RBA warns Australia needs fiscal discipline; don’t follow US example – The Australian Financial Review

The federal government’s mid-year economic and fiscal outlook (MYEFO) published in December revealed the government has locked in about $9 billion of secret additional tax cuts due to be announced between now and this year’s election campaign.

While the IMF also made very clear its similar warning on fiscal discipline it said that the current government’s fiscal settings meant it had space to deal with a decline in the economy.

“The government’s medium-term fiscal strategy appropriately aims to reach a balanced budget by FY2019/20 and run budget surpluses thereafter,” the IMF said.

It said that given “limited conventional monetary policy space”, discretionary fiscal stimulus may need to complement cuts to interest rates “in the event downside risks materialise”.

Deputy governor Guy Debelle says quantitative easing is “highly unlikely”.  20081031:000.000:

“Australia’s substantial fiscal space allows for fiscal policy to respond as necessary,” the IMF said.

However it warned that some of the recent revenue strength may well turn out to be “more temporary than expected” and the cap on tax might need to be changed.

“In this respect, a rigid interpretation of the cap on Commonwealth tax revenue of 23.9 percent of GDP formalised in the FY2018/19 budget might not be consistent with the principle of running sustained budget surpluses in good times,” the IMF said.

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If both fiscal stimulus and conventional interest rate cuts were not enough to combat a recession, the option of quantitative easing may come into play.

However deputy governor Guy Debelle, who has raised the idea of such easing, told the parliamentary economics committee on Friday that it was “highly unlikely”.

“On the basis of the forecasts that [Dr Lowe] described earlier and our outlook, that is not a situation we expect to find ourselves in,” Dr Debelle said.

Liberal MP Tim Wilson asked Dr Debelle what the interest rate would have to be before the discussion about quantitative easing started.

“Clearly, it would be a lower interest rate than where we are now. As you move your interest rate down, you start to see different dynamics,” Mr Debelle said.

The impact of falling house prices in Australia was also repeatedly raised but Dr Lowe said the first order issue was not falling house prices but wage growth.

“This adjustment in the housing market is not expected to derail our economy. It will put our housing markets on more sustainable footings,” Dr Lowe said.

“Declining housing prices also make some people feel less wealthy so they spend less, although this effect doesn’t look to be particularly large.”

“Most people are sitting on substantial capital gains, so there are still positive wealth effects coming from that. It’s largely the income story which doesn’t get talked about enough, because the media love talking about property prices, but year after year of weak income growth finally weighs on our spending plans, so both the pick-up in wage growth and the tax cuts will boost disposable-income growth.”

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