The federal government will probably never clear the debt run up dealing with the COVID-19 recession, some of the nation’s most respected economists predict while warning only a strongly growing economy and one-off asset sales will bring it to heel.
But most economists in The Sydney Morning Herald and The Age’s Scope survey panel question whether returning to the net negative debt position Australia had in 2008 is worthwhile, arguing there is little wrong with carrying some debt.
Treasurer Josh Frydenberg delivering this year’s budget. Economists expect the coming budget to remain deep in the red.Credit:Alex Ellinghausen
Treasurer Josh Frydenberg is expected to confirm on March 29 the budget will remain in the red over the coming four years with continuing deficits. Net debt, which was minus $11.3 billion in 2008-09, is forecast to reach $914.8 billion in 2024-25.
Gross debt is already at a record $866 billion and on track to surpass $1 trillion within two years.
KPMG senior economist Sarah Hunter said the sustainability of the government’s debt position was more important than its sheer size.
She said much of the debt taken on over recent years had been at very low interest rates, with that money used to support the economy through the recession.
“Net debt is unlikely to decline significantly over the forecast horizon, given that structurally the government is set to run a deficit from now onwards,” she said.
“The sustainability of the government’s debt position is what really matters, rather than a need to drive net debt back to zero. And even with the significant increase in gross and net debt over the last two years, given the current trajectory for interest rates the government should not have any issues with sustainability.”
Independent economist Stephen Koukoulas said getting back to zero net debt was unlikely and should not be a policy aim.
“As the economy enters a period of solid growth with a lift in inflation and wages, at the very least the automatic stabilisers should be allowed to repair the budget,” he said.
NAB chief economist Alan Oster said the nation’s debt levels had fallen to extremely low levels ahead of the global financial crisis due to a sustained period without recession and the then mining boom.
“It should be no surprise that, having experienced two major global economic shocks as well as the end of the mining boom over the past decade, Australia’s net debt level is now substantially higher as a share of GDP,” he said.
“Looking ahead, it would require a similarly sustained period of economic outperformance, or very strong productivity growth, for net debt to return to very low levels. While not impossible, this doesn’t appear likely – and any future adverse shock would push the level of debt higher still.”
EY chief economist Jo Masters said productivity reforms would be needed to accelerate economic growth that would enable the government to pay down the nation’s debt.
EY chief economist Jo Masters says paying down government debt will be important for the state of the budget. Credit:AFR
“[There’s] a large pile of debt to address – it’s arguably debt that we had to have, but you can think of it as borrowing growth from the future. The least costly way to address the debt burden is to grow the economy, otherwise you are left with cutting government services or raising taxes,” she said.
“To tackle nearly $1 trillion of debt over any meaningful time horizon requires productivity-enhancing reform to raise the speed limit of the economy so that we can push growth higher without hitting capacity constraints.”
AMP Capital chief economist Shane Oliver said only another massive mining boom, the sale of public assets and a string of large budget surpluses would enable debt to be run down.
He cautioned that while debt was affordable now, higher inflation could pose a risk.
“If we are entering a time of higher inflation and higher bond yields, it will become more of a concern as debt interest payments will take up a rising share of public spending, which will in turn make it harder to reduce the deficit,” he said.
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