Reserve Bank of Australia
Reserve Bank of Australia, 24 May 2011
I would like to speak about three things today: the recent appointments to the Reserve Bank board and the members who are stepping off the Reserve Bank board; the broader outlook for inflation in the Australian economy; and the current low levels of government debt.
Firstly looking at appointments to the Reserve Bank board, I want to use the opportunity to put on the record my thanks to Don McGauchie and Warwick McKibbin for their service to the Reserve Bank board. Warwick McKibbin is not only an extraordinary Australian economist but was also my immediate boss before I came into parliament. Warwick is the director of the Research School of Economics at the Australian National University and in my last position at ANU I was his deputy director. Warwick is an extraordinary economist, someone who was awarded his PhD from Harvard University studying under Jeffrey Sachs. He has been awarded the Centenary Medal for service to Australian society for economic policy in tertiary education, and was made a fellow of the Australian Academy of Social Sciences at the age of 40. I wish him well in the next public endeavours that will occupy his now freed-up weekends.
I also note that joining the Reserve Bank board are Ms Catherine Tanna, who is currently the executive vice-president of BG Group and managing director of its Australian unit QGC Pty Ltd, and also Dr John Edwards. Dr Edwards is somebody who has a long and distinguished career in economic policy-making. He has served the Australian public well as a senior economic adviser to then Prime Minister Paul Keating. He has been actively engaged in policy debates for a number of decades and has also produced a number of terrific books over this period. He is in every sense a public intellectual and the Australian public are fortunate to have his skills joining the Reserve Bank board.
The second issue I want to speak about today is the issue of inflation. I want to draw the attention of the House to some of the statements made during our last Reserve Bank hearing regarding Australian inflation. On the headline number, I would like to quote from the Governor’s opening statement when he said:
‘It is worth recording that a combination, on the latest figures, of a 5 per cent unemployment rate and an inflation rate clearly ‘in the 2s’ is a pretty favourable one by the standards of recent decades.’
In questioning, the Governor was drawn out on the issue of inflation perceptions and made some comments that I think are particularly salient in the current policy debate. It is always important to focus on the cost of living but we need to do so by looking at the facts rather than some of the spin that is occasionally heard from those opposite. The Governor said:
‘People do, though, tend to overlook prices that fall a little bit, and 30 per cent of the CPI items actually had a negative price change in the latest quarter. There are certain things that people do not buy quite as often as the weekly groceries and it is human nature that we tend to forget that those prices go down in many instances. So I think that is a factor and it is understandable. But, in the end, the consumer price index samples 100,000 prices every quarter. There is a far better sampling there than any of us could do by keeping a casual tab on our grocery bill …’
The governor went on to say:
‘The prices of many goods at the moment are declining. If you go through the CPI over the past year, you see that the price index for clothing is down six per cent, the price index for major household appliances is down four per cent, the price index for audiovisual equipment is down 18 per cent, the price index for furniture is down two per cent and the price index for linen, manchester, is down around two per cent. Almost all the goods in the CPI are down quite significantly. I think many people, because they do not buy these goods on a regular basis and have in their mind a clear concept of what the actual price is for a shirt or some Manchester, do not feel price declines but they are real and they are happening. What people are noticing is the higher price of utilities in particular.’
The governor went on to speak about some of those prices. But as we know, households make a set of consumption purchases and we need to look at those consumption purchases as a whole, not simply cherry pick parts of the consumer price index but look at the overall picture that Australian households are facing. For example, if we look at the year-on-year percentage change for the current March quarter, the latest figures available at the moment, we have a fall over the last year in clothing and footwear prices of one per cent, in household contents and services of around half a per cent, in communications of 0.2 per cent and in recreation of 1½ per cent.
So it is important to keep all of those factors in mind when we are looking at the overall picture for inflation. I think it is that overall picture which has naturally led the governor to point out that Australia’s inflation rate is clearly in the twos, certainly not a picture that one would receive if one were to listen solely to pronouncements from those opposite. I think this is important and goes to the very heart of the economic challenge. If those opposite intend to be taken seriously as economic managers then it is important that they focus on the facts rather than the spin.
Finally, I said that I would go to the issue of government debt. Here again, I think it is important to lay out the facts. Ross Gittins, in an opinion column on 15 November last year, wrote as follows:
‘Even the press gallery is buying the Libs’ propaganda about excessive, wasteful spending and the need for swingeing spending cuts to get the budget back on the rails. Nonsense. The real story is how amazingly responsible the government’s been.’
He goes on to say:
‘From the start, the government adopted a “deficit exit strategy” to bank all revenue growth and limit real spending growth to 2 per cent a year until the budget was back in surplus. No government has ever voluntarily donned such a chastity belt.’
Those opposite would have you believe that Australia’s government debt is out of control, and they would do so because I sometimes believe they live in a little bubble, a little bubble in which climate change is not real, a little bubble in which you can ignore everything happening in the rest of the world, a little bubble in which the only thing that drives asylum seeker arrivals is Australian policy rather than wars going on overseas. Of course, if you take a global perspective, and any responsible economic manager does take a global perspective, you are immediately struck by how low Australian public debt is.
A special report on the world economy in The Economist quoted research by Carmen Reinhart of the University of Maryland and Ken Roghoff of Harvard University looking at the effects of a couple of centuries of sovereign debt. It reads:
‘Their verdict is that public debt does little discernible harm until it reaches about 90% of a country’s GDP, but then the effect on growth can be sudden and big.’
This is relevant because there are OECD countries that are looking at debt loads at that level. Every member of the G7, according to The Economist report, will go over a threshold of 77 per cent of GDP. The article noted:
‘The IMF says governments should aspire to cut their debt ratios back to 60% by 2030. To do so they will have to perform some fiscal heroics.’
Australia is simply not in that ballpark. Our debt level remains well below 10 per cent of GDP and will continue to do so. The government will bring the budget back into surplus in 2012-13. Australia is better off for having taken on that public debt. That is what mainstream economics tells you. When faced with the largest global downturn since the Great Depression, it was the right decision to put in place a timely, targeted and temporary fiscal stimulus—saving 200,000 jobs and tens of thousands of small businesses—and then to responsibly pay back that debt. At the end of that, not only do we have lives that were not blighted by periods of unemployment and small businesses that did not go to the wall but we also have public assets future generations will look back to: public assets such as some of the valuable school infrastructure in my own electorate of Fraser; infrastructure such as the Amaroo school’s investments that allow their teachers to do team teaching; and infrastructure such as a school hall that allows all of the children in Black Mountain special school to attend the same assembly. It is infrastructure of which I am proud, and I wish those opposite were equally proud of it.