The government still treats debt like it is economic poison but now is the time to invest
Every three months businesses provide estimates of how much they will invest in the following financial year. The first estimate occurs in January and February, the second in April and May. On Thursday the second estimate for 2020-21 was revealed. And it was a horror show.
As a general rule, the second estimate is around 6% higher. But on Thursday the second estimate for private-sector investment in 2020-21 was 9% below the first estimate made three months ago.
The previous biggest drop was a 0.9% fall that occurred at the start of the 1990s recession.
Hopefully businesses are just being overly pessimistic, but even a large improvement on that outlook would still see a massive shuddering of investment.
It is the perfect time for the public sector to get to work.
This week the latest construction figures also showed that the private sector has long been reducing its building and engineering work.
Again – the perfect time for the public sector to get to work.
And yet the government continues to pretend we must “live within our means” – even as the news about the $60bn forecasting error shows just how hollow that line has become.
One of the more interesting aspects of the announcement that the jobkeeper payment forecast was out by $60bn is how little it mattered.
Yes, politically it had an impact, but in terms of finance, next to none.
Prior to the announcement that the Australia government would need to borrow $60bn less than previously expected, the yield (or interest rate) for Australian government five-year bonds was 0.41%; by Friday this week it was 0.40%.
Essentially the Australian government announced its debt would increase by half the expected amount, and the people who lend money to the government didn’t give a damn.
Nothing happened, except the government borrowed more money, and the market as usual rushed to lend it.
This week the government borrowed $2bn to be repaid in 2030 at an interest rate of 0.8919%.
Given the Reserve Bank’s inflation growth target minimum is 2%, that means the government has borrowed $2bn for 10 years effectively for free.
It is able to borrow at a lower rate now than it could in January when it was still trumpeting about a return to a budget surplus.
And yet the government still treats debt like it is economic poison.
The prime minister, Scott Morrison, this week at the National Press Club invoked the Indigenous approach to land and water management of “caring for country” by absurdly applying it to government debt.
He argued “governments ... must live within their means, so we don’t impose impossible debt burdens on future generations that violates that important caring for country principle”.
If he really cared for country, the government would massively invest in renewable energy infrastructure and environmental management.
His speech highlighted how budgets are more about politics than economics.
The government was happy to spend $60bn on people it deemed worthy, but upon discovering it could instead spend it on others in desperate need it says it cannot.
Morrison used to say we needed a strong budget in case of an economic shock, but now that we are in the greatest shock for 90 years apparently it is still time to worry about living within your means.
Just how bad does it have to get? Cutting spending – or limiting stimulus – while the private sector is shrinking in order to “live within your means” will only compound the problem.
Yes, the debt “burden” will be long lived, but so too will the benefits of the spending – such as growing up with parents having a job, and using the school buildings, bridges, roads, renewable energy infrastructure, rail links, and proper NBN that could be built, and benefiting from thriving tertiary and arts sectors that need funding.
Right now the private sector anticipates investing around 8% less next year in real terms than it did a decade ago – a massive investment hole.
This is the worst economic crisis since the Great Depression. If the government does not take advantage of the low rates to borrow and fill that hole to set up the economy for the future it would also be the worst economic management of a crisis since then.
• Greg Jericho writes on economics for Guardian Australia