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Home / Business / Companies

The Economy Hub: It's time for Governments to start spending

Liam Dann
By Liam Dann
Business Editor at Large·NZ Herald·
1 Sep, 2016 02:30 AM2 mins to read

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Increased government spending may be the only way out of the economic doldrums that have slowed growth and pushed the world's interest rates to record lows, says S&P Global chief economist Paul Sheard.

"I do think that fiscal policy in this post-recession environment since 2009 has been missing in action."

New York based Sheard, who visited New Zealand this week, said he was picking the next US rate hike was likely to come in December, despite some market excitement about the prospect of a September hike.

But rather than just debating the moves central banks needed to make in the short term the time had come for a much broader debate which involved "a re-think of the whole macro-economic tool-kit," he said.

"This is a discussion that you don't want to have just with the monetary policy makes, I think you need the fiscal policy at the table."

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There were worries about the amount of "ammunition" central banks had in the tank to deal with future economic crises, he said.

"Negative interest rates and pushing QE [Quantitative Easing] to this point should be a wake up call to the fiscal policy makers."

Monetary policy only had the power to make conditions more conducive to borrow money for economic activity.

"There is just not enough demand in the system. Government's can crank up fiscal spending, particularly infrastructure," he said.

Politically and among policy thinking and academically as well, people were rethinking things.

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It might take another economic downturn to really shift the politicians and policy makers, he said.

"But when you listen to the central bankers at Jackson Hole they are increasing saying we can't carry all the burden. I think it is slowly building and the penny is starting to drop."

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There is just not enough demand in the system. Government's can crank up fiscal spending, particularly infrastructure.

Sheard, an ex-pat Australia, said it did feel a bit like "a different planet" when he visited New Zealand and Australia.

Our economies had remained buoyant through the aftermath of the financial crisis and rates remained relatively high.

Both countries had benefited greatly from the rise of China but a little bit of shine was coming off that story as China slowed.

"But one advantage is that if New Zealand and Australia do need to move to closer to unconventional [monetary policy] territory, they have a lot of models they can follow."

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