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RBA governor upbeat on economic prospects -

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RBA governor upbeat on economic prospects

Stephen Long reported this story on Friday, August 14, 2009 12:10:00

ASHLEY HALL: The Opposition's campaign about the alleged dangers of government debt has been dealt
a blow by the governor of the Reserve Bank.

Glenn Stevens addressed a meeting of the House of Representatives Economics Committee this morning
in Sydney.

He told them the level of government debt is not a problem and that despite the
quicker-than-expected economic recovery, there is no evidence that the Government has spent too
much on fiscal stimulus.

The central bank boss also said this may be one of the shallowest recessions Australia has faced.

Economics correspondent Stephen Long has been at the hearing and he joins me now.

Stephen, what prompted these comments by the Reserve Bank governor on the government debt?

STEPHEN LONG: Ashley they came in response to questions from the Liberal MP for Cook, Scott
Morrison. Now Cook is a seat on the Sutherland Shire in Sydney, an area known locally simply as
"the Shire" or "God's own country" and Scott Morrison began by observing that the Reserve Bank
governor Glenn Stevens is actually a constituent and suggested there may be a Shire conspiracy at

But that theory was soon shot down when he asked him questions which I guess these things are quite
political, these hearings, with members from both sides of the House; and his questions were I
guess leading the governor possibly down the path of trying to elicit a response that the
government debt was high, might be a problem.

But the Reserve Bank Governor made it clear that he doesn't see the debt level as high by
international standards or historical standards and he does not believe that the level of
government debt is a problem.

This is part of what he had to say.

GLENN STEVENS: Well it depends how much debt there is. I think that the sort of federal debt that
we are going to see if the projections in the budget papers turn out to be right and that debt is
going to go from about minus 5 per cent of GDP and according to the budget figures I think peak at
less than 15.

Fifteen per cent of GDP is a low number actually by virtually any other standard. So I don't myself
feel that that debt burden, if that's what happens, is going to kind of seriously impair the
country's economy. I don't think you can really say that net debt of 15 per cent of GDP itself is
you know a serious problem.

ASHLEY HALL: The Reserve Bank governor Glenn Stevens there.

And Stephen Long, is it unusual for the central bank chief to make such a direct intervention into
a political debate like this?

STEPHEN LONG: Well clearly Ashley it does have significance for the political debate but I would
merely characterise it as an honest answer to the questions given to him.

The views of the governor are very much in line with the mainstream view amongst macro economists
that the level of debt here is not high and will not be a significant problem for the economy
providing - the Government and the Reserve Bank governor commented on this - that the Government
has given assurances that it will move to rein in spending in the out years when we do move into

And provided that does take place the mainstream economic view is that the debt won't be a
significant problem. I think the Reserve Bank Governor was merely reflecting that consensus.

ASHLEY HALL: So having struck out on the question of debt, how did the Opposition fare with its
questions on fiscal stimulus?

STEPHEN LONG: Not much better although the Reserve Bank governor's answers were a little more
qualified. He did say that if you look at their growth projections that they factor in the fiscal
stimulus that has been put in place and has been committed.

And clearly if you look at it, we are not looking at stellar growth even though we have had a
better than expected recovery. So there was no suggestion and he indeed said there was no evidence
that there had been too much fiscal stimulus.

He was pressed about the possibility of delays which we already apparently are seeing to the
building projects, the Government spending on construction works and the like and what impact they
would have.

Now he observed that clearly they would have, if they were delayed they would have less of a
positive impact on growth in the near term and might in the out years mean more growth but we
actually want to see more growth in the out years.

ASHLEY HALL: In the wake of the housing meltdown there was some debate about whether central banks
should use interest rates to lean against asset prices, not just to target inflation. What did Mr
Stevens have to say about that?

STEPHEN LONG: Well he was questioned very specifically and in detail about this and his view was
that he hasn't got a fixed view that you shouldn't do it but he sees it I guess as being at the

And he observed that in a sense they did this to an extent in 2003 when they brought forward or
interest rate rises that would have occurred anyway, they would have lifted to rein in inflation in
any case but at the margins it had an effect on house prices and a desirable effect of stopping the
big run up in house prices that we had been seeing.

Now he said that they would not specifically use monetary policy to target asset prices but if they
could work it in with their other policy considerations such as inflation they would do so. And he
noted that this is very much a live debate with a whole range of views in central banking circles

So I think it's possible we could see them using it to lean against asset prices but only if it
fits in with their inflation priority.

ASHLEY HALL: Stephen Long our economics correspondent, thanks very much.