Analysis
Posted
So soon into office and so much pressure, not simply for a complete policy reversal, but a philosophical overhaul.
For months now, and with increasing urgency, Reserve Bank governor Philip Lowe has used almost every single public outing to deliver an increasingly urgent message to the Federal Government.
His message is simple. Interest rate cuts alone won't be enough to shore up the economy as global growth slows and our economy sputters.
With global interest rates at their lowest level in recorded history, the RBA boss has called on governments state and federal to borrow and spend, to have fiscal policy working in unison with monetary policy.
Politically, that creates a huge problem. It involves deliberately running a budget deficit and adding to debt, just as the Rudd government did during the global financial crisis.
For decades, we've been indoctrinated into believing that deficits are evil; so much so that in the most recent campaign, even the ALP was boasting that it would out-surplus the Government.
Endless surpluses, however, can be every bit as destructive as ongoing deficits as investment is withheld from vital community projects.
Busting out the cash now may just cushion a flagging Australian economy from a damaging global slowdown. It clearly is a sensible option right now, otherwise you wouldn't have the RBA governor so stridently pushing it.
But there are two major hurdles for the Government.
First, it would be an admission that the economy was not strong when the Federal Budget was handed down in April in what was an unofficial campaign launch. And second, it would fly in the face of decades of Coalition ethos calling for small government.
Why is the RBA pushing so hard?
If the past decade has taught us anything, it's that there are serious limitations to ultra-low interest rates.The big gripe about the global economy right now is that inflation is chronically weak and wages growth, despite all the predictions and forecasts, has failed to materialise.
But inflation isn't dead. It's just not firing up in the places we expected.
While consumer goods and services prices are languishing, it's a different story for assets. Real estate and financial assets have soared in recent years, widening the wealth gap between generations and between those who own a house and those who don't.
Why? Because when central banks flooded the world with cash, to help bring down the price (interest rates) we were told businesses would borrow, invest the money in new plant and equipment, and hire more workers as profits grew.
Except, it didn't happen. Human behaviour didn't quite match the theory.
Businesses, especially in the US, borrowed big time. But they doled the cash out to shareholders as dividends and buybacks. Investors, desperate for returns in a zero-interest rate world, dived into shares that paid big yields. And so stock markets went wild.
Property prices went crazy too across the developed world and in some emerging economies. Here at home, runaway housing prices pushed household debt to world record levels of 199 per cent of income. Wages growth, meanwhile, sank to the lowest levels on record.
We've maintained those world record debt levels even though borrowings have fallen sharply, primarily because our wages growth has been so low.
We still lead the world in household debt
Can we avoid another house price boom?
After two years of consistent property market declines on the east coast and three years on the west coast, which have taken a lot of hot air out of the bubble, the last thing the Reserve Bank wants is to fire up another debt-fuelled property binge.Instead, it wants the rate cuts to spur wages growth; to tip the balance towards income and away from debt. It wants businesses to expand, to hire more workers and drive wages higher.
That can only be achieved if the banking regulator — the Australian Prudential Regulatory Authority — insists on maintaining tighter lending standards on the housing market, to ensure we don't get a repeat of the property boom.
Unfortunately, the pressure already is on the RBA and APRA to loosen restrictions, to get housing prices on the march again.
On Friday, APRA loosened its mortgage stress test standards. Until now, a bank lending you cash for a 25-year mortgage calculated whether you could maintain repayments if rates rose to above 7 per cent.
It's rationalised the cut in standards by arguing that, with lower official interest rates, that kind of buffer is no longer appropriate. But that's an argument largely put forth by the banks.
From now on, loans will be stress-tested at just 2.5 per cent above that of the loan.
Earlier in the week, Assistant Treasurer and Housing Minister Michael Sukkar told the Australian Financial Review that bankers had become "too conservative" in the wake of the Banking Royal Commission and that he wanted to get credit flowing to home borrowers.
The case for infrastructure
The tax cuts that passed through the Senate last week should give the economy a jolt, particularly the first round cuts that target lower and middle income groups which tend to spend the extra cash, thus boosting consumption.But the second and particularly the third round cuts don't kick in for years and rely upon a series of bullish forecasts about spending and economic growth to work.
While tax cuts can deliver a boost to consumption and lead to stronger growth, they fail to address the fundamental problem facing Australia.
For years, our economy has been based upon population growth rather than improved productivity. Our major cities have become choked and so improved infrastructure desperately is required.
These projects, if run successfully, boost employment and can lift productivity. Unlike tax cuts, which last forever and tend to lock in revenue shortfalls during tough times, infrastructure projects have a finite life and can be wound back during booms.
But they can be problematic, and expensive, as the NBN rollout has shown.
Without independent oversight and costing analysis, they can easily become political footballs with electioneering as their main objective.
One of the worst examples was the East West Link debacle in Melbourne. Legally binding contracts were signed shortly before the 2014 state election. It was controversially dumped shortly after the poll with $1.1 billion of taxpayer cash paid out in compensation.
Former Coalition leader and now Crawford School professor John Hewson, however, argues that, with proper oversight and, given the sad state of our cities, we are in a unique position to capitalise on our AAA credit rating and ultra-cheap loans.
It would, however, require some bold initiatives such as the creation of a strongly independent and transparent Infrastructure Fund that could provide equity to state governments and private interests on major projects.
Perhaps that's a bridge, or highway, too far.
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