Treasury’s Philip Gaetjens warns both sides of politics about Australia’s debt – The Australian Financial Review

Secretary of the Treasury Philip Gaetjens gave a warning to both sides of politics about debt levels.

Treasury secretary Philip Gaetjens has delivered a pre-election warning to both sides of federal politics that government debt levels need to be lowered to replenish Australia’s fiscal ammunition for a future economic downturn, as he signalled wariness about the fragility of global asset prices.

“While the budget position has recently been improving on the revenue and spending sides, we have some work to do to reduce the government debt accumulated over the past decade, if we are to be as prepared to deal with future crises as we would like to be,” Mr Gaetjens said in a speech in Beijing on Sunday.

Mr Gaetjens was speaking to mark the 10-year anniversary of the global financial crisis, which Australia escaped partly because the federal government entered the downturn with a budget surplus and zero net debt, which allowed a large fiscal stimulus and taxpayers to backstop the financial sector.

In the speech published Monday afternoon on Treasury’s website, Mr Gaetjens also praised Australia’s cutting of interest rates and flexible exchange rate for helping the economy to sail through the 2008 crisis.

Surging corporate tax revenues have the budget on track to hit a surplus in 2019-20, or possibly this financial year, if spending restraint is exercised before next year’s election. 

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Australia’s federal net debt hit $342 billion or 18.6 per cent of GDP by June 30 2018, a level that is low by international standards and has allowed the commonwealth to retain its AAA credit rating.

Mr Gaetjens signalled the Coalition government and Labor should continue to bolster the government balance sheet in case of a future economic crisis.

“We won’t necessarily know beforehand where or when the next crisis will start. This is not to say that one is imminent.”

“But if trouble arises, Australia’s experience demonstrates the old toolkit of responses still works. And our strong fiscal starting point in 2007 also emphasises the need to replenish buffers to be ready for a future shock.”

The government is due to update its economic and fiscal forecasts in the mid-year economic and fiscal outlook due to be published in December.

Mr Gaetjens also took a veiled swipe at the experimental monetary policies overseas, such as bond buying and negative interest rates.

“There is consensus that they were somewhat successful in flattening yield curves and compressing term premia. However, many observe that these policies have not proved as effective as policy makers had previously hoped. Furthermore, they have proved easier to enter than to exit and the normalisation from these settings post-crisis remains elusive for many countries and regions.

“In addition, the various quantitative easing programs appear to have had more of an impact through the asset price channel than conventional policy.

“Open questions remain whether these policies continue to exert pressure on asset prices (even as most programs have ceased or at least slowed their accumulation of assets) or whether the prices of many financial assets are justified by what are perhaps lofty expectations for future cash flows.”

Mr Gaetjens also called out the post-crisis jump in global debt levels, including in the private sector.

“Global indebtedness has increased significantly since the financial crisis,” he said.

“In part, this reflects an increase in public sector debt in a number of advanced economies immediately following the crisis as many governments moved to support their economies and financial systems.

“But in recent years, much of the growth in global debt has been driven by private sector debt. There are risks to the sustainability of this debt if there are shifts in the current environment of low interest rates, high asset prices and the solid pace of growth in borrower incomes. Given this we could ask whether more should have been done to build resilience.”

“While the potential triggers for any crisis may vary – trade and geopolitical tensions, policy mistakes, exuberance in asset markets – it is typically excessive leverage that fundamentally sits behind most major crises.”

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