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Treasury boss Steven Kennedy sees no reason for the Morrison government to provide additional support for the Australian economy.
But neither does he want support measures put in place during the pandemic removed too quickly for fear of having a negative impact on the economy.
He told senators that while the disruptions caused by the Omicron variant have been significant, the overall economic impact is likely to be less than feared.
He told a Senate economics committee on Wednesday that while a challenging health outlook had persisted, the economy had proved more resilient.
“This likely reflects both policies being more effective than expected and a more rapid adjustment by the community to the tribulations of COVID,” Dr Kennedy said in his opening statement to the hearing.
He said the fiscal response was receding, reflecting the temporary and targeted nature of policies, while monetary policy was beginning to normalise with no additional unconventional programs.
“Interest rates are still close to zero and are expected to remain historically low for some time,” Dr Kennedy, a member of the Reserve Bank of Australia board, said.
Fiscal support needs to taper off to ensure monetary policy has an opportunity to normalise, Dr Kennedy added.
“If we were to withdraw fiscal policy abruptly through very large widespread cuts that would have a negative impact on the economy, monetary policy may need to remain loose for longer than it otherwise would,” he said.
He said this would keep interest rates historically low, and would risk, for example, even higher house prices
He said fiscal policy already tapers over the four years of the budget forward estimates.
“I think that gives a real opportunity for monetary policy to normalise and the economy to remain strong,” he said.
Treasurer Josh Frydenberg will hand down his pre-election budget on March 29.
Treasury’s current assessment was the negative impact on aggregate spending had been relatively muted, particularly when compared with previous COVID-19 lockdowns.
“We do not expect the Omicron wave to have a large negative impact on employment,” Dr Kennedy said.
“It is more likely to have a relatively large impact in the number of hours worked across the economy rather than employment.”
The unemployment rate fell to a 13-year low of 4.2 per cent in December.
Treasury expects the jobless rate will have a “three” in front this year, “or at the very least settling in the low fours.
Meanwhile, there are further signs the economic recovery is gaining ground.
The Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity over the next three to nine months, is again pointing towards the economy growing at trend, seen at above 2.8 per cent.
The index rose from minus 0.1 per cent in December to plus 0.4 per cent in January.
Westpac chief economist Bill Evans said this is the first positive results since the Delta lockdowns in August last year.
“With the growth rate now in positive territory the index is signalling that the growth outlook has improved with above trend growth over the next three to nine months likely,” Mr Evans said.
Westpac expects a contraction in spending in January due to the Omicron variant will see zero growth in the March quarter national accounts.
“(However,) the economy is likely to bounce back strongly over the remainder of 2022 registering a solid 5.5 per cent growth rate for the year overall,” Mr Evans said.
Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)