May rate cut a 'warning sign', says top research analyst

by AB03 Jun 2013

A top research analyst has labled the quest for government economic surplus ‘inappropriate’ and the RBA’s decision to lower the cash rate last month a ‘warning sign’ of contractionary fiscal policy.

The Australian Institute (TAI) senior research fellow, David Richardson, says 'the Chicken Littles are at it again, scaring us about the level of government debt and the deficits that bring about debt' which, he believes, is actually not such a bad thing.

Don Argus, a former chair of the board at NAB, has warned that Australia is in dire need of a productivity boost if it’s to offset fast-growing gross national debt, arguing that this country is set to inherit the same challenges confronting ‘stricken economies elsewhere in the world’.

But Richardson says this argument is hypocritical, given the level of (perfectly acceptable) debt experienced by most major companies.

“Mr Argus should know about debt. On the latest figures, the NAB had total debt of $345 billion, well above the government debt expected in June this year at $162 billion, or 11% of GDP. There is, of course, no reason to suppose that the NAB is in any difficulty - that's just what banks do. They borrow in order to lend, and as long it's done prudently there is nothing wrong with borrowing.”

Likewise, believes Richardson, this is what governments should do.

“Borrow when they need to go into deficit for the health of the economy and repay debt if they need to offset unhealthy booms. We rarely ask why government should repay debt.”

“Westpac…has been around for almost 200 years and it never saw fit to pay off its debt, which now stands at $450 billion. OK, that's a bank and they are different, but BHP Billiton in one form or another has been around for over 150 years and still owes $62 billion, according to last year's annual report. Nobody complains about the morality of BHP Billiton for spending its money on its shareholders rather than repaying debt. But governments are supposed to have some moral objective involving a debt reduction strategy.”

“Let's ask who is being hurt by the high levels of debt? How are they being hurt? And how will they be made worse if that debt increases a bit?”

“One of the reasons the Reserve Bank lowered interest rates was because growth was expected to be below trend in 2013 in part because of 'fiscal consolidation', which is Reserve Bank code for contractionary fiscal policy. That should be a warning. The quest for a surplus is inappropriate at a time when unemployment is at its post-global-financial-crisis peak and expected to continue upward over the forecast years. If anything, monetary and fiscal policy should be mutually supportive.”


  • by Robert 3/06/2013 10:19:00 AM

    The Key Word from Mr Richardson in this article is "Prudent". The public aren't the drop kicks they are treated like. They don't see the government debt being used prudently. Lets build dams, roads and infrastructure not bureaucracies.

  • by SIDBROKER 3/06/2013 10:43:55 AM

    I am happy this fellow is not the treasurer!!

  • by Greg of Perth 3/06/2013 11:16:50 AM

    Don Argus was never Chairman of NAB, he was in fact the CEO, two very different beasts altogether. After his Administration purchased Homeside Lending only to have it fail so spectacularly whit Billions in write downs, he then Chaired BHP for around 10 years.
    Banks' debt positions are all part of the business they're in. Much like "Stock in Trade". They borrow it to lend it and generate a profit. Again a different debt posture to Government debt.
    Perhaps Mr Richardson should get some facts correct before making silly pronouncements.