The Governor of the RBA gave a speech on Tuesday where he basically pleaded with the government for some help.
“… we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.”
Philip Lowe also pointed out that the benefits of the easing of monetary policy are not evenly distributed across the community. It’s great for investors wanting to expand their share or property portfolio but the majority of people are not in the position to take advantage of lower interest rates to take on more debt.
And we are not seeing a rise in business investment, in part due to policy uncertainty but also due to a lack of demand. There is no point expanding if you don’t have customers.
Whilst the government might be proud of their record on employment, that optimism is not shared by the RBA who say there is too much spare capacity in the economy and that it is both “possible and desirable” to reduce unemployment and underemployment.
They are hoping that an increase in the tax offset for low and middle income earners will increase disposable household income but it is much more likely to be eaten up by bills and, unlike franking credits, it is not refundable so those on the lowest incomes will see no benefit at all.
One obvious strategy would be to invest quickly in building infrastructure as the Labor party did during the GFC.
“This spending adds to demand in the economy and – provided the right projects are selected – it also adds to the country’s productive capacity. It is appropriate to be thinking about further investments in this area, especially with interest rates at a record low, the economy having spare capacity and some of our existing infrastructure struggling to cope with ongoing population growth.”
Unfortunately, the government has preferred a piecemeal porkbarrelling approach to infrastructure rather than allowing the experts to determine priorities based on need and value.
The commitment to delivering surplus budgets is madness at a time when the economy is lagging and interest are so low.
As the Governor pointed out…
“the Australian Government can borrow for 10 years at around 1.3 per cent, the lowest rate it has faced since Federation in 1901. It is also able to borrow for 30 years at an interest rate of less than 2 per cent.”
It is inconceivable that they would choose now to pay down debt when they could borrow money at such low rates and really kick start the economy through government spending on productivity enhancing investments.
It’s not only the surplus fetish that is a problem as former head of the RBA, Bernie Fraser, points out. The government’s self-imposed cap on tax-to-GDP would also act as a restraint on the economy.
“What this dopey cap does is that it acts as a cap, not just on tax but also on expenditure, so if you have to do something you’ve created a problem for yourself,” he said.
With borrowing costs so low, an exchange rate at the bottom end of its range in recent times, surging iron ore prices boosting our terms of trade, and a nominally low level of unemployment, things should be going a lot better than they are.
But the reality is that social security payments are too low and many people are living in poverty, wages have stagnated, underemployment is rising and job security is falling.
Yet all this government can talk about is tax cuts for the wealthy and delivering a surplus.
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