Sharon Grierson (Newcastle, Australian Labor Party) Share this | Link to this | Hansard source

I wish to support the report tabled today, Review of the Reserve Bank of Australia annual report 2005. As part of its role, the House of Representatives Standing Committee on Economics, Finance and Public Administration scrutinises the performance of the Reserve Bank in its functions of implementing monetary policy and managing the bank payments system. This report deals mainly with the presentation of the RBA governor and his executive at the committee hearing held in Sydney in August of this year.

It was quite a historic event: Governor Ian Macfarlane—the Governor of the Reserve Bank for a decade—was soon to retire, and Deputy Governor Glenn Stevens had just been confirmed as the next Governor of the Reserve Bank. It is true to say that neither disappointed in their performance. In exploring the current state of the economy, 15 years of expansion, high employment and a growth rate revealing the impact of significant capacity constraints, the governor’s attention and that of the committee was focused on inflation and the impact of past and further interest rate rises—and they keep coming.

In regard to capacity constraints, the governor was an optimist—efficient use of labour and capital, he claimed. That may all be correct. However, in my city, the Port of Newcastle faces the difficulties posed by this economic state where capacity constraints hold back growth. The Port of Newcastle remains at high export efficiency. The rail infrastructure bottlenecks have been partly attended to and coal loader expansion is underway, but demand from our developing nations—China and India particularly—just keeps growing. The 50 ships off our coastline will be there for quite a while.

The other impact of the failure of this government to tackle these capacity constraints is, in real terms, inflation. In real terms, to the Australian people it means interest rate rises. In fact, those interest rate rises have kept coming. In August we had an interest rate rise. In November we had an interest rate rise, which was the fourth interest rate rise since this term of parliament began.

The governor took the opportunity at that hearing to deal with and try to explain comments he made to a previous committee hearing regarding tax cuts. He actually said that his comments were completely misinterpreted. Further, he told the committee that he was trying to pour a bit of cold water on the idea of having really big tax cuts and big fiscal expansion. I hope that John Howard and Peter Costello are listening, because we do not want to see a wasted opportunity next year when the budget is announced.

Governor Macfarlane commented on the possible fiscal stimulus of federal and state budgets by saying:

We are now entering a period where there are capacity constraints where we really do not want the economy growing much faster than the twos to threes. The economy is in a situation where it is more sensitive to what happens with fiscal policy than it has been in the past.

In his statement he said that his best guess was that, if the federal budget outcome is as it is budgeted, that would be equivalent to a fiscal stimulus of half a per cent of GDP. He then said: ‘If you add the state budgets’ stimulus as well, then you end up with one per cent stimulus and you end up with an economy that is prone to inflation’—

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

State budget deficits.

Sharon Grierson (Newcastle, Australian Labor Party) Share this | Link to this | Hansard source

Do not blame the states, please. Who leads fiscal policy in this country? I think his name is Peter Costello. I think the governor has given a strong message, saying: ‘Let’s be very sensible with fiscal policy. Let’s not waste opportunities in terms of capacity constraints and helping this economy grow. Let’s not use tax cuts without thought to the impact on the economy as a whole and, therefore, the ordinary voters of Australia, who have to wear any negative impacts in their budget each week.’

At that hearing we also canvassed the concept of a dual economy, and the governor was quite optimistic because he stated that we have had a dual economy before, where states have had varying conditions. That may be true. Currently we do have Western Australia booming and we do have negative growth in New South Wales, but we have never had the situation before where the most populous states have that negative growth. You have to be very mindful that, if there are recession tendencies in the most populous state in Australia, it is going to have an impact on the whole of Australia. So I do differ from the governor in that regard. The dual economy deserves closer examination.

We also discussed housing affordability. Obviously, interest rates do impact on peoples’ mortgages. There were some interesting explanations by the governor as to why he thought housing affordability was an issue. He said that it was not interest rate rises; it was perhaps land release policies by the states and the cost of infrastructure, roads and electricity et cetera being passed on to the customer. He also said that demand had been high in the past, prices had been reasonable in the past, interest rates had been reasonable and people were therefore encouraged to borrow—and borrow they had. Banks had made credit readily available and people had easily been able to access large mortgages—much larger than perhaps they could afford when things change.

What the governor did not mention is that the government has also contributed to that housing unaffordability by halving capital gains tax in its terms and having a first homeowner grant with no cap on it—for anyone, no matter whether they are buying a million-dollar mansion or a $300,000 average priced home in Newcastle, further pushing house prices up. So, really, the stories are much more complex. I give credit to the governor: he does not have to handle some of those policy measures. Again, that is fiscal policy in the hands of this government.

We also looked at the problem where capacity remains tight and productivity growth is not as high. When we looked at the skills issue we very much looked at the downturn for manufacturers and the workforce issues they face. They cannot find skilled labour at a time when they need many more workers. Also, the service sector cannot get entrepreneurs and people trained in management at a rate they need right now in this boom period, because they just have not been trained. That is more a failure of education policy, not monetary policy. The committee has taken up that challenge by looking at the state of the manufacturing and service sector in this country and trying to develop policy solutions that might overcome some of these problems in the future—for example, what sort of public policy will assist our manufacturers to be in the highest growth sectors, as is the case in some developed countries, rather than facing the constraints they are suffering at the moment.

The new governor certainly set his stamp in terms of the sort of governor he would be. Since that hearing, he has strongly said that inflation measures would always be the deciding factor in shifting interest rates. He has lived up to the promise, I suppose, that he made clear through authorising the last interest rate rise. Also, when asked by the committee about the relationship with Treasury and the Treasurer, he made it very clear—and I applaud him for this—that there would always be, under his leadership, an independent Reserve Bank. It would always act independently under its charter, with its responsibility to the national economy and the Australian people. It is always a pleasure to meet with the RBA in that committee and look at the economic challenges from every different perspective.

I send my best wishes to former Governor Macfarlane. When you have the great pleasure of reading his series of Boyer lectures you will know that he has had all sorts of views on our economy. He has a historical perspective that has acknowledged the great reforms of Labor. In some ways he has been bolder now perhaps where he could not be as bold before. I wish him every success. I know that he will continue to contribute to this country in many ways. His experience over 10 years is something we should all perhaps study. I would recommend his Boyer lectures to every member of parliament. They are an education in themselves. I look forward to the next hearing with the economics committee and the new governor, Glenn Stevens, which will be held in February next year, in Perth—we might as well go where the boom is happening—and we will be again looking at monetary policy. I can only hope, though, that the Australian people face Christmas and the New Year without any other threats to their family budgets.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am certainly pleased to rise in the Main Committee this afternoon to speak to the Review of the Reserve Bank of Australia annual report 2005, a report put forward by the House of Representatives Standing Committee on Economics, Finance and Public Administration. I am very pleased to have the opportunity to remark on a number of the key findings of the committee’s report into the Reserve Bank’s conduct of monetary policy. This report comes off the back of the hearing that the committee held, chaired ably by the member for Cook, the Hon. Bruce Baird, on 18 August 2006.

It was certainly a momentous day—an opportunity for the committee to give its thanks to the outgoing Governor of the Reserve Bank, Ian Macfarlane, who so ably and dedicatedly led that organisation for approximately a decade. Likewise, it was a chance for the committee to welcome the incoming governor, Glenn Stevens. We certainly look forward to working closely and cooperatively with Glenn Stevens in our capacity of providing parliamentary oversight over the operations and conduct of monetary policy by the Reserve Bank.

I would like to pick up on a couple of points made by the member for Newcastle as well as generally addressing some of the findings of the committee. What we know from the Reserve Bank’s testimony before the committee—from their Statement on monetary policy that they previously released—is that the Australian economy is in very good shape. Thanks to 10 years of responsible and careful economic management by the Howard government and in particular by the Treasurer, Peter Costello, the Australian people currently enjoy a level of prosperity that they have never enjoyed before. The economic certainty—the fact that our economy has been growing successfully for 15 years—underscores the very proud track record that this government has in delivering meaningful prosperity to the Australian people.

On all of the key economic indicators, the Australian people are enjoying a period of sustained economic sunshine. Unemployment is down to a 30-year low. It is foreseeable by both the Reserve Bank and the committee—although it may not be all members of the committee; I am sure the opposition would disagree with us—that unemployment will remain at generational lows, thanks to the strong economic growth created by the Howard government.

It is also worth noting that the Reserve Bank touched on, and expanded upon, comments they had previously made to the committee about the importance of labour market flexibility. About 12 months ago, the Reserve Bank governor indicated to the committee that the Reserve Bank felt that labour market flexibility was a key driver of sustained economic growth into the future. The Reserve Bank governor made it very clear that, for Australia to continue to enjoy the benefits and prosperity that come from sustained economic growth, it was fundamental that there be increased labour market flexibility and that, where governments took the time and the initiative to introduce greater flexibility in the labour force, the consequent benefit that would flow from that increased flexibility was continued economic growth.

That, in large part, underlines the very reason why this government introduced its Work Choices policy. Work Choices provides the very flexibility that a well-credentialled and forward-looking man like the former Governor of the Reserve Bank Ian Macfarlane knows—as, I am sure, the current Governor of the Reserve Bank, Glenn Stevens, knows—is fundamental to maintaining that prosperity. To use the words of the Prime Minister, the reforms of today guarantee the prosperity of tomorrow. It is worth highlighting that, especially for those members opposite who like to discard this kind of information from the Reserve Bank from the public record.

Likewise with respect to inflation. It was very interesting to hear the Reserve Bank board’s thoughts on inflation in Australia. Certainly we know that the headline rate of inflation has been higher than otherwise would ordinarily be desired and, as a committee, we certainly know that the inflation rate—the principal driver of monetary policy in this country—has been bumping at the top of the Reserve Bank’s desired range of two to three per cent. But we also know the reason why this has come about.

The Reserve Bank board, in its Statement on monetary policy as well as evidence adduced to the committee, highlighted that there were an enlarged number of one-off factors that were contributing to this higher level of inflation. In addition to that, the Reserve Bank also highlighted that, given that Australia has enjoyed 15 years of economic prosperity—given that the Australian economy has been growing by over three per cent for nigh on 15 years—it is little wonder that we should be starting to experience some capacity constraints on economic growth in Australia. A direct impact of some capacity constraints is that inflation tends to creep a little bit higher. So there were no surprises for the Reserve Bank and no surprises for the members of the government who sit on the committee. But all of this comes as a revelation to the opposition members, who unfortunately attempted to use the fact that we have had such a long and sustained period of economic growth—and, therefore, some upward pressure on inflation—as being in some way some gigantic revelation, when in fact it is quite the opposite.

What was also clear from the Reserve Bank’s testimony is that this government’s track record of delivering surplus budgets back to the Australian people by way of tax cuts is not irresponsible. What the Reserve Bank made very clear in its testimony to the committee was that tax cuts that maintain a budget surplus of about one to 1½ per cent of GDP are not irresponsible at all, and that is what this government has done. In fact, the Reserve Bank governor went out of his way to clarify remarks that have been misused and misconstrued by members opposite with respect to tax cuts and to highlight that the tax cuts this government has delivered have not been overly stimulatory and have been affordable. Furthermore, what is very clear if one reads between the lines from the Reserve Bank governor’s statements is that it has been the deficit budgets of state governments, when taken in collaboration with the responsible repayment of taxpayers’ money by this federal government through sustainable budget surpluses, that are putting an incredible amount of upward pressure on interest rates. It is not the fact that the Howard government, under the stewardship of the Treasurer, Peter Costello, when it comes to the economy, has delivered money back into the pockets of ordinary Australians. It is not the fact that we provided $34 billion worth of tax cuts. It is the fact that at virtually every tier we have state Labor governments running budget deficits at a time of unsurpassed economic wealth and generation of wealth in this country which is causing the problems.

I say to all the state Labor Treasurers: do not come to Canberra and say that it is the policies of this government that cause interest rates to go up when it is very clear not only on my assessment but on the assessment of those umpires of monetary policy in the Australian economy, the Reserve Bank board, that deficit budgets by Labor state governments are putting an incredible amount of upward pressure on interest rates. I say to all the state governments: do something to get your books back in order.

In addition to that, state Labor governments could also address the overwhelming desire and need to ensure that, when it comes to key infrastructure facilities such as railroads and ports, they actually do something to increase capacity for these key pieces of economic infrastructure that help to expand the Australian economy going forward—the kind of infrastructure that does not see 50 ships floating off the port of Newcastle but actually sees those ships being able to call into port, load up with the various stock, load up with the various commodities, and export them overseas and generate wealth for this country. That is what we need to see.

I would also question, in the less than two minutes I have remaining, what it was that the member for Newcastle was alluding to when she said that part of the problem of housing affordability—and I will touch on this in more detail—was the first home owners grant and the fact that this government has halved capital gains tax. It seems very clear to me that what the member for Newcastle was saying was that the problem with housing affordability is not only a lack of or limited land release or that headwork charges have skyrocketed under state Labor governments but that the federal government is providing stamp duty relief through the first home owners grant and, furthermore, has halved capital gains tax. The member for Newcastle in this chamber only moments ago said implicitly that there should be no first home owners grant and that there should not have been a halving of capital gains tax. I would be fascinated to know whether the shadow Treasurer is supportive of the comments of the member for Newcastle about halving capital gains tax and the first home owners grant being a problem. In both those respects I would be very keen to find out what the Labor Party has to say.

Furthermore, and just expanding on this point a little more fully, it was also clear from the evidence provided by the Governor of the Reserve Bank that the key driver of unaffordability when it comes to housing has been the fact that state governments continue to not release land. This lack of release of greenfield sites by state governments, coupled with skyrocketing headwork charges, has certainly put a huge amount of upward pressure on the prices of homes therefore locking so many young Australians out of the opportunity to buy a home, despite the fact that this government seeks to assist them through, for example, the first home owners grant. As a result of the evidence provided to the committee and outlined in this report, the Australian people can look forward to continued economic sunshine in the future.

Patrick Secker (Barker, Liberal Party) Share this | Link to this | Hansard source

We have now had 15 or 16 years of extraordinarily good growth, a healthy economy in this country, and that sort thing does not happen by chance. When you look at the Review of the Reserve Bank of Australia annual report 2005 by the House of Representatives Standing Committee on Economics, Finance and Public Administration, I think you will see we can learn many things from the Reserve Bank of Australia as to how they have helped our government—our government has certainly helped the Reserve Bank—to set the key areas to continue the healthy growth of this economy.

The then Governor of the Reserve Bank, Mr Macfarlane, did indicate a real concern—and I think it sticks out very clearly from this review—that the changes in housing affordability for Australians are a clear worry for many people. But, as Mr Macfarlane said, the real concern is the increase in the cost of housing and the cost of the land, as opposed to the increase in the interest rates. Certainly a lot of people—in particular, young people—are purchasing houses or putting themselves in a position to purchase a house. The problem is not the interest rates. If we had to buy houses under Labor’s interest rates, it would be impossible. Seventeen per cent on borrowing for an average home in Sydney would be beyond most people in average conditions.

The difference between now and five to 10 years ago is actually the cost of housing, not the interest rates, because interest rates of course are much lower. In fact, the interest rates on housing are lower now than they have ever been, compared with Labor’s 13 years in government. The two recent interest rate rises certainly have increased the cost of mortgage repayments—we cannot deny that—but purchasing a house now will cost a fair amount more than it would have done 10 years ago. When looking at housing affordability, we also need to look at the role of state governments in relation to land releases.

Mr Macfarlane looked at the supply and demand theory and suggested that price increases are due to excessive demand over supply. Because Australia has a good economy and returned to low inflation, and interest rates were halved, borrowing became a lot easier. People borrowed more and therefore drove up housing prices. But we also need to look at the supply-side issues in relation to land releases. I think state governments all around Australia have been at fault here. With the reluctance to release new land and buyers now having to pay up-front for services like sewerage, roads, footpaths and other services, this has enormously increased the price of new homes. These factors are very important to people when they decide whether to buy or to build. It is not the interest rates that are scaring people; it is the up-front cost of the housing loan that is scaring them. For some of these houses for sale these days, very little has changed on the house in the last 10 years except the price. These changes certainly have not been steady and across the board in each state. This issue determines where people will decide to live and invest their money.

When we look at the pace of economic expansion and domestic economic conditions in Australia, we see that it appears to have picked up over the first half of 2006, with business investments becoming particularly strong in Western Australia and Queensland, where the activity has continued to run faster than in the rest of the country. In the hearing the issue of the dual economy was raised with the Reserve Bank of Australia. Up to the June quarter, unemployment in Western Australia was averaging 3.6 per cent whilst in New South Wales unemployment was 5.4 per cent. That is quite a large difference—50 per cent in fact. Perth house prices, as a result, have increased by 28.8 per cent for the year to the March quarter, and house prices fell 3.1 per cent in New South Wales.

Mr Macfarlane indicated that there is a lot of flexibility in the economy now which, even with those sorts of problems, is making things a lot better than they would have been 30 years ago. When we look at the household sector, we see that the Reserve Bank of Australia reported that household demand strengthened in the first half of the year following a period of moderate growth in consumption spending and a corresponding increase in the household saving ratio in 2005. The volume of retail sales increased by 3.6 per cent over the year. Consumer sentiment rose in July and remains at above-average levels after having eased in recent months in line with higher petrol prices and the increase in the cash rate in early May.

One of the larger areas of responsibility for the Reserve Bank of Australia is inflation. Of course, one of the main levers that they use to control inflation is interest rates, to hopefully reduce the supply of money. We can all see from this information that the health of the economy is greatly admired all over the world. In fact, if you want to look at what is causing some of the pressure on interest rates apart from the amount of supply of money that we have, you can see that the demand for loans is not due to the federal government. In fact, over the 10½ years of this government, we have reduced debt by $96 billion—no mean feat when you consider that it took this country 90 years, since Federation, to accumulate in total $16 billion of debt.

In that time we actually built a new Australian capital, we had two world wars and quite a few other skirmishes and we had to build up a federal bureaucracy. It took us 90 years to accumulate $16 billion worth of debt. But, over the next five years of the Labor government, what we as a country took 90 years to do they did every year for the next five years. So we went from $16 billion to $96 billion in five years, from 1991 to 1996. We were elected on the basis that we needed to reduce that debt and reduce the demand on money. If you believe in the Friedman idea of the cause of inflation—and certainly I do—that is what had increased the interest rates. That is why interest rates went through the roof during the term of the Labor government.

We have reduced that demand on money and we have now taken the debt from $96 billion down to zero. In fact, now we actually have money in credit, which serves us well. But isn’t it funny that what we saw Labor do federally we see them in the states—we have Labor governments all around the country—falling for the old problem. They have actually increased the demand on loans themselves. Their budgets have all gone into deficit, no matter how good the times are and no matter how much of a windfall they have had from things like land taxes and stamp duties, which we would all hope they would reduce. In fact, in my state of South Australia they actually increased the stamp duty on houses—yet another way of increasing the cost of housing.

Here we are, as a federal government, giving a $7,000 grant for new home building, and someone buying an average house in South Australia is charged about $15,000 in stamp duty by the state government. So we giveth and they taketh, which is the old Labor way. As a result of that, in South Australia, for example, each year they are getting about $200 million extra from GST receipts. They get all of the money from GST. They have been getting all the money from their windfall taxes in stamp duty and land tax. As a result, in South Australia alone, they are about $500 million better off than they would have been under the old system and without those windfall taxes. But what did they do? Did they reduce their deficit? No. They have actually increased it. They have increased their borrowings, which puts pressure on our interest rates.

This is happening all around Australia with state governments. So I think it is very clear that, if you want a government to actually manage the economy, you elect a coalition government. If you want disaster, you elect Labor. (Time expired)

Debate (on motion by Ms Hall) adjourned.