TO say that the COVID-19 pandemic has had a major effect on the Australian economy is quite an understatement.

Despite the fact that, in global terms, Australia has weathered the pandemic relatively well to date and has seen strong recovery in recent months, the pandemic drove a record contraction in gross domestic product (GDP) in Australia as elsewhere. The International Monetary Fund warns that, “there can be no lasting end to the economic crisis without an end to the health crisis,” while governments around the world (Australia’s included) have clearly concluded that high levels of spending and consequent deficits cannot yet be wound back.

The federal Budget, delivered in May 2021, revealed that the Commonwealth government will preside over a decade of deficits and debt set to peak at almost $1 trillion in 2025.

This change in economic outlook is all the more startling considering the fact that, only months before the first reported cases of COVID-19 filtered out of China, Australia was on track to have an “essentially balanced budget”. The Sydney Morning Herald’s senior economic correspondent, Shane Wright, captured these concerns succinctly:

“The pandemic’s devastation of the nation’s finances will be laid bare … revealing huge levels of debt over the next 40 years … [and] a ramp-up in spending in areas such as aged care and health.”

Despite – indeed, because of – the sheer scale of unavoidable spending within the latest federal Budget, some within government are already looking ahead to the need to rein in public spending once Australia is out of the crisis. These voices echo a long-standing line of argument that queries whether continuous increases in health expenditure can be sustained indefinitely. For example, in the year before COVID-19 struck, there was a broad media narrative in the UK that the National Health Service (NHS) was about to become, if not already, “bankrupt”. The narrative was almost identical in the US: Federal Reserve Chair Jerome Powell, testifying before the US Senate Banking Committee in February of 2019, warned that “the US federal government is on an unsustainable fiscal path … The thing that drives our single unsustainability is health care spending”.

Even here in Australia, the long term sustainability of health expenditure has been a subject of deep concern for some time. Five years ago, the amount of money spent on health in Australia exceeded 10% of our GDP for the first time, reaching $195.7 billion by 2018. That milestone provoked strong reactions: some health economists warned that state and federal governments needed to act urgently to avoid a spending and funding crisis. Now that the COVID-19 pandemic has driven vastly increased government spending and deficits, surely these concerns are even more warranted today?

In a new position paper, we explore a quite different way of thinking about money, public expenditure and government deficits – “Modern Monetary Theory” (MMT) – and what it means for the Australian health care system. Adopting an MMT perspective leads to some very different conclusions about the true fiscal sustainability of Australian health care and provides an opportunity to think differently about how to plan for and fund the health outcomes we want for Australians in years to come.

What is Modern Monetary Theory?

MMT was developed in the 1990s by a group of economists and fund managers, driven by their concern that orthodox economic models simply did not accurately describe the real operation of monetary systems and institutions. MMT starts with the attempt to describe more realistically the true functioning of monetary and fiscal systems and, from that foundation, to build a more accurate (and hence more predictive) model of macroeconomics with which to guide policy. MMT has gained particular prominence in recent years through the work of Professor Stephanie Kelton (one of our co-authors), and notably her recent New York Times bestseller The deficit myth: modern monetary theory and how to build a better economy (2020).

MMT challenges the conventional wisdom that has for decades driven economic policy worldwide: that a government must levy taxes or borrow money before it can spend on public services or benefits, and that a national government, just like a prudent household, must live within its means. Modern monetary theorists tell us that this “common sense” economic narrative used in Canberra and other capitals is decades out of date; it ignores the distinction between currency users and currency issuers. Households, businesses, private organisations and non-currency issuing governments are currency users. Before they can spend money, they need to find it. A state or territory government does need grants from the federal government, tax receipts, or borrowed funds in order to finance its spending. State governments are currency users so, in principle, can become insolvent and this financial constraint must be taken into account.

Yet the federal government is in a completely different position: it is the monopoly issuer of its currency. In the case of the Australian Government, every Australian dollar it ever spends is a new dollar. Every dollar of federal spending adds a dollar to every official monetary aggregate. This happens all the time, every day. All federal spending takes place the same way. Funds are created electronically in private bank accounts and added to the reserves of those banks at the government’s fiscal agent – the Reserve Bank of Australia (RBA). Monetary sovereign governments, such as Australia’s federal government, can never become insolvent – they face no purely financial constraints on spending. Their spending has economic consequences, obviously, but no purely financial limits. They do not need to raise taxes prior to engaging in additional spending.

The COVID-19 pandemic and its effects on the federal Budget deficit have seen our media awash with worried and worrying headlines. Another way to look at the government deficit, though, is as a non-government surplus. A government deficit is a net financial contribution the government has made to the private sector. Indeed, in an economy without a significant trade surplus, a government surplus weakens private sector balance sheets, and either forces the private sector into further debt to support the economy, or leads to a recession, which reduces tax payments, raises welfare payments, and drives the government balance back into deficit in any case.

It turns out that it is not government deficits which are unsustainable, but government surpluses. A surplus, after all, just deletes dollars from the monetary system.

MMT does not suggest that there are no limits on spending but, instead, argues that it is inflation risk – not solvency – which should be the focus when discussing public finance. The real constraint is the productive capacity of the economy, which depends on available labour, skills, equipment, technology, natural resources, infrastructure, and institutional capacity. If the real resources exist to allow for additional spending without that spending driving up inflation, then the currency issuer is always in a position to carry out that spending.

Getting this wrong can and has led to unnecessary austerity in the past, in the name of living within our means.

Modern Monetary Theory, health and health care

The COVID-19 pandemic has shown us just how important population health is in allowing communities and countries to thrive, both economically and socially. Poverty, involuntary unemployment and underemployment, and inequality have an impact on wellbeing and on psychological and physical health.

MMT suggests that the government does not lack the financial resources to address these problems. It enables us to understand better the real options available to a monetary sovereign government like Australia’s and opens the door to far-reaching and ambitious investment by government in public, social, environmental and care infrastructure to meet the needs of coming decades. Our position paper outlines some of these opportunities; for example, the transformational health impacts of a federal Job Guarantee program and the scope for using taxes more effectively to drive healthier production and consumption, not just to raise revenue.

One of the great strengths of MMT is precisely its recognition that money is not everything, that there are real, physical constraints to action.

The Australian health care system, like all others, is deeply complex and heavily reliant on a limited supply of skilled health professionals. Applying the MMT lens to health care policy enables us to focus on areas where the challenges to action are more than simply financial: skills shortages, regional and rural access inequalities, persistent Aboriginal and Torres Strait Islander health inequalities, pervasive difficulties in achieving integrated and coordinated patient care, and the ongoing presence of low value and low quality care.

Yet it also enables us to see where we can achieve transformational change through systematic, planned investment, once we move past unfounded fears about affordability and misplaced austerity measures. If we harness fully the power of the Australian Government as a sovereign currency issuer, we can set in train the investments that will allow us to tackle these deep-rooted problems and more.

We suggest a transformational investment agenda, which might include the introduction of universal dental health care access, a post-pandemic remodelling of the health care system to meet the challenge of chronic diseases in an ageing population, guaranteed access to a high quality public option for aged care, building a resilient domestic base of essential medical supply industries, and renewing Australia’s health care infrastructure to meet the challenges of climate change mitigation and adaptation.

For too long, the accepted narrative – that the direct and indirect costs of health care are unsustainable in the long term – has constrained many governments’ abilities to fund both the direct costs of providing equitable access to health care resources and the costs of addressing the social determinants of health. In the post-pandemic world, MMT will enable us to reimagine health care and explore many ways in which we can promote health, wellbeing, and the productivity of our society.

Stephen J. Robson is Professor of Obstetrics and Gynaecology at the Australian National University Medical School. He is also Principal Committee Member of the National Health and Medical Research Council, and a Federal Councillor of the Australian Medical Association.

Steven Hail is Lecturer in the School of Economics and Public Policy at the University of Adelaide. He is a Research Scholar at the Global Institute for Sustainable Prosperity.

Martin Hensher is Associate Professor of Health Systems Financing and Organisation at Deakin University’s Institute for Health Transformation, and Deputy Director of Deakin Health Economics.

 Stephanie Kelton is Professor of Economics and Public Policy at Stony Brook University, New York. She is a former Chief Economist on the US Senate Budget Committee and was the Senior Economic Adviser on the 2016 and 2020 presidential campaigns of Senator Bernie Sanders.

Lachlan McCall is a graduate student in development economics at the Australian National University’s Crawford School of Public Policy and President of the Young Economists Network at the Economic Society of Australia (ACT branch).



The statements or opinions expressed in this article reflect the views of the authors and do not represent the official policy of the AMA, the MJA or InSight+ unless so stated.

14 thoughts on “Who’s afraid of the deficit? What it means for health care

  1. artsrc says:

    Gold seems like nonsense to me. You can’t eat gold. It is not good clothing. It is a poor construction material for houses.

    What if we backed a currency with land?

    Land is useful. You can grow crops, build home, factories, and shopping centres on it.

    Require all land owners pay 2% of the value of the land to the government each year.

    Then back currency with that 2% annuity on the value of all land.

    Since, in Australia, the states levy land taxes, the states should issue this currency.

  2. Nicholas says:

    I think the best way to advance population health and wellbeing in Australia is to do a combination of improving the structural determinants of health and improving the scale, scope, and quality of what the public health care systems do at the state and territory level.

    The big structural reforms that would help are:
    1/ Federal government keeps the economy at full employment at all times (which means unemployment below 2 percent with no under-employment and no hidden unemployment);
    2/ Federal government lifts all social security payments above the poverty line ($550 per week for a single person);
    3/ Federal government removes all tax incentives for owning investment properties, enacts a hefty vacancy tax on properties left vacant without a good reason (renovation or redevelopment), legislates strong tenants’ rights (lifelong leases, right to keep pets indoors, right to make minor modifications to a property to make it more homely); bans the purchase of investment properties, and purchases large numbers of properties from investors and adds them to the stock of public housing.
    4/ Make urban planning and property development a highly democratic process that provides real and meaningful voice to people who aren’t real estate companies and property developers. Prioritize a mix of dwelling types in a community, a mix of income groups in a community, artistic and cultural facilities, green space and community sports facilities, ecological sustainability, healthy micro-climates, and convenience and safety for pedestrians, cyclists, and electric scooters.

  3. Anonymous says:

    So Dr Hensher cites in support of his position a US politician that presides over trillions in debt that his government has no hope of repaying? As though this guy is going to stand there and tell the truth and say yes, we’re irresponsible legislators and spenders saddling future generations with crippling debt
    To paraphrase Mandy Rice Davies, he would say that wouldn’t he?

  4. Martin Hensher says:

    Thanks to everyone who has taken time to comment. We have tried to make clear in the article and our longer paper that MMT is not a panacea that solves all problems; but if you are using the wrong model of the operation of the economy (which the neoclassical / neo-keynesians are) you are guaranteed to make those problems worse than they need to be! Thanks to Senexx #7 for a great link on Weimar. Here are two more links for the interested (or concerned) to investigate:

    An interview this week with the Democrat Chair of the US House Budget Committee – answers many questions, by someone in the thick of real fiscal policy decisions:

    A still highly relevant piece from 2009 by Bill Mitchell on what factors really drove hyperinflation in Zimbabwe and Weimar – well worth a read today:

  5. Anonymous says:

    This is an excellent idea. All those complaining of the “magic money tree” seem to ignore the fact that it already exists in multiple forms e.g. taking out a mortgage, the bank magics money out of nothing when it loans it to you. Similarly quantitative easing. There is really no reason why in a large sovereign country like Australia that MMT shouldn’t be tried/used, or at least elements of it.

  6. Joe Kosterich says:

    Zimbabwe is a great example of what happens when a government prints increasing amounts of money that has no value. Never has and never will end well. But hey, dream on. Who cares about our grandchildren paying off our debt.

  7. Anonymous says:

    MMT sticks to only part of the economic script: it raises taxes to try to reduce demand to cap inflation. But to stimulate the economy, instead of the opposite – i.e. tax cuts – it imagines money out of thin air and deposits this electronically in the account of the Reserve Bank. Far from being money that the federal government has acquired through taxes in the usual fashion, these dollars are all ‘new dollars’ in the Cartesian fashion: I think therefore I am. Plenty of dollars drives demand but with no matching increase in supply (no; spending dollars on welfare drives demand, not supply). Inflation is inevitable. And round we go. Tax hikes in the bad times, but no cuts in the good.
    MMT is manna from heaven for those who adore Big Government. Nothing more than rebranded Keynesianism; perhaps a modern version of Roosevelt’s New Deal.
    But Henry Morgenthau, Roosevelt’s treasury secretary, confirmed the total failure of the New Deal to stop the Great Depression: “We are spending more than we have ever spent before and it does not work. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!” It is arguable that the great depression was instead ended by WWII, and that the New Deal did nothing but slow the American recovery.
    Still, I guess the prospect of a war to fix what may be wrought by MMT is not so far-fetched.

  8. NW Citizen says:

    Perhaps we can wait for universal healthcare financed by the federal government. However, we cannot wait to fund the necessary projects needed to respond to the climate crisis. We simply don’t have the time to waste. Now is the time to enact climate change mitigation projects. Doing this incrementally, slowly will not get us where we need to be in the next 10 (now 9) years.

    If you don’t like using monetary policy to finance the work, what is your plan? I’ve yet to hear anything but FUD coming from the naysayers.

  9. Anonymous says:

    It’s hard to know where to begin.
    MMT is a fringe theory, rejected by most macroeconiomists.
    This is because MMT is, despite what it’s proponents say, nothing modern or new. In various guises has been tried many times before and called many things, and it has never worked anywhere.
    Put simply, it has simply proven to be impossible for governments to do what MMT relies on to make it work – to employ hundreds of thousands of people to do things that the private sector won’t invest in because they are not profitable, to print money to reach this full employment, and then to calibrate at just the precise point to avoid inflation so the piles of money they printed actually retains value. It’s been tried and tried and tried again and it doesn’t work.
    sure governments can print money – they have the power to do that. What they don’t have the power to do is guarantee that money retains value.

  10. Anonymous says:

    Too late, Anonymous, the magic money tree has already been implemented in several countries. MMT seems plausible to me (an economics graduate) but recent events in the UK make me realise that not all governments will spend the money created wisely. One can argue that almost all spending is a good thing (even if one does not personally agree with it) but isn’t there evidence that transferring money to rich individuals and organisations does not trickle down and is simply hoarded?

  11. Senexx says:

    Dear Anonymous at comment #3

    You might like to read this paper first before rushing to any hasty judgments.

  12. Anonymous says:

    The real limits to the economy are the physical resources and productive capacity of society. This is what ‘underpins’ paper money. MMT offers a way of using these resources to benefit the entire community, not only the current owners of weslth. What’s not to like?

  13. Anonymous says:

    Love this work. Thx to my past Professor Stephen Hail in Macroeconomics.

  14. Anonymous says:

    MMT: more colloquially known as Magic Money Tree.
    The notion that governments that print their own money can never go broke.
    Worked well in the Weimar Republic.
    Many trained economists still think that the paper currency should be underpinned by something: used to be the gold standard.
    Everyone is in for their chop; no one wants their own belt tightened; but this little hypothesis (doesn’t make it as a theory so far, as its not falsifiable) seems imprudent as a way to keep the health dollars flowing.
    We are already deep in trouble: if MMT is the nonsense many think it to be, this may not be the best time for the experiment.

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