Reserve Bank of Australia governor Philip Lowe (Image: AAP/Joel Carrett)

There’s now a clear split within policymaking ranks over Australia’s path back to economic growth and low unemployment.

On the one hand there is Josh Frydenberg and most of the government — especially right-wing backbenchers — backed by big business and their media cheerleaders at the Financial Review and News Corp, who think that Australia must reform its way to growth via a supply-side agenda of tax reform, industrial relations changes and deregulation.

On the other side is the Reserve Bank (RBA) governor Philip Lowe, who says demand is the central problem in the economy.

When Lowe spoke to the House of Reps Economics Committee on Friday, he identified three major issues affecting the recovery. One was the obvious one — Victoria. The second was “the growing impact of an extended period of weak aggregate demand”.

In the initial phase of the pandemic some firms were able to keep going because they had a pipeline of work to keep them busy … But with new contracts having been scarce over recent months, this pipeline is being emptied for many firms and they are having to scale back. Critical to reversing this is stronger growth in aggregate demand.

The third issue was that “households and businesses will remain more cautious” due to the pandemic.

That is, two out of the three dominant issues in the recovery relate to demand, not supply. Demand is the way out of this recession.

It’s not the first time the bank has emphasised the importance of demand. For that matter, if people can remember back before the pandemic, they might recall the RBA was pressing for fiscal stimulus to lift demand last year too.

Fiscal circumstances has obviously changed since last year, but Lowe is unconcerned about debt. “While monetary policy has played an important role,” he said, “it has been fiscal policy that has provided much of the support to the Australian economy. This is quite a change from how things have worked over recent decades and it is being accompanied by a significant increase in public borrowing.”

“By borrowing today to support the economy we are avoiding an even bigger loss of output and jobs that would damage our economy and society for years to come, which would put ongoing strain on the budget. Australia’s public finances are in strong shape and public debt here is much lower than in most other countries.

“The overall national balance sheet is also in a strong position after decades of good economic performance. Government’s financing costs have never been lower, with interest rates being the lowest since Federation … It is the right thing to do to borrow today to help people, keep them in jobs and boost public investment at a time when private investment is very weak.”

Scott Morrison would like to be with his colleagues in the supply camp, but political and economic reality keeps dragging him toward Lowe and the RBA.

He refused to countenance fiscal stimulus before the pandemic, preferring wage stagnation, unemployment stuck above 5% and tepid growth. To his credit, he abandoned the Coalition’s years of revisionist nonsense about fiscal stimulus and embraced it as the looming crisis became clear, then re-upped the dose when the Victorian outbreak wrecked the September quarter recovery.

All the while, though, with the encouragement of business and the media, the government have been plotting a way to drive “reforms” aimed at helping big business — tax cuts, industrial relations deregulation, handouts for fossil fuel companies. Josh Frydenberg belled the cat when he cited Margaret Thatcher as an inspiration for the government’s plans — evidently to Morrison’s chagrin.

Morrison and Frydenberg are not averse to more fiscal stimulus, but they want the states to do it. There’s a great deal of sense in this: states can aim money at more smaller-scale infrastructure projects and services that will support growth and employment better than the Commonwealth can.

But the Commonwealth can borrow money very cheaply at the moment, and from a taxpayer perspective public debt is public debt, regardless of which level of government holds it. There are also some areas entirely within Commonwealth responsibility, like aged care, that badly need investment.

Otherwise, the government’s only plan to address demand is to try to stop the long-scheduled increase in the compulsory superannuation contribution. While ostensibly on the basis that workers need this increase as a wage rise now, in fact it’s part of the Liberal Party’s forever war on industry superannuation.

You have to admire the chutzpah of the Liberals — having spent years engineering wage stagnation as a “deliberate feature” of the industrial relations system, they now profess to be shocked, shocked to find wage stagnation is going on here, and use it as a basis to prevent a superannuation increase.

Meanwhile the jobless queues lengthen and households and business hunker down to await better times, off in the 2020s.