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Balanced Budget Or Aggressive Spending To Boost Economy, The Dilemma For Australia


08/23/2019


Balanced Budget Or Aggressive Spending To Boost Economy, The Dilemma For Australia
Four years ago, the Prime Minister of Australia had warned that the country was heading towards “a Greek-style economic future”. He was referring to the economic policies that had been undertaken under the previous Labor government.
 
In 2013, the federal government’s budget deficit was 3 per cent of GDP while that of Greece at the same time was 7 per cent of GDP. Back, then the debt to GDP ratio of the Australian government was 20 per cent while it was 177 per cent for the Greek government.
 
And in reality, back then the Australian economy was nowhere close to being like that of Greece. But the current economic scenario is not so rosy.
 
While one would love to become an economy like Germany, there are trouble s associated with it.
 
For one, the German economy is not in good shape. In the June quarter, the GDP growth of the country was 0.1 per cent which showed shrinkage of economic activity. And according to predictions of country’s central bank, the Bundesbank, its economy is not going to get better in the short term. The bank recently said: growth “is probably set to remain lacklustre in the third quarter of 2019”.
 
The very low interest rates in the country means that the investors are now having to pay money to the banks for keeping their money. The nominal interest rate on 2-year German government debt is -0.90%, and on extremely long-term 30-year bonds is -0.15%.
 
Similar to Germany, the interest rates in Australia are nearing the zero mark while the real 10-year bond interest rates is negative and 30-year bond rates are at zero.
 
And even at this juncture, the Australian government is more focused on presenting balanced budgets and potentially ignoring the economic realities around.
 
While not being as fanatical in budget management and balancing as the Germans, the current Labor government in Australia is acutely focused on a balanced budget which apparently seems to be aimed at bettering what the previous government did and to showcase its credentials for economic management. So much so that delivering a surplus budget apparently seems to be the corner stone of the economic agenda of the Australian government.
 
But on the other hand, the pace of economic growth of the country is slowing down. While the country does not yet have a negative GDP growth rate as has happened in Germany, the per capita growth in the country is negative.
 
There have been repeated calls by economists, including the Australian Reserve Bank governor Philip Lowe, for the government to make more aggressive spending to boost the economy and generate demand and growth, specifically on infrastructure, so that the lowering o f interest rates can be complemented by matching fiscal policies. However such calls apparently have fallen to deaf ears.
 
While economists agree that a balanced budget is important, but the conception that government debt is always bad can be a misleading economic concept. In times of stunted economic growth, it is but normal for governments to take in debts and spend up big.  
 
And many economists feel that the time is just right for the Australian government to boost consumption and the economic activity by spending big if they want to avoid a negative GDP growth soon.
 
(Source:www.theconversation.com)


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