So why don’t most economists share the worries of so many conservative politicians, headline writers and ordinary citizens? Five reasons.
The first is, these are extraordinary times. I’m not sure Frydenberg is right in claiming the pandemic is “without doubt, the biggest shock this country has ever faced,” but it’s certainly one of them. And it’s certainly the most economically devastating pandemic since the Spanish flu of 1919.
As we can see even more clearly in countries that have been less than successful than we have in containing the virus, between the direct damage caused by the lockdown and the psychological damage of great fear and uncertainty about what the future holds, the economy has been flattened.
The pandemic will be working to keep the economy down until an effective vaccine is widely available worldwide, which may be several years way. Just as World War I wasn’t all over by Christmas, nor will this be.
It’s thus not surprising that such extraordinary times should be leading to previously unknown levels of government spending, budget deficits and public debt. Except, of course, that nothing we’re likely to do comes anywhere near where we were by the end of World War II.
Second, as AMP Capital’s Dr Shane Oliver has said, “it makes sense for the public sector to borrow from households and businesses at a time when they have cut their spending, and to give the borrowed funds to help those businesses and individuals that need help”.
Relative to the size of our economy, Australia’s net public debt is much smaller than the Eurozone’s, a hell of a lot smaller than the United States’ and almost invisible compared to Japan’s.
People ask me where will all the money the government’s spending come from? Mainly from other Australians, who have money they’ve saved and want to lend. Others ask, who buys all those government bonds? There’s no shortage of financial institutions keen to buy, starting with your superannuation fund and other fund managers.
So much so that recent offerings have been way oversubscribed, allowing the government to borrow for five years at a yield (interest rate) of just 0.4 per cent, and for 10 years at just 0.9 per cent. With the inflation rate at 1.7 per cent, this means it’s costing us nothing to borrow.
Third, the federal government has run budget deficits in more than 80 per cent of the years since federation. If deficit and debt is such a terrible thing, how come we’re not in debtors’ prison already?
Fourth, just because our latest levels of debt and deficit are high by our standards, doesn’t mean they are by anyone else’s. Relative to the size of our economy, Australia’s net public debt is much smaller than the Eurozone’s, a hell of a lot smaller than the United States’ and almost invisible compared to Japan’s.
That’s why the International Monetary Fund – the outfit responsible for bailing out countries that get too deeply into debt – keeps assuring us we have plenty of “fiscal space”. Translation: Why do you Aussies fret so much about so little debt?
Finally, it’s fine to fret about debt, but what’s the alternative? The alternative to using government spending to support the economy until the crisis finally passes is to let it continue shrinking, with more and more people being thrown out of work and businesses failing.
But this wouldn’t get the budget back to balance, it would cut tax collections even further and increase government spending on unemployment benefits, thus worsening the deficit and adding further to the debt. Why would that be a good deal?
Ross Gittins is the Herald’s economics editor.
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Ross Gittins is the Economics Editor of The Sydney Morning Herald.