A top research analyst has branded government attempts at economic surplus as ‘inappropriate’, saying the RBA’s decision to lower the cash rate last month is a ‘warning sign’ of short-sighted fiscal policy.
Australian Institute (TAI) senior research fellow David Richardson said that a lot of commentators are scaring the public about the level of government debt and the deficits that bring about debt, when the debt is not such a bad thing.
He points to comments by people such as Don Argus, a former chair of the board at NAB, who has warned that Australia is in dire need of a productivity boost if it is to offset fast-growing gross national debt. Argus has argued that Australia is set to inherit the same challenges confronting stricken economies elsewhere in the world.
But Richardson believes this argument is hypocritical, given the level of (perfectly acceptable) debt experienced by most major companies.
“Mr Argus should know about debt. On the latest figures, the NAB had total debt of $345bn, well above the government debt expected in June this year at $162bn, or 11% of GDP. There is, of course, no reason to suppose that NAB is in any difficulty, that's just what banks do. They borrow in order to lend, and as long it's done prudently there is nothing wrong with borrowing.”
Likewise, this is what governments should do, Richardson said. “Borrow when they need to go into deficit for the health of the economy and repay debt if they need to offset unhealthy booms. We rarely ask why government should repay debt.
“Westpac… has been around for almost 200 years and it never saw fit to pay off its debt, which now stands at $450bn. OK, that's a bank and they are different, but BHP Billiton in one form or another has been around for over 150 years and still owes $62bn, according to last year's annual report. Nobody complains about the morality of BHP Billiton for spending its money on its shareholders rather than repaying debt. But governments are supposed to have some moral objective involving a debt reduction strategy.
“Let's ask who is being hurt by the high levels of debt? How are they being hurt? And how will they be made worse if that debt increases a bit?”
Richardson also argued that one of the reasons the Reserve Bank lowered interest rates was because growth was expected to be below trend in 2013. This was partly because of “fiscal consolidation”, which he said is Reserve Bank code for contractionary fiscal policy.
“That should be a warning. The quest for a surplus is inappropriate at a time when unemployment is at its post-GFC peak and expected to continue upward over the forecast years.”
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