Bruce Baird (Cook, Liberal Party) Share this | Link to this | Hansard source

On behalf of the House of Representatives Standing Committee on Economics, Finance and Public Administration, I present the committee’s report entitled Review of the Reserve Bank of Australia annual report 2005 (second report), together with the minutes of proceedings.

Ordered that the report be made a parliamentary paper

I have pleasure in presenting this report of the committee. Australia’s current economic expansion has continued for an unprecedented 15 years. This is an enviable performance and one which many Western countries would like to emulate. The RBA has played a critical part in this success by carefully monitoring inflation and conducting monetary policy so that it contributes to the stability of the Australian currency, the maintenance of full employment, and the continuing economic prosperity and welfare of the people of Australia.

This long period of expansion has resulted in capacity constraints which are creating some inflationary concerns. The RBA is quick to point out that full capacity is not something to fear. For example, the unemployment rate is the lowest in 30 years. Nevertheless, the RBA, taking into account capacity constraints and domestic pressure on prices, together with rising global inflationary pressures, has recently raised rates, taking the cash rate to 6.25 per cent. The RBA advised that the current level of interest rates was in the ‘neutral’ area where interest rates are having neither an expansionary nor a contractionary effect on the economy.

In relation to housing affordability, the RBA was surprised at the enormous public focus placed on the recent rate increases and their apparent impact on housing affordability. Mr Macfarlane, the then Governor of the RBA, suggested that the real problem for people was not the rate increases but the fact that houses were so expensive.

During the examination of housing affordability, scrutiny focused on the role of state governments in relation to land release. Mr Macfarlane commented that the reluctance to release new land plus the new approach whereby the purchaser has to pay for all the services up-front—the sewerage, the roads and the footpaths—have enormously increased the price of the new, entry-level home.

The public hearing held on 18 August 2006 was particularly productive and marked the final appearance of Mr Macfarlane, who retired during September. I take this opportunity, on behalf of the committee, to congratulate Mr Macfarlane on his leadership of the RBA over 10 successful years and I commend him for his outstanding contribution to the stability and growth of the Australian economy.

Finally, I would like to advise the House that the committee’s next public hearing with the RBA will be held in Perth on 21 February 2007. The committee is obviously keen to probe the RBA on the latest rate rise. This hearing will also mark the first appearance before the committee of the new governor, Mr Glenn Stevens. I commend the report to the House.

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

The report before us entitled Review of the Reserve Bank of Australia annual report 2005 (second report) and the accompanying statement of monetary policy released by the Reserve Bank on 13 November 2006 tell a tale of economic mismanagement. We have a situation now where interest rates have increased on four occasions since the election in 2004 when the Prime Minister made a commitment to keep interest rates at record lows. The Australian people believed him at that time, but they will have learnt that he is not to be believed. Not only have there been four interest rate increases since that time but the statement of monetary policy points to the possibility of a further interest rate rise some time in the new year. I will expand on that by reference to the statement of monetary policy.

The problem is that the government has not been successful in easing capacity constraints. It has been spending like a drunken sailor and fuelling consumption spending in this country. So, on the one hand, budgetary or fiscal policy is providing an expansionary stimulus to the economy and, on the other hand, the Reserve Bank is having its hand forced to increase interest rates to counteract the expansion that has been created by the government’s spending spree.

In the Statement on monetary policy, it says:

More recently, spending has been supported by the strong labour market and the tax cuts that took effect in July 2006.

That is a matter about which I warned before the tax cuts were brought down, so I was not a Johnny-come-lately to that debate. I certainly cautioned about the expansionary impact of tax cuts that did not constitute a genuine reform, and those tax cuts fell into that category. The statement goes on to say:

... the Bank’s liaison with retailers indicates that recent spending growth has been fairly broad-based.

It also says:

The Westpac-Melbourne Institute measure of consumer sentiment was modestly above its long-run average in October ...

The point is that consumers are rebounding after these interest rate rises and are getting another head of steam—that is, spending more and therefore putting more pressure on interest rates. In the labour market, the statement says, ‘Businesses are reporting firm hiring intentions and significant difficulty in finding suitable labour’—all a reflection of the skills shortages that this government has allowed to develop because of its disinterest in investing in education and training in our country. So there we have skills shortages and inflationary pressures from consumption spending, fuelled by government extravagance. In addition, the statement from the Reserve Bank says:

Producer price data suggest that upstream inflation pressures remain strong.

So all the portents are there for a further interest rate rise. I am not saying that that will happen with certainty, but the ingredients are very much there. Again, I refer to the Statement on monetary policy, which in its conclusions in relation to interest rates says:

... the generalised price pressures currently evident in the economy are likely to continue in the near term. The central forecast is that underlying inflation will remain at around 3 per cent over the next year.

That is very worrying because that is the underlying rate, and it is at the top of the range. Therefore the balance of risks would tend to favour a further interest rate rise, which would be five interest rate rises since the Prime Minister promised to keep interest rates at record lows, giving Australia the second highest interest rates in the developed world.

But, if that was disappointing, more disappointing has been the government’s performance on productivity growth, because today’s productivity growth is tomorrow’s prosperity. This Statement on monetary policy says, in relation to productivity growth, that the data:

... imply that labour productivity growth has been low, at 0.6 per cent per annum over the two years to 2005/06 ...

It goes on to say:

If firms cannot bring new factories or mines immediately on line when capacity constraints become binding, they may decide to hire more labour to work their existing production processes more intensively—

and it points to that then leading to productivity reductions. This is a terrible performance on productivity growth, a failure to invest in Australia’s future by investing in our young people in skills formation and education, and economic mismanagement both in the short term and in a lack of any vision and forward planning to lock in Australia’s prosperity and provide opportunity for all.

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

The time allotted for statements on this report has expired. Does the member for Cook wish to move a motion in connection with the report to enable it to be debated on a later occasion?

I move:

That the House take note of the report.

In accordance with standing order 39, the debate is adjourned. The resumption of the debate will be made an order of the day for a later hour this day.