Central bankers are a notoriously circumspect crowd, and Reserve Bank governor Glenn Stevens is no exception. Occasionally, however, he is a little less circumspect than usual, and his speech in New York early this morning falls into that category.

One of the key issues Stevens addressed in his speech was the respective roles of monetary and fiscal policy in restoring Australian growth, and he delivered a loud, clear message to the politicians about the forthcoming federal budget. Looking back, it’s rather a pity Stevens wasn’t equally loud and clear before the 2014 budget.

Ahead of last year’s budget, and indeed for much of 2013, when economic growth pulled back significantly, Stevens and the Reserve Bank repeatedly pointed out that public spending in Australia was flat and likely to have a moderating impact on economic growth. And while Joe Hockey’s first budget avoided big immediate spending cuts because of their likely affect on growth, the government’s fiscal disciplinarian rhetoric and the mishandling of the politics of the budget had a big impact on consumer and business confidence.

With three weeks to go before Hockey delivers his second speech, Stevens has adopted a far more direct approach this year.

“[T]he balance that the Reserve Bank Board has struck has seen the policy rate held at what would once have been seen as extraordinarily low levels for quite a while now. The Board has, moreover, clearly signalled a willingness to lower it even further, should that be helpful in securing sustainable economic growth … Any help in boosting sustainable growth from other policies would, of course, be welcome. In particular, things that could credibly be seen as lifting prospects for future income, and increasing confidence in those prospects, would give easy monetary policy a good deal more traction.”

Stevens went on to say “[i]n fact, that point generalises to the rest of the world. Across much of the world, too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high. Monetary policy alone won’t deliver that.”

As if to reinforce the point, Stevens noted elsewhere in his speech that monetary policy adjustments “don’t directly create demand in the way that, for example, government fiscal actions do”.

Not enough? Stevens went further still. “On the fiscal front, the government has little choice but to accept the slower path of deficit reduction over the near term,” he said.

That’s about as clear an imprimatur as you’ll get from a central banker for not aggressively pursuing fiscal tightening “over the near term”. But: “over the longer term, hard thinking still needs to occur about the persistent gap we are likely to see (under current policy settings) between the government’s permanent income via taxes and its permanent spending on the provision of good and services.”

The funny thing is, that’s what Hockey actually attempted to do last year — put in place longer-term savings without undermining growth in the short term. But so badly did the government bungle the budget, and so rigidly ideological were many of the savings it went for, that it not merely managed to undermine short-term growth but failed to put in place the longer-term savings. This time around, Hockey is not doing anything — there’ll be nothing to frighten the horses, long term or otherwise, and no effort made to offset falling revenues. Judging by the comments of the Prime Minister, Hockey won’t even be allowed to address the burgeoning cost of superannuation tax concessions, which cost the budget tens of billions of dollars a year.

This is a particular problem for Treasury, now lead by John Fraser, a man who has spent a decade or more out of public policy making money at UBS. Rather than Treasury’s default policy position of hacking and slashing at spending, the RBA wants the government to do more, to force fiscal policy to help monetary policy and not retard or weaken the impact of record low interest rates on the wider economy — not just on housing and the Sydney property boom. And Stevens felt obliged to point out a complicating factor, rising personal debt levels, partly because it further reduces the capacity of monetary policy to stimulate growth:

“But household leverage starts from a high level, having risen a great deal in the 1990s and early 2000s. The extent to which further increases in leverage should be encouraged is not easily answered, but nor can it be conveniently side-stepped. Even if we chose to ignore it, monetary policy’s ability to support demand by inducing households to bring forward spending that would otherwise be done in future might well turn out to be weaker than it used to be. For a start, households already did a lot of that in the past and, in any event, future income growth itself looks lower than it did a few years ago.

In years to come, it may well be the case that 2014 will go down as not merely a political disaster for this government — and that is still yet to fully play out — but a lost year in terms of economic growth and fiscal recovery. Australia has marked time over the past 12 months, with tepid growth, rising unemployment and policymakers paralysed. Stevens has abandoned the subtle prompting of 2013 and early 2014 and made it clear that the government has to do much, much better if 2015 isn’t to be another lost year.

Peter Fray

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