Posted 7 April 2020. <\/p>\n\n\n\n
Adam Triggs<\/a>. <\/p>\n\n\n\n Much is uncertain about the Covid-19 crisis, but two things are clear: government debt is about to become much bigger, and there\u2019ll be no shortage of commentators who will say that\u2019s a problem.<\/p>\n\n\n\n G20 governments have collectively announced more than $5 trillion in \nfiscal stimulus, with more to come. The Australian government\u2019s \nmeasures, including yesterday\u2019s $130 billion spending package, are \nbroadly in line with other countries. So should we be worried about the \nconsequent growth in government debt?<\/p>\n\n\n\n The answer is a clear and resounding no. Whether this new debt is \njustified depends on the benefit of the increased spending versus the \ncost of that spending and, in the current environment, the benefit is \nsubstantial while the costs are minimal.<\/p>\n\n\n\n Fiscal stimulus will avoid the current crisis turning into an \neconomic catastrophe, a fact that appears to be well understood by the \npublic. The lesson from the Great Depression is that my spending is your\n income, and your spending is my income. If we all stop spending at our \nlocal restaurants, the owners and workers in those restaurants lose \ntheir income. They spend less in other businesses, which lose their \nincome too, producing a vicious downward spiral that ends in economic \ncollapse. The solution is for the government and Reserve Bank to step in\n and substantially increase spending and support businesses to fill the \ngap until the private sector recovers.<\/p>\n\n\n\n Failing to expand government significantly would have catastrophic long-term consequences: huge increases in the number of unemployed people (many of whom will never work again), the destruction of thousands of healthy businesses (many of which will never recover), and the permanent destruction of income, wealth and the earning potential of our young people, to say nothing of increased suicides, increased mortality among the very young and very old, increased domestic violence, increased attacks on minority groups, the rise of political extremes and the increased probability of war. The benefits of increased spending are simply enormous.<\/p>\n\n\n\n Conversely, the costs of increased government spending are very low. These costs typically come in three forms.<\/p>\n\n\n\n The first is the potential for increased government spending to \n\u201ccrowd out\u201d the private sector. When governments run budget deficits \nthey are borrowing money from investors, money which is no longer going \nto other worthy investments. Increased demand on the limited pool of \nsavings, in normal times, means higher interest rates (which make it \nmore expensive for businesses to invest and households to borrow) and an\n appreciated exchange rate (making our exports more expensive than those\n from other countries). The increased government spending stimulates \ninflation, meaning higher prices for all of us. In normal times, then, \nincreased government spending can hurt businesses, households and \nindividuals.<\/p>\n\n\n\n But these are not normal times. Even before Covid-19 the world was \nawash with savings, which is why interest rates and inflation were so \nlow. The current crisis means even more savings, even less demand for \nthose savings and even lower interest rates and inflation, and an \nexchange rate that\u2019s less responsive to increased government spending. \nPut simply, the costs of increased government spending in normal times \ndo not apply.<\/p>\n\n\n\n The second potential cost of increased government spending is the \nfuture cost of paying interest on that debt. This is minimal in the \ncurrent environment. The interest rate the Australian government pays on\n new debt is at its lowest level in history \u2014 just 0.8 per cent for \nmoney borrowed for ten years. Households and businesses can only dream \nof being able to borrow that cheaply. This is why it makes perfect sense\n for the burden of stimulating the economy to be placed on the \ngovernment since it can borrow so much more easily and cheaply than \nhouseholds or businesses. This is also why it makes no sense to be \nasking households to access their superannuation (especially given they \nare already losing their jobs, taking wage cuts and watching their super\n balances plummet) or asking small businesses to take out loans (whether\n profit-contingent or otherwise). Stimulus should come from the \nlowest-cost supplier, and that\u2019s the government.<\/p>\n\n\n\n Some might worry whether this increase in debt would mean higher \ntaxes in the future, but there is no reason this needs to be the case. \nThe reason a $10 million debt is a bigger problem for me than it is for \nGina Rinehart is the same reason economists look at debt as a percentage\n of GDP \u2014 the denominator matters. The best strategy for reducing debt \nis to generate economic growth. The maths is simple. If the Australian \neconomy resumes its long-run average growth rate after the current \ncrisis, any increase in debt as a percentage of GDP will halve within \ntwenty years. People would need to start having kids very early in life \nfor this to become an intergenerational debt burden.<\/p>\n\n\n\n The third cost of increased government spending is that it can be \nunsustainable (meaning it can cause problems if that level of spending \ncontinues) or can destabilise financial markets. The sustainability of \nAustralia\u2019s current increase in spending is not a concern because it is \ntemporary and doesn\u2019t change the long-run growth rate of debt. Financial\n stability is not a concern given Australia\u2019s debt is seen as a \nsafe-haven by financial markets: this is why investors are willing to \naccept pathetically low interest rates for the honour of being able to \nfinance our debt. Even if private investors stopped financing the \ngovernment\u2019s debt, or charged prohibitively high interest rates to do \nso, the Reserve Bank would take over that debt, safe in the knowledge \nthat inflation is non-existent and the debt is denominated in our own \ncurrency.<\/p>\n\n\n\n All of this means that Australia won\u2019t come out of this crisis with a\n debt problem. The International Monetary Fund ranks Australia\u2019s fiscal \nposition as being in the highest category possible, meaning there is \nample room to substantially increase spending. The Australian government\n could increase debt by three-quarters of a trillion dollars \u2014 far more \nthan anyone is suggesting \u2014 and still have less debt as a percentage of \nour economy than the average among its G20 peers.<\/p>\n\n\n\n Sadly, this will not prevent a flood of commentators and politicians in the coming months warning of an impending debt crisis in Australia. As soon as the health crisis shows the faintest sign of abating, or perhaps even before then, the government will face tremendous political pressure to cut spending and pay down debt. It is no doubt already facing calls to limit stimulus out of fears of future debt. To protect the living standards of Australians, it must withstand this deeply misguided advice. \u2022<\/p>\n\n\n\n Posted 7 April 2020. Adam Triggs. And that means government spending is overwhelmingly beneficial in these crisis conditions. Much is uncertain about the Covid-19…<\/p>\n","protected":false},"author":2,"featured_media":16585,"comment_status":"open","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"sfsi_plus_gutenberg_text_before_share":"","sfsi_plus_gutenberg_show_text_before_share":"","sfsi_plus_gutenberg_icon_type":"","sfsi_plus_gutenberg_icon_alignemt":"","sfsi_plus_gutenburg_max_per_row":""},"categories":[44,36,55],"tags":[532,531],"_links":{"self":[{"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/posts\/16510"}],"collection":[{"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=16510"}],"version-history":[{"count":10,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/posts\/16510\/revisions"}],"predecessor-version":[{"id":16618,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/posts\/16510\/revisions\/16618"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=\/wp\/v2\/media\/16585"}],"wp:attachment":[{"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=16510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=16510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.socialpolicyconnections.com.au\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=16510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}And that means government spending is overwhelmingly beneficial in these crisis conditions. <\/h5>\n\n\n\n
Costs to government?<\/h4>\n\n\n\n
Adam Triggs<\/a> is the Director of Research at the Asian Bureau of Economic Research, Australian National University.<\/h5>\n\n\n\n
Republished with permission from Inside Story<\/em> 30 March 2020<\/a>.
Inside Story<\/em><\/a> is an online magazine of current affairs and culture from Australia and beyond. Its founding partner was Swinburne University of Technology in Melbourne. You can subscribe for free for frequent insightful articles over a wide range of issues.<\/h5>\n\n\n\nPhoto Russ Allison Loar. flickr cc.<\/h6>\n","protected":false},"excerpt":{"rendered":"