Govt cautioned on going into red

Higher government debt and public intervention were unavoidable consequences of the global financial crisis, but nations shouldn't rush to dive deeper into the red, the central bank says.

Reserve Bank of Australia (RBA) Governor Glenn Stevens said many nations would have rising public debt relative to economic output for several more years following the downturn.

"This was largely unavoidable," Mr Stevens said in an address to the Anika Foundation Lunch in Sydney yesterday.

"To a considerable extent, the fiscal legacy can be seen as one manifestation of a broader legacy of lost output [and hence weaker budgetary positions through automatic stabilisers] over a period of several years.

"Generally speaking, the public balance sheet has played the role of a temporary shock absorber as private balance sheets contracted."

However, Mr Stevens said servicing the debt was an ongoing cost to the taxpayers of the nations concerned.

"At present that additional cost is, in some countries, reduced compared with what it might have been due to the low level of interest rates on government debt that we see," he said.

"Moreover, had the debt not been taken on it could well be that the economic outcomes would have been much worse, so increasing fiscal and other costs. Nonetheless, this lasting debt servicing burden is a real cost."

Measures such as bank deposit guarantees used during the economic crisis to avert a closure of markets had been necessary, but governments should be wary of standing in the foreground of future financial turmoil, Mr Stevens said. "The simple truth is that, given a big enough shock, the public backstop to the financial system has to be used.

"But the backstop having been used so forcefully on this occasion, it is desirable not to use it again soon. The real question is how, having set the precedent, governments avoid too easy recourse to such measures in the future."

Regulators were proposing reforms that could constrain risk taking and excessive borrowing ahead of a future boom, which could lower growth over a period but be of a potential benefit also.

"A global financial system that is more stable and therefore less likely to be a source of adverse shocks to the global economy in the future," he said.

"So we have a cost-benefit calculation to make."

Mr Stevens said the effects of the financial crisis would continue to affect government balance sheets, the role of governments in the banking sector and the reforms of regulators.

"It will be important, as these reverberations continue, for there to be a balanced approach blending strong commitment to sensible long-run principles with pragmatism in implementation."

Australia had emerged from the economic downturn in better shape than other major nations, Mr Stevens said.

"In Australia we have been spared the worst impacts of serious economic recession in terms of lost jobs, much as we will be spared the prospect of higher taxes that face so many in the developed world," he said.

"These are factors which support our native optimism, at least about economic conditions."


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