Conclusions
The government is not like a private sector entity, nor is it like a household. The fiscal constraints that apply to private entities do not apply to the Australian government which can issue its own currency.
Government debt is a private sector financial asset (savings). As a country with a fiat currency and a floating exchange rate, the Australian government can always choose to direct spending on projects it considers worthwhile and can always meet its fiscal obligations. The nominal size of the government’s aggregate debt is not a meaningful indicator of economic performance – it is not, and should not be, a constraint on government investment in the economy.
To support the private sector, government debt should increase in times of reduced aggregate private sector demand and visa versa, meaning the government should act fiscally in a counter cyclical manner. Australian government spending is only constrained by the availability real resources in the economy, and the government’s ability to utilise these resources without undesirable inflationary consequences.
Australian banks, and the Australian economy are not reliant on off-shore investors to source funding. However, current prudential regulatory requirements with respect to banks’ liabilities, combined with other structural aspects of the economy, create a requirement for Australian banks to borrow funds from off-shore to transform the nature of their liabilities. While these requirements are designed to safe-guard the financial system, they expose banks to volatility in off-shore economic conditions and capital markets, and introduce greater financial risk to the Australian economy.
A system of forced savings results in current demand leakage. A larger Australian superannuation system has resulted in higher private sector leverage, lower interest rates and larger government deficits to offset this demand leakage while maintaining or growing GDP. A larger pool of private savings does not increase the availability of "funding" to the economy and has not led to greater investment. Funding is always available in Australia for credit-worthy ventures, with or without superannuation, since banks and the government create that funding so long as it is in Australian dollars.
Investment in infrastructure and other projects considered to be attractive from a public policy perspective is not constrained by a lack of funding, either public or private. Rather, private investment is constrained by a need to receive commercially acceptable returns. Public investment is constrained by the availability of excess real resources which may be purchased by the government and the effect this may have on price inflation.
In an economy with an aging population, a system of forced savings, a current account deficit and near zero interest rates, larger government deficits will be required to maintain GDP growth in the absence of a significant to change to the current account position (greater exports).
Excess competition in the banking system is undesirable and can reduce lending standards and bank asset quality generally since banks are profit driven entities. Potential negative effects for the economy of reduced banking competition should be addressed. A larger Australian corporate bond market may be beneficial to the economy if it leads to a more efficient allocation of risk capital to commercial projects, but it will not provide an additional source of funding to the economy.
Recommendations
Government annual budgetary considerations should be determined in the context of unemployment and inflation, and should not be influenced by aggregate government debt levels.
The objective of the government’s fiscal policy should be formalised in a similar manner to the description of the RBA’s duty Monetary policy and fiscal policy are not independent. A mechanism should be found to allow both to operate in a co-ordinated manner and formalise the equivalency of their objectives
Mandatory contributions to superannuation should be reduced or stopped
Banks are quasi-public entities operating in a less than fully competitive environment and bank profitability should be regulated to reflect this. Allowing increased bank competition to reduce profitability is not desirable for financial stability.
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