Don't trip up the recovery - the books can wait.

The stimulus and support being provided by government to manage the impact of – and support a recovery from – the COVID-19 pandemic is most welcome. So far the Australian government and the RBA have announced a combined $189 billion of support and stimulus. Supporting individuals who lose their jobs and facilitating key businesses to stay open and hold onto their employees wherever possible, will be key to riding out the storm and bouncing back as quickly as possible.

There is a dangerous incentive for all levels of government once it appears that things have returned to normal, to balance the books once more. It is crucial that this is not attempted too soon. The raising of taxes and/or withdrawal of stimulus before a recovery is far enough advanced can send the economy straight back down again. This will not just inflict economic damage and human hardship, but can literally worsen the very budget situation that the reversal of policy sought to address.

The last century is littered with examples of premature austerity, including the last decade and even the last few months:

-        Great Depression – the US sent their economy back into recession in 1937 by prematurely tightening monetary policy and attempting to balance the budget after the Depression, an effort which “almost destroyed [FDR’s] New Deal”, according to Nobel Prize-winning economist Paul Krugman.

-        GFC – both the US and the EU turned to austerity in 2010, sending the EU into a full-on repeat of the Great Depression, and the US into a recovery that was much weaker and more prolonged than it should have been.

-        Japan raised its consumption tax in October 2019 from 8 per cent to 10 per cent, contributing to a annualised 6.3 per cent contraction in economic activity in the final quarter of the year.

-        Australia too, has limped through several years of weak wage and productivity growth, and more recently sluggish economic growth following the housing downturn and credit squeeze, while the Australian government preferenced a budget surplus over further stimulus.

When economic activity is weak, government spending has a much stronger impact on boosting activity more broadly. The resources the government absorbs to undertake this spending is not being taken away from the private sector – the private sector wasn’t using them at all. It is pure stimulus. It is only when the private sector starts competing for these resources with the government and bidding up prices, that the government should consider withdrawing stimulus and balancing the books. In other words, not until inflationary pressures emerge.

While these new debts will inevitably have to be paid back, the interest bill on them is negligible, and not just for short term debt. The RBA’s actions have brought the cash rate to 0.25 per cent and the 3-year Australian government bond rate to around 0.3 per cent. Even before the RBA’s announcement of unprecedented stimulus, the 10-year rate reached as low as 0.62 per cent on the 9^th of March and the 30-year rate reached 1.16 per cent.

For a government to not be willing to borrow and spend at rates this low is to suggest that they can think of virtually no investment with a positive return. Even the borrowing required just to cover the loss of revenue and increase in unemployment benefits that will come from this economic downturn will be largely spent by people on goods and services, thereby supporting economic activity – and government revenues.

Australia also has some of the lowest national public debt levels in the world. With net debt at just 20 per cent of GDP in 2018, this is equivalent to Switzerland (21 per cent); below Canada (27 per cent), Taiwan (33 per cent), Germany (43 per cent) and Ireland (55 per cent); and just a fraction of the UK (77 per cent), the US (80 per cent), Italy (120 per cent) and Japan (a whopping 153 per cent).

In current circumstances, there is no reason to think Australian public debt is going to become a bigger priority than the economic recovery, so the economic recovery must not be tripped up for the sake of the books.