MY MONEY

There's no sugar-coating it: the next few years are looking grim

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The government support you are relieved to receive - or irked not to receive - has come at a cost of $289 billion.

The help this has provided in weathering the COVID-19 storm is yet to be seen. Still, that hasn't stopped the government taking us through its best guess, otherwise known as the July Economic and Fiscal Update.

The first thing to know is that treasury economic projections are only that - projections. They'll almost certainly miss the mark.

economic outlook

On the other hand, the coronavirus pandemic is without modern precedent, so these models provide some level of guidance, or what could be described as a crystal ball covered in mud.

The economy is expected to have shrunk 0.25% in 2019-20 and shrink 2.5% in the current financial year.  That's two years of economic contraction which, by some definitions, qualifies as a depression.

Unemployment is equally grim, with an expected rise to 9.25% in the December quarter.

Nine per cent is bad in anyone's book, but the reality of the situation is far worse because the projection doesn't factor in people who are on JobKeeper and aren't looking for a job; it only accounts for those who are out of a job and actively looking for one.

This hasn't been lost on the government. Last week, Treasurer Josh Frydenberg acknowledged that the effective rate of unemployment - which includes people who aren't working and aren't looking for work - is closer to 13%.

Since the beginning of the crisis, the Australian government has tried to stem the economic bleed with $289 billion in fiscal measures, equivalent to around 14.6% of 2019-20 gross domestic product.

"We estimate that were it not for JobKeeper and people leaving the workforce the effective unemployment rate would currently be 11.3%, which is well above the official measured rate of 7.4%," says AMP Capital chief economist Shane Oliver.

This support has led to estimated deficits of $85.8 billion in 2019-20 and $184.5 billion, or 9.7% of GDP, in 2020-21. You have to go back to World War 2 to see the country that deep in the red.

But these numbers, bad as they are, remain comparatively good globally. Though net debt is expected to be $488.2 billion, or 24.6% of GDP, at 30 June 2020 and increase to $677.1 billion, or 35.7% of GDP, by 30 June 2021, we still boast one of the best debt to GDP ratios of any country.

Fortunately, Australia has gone into the crisis in a relatively healthy fiscal position.

"In other counties, the debt from COVID-19 is more problematic," Mark Crosby from Monash Business School tells Money.

"But we have room to move and the government has rightly spent the money that needed to be spent."

Moreover, due to the rock-bottom interest rates, the government is able to service debt cheaply, and this is expected to result in a relatively flat finance costs as a share of the economy.

Governments typically borrow by issuing government bonds. Bond yield rates - which generally move in the same direction as interest rates - are below one per cent. So while the government is going into enormous debt to get us out of this hole, in some sense it's doing it on the cheap. And the borrowing is in Aussie dollars, so it won't be exposed to currency risk.

At the end of the day, talk of balancing the budget is out the door. But these are special times and Australia is better off than most.

"To pay for this level of debt in a sensible way is a decade long process," says Crosby.

"That's why you don't want to start with high debt, and in Australia we've had sensible governments on both sides of politics that have managed our debt well."

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.

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David Thornton is a journalist at Money magazine. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
Comments
Bernie Laws
July 25, 2020 9.09am

If everyone is borrowing, why are interest rates so low? Logic suggests that as demand increases, then rates should rise. Further, what is the risk of a future interest rate rise making the debt harder to pay off? It seems strange to say interest rates are so low, I can borrow up to my neck. As a baby boomer, I come from the 18% home loan rate era and am now in the 1% era for my investments.

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