Tim Wilson (Goldstein, Liberal Party) Share this | Link to this | Hansard source

On behalf on the Standing Committee on Economics I present the committee's report entitled Review of the Reserve Bank of Australia annual report 2018, second report, together with the minutes of proceedings.

Report made a parliamentary paper in accordance with standing order 39(e)

by leave—After a long period of interest rate stability, the Reserve Bank of Australia lowered the cash rate in June and July 2019 to one per cent. Commenting on the decision to leave rates on hold in August 2019, the governor said the RBA:

… judged that after having moved twice in quick succession it was appropriate to wait and assess developments both internationally and domestically.

These two reductions by the RBA were scrutinised at length at the committee's public hearing on 9 August 2019. The governor said the RBA expects growth in the Australian economy to strengthen gradually, with the RBA's central scenario forecasting GDP growth of around 2.5 per cent over 2019 and 2.75 per cent over 2020. I need to note those were statements at the time. Obviously, events since have raised questions about those projections. This outlook, the governor commented, is being supported by 'the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector.'

However, the governor also identified that Australia is vulnerable to economic headwinds from the global economy, in particular the ongoing trade and technology dispute between the United States and China. The governor remarked that the dispute has disrupted trade flows, resulted in business investments being postponed or reconsidered, increased volatility in financial markets and has increased the likelihood of other central banks reducing their rates.

Inflation remains low in the Australian economy, and underlying inflation has been below two per cent for around three years. CPI inflation was 1.6 per cent in June 2019 and is forecast to lift gradually to around two per cent by 2021.

The governor defended the effectiveness of the RBA's inflation target, which aims to keep CPI inflation between two and three per cent, on average, over time. He noted that recent inflation data suggests that there has been more spare capacity in the economy than previously thought and the Australian economy can have a lower unemployment rate without producing inflation pressures. Consequently, the RBA has revised down its estimate of the non-accelerating rate of unemployment, or the NAIRU, an indicator of full employment, from five per cent to 4.5 per cent. The governor commented that 'the economy has generated a huge number of extra jobs, and the employment-to-population ratio has never been higher in Australia than it is right now.'

Despite this, within only three months, the RBA reduced the cash rate further to a historical low of 0.75 per cent in October 2019. Commenting on the decision to keep rates on hold at 0.75 per cent in November 2019, the governor said that the RBA board 'is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.' After three relatively quick reductions in interest rates, the efficacy of monetary policy is being publicly brought into question, including by myself.

In answers to questions on notice to another inquiry, the committee found that, following the June and July interest rate cuts, between 0.4 and seven per cent of the big four banks' principal and interest mortgage holders actively requested a reduction in their interest repayments. By comparison, the overwhelming majority of customers passively accepted higher principal repayments. This data suggests that the benefits of interest rate cuts according to economic theory are not necessarily being realised in practice.

Similarly, the data also showed that the impact for interest-rate-bearing depositors was immediate and real. While low interest rates may encourage some people to borrow and invest, low rates reduce interest income for others. Many Australians, particularly those relying on interest-bearing deposits for their income, have been negatively affected by persistently low interest rates and further reductions in the cash rate in June, July and October of last year.

The RBA's rate cuts also sit against a global backdrop where currency effects appear to be a core motivation for monetary policy decisions. As Governor Lowe rightly cautioned foreign central bankers at a conference in Jackson Hole, Wyoming, last year:

… if all central banks ease similarly at around the same time, there is no exchange rate channel: we trade with one another, not with Mars.

The committee will continue to hold the RBA to account, including this Friday at our next hearing, for the effects of its rate decisions on all Australians and the Australian economy, as well as the emerging discussion surrounding unconventional monetary policy options as global interest rates may head towards zero.

During the global financial crisis, the RBA used a form of unconventional monetary policy through expanding the repayment terms of funding for banks to increase liquidity. That decision was made in the face of a temporary liquidity crisis. The challenges facing Australia's economy today are neither temporary nor as a result of liquidity. The challenges are structural.

If enacted, quantitative easing would be one of the most significant economic decisions made since floating the Australian dollar. We acknowledge and accept the right of the RBA to independently set monetary policy, but this does not render them immune to scrutiny. Monetary policy is currently determined independent of the government and the parliament. The independence of the RBA obliges parliamentarians to scrutinise their decisions on behalf of Australians as part of their core representative function. This justifies heightened scrutiny on the preparation of any measures for consideration by the RBA, the decision pathway for their use, their practical implementation and their efficacy, particularly with unconventional monetary policy.

In answers to questions on notice posed by the committee, the RBA outlined that unconventional monetary policy options range from purchasing government securities to providing longer term funding to banks to support credit creation to purchasing private-sector assets such as mortgage-backed securities and foreign exchange intervention.

Through speeches and interactions with the media, the RBA has continued to familiarise Australians with its thinking on potential unconventional monetary policy approaches. The practical consequences of these approaches should be considered. Recently, former RBA board member Warwick McKibbin warned that QE is corrosive to capitalism itself through the misallocation of capital and may reduce business investment in innovation, decreasing their long-term viability.

A 2018 study from Wei Cui and Vincent Sterk from the University College London concluded that QE 'come with strong side effects on inequality, which can substantially lower social welfare'. This analysis is backed up by 2018 Congressional Budget Office data, which shows that from the start of the Federal Reserve's QE program until 2014 in the context of it the global financial crisis, average income growth before taxes were stable or declined for low- and middle-income earners while it increased markedly for high-income earners. Disturbingly, the study finds that within the highest quintile income was highly skewed towards the very top of the distribution, mostly through the increased pricing of assets and stabilisation of their prices. In practice, QE acts as a wealth transfer through asset price inflation from the young, who are trying to get ahead, towards those who are already established, exacerbating existing issues of intergenerational equity.

At an economy wide level, the benefits are also dubious. Stephen Roach from Yale University concluded the US QE 'payback was disappointing', highlighting that over the six years form November 2008 successive QE programs added $6.3 trillion to the Fed balance sheet, which amounted to nearly 25 per cent more than the $2.9 trillion expansion of nominal GDP over the same period. In fact, for every dollar of QE, you got less of your dollar back.

In a recent speech, the RBA governor dampened down expectations that they would adopt QE. He observed Australia's financial markets were operating normally and our financial institutions were able to access funding on reasonable terms, so QE to address liquidity is unjustified. The RBA governor outlined he has no appetite to undertake outright purchase of private sector assets such as part of a QE program and the only option they would consider would be to purchase government bonds to lower risk-free interest rates along the yield curve with effects on the exchange rate. In that context, the RBA governor outlined such a scenario would be considered at a cash rate of 0.25 per cent but not before that. Consequently, the committee has an amplified responsibility to closely scrutinise any rate cut because of the cascading consequences to licence QE. On that basis, I welcome the decision only yesterday not to cut rates.

In his speeches and in other public remarks, the RBA governor has outlined the options available to Australia—monetary policy, fiscal policy and structural reform. In doing so, much of the discussion has focused on the progressive exhaustion of monetary policy. Media commentary of the RBA governor's speeches appear to have an overweighted focus on his remarks on fiscal policy—and I might note that continues even this year—without recognising his regular reflections on capital constraints, notably in infrastructure. Obsessing over high-GI spending that increases public debt for an economic sugar hit is not sustainable, despite its periodic advocacy by some people in this House.

More emphasis needs to be put on the RBA governor's commentary on the potential of low-GI structural reform that yields long-term results, encourages business investments and would aid in the progressive expansion of the economy to the benefit of the Australian people through jobs. The options are manifest from further broadening and flattening of the tax base, reforming litigation funding models, the grounds for shareholder class actions and the application of responsible lending laws that can all foster unnecessary costs and risks as well as many other measures. The RBA governor has also outlined it is not clear the experience with negative interest rates has been a success, outlining the risks of a reversal interest rate—that is, the interest rate at which lower rates become contractionary rather than expansionary—and there is a confidence we are still a fair way from it.

The answers provided from the banks to the committee on the stimulatory effects of interest rate cuts at such low levels backs up the RBA governor's statements, narrowly. But at these levels reducing interest rates for stimulus appears to be equivalent to tapping an empty well—that is, there may technically be shallow puddles of water still at the bottom, but it would be more effective and sustainable to look for alternative sources of water.

The committee notes that on 5 November 2019 the Treasurer, the Hon. Josh Frydenberg PM, announced that the current statement on the conduct of monetary policy would remain unchanged. This continues the September 2016 agreement between the Treasurer and the governor of the Reserve Bank that an appropriate goal is to keep consumer price inflation between two and three per cent. On average, over time, it's the government's view that this provides continuity and consistency at a time of global economic uncertainty.

On behalf of the committee I would like to thank the governor of the Reserve Bank, Dr Philip Lowe, and other representatives of the RBA for appearing at the hearing on 9 August 2019. I'd also, of course, like to thank the committee members and the secretariat, who ably assisted at every point in the task and duty of the committee. And I know at times I can be a challenging chair! The committee will scrutinise the RBA at further public hearings this Friday 7 February and Friday 14 August 2020, and I very much look forward to scrutinising every decision the RBA makes, as I'm sure the opposition does as well, on behalf of the Australian people. I commend the report to the House.

Andrew Leigh (Fenner, Australian Labor Party, Shadow Assistant Minister for Treasury) Share this | Link to this | Hansard source

by leave—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. Wages are 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 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 they'll do it straightaway, they're promising 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-level 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 can 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 level of the target band. 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 is a range of other central banks that are at or near the lower bound.

The member for Goldstein 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 be, that means 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 the member for Goldstein 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 to household spending.

We also heard from the Reserve Bank that they don't regard climate change as 'a hobbyhorse 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. He said, 'Looking back at last year, economic growth was weaker than we had 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's and Treasurer's inaction and incompetence have left the Reserve Bank to do all the heavy lifting. The government 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.