NO.087

STATE DEBT: RBA CONCERNS

The Governor of the Reserve Bank of Australia, Ian Macfarlane, expressed concerns to The Australian newspaper on the weekend about state deficits and borrowings.

He said:

“I have been lucky – for most of my time, fiscal policy has consisted of small surpluses. So the movement in the government account has not been big enough to be important in the consideration of monetary policy. It might become an issue because the states are now part of the equation.”

(Ian Macfarlane, Reserve Bank Governor, The Australian, 12-13 August 2006, p.33)

State fiscal balances and cash balances are forecast to move into deficit from 2006-07.

Collectively, the states and territories (the states) are forecasting fiscal deficits of almost $5 billion in 2006-07, compared to a surplus of $1.2 billion in 2005-06 and a $4 billion surplus in 2004-05.

In addition, the states are budgeting for a significant increase in borrowings. State government net debt is forecast to rise by around $43 billion between 2005-06 and 2009-10.

This contrasts with the Australian Government, which has reduced Labor’s $96 billion net debt to zero. This puts downward pressure on market interest rates.

State borrowing puts upward pressure on interest rates.

The example of State Labor should serve as a warning about what Federal Labor would be like in government.

CANBERRA

14 August 2006

Contact: Renae Stoikos

03 9650 0244