Has the Fiscal Stimulus Reached Its Limits?

Has the Fiscal Stimulus Reached Its Limits?

Iain Dale 8:06 PM

ABC in Australia has an interesting report about the views of former Australian premier Paul Keating about the current economic crisis. His career mirrored that of Gordon Brown in that he played second fiddle to Bob Hawke as Chancellor (or Treasurer as they call it in Australia) for many years (1983-91) and then edged Hawke out so he could take over the top job himself. He was PM from 1991-96, when John Howard beat him in a general election.

Former prime minister and treasurer Paul Keating says fiscal stimulus is reaching its limits and even advanced nations are at risk of debt default if they continue to amass huge budget deficits and borrowings to rescue their economies.

"There is a limit to what fiscal policy can do simply because there is a limit to fiscal policy," Mr Keating told a Lowy Institute gathering in Sydney on Thursday. "Is this sustainable? Who is going to buy the bonds?" He cited in particular the huge bill the United States was running up in an effort to counter the recession and to bail out its banking system and strategic companies such as the insurer AIG.

"Is America going to default on its debt or be able to issue bonds?" he asked. Governments across the globe will seek to borrow between $US3 trillion and $US4 trillion on bond markets in the coming year to fund stimulus packages and rescue packages for ailing banks and other financial institutions.