Government faces lifting its own debt cap as virus hits budget

The government is now preparing a multibillion-dollar stimulus package. An economic slowdown will result in lower tax revenues for the government and push up spending, particularly in health and welfare support for the unemployed.

In his 2017 budget, then treasurer Scott Morrison increased the maximum amount of Commonwealth debt that could be on issue to $600 billion.


The government, in the mid-year update last year, forecast it would have debt peak at $576 billion over the next two financial years. Debt already stands at $573.1 billion.

Analysts said the combined impact of the slowdown in the economy, which is expected to contract through the March quarter, as well as extra costs from the bushfire response and the stimulus package mean Treasurer Josh Frydenberg will have no option but to lift the debt ceiling.

The increase is expected to come in the May 12 budget and will only require a direction from Mr Frydenberg to the government’s debt agency, the Australian Office of Financial Management.

Mr Frydenberg said on Monday the government’s stimulus package would not “undermine the structural integrity of the budget”.

The increase in debt may not mean a lift in interest payments. Interest on government debt has fallen to record lows of below 0.6 per cent because of the concern about the state of the global economy.

The domestic economy is facing its toughest period since the global financial crisis with Westpac chief economist Bill Evans on Monday forecasting the country will suffer its first recession since 1991.

Mr Evans said he expected the economy to contract by 0.3 percentage points in both the March and June quarters – back-to-back quarters of negative growth which is the common description of a recession.

He cautioned that while there is likely to be negative growth through the first half of the year, the following six months were likely to be much stronger which would limit any increase in unemployment.

Rating’s agency Moody’s on Monday downgraded its expectations for the global and Australian economies.

In mid-February, the agency tipped it expected Australia economic growth to average 1.8 per cent through 2020.

It now believes this is likely to be 1.6 per cent, warning if the coronavirus leads to an “extensive and prolonged slump” then growth would fall to 1.3 per this year. That would be the worst year for growth since 2000.

Moody’s believes the chances of a global recession have increased with most damage to occur through the first half of the year.

“The longer the outbreak affects economic activity, the demand shock will dominate and lead to recessionary dynamics,” they said.

“In particular, a sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment.”

The International Monetary Fund is also preparing for a worse-than-expected hit to the global economy from the coronavirus.

The fund’s economic counsellor, Gita Gopinath, said the outbreak was now having both supply and demand shocks.

Business operations were being disrupted by lower production, particularly out of China where exports through January and February fell by almost 20 per cent, while a drop in confidence among consumers was lowering demand.


Ms Gopinath said all governments should consider stimulus measures including direct cash handouts to households and an increase in welfare support for those who may be pushed out of work temporarily.

“The loss of income, fear of contagion, and heightened uncertainty will make people spend less. Workers may be laid off, as firms are unable to pay their salaries. These effects can be particularly severe on some sectors such as tourism and hospitality,” she said.

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