The Morrison government may have secured a parliamentary majority but the Reserve Bank has voted no confidence in its economic management, taking the unusual step of flagging that it will be likely to cut interest rates at its next meeting due to concerns about unemployment.
In both a major speech yesterday by governor Philip Lowe and in the minutes of its May meeting, the bank yesterday explained that it believed there was persisting spare capacity in the economy, the rate of unemployment at which inflation would start to rise was lower than previously thought and that the jobs market was now softening. Lowe was about as blunt as a central banker could be about what the board is thinking:
We discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5% mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate. A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.
Economists now see at least two rate cuts this year, taking rates from the current record low of 1.5% to a new record low of 1% by year’s end — or perhaps as early as July.
Noteworthy in Lowe’s speech was his view that unemployment is softening, despite more evidence of strong growth from the recent April jobs figures. That data showed the seasonally adjusted unemployment rate, in Lowe’s words, “ticked up to 5.2%” (hat-tip to Michael Pascoe for spotting that Lowe used the seasonally adjusted figure, not the trend figure that the ABS prefers in its communication) and “the underemployment rate has also moved a little higher”.
Against this was an expectation that the Coalition’s dramatically increasing tax burden on the economy would lighten a bit. “Over the past year, tax paid by households increased at a much faster rate than did income; almost 10%, compared with 3¼%,” said Lowe. “That is a big difference and it is unusual.”
According to Lowe, the bank was looking to the government’s forthcoming tax cuts to finally, if partially, fix that. “the tax offsets for low- and middle-income earners announced in the recent budget will boost disposable income.” The only problem is Morrison and Frydenberg have stuffed up the implementation of the tax offsets and these may now be delayed due to the inability to legislate them.
Lowe also produced a graph on household income that should shame the Coalition, given it demonstrates how bad the last few years have been for Australian families.
That’s the result of a deliberate policy of wage stagnation and the Coalition’s dramatically rising tax burden, which has seen taxes rise from 21.3% of GDP under Labor to over 23% this year.
One serious question not addressed by Lowe is why the RBA didn’t cut at the May meeting. Arguably, the case for a cut was stronger then than it will be in June: it was before the April jobs data, which showed that yes, seasonally adjusted unemployment had gone up to 5.2% but also showed continuing strong jobs growth pulling in more workers. Notable was the number of female workers, with the participation rate at a new record high, hitting 61% for the first time ever.
Was the bank worried that a rate in May would have been seen as politically problematic given there was an election campaign? Would it have been seen as a vote of no confidence in the Coalition’s economic management — exactly the issue Scott Morrison was running on?
If that was its thinking, it allowed such considerations to get in the way of fulfilling its goals. And if such politically sensitive matters were discussed, what was the role of longtime Liberal apparatchik Phil Gaetjens in them? Did he recuse himself given his close links to the Liberal Party?
Such questions shouldn’t need to be asked about the Reserve Bank, and reflect just how utterly inappropriate Gaetjens’ appointment as treasury secretary was in the first place.