Federal budget: Why owing a trillion dollars could make us richer

Australia's $1 trillion federal debt won't affect workers because borrowing is cheap and the economy is still growing.

Australia's $1 trillion federal debt won't affect workers because borrowing is cheap and the economy is still growing. Photo: Getty

The federal government plans to spend its way out of recession, with the budget’s forward estimates predicting federal debt will reach nearly $1 trillion by 2024.

Despite 2019’s assurances that the budget was “back in black”, Treasurer Josh Frydenberg’s 2020 budget revealed a $213.7 billion deficit and net debt of $703 billion.

But economists say Australians have nothing to worry about – so long as the government spends on policies that grow the economy. 

The “eye-watering” debt came from several initiatives designed to create new jobs and encourage business investment as Australia recovers from its first recession in three decades.

These initiatives include tax cuts, subsidies for apprentices, hiring credits for young workers, agricultural export reforms, and infrastructure projects.

By 2024, net debt is forecast to hit $996.2 billion – or 43.8 per cent of the nation’s GDP.

“Our economic response has come at a significant cost,” Mr Frydenberg said.

“This is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time.”

Size doesn’t matter, it’s how you use it

For the past several decades, Australians have had an “obsession” with reducing government debt and deficit, Emma Dawson, executive director of left-leaning think tank Per Capita, told The New Daily.

And this obsession has done more harm than good, she said.

The idea you have to rein in your belt and pay it all off is actually the worst thing you can do,” Ms Dawson said.

“Because cutting spending on services, cutting government investment, and engaging in austerity actually decreases economic growth.”

Although it sounds like it would reduce our debt burden, slashing government spending typically results in fewer jobs, leading to a smaller government tax take and less economic growth overall.

Or, as Reserve Bank deputy governor Guy Debelle put it: “We’ve got to be careful how we think about the debt situation, on the public side in particular, in the sense that the counterfactual doesn’t obviously lead to lower debt”.

“If there was less fiscal support, the economy would be in worse shape and potentially debt levels would be even higher,” Dr Debelle said during a videoconference hosted by Ai Group.

“Another way of putting that is, the fiscal stimulus that is in place here, and in other countries for that matter at the moment, is leading to better outcomes for the economy, which actually improves the fiscal position down the track.”

The better way to pay off the debt, Ms Dawson said, is to focus on shrinking the debt as a proportion of the economy by using government spending to stimulate growth.

This is because the larger the economy grows, the greater the tax take and the easier it is to service the debt.

Australia’s economic recovery after World War II is a great example of this.

Some 75 years ago, when post-war federal debt reached approximately 120 per cent of GDP, the incumbent Chifley government responded with “a program of rapid economic growth”, Ms Dawson said.

“Within ten years the size of the debt had shrunk because the economy had grown so much,” she said.

“The debt was proportionally back to about 30 per cent, about where it was before the war.”

Effectively free money

Another factor working in the government’s favour is record-low interest rates.

The government currently pays less than 1 per cent interest on its debt – before taking into account inflation – making borrowing money “effectively free,” Ms Dawson said.

Source: Federal Treasury. Note: AGS refers to Australian Government Securities, including bonds and notes.

There’s also no requirement for government to pay off its debt within a set timeframe, like household debts.

The federal government can continue to roll over debts as it grows the economy, Ms Dawson said.

And the government is not borrowing against the value of assets like a home, which typically needs to be repaid before retirement.

Instead, governments borrow against the productive capability of their economy.

If you get the settings right, the economy continues to grow, and if it continues to grow the size of debt in proportion shrinks,” Ms Dawson said.

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