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Mired in debt and deficit

Good morning! South Australia was the latest state to be pulled into the ongoing Delta-variant crisis yesterday, reintroducing mask requirements for "high-risk settings" (e.g. health, aged care) and limiting gatherings for at least a week. Western Australia (Perth and Peel) entered into a full lockdown at midnight, while in Queensland Premier Palaszczuk said her state was "on the verge" of another lockdown. In the Northern Territory, the government extended its ongoing lockdown for a further 72 hours.

The chaos had earlier led ScoMo to call his second emergency national cabinet in just two weeks, with the leaders of the various state and territories meeting yesterday evening. The key takeaways were that:

  • aged care workers will be required to have at least one shot of vaccine by mid-September (with a grant program set up to provide staff with paid vaccination leave);
  • international arrivals will be separated from domestic hotel quarantine guests;
  • mandatory vaccination and testing will be required for anyone involved in transporting airline workers;
  • people will be required to get tested 2-3 days after leaving hotel quarantine; and
  • an indemnity scheme for GPs will be implemented so that they can offer AstraZeneca to patients aged under 50.

Most of those should have been in place months ago. As for the mid-September first dose target for aged care workers – that sure sounds like one of those deadlines you give when you want it to seem like you're doing something without actually doing anything.

National cabinet will reconvene on Friday to discuss possible further measures.

Markets

Daily % change

AUD/USD

75.7

-0.1%

10Y Bond

1.50

-3.8%

ASX200

7,307

-0.0%

Brent (bbl)

74.6

-2.0%

Gold (oz)

1,779

-0.2%

Iron ore (t)

212.5

+0.0%

Bitcoin

34,594

+5.5%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

It was a quiet day for data releases yesterday, with action on local markets equally benign (ASX200 -0.01%), other than Qantas (-4.0%) and other travel-related players that were understandably sold off given the current domestic turmoil. In the US, the S&P500 (+0.23%) set yet another record high, with the tech-heavy Nasdaq gaining a full percentage point after a judge threw out the Federal Trade Commission's antitrust case against Facebook.

Coronavirus restrictions: A new Pew Research Center survey in 17 advanced economies showed that over the course of the pandemic, 68% of Australians believed that the government's restrictions "were about right", below only Taiwan (78%) and New Zealand (80%).

Iron ore boom: The Department of Industry, Science, Energy and Resources' quarterly resources and energy report estimates that the value of Australia's iron ore exports will increase to $A149 billion in the 2020-21 financial year, a nearly 50% increase from the $A103 billion recorded in 2019-20 (which at the time was a record high for any commodity).


Analysis

Mired in debt and deficit

The Australian government released its latest Intergenerational Report (IGR) yesterday, the first since 2015, providing "an outlook for the economy and the Australian Government's budget over the next 40 years".

Why this matters: The global pandemic took a big toll on the nation's finances, with Treasury now expecting net debt to peak at 40.9% of GDP in 2024-25, up from zero net debt just 20 years ago. From there the IGR expects it to decline as "the focus will move to debt reduction", although higher interest payments, an ageing population and low productivity growth mean that there will be no surplus and the federal government will remain in debt for the entirety of the next 40 years.

There will be no return to surplus due to higher interest payments.
There will be no return to surplus due to higher interest payments.

Slower growth: The IGR is forecasting real GDP growth of 2.6% over the next 40 years, down from the 3.0% achieved over the past 40. That's despite a bold productivity assumption – the IGR assumed it will be 1.5% over the entire period, which it notes "will require an improvement over recent performance [of 1.2% in the decade from 2010]".

  • Productivity matters: over the past 30 years, it has contributed "over 80% of growth in real gross national income (GNI) per person".

Work to be done: The assumptions in the IGR are optimistic and obviously do not take into account the recent lockdowns, so it has caveated some of them accordingly. In particular, it cautions that "government policies and institutional settings can play an important role in lifting productivity and ensuring individuals and businesses take full advantage of new innovations and technologies". The long-run starts now, meaning without a productivity agenda soon growth and incomes could be considerably lower – and the federal government's debt much higher – than the IGR has forecast over the next 40 years.


The Wrap Up


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