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Australians can expect to see interest rates at record lows for a number of years as the economy slowly recovers from the COVID-19 crisis, according to a leading economist.
And those low rates could mean the government will be able to avoid a massive budget blow-out in the longer term, despite borrowing billions of dollars to prop up the economy.
On Monday, the Prime Minister announced a $130 billion package to provide a wage subsidy to around six million workers, bringing the Federal Government's total spending to combat the coronavirus pandemic to $320 billion – with the promise of more to come if needed.
While in the short term the budget will be a sea of red ink as government spending soars to get through the crisis, at the same time as tax receipts fall, Chris Richardson from Deloitte Access Economics says it's money well spent.
"If you think of the trade-off it's not so bad," Mr Richardson told Nine.com.au.
Treasurer Josh Frydenberg announces the government's $130b wage subsidy package at a press conference at Parliament House in Canberra, Monday, March 30, 2020. (AAP Image/Mick Tsikas) NO ARCHIVING (AAP)
"This week's announcement was an extra $130b, but we're spending it at a time when interest rates have never been lower.
"People tend to forget that when you're spending money, the key thing is the interest rate. That $130b will cost us a little over $1b a year in interest.
"That's not nothing, but it is under 0.25 percent of all Federal Government spending each year. While the figure looks big, it's worth keeping it in perspective."
While debt will increase as the government looks to keep the economy afloat, Mr Richardson says that's not the biggest concern.
Treasurer Josh Frydenberg and Australian Prime Minister Scott Morrison arrive to announce the $130 billion package to support workers with wage subsidies during a press conference to outline the government's economic response to the COVID-19 pandemic. (Alex Ellinghausen)
"We will have to borrow more, but now is the best time to do it," he said.
"The oldest rule in economics is that unemployment goes up really fast, and it comes down really slowly. If you can fight against it really hard on the way up, and keep the peak a bit lower, that's a very valuable trade-off.
"You don't just save jobs today, you make it easier to re-start, because it hits the ground just a little bit harder when we get past this crisis and things start to return to normal.
"It's not just the jobs now. We know from history that if you lose your job in a recession, and you don't get it back in the following two years, you're essentially unemployed for the rest of your life, with all the costs that come with that.
"There's no tax income, there's extra spending on welfare, plus the hit to mental health and domestic violence.
"Yes we're spending a lot of money at the moment, but now is the most valuable time to spend it."
Mr Richardson also forecasts a decline in house prices due to the crisis, despite the record low interest rates.
"House prices will go down in the short term, because it's never really interest rates that pressure housing prices, it's unemployment. And even with all the good stuff we're seeing right now from the government, of course unemployment will go higher," he said.
"You'll see house prices go down, and in the near-term unemployment will rise. But you should also see unemployment declining if you look a couple of years ahead.
"Interest rates are nailed to the floor for a while yet, certainly for the next couple of years, you'll definitely see still the Reserve Bank keeping those rates really low."
While Scott Morrison is reportedly planning to push ahead with company and personal income tax cuts, Mr Richardson believes the government will have to tighten its belt moving forward.
"Of course this will cast a shadow over the economy, but remember this is the right time to be spending this money, I've got no problems with what's been announced," he said.
"But governments will have to be more careful with their spending, and they're likely to be a bit tougher on tax going forward.
"Having said that, those costs will be because we've protected lives through this crisis, and you can't but a figure on that."
Mr Richardson said it will take years for the true extent of this crisis to play out.
"It will be a while before the books get written and we can look back at how these decisions were implemented, but right now I'm pretty happy with how the government has responded.
"This is the hardest crisis I've ever seen, and in my opinion they're rising to the challenge."
For breaking news alerts and livestreams straight to your smartphone sign up to the 9News app and set notifications to on at the App Store or Google Play.
https://www.9news.com.au/national/i...s-crisis/8ddb698b-6392-4492-955a-7f49ad627b0f
And those low rates could mean the government will be able to avoid a massive budget blow-out in the longer term, despite borrowing billions of dollars to prop up the economy.
On Monday, the Prime Minister announced a $130 billion package to provide a wage subsidy to around six million workers, bringing the Federal Government's total spending to combat the coronavirus pandemic to $320 billion – with the promise of more to come if needed.
While in the short term the budget will be a sea of red ink as government spending soars to get through the crisis, at the same time as tax receipts fall, Chris Richardson from Deloitte Access Economics says it's money well spent.
"If you think of the trade-off it's not so bad," Mr Richardson told Nine.com.au.
Treasurer Josh Frydenberg announces the government's $130b wage subsidy package at a press conference at Parliament House in Canberra, Monday, March 30, 2020. (AAP Image/Mick Tsikas) NO ARCHIVING (AAP)
"This week's announcement was an extra $130b, but we're spending it at a time when interest rates have never been lower.
"People tend to forget that when you're spending money, the key thing is the interest rate. That $130b will cost us a little over $1b a year in interest.
"That's not nothing, but it is under 0.25 percent of all Federal Government spending each year. While the figure looks big, it's worth keeping it in perspective."
While debt will increase as the government looks to keep the economy afloat, Mr Richardson says that's not the biggest concern.
Treasurer Josh Frydenberg and Australian Prime Minister Scott Morrison arrive to announce the $130 billion package to support workers with wage subsidies during a press conference to outline the government's economic response to the COVID-19 pandemic. (Alex Ellinghausen)
"We will have to borrow more, but now is the best time to do it," he said.
"The oldest rule in economics is that unemployment goes up really fast, and it comes down really slowly. If you can fight against it really hard on the way up, and keep the peak a bit lower, that's a very valuable trade-off.
"You don't just save jobs today, you make it easier to re-start, because it hits the ground just a little bit harder when we get past this crisis and things start to return to normal.
"It's not just the jobs now. We know from history that if you lose your job in a recession, and you don't get it back in the following two years, you're essentially unemployed for the rest of your life, with all the costs that come with that.
"There's no tax income, there's extra spending on welfare, plus the hit to mental health and domestic violence.
"Yes we're spending a lot of money at the moment, but now is the most valuable time to spend it."
Mr Richardson also forecasts a decline in house prices due to the crisis, despite the record low interest rates.
"House prices will go down in the short term, because it's never really interest rates that pressure housing prices, it's unemployment. And even with all the good stuff we're seeing right now from the government, of course unemployment will go higher," he said.
"You'll see house prices go down, and in the near-term unemployment will rise. But you should also see unemployment declining if you look a couple of years ahead.
"Interest rates are nailed to the floor for a while yet, certainly for the next couple of years, you'll definitely see still the Reserve Bank keeping those rates really low."
While Scott Morrison is reportedly planning to push ahead with company and personal income tax cuts, Mr Richardson believes the government will have to tighten its belt moving forward.
"Of course this will cast a shadow over the economy, but remember this is the right time to be spending this money, I've got no problems with what's been announced," he said.
"But governments will have to be more careful with their spending, and they're likely to be a bit tougher on tax going forward.
"Having said that, those costs will be because we've protected lives through this crisis, and you can't but a figure on that."
Mr Richardson said it will take years for the true extent of this crisis to play out.
"It will be a while before the books get written and we can look back at how these decisions were implemented, but right now I'm pretty happy with how the government has responded.
"This is the hardest crisis I've ever seen, and in my opinion they're rising to the challenge."
For breaking news alerts and livestreams straight to your smartphone sign up to the 9News app and set notifications to on at the App Store or Google Play.
https://www.9news.com.au/national/i...s-crisis/8ddb698b-6392-4492-955a-7f49ad627b0f
