Australia Must Lose Its Distaste for the `D’ Word

(Bloomberg Opinion) -- The pandemic is forcing a profound shift in Australia’s economic philosophy. Few people want to talk openly about it.

Ministers last week projected a budget deficit of A$185 billion ($132 billion), or almost 10% of gross domestic product, in the year ending June 30, 2021. That would be the most since World War II. Treasurer Josh Frydenberg and Finance Minister Mathias Cormann went out of their way to avoid using the “D” word at their July 23 press conference announcing the estimates, instead preferring “support.”

Their caution is understandable. Before the coronavirus pandemic, ministers wore surplus promises on their shirtsleeves. Successive administrations of right and left have made commitments to surpluses a test of fitness for office. Yet the case for red ink is unassailable. Australia forecasts an economic contraction of about 7% in the second quarter, and the International Monetary Fund has warned that the worst thing for the world would be for stimulus to be withdrawn too soon.

The switch to thinking about an enlarged role for fiscal activism is as significant and far-reaching as the floating of the Australian dollar in 1983. That means government leaders have much to do to prepare the public. The freeing of the local dollar meant that policy settings would be judged first-and-foremost by how markets reacted. The center-left Labor party, which engineered that change, brought home to households the need to restrain their spending, helped by evening news programs that featured the currency’s gyrations in every bulletin. Prime Minister Scott Morrison's center-right bloc must now lead a similar reappraisal.

Peppered by reporters’ questions about whether deficits would run for a decade or how an increase in debt will be presented to Australians, Frydenberg opted for stories. He talked of how emergency government programs had helped a person called Lisa keep her Brisbane gym open and the benefits to a chap called Michael who has a cafe at Gosford on the New South Wales coast. In the press release announcing the new fiscal landscape, the word “deficit” was used sparingly, in contrast to almost two dozen references to “support.” (Gosford is in a competitive constituency, held by Morrison's party, and the Brisbane metro area is a perennial battlefield.)

A sure sign that Australia needs to find a way live with deficits for the long haul came two days earlier when central bank Governor Philip Lowe waded into the issue. Monetization of Australia's debt by the central bank isn't in the cards, Lowe insisted in a speech. He laid out reasons why such a step isn't necessary: chiefly that the government can borrow for 10 years at less than 1%, the least since Australia became a nation in 1901. Monetization might be an increasingly trendy issue,  but it’s no free lunch, Lowe said. 

In fact, no serious observer had suggested the Reserve Bank of Australia would or should finance the deficits. “This seems like one of those occasions where the RBA is playing to a broad community audience,’’ Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney, said in a note. Lowe also mounted a robust defense of the RBA's Covid-19 response in cutting interest rates to near zero and capping the yield on three-year government bonds. His caution against monetization signaled that the RBA won’t abandon prudence in the coming era of deficits. “While the topic is clearly in the realm of the hypothetical, the discussion adds weight to the idea that with the immediate crisis period having passed, the RBA is a little squeamish about perceptions,” Jarman said.

Economic arguments against deficits belong to yesteryear. It's a measure of their lingering potency in the public mind, however, that Frydenberg chooses to frame funding around people rather than numbers. He knows that voters need to be walked into this. The sooner deficits can be called by their name, the sooner folks Down Under can understand the pandemic’s long-term consequences. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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