I want to focus on how bond holders debt will be paid off. They have spent billions of dollars buying bonds that yield 2-3% p.a. and are due to be redeemed in 2 – 15 years. The banks happily process the debt and the governments will have to raise the money from taxpayers, thus sucking money from the public, reducing consumption, increasing unemployment and torpedoing economic recovery. Because of the large amount of the debt, repayment is likely to take many years with declining living standards. There would be a strong resistance to disposing of the debt in any other way.
The above is a simple explanation of a complex financing problem. Governments could minimise further debt and increase taxes to pay off the COVID-19 debt as quickly as possible. The graph shows personal versus corporate tax burden in the US in the past. The trends may have continued.
My blog has writing on how COVID-19 debt has been funded, government, development, growth and other topics.
I want this piece to focus on Australia’s public finance to show where it’s going at the current dizzying time.
Eligible businesses receive the JobKeeper payment as monthly arrears distributed from the Australian Taxation Office. The ATO gets a fund credit from the Australian Reserve Bank (ARB).
The Queensland Treasury Corporation (QTC) offers retail investors bonds with a minimum of $5,000 of differing maturities and differing interest rate earnings. Australian Government Bonds can have 2 – 15 year yield, price $102-109 and Yield 1.82-2.52%.
Commercial banks sell the bonds to investors, crediting the bond issuer, who credits the ARB, who purchases existing government bonds (gilts) in order to pump money directly into the financial system. The ARB then credits the ATO, who are able to credit employers with Jobkeeper payments.
The funds raised must be serviced and eventually paid back. The bond issuer pays interest on the bond face value. Investors are able to trade bonds at the going rate with interest rate specified. The finance burden to governments is only 2-3%, but on debt of billions of dollars, it could take a large part of government revenue to service the budgeted debt. After 2-15 years, when the bonds mature, they must repay the face value of the bond or possibly reissue the debt. Governments could find it difficult to paydown debt and it could even balloon.
In short, the government debt from Jobkeeper is being met by private and corporate bond investors who get 2-3% p.a. interest and are supposed to get their principal returned in 2-15 years at face value.
Warning: I do not guarantee the above is an accurate description of this complex system.
My blog has pieces on development, growth, government and COVID-19.