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Our virus debt will be jaw-dropping but nothing to worry about for now

Business

Australia’s staggering debt binge to keep the economy alive could be paid off by a small rise in the Medicare levy, according to Deloitte Access Economics.

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The expectation is that Australia will have to sell an extra $300 billion in bonds to deal with the escalating problem.

Economist Gene Tunny said that would not be a problem at current interest rates but if the debt needs to be refinanced at a later date when interest rates are higher, it could become problematic.

Deloitte’s Chris Richardson said the dollar amounts in the rescue package were “jaw-dropping” but interest rates were at historic lows and there was an option of doing nothing to pay back the debt.

He said benefits from the programs would be substantial. The $130 billion wage subsidy would save 500,000 jobs and reduce unemployment from an expected 12 per cent down to 8 per cent.

“Never in the 2000 years of recorded history of interest rates has it been cheaper for governments to borrow. Never. And markets aren’t fazed in the slightest:  they reacted to the latest package by dropping the rate on 10-year Commonwealth borrowing substantially further,” Richardson said.

The Government’s rescue has so far amounted to $213 billion and Richardson said the ongoing interest would be $1.6 billion, which could be dealt with by raising the Medicare levy from 2 per cent to 2.14 per cent.

“That’s not nothing.  You’d much prefer not to have to pay that much extra in interest every year.  And there’s a chance that rates eventually go back up – though probably not for a long time.  Yet these costs are far from scary,” Richardson said.

“Australia’s economy will grow again on the other side of this war.  So, here’s a simple suggestion: let’s just let our debts from this new war simply became a smaller share of our growing economy over time.

“That’s what we did with the war-time debts of the past.  And it’s probably the smart play this time too.

“We’ll be borrowing about an extra 10 per cent of national income.  If we choose not to pay back a single cent of that, the growth in our economy over time will halve to about 5 per cent of national income in 18 years, and then halve again to 2.5 per cent in a further 18 years.”

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