Shadow Treasurer Chris Bowen is urging for “bigger budget surpluses to provide a buffer for uncertain international times”. Picture: AAP

Build bigger budgets before downturn or suffer, Labor warns

December 10, 2018

Australia needs bigger budget surpluses to prepare for an economic downturn, Labor treasury spokesman Chris Bowen has warned, after the OECD singled out a collapsing housing market was the biggest threat to the Australian economy.

“We need to prepare. We need to build the buffers now,” Mr Bowen said.

“Labor’s made the case repeatedly that we need bigger budget surpluses to provide a buffer for uncertain international times,” he said.

 “A few weeks ago I pointed to the downside risk in the international economy and some of the vulnerabilities that Australia faces. I made the point that without being alarmist or negative,” he said, warning that benign economic conditions in the global economy “won’t last indefinitely”.

The OECD, the organisation of development economies, in a report released overnight said Australia’s 27-year run of economic growth was likely to continue, but that the Reserve Bank should start raising rates as soon as possible to brace against economic shocks.

The Paris-based institution says the long period of very low interest rates is leading to distortions in the economy and there is a “risk of imbalances accumulating further if the low interest-rate environment persists”.

Josh Frydenberg said the OECD recognised the strength of the Australian economy by describing it “in upswing, with growth above potential”.

“The Government’s strong and disciplined budget management, which has seen the deficit drop to its lowest level in a decade, is acknowledged by the OECD,” the Treasurer said.

The OECD consulted with Treasury and the Reserve Bank while compiling its review and it says they believe they are “well equipped to handle shocks”. However, the OECD believes more needs to be done.

House price falls are also appearing to frighten consumers into shutting their wallets ahead of the key Christmas trading period. Official data last week showed the Australian economy grew at its slowest pace in two years, sharply slower than expectations, following a large dip in mining investment that wasn’t offset by an expansion in non-mining industries, and amid weakness in the retail sector as stretched households reach their spending limit.

Although national house prices have already sunk about 6 per cent from last year’s peak, with steeper falls in Sydney and Melbourne, Mr Frydenberg said Labor’s housing policies, such as grandfathering negative gearing and cutting capital gains tax discounts, would damage the housing market.

“They will damage Australia’s housing market and destroy the equity that people hold in their homes, increasing the risk of financial instability and lower economic growth,” Mr Frydenberg said.

It comes after Treasury Secretary Phil Gaetjens late last month urged Australia to get its fiscal house in order, as it was before the global financial crisis, to head off any future serious financial downturn. Speaking in Beijing on the 10th anniversary of the GFC, Mr Gaetjens said the country needed to ensure it developed “exit strategies” to ensure the resilience of the economy in the aftermath of such events.