The federal government’s latest rescue measure, the JobKeeper Payment, estimated to cost $130 billion, may well be justifiable, given social distancing measures have shut down large parts of the economy for an indeterminate period, and I recognise the need to act fast, but the government needs to provide further information to assure the public it is in control of the situation. One area of concern is how the government is going to pay for all these measures and how much public debt we’ll ultimately end up with. I expect it will be challenging for the Australian Office of Financial Management (AOFM), the government’s debt management office, to fund the government’s $194 billion of rescue measures (and to make up for a huge fall in revenue) and to ensure the money is available when it is required.
Until recently, the AOFM would promptly update the market on its borrowing program following major government announcements. It is no longer doing so, as it appears it’s all too hard given the rapid pace of policy development. The AOFM last provided an Issuance Program Update on 12 March, the day of the first $17.6 billion rescue package. It hasn’t provided an update on what measures since then mean for the amount it has to borrow each week, which now must be at least $3 billion per week for the foreseeable future, rather than the $1.2 to 1.6 billion per week it contemplated on 12 March. In its weekly Forthcoming Transactions update published last Friday, the AOFM acknowledged it needs to provide further information:
The Australian Office of Financial Management (AOFM) understands the need to provide updates on its funding program and will do this to the best of its ability. Further details on projected issuance rates and related operations will be released in the coming week.
In other words, the AOFM is scrambling to figure out how it’s going to fund the government’s commitments and the revenue shortfall. Let’s hope the AOFM does release those further details on projected issuance (i.e. bond sales / borrowing) this week. We need to have confidence the Government can borrow the money it needs to fund its commitments as they fall due.
In the worst case, the government could always ignore the RBA’s independence and instruct it to monetise the deficit, with all the long-term risks that involves. In the last two weeks, hitherto unthinkable policy measures have been introduced, so we probably shouldn’t be surprised if we ultimately end up with an experiment in so-called Modern Monetary Theory. As the PM said the other day, we are in “uncharted territory.”