Over the last decade or so, governments have become overly reliant on monetary policy as an engine of growth in their economies.
This stems back to the early 2000s, where, following a series of high-profile government bail-outs, public concern began to mount around the sustainability of government debt, worries which were further exacerbated by the US sovereign debt downgrade in 2011. As a result, sentiment within government shifted broadly in favour of fiscal austerity, with one of the more notable examples being the controversial program instituted by the incoming Cameron Government in Britain in 2010.
The age of austerity has dissipated somewhat over the last few years, with the Trump administration being one of a number to engage in fiscal stimulus in a bid to spur on growth. Generally speaking, however, the appetite for fiscal stimulus that was evident through the 2008-09 financial crisis is lacking in today’s governments.
That’s certainly been the case in Australia, and to a degree it has been an understandable position. The Australian economy has performed well over the decade, relative to other developed nations, and it made sense to rein in public debt levels and bring budget deficits under control at a time when private investment was sufficient to sustain healthy levels of growth.
However, as renewed signs of weakness have become evident at home and abroad, an undue emphasis has been placed on the role and ability of monetary policy to stimulate the economy through lower interest rates, and in some countries negative interest rates and unorthodox programs of quantitative easing. As Australia’s interest rates have edged closer to zero, recent discussions have concerned the possibility of quantitative easing here in 2020 if the economy doesn’t grow satisfactorily over the short-term.
Overall, as a package, I think these monetary actions have helped on a global scale. As one indicator, we have seen unemployment rates fall around the world. On the other hand, experience tells us such expansion can’t continue indefinitely and that there are likely to be diminishing returns to a policy of pure monetary stimulus. At the end of the day, I believe central banks really do need more help from the government balance sheets.
That’s certainly the case in Australia. Monetary easing does help, but it doesn’t provide the same degree of stimulus, or guarantee of stimulus, as fiscal expansion.
Fiscal easing produces a largely guaranteed impact on the economy. Tax cuts and government spending have an immediate and direct impact on the consumer, meaning they will give the economy a much-needed kick-start at a time where we face a real danger of stalling.
If the government announces new infrastructure spending that will have a definite impact: more projects, more contracts, more jobs, higher incomes and more consumer spending.
If the government increases the Newstart Allowance, people are almost guaranteed to spend that money.
Alternatively, further cuts to interest rates or quantitative easing will probably help a little, but there’s a degree of pushing on a string there. Current monetary easing in Australia is reaching the end of its effectiveness.
The May 2020 federal budget is expected to contain business investment guarantees. Whether that is soon enough is questionable. We’ll better understand whether recent tax cuts and interest rate reductions have done enough in a few weeks’ time.
Nevertheless, we are at the point where both global and Australian governments need to allow fiscal stimulus back into the game and start committing to action. Just last month, the IMF gave corresponding advice to world governments at the same time that it slashed its economic growth forecast for Australia in its World Economic Outlook. In September, our own RBA governor called for a major infrastructure spending program from government to support economic growth. And the West Australian government recently announced a $200 million stimulus package of its own, by way of a new school maintenance program.
This may be small change in the broader scheme of the Australian economy, but it’s exactly the nature of stimulus needed, with a focus on shovel-ready projects that will deliver immediate benefit to the economy. The question is, will global governments move towards similar commitments? We hope so.
Subscribe below to SMSF News to receive my latest articlesShane Oliver, Head of Investment Strategy & Economics and Chief Economist
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