Recovering from the fiscal side-effects of COVID-19

So, if the dollar soars in coming quarters, damaging the prospect of a quick economic recovery, remember to blame the COVID19 fiscal overdose administered by federal and state governments. Another contributing factor to a climbing dollar is likely to be the United States Federal Reserve flooding world money markets with US dollars, to assist US competitiveness, again an international factort.

Announcing bonus cash payments and bolstering welfare payments under crisis conditions with public debt already escalating rapidly due to revenue losses was not unlike a household deciding to spend more each week at pricey restaurants while under pressure with income falling to meet the mortgage payments.

The international factor that would puncture the dollar's rise is a downgrade of the federal government's AAA credit rating, that would also flow through to the states. Now a strong possibility, this would add a risk premium to interest rates across the spectrum.

With a trillion-dollar public debt, every additional basis point of any consequent interest risk premium would add $100 million to the public debt interest bill, mostly paid to foreign bondholders.

Again, remember to blame fiscal 'stimulus'.

Federal public debt interest is a net drain on national income and at federal level alone, could rise to over eight times the size of Australia's foreign aid budget and three times the federal spend on higher education and many other federal government programs.

Australia's pre-pandemic fiscal position was not as strong as it should have been, because successive federal governments failed to rewind the growth in government expenditure in the wake of the GFC. The size of Australian government pre-pandemic was already above its optimal level.

Australian governments should therefore take immediate action to reduce the burden extra government spending has placed on the future economy and taxpayers.

Cutting government spending should take precedence over raising taxes as the priority fiscal repair option. Reduced public spending - particularly on industry assistance and the overlap in spending at federal state levels - should therefore be central to the recovery program.

This should be accompanied by tax reform (including to internationally uncompetitive company tax rates) along with business deregulation and industrial relations reform.