With little room left on the monetary policy front, there is a growing case for the Australian government to consider proactive fiscal easing to offset the negative demand shock arising from the coronavirus outbreak and bushfires, according to ANZ.
Key quotes
Coming on top of the bushfires, the coronavirus adds to the downside risk to the budget. The combination is likely to damage revenue and lift expenditure more than was expected at the end of last year.
The appropriate fiscal policy response to this kind of short-term demand shock is to allow the so-called ‘automatic stabilizers’ to work. That is, to accept the deterioration in the fiscal position rather than try to offset it.
While this will mean pressure on the fiscal position, it will diminish the risk of these shocks having a greater impact on the economy.
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