Governments will spend $327bn battling COVID-19 over five years, budget watchdog says

The response to COVID-19 will be paid for by a tripling in combined net debt burden to nearly $1.3 trillion.

Treasurer Josh Frydenberg has overseen the biggest increase in spending and debt in peacetime. Picture: Getty Images

Australian federal, state and local governments are expected to spend $327bn over the five years to 2024 in response to the COVID-19 pandemic, paid for by a tripling in the combined net debt burden to nearly $1.3 trillion.

The extraordinary anticipated level of spending is equivalent to half of the combined revenue of the three levels of government in the 2019-20 financial year, or 17 per cent of GDP, the independent Parliamentary Budget Office said in its latest annual national fiscal outlook.

The PBO said that since the start of the pandemic, the combined bottom line of governments “has significantly worsened”.

The national net operating balance for the four years from 2019-20 to 2022-23 had deteriorated by $671bn compared to the 2019-20 outlook, the PBO said – $538bn of which was at the federal level.

The biggest impact would be on the 2020-21 budget bottom line.

This time last year the budget watchdog said it expected the national net operating balance across the three levels of government in this financial year would be a surplus of 1.7 per cent of GDP in 2020-21.

In its latest report, the PBO said the spike in expenses and collapse in revenue through the pandemic meant this figure had been revised to a deficit of 11.1 per cent of GDP, or $222bn.

By comparison, the peak deficit during the GFC in 2009-10 was 3.2 per cent of GDP, or $42bn.

 

Government net debt levels will triple to $1.3 trillion, or 59 per cent of GDP, by 2023-24, from $393bn in 2018-19.

Despite this immense increase in the national debt burden, interest costs will remain roughly steady at 1.3 per cent of GDP over the coming four financial years thanks to the large drop in borrowing rates, the PBO said.

The Morrison government has been intent on implementing relief measures which, while historically large, are temporary.

And while the legacy of the pandemic will be a record debt pile that is likely to take a generation or more to repay, the PBO said “the national budget balance is forecast to substantially recover by 2023-24”.

“While the economic shock of COVID-19 is profound, the national net operating balance is forecast to improve after 2021-22, with a more modest deficit of around 2.2 per cent of GDP ($49 billion) expected in 2023-24,” the report said.

Reflecting the expected trajectory of spending over the medium term and the country’s relative outperformance versus global peers, Australia remains one of only nine countries to hold a AAA credit rating from all three major credit rating agencies.

In contrast, Victoria and NSW have both suffered ratings downgrades during the pandemic.

Josh Frydenberg has flagged that the federal government’s fiscal strategy will turn to budget repair only once the unemployment rate is “comfortably” below 6 per cent. According to the latest Reserve Bank forecasts, that will not be until 2022 at the earliest.