Chief economist update: When monetary and fiscal policies don't meet

He said, he said.

This must be a thing now. Just as US President Trump and his central bank governor Jerome Powell don't see eye to eye with the conduct of government and monetary policies, there is no meeting of the minds between Australian Prime Minister Scott Morrison (and his Treasurer, Josh Frydenberg) and Reserve Bank of Australia (RBA) governor Philip Lowe.

A report by the Bank for International Settlements (BIS) - the central bank of central banks - Committee on the Global Financial System, chaired by Lowe, provides the clearest indication yet of the RBA governor's thoughts and concerns.

That is, that unconventional monetary policy would become the convention for central banks around the world (hasn't it already?)

The BIS reviewed these unconventional tools employed by central banks since the Great Recession of 2008, with the Australian Financial Review reporting: "Negative interest rates, central bank lending to commercial banks, purchases of financial assets such as government bonds and "forward guidance" pledges on stimulus by central bankers".

Lowe's concern is that the RBA would be forced to follow the unconventional polices of other developed country central banks that, although it carries negative side effects, "the benefits of boosting economies outweighed the costs", it said.

The best way is for fiscal policy to lend a helping hand; "One key lesson is that the tools are most effective when used together with a broader set of policies, like fiscal and prudential measures."

Talk to the hand. Lowe might as well have.

In his speech in Tasmania a few days before, Morrison made himself equally clear about having a Budget surplus (surpluses) under his watch.

"I'm passionate about bringing the budget back to surplus for the first time in 12 years ... It puts us in a position of strength and resilience to face whatever comes at this country," he said.

"A balanced budget to me equals sovereignty and self-respect as a nation."

Strength, resilience and self-respect -- fresh rationales to replace the old argument that a balanced budget would take pressure off the central bank from raising interest rates.

Oh, I forgot, domestic interest rates are already at record lows (and are expected to head lower, even to negative).

The warning contained in the BIS report is certainly playing out in Australia.

"It might induce a bias toward inaction among other policy authorities, such as regulatory, prudential and fiscal policymakers, if they believe the burden of policy interventions can be left to the central bank, thus raising unfounded expectations that the central bank may resort to [unconventional monetary policy tools] against all types of adverse outcome," it reads.

It could be that the only way to prise the government away from its obsession with achieving and maintaining a budget surplus is for the going to get tough(er) - an outright domestic recession or a major financial market crisis.

But by waiting for a deeper crisis to materialise in order to be able to justify its backflip on the budget surplus and reneging on its pledge, the government might be setting the domestic economy up for an even deeper slowdown.

The RBA is already doing what it could. It's time for the government to do the fiscally-responsible thing - engage in deficit spending.

With its AAA-rating and interest rates at record lows, the government needs to heed its own advice to businesses and consumers.

Borrow and spend.

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