He also warned that the renewed promotion of national self-reliance in the manufacturing sector would make Australians “poorer”.
Mr Brennan said the $ 250 billion emergency budget response, including the JobKeeper wage subsidy, had shifted from an “insurance” policy during lockdowns to more recently a traditional “Keynesian” stimulus to bolster trust and demand.
Australia’s experience in protecting domestic manufacturing – an experience of around 80 years – was not a very happy one.
– Michael Brennan, President of the Productivity Commission
While necessary in the current early stages of the recovery, Brennan said the government’s fiscal recovery strategy, according to which economic growth is expected to exceed interest rates to reduce the debt-to-GDP ratio, risked falling. send the wrong signal to the community.
“The risk in the public debate is that this idea – that GDP growth tends to exceed interest rates – is interpreted to imply something completely different and much more important: that debt and deficit do no longer matter, ”he said.
“That we can afford the next and the next ‘one-time’ increase in debt on the grounds that growth rates will continue to exceed bond yields.” “
Mr Brennan told Australia’s Economic Development Committee event that projected gross debt of $ 1.6 trillion over the next decade would have implications for future taxpayers who are “under-represented. by today’s voters “.
“It doesn’t necessarily follow that at the same time we should be pushing heavy consumption forward by borrowing heavily in the future, even though the bond markets make it doable and attractive,” Brennan said.
“The simple story of debt dynamics is incomplete if it is not based on a certain sense of well-being over time – that is, the trade-offs between current consumption and consumption in the years to come or by future generations. “
Increase in social spending
Last month’s government budget added tens of billions of dollars in new, permanent debt-funded spending for senior care, the national disability insurance plan, child care and mental health.
The government is under pressure from Labor and community groups to further increase social spending.
Treasury Secretary Steven Kennedy signaled in a post-budget speech last month that the government will eventually need to curb spending once the economic recovery locks in, to close a budget deficit of around $ 40 billion a year. But cutting spending prematurely now would endanger the economy and fiscal repair, he said.
Dr Kennedy said Australia’s fiscal position was affordable based on three key metrics: budget deficits, debt-to-GDP ratio and debt servicing costs.
Mr Brennan said there were limits on future borrowing because there was what economists called an “opportunity cost.”
“The real cost of public spending is measured in labor, capital and materials used that would otherwise be used elsewhere, for example in the pursuit of a private entrepreneurial goal – innovation or investment,” he said. declared.
“Resources have an alternative use, with an alternative value to society – a value that may even be greater than that produced by a government program.
“Obviously, this is especially true if public spending is not universally of high quality. “
S&P Global Ratings revised the government’s AAA rating to “stable” on Monday and removed it from a potential downgrade list, leaving Australia as one of nine countries to have AAA ratings from all three major agencies rating.
The world’s largest credit rating agency has given a vote of confidence to Australia’s “strong” economic rebound and COVID-19 suppression.
Mr Brennan said it would be important to rebuild “budget buffers” to be deployed during the next economic emergency.
If inflation recurs or bond yields exceed nominal growth for a period, which is possible for a resource exporter like Australia, the government could be forced to consolidate the budget at a very difficult time.
“[It] would probably be even less popular in times of rising inflation or falling terms of trade or slow real growth or rising interest rates, but these are the very circumstances under which our current debt dynamics favorable would be reversed, ”he said.
Mr Brennan also criticized a protectionist push by politicians and businesses through “a renewed promotion of ideas of national self-reliance and sovereign capacity emerging from the pandemic.”
The government’s manufacturing policy last year identified the need for more domestic manufacturing capacity in personal protective equipment such as masks, vaccine manufacturing, petroleum refining and rare earths.
Some professional organizations and politicians want the domestic manufacturing capacity to go even further.
“Australia’s experience with domestic manufacturing protection – an experience of around 80 years – was not a very happy one,” Brennan said.
“The death of free trade is far overstated, and the pressure to encourage domestic production as a political priority is likely to undermine growth.”
The Productivity Commission’s work on vulnerable supply chains shows that only 2% of Australia’s imports come from a concentrated source, for which there are few substitutes, and which flow to essential industries.
“Even in many of these cases, domestic production would be a prohibitively expensive option compared to some storage or measures to diversify sources of supply,” Brennan said.
“Likewise, while some might think that we are heavily dependent on a small number of export markets, in fact our levels of export concentration (by country and by product) are similar to those of our peers.
“And at the height of the pandemic, as some shortages have been filled by domestic manufacturing (like gin makers switching to hand sanitizer), we’ve mostly responded to emerging needs – like for PPE – through Trade. And it worked.
“Our first best policy is to continue our international efforts to strengthen the world trading system – to update its rules and strengthen the dispute settlement process.”