Budget 2024: How Australia can rebuild its buffers against trouble

Already a subscriber?The initial noise from the federal budget has quietened down, but unfortunately the distant rumble is the sound of theWhile monetary policy takes the lead in managing the economic cycle, large-scale fiscal stimulus has been needed when we’ve been hit by large shocks.Substantial fiscal stimulus saved the economy, and so tens of thousands of jobs and livelihoods, in the pandemic and before that in the global financial crisis.

– at which monetary policy is neither expansionary nor contractionary – has declined for a range of reasons including slower productivity growth and the ageing population. A good “guestimate” is that the neutral rate around which the cash rate will cycle is around 3.5 per cent. Also, better household and business-level data and Australia’s fast payment system mean that fiscal stimulus payments can be targeted and distributed quickly.We might hope having had a global financial crisis and a pandemic we are due for some smooth times. Sadly, it doesn’t work that way. Big shocks can come at any time, we just don’t know when.

As a starting point, suppose we might need a 10 per cent of GDP stimulus every 20 years. If we wanted to avoid national debt ratcheting up, we would need to reduce our debt to GDP ratio by an average of 0.5 per cent in non-crisis years.

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