The Future of the Australian Economy After Debt Separation

Australia’s central bank was already highly unlikely to shift policy at Tuesday’s meeting. Now it has even less incentive to do so.
Policy makers will leave the benchmark interest rate unchanged at 1.5 percent for a ninth month, money markets bet and economists predict, after data last week showed inflation creeping higher. A day later, the government moved to give itself leeway to fund major infrastructure projects by redefining its debt potentially adding long-overdue fiscal stimulus to the economy.
“The fact that inflation has lifted from its lows probably reinforces the Reserve Bank’s inclination not to do anything,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

At the same time, Australia’s biggest export, iron ore, has fallen into a bear market, potentially undermining any boost to government revenues from an unexpected rally in prices last year. The Aussie dollar, which normally tracks commodity prices, has remained fairly static around the 75 U.S. cent mark, providing a headwind for key exports like education and tourism.
More positively, business conditions have improved recently.

But it’s the opportunities provided by the splitting of debt in the May 9 budget, flagged by Treasurer Scott Morrison last week, that could alter the equation. The government had been constrained on infrastructure spending by efforts to bring a budget deficit under control and ensure it doesn’t preside over the loss of the nation’s AAA credit rating.

In distinguishing between so-called good debt used for productivity enhancing infrastructure and bad debt for recurrent expenses that should be met via tax revenue, it opens up options for the government. The move also has support from the RBA and the International Monetary Fund.
“The separation of debt may give the government more wriggle room to put more money into infrastructure,” said AMP’s Oliver.

One project under consideration is an inland rail network that local media speculate will see the government provide A$1 billion ($747 million) to kickstart. It would move goods from Brisbane to Melbourne in under 24 hours. The government is also expected to contribute to construction of Sydney’s second airport, a vital piece of infrastructure in the city’s sprawling and electorally volatile west.

Source: Bloomberg

Jr Trader Petar Milanov

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