For a nation trained by both sides of politics to fear government debt and deficits, it’s a scary prospect.
Such fear is unnecessary, but the answer to the question of how we are going to fund all this spending is orders of magnitude more complicated than in the past.
Reserve governor Phil Lowe confirmed on Tuesday the central bank has already bought $36 billion of government bonds.Credit:Ben Rushton
The traditional answer is simply that we’ll borrow the money, from domestic and foreign investors, and pay it down very slowly over time as normality returns. But these are anything but normal times.
Indeed, very weird things are happening today in the world of government finances and how they are funded. If you don’t have an existential crisis about what money even is, as you’re contemplating it, you haven’t fully grasped the seriousness of the situation.
It’s a quirk of history that the COVID-19 crisis has struck at precisely the same time our central bank has exhausted its traditional methods of stimulating our economy.
We began 2020, after all, with an official cash rate already pretty close to zero. Responsibility for dealing with this crisis, then, now falls squarely with the federal government.
But that’s not to say the Reserve has no role to play. Indeed, having exhausted its traditional method of stimulating the economy, the Reserve has been stepping up to the plate with more exotic methods to boost the economy, including by buying government bonds.
This was initially aimed primarily at holding down the cost of borrowing, by adding to demand for money. But we’re now in the situation where the Reserve Bank is indirectly funding some proportion of the government’s coronavirus stimulus.
A large part of the answer to the question “where does the money come from?” is that it will come from the Reserve Bank. Weird, you might be thinking. Does that mean that one arm of government — albeit a statutory independent agency — is now lending to another arm of government, the executive branch?
To whom, in such a situation, do taxpayers ultimately owe the money? Themselves? The answer is: well, yes (I warned you it was weird).
And if we only owe the money to ourselves, what’s to stop us spending as much as we like? Another very good question, and one to keep in mind in the strange debates to come.
Indeed, the times are already stirring up a long-running grudge match in economic circles, between those who have always thought government could be printing money to spend to attain full employment — and to hell with the surplus — and those of a more traditional bent, who generally think it’s best if taxpayer dollars are spent under the watchful eye and approval of private financial markets.
The former camp call themselves “modern monetary theorists” and argue any country with its own currency can always simply expand its money supply to do anything it wants to boost the welfare of its people.
MMT proponents would rather see the government simply print the money, rather than borrow it from the private sector in a money-go-around they decry as “corporate welfare”.
Our current scenario, with the central bank buying government bonds — albeit only once they’ve been bought by the private sector — is getting closer to a MMT world.
Traditional thinkers, however, are cautious about giving politicians and bureaucrats carte blanche to be at the epicentre of decision-making in the economy. Handing a blank cheque to print money to the same people who flagrantly rort sports funding programs, for example, might cause many to pause for thought.
As things stand, the way we are funding the response to this crisis, with the government borrowing money from the private sector and only having the central bank step in to buy bonds in the secondary market, can be expected to keep some discipline on government spending.
In times of severe national crisis like this, we need all arms of government to step in, and to do so with purpose and confidence, which they are doing.
Reserve governor Phil Lowe confirmed on Tuesday the central bank has already bought $36 billion of government bonds, effectively helping to fund the Morrison government’s stimulus efforts.
We may one day have cause to worry about governments getting out the printing press and driving hyper-inflation. But it is not this day or likely any day soon.
So don’t add government debt to your list of things to worry about. There are enough of those already.
Jessica Irvine is a regular columnist.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.
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