Don’t worry about the debt!

In meeting the challenges posed by COVID-19 our nation’s focus has primarily been on ensuring the continued delivery of world-class healthcare in the face of potentially overwhelming demand.

The pandemic however, continues to challenge our welfare in other ways, not least of which is the impact we are seeing throughout our economy. This is perhaps most visible in rising unemployment, industry sector shutdowns such as those within tourism and hospitality, and reduced consumer spending.

The economy is at the centre of many government leaders’ and decision makers’ speeches regarding COVID-19 and concern for its welfare are principal among many of their priorities. As the largest single workforce in Australia, it is important nurses, midwives, and carers are provided with the information they need to make informed judgements. This includes judgements regarding what our government tells us about their policies and approaches to handling the economy which impact on almost every facet of all our lives.

Control measures such as physical distancing, isolation, and quarantine restrictions restrict trade throughout many sectors of the economy.

Less trade throughout the economy reduces employment, and reduced employment limits income and the amount of money people can spend on goods and services. This then reduces demand for other goods and services throughout the economy, and so the process continues. It is therefore in support of maintaining employment and spending throughout the economy that the government has largely targeted COVID-19 related stimuli.

When discussing the cost of these stimulus measures (such as JobKeeper), the government have made comments that indicate there is ‘no money tree’, and that borrowed money must be paid back by future generations. We argue these statements promote feelings of unease towards government borrowing and peoples’ association of government debt with a similar sense of risk and anxiety that one might feel when they have a high level of personal debt.

There are, however, several considerations which indicate this should not be the case. In fact, government debt is critical to supporting Australians now and building a foundation for the wellbeing of future generations. This is particularly the case where debt is used to fund policies and infrastructure that support employment and increased economic activity. For example, policy and funding to enhance and support improved employment rates and conditions for workers across health, disability, and aged care sectors could have the result of not only better health and wellbeing outcomes for patients and clients but a larger and more supported workforce across areas we already know are lacking.

When reflecting upon government debt, some points we should consider are detailed below:

  • One indicator of a country’s ability to service repayments on debt is how much debt as a proportion of Gross Domestic Product (GDP) it has. A low proportion of debt to GDP indicates a country is well placed to make future payments on its debt. Australia has amongst the lowest proportion of public debt to GDP of any developed nation meaning we have a strong ability to meet our payment obligations.
  • We only need to make repayments on the interest. Australia is an independent economy with its own currency. This allows debt to be refinanced with new debt when full payments on the original loan become due. This means it is only ever the interest payments on debt that must be made.
  • These interest rates, which also determine the cost at which the government can borrow, are the lowest they have ever been. This means it has never been more affordable for governments to take on and service more debt. Further, economic supports provided by the Reserve Bank support the stability of low interest rates over the longer term, allowing sustainable management of repayments.

We can also look to the relatively recent experience of the Global Financial Crisis (GFC). Of the various responses by governments globally, it has been those that took on more debt that have seen stronger economic growth in the years following; the economic growth of countries whose governments made efforts to reduce national debt has been weaker.

We can consider the UK for example, in response to the GFC budgets were cut in an effort to reduce the level of national debt. The UK has since seen limited growth in the years following, particularly in contrast to a country like the USA who borrowed extensively and has seen relatively strong economic growth over the last decade.

Finally, economists of course, do not hold a clear and decisive opinion as to what an appropriate level of national debt might look like. Likely, there is no one ‘right’ answer. Most however, do agree that an unwavering focus on minimising national debt as a top priority of government is a detriment to that nation’s prosperity and welfare, particularly during an economic downturn.

To conclude:

Public investment can support policies that promote employment and economic activity and Australia is well positioned to take on further debt to fund these initiatives. In fact, it is critical that we do just that to support the continued growth and prosperity of our nation as we work through this pandemic together.

This article is a summary of a more detailed paper which can be located here

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