobs are created. This immediately reduces the government’s welfare bill. See? We’re making money already. Wheeee!!!
Creates profits for the (Construction, Engineering, Fitting Out, Equipment Supply), companies that win the projects, on profits from which the government gains company tax, making more money already. Double Whhheeeee!! And the projects haven’t actually started to earn the nation anything from their functions yet already the government, (and we), are benefiting:
- The Infrastructure projects perhaps create new industries, e.g. building a technology park, which leads to new inventions and production output for us to sell to the world;
- The infrastructure projects perhaps make Australia more competitive internationally, e.g. a high speed rail to get agriculture output to shipping terminals more quickly and cost effectively.
And so it goes on.
And, just as an aside, as long as it stays within prudent inflation levels, a country can print money, thereby offsetting some of the debt. And if you think a country can’t create money out of thin air, then ask yourself how the US government has funded Quantitative Easing for a decade while paying off trillions in wasted wars.
So, bottom line? We should stop banging on about debt and demand that the government borrow and invest wisely. (Yeah, I know using the words, “government” and “wisely” in the same sentence is always problematic).
Now Morrison and his economically illiterate cronies will tell us that, “Governments shouldn’t be in the business of picking winners.”
To which I reply, Why not? Companies do it all the time. They pick winning strategies, borrow and invest in them.
And insisting on that being done, boys and girls, is what Shareholders can teach Voters.
This article was originally published on ‘Observation Point’.
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