Australia’s debt to hit World War 2 high

Treasurer Josh Frydenberg will give an all important update on the economy and the nation’s finances this Thursday.

The Economic Statement will include a lot of vital information on how the economy, budget and government debt are panning out in response to the 2020 Covid Depression, which has seen 20 per cent of the workforce unemployed, unemployed or dropping out of the search for work.

Mr Frydenberg will give details on the policy changes in the months ahead as the JobKeeper and JobSeeker measures are due to end. It is likely too that he will outline other policy measures on spending and tax that will be aimed to support the economy during these deeply troubling times.

This is essential to prevent the labour market deteriorating in the wake of the Covid-19 induced economic hardship.

In the last budget update in December 2019, Mr Frydenberg was forecasting budget surpluses in 2019-20 and every year for the next decade.

These ‘back in the black and back on track’ surpluses, as the Treasurer liked to call them, have been blown out of the water as government payments and spending have sky-rocketed in response to the economic slump and this has been compounded by a loss of tax revenue as company profits have collapsed and income tax payments have dived on the back of the destruction of jobs and hours worked.

It seems likely that instead of budget surpluses for the next decade, there will be budget deficits for at least five years.

Most of these deficits will be massive, at levels not seen in 75 years around the time of World War Two.

For 2019-20, the budget deficit will be around $75 billion or 4 per cent of GDP. For 2020-21, the deficit is expected to be in excess of $225 billion or about 12 per cent of GDP.

Based on some form of economic recovery, which of course is problematic, huge budget deficits will persist for a few years after that.

These deficits will, of course, be funded by the government borrowing money. As Mr Frydenberg correctly noted some time ago, “there is no money tree” which means that gross government debt will be on track to hit $1 trillion in 2022, around the time of next Federal election.

Net Commonwealth government debt will be a little lower than that but, nonetheless, is on course to exceed $650 billion or 30 per cent of GDP.

Mr Frydenberg’s economic update will also include the cost of servicing that level of government debt – the interest cost in other words.

Even with interest rates at the current incredible and historically low levels, it is likely that the government will be spending over $20 billion a year or about 4 per cent of its usual revenue to pay the interest alone.

Indeed, the government is borrowing money to pay the interest on its debt.

The $20 billion plus of annual net interest costs means there is less money available for the government to spend on other parts of the economy.

While clearly the current economic debate is about protecting as many jobs as possible, pumping cash into the economy and setting in train measures that will underpin business investment regardless of the cost, government debt at the levels forecast will be a hot issue when the worst of the COVID-19 health crisis eventually passes.

Such is the structure of the government borrowing that within two years, around $400 billion to $500 billion of debt will need to be refinanced in the period from 2024 to 2030.

If in a few years interest rates are materially higher – which is distinctly possible – and the budget is not in surplus, again a realistic probability, the annual interest cost to the budget will increase, perhaps markedly.

Before that happens, Mr Frydenberg will be the first Treasurer to increase government debt to $1 trillion.

When he delivered the 2019-20 Budget in April last year, Mr Frydenberg claimed that

“we will see a decade of surpluses” and that as a result of that budget, the Coalition government will “reach our goal of eliminating Commonwealth net debt by 2030 or sooner.”

When he delivers his economic statement this week, it is likely he will be delivering a scenario that has huge budget deficits for 5 years or more and that net government debt will be more than triple the level the Coalition inherited when it won the 2013 election.

This will be an amazing outcome for the trillion dollar man.

Are you a millennial or Gen Z-er interested in joining a community where you can learn how to take control of your money? Join us at The Broke Millennials Club on Facebook!