I’ve written many times before (at
least here, here and here about the need for
Australia’s government to pull the fiscal levers more to support the economy.
The RBA has all but exhausted the monetary levers. Interest rates are nearing
zero and risk creating an asset price bubble in the property market and/or the
stock market. Even the Governor of the RBA Philip Lowe acknowledges that “it
won’t generate medium term growth and just risks pushing up asset prices”. That’s
why we need the government to fast-track more infrastructure investment, enact
more training and skills development programs, undertake tax reforms in areas
such as housing, and offer private sector investment incentives.
But it still won’t be enough.
Australia could do everything
right. The government could go on the most well-targeted unprecedented spending
spree in our history. Economic growth could push up over 3 per cent again.
Unemployment could fall under the RBA’s 4.5 per cent target. Productivity could
start accelerating. Wage growth too could once again have a three in front of
it. Even inflation could return to the RBA’s 2-3 per cent target range.
But interest rates will still be
too low.
Low interest rates are a global
phenomenon. There are enormous amounts of savings sloshing around the global
financial system looking for returns. Households and businesses are indeed
borrowing it (every dollar of savings naturally represents a dollar of
borrowing somewhere in the world – it has to) but it’s not productive
investment. Too much of it is speculative. If it were productive, it would generate
solid returns and would drive up interest rates. This isn’t happening. The private
sector alone can’t find enough productive investments and governments aren’t
bold enough to go on an infrastructure spree. Hence low interest rates and
bubble-susceptible asset markets.
Australia can’t fight this trend
alone. If global interest rates are low, ours will be too, even if our economy
is running as well as possible.
This is the problem. During the
good times, we want central bank interest rates to be at least 4 per cent. Before
the GFC in Australia, they were 7.25 per cent! By some estimates today, good
times would only deliver 2-3 per cent interest rates. The reason this is a
problem is that during a downturn, it doesn’t leave the central bank much room
to cut interest rates to stimulate the economy (unless they wanted to target a
higher inflation rate – see my previous work here). This lack of ammunition would once again
put the burden on the less efficient and less timely political process to boost
the economy – something that independent central banks were supposed to largely
mitigate.
This is why we need … A GLOBAL
FISCAL PUSH. Trillions of dollars can be borrowed by national governments all over
the world at near zero per cent interest rates. Some governments can borrow at
LESS than zero. Even mortgage holders in Denmark are enjoying negative
interest rates of -0.5 per cent – yes, their monthly bank statement literally includes an
interest payment FROM THE BANK TO THE BORROWER! This is unprecedented and our
grandchildren won’t believe it – so keep your bank statements as evidence.
I’m old enough to remember a time
when it was unthinkable that we couldn’t convince governments to spend MORE and
we may be seeing the tide turning. The European Central Bank is increasingly putting
pressure on its national governments to spend up big. Even fiscally
conservative governments like Germany and the Netherlands are reconsidering
their balanced budget rules in light of the ridiculous cheapness of borrowing
and the fact that the EU may already be in recession.
And there’s no shortage of projects
that could be financed. In Australia, the pipeline of potential public
transport projects is virtually endless. In Europe and the US, simply repairing
and upgrading existing infrastructure would be a big boost. Given current interest
rates, it beggars belief that governments can’t think of a worthwhile way to
spend money.
This is one of the biggest moments
in the global economy since the 1930s but we don’t need a world war to finish
it. We just need governments to invest in their own backyards. It won’t just spur
long term economic growth and bring interest rates back up to levels that would
provide insurance against the next downturn. It could also show the world what
happens when they work together, ushering in a new era of global cooperation
that even a decade of insular nationalistic politics hasn’t yet destroyed.
