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No problem with stimulus, debt: RBA boss -

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No problem with stimulus, debt: RBA boss

Stephen Long reported this story on Monday, September 28, 2009 12:10:00

ELEANOR HALL: The Reserve Bank governor Glenn Stevens told a Senate committee this morning that the
recent economic downturn was much milder for Australia than in previous decades and is over.

Glenn Stevens rejected claims that there's too much fiscal stimulus and that the Government
spending will push interest rates too high. He also told a Senate economics committee hearing that
the level of Commonwealth debt is very manageable and he rejected Coalition claims that the Federal
Government is running up a dangerous level of debt.

Economics correspondent Stephen Long joins us now.

So Stephen, take us through the questioning that Glenn Stevens faced this morning.

STEPHEN LONG: Eleanor, this committee is looking at the fiscal stimulus and really the question of
whether it is appropriate or whether further stimulus should really be wound back and that was the
thrust of the questioning, certainly from the Coalition senators and other cross bench senators and
Glenn Stevens was pretty clear on this that he doesn't think that the levels of stimulus right now
are too high and well, no one really knows what the future holds - how strong or weak the economy
is going to be down the track but he is pretty comfortable with where things stand.

Bob Brown, Senator Bob Brown from the Greens was the first to press him on this. Asked him whether
he thought the stimulus should be wound back and he suggested that Senator Brown, with respect,
should rephrase the question.

GLENN STEVENS: It isn't so much should it be wound in because it is going to be automatically. It
seems to me the thing you are really debating is should that process be accelerated.

BOB BROWN: That's right.

GLENN STEVENS: All I can say in response to that is that, I think it is a bit hard to claim that as
of this moment there is too much growth in the economy so I haven't really had a serious problem
with what has occurred on the fiscal front thus far.

The presumption we are making is that things will be delivered and then wind back more or less on
the schedule that is set out in the budget. You know, I'm not sure I'd say that outlook is terribly
worrying outlook really.

It is important these measures be wound back over time but they are on track to be so.

ELEANOR HALL: That is the Reserve Bank governor Glenn Stevens talking to the Senate committee this

Steven, did he say whether maintaining the stimulus would lead to higher interest rates as has been
said by the Opposition many times?

STEPHEN LONG: Well, he was indeed questioned on this and pressed on this by the Opposition and also
by Senator Steve Fielding and he had to accept that as a basic principle, as you know common sense,
if there is more demand in the economy and the government stimulus is contributing to demand then
that will lead to a higher level of interest rates than if the demand wasn't there.

But he said he questioned the assumption that lower government stimulus and lower interest rates
was a good thing. Whether having a situation where the government was stimulating or doing less to
stimulate the economy and that meant that interest rates were lower was a good thing.

In other words, whether it would actually be in the broad public interest if we had interest rates
low. He said he was extremely grateful and very, very pleased that interest rates hadn't hit the
very, very low levels zero per cent, half a per cent that they have in other major economies and
also he was pressed about whether the government stimulus for instance would lead to asset price
bubbles in housing.

He said that low interest rates were more likely to lead to asset price bubbles in housing and
other markets. So his suggestion was that you have to have both arms of policy working and higher
interest rates aren't necessarily a bad thing although it would be a long time and nowhere in any
sort of near prospect that we'd get back to the interest rates we had, if you go back to early 2008
before the big cuts.

ELEANOR HALL: I presume he was pressed on government debt?

STEPHEN LONG: Oh, indeed he was. He was pressed on government debt and here he was even stronger
that the notion that the government debt is not something that can be sustained, is a problem in
Australia, is really, he didn't use these words but he was pretty much saying that it is one that
just does not stand up to any sort of scrutiny when you compare the level of debt here to overseas.

This is part of what he had to say.

GLENN STEVENS: I think for a country like Australia ought to be seen as quite manageable. You know
we are talking about 14 or 15 per cent of GDP for net debt if it reaches that. Now that certainly
is a significant change from where we started but I'd be pretty sure that most governments in the
world would be very, very happy to have a picture like that ahead of them rather than the one
they've actually got in their own country.

I personally am not greatly worried by the debt sustainability angle here. I don't think that is
likely to be our problem.

ELEANOR HALL: Glenn Stevens again saying he is not too worried about the government debt. Is he
saying that it will put any pressure at all on interest rates?

STEPHEN LONG: No and he said that Australia's government borrowing wouldn't have any material
effect on the borrowing costs that the Commonwealth faces. If there is going to be an effect then
it is going to be through the huge fiscal measures that are being in place in America and Britain
and other European countries which we can't really do anything about.

ELEANOR HALL: Stephen Long, our economics correspondent, thank you.