Grenville: Ignore ratings agencies and spend!

By in Australian budget, Australian interest rates

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At the AFR, monetary curmudgeon Stephen Grneville is making sense:

Rating agency Standard and Poors has just issued its usual finger-wagging warning to Australia about the dangers of budget deficits.

…The issue of the moment, however, is what to do about an economy which is performing well enough, but growing just a little too slowly to get unemployment down to its full-employment level, or to push inflation up to the RBA target.

Foreign lenders will compare Australia’s record of growth with these underperforming Europeans, and will judge us an excellent credit risk.

Budget policy is, in fact, one cause of our slow growth.

…the Prime Minister wants us to continue budget austerity, running surpluses to pay down our debt, which is tiny by comparison with government debt in OECD countries and trivial when compared with the household debt levels which average Australians now regard as normal. Government debt currently pays the lowest interest rate in living memory.

Quite right. If we are downgraded then it will make a meaningless difference to budget funding costs as far as the eye can see.

Of course, it will also lift bank borrowing costs a little as they are downgraded as well but that’s not going to do us much harm with interest rates where they are, either. The RBA has more cuts coming and QE in the kit bag anyway.

Without fiscal investment, Aussie growth will remain near stall speed, unemployment climb and the Government engineered house price recovery stall as well.

The surplus is pure politcal vanity and should be dumped.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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