So if we do suffer a sharp correction from international or trade-related factors that punctures our rebounding economic boom, can we do anything about it? Can the Government have a stimulus Mark 2?
We already know what the Reserve Bank will do if there’s a sharp fall in confidence, export income and demand globally, as there was in late 2008; it will cut rates as quickly and as deeply as possible to provide a monetary policy buffer to cushion any hard landing.
Then it would be up to fiscal policy to counter falling Government revenues, under pressure from weakening tax revenues as unemployment starts rising and corporate profits fall, as we saw in 2008-09 and 2009-10.
To counter that, can the federal government again lift spending (even if it increases debt and the size of the deficit)?
After the phony campaign on debt and the deficit in the recent election campaign, a government from either side of the political fence might hesitate, but as we have seen this week with the June quarter growth figures, the last lot of spending worked and saved hundreds of thousands of jobs.
But a study from the International Monetary Fund has good news for Australia and a handful of other well-resourced, low-debt countries, and also for high debt nations like the UK, Greece and the US.
The study is contained in a set of policy papers focusing on the fiscal condition of major developed economies. One looks at so-called Fiscal space, another looks at why the risk of default has been overestimated by worried investors and commentators at the moment (See below).
Firstly the IMF survey says that Australia has the room to lift spending to cushion another shock.
"Australia, Denmark, Korea, New Zealand, and Norway generally have the most fiscal space to deal with unexpected shocks—although of course they, too, must be mindful of future fiscal pressures," a key finding in the staff study notes.
The phrase "fiscal space" is taken to mean "financing the deficit without either a sharp increase in funding costs or undue crowding out of private investment" or "the difference between the current level of public debt and the debt limit implied by the country’s historical record of fiscal adjustment."
"The probability that Greece, Italy, Japan, and Portugal have additional fiscal space is low."
In other words, these countries are running out of time (and fiscal capacity) to go on spending without cutting outlays and starting austerity programs.
"Next are Iceland, Ireland and Spain, where the probability that these countries have at least some additional fiscal space is about 50–70 percent (rising to more than 80 percent for Spain using the model-implied interest rate).
"For the United States and the United Kingdom, the probability of any remaining fiscal space is about 70–80 percent.
"Australia, Denmark, Israel, Korea, New Zealand and Norway have the highest probabilities of some additional fiscal space—although the point estimate of that space is substantially lower for Israel than for the other countries in this group," the study finds.
That means that despite the misgivings and political jousting over debt and the deficit in this country, our finances are still solid enough to enable more to be spent on meeting any new dip in global growth, should it be needed.
There would have to be some careful considerations made; for example a fall in US domestic demand with consumer spending slumping, would not necessarily see more spending here (a rate cut or two perhaps), until we saw if it impacted on demand for Chinese goods, or Japanese cars.
Then a stimulus program might be introduced, with the IMF funding that it can be without doing too much damage to future deficit and debt levels,
For those highly indebted, such as Spain, Greece, the UK and US, countries facing current account, spending or debt burdens of increasing severity, default is not the outcome that a lot of commentators (and people in the markets) seem to assume these days, another IMF study finds.
"In our view, the risk of debt restructuring is currently significantly overestimated," a staff paper noted.
So those investors worried about possible defaults by the likes of Spain or Italy or Greece or Ireland have overestimated the risk of default.
The Fund says that repairing public finances is a daunting task that will pressure global economic growth, but countries have successfully adjusted before and they can do it again.
"Although the fiscal fundamentals look challenging, current market indicators of default risk seem to reflect some market overreaction," the IMF said.
"Although it is generally wise to assume that market developments reflect economic fundamentals, market overreaction does occur from time to time, with adverse implications for countries’ borrowing costs and debt dynamics.
"For example, considering data on sovereign bond spreads over the past decades, markets sounded false alarms in the vast majority of episodes."
In other words, the market got it wrong in more cases that it got it right.
Over the past three decades, there were 14 instances in which advanced economies managed deficit reductions
