Government fiscal policies not undermining rate cuts: Treasury's Martin Parkinson

Treasury secretary Martin Parkinson has rejected criticisms that the government’s spending cuts and taxation policies announced in the budget (and aimed at generating a surplus) are undermining the efforts of the RBA to stimulate spending and borrowing following the 0.5% rate cut announced on May 1.

Speaking to economists in Sydney today, Parkinson said the current directions of monetary and fiscal policy were not at cross purposes but simply reflected “a return to their normal roles following an extreme event.”

“The primary objective of fiscal policy, outside of extreme events like the GFC, is to maintain the budget in a sustainable position from a medium-term perspective, while monetary policy should play the primary role in managing demand to keep the economy stable,’’ Parkinson said.

“In an economy with unemployment forecast to be not far from reasonable estimates of its lowest sustainable rate, and commodity prices remaining near historical highs, it is appropriate that the budget return to surplus to remain consistent with the medium-term fiscal objective."

Last week, economists said returning the budget to surplus could dampen domestic growth.

Credit Suisse strategists Damien Boey and Atul Lele suggested fiscal and monetary policy were working against one another.

“In principle, the budget could bring the economy to the brink of recession, but for the timely intervention of the RBA,’’ they said.

Releasing the federal budget last week, Wayne Swan said returning the budget to surplus would ensure the Reserve Bank “continues to have the flexibility for further interest rate cuts if it thinks that's necessary”.