Monday’s historic $130 billion JobKeeper package to save jobs from the coronavirus fallout will take years to pay off – and may threaten Australia’s AAA credit rating.
Treasurer Joshn Frydenberg told ABC’s 7.30 the massive rescue package would saddle future generations with debt.
‘This will be paid back for years to come, there’s no secret in that,’ he told the ABC’s 7.30 Report.
Australians returning from overseas are escorted to quarantine by the Australian Defence Force on Monday. The economic fallout may take years to repay
‘Of course, we will enter into discussions with the credit rating agencies over due course.’
Ratings agencies determine a country’s sovereign credit rating by looking at a combination of government debt and the budget balances of both federal and state governments.
A falling credit rating signals higher risk to the bond market meaning a higher interest rate is needed to attract bond buyers, potentially increasing the cost of borrowing for the government.
S&P Global Ratings threatened Australia’s stable AAA credit rating last July if it didn’t retain its target of returning a surplus in the 2019-20 Budget.
S&P Ratings director Anthony Walker said at the time that states’ infrastructure spending was holding back the return to budget surplus.
The Australian Securities Exchange was a sea of red on March 19 as coronavirus pummelled the market. Sovereign debt is far more attractive than equities in a high-risk pandemic environment, even if Australia’s AAA rating is under threat
‘The sovereign needs a strong fiscal position towards a surplus and addressing the net debt to maintain its AAA stable rating,’ he told The Australian Financial Review.
The government did manage to balance the Budget for the first time in 11 years, and Treasurer Frydenberg told the ABC that had put Australia in a good position to respond to the coronavirus crisis.
‘Australia has entered into this crisis from a position of economic strength,’ he said.
‘Our debt to GDP ratio is around 20 percent. That’s a quarter of what it is in the United Kingdom, and in the United States and one-seventh as Japan.’
‘That’s given us the fiscal responsibility to respond.’
The $130 billion JobKeeper payment would bring the Government’s total economic support for the economy to $320 billion or 16.4 per cent of GDP, all of which will have to be paid back at a future date.
Economist Steve Keen said the ratings agencies should simply be ignored as governments can easily print money to pay off their debt.
‘Governments can create any amount of their own currency they desire by running a deficit and have it financed by the Central Bank,’ Professor Keen said.
The UK Treasury was borrowing directly from their central bank, the Bank of England, for their coronavirus rescue package – making it all just accounting, he said.
‘The Treasury is the formal owner of the Bank of England and receives all its net interest income. So the cost of doing this is effectively zero,’ he said on Monday.
The only problem comes with spending the money as it can cause inflation or a trade deficit, but Professor Keen said those were the ‘very last’ problems that exist right now.
‘The economy could shrink by as much as 25 percent due to the coronavirus: inflation won’t be the problem but deflation as people sell assets and goods at any price, simply to raise cash when they are unemployed or businesses face going bankrupt,’ he told Daily Mail Australia from Thailand on Monday night.
The Reserve Bank of Australia could buy back $200 billion worth of bonds issued to raise money for the package in a round of quantitative easing, adding just $2 billion to the deficit
‘Both exports and imports have been cancelled by the virus: trade has come to a standstill.’
Weeks ago, Professor Keen proposed paying workers to stay home so that jobs can be saved and people could afford to pay their bills until the crisis was over.
He recommended Treasury finance it by issuing $200 billion in coronavirus bonds.
There would be no problem attracting finance sector buyers, because sovereign bonds are far more attractive to the market than shares in a high-risk environment.
Professor Keen said if the bonds were issued at 1 percent per annum that would add $2 billion to the Budget deficit.
‘That’s relatively trivial,’ he said at the time.
‘The Reserve Bank of Australia buys the bonds off the financial sector and creates $200 billion to compensate. It doesn’t make up for the lost production, but it stops the lost production sending companies and people bankrupt and making the crisis far, far worse.’
The Reserve Bank creating money to buy back the bonds would be ‘quantitative easing’ and would likely exert downward pressure on the Australian dollar making exports cheaper but imports more expensive.