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Economic Reform: Hard & Unsexy

Australia will need to do more than simply cut interest rates in order to boost economic growth — but we are not going to like it, said former federal treasurer Peter Costello. Speaking in Sydney just a day after the Reserve Bank slashed the national interest rate to a new record-low of 0.5 per cent, Costello said the strategy of cutting rates was an ‘easy lever’ that was quickly becoming less potent.

“Moving the rate by 25 [basis points], even 50 bps … You’re running out of efficacy,” he said.

When looking at boosting economic growth, manipulating monetary policy – as opposed to adjusting fiscal policy, which requires legislation that requires parliamentary approval – is the “easiest lever to pull”, he said.

“In a crisis, everyone relies on the easiest arm of policy which is monetary. We've been relying on it since 2008 – since the global financial crisis.”

But with the cash rate now at 0.5 per cent, a new low never before seen in Australia, Costello pointed out that monetary policy has little room left to move.

Sooner or later, the government will have no choice but to address “unsexy” underlying issues weighing on the broader economy by boosting productivity and removing “blockages and stoppages”, he said.

“It’s looking right across our economy: an efficient tax system which rewards initiative, good transport links which make it easier to distribute at lower costs good and services, good education so people are able to realise their full potential, less intrusion in regulation."

According to the former treasurer, we haven’t dealt with these issues because they are more difficult to tackle than changing the cash rate, which is “done overnight”.

“All of those things are pretty hard, and they are unsexy. And that's why it's much easier just to get your central bank to make an announcement on the cash rate,” he said.

“But the trouble is after your central bank has done all their cash cuts … [we’ve] still got all of these hard issues to go back to.”

This problem isn’t Australia-specific, but has been a feature of other Western countries since 2008, he added.

“The easy stuff we’ve all done, but there's a lot of the harder stuff that’s still there.”

“These are abnormal times,” he said. “What will a rate cut do for the economy? In my view, not much.”

“It’s also what we call the law of diminishing returns. Every rate cut brings a little less of a return than the one before.”

In a post-bushfire and post-coronavirus outbreak era, below are the thoughts of some other experts. Here’s what they said needs to be done to kick start the economy:

1. Give Aussies cash: Stephen Koukoulas, an independent economist

The single, most effective solution would be to have a series of cash payments to householders.

The bulk of this money would be recycled through the economy, ramping up retail spending and sustaining jobs. To support the economy over time, it could be a payment made once a month for several months.

The other benefit is that such action is not baked into the budget (unlike tax cuts, which last forever). When the fallout from the virus ends, the payments stop.

2. Boost wages: Jim Stanford, Australia Institute Centre for Future Work chief economist

Consumer confidence has been hammered by the fires and now by the pandemic … but it was already staggering because there’s been no improvement in real wages for the last seven years. The string of retail bankruptcies in recent months is more proof consumer spending is historically weak.

For years the government has been telling Australians to be patient and just wait for better wage growth around the corner. That hasn’t happened – and in fact, it is now clear that wage growth will get weaker before it gets stronger. The latest economic and labour market data has been very disappointing.

Instead of just hoping for better wage growth around the corner, here are four things the Commonwealth government could do right away to strengthen wages.

1. Provide emergency income protection for workers who lose work because of the pandemic;

2. Restore penalty rates for hospitality and retail workers;

3. Lift the minimum wage to a living wage level;

4. Eliminate the 2 per cent cap of wage gains for public servants.

3. Incentivise businesses to invest more: Shane Oliver, AMP Capital chief economist

A significant tax inducement is available for all businesses to invest more by December 31.

It would basically mean allowing companies to reduce their tax bill by all or a portion of the amount of investment they undertake.

This is already available for smaller businesses but needs to be extended in some way to big businesses too.

4. The government should cough up: Kerry Craig, JP Morgan Asset Management global market strategist

The broad answer is to create demand, but this can be achieved in many ways.

It could be done by increased government spending on infrastructure that generates the need for resources and labour, boosting wages, which would flow into the broader economy.

It could be done by incentivising households to spend, and lift consumer demand through tax cuts, rebates or so-called helicopter money. It could be done through regulator changes around wage and the labour market or the housing market.

Once Australian companies and consumers feel better about the direction of the economy, job prospects, earnings, then they are likely to spend and invest more, lifting domestic economic activity.

5. Print more money: Jessica Amir, market analyst, Bell Direct

If I could say one thing that we need in times like these, it’s quantitative easing (QE). We are expected to see another rate cut next month. But that’s not enough to prop up growth.

Which is why we are expecting some light quantitative easing (when the RBA will step in and buy bonds, injecting money into markets, which will encourage spending, boost growth and employment.. and hopefully wages will rise too).

Let’s remember there are still too many people unemployed and wages are not high enough to boost economic growth. As they are not in the RBA’s sweet spot, to support and bolster economic growth…we need QE.

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