ESA National Economic Panel Polls

Government Debt during the COVID19 Crisis

Should the government keep running up debt to get us out of the crisis? Overwhelmingly, economists say yes

Peter Martin, Crawford School of Public Policy, Australian National University

Overwhelmingly, the 50 leading Australian economists surveyed by the Economic Society of Australia and The Conversation ahead of Thursday’s economic statement want the government to keep spending to support the economy — even if it means a substantial increase in debt.

The question is the third asked in the Economic Society-Conversation monthly poll, which builds on a series of polls conducted by the society since 2015.

The economists polled were selected for their preeminence in the fields of microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers and a former and current member of the Reserve Bank board.

Each was asked whether they agreed, disagreed, or strongly agreed or strongly disagreed with this proposition:

Governments should provide ongoing fiscal support to boost aggregate demand during the economic crisis and recovery, even if it means a substantial increase in public debt

Only three of the 50 economists polled disagreed with the proposition, none of them “strongly”.

It is one of the starkest results in the survey’s five-year history.

50 economists respond: Govs should provide ongoing fiscal support to boost aggregate demand during the economic crisis and recovery, even if it means a substantial increase in public debt. Strongly agree: 66%, Agree: 22%, Uncertain: 6%, Disagree: 6% — The Conversation, CC BY-ND

Of the 50 economists polled, 44 supported the proposition, 33 of them “strongly”.

Of the remaining six, three were uncertain, and provided well-argued accounts of their reasoning which are published in full along the responses of each of the other participants at the bottom of of this article.

Debt now, concern later

Rachel Ong of Curtin University said the amount of public debt that has accumulated during the COVID-19 crisis was at a historical high and had to be repaid at some point. But she said governments had to be careful about removing support until the economy was clearly on a trajectory of recovery.

Nigel Stapledon of the University of NSW said while some level of on-going support was needed, at some point the cost would be larger than the benefit. Some sectors, including universities, will have to permanently adjust to lower incomes.

The economists who strongly agreed said that if not enough support was provided or if it was withdrawn too early, the resulting recession would itself make the debt that had been run up less sustainable (Fabrizio Carmignani, Griffith Business).

Financial markets are keen to lend

Beth Webster of Swinburne University argued the only real limit to government spending was high and damaging inflation.

If the government was worried about debt, it could finance its spending in other ways, by borrowing from the Reserve Bank (which could itself create money and “monetise” the debt).

Sue Richardson from the University of Adelaide agreed, using a technical term to argue that the was economy was “so far inside its production possibility frontier” (producing so much less than it was capable of) and inflation was so dormant, that there was a case for creating money.

Saul Eslake said that wasn’t necessary. Even with the hundreds of billions committed, financial markets appeared to be comfortable with the debt and keen to lend.

Debt is how we do things

Reserve Bank board member Ian Harper said the Commonwealth could borrow for 30 years at about 1%. “Can we expect the economy to grow faster than 1% per annum in nominal terms over a 30-year horizon?” he asked rhetorically. “I would have thought that’s a shoo-in,” he answered. If so, then the debt would be easily serviced.

Consulting economist Rana Roy pointed out that public debt was “not an anomaly”. It was an enduring and defining feature of the modern economy, providing an enduring and defining asset class, sovereign bonds, which were in high demand.

Of the three economists who opposed the proposition, Tony Makin of Griffith supported “supply side” measures such as JobKeeper that would keep firms in business but opposed “demand side” measures to boost consumer spending, saying they would ultimately prove counterproductive.

Escalating public debt would induce capital inflow, drive up the dollar and make Australian businesses less competitive. Although interest rates are at present low, they would increase when the debt had to be refinanced.

Doubts for differing reasons

Paul Frijters of the London School of Economics said he would normally support running up government debt for the sake of the economy, but could not support it being run up to support an economy the government itself had run down.

The government should wean the population off of its “irrational fears” and letting “normal economic life return”.

Although strongly argued, these views were more weakly held than those of the majority.

Previous responses weighted by confidence: Strongly agree: 70.4%, Agree: 21.7%, Uncertain: 3.5%, Disagree: 4.4% — The Conversation, CC BY-ND

Participants were asked to rate the confidence with which they held their opinions on a scale of 1 to 10.

When adjusted for these ratings, the proportion prepared to countenance a substantial increase in public debt climbed from 88% to 92.1%.

The proportion opposing it fell from 6% to 4.6%.

Tommorrow’s economic statement will be the last budget and economic update before the budget itself on October 6.

Individual responses

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Responses (50)


Peter Abelson	Strongly agree	9	When monetary policy is at or near the effective lower bound as it is now, fiscal policy support is critical.?


Garry Barrett	Agree	10


Harry Bloch	Strongly agree	9	Inadequate aggregate demand leads to reduced output and unemployment, with adverse consequences for individuals and society as a whole.


Alison Booth	Strongly agree	10


Jeff Borland	Strongly agree	8	Australia's situation is that - even if the current outbreak of COVID-19 in Melbourne is quickly resolved and reopening of economic activities within Australia then proceeds smoothly - by the end of September I believe that the labour market will only have returned to about the worst points of the 1980s and 1990s recessions.?


Robert Breunig	Disagree	5	Governments should provide targeted fiscal support that doesn?t make debt go up too much. Untargeted splashing of extra money is unlikely to be productive and will harm the economy in the medium term.


Matthew Butlin	Agree	8


Lisa Cameron	Agree	9	Ongoing fiscal support will be necessary to forestall a deep recession. Such a recession would of itself have dire negative budgetary implications over the longer term. There will however be an opportunity to target the fiscal support to the most adversely affected industries - such as retail, hospitality and the arts.


Fabrizio Carmignani	Strongly agree	10	In the current conditions, a flattening of the recession curve can only be achieved through fiscal support.


Ken Clements	Agree	9


Deborah Cobb-Clark	Strongly agree	10


Lin Crase	Strongly agree	8	As with all things relating to government, timing really matters. There is a time to reduce public expenditure - but it is not now.


Kevin Davis	Strongly agree	9	The size of the national debt (if in AUD) should only become a concern if the interest obligations on the debt get to such a point that their payment (and principal repayments) threaten the future ability of the government to make expenditures to provide a desired level of government services.


Brian Dollery	Agree	8	A lot depends on what form expansionary fiscal policy takes.


Uwe Dulleck	Agree	9	Given that the economy was in a reasonable healthy state before the crisis, a lot of the effect we currently see is a lack of demand. Boosting demand - in particular by helping those of low income that were hit hardest - that are likely to spend most of the support they receive - can help to boost demand, leaving the economy in a better shape once we get out of the crisis.


Chris Edmond	Strongly agree	10	The Australian economy is going through a severe recession. The Reserve Bank predicts GDP will contract by around 10% and will not regain its pre-recession levels for several years to come. And that forecast is built around the current extensive levels of fiscal support. Prematurely unwinding that fiscal support is a serious threat to the recovery.


Craig Emerson	Strongly agree	10	Interest rates on public debt are at record lows and in a deflationary world are expected to remain low indefinitely.


Saul Eslake	Strongly agree	9	The recovery from the downturn induced by Covid-19 and the measures required to contain it will be slow, vulnerable to setbacks, and in the absence of ongoing support from both monetary and fiscal policy, accompanied by persistent high levels of unemployment, with long-term adverse consequences for both the unemployed themselves and for the broader Australian community.


ALLAN FELS	Strongly agree	8


Gigi Foster	Strongly agree	9	The debt is not a problem per se. Government expenditure during a downturn (which accumulates debt) is a concern if it is directed toward purposes that will not serve to support Australia's economic stability and recovery, or if it is so substantial and/or financed in such a way that it creates inflationary pressure. Neither appears to be the case now.?


john Freebairn	Strongly agree	9	A debt funded fiscal stimulus will help to counter insufficient aggregate demand associated with the pandemic driven sharp drop in household consumption, business investment and international trade, and in recognition of the limited available stimulus which can be provided by monetary policy.


Paul Frijters	Disagree	5	In a normal depression, I'd say "of course" because when hit by an outside economic shock, you want to stimulate aggregate demand in order to minimise unemployment whilst businesses adapt to the changed environment.


Renee Fry-McKibbin	Strongly agree	10


Lata Gangadharan	Strongly agree	9	Some form of income support needs to be considered for the next few months. Governments should not be worrying about public debt during such difficult times.


Ian Harper	Strongly agree	9	Current net levels of public debt are relatively low, especially by the standards of other developed economies, and further fiscal stimulus would be prudent in the face of an economic crisis of uncertain depth and duration. The case is even stronger when the historically low levels of interest rates on public borrowing are taken into account. The Commonwealth can borrow for 30 years at about 1 per cent.


John Hewson	Agree	8	Not just a question of demand but also need some supply side responses.


RICHARD HOLDEN	Strongly agree	10	The carrying cost of long-term debt is less than 1% pa and net debt/GDP is around 20%.


Geoffrey Kingston	Uncertain	8	It is true that hefty fiscal deficits and government spending are both needed now. This does entail a "substantial increase in public debt". However, the main fiscal objective should not be to "boost aggregate demand"---the RBA has done enough thus far to prevent falling prices.


Michael Knox	Agree	9	The Cash rate is at the Zero bound. The Reserve bank is buying bonds .


Guay Lim	Agree	8	The public debt will be sustainable if the fiscal support yields a growth in income which exceeds the cost of funds. Since interest rates are currently very low, the burden of the debt is unlikely to be high.


Tony Makin	Disagree	9	My response presumes that "ongoing fiscal support to boost aggregate demand" means increased government spending (G) to influence total spending (C+I+G). Ongoing fiscal support provided directly to firms and employees (eg JobKeeper) is presumed to be a supply side, not a demand side fiscal measure. Tapered fiscal support of this kind may continue to be necessary, along with retraining assistance for the worst hit sectors (eg travel and tourism) in concert with continued monetary and banking sector support. However, further fiscal measures to 'stimulate' demand, such as direct spending on unproductive infrastructure, cash splashes, increased transfer payments etc should not be countenanced as they ultimately prove counterproductive in an open economy according to standard textbook theory, backed by empirical evidence.?


Warwick McKibbin	Strongly agree	9	The nature of the fiscal support matters. I assume the question is focused on a set of good policy options rather than wasteful and distorting policies. I also assume that the support is temporary until there is a recovery.


Flavio Menezes	Strongly agree	10	The government?s response to the COVID-19 crisis highlighted that providing social insurance is one of the key roles for government in a modern, democratic society, with an independent central bank tasked with monetary stability. I have no doubt that the timely and substantive income support provided by the government prevented a much deeper economic downturn.


James Morley	Strongly agree	10	If governments do not provide ongoing fiscal support, the global economy risks a debt-deflationary spiral (lower wages/prices, higher real debt/default), similar to the Great Depression.


Margaret Nowak	Strongly agree	10	The critical fiscal support should be targeted towards supporting consumption expenditure along with skills enhancement and supporting people to get back into employment via child care support and adequate income support for the unemployed. As activity picks up there may also be a good case for targeted support for business investment expenditure via accelerated depreciation.


Lionel Page	Agree	8	Australia?s public debt is relative low among OECD countries. It is reasonable to think that a cautious fiscal policy in good times is to allow deficits in bad times to support the economy. Australia can, and I believe should, use this possibility.


A Abigail Payne	Strongly agree	10


John Quiggin	Strongly agree	8	In the special conditions of the pandemic, the primary purpose of government spending is not to boost aggregate demand, but to provide income support to workers and businesses who are suddenly unable to work as they normally would. But the case for taking on debt to do this is overwhelming, particularly since interest rates are likely to remain at or near zero for many years to come


Sue Richardson	Strongly agree	9	The problems that face the economy are mainly lack of demand, caused by shut downs and people?s caution about exposing themselves to the virus. They include also disruption to supply chains and increased uncertainty and costs of operating in a Covid-safe way.


Rana Roy	Strongly agree	9	To the best of my knowledge, the Australian Government has not proposed, nor is planning to propose, the withdrawal of ongoing fiscal support to boost aggregate demand during the economic crisis and recovery. The Prime Minister has said that such a suggestion is tantamount to ?fear-mongering?. Therefore, rather than running an argument against what may be well be a ?straw man?, I shall confine my comments to the second part of the proposition, the case for accepting a substantial increase in public debt as a result of this ongoing fiscal support.


Stefanie Schurer	Strongly agree	9	Australia has one of the lowest government debts -- as percentage of GDP -- among OECD countries. In December 2019, this debt ratio was 45%. In comparison to Germany (60%), the UK (81%), EU (80%) and the US (107%), Australia's government debt ratio is low. It is similar to Switzerland's and Norway's (~41%), two exceptionally rich countries with a healthy and functional public sector and a thriving private sector. Thus, Australia will be able to increase its public debt substantially, without compromising its financial health.


Jeffrey Sheen	Strongly agree	9	Uncertainty about the fiscal support and its tapering has a high cost. The support should continue insofar as governments maintain lockdowns of the labour market. Although difficult to design, a contingent plan for the tapering off of the support needs to be announced as soon as possible.


Hugh Sibly	Agree	8


Helen Silver	Strongly agree	8	The current economic crisis has been largely driven by the consequences of managing the health crisis.


Nigel Stapledon	Uncertain	7	I agree that a level of on-going fiscal support is needed. However, there is a trade-off here. Given the magnitude of the shock, it is not possible for Australia to avoid a decline in demand and a recession. It can only be mitigated. At some point, the cost (of fiscal support) will be larger than the benefit. in addition to the fiscal (debt) cost, there will be the cost to the economy of not adapting in a dynamic way if support is "too generous".


Julie Toth	Strongly agree	10	Government spending must be increased to match the scale of this crisis.


Joaquin Vespignani	Strongly agree	9


Rachel ViforJ	Uncertain	8	Governments should be very careful about suddenly removing fiscal support suddenly until the economy embarks on a steady trajectory of recovery. However, they should look at reducing the level of fiscal support incrementally as soon as possible.


Elizabeth Webster	Strongly agree	10	The natural limit to national government spending is the creation of high and damaging inflation.


Danielle Wood	Strongly agree	9	Without ongoing stimulus over the next couple of years, unemployment will remain too high and the economy will grow more slowly than it should.