Should We Worry about Government Debt? Thoughts on Australia's COVID‐19 Response

• Published date: 01 December 2020
• Author: Chris Edmond,Richard Holden,Bruce Preston
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/1467-8462.12402

The Australian Economic Review, vol. 53, no. 4, pp. 557–565 DOI: 10.1111/1467-8462.12402

Should We Worry about Government Debt? Thoughts on

Australia's COVID‐19 Response

Chris Edmond, Richard Holden and Bruce Preston*

Abstract

No. While the COVID‐19 crisis has required a

dramatic increase in debt‐financed govern-

ment spending, in the current conditions the

benefits from this debt are unusually high and

the costs unusually low. While conditions can

change, the Australian Government can right

now hedge against these risks by lengthening

the maturity structure of government debt,

even at the cost of a modest increase in its

current servicing costs.

1. Introduction

The COVID‐19 crisis has lead to an extra-

ordinary turnaround in Australian fiscal

policy. Only a year ago, the federal govern-

ment was forecasting a return from persistent

deficits to modest surpluses, around 1 per cent

of national income. But in response to the

crisis the federal government has sharply

increased government spending, in particular

spending on the JobKeeper wage replacement

program and the JobSeeker unemployment

benefits program. Together with a modest

decline in tax revenues, this has led to a

budget deficit on the order of 10 per cent of

national income, an 11 per cent (or approxi-

mately $600 billion) turnaround. This deficit

is projected to fall to around 6 per cent of

national income as JobKeeper and other

pandemic support measures are wound back

but is still expected to be sizeable for the rest

of the decade.

While this debt‐financed government

spending has been necessary to address the

unprecedented public health crisis, and re-

sulting economic crisis, it still raises several

fundamental questions. How are we going to

service this debt? Should we return to surplus

quickly? Do we have the capacity to spend

more should circumstances warrant it? Do

high levels of debt limit our ability to pursue

other government programs? What are the

implications of governments all around the

world all issuing large amount of new debt at

the same time?

In this article we briefly address these

issues, with a focus on the sustainability of

large levels of government debt both under

* Edmond and Preston: University of Melbourne,

Australia; Holden: UNSW Business School, Australia.

Corresponding author: Preston, email: <bruce.preston@

unimelb.edu.au>.

© 2020 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd