Low debt gives government more fiscal firepower

While the emergency measures taken by the federal government so far are expected to leave a debt overhang that could last for decades, independent economist Saul Eslake said the Australian government's financial position would still be one of the strongest among advanced economies.

Mr Eslake said the government's fiscal response of around 10 per cent of GDP was broadly comparable to that of other countries and could, if needed, extend initiatives like the JobKeeper scheme for a further six months.

"[The crisis] could send some other countries broke but it is not going to send Australia broke," he said.

Deloitte Access Economics economist Chris Richardson said there was "room to do more if required".

Nonetheless, the combined effect of COVID-19 rescue packages and a plunge in revenue from a stalled economy, combined with existing liabilities, could force net government debt to surge to around $680 billion in the next 15 months.

Mr Eslake admitted the action being taken to put the economy on life support would "blow a very big hole" in the budget.

But he said that even with the massive amounts of funds the Commonwealth will be forced to borrow, Australian government net debt will reach only about 33 per cent of gross domestic product, which was modest in comparison with other advanced economies.

Net government debt among G20 economies currently averages 83 per cent of GDP, and Mr Eslake warned it was likely to rise much higher as policymakers overseas took similarly drastic action to protect businesses and jobs.

Not only is Commonwealth net debt set to be low compared with other advanced economies, it will be far less than was accumulated during the Second World War.

Net government debt reached close to 150 per cent of GDP in the immediate aftermath of World war Two, Mr Eslake said, and was still above 100 per cent in 1950.

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The federal government is also set to benefit from record low borrowing costs.

Deloitte Access Economics economist Chris Richardson said low interest rates meant the Commonwealth was facing an interest bill of around $1 billion a year on the $130 billion it would borrow to fund the massive JobKeeper wage subsidy scheme.

Mr Richardson said this amounted to just 0.25 per cent of current annual government spending.

"One billion dollars is a lot of money, but it's one four hundredth that we are adding to the ongoing costs of running Australia," he said.

Although the government was being forced to borrow heavily to fund the lifeline it is throwing the economy, Mr Richardson said its financial position going into the crisis was far better than just about any other advanced economy, including a near-balanced budget and low public sector debt.

"We were broadly in balance, and that lets us punch much more strongly to get ahead of this than Europe, than the US," he said.

Even so, economists expect the budget to be in the red for many years.

In its mid-year update on the budget released in December, the government forecast that it would need to annual budget surpluses of around 0.75 per cent of GDP every year for the next nine years to bring net debt down from $374 billion to $176 billion.

Mr Eslake said that in order to reduce the debt overhang, future governments would likely need to raise taxes and cut spending.

But he warned that government would need to be careful that any such actions did not hurt the economic recovery, and questioned whether it should try to pay off the debt at all.

"Australian governments have been debt-free for just two years out of the last 120," Mr Eslake said.

If the government tried to pay off the debt through budget surpluses, it will have to deliver them "for a very long time", Mr Eslake said, adding that other ways to reduce the debt could include encouraging inflation or getting the Reserve Bank of Australia to write off government debt.

Mr Richardson said that although the emergency measures taken by the government involved "jaw-dropping" sums, it was likely to be money well spent.

He said that in a recession doing too little to support the economy was a dangerous mistake for governments to make.

By assisting as many as possible to hold on to their jobs the government was helping ensure the fastest possible economic recovery.

"Economies are hard to start again and the faster you can keep them running through the crisis the easier it is for them to recover," Mr Richardson said.