Only fiscal discipline will protect us

Leonard Hong

15 March 2019 | Ideas@TheCentre

Former Australian Treasurer Wayne Swan’s valedictory speech hailed the legacy of his stimulus package (but not the subsequent — and growing — government debt).

As everybody knows, debt and recession are often linked — and many speculate that another recession may be around the corner.

It’s been 11 years since the 2008 Global Financial Crisis. In the aftermath, many Western governments, including Australia, pushed for fiscal stimuli to expand aggregate demand and boost the economy.

Since then, we have had a higher debt-to-GDP ratio as a result of continuous government spending and deficits by both Labor and the Coalition. On top of this, Australia’s economic performance in the last decade has been ‘lacklustre’ at best, on an average GDP per capita growth of 1.25%.

Although fiscal balance and economic performance aren’t closely related, low government debt provides countries with an optimal position and a better chance of having low interest rates.

Despite the growing debt, in contrast to other countries like Greece, Australia has a moderate debt to GDP ratio of 41.9%, and the Coalition is expected to record a first budget surplus after eleven consecutive budget deficits.

However, it is unlikely that the Australian government will continue to maintain fiscal discipline. The IMF’s Christine Lagarde warns of a global downturn, and it is possible that either side would push for a fiscal stimulus again if such a scenario happens. This leads to increased government deficit and debt.

This would put upward pressure on interest rates and the exchange rate, and crowd out private investment, both of which lead to lower wages and slower economic growth. Australians know that eventually, public debt needs to be paid back by either tax increases or cuts to essential public utilities.

For the Australian economy to prepare for an economic downturn and long term economic stability, we must have fiscal discipline that will make the economy more resilient against shocks.

Leonard Hong participated in the CIS intern program.

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