Government to investigate potential financial crisis

Government to probe potential financial collapse as the economy sinks into recession and unemployment rates rise in key states.

The Reserve Bank will consider a recommendation from the Bank of Australia to hold interest rates at record lows for another two years in the wake of a sharp drop in growth.

Treasurer Scott Morrison has previously indicated he wants the central bank to hold rates near zero to stabilise the economy.

In a letter to Reserve Bank governor Glenn Stevens, Mr Morrison said the Bank would be looking at potential financial crises and other macroeconomic risks.

“I am not sure that the current economic situation is conducive to the creation of such a crisis,” Mr Morrison wrote.

He said the Reserve Bank would look at “a range of potential risks to the health of the Australian economy”, including “a prolonged and sustained decline in gross domestic product (GDP) that is not accompanied by growth, employment, inflation, unemployment and household debt”.

“We will also be considering a range of options for mitigating the risks to economic activity and the quality of financial stability.”

Mr Morrison said he was also considering a move to reduce capital gains tax.

If that were to occur, capital gains would be taxed at half their value, but would not be taxed when it was sold, making them tax-free for Australians earning $150,000 or more.

Mr Morrison also said the central banks interest rate policy could be changed to reduce the potential for a crisis.

‘I can’t believe the level of stress that’s on the economy’: Treasurer Scott Morrison “If there’s a need for us to change the policy, we will,” he said.

Meanwhile, the Federal Government is facing criticism from some economists that it is not prepared to take on more risks.

Federal Treasurer Scott Morahan has been urged to act more quickly to address the crisis, with some economists suggesting the Government needs to do more to contain the shockwaves caused by the economic downturn.

On Monday, Treasury modelling found that if the Reserve did not raise interest rates in June, the economy would collapse by about one percentage point by 2021.

But the modelling was based on a scenario in which the Reserve raised rates immediately but did not announce them until November.

Economist at the Commonwealth Bank of New South Wales Andrew Wilson said he did not expect the Federal Budget would make much difference.

“[The Reserve] will have to be more aggressive, more patient, more thoughtful in the way they manage the risks and I think that would be helpful,” he told the ABC.

His concern was that the Federal Treasurer might “go too far in his monetary easing and he’s going to blow up the economy”.

“I think that will be a big problem.”

I don’t think it’s going do much to help the economy but I think the fact the Federal Treasury’s doing it makes the difference.”‘

No way’ for the Federal government to cut back on debt: Greens finance spokesman Scott Ludlam The Federal Government’s debt to GDP ratio was a record high of 4.9 per cent in December, up from a record low of 4 per cent.

Its net debt is now more than double that of the previous record high, at more than $6.3 trillion.

It has also raised $2.2 trillion from the Reserve’s asset purchase program, but this has been used mostly to finance debt servicing.

There is also debate about whether the Reserve can continue to inject liquidity into the economy through its bond purchases.

As a result, the Government is in the position of having to continue to spend money to fund its budget.

Topics:economy-and-finance,financial-and_informatics-and/or-federal-government,business-economics-exceptional-credit,financial,government-and‑politics,economy,federal—state-issues,government,economics,government—public-sector,industry,australia,melbourne-3000,sydney-2000More stories from Victoria

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