Govt can borrow more for recovery: RBA

Reserve Bank Governor Philip Lowe has urged the federal government to borrow more and boost public spending to support the country’s economic recovery.

Mr Lowe said the foundations of the Australian economy were strong with solid public balance sheets.

Monetary and fiscal policy measures were also helping to provide “an important bridge” to recovery as Australia faces its worst economic shock since the 1930s with the unemployment rate at a 22-year high, he said. 

In a speech titled COVID 19, the Labour Market and Public-sector Balance Sheets, Mr Lowe said direct cash transfers to households and businesses as well as boosting public spending on infrastructure and wage subsidy schemes were examples of how the government could “smooth things out”.

“By helping the economy today, these measures also support the all-important confidence.

“So they assist with a return to more normal patterns of spending and consumption, without the need for ongoing fiscal stimulus,” he added.

The remarks come as the government announced it would trim the size of its wage subsidy payments and tighten the eligibility rules.

Lowe said using the public balance sheet in this manner inevitably required increased government borrowing.

“For a country that has got used to low budget deficits and low levels of public debt, this is quite a change. But it is a change that is entirely manageable and affordable and it’s the right thing to do in the national interest,” Lowe said.

The RBA, for its part, has slashed interest rates to a record low 0.25 per cent and launched an unlimited government bond buying programme.

The central bank has ruled out negative interest rates and intervention in the foreign exchange markets as possible policy options.

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