Reserve Bank gives Coalition green light for record spendathon in federal budget | Reserve Bank of Australia

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Australia’s public debt levels remain “manageable”, with record low interest rates leaving the government plenty of room to boost the economy in the October budget, according to the Reserve Bank.

In a speech on Tuesday the RBA deputy governor, Guy Debelle, has defended the size of support payments including jobkeeper and jobseeker and given the Morrison government the green light to conduct a record-breaking spendathon in the budget.

The government is considering a package of accelerated income tax cuts, infrastructure spending through the states and wage subsidies to boost the Australian economy out of the Covid-19 recession with a deficit nearing $200bn.

But rather than hold back in the face of growing debt, Debelle reiterated the RBA’s consistent position through the first recession in 30 years that there is room for more spending.

In a speech to the Australian Industry Group, Debelle said the RBA still believed it would be “more than three years” before the economy would make sufficient progress towards full employment to push up inflation.

It was “highly unlikely” the RBA would increase official interest rates in that time, he said.

Debelle noted that the current level of government bond rates – the interest charged on loans to federal and state governments – “is not a constraint” on their budget spending.

“They all have strong balance sheets, with debt stocks that are low relative to other jurisdictions, even taking account of the current sizeable fiscal stimulus,” he said.

“The increase in debt is definitely manageable. Moreover, there is not, in my judgment, a trade-off between debt and supporting the Australian economy in the current circumstance.”

Debelle warned that without fiscal stimulus the Australian economy would be “significantly weaker and debt levels even higher”.

“This is particularly so with interest rates at their historically low levels, where the growth benefit from the fiscal stimulus will improve the debt dynamics and help service the debt in the future.”

The RBA’s message not to worry about debt echoes advice from the Treasury that Australia is in a sound fiscal position.

Labor has criticised the level of public debt which was rising before the Covid-19 recession. The opposition is walking a fine line of targeting the Coalition over alarmist rhetoric about debt levels in the global financial crisis, while also calling for the rate of jobseeker and jobkeeper – which are set to be cut from 28 September – to be maintained.

Debelle said although the size of the Australian economy contracted by 7% in the June quarter – the largest peacetime contraction in its history – the economy had been on a “slow grind” recovery since May.

Despite better than expected jobs figures released on Thursday showing the official unemployment rate is down to 6.8%, the effective unemployment rate remains at 9.3%.

Debelle said hours worked had decreased by 10% to May and only recovered by 6% since, leaving “considerable spare capacity in the economy”.

“In particular, the high unemployment rate will mean that wage growth, which was not strong pre-pandemic, will remain subdued.”

During the recession, household income rose due to income support from jobkeeper and jobseeker, early superannuation withdrawals, and deferral of rent and interest payments.

“The fact that household income rose in the quarter does not mean that the stimulus was overdone,” Debelle said. “Absent the stimulus, the decline in GDP and employment would have been significantly larger and there would have been much greater financial hardship.”

Debelle said the fact that households had increased their savings would mean they are “in a considerably better place than would normally be the case in a recession” and better able to support the recovery.

“The transfer from the strong balance sheet of the government to bolster the balance sheet of the household sector is an entirely appropriate and timely policy response.”

Source: The Guardian
Keyword: Reserve Bank gives Coalition green light for record spendathon in federal budget | Reserve Bank of Australia

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