InvestNow News – 22nd May – AMP Capital – Budget 2020

Bevan Graham –¬†Managing Director and Chief Economist, AMP Capital

The Government is throwing the kitchen sink at its response to the COVID-19 crisis. Of course it is only able to do this because of the fiscal restraint shown in the prior decade as the fiscal buffers were rebuilt following the Global Financial Crisis and the Christchurch earthquakes.

There have been repeated calls over the last few years for the Government to spend a bit more and take advantage of low borrowing costs. We have argued continued restraint lest the Government find itself needing to respond to a fresh crisis: welcome to Budget 2020.

The Government has committed $62 billion (20% of GDP) towards both supporting the country through the crisis and to the subsequent recovery. Some has already been spent, with $26 billion already committed to various response measures while $16 billion of new measures were announced in the Budget. That leaves the Government with a further $20 billion up its sleeve for future initiatives.

The downside is the upside in the debt profile. Net core public debt rises from 20% of GDP to 53.6%. Debt at that level is not unprecedented but you have to go back to the mid-1990s to find a comparable number. Debt issuance rises to $190 billion over the next five years.

Many of the new initiatives were focused on jobs, firstly continuing to help firms retain their employees through the crisis via an extension to the wage subsidy. But the government can only continue to support vulnerable firms for so long. Some businesses will inevitably fail leaving the unemployment rate elevated for some time.

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