In a few careful sentences, the Reserve Bank this week told the federal government not to worry about debt approaching $1 trillion as it tries to minimise the ’Rona Recession.
There was one caveat: The government has to go for growth, has to keep up the necessary fiscal stimulus to have the economy grow at a higher rate than the interest rate it pays on its borrowings.
Of course, RBA deputy governor Guy Debelle didn’t quite phrase it like that in his speech to the Economic Society of Australia – when a speech is titled ‘The Reserve Bank’s Policy Actions and Balance Sheet’, you don’t expect the language to be particularly racy and headline worthy – but that was his clear meaning.
So the government ministers and commentators rabbiting on about the need to reduce stimulus, who talk about the federal government’s debt as if it was the same as a household’s debt, all get a fail mark from Dr Debelle.
The RBA has purchased more than $51 billion worth of Australian government and semi-government bonds since the start of the COVID crisis and is happy to keep purchasing bonds to maintain liquidity and keep hitting its target rate of 0.25 per cent on three-year government bonds.
Buying those bonds on the secondary market is “printing money”, injecting cash into the financial system.
A criticism of “money printing” is the danger that it could cause an outbreak of inflation. Dr Debelle effectively said “don’t be silly”.
He actually said: “While the bond purchases by the RBA increase liquidity in the system, I do not see this posing any risk of generating excessively high inflation in the foreseeable future. Indeed, the opposite seems to be the more likely challenge in the current economic climate, that is, that inflation will remain below the RBA’s target.”
Most importantly for our central bank, it doesn’t doubt that the government will be able to repay those bonds.
Said Debelle: “Nor do I see any issue at all with the capacity of the government to repay the bonds it has issued.
“Firstly, even with the increased issuance to fund the fiscal stimulus, the stock of government debt relative to the size of the Australian economy remains low.
“Secondly, the government is borrowing at yields that are very low historically. Importantly, the yields on government debt are considerably below the long-run growth rate of the economy …
“While ever this remains the case … there are no concerns at all about fiscal sustainability from increased debt issuance. This is because growth in the economy will work to lower government debt as a share of nominal GDP.”
Basically, the government can grow its way out of debt as a high proportion of GDP.
That is what Australia did after World War II when our debt was proportionately higher than it is now.
The important thing is to keep the economy growing – stimulus rather than austerity.
With interest rates at unprecedented lows, the government has a low hurdle to clear in keeping growth higher than rates.
Dr Debelle dismissed the possibility of the government withdrawing all its fiscal support in September – the feared “September cliff”. He said the government was aware that that would indeed be a problem and is working on it.
(We can only hope. So far, Scott Morrison’s post-September policy announcements have been piecemeal and bitsy, given the scale of the problem, or pure marketing spin – such as his “record” defence spending announcement that was actually not keeping pace with the bipartisan pledge to spend 2 per cent of GDP on things that go bang.)
Dr Debelle said that although there is considerable uncertainty about what lies ahead, “it is still quite likely that this decline will have a long-lived impact that will require considerable policy support for quite some time to come”.
“While much of that support is likely to be on the fiscal side, the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available, and stands ready to do more as the circumstances warrant.”
Translated from RBA-speak, the central bank will do its bit, whatever it takes on the monetary side, but there’s a lot of spending to be done by the government, too.
Dr Debelle also had a swipe at those pushing negative interest rates.
He said that looking at countries that have used them, it was “not entirely clear how effective they’ve been”.
That was a polite way of saying it doesn’t work.
No one brings up the cost of borrowing as a constraint,” he said.
It was a lack of appetite for borrowing holding businesses back, due to their concern about the outlook for the economy.
In another part of his speech, Dr Debelle pointed to how borrowing costs for businesses and households had fallen in response to the RBA’s actions.
As a sidelight, the accompanying graph shows that, on average, people with existing mortgages are paying about half a percentage point in “lazy tax” – the difference between what banks are charging them and what the banks are offering new customers.
Some customers are unable to shop around at present, though, because their weaker financial state makes them poor candidates for a new banking relationship.
Anyone in financial trouble is pretty much stuck with the banking relationship they have – and they have to hope it’s a good one.