Who’s afraid of the deficit? What it means for health care

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.