Australia Shouldn’t Worry About Huge Government Debt, RBA’s Lowe Says
Australia shouldn’t be concerned about its escalating government debt in response to the coronavirus crisis because of the long record of responsible fiscal policy, Reserve Bank Governor Philip Lowe said.
“If ever there’s a time to borrow, now is it,” the RBA chief told the Australian Broadcasting Corp.’s Four Corners program in a report on the scramble to combat the economic fallout from the epidemic. “We shouldn’t be worried” about the debt, it cited Lowe as saying.
Australia is spiraling toward its first recession since 1991 with Treasury predicting unemployment will double to 10% as restrictions to stem the spread of the virus shut down much of the services industry. In response, the government and central bank assembled a massive fiscal-monetary injection worth 16.4% of gross domestic product to aid households and firms.
“It’s the right thing to do,” Lowe said of the government’s largess. “We have the capacity to borrow, our interest rates are as low as they’ve ever been, the Australian government has a long record of responsible fiscal policy, so the budget accounts are in reasonable shape.”
Trying to run a budget surplus has become an article of faith in Australia — electorally it’s viewed as a sign of good economic management — and the government was on track to return the books to the black this fiscal year.
Now, the budget deficit is set to blow out to A$155 billion ($98 billion), or 8.1% of GDP, according to Commonwealth Bank of Australia, the nation’s largest lender, which sees outstanding government bonds swell to 40% of GDP in fiscal year 2021.
Lowe told the government in early March that “it was hard to spend too much money here,” according to the ABC, yet it spent less than 1% of GDP in the first fiscal package. The RBA chief said it was “understandable” the government didn’t go for a bigger response at the time because the scale of the crisis wasn’t completely clear.
In January, Treasurer Josh Frydenberg said he was only expecting a “dent” to the economy from the outbreak in China. In February, that became a “substantial but not necessarily severe” impact.
The RBA governor gave the government a rare forewarning of the monetary policy response the central bank would be delivering.
“I gave an outline to them of my thinking, and they’ve done exactly the same with me,” Lowe said, referring to the RBA’s cut at its March meeting.
The RBA held a second, emergency meeting in mid-March, where it cut the cash rate to its effective lower bound of 0.25%, announced a bond-buying program and a lending facility to get credit into the economy.
“I thought this was going to be perhaps a once-in-a-lifetime event and it required a truly extraordinary response,” said Lowe, who took the helm of the RBA in 2016. “I didn’t think in my term of governor, I’d be buying A$40 billion of government bonds, which we’ve done in the past few weeks and lending over A$100 billion to the banking system.”
Lowe made clear where he stands in the debate on whether the lockdown should be soon lifted in order to limit the economic damage, signaling health comes before all else.
“If we need to have restrictions for six months to contain the virus, that’s what we need to do,” he said.
The government’s lockdown response is working well by global standards. At the weekend, the nation had recorded just over 6,500 cases of the virus and 67 deaths.
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