Federal budget 2020: Australian gross national debt to hit $1 trillion in 2021-22
Australia is set to borrow its way to economic stability in a move that will send gross national debt spiralling past $1 trillion as the federal government fights the worst downturn since WWII.
Federal Budget
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Debt is not a dirty word this year – and at least the next four – as Federal Government borrowings blow out beyond $1 trillion in an attempt to rebuild the economy.
Borrowed money will underpin Australia’s COVID-19 recovery as the nation’s record debt burden expands by more than $450 billion over the next four years.
The government expects to spend $213.7 billion more than it earns this financial year, but this cash deficit will then shrink to $112 billion in 2021-22 and $66.9 billion by 2023-24.
It will propel gross national debt beyond $1 trillion in 2021-22, where it’s likely to remain for most of this decade.
Net debt won’t quite crack $1 trillion in the Budget’s forward forecasts, peaking at $966 billion in 2023-24.
However, the government warns that “significant uncertainty remains” until a coronavirus vaccine is developed and widely deployed, and reiterated its plan to get unemployment back on track to pre-crisis levels below 6 per cent before it focuses on bringing down debt.
Treasurer Josh Frydenberg used his speech to compare the nation’s debt position favourably with other key economies.
“Australia’s net debt as a share of the economy will peak at half of that in the United Kingdom, around a third of that in the United States and around a quarter of that in Japan today,” Mr Frydenberg said.
“This is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time.”
Mr Frydenberg said net debt would peak at 44 per cent of GDP in 2023-24, while gross debt would reach 51.6 per cent of GDP in 2023-24 then stabilise at around 55 per cent of GDP in the medium term.
Gross debt is the total value of Australian government securities – such as treasury bonds – on issue and owned by investors, banks and super funds, while net debt subtracts government financial assets such as cash and loans from the gross number.
Gone are the days of Coalition governments doing everything in their power to drive down national debt and lower the interest bill of the next generation.
COVID-19 has rewritten the rules, and the interest bill is not crippling because of record low interest rates globally.
With the government currently able to borrow money at rates below 0.5 per cent, economists say our interest bill will be less than it was before the coronavirus struck.
And they expect Australia to grow its way out of the record debt pile, just as it did after the last great economic shock – WWII.
CommSec senior economist Ryan Felsman said government spending to combat COVID’s impact had to be large to support households and businesses.
“The economic cost of not doing anything now would mean we would see much higher unemployment,” Mr Felsman said.
“Our view is the higher debt levels will eventually be paid back over time.
“Australia’s debt burden was lower relative to global peers going into the crisis.”
BetaShares chief economist David Bassanese said while total debt was higher, interest rates were a lot lower.
“Interest payments on the debt are about 1 per cent of GDP, and that’s still below what we used to pay back in the 1990s when we paid almost 2 per cent,” Mr Bassanese said.
“Over the next couple of years public debt interest as a share of GDP isn’t going up.”
He said two positives of the debt situation were that government borrowing was locked in at record low rates, and it was in our own currency so it could not be blown out by foreign exchange issues.
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“Provided your interest rate is less than nominal GDP growth, debts as a share of GDP should decline over time and you grow your way out of the problem,” he said.
“Fortuitously they are having to borrow heaps of money at a time when interest rates are at the lowest levels in recorded history.”
However, paying down the record debt pile may be tougher than it was 70 years ago.
KPMG chief economist Brendan Rynne said the last rebuild after a global calamity – WWII – benefited from mass international migration that helped population growth and the economy.
“This time we need self-generated productivity growth,” Mr Rynne said.
“Naysayers will focus on doom and gloom.
“But Australians are a resilient and innovative bunch, and history shows we have the capacity to knuckle down in times of adversity and gradually work our way through to the other side.”
PwC Australia chief economist Jeremy Thorpe said the debt increase put a bigger onus on prioritising growth.
“Even with the extraordinary budget deficit and associated increase in debt, we are not in a debt crisis,” he said.
“By international standards we still have moderate levels of public repayments.”
In a joint statement, Mr Frydenberg and outgoing Finance Minister Mathias Cormann said since the onset of COVID the government had committed an “unprecedented $507 billion or 25.6 per cent of GDP in overall economic support, putting Australia on the road to recovery”.
The $101 billion JobKeeper wage subsidy program and enlarged JobSeeker unemployment benefits are two key planks of this spending surge.
Both are winding down in the coming months and the Budget does not prolong them further despite calls from welfare groups to continue the support longer into 2021.
“Our economic and fiscal strategy sets out the path to grow the economy, stabilise debt, and then reduce it over time,” the Treasurer and Finance Minister said.
“By stabilising and then reducing net debt as a share of the economy we will be in a strong position to manage future economic shocks.”
Shadow treasurer Jim Chalmers said the Budget would rack up trillion of dollars in debt but does not do enough to create jobs.
“Despite producing a grab-bag of headline-seeking announcements, the Government expects another 160,000 Australians to be added to the jobless queues by Christmas,” Mr Chalmers said in a statement.
Labor criticised the government’s failure to lift the permanent JobSeeker rate above $40 per day, improve access to childcare, promote cleaner energy, or address the crisis in aged care.
“While the average worker will receive a $50 per fortnight tax cut, millions on JobKeeper have seen their payment cut by at least $300 per fortnight,” Mr Chalmers said.
“Decisions taken by the Liberals in this Budget mean that the Morrison Recession will be deeper and longer than necessary.”
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Originally published as Federal budget 2020: Australian gross national debt to hit $1 trillion in 2021-22