Reserve Bank governors don’t leave office very often, so we should pay attention when they do. And Glenn Stevens leaves with the Australian economy facing far more challenges than when his predecessor Ian Macfarlane left in 2006, when the days of economic and fiscal sunshine seemed endless.
Yesterday, Stevens gave his final Anika Foundation address as RBA governor, which is also his last speech as governor before handing over to Philip Lowe. He’s been a long-term supporter of the foundation, which raises funds for research into mental health and suicide among adolescents, and has often used his foundation speeches to offer a slightly more wide-ranging take on economic issues — at least as far as he’s able to within the bounds of central banker circumspection. Yesterday was no different, and what he had to say should be required reading for every parliamentarian making their way to Canberra at the end of the month.
For the politicians, there are two key points, about government debt and household debt.
Like ratings agencies and plenty of others, Stevens is plainly concerned about how committed the federal government is to returning the budget to surplus.
“At present, general public debate starts with commitment to the need for reform and for putting public finances on a sustainable medium-term track. But when specific ideas are proposed that will actually make a difference over the medium to long term, the conversation quickly shifts to rather narrow notions of ‘fairness’, people look to their own positions, the interest groups all come out and the specific proposals often run into the sand. If we think this rather other-worldly discussion will not have to give way to a more hard-nosed conversation, we are kidding ourselves.”
But as Stevens notes, there’s also the problem of weaker growth — indeed, that’s one of the contributors to our ongoing fiscal challenge. Those proposals for fiscal discipline that don’t “run into the sand” risk undermining already weak growth. Worse, we can’t rely on monetary policy to help us on that front given central banks around the world and here have already reduced interest rates to record lows. “We can’t just assume that monetary policy can simply dial up the growth we need. We need some realism here,” Stevens said.
That’s particularly the case given the likelihood of a softening economy ahead. This week, the NAB was the first forecaster to focus on 2017-18. At the moment, the NAB’s business conditions and confidence survey shows the economy travelling well. But the bank’s chief economist Alan Oster now sees those favourable conditions fading into 2017-18, with the housing boom likely to fade and mining investment and exports likely to remain weak — and the RBA responding with more rate cuts — even though, as Stevens noted, monetary policy has little further capacity to carry the loading in terms of stimulus.
The way out of this dilemma is for governments to, in effect, shift the deficit from recurrent spending to infrastructure investment; the RBA has long been an advocate for governments establishing a steady pipeline of quality infrastructure investment. “The case for governments being prepared to borrow for the right investment assets — long-lived assets that yield an economic return — does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances,” Stevens said.
Stevens’ other key point also had a particular resonance for political policymakers: there’s not enough focus on household debt. “In Australia, gross public debt, for all levels of government, adds up to about 40 per cent of GDP,” he explained.
“We are rightly concerned about the future trajectory of this ratio. But gross household debt is three times larger — about 125% of GDP. That is not unmanageable — but nor is it a low number. It’s an interesting question which sector would have the greater capacity to take on more debt, in the event that we were to need a big demand stimulus … Foreign visitors to the Reserve Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt. So the way ahead is going to have to involve a rather more nuanced consideration of all these issues.”
It’s true that, while the post-GFC savings peak has long passed, we still save much more than we did in the salad days of the pre-GFC era, when Australians went on a prolonged, debt-fueled spending binge. We also have a strong superannuation system. But, as a country, we also have major policies in place that encourage debt — particularly a negative gearing system that encourages debt-fueled housing investment and that, in turn, forces new housing market entrants to take on higher levels of debt themselves in order to buy a house. Curbing negative gearing would be both good fiscal policy and reduce one of the pressure for greater household debt — but we have a government committed to defending it against reform, even of what it itself admits are “excesses”.
And take note of the higher education debate. In relation to university education, the government remains keen to shift a greater burden of the cost of higher education, saddling them with even higher debt levels — creating a future in which young Australians will bear six-figure debt loads before even trying to get a seven-figure mortgage. And in vocational education, bipartisan reforms have turned the sector into an outsourced disaster that has left students and governments with huge bills for non-existent services offered by fly-by-night providers.
It seems that on household debt, the policy struggle is merely to stop things from getting worse, not improve them — which is exactly what the fiscal challenge looks like.
Let’s hope that when Philip Lowe retires in the 2020s, we don’t look back on Stevens’ farewell with the same air of nostalgic longing that we do with Macfarlane’s.