While politicians in Canberra yesterday indulged in some silly theatrics to mark the opening of parliament — people in funny costumes, a speech by the representative of a northern hemisphere monarch, popguns on the front lawn, a church service — the Reserve Bank continued to play the adult in the room, deciding a second interest rate cut to 1% was needed to make inroads on spare capacity in the economy.
When the politicians finally did get around to anything of substance in Canberra, it was about the sole item on the government’s agenda, tax cuts, which in the immediate future will provide some modest stimulus to the economy but are otherwise irrelevant (though the press gallery, which is obsessed with reporting every trivial detail of Labor’s position on the tax cuts, thinks otherwise).
Much more than some limited tax cuts are needed. As RBA governor Philip Lowe pointed out in a speech last night, thanks to the lowest bond yields in history, the government can afford to borrow heavily to finance a range of spending plans, starting with infrastructure:
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 … borrowing costs for almost all borrowers are now the lowest they have ever been. As an illustration, 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.
So far, however, complete silence from the government beyond a request from Josh Frydenberg to Coalition MPs to “speak with confidence about our economy”. And complete silence on the other option identified repeatedly by Lowe for stimulating the economy: “structural policies that support firms expanding, investing, innovating and employing people. A strong, dynamic, competitive business sector generates jobs.”
This is the other challenge facing the economy: we’re deep in a productivity and innovation hole, as the Productivity Commission pointed out recently. That is, not merely is the economy growing sluggishly despite massive monetary policy stimulus, but its capacity to grow has been eroded by years of policy drift in Canberra.
That’s despite Malcolm Turnbull’s brief flurry of interest in innovation — abandoned because it scared Queensland farmers, apparently — and despite Scott Morrison specifically asking the Productivity Commission to provide a shopping list of suggestions for lifting productivity, which it happily did. Morrison ignored that list entirely in favour of industrial relations and deregulation pabulum in his recent venture into economic reform territory.
This is classic boiling frog stuff: we’ve become used to lower productivity, less innovation, lower wages growth, lower household income growth, disinflation and lower interest rates over the last six years — they’re our new normal and likely to remain so for the next three years. Without the “good fortune” of a colossal Brazilian mining tragedy pushing up iron ore prices, things would be substantially worse.
And even if the government moves to pursue both infrastructure spending and structural reform, it will take many quarters to have an impact on the economy. The tax cuts will provide some support to household disposable income in the December half, but what happens in the June half next year? And a further boost to infrastructure spending — and Malcolm Turnbull lifted infrastructure spending substantially, especially in cities — will take six to eight quarters to affect employment and incomes, especially if the government makes the effort to pick the best projects.
The RBA used to talk about the need for a “pipeline” of infrastructure projects that could keep providing consistent stimulus for the construction sector, but we’re still stuck with lumpy investments at the state and federal level that leave the timing of stimulus to chance.
The government at least has the buffer of continuing low unemployment and persistent jobs growth. It should be using that and thinking hard about ending years of policy drift and political opportunism and restore the economy’s growth capacity.
Borrow, really, borrow? But, what would happen to the purple unicorn of happiness called ‘Surplus’? Would she/he/it be sacrificed just to make the economy move forward and deprive its erstwhile handlers the opportunity of standing in the circus tent and proclaiming ‘Look, behold, the purple unicorn named ‘Surplus’! Gosh, I’m not sure that thought will fly, unlike the purple unicorn of happiness called ‘Surplus’.
How Good is that Surplus!
Probably non existent.
You mean the unicorns ate it?
There are two things for the government to deal with but will do neither because it is so ideologically driven that it thinks that all you have to do is have as much money as possible in private hands and all will be well.
First, they need to deal with a looming recession with a massive social housing program, negotiated with as many states as possible, which will bring spare capacity in building construction back into use, and provide lower rent public housing for people who have to spend too much of their income on rent. This should increase household spending of lover income households in the near term.
The second thing is that they should borrow to improve city infrastructure so as to reduce the cost of excessive travel time and queuing in our cities and to encourage advanced infrastructure in power generation and new technology. This will deal with productivity issues and longer term growth.
Will they do anything? Not at all. These improvements are contrary to putting money in private hands, which in many cases will do nothing of what is needed.
Agree that spending on social housing is a top priority – no one should be homeless is this wealthy country. But consider building these homes in regional areas -land is cheaper, locals would welcome a stimulus to their economy, and increased population in regions would be good for local business. With the current employment situation we need to acknowledge that many of these people are not going to get jobs ( because of age, disability or lack of skills among other reasons) so there is no need for them to live in our large cities. This would also make governments seriously consider decent transport from regions to cities – stimulus again from infrastructure. It seems to me that the possibilities are endless, and would improve standard of living (or existing) for many of the least well-off.
And they do not even need to worry about the cost of borrowing since the Australian Government only borrows in Australian dollars and thus it is currency that only it can provide. They only have to not bother with the ‘middle man ‘ – Bond sales – and just ‘borrow’ from itself.
So true, yet there is no way that this or any other conservative government, would let this cat out of the bag.
Fancy giving up debt and deficit fear campaigns, austerity measures designed to transfer wealth from public hands to private and infrastructure projects given to mates rather than proven government departments.
The opening of the Parliament has descended into superficial farce – as you might expect from a PM whose only background is as a flim flam merchant (i.e, someone from marketing). Again, as you might expect from a man as vacuous as Morrison, the opening ceremony showed the same chgaracteristics of an Olympic opening ceremony – a great deal of pretense and lots of talk about unification and reconciliation, but the precursor to nothing of substance – the aim was grandiosity.
This is an LNP that threw out the indigenous request for a voice in the parliament – ostensibly because they sought too much. The LNP, as usual, talks the talk, but won’t deliver genuine outcomes. Labor’s hands aren’t clean either – they have Pat Dodson in their ranks, but could not find a place for him on the front bench.
It is thus with the economy. The RBA’s latest interest rate cut is, by any measure, a stinging slap in the face to the inept economic management of the LNP who have no plan to restore economic health. Instead they have a plan designed to win votes and wedge Labor – and it is their only plan, which is to say tax cuts for many, but in large part those cuts go to those who don’t need them.
The willingness of the Liberal Party to play politics with the economy can never be over-estimated.
In any policy area, their first and foremost consideration seems to be how they can wedge Labor. Second is how they can give more to the rich and not much else seems to matter.
“structural policies that support firms expanding, investing, innovating and employing people. A strong, dynamic, competitive business sector generates jobs.”
This only is successful if there is a community with enough disposable income to buy their products/services.
I would also query the ‘low unemployment’ with unemployment at 5.3% and underemployment an additional 8%.
What about the ‘jobs growth’? You only have to work an hour a week to be an employed statistic and 3% are in the ‘limited hours’ category.
So what if there has been an increase in full time jobs? Not much chop if those in the private /non government service delivery areas are paid lower wages and the majority are paid for as public servants. (No complaint about the government paying but that is not the private sector creating jobs)
On the bright side, tax cuts will take the need off the government’s business buddy patron donors having to dig into those healthy growing profits to pay wage rises (to workers anyway – bosses, that’s necessary).
Who cares what happens when the economy turns to l’Murd and services have to be cut because of reduced revenue – we can eat cake.
As for “jobs growth”? Doesn’t that get a spurt on when you move the goal posts and lower the bar?
“Viva Jobson Poverty!”?