Australia: Attention turning to Fiscal policy – ANZ

ANZ analysts suggest that with interest rates coming close to their lower bound in Australia, attention has turned to fiscal policy.

Key Quotes

“This week, Treasury Secretary, Steven Kennedy, said when he appeared before parliamentarians at Senate estimates hearings that only rare circumstances would warrant temporary fiscal responses. We argue that, while the economy probably doesn’t warrant a short-term fiscal sugar hit, there is a better mix of fiscal and monetary policy that would lessen the downside risks. This would preferably occur in a coordinated way across governments and be productivity-enhancing.”

“Strongly growing public investment will wane in the next couple of years before a 2021-22 pick-up. Despite tax cuts, average income tax rates will continue to increase for low and middle income households over the coming decade. Commonwealth spending overall is also projected to fall in this period, in part, due to a tightening in Commonwealth spending programs.”

“There are some offsets on the horizon, such as ongoing increases in NDIS spending; but even with further interest rate cuts and a small currency depreciation on the horizon, we think there are still downside risks to growth.”

“Rather than the Reserve Bank having to engage in unconventional monetary policy, we think loosening fiscal policy over a medium-term horizon would be the more desirable way to shore-up the economic growth outlook.”