My favourite economic Mandarin, Martin Parkinson (AKA Parko), Secretary of the Treasury, is on the hill today beating the exceptionalism drum. From the AFR:
Treasury secretary Martin Parkinson said Australia would have the capacity to respond to any potential renewed global credit crisis or recession triggered by Europe, including returning to larger deficits.
“I disagree entirely that our fiscal capacity is constrained,” Mr Parkinson told a senate estimates hearing in Canberra today.
…“We could, if necessary, go back into deficit to support activity… [and there is] “quite a lot of capacity on monetary policy.”
The secretary told the committee that the situation in Europe had deteriorated again but said that a potential exit by Greece from the euro would not “really require much response from us.”
Australian policy makers would only need to react with fiscal policy and other measures if there was a “clogging of the financial system” and a global recession, he said.
If that happens, “it’s a different world – all bets are off,” he said. “In that environment our fiscal position is incredibly healthy vis a vis the rest of the world.”
“The real message is: Australia is not caught up in this,” he said.
Oh, come on. If Greece exits the euro, the arteries of global finance will almost certainly get clogged as counter parties all over the world scramble to limit unknown exposures to one another. That’s not to say it’ll be the end of the world. Maybe not as bad as Lehman even. But it won’t be pretty and there is every chance Australia would have to take similar guarantee actions to protect our banks.
Which brings us to fiscal constraints. Of course we face them. That’s not to say we couldn’t stimulate, we could. And we would. But it would not be the size of package deployed in the GFC. A rerun of the last few years would push gross debt towards 50% and definately into ratings downgrade territory. The ratings agencies have been very clear that the Budget backstops the banks and if we had a global recession they would expect a constrained fiscal response that takes that into account.
Parko does have the sense to affirm that:
“I don’t want to leave anyone with any impression that there are risks in Australia, but equally, if things deteriorated dramatically there would be no way we’d be immune.”
We are lucky but not different and saying otherwise does nothing for our credibility.
