Australia's Fiscal Space: The Role of Public Investment

Abstract

How large is Australia's fiscal space? Blanchard (2019) shows that as long as the real interest rate (Formula presented.) is below the real growth rate (Formula presented.), a government can sustain a positive primary deficit with a constant (or even declining) ratio of public debt to GDP. In this article, we explain the neutral real interest rate and the reasons for its decline. Then, we discuss the results of a companion paper, Domínguez and Quiggin (2022), in which we quantify the fiscal space for Australia and find that a permanent increase in the primary deficit can be afforded up to reaching a debt to GDP ratio of 79 per cent. Furthermore, this so-called ‘free lunch’ in the fiscal space can be expanded if debt is used to finance public investment.