By any measure, today’s debt is cheap if you can get it. Not only cheap, but in many countries the cost of debt, of borrowing money, is tax free. Cheap untaxed borrowing means that equity has comparatively less attraction and companies tend to be more leveraged and thus operate at a higher level of financial risk.
Half the world’s rich countries (the UK being one of the exceptions) allow interest on mortgages to be deducted from taxable income. Almost all countries allow interest on the borrowings by companies to be deducted from taxable profits.
As the Economist points out this week “…60% of bank lending in rich countries is for mortgages. Without such a tax break, people would borrow less to buy houses and banks would lend less against property. Investment in new ideas and businesses that enhance productivity would become relatively more attractive, in turn boosting economic growth…”
When interest rates rise, the burden on government financing will also increase. With rates at all-time low – now is the opportunity to end the subsidy with the least amount of pain and prepare the ground for long term growth and a desperately needed improvement in productivity.
As with all changes there will be winners and losers. The trick is to do the right things and then do them right…