From Fairfax:
Citi economist Paul Brennan has suggested the time has come for fiscal stimulus measures such as increased infrastructure investment or a smaller version of the multi-billion stimulus program launched by the Labor government in 2008 .
“Government debt is low, borrowing costs are low and there is scope to stimulate given that public sector demand fell in the last 12 months. If public sector demand was growing at its average rate, this would push growth in the economy close to trend,” Mr Brennan said in a note.
…”Both major political parties appear wedded to returning the budget to surplus as quickly as possible, even though to do this requires relying on bracket creep and fiscal drag, which won’t encourage consumer spending.”
This is good advice as far as it goes but it must be remembered that it is no that simple. There are factors holding this back, as Leith described yesterday:
Unfortunately, there are some real world impediments to such a borrow-to-build approach, which extends beyond mere politics and ideology. And it revolves around Australia’s desire to maintain a AAA credit rating, which is vital to support the highly leveraged banking system.
As highlighted by David Murray in March, borrowing to build infrastructure – be it at the state or federal level – would increase Australia’s overall public debt levels, increasing the risk that the ratings agencies would downgrade Australia’s sovereign rating, automatically downgrading the banks and pushing-up the cost of borrowing:
“The net debt number that is used by the ratings agencies is the aggregation of commonwealth and states”…
“If the commonwealth rating is lost then the banks are downgraded, the states are downgraded, and the cost of debt rises”…
So rather than borrowing to invest, this constraint has left the federal government pursuing sub-optimal approaches like its asset recycling program, which allows the states to fund new infrastructure via privatisation (topped-up by the federal government) without raising overall borrowings and putting at risk the AAA rating. Once again, David Murray explains:
“If it’s not possible for the states to borrow in the normal course to build infrastructure, which is actually what they should do… It’s the states that need to do the borrowing, but if they push it up too high and it hurts the Commonwealth position, they get hurt as well…
That’s why at the present time, if we are to get the productivity improvement of new infrastructure, and we want governments to take the lead in doing it, then the only sensible path at present is for them to recycle it to afford the new infrastructure”…
Unfortunately, with this growth straightjacket in place, the only viable solution is for Budget reform that improves the quality of spending in terms of productivity gains as much as the quantity.
Unproductive tax giveaways like Australia’s huge tax concessions should also be cut in return for new productive spending. That will increase investment in vital infrastructure investment and keep the Budget in reasonable shape.
Alas that opportunity has been lost in the Abbott Government’s misfired first budget and subsequent abandonment of all reform.
Finally, market economists calling for public spending are still missing the bigger picture. Kicking the can with more spending does not treat the underlying problem, except where that investment boosts productivity and in turn competitiveness. The only long term solution to our growth woes is to treat the Dutch Disease that has hollowed out everything but houses and holes, both of which are now structurally impaired.
