How bad is Australia’s debt? Will young people still be paying it back? The federal budget explained

How bad is Australia's debt? Will young people still be paying it back? The federal budget explained

By Rio Davis and David Chau

The federal budget will be handed down on Tuesday, and it’s expected to show yet another deficit.

But how bad is that really? Is it all doom and gloom? And will young people have to pay it off through higher taxes in the future? 

As we wait to see what the numbers are, we’ve got all the answers you’re looking for about the budget, our COVID-19 debt, and why it matters to you.

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What is the budget?

The federal budget outlines how the government will spend the money it raises through taxes and investments.

There’s a lot of stuff it needs to pay for: funding for schools and hospitals, welfare payments, defence, and many others things. 

Different governments spend taxpayer money differently, according to their values and priorities.

So, the budget outlines where all the money will go.

For you, it might determine what your Youth Allowance payment looks like, or whether your university or TAFE fees will be going up or down.

Every year, on budget night, we get an insight into what the next 12 months are expected to look like in terms of the nation’s finances.

A budget deficit is when a government’s spending is bigger than its income, and Australia has run a deficit nearly ever year since 1901.

However, a national budget is not as simple as a personal budget. That’s because governments can borrow large amounts of money at a lower cost than individuals.

Also, Australia has its own currency, so the government may not always even need to borrow to cover deficits because it can literally print its own money.

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Did COVID-19 leave us with a lot of debt? 

Yes. Australia’s first lockdowns might have reduced the spread of COVID-19, but they had a significant economic impact.

For example, hospitality trade fell by nearly 40 per cent. 

Since the start of the pandemic, the federal government has racked up about $300 billion of extra debt, trying to stimulate the economy. 

One of the ways the government did that was via the JobKeeper scheme, which used taxpayer money to supplement people’s incomes. 

At the end of 2020, there were about 1.5 million people on JobKeeper. 

Despite that effort, 2020 saw our first recession since the ’90s. That is economic activity — which is measured every three months — fell in two consecutive quarters.

Will I have to pay for all this debt? 

Long story short, yes. But it’s not that straightforward.

Australians in the future may, at times, have to pay higher taxes, but there are two major reasons for this, and neither of them relates to COVID-19.

Firstly, we have an ageing population. 

As the amount of babies we’re having slows, there are relatively more older people on pensions than there are working-age people paying income tax. 

Secondly, the accelerating effects of climate change are expected to cost more into the future, as the clean-up bill of bigger natural disasters gets more expensive. 

Grattan Institute chief executive Danielle Wood says these structural factors are just as likely to have an effect on tax rates as COVID-19. 

“In the long term, it probably actually will be necessary for taxes to rise or spending to fall to try and manage that,” she says. 

“But that’s really because of those longer-term pressures, not because of the COVID debt.”

So … is debt bad? 

It’s complicated. Returning government spending to a surplus has been the promise of most treasurers at some point in their political careers. 

Despite that, plenty of budget experts say that running a deficit isn’t necessarily a bad thing. 

Ms Wood says the spending during the pandemic has been a good example of this.  

“If you think of something like COVID, what would the world have looked like if we didn’t have the government roll out the JobKeeper program, the boost to JobSeeker, [or] all the other supports?,” Ms Wood asks.

“You want the government in there as kind of a shock absorber, running deficits to cushion the impact of big economic shocks.”

Have we been in this position before?

Yes. The last time the federal budget was in surplus, the first iPhone had just been released. That’s right, 2007.

But, in 2008, a collapse in the United States’ banking system had a domino effect on economies around the world, leading to what became known as the global financial crisis (or GFC).

The newly elected Labor government, led by Kevin Rudd, spent about $51 billion to help the Australian economy weather that storm.

A decade or so later — thanks, in part, to a resources boom — the Morrison government came within $1 billion of a surplus in 2019.

It promised we’d be “back in the black” by halfway through 2020.

Yes, 2020. Unfortunately, we all know what happened next.

*This article first appeared on the website

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