Australia’s $ 1 trillion debt explosion exposed

“Disconcerting”: Australian debt explosion revealed. Source: Getty

Last week’s budget lit the fuse of an economic time bomb.

The Morrison government has blocked a decade or more of massive budget deficits and a never-ending increase in public debt, even though it assumes that a Covid-19 vaccine will be found next year and the economy will rebound solidly in the over the next few years. month.

No one in their right mind would dispute the need for substantial fiscal stimulus to deal with the economic fallout from the Covid-19 recession. Indeed, the Morrison government could and should have done more to help the economy here and now to help those affected by the recession, even if that meant the budget deficit this year and next was higher than expected. in the budget.

The problem is that the budget documents show that there is nothing to put the budget back in the dark and get it back on track once the Covid-19 health crisis has passed.

Nothing. Not a single reform or political initiative.

Indeed, a number of decisions made to tackle the 18-24 month recession triggered by Covid-19 have forever turned into huge deficits.

Income tax cuts, for example, will always come out of the bottom line of the budget after the recession ends and Australia and the world have learned to live with Covid-19.

While the payments including the JobKeeper program and the increase in JobSeeker payments are temporary and are expected to be phased out over the coming months, there is not a single policy in the budget that is designed to see an increase. income or reduce expenses when the Covid The -19 crisis is over.

In areas such as defense, for example, spending is multiplying with increases in real terms of 8% per year for the next few years.

Numbers

Even in 2023-24, when the economy has experienced several years of growth and the unemployment rate is on a clear downward trend, the budget deficit will still be $ 67 billion. And this massive deficit will be hit without a cent of JobKeeper’s payments or any of the other temporary measures.

Gross public debt is expected to reach $ 1.138 trillion in June 2024. Net public debt will be $ 966 billion.

The puzzling problem is that Treasurer Frydenberg is aiming for 17 years of budget deficits. Indeed, even in 2030-31, Frydenberg estimates the budget at 1.6% of GDP, or around $ 50 billion. It is only in 2028-2029 that the budget deficit will be less than 2% of GDP.

And these forecasts and projections assume that the economy will not suffer any economic setbacks over the next decade. If there is a drop, for whatever reason, these budget deficits and the debt level will be even higher.

Buried in the budget document is the estimate that by 2031 gross public debt will be around $ 1.7 trillion and net debt around $ 1.175 trillion.

Why is this important

It is well established in basic economics that budget deficits are prudent when the economy is weak and that budget surpluses are good policy when the economy is strong.

This simple rule of thumb served Australia well for about four decades, but was left out of economic planning in the last Frydenberg budget.

At the moment, while interest rates are very low, the cost of servicing new debt is also low. It’s good news.

But how long will these low rates last?

It would be a mistake to assume that over the next five years, let alone the next decade, interest rates will stay as low as they are today. Indeed, if the fiscal forecast for the economy turns out to be correct, interest rates should rise, perhaps by 3 or 4 percentage points in the medium term. This would result in a substantial increase in the allocation of funds by the government to pay this interest.

Indeed, if there are still budget deficits in the second half of the 2020s, that interest rates are higher than today and that there are several tens of billions of dollars in bonds. State to refinance, the government will allocate 4 or maybe 5% of its total spending to pay the interest on its debt.

It would be a misuse of meager finances.

This is why, when the economy recovers and the labor market returns to full employment, a real budgetary repair will be necessary.

It’s no surprise that the Covid-19 has smashed government finances. The big question, which has eaten into the budget, is how to repair the damage.

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