Ask an Adviser - What Will Be The Impact Of The Billions Injected Into The Economy For Investors And Consumers? (2)

Top answer provided by:

Paul Benson

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Thanks for your question Colin.

Governments right around the world have injected trillions of dollars into their economies in the past few months in response to the economic implications of COVID19. During the Great Depression of the early nineteen hundreds, governments endeavoured to run balanced budgets under the mantra that “we must live within our means”. This approach led to widespread economic harm, with the toll on households scaring a generation.

Ever since, governments have adopted the approach of spending money and running deficits when broad economic conditions turn sharply south.

The short-term impact of the current intervention is that it prevented financial markets instability, kept interest rates down, and lessened the economic impact of social isolation. Payments like JobKeeper and JobSeeker meant fewer people defaulting on their mortgage, not being able to pay their rent, or not being able to afford other household items.

In the medium term the RBA have indicated interest rates are likely to remain low. Budget deficits will mean tax cuts are unlikely.

In the long term it may be that this spending leads to inflation – more money chasing the same amount of goods and services should result in prices rising. But that’s just theory. Around the world inflation has been stubbornly low for a very long time. So, whilst the textbooks tell us we should see a bout of inflation, I certainly wouldn’t be betting the house on it.

One final point worth mentioning. In most discussions on the government stimulus, the question often turns to “how will this all be paid for?”. The simple answer is taxes. But of greater relevance is what sort of economic growth we get in the next 10, 20 or 50 years. If the Australian economy grows strongly, then that growth can quite easily fund repayment of this debt – think of your parents buying a home for $40,000, borrowing $35,000 40 years ago. It seemed like a lot of debt but it’s insignificant now. So, growth in our economy will be super important, and the main driver of growth is immigration. Australia wins massively from people of working age wanting to come and work and pay taxes in our country. Will COVID19 change that flow?

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Article by:

Paul Benson

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