Scott Buchholz (Wright, Liberal Party) Share this | Link to this | Hansard source

It is my privilege here tonight to speak on the review of the Reserve Bank Annual Report 2010, the second report, which was tabled in 2011. The House of Representatives Standing Committee on Economics from time to time questions the Reserve Bank by calling governors as witnesses to further expand on monetary policy and how it interacts with Australian fiscal policy. Let me say from the outset that I commend the Reserve Bank under the stewardship of Glenn Stevens. While I am talking about Mr Stevens and his role as governor, I also want to take the opportunity to welcome some of the new board members and thank the outgoing board members.

I would like to pass on my congratulations on the magnificent effort over the last 10 years of one Warwick McKibbin. He had been a member of the board since July 2001. He was the director of the Centre of Applied Macroeconomic Analysis at the ANU. He was the director of the Research School of Economics at the Australian National University. He is a professional fellow of the Lowy Institute for International Policy, a non-resident senior fellow of the Brookings Institute USA and the list goes on. He is a man of immense talent.

He has been replaced by Catherine Tanna. Catherine comes with myriad experiences from the resources sector—particularly the gas sector. Those skill sets will serve her one in this two-speed economy and the terms of trade that we are dealing with at the moment, which I will speak more about during my speech. I also want to take this opportunity to welcome Dr John Edwards, a man of immense talent. In summary, he was a senior economist for HSBC and has a strong academic background. He will fill that void at the Reserve Bank and complete that team.

I want to encourage the ongoing independence of the Reserve Bank and its separation from government and how it sits at arm's length. I support their charter and the way that works autonomously. The Reserve Bank Board normally meets 11 times a year—on the first Tuesday of each month except January each year. At least one meeting is held in Melbourne, usually in the first half of the year. From time to time the board also meets in other capital cities. I would also like to take this time to acknowledge and thank Glenn Stevens again for making time to be available to come to Canberra. Later on in the year, we will be meeting again in Canberra.

To speak more directly to the report, one of the first things that I want to go over is the issue of inflation and some of the pressures that that will put on our economy moving forward. I am a commercial businessman, so I do not have an economic background as such. At university, I did a couple of subjects in it, so I understand the basic fundamentals of economics. What I remember is that when measuring GDP the formula was consumption plus government expenditure plus investments plus exports minus imports. Our exports and imports are our terms of trade. At the moment they are going off like a rocket. That is on the back of very little that we do with reference to fiscal policy. They are going off like a cracker because of the demand on our resources by international trading partners, given that they would be China and India. We do not have a lot of influence on that part of the equation when it comes to trying to stay within our inflation range of two to three per cent.

When you go through and start pulling that formula apart, you have consumption. Some will say consumption figures are up. Others will say they are down. The guys that are saying that consumption figures are up are referring to the lower household budgets, where people are struggling under the cost-of-living pressures—increases in rent, increases in energy prices and new taxes on energy and fuel. Those guys who are saying that the cost-of-living pressures are down are the ones who are saying that the monetary system, with reference to consumption in that formula, is drying up. There is very little stimulus in our retail market. When you have a look at business receivables ledgers, people are struggling to find the capacity to pay their bills.

We do as a government, through fiscal policy, have the capacity to affect consumption. But the most important part of that formula is government expenditure. I will use the NBN as an example. For the sake of an economic debate, whether you believe the NBN is good policy or not, set that aside and just look at it as a capital investment of government. We have heard the analogy of our two-speed economy. We have a resources sector that is going off like a cracker then we have another speed in our economy which the Reserve Bank refers to as the multispeed economy. I refer to it as a two-speed economy. The government refer to it as a patchwork economy. The definitions may differ but the fundamental principles of what we refer to are overwhelmingly the same. My concern is that capital investment in an NBN program in excess of $43 billion is just about to come online into that formula at the very time when the resources sector is going through a one-in-110-year spike in capital investment on the back of this unfathomable terms of trade. What we have are some things that we can control in that formula and some things that we cannot.

From a macroeconomic perspective, a fiscal policy perspective, I believe that large government spending programs need to be wound back to allow the private sector room in the marketplace. The predominant funding capacity in the NBN program is civil works, and they are very civil works that compete against the resources sector. What does that mean? When we are out there in the marketplace looking for loader drivers and graders and tractor drivers, the telcos are looking for those very same skill sets. I am sure when they did their forecasting they would have found that you would normally buy those commodities at around $60,000 to $80,000 a year per head. The resources sector pay $130,000 to $150,000 per head. That puts upward pressure on wage inflation, which then trickles down. That is a long way of going about it to try to explain how inflationary pressure works. I can assure you it is a challenge for our Reserve Bank moving forward when it comes to trying to cope with the inflationary pressures that we have.

I have already spoken about the capital expenditure with reference to the mining sector and the impact that that will have on our economy. I want to now speak about those small communities in regional Australia, even some of the cities, that have no linkages to the resources sector, and about how isolated they are. What happens is that as inflationary pressures push up the cash rate and so push up our mortgages and our cost of living, we find that those people who do not have access to the resources sector, to those inflated disposable incomes, when the upward pressure of inflation tunnels in and has virtually a multiplier effect, it does most harm to the people that can least afford it in our community. I just counsel the Reserve Bank when making their deliberations when it comes to movements in the cash rate that they are very mindful of those communities like mine in the seat of Wright in Queensland that do not have linkages to the resources sector, and that they take that into account.

Andrew Leigh (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

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. (Time expired)

Kelly O'Dwyer (Higgins, Liberal Party) Share this | Link to this | Hansard source

I always love listening to the contributions from the member for Fraser. I think it is terrible what they do to him as he tries to defend the government's economic record, but he does try valiantly, and I am going to make a couple of comments on it tonight.

I rise to speak on the review of the Reserve Bank of Australia's annual report for 2010 and the House of Representatives Standing Committee on Economics hearing with senior members of the Reserve Bank, including the Reserve Bank Governor, Glenn Stevens, in February of this year. The House of Representatives Standing Committee on Economics is in fact the only committee that has oversight on monetary policy settings, which of course is why it is so significant. Also, it is the only committee that has the opportunity to question the Reserve Bank on monetary policy settings, and that happens twice a year. When speaking about monetary policy and the management of the Australian economy we cannot ignore the government's fiscal policy settings. This was also a feature of the report and has been a feature of much economic analysis subsequent to the report.

Tonight I just want to touch on a couple of overarching points. The government has cherry-picked aspects of the RBA's report and testimony to congratulate itself on its economic management of the Australian economy, for its handling of the GFC, its stimulus spending and the forecast surplus yet to be delivered. It blames events like Cyclone Yasi and the floods for having a negative impact on GDP growth, and its need to both tax more and borrow more at unprecedented levels.

Of course, there are other very important structural reasons why Australia came through the GFC. Give credit where it is due. It was the Hawke-Keating government that floated the dollar, allowing our exchange rate to dive at the end of 2008 to support our export industries. And there was bipartisan support for a wholesale funding guarantee for our banking system and for retail deposits in the dark days after the Lehman collapse. But it was the hard work of the Howard-Costello government in paying off Labor's $96 billion of debt and investing in the Future Fund that meant the national balance sheet was strong—strong enough to support those contingent liabilities. It was the coalition's regulatory reform agenda that struck the right balance between regulation and flexible markets. We introduced a dedicated prudential regulator in APRA, which conducted regular stress tests on the banks. We reformed the Corporations Act to facilitate faster and more efficient capital raisings. Our financial services reforms, while not perfect, stood in the way of a US-style subprime mortgage market emerging. A long history of stable coalition government and mature policymaking gave international investors confidence and reduced foreign capital outflows.

Our tax reforms improved budgetary stability during a volatile period. We left the country with a $20 billion surplus. It was the Howard-Costello government that enshrined the Reserve Bank's independence, with the RBA ensuring that our economy did not overheat, pre-GFC. What is more, our RBA was able to deliver a huge stimulus directly into the economy, because most Australian mortgages are floating rate.

Finally, the coalition ensured that we maintained and nurtured diversified trading relationships, including with China, because it has been China's massive stimulus spending that has underpinned the Australian budget. In contrast, the government would have you believe that we have seen off the GFC due to pink batts, BER blow-outs and $900 cheques. This is not sustained by a proper analysis of the evidence. We need a government that can set aside the spin and understand what drove Australian exceptionalism compared to the rest of the developed world during the GFC. Without that understanding, the government will invariably continue to make mistakes. It will continue to introduce regulation where regulation is not required. It will spend where it is unnecessary and counterproductive. And it will play political games with our international reputation, just as the government did with their first attempt at their mining tax. The latest budget is, of course, more of the same. From the latest budget papers we see that the budget deficit has soared to $49.4 billion and the forecast deficit in 2011-12 has blown out by $9.6 billion to $22.6 billion. We also have $107 billion in net debt. Something that the government also tried to do the other week and continued to try to do this week and also going into next week is lift our gross debt ceiling. This was already expanded in 2009 from $75 billion to $200 billion, and the government is trying to increase this further. These are all very important matters.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Whilst these are matters in this debate, it is a bit hard to talk about something that has happened this week when we are referring to a report that was done some time ago and the Governor of the Reserve Bank could not have referred to it.

Kelly O'Dwyer (Higgins, Liberal Party) Share this | Link to this | Hansard source

I will take it back then to the topic if you think I am wandering off it.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Just a tad. I would really like you to try, thank you.

Kelly O'Dwyer (Higgins, Liberal Party) Share this | Link to this | Hansard source

I think it is important to look at the evidence, because there are some warnings in the RBA's evidence that they presented to us. There will always be those who use a crisis to further their own agendas, and this government has used the cover of the GFC to continue its large spending program and to introduce new taxes. The government has already gone beyond its mandate at the last election and significantly reregulated the labour market in a way which will mute our competitiveness and jobs growth over time. The warnings are such that we need to be concentrating on a couple of key points, and they are these: the cost of living for Australian families; the danger of inflation as restated in the latest monetary statement; our two-speed economy and the challenges that poses; the sustainability of the resources boom and our reliance on China; the challenge of a volatile Australian dollar; capacity constraints; and the need to focus on improving the nation's long-run productive capacity, on which this budget has not done terribly much. The government needs to recommit to the economic fundamentals: sound budget settings, a prudent debt position and a transparent and well-managed financial system. I look forward to the next opportunity to hear from the Reserve Bank, in August. Before I conclude, I would like to add some remarks to those of my colleagues presented earlier as to the outgoing members of the RBA board, Donald McGauchie and Warwick McKibbin. We do appreciate the incredibly valuable service that they have provided to the RBA. We appreciate the expertise that they have provided for the good of the Australian people in developing sound monetary policy settings and we look forward to their contribution in other ways through other forums that no doubt they will now participate in. We thank them.

Debate adjourned.

Main Committee adjourned at 21:24