Where is all the Govt. Assistance Money Coming From?

2020, 05 08 - 75267-Where_is_t-1588834181-1

There is no question that we live in the lucky country. It is times like this that this statement rings truer than ever. With Treasurer Josh Frydenberg declaring “Extraordinary times call for extraordinary measures”, the Morrison Government unleashed a $130 billion wage subsidy for workers in a bid to save Australia from a deep and prolonged recession in the wake of COVID-19. But have you ever wondered where all this money comes from? And what about the question of how Australia will pay it all back?

Let’s start with the question of how the Federal Government gets money.

The Federal Government has a long-term commitment to balance incoming money from taxes with outgoing spending on infrastructure, welfare, health services etc.

Debt is incurred when government spends more money than it raises in a year, causing the budget to fall into deficit. Australian governments have never completely paid off their debts from previous downturns and crises. However economic growth has been such that it has dwarfed the size of the debt relative to our national income.

In order to keep paying regular incoming bills, such as public services wages, the government must borrow any shortfall, adding to its existing debt. Last financial year the Australian Government’s net debt stood at $373 billion or 19.2% of GDP (Gross Domestic Product). While this may seem like an extraordinarily high debt, this figure compares very favourably with other nations, including the UK and the US, which both carry debt worth around 80% of their respective economies.

At the last budget, the forecast was that we would achieve a budget surplus this financial year. That is no longer on the cards. In fact our net debt is now expected to exceed half a trillion dollars as a result of the current global health pandemic.

So how does the Government borrow?

The Australian Government’s debt managers are known as the Australian Office of Financial Management (AOFM). They act as intermediaries between the Government and its potential lenders. They establish online auctions for government bonds. Investors lodge bids to buy these bonds by indicating what interest rate they will accept in repayments.

As of April 3, the AOFM had $579.2 billion of these bonds on issue to investors. To fund the stimulus package, the Australian Government instructs the AOFM to conduct more frequent and larger auctions of these bonds. While this gives the Government access to money to fund the stimulus package, the level of debt will rise, as will the interest they have to pay back.

Who buys the bonds (in other words, who does the Government owe money to)?

Just over half of the Australian Government bonds are held by non-residents. They include foreign banks, central banks and investors, including large pension funds. The rest is held by Australian entities like banks, super funds and other institutional investors. The RBA has also started to buy Australian Government bonds. Ultimately we can expect the central bank to become a significant owner of Australian Government bonds.

How we will we pay the money back?

More than half a trillion dollars is a figure that most of us can’t even get our heads around let alone imagine how such a sum will be repaid. The answer is that it will need to be repaid slowly, over a very long time. Once COVID-19 has run its course and we have evidence that the stimulus has successfully protected jobs, we can expect a gradual lift in economic activity, producing more tax revenue. Once the budget returns to the black (surplus), we can start to pay down the accumulated debt. The mining boom of the 2000s helped restore the budget to balance after the 1990s recession, so it can be done again.

Will the next generation carry the burden?

Borrowing today will NOT impose an unfair advantage on future generations. With interest rates historically low, the interest bill will be kept low as well. Australia’s economy will grow again. We just need to let our debts become a smaller share of our growing economy over time. 

The key takeaway from all of this is: don’t be afraid of this debt. Its costs aren’t that bad. Furthermore, taking on this debt will very likely prove to be a great investment in the livelihood of Australians today and into the future.

Post by ShelMarkblog 08 May 2020 0