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.