March 31, 2020 15:40:24
The Morrison Government’s $130 billion wage subsidy package is massive.
For the next six months, the Federal Government will be paying the equivalent of half of the country’s total wage bill to prevent over a million workers losing their jobs.
Australia has never seen anything like it — and it will be very costly.
In the mid-year budget update, Australia’s net debt was forecast to peak at $392.3 billion in 2019-20, or 19.5 per cent of gross domestic product (GDP), before declining.
But the emergency wage package will see Australia’s net debt increase by a third, swelling to roughly $507 billion by the end of June, to hit 26 per cent of GDP.
And that won’t be all — there’s more debt on the way next financial year.
How will the Government pay for it?
Essentially, the Government will pay for the stimulus package by creating the money and racking it up as debt.
Officially, it will raise the money via the Australian Office of Financial Management (AOFM), which borrows money on behalf of the Government by selling Australian Government bonds.
Institutional investors (foreign and local banks) will buy the bonds, which promise to pay regular interest payments and repayment of the principal at a set future date.
The bonds will be traded with other investors, such as superannuation and pension funds, insurers, hedge funds, and private banks and central banks, which like to hold interest-bearing financial assets in their portfolios.
The ultimate buyer of the Government bonds could be the Reserve Bank, because at the moment, the RBA is stepping into the market regularly to purchase as many Australian Government bonds as necessary to keep the interest rate, the “yield”, on three-year Government bonds around 0.25 per cent.
“The Government will have to increase its debt by about 40 per cent, but issuing debt is not a problem, they could issue five times that and it still won’t be a problem,” ex-Treasury official Steven Hamilton told the ABC.
“Usually the AOFM holds a bond auction every week, where it sells around $1 billion worth of bonds — but the value of its bond issuances will skyrocket over the next few months to pay for these stimulus packages.”
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The AOFM says there is strong demand for three-year, five-year and 10-year bonds at the moment.
Investors no longer want to carry the risk of purchasing 15-year and 20-year bonds when the global economy is so fractured.
How much are the Government’s emergency stimulus measures worth?
The Federal Government is spending far more than the $130 billion wage subsidy package announced on Monday.
In fact, it has announced $213.7 billion worth of stimulus across three packages:
• First package of $17.6 billion (announced March 12)
• Second package of $66.1 billion (announced March 22)
• Third package of $130 billion (announced March 30)
It has also asked the Australian Office of Financial Management to extend $15 billion in special loans to smaller banks and non-bank lenders so those lenders can continue to finance small businesses during the crisis.
The Reserve Bank has also opened an emergency $90 billion funding facility to encourage banks to extend credit to small and medium-sized businesses.
Combined, the Government’s stimulus packages and the Reserve Bank’s emergency lending measures are worth $318.7 billion, which is roughly equivalent to 16 per cent of GDP.
How does it compare to the Rudd government’s stimulus packages?
Australia has never seen a stimulus package of this size.
It dwarfs the size of the Rudd Labor government’s stimulus packages across 2008-2010, during the global financial crisis, which were worth $67 billion.
The Rudd government began in November 2007. At the time, Australia’s net debt was -$22.1 billion, meaning it held $22.1 billion more than it owed.
In the final months of the Rudd government in July 2013, Australia’s net debt position had risen to $159.6 billion, due in large part to its stimulus spending during the GFC.
It left Australia with a debt-to-GDP ratio of 10.4 per cent.
The Morrison Government, by comparison, has announced stimulus packages worth $213 billion so far.
When the Coalition Government replaced the Rudd government at the 2013 election, net debt was $174.5 billion, having risen by $15 billion in the three months leading up to the election.
In December last year, Australia’s net debt position was estimated to be peaking at $392.3 billion this financial year, before slowly reducing in size.
That’s an increase of $217.8 billion since 2013.
But the net debt position is now likely to jump to $507 billion this financial year.
It could see Australia’s net-to-GDP ratio it 26 per cent — well above the Rudd government’s 10.4 per cent.
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What do economists think?
Cherelle Murphy, a senior economist at ANZ, says the Government’s $130 billion wage subsidy package will “undoubtedly” prevent the unemployment rate rising as much as it would have otherwise.
She had been assuming that, with a widespread shutdown of economic activity of about six weeks, followed by a progressive lifting of restrictions, more than 1.1 million workers would have lost their jobs in coming months, swelling the number of unemployed to 1.8 million.
That meant the unemployment rate was going to jump from 5.1 per cent to 13 per cent in the June quarter, before dropping back to 8 per cent by the end of the year when the economy starts to recover.
But she says the Government now appears to be planning for a longer, harsher shutdown, because it thinks 6 million Australians will be accessing the fortnightly JobKeeper payments over the next six months.
That complicates her unemployment forecasts, but she thinks the payments will prevent a huge number of people from becoming unemployed.
“We think the size and reach of the JobKeeper payments should reduce the peak in unemployment — the economic version of ‘flattening the curve’,” she said.
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