Should the government worry about its record debt in the federal budget?
While the federal government is currently carrying record levels of debt, there are more important considerations for the Australian economy in the federal budget, says UNSW Business School
While the Australian economy has emerged from the events of 2020 with record levels of debt, the federal government should provide ongoing fiscal support in the federal budget while shrinking down debt as a share of gross domestic product (GDP) in the long-term, says Richard Holden, Professor of Economics at UNSW Business School.
Australian government debt has steadily increased over decades, with the Department of Treasury forecasting Australia’s net debt position to be $703.2 billion for 2020-21, with a net debt-to-GDP ratio of 36.1 per cent. It is predicted this debt will increase to $966.2 billion in 2023-24, with a net debt-to-GDP ratio of 43.8 per cent.
This is a notable increase on previous years, and while many are uncomfortable with high levels of debt (including the current Coalition government which likes to tout its economic management credentials) Prof. Holden said there were more important considerations around debt in the upcoming federal budget.
“The economy has needed a lot of fiscal support that was provided in 2020,” he said. “If that’s cut back too aggressively in the name of trying to reduce or not increase debt, that would be a shame.”
The real cost of debt?
It is important to remember Australia came into 2020 with one of the lowest net debt to GDP ratios in the world. “And we’re going to come out of it with one of the lowest in the world,” said Prof. Holden, who noted this also comes at a time when the country can borrow at interest rates of just 1–1.5 per cent: “even $200 billion, you’ve got to think about the carrying cost of that being $2-3 billion a year. That’s the real cost of it, not the sticker value itself,” he said.
“I think it’s really important that we get away from this narrative of needing to, quote, pay down the debt, rather than just shrink it away as a share of GDP as the economy grows. That’s what we did in the post-World War Two era in Australia. And that’s what we should do this time, rather than pulling back fiscal support too quickly, and not helping the economy grow as rapidly as it otherwise could.”
The government ran a very large budget deficit in 2020 with necessary fiscal support measures such as JobKeeper and Jobseeker, as well as an increase in other welfare payments, so Prof. Holden said it will be “no surprise” that the government will also run a big deficit this year.
“There’s nothing more that the Reserve Bank can do, they can keep doing what they’re doing. But the government needs to continue with its fiscal support,” he said. The government has signaled it may pull back from fiscal stimulus measures and begin on fiscal repair when unemployment was comfortably below 6 per cent – but Prof. Holden also noted 2021 is an election budget. “So, they’ll probably be more apt to throw some money around,” he said.
Short-term spending vs long-term investment
Gigi Foster, Professor of Economics at UNSW Business School, also acknowledged the federal government will be releasing its 2021 budget carrying record levels of debt. “A lot of people say that the government has got to pay off the debt, right? Because the debt to GDP ratio is now about 40 to 45 per cent, said Prof. Foster.
“But actually, if you compare that to our peer nations’ debt to GDP ratios, we’re doing quite well. We’re way below the US, the UK, France, Germany, Canada, a lot of nations that we compare ourselves to on many other levels. We have a much lower debt to GDP ratio. So, I think it’s one thing that is going to get a lot of play in the politicking around the budget, but actually, it’s kind of a red herring, is that we have got to pay down the debt.”
While Australia was one of the few developed economies that came out with generous income support in the form of JobKeeper and other support measures for employers and employees, Prof. Foster said this came at a high cost, with little to show in terms of long-run investment into Australia’s productive capacity. “A lot of commentators point to that and say, ‘well, $90 billion later, here we are.’ And that’s an awful lot of debt to have accumulated,” she said.
“And it’s true, it is a lot of money to spend. I was a big proponent of the JobKeeper program when it first came out back last year, because essentially, that enabled us to keep the employees and employers together for a period of uncertainty and lockdown, which I was hoping would be very short. As it happens, it’s been very long.”
With JobKeeper coming to an end as of March this year, Prof. Foster said the government’s stated fiscal strategy in 2020 was focused on two stages: firstly, getting the economy to a point where it could recover, and secondly growing the economy with the implicit and explicit aim of paying off the debt.
The policy nominated a notional unemployment rate of “comfortably below” 6 per cent before it moved on to stage two. With ABS statistics indicating an unemployment rate of 5.6 per cent for March 2021, Prof. Foster said the first and second stages of “helping people to recover and helping the economy to grow are kind of the same thing. They kind of blend together. So that fiscal strategy is a political statement more than anything.”
Prof. Foster said she expects the government will continue to provide fiscal stimulus to assist with the changes over the past year being absorbed into the economy in different ways. “This is largely about structural reorganisation. Certain industries that got hit really, really hard now need to recover. And the people and the capital that were in those industries need to be reallocated. And that’s a huge job. So they’re going to be trying to work out how they can do that,” she said.