RBA: US stimulus timing interesting, debt a mystery

SYDNEY: Australian central bank No. 2 Guy Debelle cocked an eyebrow at the Trump administration’s decision to slash taxes and boost spending when the US economy’s expansion is at such an advanced stage.

“It’s interesting, I suppose that’s the best word to use, that the US, in an economy which is close to full employment, is injecting a fairly large amount of fiscal stimulus,” Debelle said on Tuesday in response to a question on US debt. “It’s not something you normally do at this stage of the cycle.

“When it’s been done in the past it hasn’t often ended up all that well.”

The US budget deficit will surpass $1 trillion by 2020, as tax cuts and spending increases signed by President Donald Trump do little to boost long-term economic growth, the Congressional Budget Office said last month. American public debt will exceed $20 trillion by fiscal 2022, up from $15.7 trillion this year, according to the CBO.

“One thing that is interesting about debt levels is that they’re basically sustainable until they’re not,” said Debelle, who is the Reserve Bank of Australia’s deputy governor. “The reason why I say that is if you looked at Japan, which has a debt to GDP ratio well north of 200 percent, the US is only half that.”

The International Monetary Fund estimates that once you add in municipal debt and other borrowings, Japan’s general government debt is the highest in the developed world at about 2.4 times the size of gross domestic product.

Debelle, who took the No. 2 role at the RBA in September 2016, previously worked at the IMF, Bank for International Settlements, Australian Treasury and as a visiting professor in economics at the Massachusetts Institute of Technology. He gained his PhD at MIT, and studied under Stanley Fischer and Rudi Dornbusch.

“A number of people have been saying for a long time that the Japanese debt position is not sustainable,” Debelle said. “But here we are today, more than two decades on from when people were first saying that it’s not sustainable, and it’s been sustained so far.”—