Australia faces highest debt since WWII as it reveals cost of Covid-19

Australian Federal Treasurer Josh Frydenberg addresses the media at Parliament House in Canberra, on July 23, 2020. PHOTO: EPA-EFE

SYDNEY - Australia is experiencing its highest debt levels since World War II as the federal government radically lifts spending to try to steer the economy out of the Covid-19 crisis.

Treasurer Josh Frydenberg released a special report on Thursday (July 23) that revealed the extent of the nation's economic descent since the outbreak of the pandemic.

After 28 years of unbroken growth - a world record - Australia is now set to experience two consecutive years of contraction for the first time since the 1930s. The economy is believed to have shrunk by 0.25 per cent in 2019-20 and will contract a further 2.5 per cent in 2020-21.

Mr Frydenberg said the enormous debt Australia was incurring highlighted the "harsh reality" that the nation and the world now faces. The budget deficit for the year to June 30 is expected to come in at A$85.8 billion ($84.5 billion) but will climb to A$184.5 billion in 2020-21.

"Australia is experiencing a health and economic crisis like nothing we have seen in the last 100 years," Mr Frydenberg said. "Our economy has taken a big hit and there are many challenges we confront. We can see the mountain ahead and Australia begins to climb."

The country entered the pandemic in a relatively strong condition. Despite sluggish growth and stagnant wages, public debt and unemployment were relatively low and the ruling Coalition was preparing to herald a small budget surplus this year, the country's first in more than a decade.

But the pandemic has drastically reversed the nation's fortunes. Australia effectively shut down its economy in March and has gradually been reopening, though a recent outbreak in Melbourne has forced the city to go back into lockdown for six weeks.

Case numbers in Melbourne, the capital of Victoria, are at levels far higher than any Australian city had experienced during the first wave of the pandemic. Australia had recorded 13,306 confirmed cases of Covid-19 and 133 deaths as of Thursday. The 423 cases recorded nationally on Thursday include 403 in Victoria.

The Government revealed on Thursday that the pandemic has sent unemployment to 7.4 per cent, the highest level in more than two decades. But this is expected to rise further to a peak of about 9.25 per cent at the end of this year.

To prevent an even greater surge in unemployment, the Government has been paying struggling businesses to keep staff employed. This JobKeeper scheme, which provides A$1,500 a fortnight to subsidise wages of staff of badly-affected businesses, was due to end in September.

But the government said this week that it will keep the scheme until March 28 but reduce it to A$1,200 a fortnight in September and A$1,000 a fortnight in January. Likewise, extra welfare benefits for the unemployed will also be continued but at a reduced amount.

Prime Minister Scott Morrison said on Thursday night that the soaring debt was necessary to save jobs and save lives.

"It's costly but it's what's necessary," he told Channel Nine. "This is like nothing we've seen in generations.

"Australia is faring better than almost any other developed country in the world."

Analysts largely welcomed the government's decision to extend its JobKeeper scheme, praising Mr Morrison for abandoning his long-held determination to try to produce a surplus.

Economist Chris Richardson from Deloitte Access Economics said the "awful" debts and deficits were necessary to assist businesses and families at a time when they desperately need help.

"If the economy were ordinary at the moment, then I'd be up in arms about a budget blowout - let alone one of this stupendous size," he wrote in The Australian Financial Review. "Yet things right now are anything but ordinary."

But the Covid-19 surge in Melbourne, the country's second-largest city, has been a sobering reminder that things remain far from ordinary and that the forecasts presented yesterday may yet need further radical revisions.

The government has effectively assumed that Melbourne's lockdown will work and that other major cities will not endure similar coronavirus surges and that international travel will resume from January.

These may turn out to have been tragically naïve presumptions.

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