“Treasurer Josh Frydenberg was asked this week if he would increase taxes or cut spending to repay the record $850 billion of gross debt forecast for next year. But here’s the economic secret. The government may never actually repay the debt, which will hit 45 percent of GDP next year. If the economy grows strongly, the debt-to-GDP ratio naturally falls over time and the borrowing is sustainable. After the immediate virus crisis, Frydenberg says that if interest rates remain low, the government consistently balances the budget and economic growth is about a trend of 2.75 percent, gross debt-to-GDP could be reduced. That’s especially true at the moment when the AAA-rated government can borrow for 10 years at about a 1 percent interest rate. The deficit in the current financial year is forecast to hit $185 billion (9.7 percent of GDP)”

If the primary deficit ratio (e-t) is 9%, sketch the debt dynamics graph for Australia on a suitable diagram. Be sure your diagram is compatible with the article’s information. Pay special attention to the slope: positive or negative, steep or shallow?


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