Chief economist update: Let's talk about debt

Financial Standard had been calling for it, central banks have, and now it's the Organisation for Economic Cooperation and Development (OECD).

In its latest bi-annual economic global economic report released this month, the OECD maintained its Australian growth forecast at 1.7% this year (unchanged from its September prediction) and raised its 2020 guesstimate to 2.3% (from 2%) in 2020.

Good ... but not as good as the RBA's forecast of 2.3% in 2019 and 2.6% next year. I don't want to quibble over the exact point estimates - economics, after all, is an inexact science because of the thousand and more factors that go into producing a single GDP growth number.

As 2020 rolls on, we could find the OECD upgrading Australia's growth forecast in line with the RBA or the Australian central bank coming down to the OECD's estimates, or both could be wide off the mark.

But one thing both institutions agree on is the need for fiscal policy help.

About two weeks before the RBA made its first of three rate cuts in June this year, Governor Lowe told his audience at the Economic Society of Australia conference in Brisbane that: "In the event that the unemployment rate does not move lower with current policy settings, there are a number of options..."

"...These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people. Relying on just one type of policy has limitations, so each of these is worth thinking about."

Fast forward to November, the OECD's report advises, "Fiscal policy, which on current plans is expected to exert a broadly neutral influence, may need to play a more active role in strengthening economic growth".

They're not alone - ABC published a report earlier this month asking "13 economists how to fix the economy" and found: "Seven of the 13 say what is needed most is fiscal stimulus (including extra government spending on infrastructure), three say both fiscal and monetary measures are needed, and three want government "structural reform", including measures to help the economy deal with climate change and remove red tape."

"The 13 represent ten universities in five states. Among them are macroeconomists, economic modellers, former Treasury, IMF, OECD and Reserve Bank officials and a former government minister."

Just as I've put forward five months earlier on June 6, ABC reported that: "Eleven of the 13 believe the Government should abandon its determination to deliver a budget surplus in 2019-20."

In trying to look "fiscally responsible", the government is encouraging households to borrow and spend - interest rates are at record lows after all - to boost economic activity and growth.

But with household debt running at 191.1% of disposable income (June quarter 2019), further interest rate reductions would almost surely be used to pay down debt rather than spent.

Not only that, as the OECD rightfully warns: "High indebtedness of the household sector could exacerbate the transmission of an economic shock".

The OECD's stats put Australia's household debt to net disposable income at 216.4% - the fourth largest behind Denmark, the Netherlands and Norway.

In contrasts, Australia's government debt to GDP, at 40.7%, is among the lowest in the G20. This compares with Japan's 238.2% (the highest), Italy's 134.8% (second highest), the US' 106.1%, the Eurozone's 87.9%, and the UK's 81.7%.

Given below-trend growth and weak capital investment, there is very little risk, if at all, of increased government spending "crowding out" private investment that's feared to put upward pressure on interest rates.

Time for the Morrison government to do what tell households to do - borrow (while interest rates are low) and spend.

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