IAN MCAULEY. The Reserve Bank’s interest rate cut – a futile gesture?Mar 5, 2020
Interest rate cuts in May, July and October last year have done little to stimulate our sick economy. Why should Tuesday’s cut be any different?
The press release accompanying the Reserve Bank’s decision to cut interest rates has all the conviction and sincerity of a confession extracted under duress.
If the Reserve Bank’s statement were to be considered at face value, by now the Australian and global economy would be recovering from their malaise, if only that wretched coronavirus hadn’t come along to wreck the party. There is no mention of the fires: perhaps that’s because most economists do not bring natural wealth or its destruction to account and perhaps it’s because they see replacement of burnt buildings as an opportunistic boost to GDP.
The coronavirus is treated as an exogenous event and that’s a reasonable call. But its consequences will be worse than they need be because of two effects – the government’s fiscal fetish, and the economy’s fundamental structural weakness.
The government’s fiscal fetish stands in the way of a 2008-style response
When hit with an exogenous shock in 2008, the global financial crisis, the Rudd Government responded decisively with a rapid cash injection and programs of well-designed fiscal stimulus, designed to keep human and physical resources employed.
Morrison can’t bring himself to do something similar, because these were Labor initiatives. No amount of sound advice can allow the government to depart from its message that anything done by a Labor government is economically reckless. Morrison’s obstinacy is a strong contrast to Menzies’ habit of managing the economy by copying Labor’s economic ideas.
And there is that budget surplus obsession, which means that a meaningless bookkeeping figure is prioritised over the nation’s economic fortunes. Perhaps Morrison hopes that a high iron ore price will allow the budget to come in with a razor-thin surplus. Perhaps he plans to manipulate his “targeted, measured, reasonable” response in such a way that the cash doesn’t start to flow until after July 1, thereby allowing him to crow about a 2019-20 “surplus”. His skill is that of the marketer – impression management. On economic management he and his inner circle are out of their depth.
As is becoming habitual with the Morrison Government, there is a conflict between its political and economic objectives. Politically it sees the coronavirus as an opportunity to deflect attention from its inaction in climate and energy policy and the corruption being uncovered in its administration of discretionary spending. Economically it wants people to go out and spend and get further into debt, even though it won’t do so itself. “Private debt good, public debt bad”.
This conflict arises because there is no way the government can shift the political focus on to coronavirus without raising anxiety. Perhaps if Morrison had displayed some decency and integrity in the 2019 election campaign, if he hadn’t lied about his department’s involvement in sports grant funding, and if he could communicate without sounding like a door-to-door missionary, he might be able to command some trust and dissuade the population from depleting supermarket shelves of toilet paper and hand sanitisers, but in order to win office he depleted his meagre stock of credibility.
This is a government whose mode of communication is fear – fear of terrorists, fear of Labor, fear of a virus. On Tuesday morning, before the RBA decision, Attorney General Christian Porter turned up on the ABC’s Breakfast program to talk about the Government’s Biosecurity Control Orders, speaking like a sergeant at a boot camp who relishes the chance to scare the wits out of recruits. Morrison won the 2019 election with a fear campaign; it’s difficult to get his attack dogs to call off what has been a successful tactic.
When people are anxious they don’t go out and spend: they save. Morrison may be trying to bypass consumers by giving money to businesses, but in times of uncertainty businesses do well to reduce debt and consolidate their balance sheets, just as consumers behave. That’s why, in situations like these, public spending on real activity is the most effective way to boost a flagging economy. The Rudd Government’s school-building and home insulation programs were on the right track, even though the latter program was not well-administered. A practical path for the Commonwealth this time would be to give cash grants to state governments on the condition that they be spent on small capital works. But that would be too similar to Rudd’s initiative, and there is no guarantee that state governments would oblige Morrison by developing spreadsheets guiding expenditure to marginal federal electorates.
So the government falls back on the Reserve Bank, even though about the only effect of official interest rate cuts in May, July and October last year has been a bout of house-price inflation, rather than stimulation of the real economy – and those cuts pre-dated the fires and the coronavirus. Why should interest rate cuts work any differently this time?
As shadow Treasurer Jim Chalmers said “The government should stop pretending that weakness in the economy only just arrived with the outbreak of the coronavirus”.
Australia’s economy is structurally weak
Stagnant wages, high underemployment, high household debt, unaffordable housing, worsening wealth inequality, a collapsed exchange rate and falling productivity are all indicators of a structurally weak economy. In its six and a half years in office, the Coalition’s only economic concern has been the budget deficit, as if managing a complex economy can be reduced to an exercise in bookkeeping.
Not only has it neglected policies related to climate change, but also, in abolishing the Gillard Government’s carbon pricing mechanism, it has deliberately thwarted attempts to make our adaption to climate change an opportunity for innovation and economic growth. It has stood by as private investment has slumped, as housing has become unaffordable, as our financial sector has become a bloated burden on our real economy, and as our education standards have slipped. It has made pitiful progress on replacing our physical infrastructure – our congested urban roads and rail systems, our main highways, our high-voltage transmission lines, our antiquated railroads, and our communications infrastructure (the NBN being another area where the Coalition has deliberately wound back structural adjustment initiatives of its predecessor).
The major structural weakness exposed by the coronavirus is our over-dependence on China, both as a destination for our exports and as a source of imports. Successive Coalition governments have presided over a fundamental transformation of the Australian economy, a transformation symbolised by the extinction of the Holden brand. The Australian economy, which once had a diversified base, has increasingly become a quarry for China. Of course the old “Australian Settlement” where our industries were reliant on tariff protection and stifling restrictions on domestic competition was unsustainable, but while the Hawke-Keating governments had plans for managed modernisation, successive Coalition governments have privileged the extractive industries – particularly coal – while neglecting opportunities for structural adjustment.
But we will probably avoid a “recession” – whatever that means
No doubt the slightly-better-than-expected national accounts released on Tuesday will allow the government to go on claiming all is well, but these figures don’t point to a healthy economy. GDP growth is almost entirely accounted for by population growth: in trend terms per-capita GDP in 2019 was only 0.3 per cent higher than in 2018.
And we will probably avoid a “recession”, but that doesn’t mean much. Because a “recession” is defined as two consecutive quarters of negative growth, Australia’s high population growth in comparison with other “developed” countries means that there can be growth in absolute GDP while there are falls in per-capita growth. Also, the “two consecutive quarters” criterion creates a quirk. It is possible that, because of the fires and the coronavirus, GDP will fall significantly in the March quarter this year, and will pick up in the June quarter as private and public funds start flowing into reconstruction. The sharper the fall in the March quarter, the more likely it is that the June quarter will see us escape a “recession”. To illustrate, if GDP were to fall by 1.0 per cent in the March quarter and then pick up by 0.5 per cent in the June quarter, we would have avoided a “recession”. But if it were to fall by 0.1 per cent in each quarter – a much milder outcome – we would have a “recession”.
So why has the Reserve Bank gone ahead with yet another interest rate cut? Perhaps it is only through expending all its ammunition on what it knows to be a futile exercise that it can bring an economically incompetent government to its senses.
Ian McAuley is a retired lecturer in public sector management at the University of Canberra.