World Economy

Deficits Fend Off Australian Recession

Ian HarperIan Harper

Australia’s politicians may be fretting over the nation’s deteriorating finances, but now isn’t the time to step off the spending gas pedal, according to the central bank’s newest policy-setting member.

Economist Ian Harper said the government spending that has weakened the budgetary position has likely been a key factor in keeping the resource-rich economy growing, along with the central bank’s record-low interest rates. He also played down concerns that a downgrading of the nation’s AAA-credit rating might poleaxe the economy, Dow Jones reported.

“There isn’t any sign of a recession, at least not in my books, on the horizon here. But if there was a time to make sure that fiscal policy was doing its thing, then you might argue that now is the time,” Harper said in an interview.

“What’s clear is that in the past, we have not recovered, or transitioned from the sort of experience we are currently going through, without a recession,” he said, referring to the economy’s transition away from mining-led expansion to broader-based growth amid sharp falls in commodity prices.

Harper’s comments come as the newly-elected federal parliament sits for the first time since July’s election, with a ballooning budget deficit a key issue for politicians.

Since the global financial crisis of 2008-2009 and, more recently, the end of the mining boom, Australia’s fiscal position has continued to weaken, delaying an eventual return to budget surpluses.

The government’s current forecast for a balanced budget in fiscal year 2021 is now eight years later than the previous administration’s first forecast.

The debate over the budget follows warnings from ratings firms that the country’s sovereign AAA credit rating is now at risk.

If Australia were to lose its AAA sovereign rating, it wouldn’t have a major impact on the economy, given that interest rates around the world are at historic lows, Harper said.

“At the moment, the world is turned on its head,” he said. “I don’t think we know precisely what the impact of that is going to be on interest rates. Clearly it is not a case that the sky falls in.”