Australian Reserve Bank governor Philip Lowe has welcomed the federal government’s $20.4 billion Jobkeep and JobSeeker scheme extension as being key to bolstering the economic recovery from the crisis-induced by the CCP virus.
During his annual speech to the Anika Foundation on July 21, Lowe supported the government’s decision to keep borrowing money against “future income” to continue its economic stimulus measures.
Continuous government spending during the crisis and recovery stage is essential to smooth out and reduce the large fiscal blows households and firms were experiencing due to the severity of the downturn, according to Lowe.
“The deeper and more protracted a downturn, the more severe are the economic scars,” he explained.
“By smoothing things out, the government is helping people right now and also limiting the longer-term damage to the economy,” he said.
Lowe said programs like JobKeeper, JobSeeker, and government investment in infrastructure and public health were vital to generating an economic recovery:
“They assist with a return to more normal patterns of spending and consumption, without the need for ongoing fiscal stimulus.”
Government In a Good Position to Borrow to Spend
Acknowledging the record-high budget deficit, Lowe said the government was in an excellent position to keep borrowing to support a sustainable economic recovery.
Currently, Australia has several favourable economic factors working for it. These include the lowest borrowing rates since 1901, good demand for Australian government bonds, and overall gross debt to GDP at less than 50 percent, which is lower than in many countries and “likely to remain so.”
“For a country that has got used to low budget deficits and low levels of public debt, this is quite a change,” Lowe said, referring to the government’s need to borrow to deliver unprecedented stimulus schemes. “But it is a change that is entirely manageable and affordable, and it’s the right thing to do.”
However, he rejected the suggestion that the central bank should finance government spending by printing money, saying it is only relevant to a high government debt situation, which does not apply to Australia.
“I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be.”
Furthermore, this option comes with high costs.
“The reality, though, is there is no free lunch,” he said. “The tab always has to be paid, and it is paid out of taxes and government revenues in one form or another.”
Confidence is The Key to Strong Economic Growth
In addressing the concern over the staggering budget deficit, Lowe said the best solution to the build-up of public debt would be economic growth.
“Given that we are borrowing against future income, we will be better placed if that future income is strong,” he said.
He highlighted the need for “Australia to be a great place for businesses to expand, invest, innovate, and hire people.”
To achieve this, Lowe said the key is “restoring confidence” in health and financial security, adding that this is the prerequisite for people to “resume their normal activities” and for firms to “hire and invest.”
“The other element is people being confident about their own finances and jobs, and businesses being confident about future demand.”
Looking forward, Lowe warned that the recovery could be “bumpy” and “drawn-out” and the jobless rate could go up unless there’s a vaccine.