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The COVID-19 pandemic has led to one of the largest economic disruptions many of us will have experienced – with three-and-a-half years of growth wiped off the Australian economy in a single quarter, and nearly a quarter of a million fewer people employed today than in March.
In response, last month the federal government released a monster budget, with a deficit equivalent to 11% of national GDP. Over recent weeks, state and territory governments have followed suit, announcing a raft of additional spending initiatives aimed at supporting households and businesses in a time of need, and moving from support to recovery.
At the same time as these spending initiatives, government revenues have been smashed. GST receipts, which are collected by the federal government but handed in full to the states, have dwindled as businesses and households rein in spending. Similarly, a drop in employment and wages sees payroll tax receipts significantly lower, and the phasing out of stamp duty in NSW will result in one of the state’s largest revenue sources taking a hit, while stamp duty concessions in Victoria will forego revenue to prop up the property market.
Combined, the net debt of state and territory governments will rise sharply – as a share of nominal output, net debt is expected to more than double in most states and territories over the coming years.
Chart 1: Net debt as share of nominal GSP, non-financial public sector
Source: Budget papers
But economies don’t operate in isolation. At the same time as a rise in expenditure and fall in revenues, the Reserve Bank – and most central banks around the world – have slashed interest rates. In Australia, the official cash rate has been cut from 0.75% at the start of the year to just 0.1% now – the lowest on record.
That’s drastically reduced the cost of borrowing for governments – firstly to the new debt that governments take on, but also to existing debt as it rolls over to new terms. As a result, the repayment burden of debt is expected to be roughly in line with where it has been over the last decade (albeit with Victoria’s interest cost burden ticking up).
Chart 2: Interest payments as share of revenue, non-financial public sector
Source: Budget papers
In truth, there’s never been a better time to borrow. Record low interest rates and the significant economic disruption being felt will see a greater economic bang for the debt buck that’s taken on.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.