Andrew Leigh

E&OE TRANSCRIPT
RADIO INTERVIEW
2GB AUSTRALIA OVERNIGHTS WITH CLINTON MAYNARD
SUNDAY, 23 APRIL 2023

SUBJECTS: Reserve Bank of Australia Review, Monetary policy, Reducing government debt, GST, multinational tax reform.

CLINTON MAYNARD (HOST): The review into the Reserve Bank and the review has been scathing. It makes more than 50 recommendations for change that the new Federal Government, I shouldn't say new, they’ve been in power since May, but they are accepting. Andrew Leigh is the Assistant Minister for Competition, Charities but critically, Treasury. He joins us on the program. Andrew, thank you for your time.

ASSISTANT MINISTER FOR COMPETITION, CHARITIES AND TREASURY ANDREW LEIGH: Real pleasure.

MAYNARD: Thanks for your time, this is a very complex issue. It's the most comprehensive review of the RBA in decades and about time. But just to, I guess, almost dumb it down for our audience to simplify it, how is this and the changes that your government is going to adopt, how is it going to make it better for people who have a mortgage or loans and are subject to interest rates?

LEIGH: Well, the first thing is to note that the review has been conducted at a time at which the Reserve Bank is under intense pressure. There's been a lot of attention paid to their decisions made around interest rates, not only in the current period where they'd forecast that interest rates wouldn't be rising until 2024, but then needed to raise interest rates; but also in the period 2016 to 2019. So, the review goes into some detail over the question as to whether rates could indeed have been lower over that period, 2016 to 2019, and whether you might have gotten better employment outcomes of that period. And really where it lands, Clinton is in saying that the decisions of the Governor weren't really challenged by the board and that by having an expert board, people who understand monetary policy, understand the macroeconomic models that are being brought to bear on the problem, then you might get a more contestation of the decision. And I think that's true anytime you're making a complicated decision. If you're running a trucking company, you'd want a board with trucking experts around the room who are able to really test the decisions being made by management. That's the model that exists for a lot of other central banks around the world, but we haven't tended to have that. We've tended to have this model of a board for the Reserve Bank that's talented generalists rather than monetary policy specialists. And the review says it's time that changed.

MAYNARD. So, you'll have that separate board away from the board of the RBA itself that will make judgments on interest rates. And eight per year. Now, we've obviously been through, and there wasn't an increase this month, but we had ten in a row, effectively ten meetings in a row, where there was an increase by reducing the number from eleven per year now, but to eight. Does that actually make any practical difference? Because if the board judges that rates need to rise by a certain level to slow down the economy, for instance, will they just not need to have bigger increases because they have fewer opportunities to lift rates or cut them, for that matter.

LEIGH: Well, they can always do an out of cycle rate hike, but this is also about making sure that you've got the energies of the board focused when the decision needs to be made. And I think the review panel took the view, Clinton, that if you've got eight meetings a year, then it's really possible for the experts to do a deep dive into the numbers and work out what decisions need to be made. Again, that brings us into line with where other countries are at. But countries around the world tend to have a model which is more in line with eight decisions a year than eleven decisions a year. But nothing ever stops the board getting together as they did during the global financial crisis and making an out of session rate change.

MAYNARD: I must admit. And look, I'm not an economist like yourself, I did it at university, but I'm not an economist by trade. But in the middle of the ten increases in a row, and plenty of experts speculated this, I did wonder why the Reserve Bank at some point didn't pause to then see what the effect was going to be like as it flowed through the economy. Because everything takes time, doesn't it?

LEIGH: It does. You've got what economists call long and variable lags. Monetary policy transmits in different ways. The obvious channel is through people with variable rate mortgages seeing an immediate increase in their repayments, but it's also through small business owners and then there's an exchange rate channel as well. And all of those have different timings. Central banks watch the data fairly closely. It's helped that the Australian Bureau of Statistics just at the end of last year moved to a monthly CPI indicator. And actually that monthly CPI indicator that just came in showing inflation going down from 7.8% to 6.8% last month is probably the reason why we saw a pause in the rate rise cycle this time around. Better data does help you make better decisions.

MAYNARD: Now you just mentioned inflation there and the Reserve Bank's target has been certainly through both sides of politics that 2 to 3% range, but with full employment at the same time. Is it possible to actually achieve low inflation and full employment? Because from my way of thinking, looking from the outside, one of the key reasons I think we've got high inflation at the moment is because we've got a shortage of workers and it pushes prices up. So, if we've got very, very low employment or full employment, is it actually possible to have low inflation?

LEIGH: Look, it's certainly possible. If you look back in Australian history, the post war decades really were a period of shared prosperity in which inflation was relatively low and we had full employment. That's a great outcome for workers. Because people not only can get jobs when they need them, but it also ensures jobs for people who are marginalised -- people who have unusual personalities, minorities, people with disabilities -- they get a look in in the labour market. Full employment also puts steady upward pressure on wages. And so wages keep pace with productivity. You don't see all the productivity gains flowing to profits, they get shared between workers and business owners. But this is a challenge and one of the things the Reserve Bank said is that we want the central bank actually aiming at the midpoint of that 2% to 3% band rather than thinking that it's done its job if inflation scrapes in just at 2%, which was the case for much of the 2010s.

MAYNARD: We often hear this term that interest rate increases are a ‘blunt instrument’. Do you think it's fair, given that and look, I'm one of them, a mortgage holder, but do you think it's fair that given that mortgage holders are not the majority of population I don't have the figure in front of me, but it's well under 50%. Is it fair that they carry the load of controlling inflation with interest rates?

LEIGH: We haven't figured out a better way of doing it as a society, and that's true of societies around the world. So, by changing the interest rate, obviously you're going to affect those who've borrowed money. Indeed those who've saved money will benefit when rates rise. You're getting the opposite effect than the central bank would want. There's been discussion over the years about whether you'd have some independent body that would change consumption tax rates but the story of that has not been very good. Japan tried using changes in its consumption tax rate in order to stimulate the economy and then found it very hard to put the consumption tax rate back where it was beforehand. So, interest rates have tended to be the instrument that's been used by advanced countries sitting independently from politicians. So, the big development of the 1990s, as you well know, is that move to inflation targeting and steadily giving central banks more and more independence from government. That meant you didn't get this electoral interest rate cycle which was real common feature of the 60s and 70s.

MAYNARD: My guest is Andrew Leigh, the Assistant Minister for Treasury. Just while I have you, Andrew, and I appreciate your time. A couple of issues that often pop up in my program away directly from the RBA is the issue of government debt. We are heading towards a trillion dollars of debt. Are you confident that within the term of the Labor government that can actually be addressed and that can start coming down?

LEIGH: Look, I'd really like it to. Certainly when we inherited the budget from our predecessors it had one trillion dollars of Liberal debt and deficits as far as the eye could see. Indeed they were forecasting deficits right out to the 2040s. We're making a bunch of hard decisions around expenditure programs we won't go ahead with, around making sure that multinationals pay more tax. We need to ensure that taxes are as low as possible and raised in a way that does least economic distortion to the economy. We need to make sure our spending programs are targeted. Sports rorts, car park rorts, land rorts, all of those rorts of the former government were coming at a cost to the Budget. We saw under the former government $20 billion of JobKeeper going to firms with rising revenue. JobKeeper was a good program but we didn't save jobs by giving money to firms whose profits were going up. So, the government needs to be a steward of the nation's finances and Jim Chalmers, Stephen Jones, Katy Gallagher, Julie Collins and I are really conscious of that.

MAYNARD: Just lastly, I often have callers concerned about this one and we've just had a New South Wales election where Labor has won the election. We now have Labor in power federally and in each state, except for Tasmania. Some of our listeners are concerned that that will be used at some point to increase the level of the GST. Is that off the table? Is that off the agenda?

LEIGH: Yeah, we don't have any plans to raise the GST and indeed you would need agreement from every state and territory, including the Liberal-run jurisdiction of Tasmania, to do that. But even if the states were pushing for it, we wouldn't see that as a solution at the Commonwealth level. Where our priorities and tax reform really are pretty squarely is in that multinational tax space where there's an international process through the OECD and G20 that kicked off in October 2021 to try and get this Two Pillar agreement landed. That's an agreement that sets a 15% floor on corporate taxes globally and is really important for a country like Australia to get away from that race to the bottom in company taxes and the move to tax havens, which has been a real blight on the corporate tax system in recent years.

MAYNARD: Absolutely. Andrew, thank you very much for your time.

LEIGH: Always a pleasure, mate. Thank you.

MAYNARD: The Assistant Minister for Competition, Charities and Treasury, Andrew Leigh.