Labor think tank goes full MMT

Think thank Per Capita argues in a new report that concerns over how the federal government’s COVID-19 measures will be paid for are “largely misplaced”.

Per Capita contends that the government can essentially roll over its debt indefinitely, so long as Australia’s productive capacity operates to its maximum potential and its economic activity continues.

Per Capita instead contends that governments should borrow even more money to stimulate economic activity and protect employment.

Below are key extracts:

Public debt is not like household debt…

When the federal government borrows, it also does so against an asset, which is the productive capacity of Australia – the nation’s natural and human resources. Unlike a household mortgage, though, there is no time limit on the repayment of the loan, because the productive capacity of the nation has no finite lifespan: Australia will never “retire”, it will continue to generate income through productive economic activity.

Therefore, unlike a household, the federal government can roll its debt over indefinitely, provided the nation’s economic activity continues and Australia’s productive capacity operates to its full potential. And, as the nation’s economy grows, the size of the debt in proportion to national wealth, measured as Gross Domestic Product (GDP), shrinks commensurately.

The national economy is not an end in itself; it is a means by which to exchange goods and services, and distribute prosperity to ensure the wellbeing of a nation’s people. While excessive public spending is problematic when economic activity is strong, the reverse is true during times of economic constraint.

As we begin to emerge from this health and economic emergency, there is likely to be a fierce battle waged over how we restore economic activity and recover from the massive loss of jobs and income…

At around 20%, Australia’s public debt as a percentage of Gross Domestic Product is among the lowest of any advanced economy (see Figure 1)…

And even with the additional debt accrued to fund the JobSeeker and JobKeeper packages, Australia’s net debt is currently predicted to “blow out” to just 26% – still considerably lower than the net debt carried by many comparable nations before their economies took a similar hit from the pandemic…

Far too often, achieving a budget surplus is presented as a policy objective rather than merely an indicator of the state of the economy. In reality, saving for saving’s sake serves no practical purpose. Balancing budgets over time is a useful fiscal discipline, but accruing large surpluses is unnecessary, and may even be counter-productive. Every dollar the government saves is money withheld from the productive economy – money that could be invested in the future health and wellbeing of the nation…

Investing in the productive capacity of the economy is the best way to create a strong, resilient economy that can more easily absorb external shocks.

…debt is rarely, if ever, a problem for advanced, stable economies like Australia’s. During times of economic ‘bust’, or decline, it becomes essential to protecting the jobs and economic activity that are critical to our ability to restore the productive capacity of the economy and, in turn, pay down that debt…

In previous episodes of high public debt, Australian governments used expansionary full employment policies to rapidly reduce debt after high levels of borrowing for investment. During WWII, large parts of the economy were commandeered toward the war effort, and government, unions, and the private sector all looked for ways to expand our economic capacity through innovation and large government investments. This led to a tripling of public debt in just six years, to over 120% of GDP by 1946 – its highest ever level…

Expanding the employment base and creating productive jobs was vital to the recovery. These policies contributed to a huge increase in wages and household income, with average weekly earnings increasing by an average of 11.15% per year over the 1948-1958 decade.

The post-war years in Australia are remembered as a ‘boom’ time that created the most prosperous middle-class society on earth, with rising standards of living and falling inequality. It was the strongest and most stable period of economic growth in our history, averaging 4.2% of GDP in the 1950s, and rising to 5.3% in the 1960s…

Once the public health crisis has passed, we will need to invest heavily in an actual stimulus, and this will require more spending – and, therefore, more borrowing. Tightening the purse strings too quickly will jeopardiase the recovery and may lead us down a low demand, high unemployment, low growth route.

At over 200% of GDP, Australia has some of the highest private debt levels in the world. The danger is that, if government spending is withdrawn too early, we will enter a liquidity trap: people will spend on servicing their debts rather than spending on consumption and other productive economic activity.

Despite record-low interest rates, households with already high levels of debt and reduced incomes due to collapsing employment will be loathe to borrow further. Business will be reluctant to borrow while consumer demand remains low. With reduced demand for goods and services, unemployment will remain high and wages low, and the cycle will repeat.

As we have shown, the government faces no such constraints on its capacity to borrow. It has never been cheaper than now for the government to borrow money to invest in the productive capacity of the economy, and to create new jobs.

The yield on 10 year government bonds is currently less than 1%, while inflation is around 1.7%. This means that borrowing is essentially interest free for the government; it is an unprecedented time for cheap investment (see Figure 4).


Once through the immediate COVID-19 crisis, the government must take advantage of these highly favourable conditions to prevent household debt from swallowing demand and stalling the recovery.

The public sector is the only engine capable of driving investment in the productive capacity of the economy, to create the jobs and growth necessary to restore household living standards, shore up business confidence and, eventually, start to pay down debt…

The GFC acted as a natural experiment for government spending policy, from which lessons can be drawn for the current crisis. Many countries implemented austerity measures following the GFC with the singular goal of paying down debt. The UK government, for example, after initially agreeing to the G20 emergency stimulus package, proceeded to cut over GBP30 billion from social spending over the following decade in the pursuit of a balanced budget.

This has been shown to have been an economic mistake that has caused social catastrophe…

It is not the debt itself that poses a risk to future generations of Australians; rather, it is how we choose to respond to it that will have a material impact on their prospects of building good lives, and enjoying the same, or better, standards of living than did their parents and grandparents.

Without actually saying it, Per Capita is endorsing Modern Monetary Theory (MMT) to the extent that it quotes long term bond yields at such low rates. It does not mention that the RBA is standing behind those bonds with its printing press to guarantee them.  

Per Capita is 100% correct. The absolute last thing the Australian economy will need is for the demand rug to pulled from beneath it via reduced government spending in a failed attempt to turn return the federal budget to surplus.

Such austerity would only lower the economy’s growth and lift unemployment, in turn stifling the economic recovery without improving the budget (since personal and company tax receipts would crash).

Instead, the federal government should take advantage of record low interest rates and borrow big to invest in productive infrastructure. This would help to eliminate Australia’s chronic infrastructure deficit (alongside lower immigration), while also supporting jobs, growth and living standards. It’s a no-brainer.

Unconventional Economist
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