- Labor leader Anthony Albanese has warned that government debt “will saddle a generation” as the government passed its coronavirus wage subsidy package on Wednesday.
- While agreeing with the broad policies, Albanese voiced concern the country was headed towards “$1 trillion of debt” that will need to be paid back in raised taxes.
- It comes as Australia has its credit rating downgraded and the big banks are urged to reduce their dividend to see them through choppy economic waters.
- Visit Business Insider Australia’s homepage for more stories.
The coronavirus has well and truly infected Australian politics, as the Coalition and Labor parties begin sounding eerily like the other.
In the lead-up to last year’s federal election, the Liberals repeatedly smeared the Opposition as a high-spending, high-taxing alternative, sensationally claiming a Labor government would “tax you to death”. While Labor ended up losing the election, it issued a similar warning on Wednesday.
“We are headed for $1 trillion of debt … a bill that will saddle a generation,” federal Labor leader Anthony Albanese told Parliament, as the government passed its $130 billion wage subsidy package.
“With this comes a compelling need for scrutiny and forensic oversight,” Albanese said, noting new mountains of debts would take years to pay back.
It’s quite the departure for both parties. The Coalition government, which has for years promised to return the federal budget to surplus at the expense of most anything else, has now committed to spending hundreds of billions of dollars in a few short weeks.
The about-face speaks volumes of the severity of the coronavirus and the damage a government shutdown of businesses will cause. Current forecasts put unemployment rising anywhere between 7.8-10%, while an Australian recession is now unavoidable.
Having also spent a number of years criticising the size and method of Kevin Rudd’s $51 billion stimulus package during the global financial crisis (GFC), the Morrison government is set to spend around $191 billion, or nearly four times that, on top of more than $100 billion of support offered by the Reserve Bank.
According to analysis by ANZ economists, those deficits the extra spending will create will be the largest in Australia’s post-war history.
Increased government spending and a mid-2020 economic contraction will lead to substantial changes in Australia’s budget position, with deficits likley to be the worst since WWII. @ANZ_Research estimates of the Commonwealth’s underlying cash balance profile below #ausecon pic.twitter.com/ZeIaCUA3cZ
— ANZ_Research (@ANZ_Research) April 8, 2020
The $130 billion wage subsidy package will pay for the government’s Jobkeeper program, worth $1,500 a fortnight to businesses per employee they keep on. Two previous packages, worth $17.6 billion and $66 billion apiece, have funded one-off payments to welfare recipients and almost doubled the JobSeeker Allowance, formerly Newstart, that the government had previously rejected raising.
Despite raising significant issues with the government’s version of a wage subsidy, including its exclusion of casual workers who have been with a business less than 12 months and visa holders, Labor supported the package.
“Never let the perfect be the enemy of the good. And this is good legislation,” he said.
Bad debts could rise as Australia’s economy sours
The size of the spend, coupled with Australia’s weakened economy, has already had serious implications. Rating agencies Fitch downgraded each of the big four banks as it suspects Australian households may struggle to pay back sky-high levels of household debt, such as mortgages.
“A sharp rise in unemployment and the disruption caused by the restrictions imposed by governments to limit the pandemic is likely to escalate non-performing loans during 2021,” it said.
Meanwhile S&P Global Ratings reaffirmed Australia’s credit rating — the appraisal of the country’s ability to pay back its debts — but revised its outlook to negative.
“With household indebtedness at elevated levels, this could delay the process of repairing the government balance sheet beyond what we expect currently,” S&P said in a report.
Typically a worse credit rating corresponds to a higher cost of borrowing, but it’s unclear whether that will occur here, given the outbreak will increase fiscal spending internationally, while reducing the tax revenues governments can collect.
The big banks have been encouraged to cut their dividends
Late on Tuesday, the banking regulator APRA urged banks to consider cutting their dividends and securing their capital positions as Australia heads into choppy waters.
“APRA expects [banks] and insurers to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance,” it said in a public letter to the industry. “This includes prudent reductions in dividends, taking into account the uncertain outlook.”
The big banks responded by insisting on Wednesday that it has made no decisions yet, but investors reacted by piling out of the majors anyway, with each down between about 2.9% and 4.3% as of 1:30 PM.
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