Government and Reserve Bank financial balance sheets during COVID-19

Released
25/03/2021

The Commonwealth Government and the Reserve Bank of Australia (RBA) played a substantial role in improving economic activity during the COVID-19 period. This article explores the impact of COVID-19 policies on the Government and RBA financial balance sheets.

Commonwealth Government

The Commonwealth Government (measured as national general government) net borrowing of $194.8b in calendar year 2020 was nearly four times the $50.4b borrowed in 2009 during the Global Financial Crisis. The vast majority of this borrowing occurred in the June and September quarter 2020 ($187.1b). The borrowings financed the various economic policies implemented in response to the COVID-19 pandemic, such as JobKeeper.

Source: Australian National Accounts: Finance and Wealth, December 2020, Table 30.

The Commonwealth Government borrowed on the markets by issuing bonds and notes (measured as one name paper). The increased supply of these high-quality bonds was met by high demand from investors, particularly from overseas (due to their yields being higher than other internationally comparable bonds). See article Financing COVID-19 government policies for further information.

Source: Australian National Accounts: Finance and Wealth, December 2020, Table 30.

Commonwealth Government deposits with the RBA were a record high of $131.6b by the end of September quarter 2020, representing surplus funds from bond issuances. In December quarter 2020, the Government reduced their bond issuance, and net borrowing declined to $33.2b due to reduced JobKeeper and Boosting cashflow for employers subsidies paid to businesses. The Commonwealth Government funded the majority of these COVID-19 related subsidies and expenditure through their RBA deposit accounts. Despite this drawdown of deposits, Government deposit assets remain at elevated levels ($100.4b as at 31 December 2020).

State and Local General Government

Source: Australian National Accounts: Finance and Wealth, December 2020, Table 32.

State governments supported their economies through the COVID-19 pandemic through record net borrowing of $89.8b in calendar year 2020. State governments’ increased funding requirements reflect higher subsidies paid to businesses impacted by COVID-19 and grants to bushfire affected businesses, combined with increased healthcare spending and ongoing public infrastructure projects.

Source: Australian National Accounts: Finance and Wealth, December 2020, Table 32.

State governments financed this expenditure through the issuance of semi-government bonds. These bonds are issued by the respective state borrowing authorities (measured as central borrowing authorities), who pass the funds onto the State governments in the form of loans. Excess borrowed funds saw deposit assets rise to a record high of $77.0b by the end of the September quarter, of which $1.9b was drawn down to help fund expenditure in the December quarter 2020.

Reserve Bank of Australia

The record amounts of Commonwealth and semi-government bonds on issue have been a key instrument in the implementation of the RBA’s comprehensive set of monetary policy measures in response to the COVID-19 pandemic.

Monetary policy measures in place include:

  • A 0.1% target for both the cash rate and three-year Commonwealth government bond yield
  • A $100 billion government bond purchase program
  • A Term Funding Facility (TFF), three-year term funding accessible to authorised deposit-taking institutions (ADIs) at an interest rate of 0.1%
  • Remuneration of 0.0% on Exchange Settlement Account balances (ADI deposits with RBA)

Implementation of these measures has resulted in a 90% expansion of the RBA balance sheet since December quarter 2019, as shown by the increased bond assets and deposit liabilities.

The RBA monetary policy measures have increased supply of low-cost funding available in the economy, however demand for credit remains weak from businesses. In contrast, demand for household borrowing increased in the December quarter 2020, particularly for owner-occupier housing loans, see Insights of the housing market during COVID-19.

 

Source: Australian National Accounts: Finance and Wealth, December 2020, Table 15.

Cash rate and bond yields

The RBA has targeted the three-year Commonwealth government bond yield from March quarter 2020, by making outright acquisitions of short dated Commonwealth government bonds in the secondary market. Along with a lower cash rate target, lowering the three-year Commonwealth bond yield enables a lower cost of borrowing for businesses and households.

Bond purchases

In the first half of 2020, to meet the heightened demand for liquidity in the financial markets, the RBA temporarily acquired substantial amounts of government, bank and corporate bonds, under repurchase agreement with ADIs in exchange for cash. These repurchase agreements were a short-term mechanism to meet the immediate liquidity needs of ADIs until the TFF became available from April 2020. By the end of December, majority of these agreements were unwound, and the bonds were returned onto the balance sheet of the ADIs.

Long dated Commonwealth and semi-government bonds were acquired outright from the December quarter 2020, as part of the commencement of the $100b bond purchase program. The bond purchase program’s purpose is to encourage lending and investment activity by adding extra liquidity into the economy. In December quarter, the RBA acquired $36.3b in Commonwealth and semi-government bonds outright in the secondary market, partly from ADIs which resulted in a $45.2b increase in their exchange settlement balances with the RBA.  

Sources: Australian National Accounts: Finance and Wealth, December 2020, Table 15

Reserve Bank of Australia – Monetary Policy Operations – Current, Table A3

a. Outright purchase transaction calculated as residual of total transaction less net repurchase agreement transaction. Total transaction sourced from Australian National Accounts: Finance and Wealth, December 2020, Table 15, and net repurchase agreement transaction sourced from Reserve Bank of Australia – Monetary Policy Operations – Current, Table A3.

b. Bond purchase program transaction is a subset of outright purchase transaction. Bond purchase program transaction sourced from Reserve Bank of Australia – Monetary Policy Operations – Current, Table A3

Term Funding Facility

From April 2020, the RBA’s TFF was made available to ADIs, providing guaranteed low-cost funding (interest rate of 0.1%), to enable ADIs to provide credit to households and businesses. ADIs accessed the TFF using internal residential mortgage backed securities (measured as bonds issued by securitisers) as collateral. The funds from the TFF were provided to the ADIs as deposits. By the end of the December quarter, ADIs had drawn down $84.7b of deposits under the TFF[1].

Sources: Australian National Accounts: Finance and Wealth, December 2020, Table 15

Reserve Bank of Australia – Monetary Policy Operations – Current, Table A3