Reserve Bank governor Glenn Stevens has all but told the country’s politicians and businesses groups to stop bickering about flood levies, taxes and other minor issues and start focusing on how the economy can ride out the resources boom without too much long-term damage.
And he has also indirectly rebuked those who argue that the country and government shouldn’t be so fixated on cutting debt and returning to surpluses.
In remarks to a Melbourne conference on the resources boom today, Stevens said that a “few simple messages seem to me to be important” about how we should handle the uncertainty that the resources boom is causing in Australia.
He said we shouldn’t assume that the surging terms of trade and national income “is a good estimate of the likely sustainable pace”.
He said he was arguing for the country saving more and pointed out that governments had reiterated their “commitments to stated medium term fiscal goals” which were to cut borrowings, debt and return budgets to surpluses.
In fact, reading these remarks, there are oblique replies to a whole group of comments on these issues, such as those who say we should borrow to pay for the flood repairs (made by a certain RBA board member, as well as countless politicians and business people).
Stevens says he would be trying to save as much as the resource boom boost to national income as possible, especially now.
“We should allow a good deal of the income growth to flow into saving in the near term. We can always consume some of that income later if income stays high, but it is harder to cut back absorption that rises in anticipation of income gains that do not materialise.
“To date, that precautionary approach seems to be in place. Households are saving more than for some years and the much-discussed ‘consumer caution’ has been in evidence. Firms are consolidating balance sheets. Governments have reiterated commitments to stated medium-term fiscal goals,” he said.
What many borrow and spend (and damn the surplus) advocates do not understand about the flood levy is the message it send to voters generally (to keep saving and not resume consuming) and the impact it has on expectations, for future consumption and inflation. These same “damn the surplus” advocates are also the same people who suddenly start fretting about inflation (and were vocal in claiming that Australia was heading for a debt crunch like the US and much of Europe did in the GFC). No such crunch happened.
Stevens also warned that the the surge in national income will cause established industries outside resources a lot of pain the longer it continues.
“There is going to be a non-trivial degree of structural change in the economy as a result of the large change in relative prices. This is already occurring, but if relative prices stay anywhere near their current configuration surely there will be a good deal more such change in the future.
“We should not look to prevent change; we should look to make it cost as little as possible. In general, that means preserving flexibility and supporting adaptation.
“Third, productivity is going to come back into focus, especially in sectors that are exposed to the rise in the exchange rate. Their prices will be squeezed, and their costs potentially pushed up by the demand of the resources sector and related industries for labour.
“Surely maintaining viability will involve achieving significantly bigger improvements to productivity than we have observed in recent years.
“Fourth, if we have to face structural adjustment, it is infinitely preferable to be doing it during a period in which overall income is rising strongly. If nothing else, in such an environment the gainers can compensate the losers more easily. Many other countries face major issues of economic adjustment in an environment of overall weakness.”
Stevens said that “at the risk of sounding like a broken record, the rise in Australia’s terms of trade over the past five years is the biggest such event in a very long time.
“It presents opportunities and challenges. With a large boost to income, we need to think about the balance between saving and spending, because we do not know the permanent level of the terms of trade.
“I argue for erring on the side of saving for the time being, and I think this is by and large what is happening so far.”