How is the Stimulus Package being Funded

April 20th, 2020
The Australian government has unveiled the largest economic stimulus package in the nation's history, with $320 billion made available to combat the economic impacts of the pandemic. As “the biggest economic lifeline in Australia’s history,” according to Prime Minister Scott Morrison, this money is designed to boost the welfare system, support workers, and keep businesses alive during this difficult time. With so much money on the table, however, people are wondering exactly where it's coming from and how we can afford it.

The latest stage-three stimulus announcement brings total fiscal and monetary stimulus in Australia to A$320 billion, which is 16.4% of gross domestic product. Despite the obvious need to "protect the lives and livelihoods of Australians”, this is a significant sum and percentage by anyone's terms. Among other things, measures include an effective doubling of JobSeeker payments and pay wage subsidies of A$1,500 every two weeks per employee to help struggling businesses.

In order to pay for these benefits and subsidies, the government will effectively create the money and rack it up as debt. Officially, it will raise the money via the Australian Office of Financial Management (AOFM), which borrows money on behalf of the government by selling Australian government bonds. While these bonds are available to a number of Australian and international investors, the ultimate buyer of these government bonds could be our very own Reserve Bank.

The Reserve Bank of Australia (RBA) recently announced it would commence 'quantitative easing', an emergency monetary policy action it has never attempted before. Despite a lack of history in Australia, this tool has been used successfully in the United States and Europe, both over recent years and during the GFC. In order to buy government bonds from banks and pension funds, however, the RBA first needs to print some money. Other than printing costs, the real price of this money is essentially unlimited.

According to conventional economic theory, however, this money needs to be limited at the source in order to prevent out-of-control inflation. Basically, the model is designed to create arbitrary scarcity in order to define value and keep society ticking over as we know it. Conventional economic theory is not the only model, however, with its fiercest rival, Modern Monetary Theory (MMT), finally getting its time in the spotlight thanks to coronavirus.

MMT has been proposed by many leading economists, and is advocated by some politicians such as Bernie Sanders. Make no mistake, this model is a huge departure from how we currently do things. Rather than limiting money through printing restrictions at the source, MMT proposes a situation where governments have free control over their spending. While this concept of 'free money' is almost impossible to grasp under the current economic model, other limits are placed by MMT to keep the economy grounded in reality.

Under a pure MMT model, governments could simply pay off their own debt by printing more money in the future. This sounds like madness at first, but makes more sense when you understand the details. Basically, a national economy does not function like a mortgage. Unlike a mortgage, which is debt taken out against an asset, national governments effectively borrow money against their future productivity. Unlike a house, which is set in stone, Australia will always produce goods and services, which means the national debt never really has to be repaid. Endless growing debt will cause hyperinflation, however, with the value of money essentially rendered as meaningless.

This is where conventional monetary policy advocates typically stop, but MMT does have an interesting answer to this problem. While limits are undeniably needed to define value, maybe these limits can be based on real-world production measures rather than the abstract notion of money creation. Rather than the budget, government spending could be limited by inflation itself. While MMT would be a huge economic and cultural shift, and existing interests are unlikely to adopt this model outright any time soon, politicians seem willing to utilise one of its basic precepts when times get tough.