Public spending adds to economic activity, Reserve Bank governor Michele Bullock has said during a tense exchange in a parliamentary hearing.
A guarded Bullock, seeking not to be pulled into the current political debate over whether federal government spending contributed to this week’s decision by the bank to lift official interest rates, tried to play a dead bat to a series of questions from Liberal MPs.
Bullock said aggregate demand in the economy had been stronger than expected, contributing to the lift in the cash rate.
Pressed by Sydney MP Simon Kennedy that government spending was part of aggregate demand, Bullock conceded it was.
“That’s logical. It’s mathematical. That’s what happens,” she said.
Later, under questions from independent Allegra Spender, the governor said both public and private activity was pivotal to aggregate economic demand.
“Mathematically, if government spending declines, public demand doesn’t grow as quickly, and then that will bring down aggregate demand unless the private sector picks up the slack,” she said.
Bullock also noted that the bank had believed supply and demand across the economy were closely aligned.
“We thought we’d closed the gap [between aggregate supply and aggregate demand] but we hadn’t. So you need slower growth and aggregate demand, and both public and private can contribute to that,” she said.
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