COVID-19 economics: ballooning debts and deficits, rising unemployment and a slow recovery

Treasurer Josh Frydenberg delivers the federal government's economic update.

THE economic update delivered yesterday by federal Treasurer Josh Frydenberg shows in detail the impact that COVID-19 has had on the Australian economy, the government spending to minimise this impact, and the additional pressure on Australia's bottom line, in terms of substantially increased government debt.

Much of the early commentary has been, naturally enough, on the debt and deficit positions.

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The June 30 deficit was $85.8 billion, compared with an estimate at last November's mid-year statement, before coronavirus appeared, of $2.8 billion.

The estimated deficit for 2020-21 has been revised from $2.5 billion to $184.5 billion.

This chart from yesterday's Economic and Fiscal Update 2020 shows that government debt as a percentage of GDP (the vertical bars, measured on the left vertical axis) is at modern era record levels, whereas the "public debt interest" or PDI cost (the black line, measured on the right axis) is well below what it was in the 1990s when interest rates were much higher than now. This is why debt is said to be "cheap" now, because interest rates are so low. But the money still has to be (supposedly) repaid.

As the government has said since its COVID-19 stimulus measures began, Australia's borrowing is increasing substantially.

Gross public debt on June 30 was $684.3 billion, 23 per cent up on the November estimate of $556 billion.

For June 30 next year, the gross debt estimate is $851.9 billion, a 52 per cent increase on the November estimate of $558 billion.

For a conservative government, such borrowing, largely for welfare purposes, is philosophical anathema, but record low interest rates mean repayment costs are lower, in GDP terms, than in the 1990s when we owed less, but interest rates were higher.

The US Dow Jones on Wednesday, showing it has gained much of the ground lost since markets bottomed on March 23. The February peak was about 29,500 points.

Yesterday's statement warns at length of the pressures facing the global economy, predicting a slow recovery no matter how quickly the virus is subdued as a threat.

Even with JobKeeper, COVID-19 lockdowns and restrictions have resulted in big job losses.

The official June jobless rate was announced earlier this month as 7.4 per cent.

Yesterday's statement says this represents an "effective unemployment rate" of "close to 11 per cent".

Australia's all ordinaries index back above 6200 points, compared with its February peak of 7200 points and its March 23 trough of 4564 points. The Australian market, like the US and other major markets, has rallied strongly. Yesterday's government statement notes these rises, and says there is a "risk" that markets "have not fully accounted for the economic consequences of the crisis".

Applying the same 48 per cent increase to the June Newcastle jobless rate of 11 per cent, announced yesterday, would push the region's "effective" unemployment rate to 16.5 per cent.

Despite the global uncertainty, stockmarkets have recovered much of the ground lost in the month-long rout that bottomed in late March.

Financial commentators have warned of market "bubbles" and yesterday's statement says "there is a risk that global markets have not fully accounted for the economic consequences of the crisis".

A crisis forced by 15.2 million COVID-19 cases, including a record 279,700 cases on Wednesday, and almost 624,000 deaths.

ISSUE: 39,368.

The US, with 3.97 million cases, has 26 per cent of the world total of 15.25 million. Its 143,193 COVID-19 fatalities represents almost 23 per cent of the overall total of 623,897, as given on the Johns Hopkins Universities global dashboard on Thursday evening.