Andrew Leigh

HOUSE OF REPRESENTATIVES, 5 FEBRUARY 2020

The Australian economy is in a bad way. In its latest business outlook, Deloitte Access Economics forecast below trend growth of two per cent in 2019-20 and 2.4 per cent in 2020-21. These figures are significantly below the Morrison government's midyear budget forecasts. Deloitte says:

The nation's growth won't lift that much from today's decade low and we don't expect unemployment to drop or wages to accelerate through 2020.

Retail, as they point out, is already amid its deepest downturn since 1990. You can see the collapse of the retail sector in the shuttering of so many household names among major Australian retailers. This sector is doing it tough under the Morrison government. Deloitte points out that construction is shrinking at its fastest rate since 1999. And, as the shadow Treasurer pointed out, ‘this is what happens when a Liberal government in its seventh year spends all its time spinning, pork barrelling and playing politics instead of actually coming up with a plan to meet the big challenges of the economy’.

The government would have us believe that the challenges of the economy are all down to bushfires and coronavirus. They want us to forget the fact that the economy has been in a bad way through their time in office.

Growth is down.

Wage growth is down.

Productivity is down.

The start-up rate has fallen.

The government that likes to talk about small business is creating fewer small businesses than the economy did decades back. And a government that likes to talk about microeconomic reform is failing to do that hard work that ensures that we see more start-ups and fewer monopolies. We've got mergers going through the roof and start-ups going through the floor. We have innovation that is putting us well below OECD levels. If you look at the top five per cent of Australian firms, they've fallen off the productivity frontier of the top five per cent of firms in other advanced nations. According to recent research from Treasury, the productivity of the bottom 95 per cent of firms has not moved since Sydney hosted the Olympics in the year 2000. Ninety-five per cent of Australian firms according to Treasury haven't improved their productivity in two decades. It is a shocking record. And that's before we get to deep-seated challenges, such as inequality and climate change, which the government seems incapable of tackling.

Interest rates are at a record low because the government has failed to engage in the structural reform, the fiscal policy that the economy needs. They've done the worst of all things when it comes to a proposal for accelerated depreciation: they have said they may do it in the budget this year. That means, if you're a firm sitting around wondering whether or not to invest, your incentive right now is to hold back on investment because you might get a better deal in the budget. Rather than taking on the proposal that Labor took to the last election of an Australian Investment Guarantee and saying that they'll do it straight away, they're saying that they may do it later, almost guaranteeing that we lock in low investment in a time when the economy is sluggish.

The Reserve Bank says full employment is in the order of four to 4½ per cent, yet we have the economy sitting with unemployment between five and 5½ per cent.

This is a full percentage point higher than unemployment in Britain, the United States, Germany and New Zealand. If we had the unemployment rate of those countries, hundreds of thousands more Australians would be in work. We would see more opportunities for young Australians and for people with lower skills. We would see more opportunities for women and migrants. Discrimination is harder when unemployment is lower. Lower unemployment would finally put some upward pressure on wages. We'd see more rapid household income growth. And yet because the government is doing so little on this front the Reserve Bank has had to step in, cutting interest rates down to three-quarters of a per cent.

But there's also a question, which is raised in the chair's foreword, as to whether the Reserve Bank is doing all it could and whether further rate cuts would be appropriate. The context in which we're currently sitting is one in which we've had on average across Australia over the course of the last two years, though not in all markets, falling house prices, taking away some of the concern about asset price inflation which previously was cautioning against rate cuts. For almost the entirety of Governor Lowe's tenure, inflation has sat below the bottom of the target band. And, as I mentioned before, we've got unemployment a full percentage point above Britain, the United States, New Zealand and Germany and above what the Reserve Bank classes as full employment. The Reserve Bank has neither managed to hit its inflation target nor its full employment target.

The member for Goldstein, in the chair's foreword to the report, claims that rates shouldn't be cut, because there is an impact on savers. It is certainly true that some Australians are net savers, just as some Australians are net borrowers, but we have categorical evidence that on average, as the Reserve Bank puts it:

…the share of people who have debt and who have a positive effect on their cash flows when interest rates fall more than outweighs the effect on consumption from the people whose incomes have been reduced somewhat.

The member for Goldstein points out that, for many borrowers with fixed-rate mortgages or variable-rate mortgages, when you cut rates mortgage repayments don't automatically fall. The Reserve Bank has gone to exactly this issue and has pointed out that there is, nonetheless, a confidence effect when households see a positive impact on their balance sheets as a result of rate cuts. The member for Goldstein says that the exchange rate channel is potentially muted if all other countries cut at the same time. I don't see coordinated cutting. What I see when I look around the world are a range of other central banks that are at or near the lower bound.

He claims that quantitative easing would be unfair to young people, but the point is that it's unemployment that's most unfair to young people. I graduated high school in 1990, in the teeth of Australia's last significant recession. I've seen what a deep recession does to young people. When unemployment is a percentage point higher than it should have been, that means that it's young people who suffer. By the way, I can't help pointing out that the only time the Liberals seem to care about inequality is when it comes to discussing monetary policy. Certainly the policies that he championed at the last election were not policies which would have had the effect of equalising asset distribution among young people and older generations.

We also went to a range of other issues in speaking with the Reserve Bank governor. The Reserve Bank governor criticised public sector wage caps for 'cementing low wage norms across the country.' That was a critique not just of governments like New South Wales which have locked in those public sector wage caps, making it more difficult to get the wage growth that supports household spending and retail sales; it's also a critique of the Morrison government's approach to public sector bargaining, which has entrenched lower wage norms across the country. Whether it's customs officers, teachers or police officers, entrenching lower wage norms has been one of the factors that has dampened wage growth in the public sector and flowed on to the private sector and flowed on to household spending.

We also heard from the Reserve Bank that they don't regard climate change as ‘a hobby horse issue’, to quote members of the government this week. The Reserve Bank is looking at the impact of climate change on stress scenarios for the economy.

They, like other central banks worldwide, are taking climate change seriously and considering the impact that it could have on the macroeconomy.

We also had an exchange over transparency. I put the view to the Reserve Bank that when compared to other central banks they are relatively opaque. They don't, for example, publish transcripts of meetings or voting records. I continue to find that disappointing and think that the Reserve Bank could do better on the transparency front.

We will hear from the Reserve Bank Governor on Friday, as the member for Goldstein has mentioned, but we know a little of what to expect from the Reserve Bank Governor's speech to the National Press Club today. As he said, 'looking back at last year economic growth was weaker than expected'. He said, 'the most important factor is a domestic one'. The Reserve Bank Governor pointed to a noticeable step down in wages growth, a troubling decline in productivity growth and the downward trend in investment and spending.

As the shadow Treasurer has pointed out, the Prime Minister and Treasurer's inaction and incompetence have left the Reserve Bank to do all the heavy lifting. They will continue to claim that this is an issue of bushfires and coronavirus. It is not. It is a deep-seated economic malaise which traces its roots back to 2013.

ENDS

Authorised by  Paul Erickson, ALP, Canberra.