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Where does all the money come from to fund the stimulus?

Where does all the money come from to fund the stimulus?…rom-to-fund-the-stimulus-20200403-p54goi.html

Has the money been there all the time? Who do we have to repay when all this is done? And can the budget be “returned to the black”?
Along Jessica Irvine
April 3, 2020

The Morrison government has unleashed over $ 200 billion worth of stimulus to save Australia from a very deep and long-term recession caused by the coronavirus.

Treasury Secretary Josh Frydenberg, who announced a $ 130 billion wage subsidy for workers this week, justified spending by declaring that “abnormal measures are needed at unusual times.”

But where does all this money come from? Did it sit there all the time? Who do we have to repay when all this is done? And is it possible to bring the budget back into the black?

How does the federal government make money?
Understanding what’s going on with a government budget requires some basic knowledge.

In the long run, the federal government is committed to balancing tax deposits with spending on welfare, medical services, and more.

When the government makes more money than it spends in a year-for example, because the mining boom has supercharged corporate tax collection-the budget is said to be in the black. These surplus funds can be used to repay existing debt.

When the Morrison administration bragged about “returning the budget to the black,” it did not mean that it completely eliminated debt, but that it began to run the annual budget surplus.

In fact, according to Deloitte Access Economics Chris Richardson, the Australian government has never fully paid off the debt it has accumulated in the past recessions and crises. Economic growth is so rapid that debt is only smaller than national income.

“We were always in debt,” says Richardson.

If the government spends more money than it raises in a year, it will be in debt due to lack of revenue, increased spending demand, or both, resulting in a budget deficit. To be able to continue to pay regular deposits, such as civil servant wages, the government must borrow to cover the shortfall, adding to the existing pile of debt.

How much debt does the government already have?
Prior to the global financial crisis, the Howard Government was able to reduce Australia’s net debt to virtually zero thanks to the mining boom.

But after a decade of big deficits, the Australian government’s debt today is on a dollar basis, higher than any other time in history.

But as a percentage of our economy, net debt is about the same as it was in the mid-1990s in the aftermath of the recession in the early 90s.


Last fiscal year, the Australian Government’s net debt was $ 373 billion, or 19.2 percent of GDP.

This is comparable to other countries. Both the United Kingdom and the United States have net government debt equivalent to about 80 percent of their economies.

At the time of the last budget, the Australian Government predicted that it would achieve a budget surplus this fiscal year and use its surplus funds to repay its net debt to $ 360 billion, or 18% of GDP. It was.

But now, net debt is expected to exceed $ 5 trillion.

How does the government borrow?
At Level 3 of the Treasury building in Canberra’s Parliamentary Triangle sits a group of people known as the Australian Treasury Administration (AOFM).

These people are government debt managers. In essence, they act as an intermediary between the government and its potential lenders.

Every few days, depending on your requirements, we set up an online auction of what is called government bonds. These bonds are essentially a government promise to repay the money and interest borrowed from investors. Investors submit bids to buy these bonds by showing the interest rates they accept, which all takes a few minutes.

As of April 3, AOFM held $ 579.2 billion of these bonds issued to investors. This is called Australia’s total debt level, and its net debt figures are much lower, reflecting the offsetting value of various government-owned assets.

To fund the incentives, the Australian Government only instructed AOFM to conduct more frequent and larger auctions of these bonds. As a result, the level of outstanding government debt rises and the total amount of interest that must be paid also rises.

Who does the government borrow money from?
So who buys these bonds? According to AOFM, over half of Australia’s government bonds are held by non-residents. These include investors, including foreign banks, central banks, and large pension funds.

Even during the crisis, large global pension funds continue to receive a steady stream of donations from workers, who need somewhere to park their money.

The rest is owned by Australian entities, including banks, superfunds and other institutional investors.

The Reserve Bank has also begun purchasing Australian government bonds. By increasing the demand for such bonds, we are trying to maintain low interest rates.

The reserve states that to avoid crowding other lenders, they will acquire them in the secondary market rather than buying them directly at the AOFM auction.

But in the end, we can expect the central bank to become the larger owner of Australian government bonds.

How Much Does the Government Cost to Borrow Money?
The good news is that debt is very low at the moment due to low interest rates.

There is an excess of savings in the world in search of attractive return on investment, but not so much given the increased risk aversion in the post-GFC era. So far, Australian government bond AOFM auctions tend to be oversubscribed.

Therefore, while the value of the Australian Government’s dollar-denominated debt is historically high, the interest claim on that debt as a percentage of the broader economy is not.

The government paid $ 14 billion in net interest on its borrowings last fiscal year.


However, as a percentage of GDP, net interest payments were only 0.7% of GDP, compared to 1.7% of the aftermath of the recession in the early 1980s and early 1990s.

But when interest rates are as low as possible and debt spikes, they rise.


How do you repay the money?
Slowly and slowly.

When the virus carries out its course, and especially if the stimulus succeeds in protecting the job, we can expect the need for spending to subside, economic activity to rise and more tax revenues to be generated. I will.

When you start to make a budget surplus again, you can start repayment of accumulated debt. This can take a very long time.

But that’s not impossible. The mining boom of the 2000s helped the Howard Government recover its budget to balance after the recession of the 1990s.

Do our grandchildren pay for it?
Chris Richardson is keen to dispel the idea that today’s borrowing imposes an unreasonable burden on future generations.

Interest rates are so low that interest claims on an additional $ 213 billion in borrowing are only $ 1.6 billion annually.

“That’s nothing,” says Richardson. “I hope I don’t have to pay that much extra interest each year … Still, these costs aren’t scary.”

But if the government does not act to counter this economic crisis, Richardson will be in a much worse budget and country as unemployment surges, revenues plummet and welfare costs soar. I’m afraid there is a possibility.

Richardson says Australia must now be on the ground for war. “Australia’s economy will grow again on the other side of this war, so here’s a quick suggestion. Over time, that’s what we were in the past wartime debt, and that’s probably This time is also a smart play. “

“There are a lot of scary things,” Richardson concludes. “Our health fight has a long way to go, but don’t be afraid to borrow. The cost isn’t too bad. And taking on this debt is a big investment in Australia’s life. It could be. “

Where does all the money come from to fund the stimulus? Where does all the money come from to fund the stimulus?

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