Australia's Treasury chief warns economic recovery could 'falter' without strong fiscal boost

Steven Kennedy calls on government to lower threshold for fiscal intervention and step in whenever economy is struggling

Steven Kennedy has warned that without strong fiscal stimulus the Covid-19 economic recovery could “falter” despite record low interest rates.

In a speech on Thursday, the Treasury secretary called on the government to consider lowering the threshold for fiscal intervention, so it could spend to boost the economy whenever it is flagging, not just after a “large shock”.

Kennedy credited the government with already providing $257bn in “direct economic support” totalling 13% of 2019-20 GDP.

But he noted that after the Reserve Bank of Australia cut the official cash rate to 0.1% on Tuesday there was no further room to boost the economy using conventional monetary policy. The reserve bank also opted to buy $100bn of government bonds from banks over the next six months by printing money in a quantitative easing program.

Kennedy told Australian Business Economists on Thursday that states and territories “can also play an important role in supporting the economic recovery” by spending more on social and other infrastructure.

He said the federal budget had “used a wide range of levers and incentives to support aggregate demand” including income tax cuts, business tax concessions and infrastructure spending.

The government had also allowed extra welfare payments and lower tax receipts to boost the economy rather than cut back to shrink the $281bn deterioration in the underlying cash balance, Kennedy said.

But “given the lack of conventional monetary support available, the recovery could falter without a strong fiscal policy response leading to years of anaemic growth”, he warned.

“More and more unemployment would become entrenched reducing the productive capacity of the economy. Lower growth also means that inflation and wages would likely remain lower for longer.”

In October, Australia’s unemployment rate hit 6.9% – outperforming expectations – although there are early warning signs that cuts to jobkeeper wage subsidies at the end of September hurt wages and will result in more job losses.

According to Australian Bureau of Statistics figures released on Wednesday, retail trade was down 1.1% in September, and payroll jobs decreased by 0.8% from 3-17 October.

Kennedy argued that there was “less space” for monetary policy to work before it reached the lower bound because the “neutral or natural interest rate” had been steadily falling for 40 years.

This raised “fundamental issues” about when governments should step in to help reserve banks boost the economy.

“Fiscal policy has always responded to large shocks but there is now a question about whether the threshold for intervention should be lowered.”

Although monetary policy was favoured as the quickest option, the Treasury is now able to use real-time data and is working to speed up its processes to provide “more up-to-date assessments of the appropriate stance of fiscal policy”.

“Any move towards more active fiscal policy needs to be pinned to credible long-run anchors,” Kennedy said. “In the case of Australia, this is achieved through a continued commitment to sound public finances, underpinned by the tax to GDP cap, balanced budgets and stabilising and reducing debt in the longer-term.”

The shadow treasurer, Jim Chalmers, responded to the speech by calling for a “comprehensive economic plan for recovery” to prevent the only lasting legacy of the recession being “a trillion dollars of debt and higher unemployment for longer”.