Post-Covid strength has come with a high price tag

The nation’s post-COVID economic recovery is strengthening, judging by new consumer price index data. In the December quarter, the CPI grew by 0.9 per cent, exceeding market expectations. Rising childcare expenses as parents returned to work, increases in private health insurance premiums and a higher tobacco excise drove the increase. And the figures show that Australians spent up on furnishings, household equipment and services, shaking off the shackles of recession. At this stage of the economic cycle, moderate price rises are a healthy sign. The economy appears to be well short of the need for an interest rate rise to contain inflation and avoid the buoyant property market overheating. The Reserve Bank board may expand on that next week.

Employment figures, due on Thursday, will give a fresh snapshot of the jobs market after unemployment fell to 6.6 per cent last month. The International Monetary Fund has confirmed Australia’s strong position. Its latest update forecasts our economy to grow by 3.5 per cent this year, 0.5 per cent faster than predicted in October, and by 2.9 per cent next year.

While we are significantly better off than comparable nations, Australians should be under no illusions. Our comfortable position has come at a high price. That price has been quantified in an aptly named report called The Looming Iceberg: Australia’s Post-Pandemic Debt Risk, by former senior NSW Treasury official Robert Carling for the Centre for Independent Studies. The report shows federal and state government debts will more than double to $1.75 trillion across the five years to 2024, seriously weakening public finances and paving the way for further credit downgrades. As a consequence, economics editor Adam Creighton writes, Australia’s exceptionalism — our fortunate position as one of the least publicly indebted nations — is over. The increased debt burden, the report says, “poses a risk to economic growth in the longer term and reduces fiscal flexibility and the capacity to respond to future crises”.

The largest increase in net debt was in Victoria. NSW, while in a stronger position, recorded the second-largest increase, “which will transform its fiscal position from one of outstanding strength in recent years to one that is more in line with the average of the states”. The assumption that debt burdens will be manageable in the long term needs to be heavily qualified, the report argues. A steep decline in the debt burden like that achieved after World War II will depend on vigorous economic growth, continuing very low interest rates and fiscal discipline on the part of governments. As Mr Carling notes, public debt was rising even before COVID struck a year ago.

Federal and state stimulus measures saved livelihoods and kept countless families out of poverty through the pandemic. Much of the increase in debt was unavoidable. But as the report says, reversing it should be a policy priority once the underlying causes of the rise have passed. Taxpayers are not a bottomless pit. The tourism sector is pushing for a limited extension of JobKeeper beyond March 28 to compensate for the ongoing loss of international visitors. As we reported last week, Scott Morrison and Josh Frydenberg have made it clear that the government does not intend to extend the $90bn wage subsidy program. But Tourism Minister Dan Tehan has opened the door to targeted support for tourism businesses, asking the sector to justify any further assistance. In the medium term, vaccines and the new 15-minute finger prick COVID tests should help restart overseas travel.