News

Adept Economics Director Gene Tunny has had a paper published in the latest issue of leading Australian public policy journal Agenda, as part of a symposium on “Economic Policy during COVID”.

Gene’s paper, produced with assistance from Taylor-Rose Hull, explores the consequences of the large government deficits and high level of debt that are a result of the COVID-19 pandemic and the Australian Government’s fiscal response. Despite public debt often being an agenda item in Australian political and economic discourse since the financial crisis, Gene notes a “… large degree of insouciance” regarding post-COVID public debt, from both the government and commentators.

Arguably, this insouciance is on display in the Australian Government’s 2021 Intergenerational Report. The IGR makes some bold medium- to long-term assumptions about the stability of inflation, immigration, and more, notably appearing to discount, if not ignore, broader demographic trends around the world, particularly in China, which could lead to higher inflation and interest rates in the future – the so-called Great Demographic Reversal. 

Gene’s paper uses a fit-for-purpose version of the Australian Treasury’s IGR model, taking into account these factors, to run a 10,000-replication Monte Carlo simulation and compute a range of possible future debt and deficit levels. The simulation returns base-case values similar to the IGR model, with the ratio of interest to total expenses in 2041-42 at around 7-8%, but with a significantly higher potential upper-bound of 12.5%. Similar interest-to-expenses ratios in the past have prompted fiscal consolidation. This was the path taken by the Hawke-Keating Government in the late eighties and the Howard Government in the late nineties, for example.

A number of other articles in the symposium examine public debt in Australia. In one, Professor Sinclair Davidson from RMIT takes a historical approach, cataloguing debt levels and interest rates as far back as 1970. Professor Davidson’s paper rings sympathetic with Gene’s, noting that, while interest rates are currently low, future generations will nevertheless have to bear the burden of paying off or continuing to pay interest on accrued debt.

Visiting Professor at the University of Adelaide Jonathan Pincus submitted a paper to the symposium that further breaks down the types of public debt into debts that are ‘remunerative’, and which help create assets that might eventually pay off the debt (or at least help to service it), versus ‘non-remunerative’ debt, which cannot do this. He argues that the debts incurred during the COVID pandemic fall largely in the latter category, and hence likely present a large intergenerational debt burden.

Other articles in the symposium include: 

• Analyses from Stephen Anthony, Stephen Kirchner, and Peter Tulip of quantitative easing – a policy approach which, prior to the pandemic, the RBA had not utilised (in contrast to other central banks, such as the Bank of England or the US Federal Reserve). 
• An article by Marion Terrill of the Grattan Institute on the nuances of public infrastructure investment over the last two years; she argues that, while public infrastructure is touted as a primary driver of post-pandemic recovery, cost overruns, time-lags, and pandemic-induced labour shortages complicate matters.
• A provocative piece from economist Saul Eslake on the consequences of “small business fetishism”, in which he argues that obsession with small businesses is misguided when the empirical evidence undermines any notion that they are the ‘backbone’ of the economy, citing data on job-creation, innovation, wages, and productivity.

The symposium’s publication is timely given the release of the 2021-22 Mid-Year Economic and Fiscal Outlook last Thursday. The MYEFO showed a mixed forecast: strong employment figures were highlighted, with a caveat that inflationary pressure may be the result of “overheating” labour markets. Gross and Net Debt were both projected to be at lower levels than estimated in the 2021-22 Budget, although still increasing over the medium- to long-term. Crucially, Australia is still projected to bear a historically-large amount of debt, and the increasing trajectory of debt levels as identified in the IGR appears delayed, rather than annulled. Unless this trajectory can be well-and-truly turned around, it seems likely that the concerns and arguments raised in the Agenda symposium will remain highly relevant and pressing for both current and future generations.

22 December 2021

This article was prepared by Adept Economics Research Assistant Cristian Gutierrez and Director Gene Tunny. For further information please get in touch with us by emailing contact@adepteconomics.com.au or call us on 1300 169 870.