Australia risks becoming a ‘welfare state’ without spending, productivity fixes

The Reserve Bank has warned ongoing slow productivity growth will restrict how far it can bring down official interest rates amid claims from a leading think tank the country will soon become a “European-style welfare state” if government spending is not reined in.

As the International Monetary Fund again urged the government to lift the economy’s speed limit by increasing competition while being cautious in supporting individual industries, minutes of the RBA’s meeting at which it surprisingly held interest rates revealed internal divisions over the inflation threats facing the country.

RBA governor Michele Bullock explained the 6-3 split in the bank’s decision.Credit: Dominic Lorrimer

In early July, the Reserve’s monetary policy committee split 6-3 to hold the cash rate at 3.85 per cent. Financial markets and economists had expected the bank to cut rates to 3.6 per cent.

The minutes show that all members of the bank believe rates are on the way down, with the doubt over when to make the next cut.

“The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty,” the minutes showed.

Those backing no change argued that unemployment – up to May – had been steady, with the overall jobs market considered tight.

This was related to ongoing weakness in productivity growth, which the minutes show the bank considers to be a structural issue, a drop-off in productivity in the mining sector and the expansion of non-market parts of the economy such as health and aged care.

The worry over productivity, the focus of a three-day meeting of experts in Canberra in August, prompted the bank to warn that without a lift in productivity, interest rate settings and the economy’s overall growth rate would have to change.

“Members also observed that, if productivity growth proves to have been persistently lower than had been the case historically, the recent subdued outcomes for GDP growth may not have been far below the rate of growth in supply capacity,” it said.

Those supporting a rate cut said there was “already sufficient evidence to be confident that inflation was on track” to remain around the RBA’s 2-3 per cent inflation target, “if not lower”.

Reserve Bank members supporting a rate cut are concerned about the potential impact of Donald Trump’s trade agenda.Credit: Bloomberg

There was also concern about the broad economic impact of Donald Trump’s tariff agenda which was likely to drag on the Australian economy and inflation.

“GDP growth in Australia was already subdued, the saving rate had risen, the underlying momentum in wages growth and services price inflation appeared to be lower and some concerns were expressed that the recent data suggested a loss of momentum in activity,” they minutes noted.

But research to be released on Wednesday by the right-leaning Centre for Independent Studies suggests productivity and economic growth are being affected by overall government spending.

Its research suggests that spending by all levels of government has increased from about 34 to 35 per cent of GDP in the late 1990s to 2008, but is now between 38 and 39 per cent and growing.

Centre for Independent Studies senior fellow Robert Carling said spending in areas including defence, the NDIS, aged care and transport infrastructure had all grown sharply, creating a “formidable bloc” of people who were reliant on government expenditure opposed to restraint.

“The honeymoon of debt-funded largesse is over. Without a determined reset of expectations, Australia risks sliding into a European-style welfare state — slower growth, higher taxes and a culture where ‘voting for a living’ replaces ‘working for a living’,” he said.

On the other side of the political spectrum, the Greens believe the government should use next month’s roundtable to consider tax cuts for young parents and offset the lost revenue by axing the capital gains tax concession and reducing subsidies on fossil fuels.

“Right now, the government gives better tax incentives to investors like Clive Palmer or Gina Rinehart than it does to people who actually work for a living,” Greens leader Larissa Waters said.

The government is also being pressed to introduce productivity-enhancing policies by the International Monetary Fund.

In a global report released overnight, the fund said Australia was one of a number of countries that had to rebalance its exposure to the rest of the world by lifting economic growth.

“Australia’s commitment to structural policies that boost competitiveness, including via promoting R&D, reducing barriers to labour mobility, upgrading competition policies and stimulating innovation, would help improve export quality, reduce unit labour costs, foster high-value industries and contribute to medium-term external rebalancing,” it said.

The government has adopted a series of specific industry policies since coming to office, including its Made in Australia program.

But the fund cautioned this type of direct intervention should be carefully targeted.

“Industrial policies should be pursued cautiously and remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions and aim to minimise trade and investment distortions,” it said.

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