Australians will soon know the staggering cost of the impact of the COVID-19 pandemic when they learn the country’s latest deficit figures in federal Treasurer’s economic statement to be delivered on Thursday.
Estimates are that the deficit could be as high as $240bn for this financial year — well over 10 per cent of GDP — given the heavy and ongoing cost of government support packages for the pandemic, including the newly extended JobKeeper and JobSeeker, which are now set to last at least until March.
The good news for Australia is that the country went into the pandemic with a strong national balance sheet, including a relatively low national debt level compared with many other countries.
In his speech to the Anika Foundation on Tuesday, Reserve Bank governor Philip Lowe pointed out that Australia’s general government gross debt as of last year was only around 45 per cent of GDP, much lower than the staggering figure of almost 300 per cent for Japan and levels of more than 100 per cent for the US and Italy.
Developed countries such as France, Canada and the United Kingdom all had general government gross debt levels last year of more than 80 per cent of GDP.
The latest figures in the IMF’s Fiscal Monitor, released in April, show how debt levels are blowing out around the world as governments deal with the pandemic.
The projected general government debt level for advanced economies (US, France, Germany, Italy, Spain, Japan, the UK and Canada) for this year is estimated to rise from 105 per cent of GDP last year to 122.4 per cent of GDP.
America’s debt is expected to rise from just over 100 per cent of GDP last year to 131 per cent this year, Canada’s from 89 per cent to 109.5 per cent of GDP and the UK up from 85.4 per cent in 2019 to 95.7 per cent this year.
As Lowe said, “debt across all levels of government in Australia, relative to the size of our economy, is much lower than many other countries and is likely to remain so”.
That said, every country around the world is in uncharted waters as it tries to grapple with the pandemic.
Australia has opted to cushion the impact of the pandemic with government assistance packages to help keep people in employment.
Jobless rate will rise
Australia’s jobless rate will rise, but it is still a lot lower than in the US, which has not chosen to go down the same path.
Australia’s unemployment rate has risen from 5.1 per cent in February to 7.4 per cent, while the rate in the US has skyrocketed from only 3.5 per cent in February to 11 per cent in June.
The impact of COVID-19 has changed the economic policy debate in Australia.
Monetary policy in Australia has gone about as far as it is going to go, with fiscal policy now doing all the heavy lifting to help cushion the impact of the pandemic on ordinary Australians.
It was only at the beginning of the year that the federal government was still talking about delivering a surplus.
But the severity of the crisis has torn up the rule books.
The old “deficit is bad and surplus is good” debate cannot stand up against today’s pandemic which is already causing severe harm to the economy.
In his speech on Tuesday, which was overshadowed by the Treasurer’s much awaited announcements on the extensions to JobKeeper and JobSeeker, Lowe pointed out that the blowout in the federal government’s deficit is needed to reduce the potential “scars” on the economy as a result of the pandemic.
These, he warned, could include young people not getting onto the jobs ladder or “slipping off it with permanent effects on their lives”, people losing training opportunities, lower levels of investment in capital and research and “the damage to the fabric of society and to people’s lives caused by a long spell of unemployment”.
While there has been much focus on younger people losing their jobs in the pandemic, in a roundtable with the Australian last week Business Council of Australia president Tim Reed warned that some of the most vulnerable people in the country were the over 55s.
Probability of employment again ‘very low’
“If they lose their job, the probability of gaining employment again is very low,” he said.
The BCA is arguing that Australia will need to create an extra two million jobs over the next two or three years to offset the negative impact of the pandemic on employment levels.
“We need to do what we can to limit the severity of these costly scars,” Mr Lowe said in his speech.
“The scars have long-term effects and they damage our society and our economy.
“The government can play an important role here by using its balance sheet to smooth things out and reduce the severity of the downturn.”
As Lowe pointed out, these are unusual beneficially times for the financing of government debt with 10-year government bond rates not seen since Federation in 1900.
In this market, he said, the federal government is able to finance itself in the bond market on very favourable terms, for five years at 0.4 per cent and for 10 years at just 0.9 per cent.
That said, at some point, Australians will have to start paying down that debt — at a time when, hopefully, the pandemic will be like a bad dream of the past.
Significantly higher taxes could be one way of doing this — given the massive levels of debt and deficits — but the hope is that Australia will be able to grow its way out of its debt problems.
That will be a challenge for governments of the future … policies to encourage economic growth without adding to the deficit.
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