Gov’t faces huge funding challenge as it puts economy on life support

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.”

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6 Responses to Gov’t faces huge funding challenge as it puts economy on life support

  1. Russell Rogers says:

    Hi Gene,
    Not being an economist or really educated in finance I am struggling to understand what all this means and what the future holds. A recent FB post of mine said; “Are we trading a very long term pain to offset a short term catastrophe?” I looked up and found out that monetising debt is effectively printing money (I think). Is this more or less ok if there is little chance of inflation? What am I saying? I think Australians like me want to understand how does a government get hold of so much money? Is is debt? Who is lending when the whole world is doing the same? Is it printing money? What does that actually mean? There is an opportunity for someone like you to educate the masses using language we understand. The press certainly needs this. I read The Oz and they report the news but no one is saying what it actually means…do they really know?
    All I know is that I am very concerned about the present and possibly even more worried about the future.
    Good luck.
    Russell

    • Gene Tunny says:

      Thanks Russell. Yes, that is what monetising the deficit means. We could probably get away with it for the short-term term, but in the long-term it’s a recipe for double-digit inflation. Good suggestion regarding a future post setting all this out. Let me work on it.

  2. annette quayle says:

    Good point Russell about the fact many more need clearer explanations from the media on what and how these announcements are put into play.

    Gene – I”m also very interested in what the Qld government is doing – debt wise. I’ve been concerned for some time that the high Qld debt levels means we are not prepared for these black swan events and there appears to be very little discussion in the Qld media about the financial consequences for the Qld coffers.
    Cheers
    Annette

  3. Jim says:

    Gene

    Great post. You will know better than me, but I suspect even another $200B+ of sovereign debt in Australia would still leave Australia in a better position than most OECD countries were before this crisis. Even if we had to increase Government debt by $400B, it wouldn’t be the end of the world, but it wouldn’t be great either.

    So I think the real question is…. how to repay the debt?

    I’d probably start by dusting off the Henry Tax Review. At least that review tried to address the structural problems that are just being exacerbated by the current situation.

    And being a bit controversial, I think we need to look at this situation as a means to address some of the inter-generational inequity currently built into the system and not to make the problem worse. Time to dump the largesse that is skewed towards mature (and generally more wealthy) Australians such as franking credits, generous tax concessions for investment properties, proper asset means testing for the pension, moves to a less progressive income tax etc etc etc. A sweeping generalisation is that younger Australians are paying the economic cost of protecting the health of older Australians (the most at-risk cohort in the population). That is absolutely the right thing to do in the short-run. But like climate change, lets not turn it into a situation where inter-generational inequality is worsened because we don’t want to upset a cohort of older voters.

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