What is going on with government debt as states and territories report budget deficits?
At the beginning of October, rating agency Standards & Poor’s released a report stating that the Reserve Bank of Australia may need to support the states and territories through the coronavirus recovery, by buying more of their debt.
S&P specified that the total state, territory, and commonwealth debt reached an all-time high during April. They raised the possibility that the RBA could finance spending by buying bonds directly from the states, rather than from banks in the secondary market, as they currently do.
While that action, known as ‘monetary finance’, has many fans, including former prime minister Paul Keating, it does run counter to orthodox central bank thinking; it has also been repeatedly ruled out by the RBA’s governor, Phillip Lowe.
The majority of the states and territories are expected to report monster budget deficits. This is mainly a result of the pandemic spending that has been piled on top of already substantial commitments to other areas, such as infrastructure.
This has increased the risk of the states facing downgraded credit ratings. In particular, Victoria is on the edge of losing its AAA rating, before the end of the year.
However, we believe that as interest rates hit historic lows, the downgrade of ratings might not be important in the short term. The RBA’s decision to wade into the market for government bonds was so they could make sure it did not freeze over, during the pandemic.
The RBA tried to ensure that their actions would help to stabilise the economy, as much as possible during a really difficult time. While S&P had no solid view on whether the RBA directly buying debt was a good idea, there were no legal hindrances, in doing so.
This strategy, however, is mainly used overseas and in the developing world, so many may wonder if this is the answer for a developed nation.
As Australia enters a recession for the first time since 1990, an array of large corporations and small businesses are also seeing huge deficits in budgets. Many will struggle through this time, but it is still important for businesses to ensure that they are being paid by their necessary parties, despite the economic circumstances.
Good businesses cannot carry on unless those who provide a service, can continue to get paid for this service. We believe that it is more than likely that debt for individuals and businesses will rise during this period, and many of these debts will eventually become bad debts.
As a debt collection agency, we know that economic events such as recessions will impact our business in terms of the amount of business we may receive during this time. However, like many, we don’t know what lies ahead economically and how the government and the RBA, will react over the next few years in order to lead us back out of this recession.
For any individuals that are struggling to get their debtors to pay their money owed, use a trustworthy debt collection agency such as eCollect. It isn’t worth wasting your time hunting down the money when the experts could help you out instead.