Former RBA boss warns Australian living standards in firing line

Former Reserve Bank governor Philip Lowe says the next interest rate move is likely to be a cut, but warned that living standards in Australia are in the firing line if productivity does not pick up.

Speaking at a panel discussion for Future Generation – a philanthropic fund chaired by Lowe – the former RBA head said there was still “further work to do” to ensure inflation returns to, and stays within, the 2 to 3 per cent target.

Future Generation chair Phil Lowe said one of the roadblocks to productivity growth was the tax system.Credit: Louie Douvis

He added that current cost pressures across the economy mean a rate hike is not yet completely off the cards. “There’s still quite a lot of cost pressure in the economy, partly because productivity growth is weak.”

“In the medium term, the challenge is to make sure that we get better at doing stuff. If we don’t do that, then our living standards will stagnate,” Lowe said.

While inflation slowed from a peak of 7.8 per cent in December 2022 to 4.1 per cent in December last year, Lowe said the “missing piece” for central banks to be able to sustainably lower interest rates was a slowdown in the growth of underlying services prices which have proved more stubborn.

“I think it’s more likely the next [interest rate] move will be down, but it’s possible they’ll need to go up again because there’s still quite a lot of underlying cost pressures in the economy,” he said.

If we can’t get stronger productivity growth, everything’s going to get harder.

Future Generation chair and former RBA boss, Philip Lowe

“Central banks are creatures of their framework. And the framework is that interest rates will be determined by the inflation outlook.”

Lowe warned that wages – which have grown 4.2 per cent over the year, and tend to be correlated with inflation – needed to be accompanied by productivity growth.

“At the moment, productivity growth is close to zero,” he said. “If we can’t get stronger productivity growth, everything’s going to get harder.”

He warned that the current tax system remained a key roadblock to boosting productivity.

“Almost all economists say the tax system is not fit for purpose,” he said.

“Australia by comparison with other countries, taxes consumption too low and wealth generation too high. In other words, GST is too low and income tax is too high.”

While Treasury’s most recent intergenerational report forecasted economic growth of 2.2 per cent over the next 40 years, Lowe said more than half of that was on the assumption that productivity would grow at 1.2 per cent a year.

“That [assumed productivity growth] is much better than we’ve done over the past decade and a half,” he said.

“There are a lot of things we can do [to improve productivity], and we’re doing none of them.”

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.