Digging out of debt: who is going to pay for the stimulus packages?

The Australian Federal Government has announced multibillion-dollar stimulus packages as well as quantitative easing. But where is all this money coming from and who is going to pay for it? UNSW Business School's Mark Humphery-Jenner explains

So the government has proposed a large stimulus plan in relation to coronavirus. The real question is how is the government going to pay for nearly $200 billion in stimulus packages?

The same question arises if you're looking at the US, but the US is a multitrillion-dollar stimulus package. How is all this going to be paid for? 

Now, to a large extent, it can be paid for in really two ways. Firstly, government debt. And then secondly, implicitly taxation.

Government debt will obviously be necessary for this because the government won't necessarily have a surplus sitting in the bank of $200 billion in Australia, or trillions of dollars in the United States.

So this is going to involve more borrowing, and therefore the government also running more of a budget deficit - because you're going to need to pay for this money somehow. 

The question is: after that borrowing is done, after the government has borrowed that money potentially from international markets, how is that being repaid?

And that can often result in either: 

A) future austerity, ie, you're going to have to try to balance that budget in the future, 

B) more long-term borrowing if they're just going to try to prop up the existing debt and, or 

C) more taxation, if the goal is to try to repay immediately, or at least to try to eat into that debt repayment. 

Sometimes it could be a combination of all three. Sometimes the government tries to bring in temporary taxation measures to try to pay off that debt. That, however, is quite risky and quite dangerous, because we've all seen that these supposedly temporary tax increases often don't end up being temporary and exist for quite some time.

So it would be ideal if the government found a better strategy for paying off this debt long-term, perhaps by paying it off over time.

In short, who's paying for it? The taxpayers ultimately will be paying for it. They'll be paying for it either with tax increases as the government's needing to eat down on their expenditure in the future, or just future debt and therefore the interest that will arise on that debt.

The significant amount of debt could transform into an intergenerational debt. Now, it's difficult to really forsee exactly how the government is going to pay off $200 billion in the immediate term in Australia, or trillions of dollars in the immediate term in the United States. 

Broadly speaking, the goal would be to try to reduce that debt over time and move more toward a balanced budget. 

However, it could easily last many, many years, because paying off $200 billion raised all at once is going to be quite difficult for the government, if they don't drastically increase taxation or drastically reduce expenditure. 

And to some extent eating into that debt is going to require the government to be disciplined going forward. And how intergenerational it is, depends on how strong and how effective is the government's management of its finances going forward.

In short, it will probably turn into a somewhat intergenerational debt, but a lot of it depends on how competent the government is at paying off the debt. 


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