Debt across all levels of the government is much lower than in other countries and is “likely to remain so”, while Australian governments can now “borrow at the lowest rates since Federation”, meaning the public balance sheet could play an integral part in the economic recovery.
“Over recent decades, the conventional wisdom has been that the government’s balance sheet has a limited role in managing economic fluctuations, with the main focus instead being on structural and intergenerational issues,” governor Lowe said. “The global financial crisis, and now the pandemic, have caused some rethinking here.”
Governor Lowe believes the public balance sheet could have a “smoothing function” on economic scars that might arise from COVID-19, including protracted unemployment, people losing training opportunities with long-term consequences for their careers, and lower levels of investment in physical capital and research.
“We need to do what we can to limit the severity of these costly scars,” governor Lowe said. “These scars have long-term effects and they damage our society and our economy. The government can play an important role here by using its balance sheet to smooth things out and reduce the severity of the downturn.”
Of course, using the public balance sheet will require the government borrowing against future income to smooth the hit to current income.
“For a country that has got used to low budget deficits and low levels of public debt, this is quite a change,” governor Lowe said. “But it is a change that is entirely manageable and affordable and it’s the right thing to do in the national interest.”
But governor Lowe believes that boosting growth by making Australia “a great place for business to expand, invest, innovate and hire people” will be the best way of addressing the build-up of debt.
