Finance Finance News The key passage of Glenn Stevens’ final speech
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The key passage of Glenn Stevens’ final speech

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In his final speech as governor of the Reserve Bank of Australia, Glenn Stevens admitted what a small minority of journalists and commentators have been saying for years:

– public debt can be a good thing if used to create assets that produce long-term economic returns for taxpayers, and generally a bad thing if used to finance a government’s recurrent spending;

– public debt is on a trajectory to become too large, but is still small compared with Australia’s private debt problem;

– loose monetary policy is failing to stimulate demand because Australia’s households are over-indebted

–  and ‘popular debate’ has for years wrongly focused on public debt, when the private debt problem has long been clear to overseas visitors.

As a columnist I have been making these arguments since April 2010. While it is pleasing to hear Mr Stevens make them with some force in his final speech, they are comments that are long overdue from such a senior public-policy figure.

In his last speech on August 10, 2016, Mr Stevens said:

“… in the end, the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend.

“The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt. So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage safely?

“In some countries there may be no safe way of borrowing and spending because debt, both public and private, is just too high.

“In Australia, gross public debt, for all levels of government, adds up to about 40 per cent of GDP. We are rightly concerned about the future trajectory of this ratio.

“But gross household debt is three times larger – about 125 per cent of GDP. That is not unmanageable – but nor is it a low number. It’s an interesting question which sector would have the greater capacity to take on more debt, in the event that we were to need a big demand stimulus.

“Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending.

“The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.

“It remains the case that, over time, the gap in the recurrent budget has to be closed, because rising public debt that is not held against assets will start to be a material problem.

“The point I am trying to inject here is simply that popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt.

“To outside observers this seems odd. Foreign visitors to the Reserve Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt. So the way ahead is going to have to involve a rather more nuanced consideration of all these issues.”