Repair budget now to contain debt, says Treasury secretary Steven Kennedy

Treasury secretary Steven Kennedy urges the government to immediately begin repairing the budget ahead of the next crisis.

Treasury secretary Steven Kennedy briefs Jim Chalmers.

Jim Chalmers says the hard yards of budget repair have begun as his Treasury secretary Steven Kennedy urges the Albanese government to use the October budget to rein in debt and rebuild firepower to confront upcoming crises.

In a speech to the Australian National University, published on Friday, Dr Kennedy said it was time for monetary policy to normalise and to “rebuild” the country’s fiscal buffers.

The Treasury chief’s comments came as the International Monetary Fund downgraded its growth projections for Australia.

“We are now around full employment, and it is appropriate for fiscal consolidation to now occur and for monetary policy to normalise,” Dr Kennedy said.

“Creating the fiscal space for interventions is important, and now is the time for us to rebuild our fiscal buffers so these options remain open to us in future.”

The Treasurer said on Friday he had “tried to be really clear about the structural challenges in the budget” ahead of the October 25 statement, with acute spending pressures on disability support, aged care, health, and defence.

“The cost of servicing the trillion dollars of debt we inherited is growing fast because of rising interest rates,” he said. “The point of (Thursday’s) ministerial statement was to bring Australians into our confidence about the substantial pressures on the economy and budget. The hard yards of budget repair have begun with a focus on rorts and waste”.

On Friday, the IMF cut its GDP growth forecast for Australia to 3.8 per cent, from 4.2 per cent, while downgrading the Asia-Pacific outlook to 4.2 per cent, well below last year’s 6.5 per cent rebound from the Covid-19 recession.

“Fiscal policy will need to tighten in countries facing elevated debt levels, providing a complement to monetary efforts to tame inflation,” the IMF’s director of the Asia and Pacific department, Krishna Srinivasan, said.

In April’s pre-election budget update, gross debt was estimated to be $906bn last month, or 39.5 per cent of GDP, growing to $1.2 trillion in 2026.

Dr Srinivasan said further fiscal support to help the needy facing high fuel and food costs “must be budget-neutral in most cases, funded by raising new revenues or reorienting budgets to avoid adding debt or working against monetary policy”.

Economists expect the Reserve Bank to raise its cash rate target on Tuesday from 1.35 per cent to 1.85 per cent to cool demand and normalise monetary policy, as Treasury estimated inflation to hit 7.75 per cent this year.

In the Sir Leslie Melville lecture at the ANU on Wednesday night, Dr Kennedy defended the Morrison government’s $314bn economic response to Covid-19, arguing “it needed to be sufficient to quell uncertainty and avoid a damaging downward spiral”.

“Given the choices faced by policymakers in March 2020, my view is that the scale of the initial fiscal support provided was warranted at the time to deliver stability and has delivered better returns than we expected,” he said

As well, Dr Kennedy launched a spirited defence of crisis management by the “official family” of economic policy advisers.

The Treasury secretary said there was no local precedent for the $89bn JobKeeper program, which critics claimed was wasteful and poorly designed. Dr Kennedy said the wage subsidy would not have suited the GFC or 1990s recession, as it would have stymied vital structural adjustment.

He said the big question now for policymakers was in deciding the correct role for “counter­cyclical” budget policy.

If the price of money remains structurally low, as it was pre-­pandemic, “it’s more likely fiscal policy will need to respond to ­future crises or sharp downturns”.

“At the same time, elevated debt levels across most of the developed world have brought fiscal sustainability back into focus.

“Outside of a crisis, fiscal policy often has long lags as it takes time for measures to be approved through parliamentary processes.

“Monetary policy is likely to remain better placed for demand management, as has been the case for many years.”

Ai Group Innes Willox said: “There is little doubt Australia needs to reduce our budget deficits and put public finances on a more sustainable footing. With unemployment low and workforce participation strong, getting started on this medium to longer-term objective in the budget makes sense and would take some of the weight from the Reserve Bank’s shoulders in addressing current inflation pressures.”