The government must lower its debt burden to protect itself should there be a significant downturn in the future, Reserve Bank governor Glenn Stevens has said.
Addressing the federal House of Representatives economic committee today, the central bank chief said while there isn’t a debt problem, it is on a trend that needs to be changed in the medium term.
“I’m not saying there is a disaster waiting for us but I think the path we are on isn’t the right path and will prove to be a significant problem,” Mr Stevens said.
He said the community, through the political process, wants certain things but there has yet to be a conversation how they are going to be paid for.
“That still has to be had,” he warned.
“As we have seen over the past year or so, reform here is not easy.”
He said the budget is supposed to return to a surplus in five years or so, but that assumes nothing goes wrong.
Economies do have downturns, which could see the budget deficit grow from two per cent of GDP to five or six in a “heart beat”.
At that point debt is added far more quickly and financial markets would be less accommodating.
“I’m not forecasting that, I’m try to prevent it,” he said.
Price rises hurt first time home buyers
Mr Stevens also touched on high house prices, saying they are the biggest enemy for first home buyers, not rising interest rates, according to the head of the Reserve Bank.
Mr Stevens was asked by a school student if first home buyers will get caught in a debt trap once interest rates start rising again.
He said the ability for first home buyers to get into the housing market is an important consideration for the RBA.
He added that banks test a borrower’s ability to make repayments at higher interest rates when they issue a loan.
“The biggest enemy for first home buyers is rising house values,” Mr Stevens said.
“It’s an important social issue how your generation will afford to house itself if you want to live in a city where the supply side of the market is unduly constrained.”
Mr Stevens said “more innovative and more flexible” use of land in major cities like Sydney was needed.
Plenty of competition for borrowers
Stevens said there’s plenty of competition in Australia’s lending market, particularly when it comes to home loans.
Competition, he said, had increased across most types of loans, particularly for mortgages and loans to big business.
Despite the RBA keeping the cash rate on hold for 18 months between August 2013 and February 2015, mortgage rates fell thanks to healthy competition, he said.
“I do not think, myself, there’s any problem of no competition in the mortgage market,” Mr Stevens said in his bi-annual testimony to a parliamentary committee on Friday.
“If you’re worried about competition, I don’t think it’s worth spending any more time on mortgages.”
One area that could use more competition was lending for small business, although this was a harder area, Mr Stevens said.
When asked about competition among credit card rates, Mr Stevens said Australians should not be encouraged to use credit cards, which were an expensive form of debt.
– with AAP