Living standards crisis: Reserve Bank lays it down on the table
The RBA has slashed its productivity forecasts and warned Australians to expect chronically lower living standards, as it cut rates for the third time this year.
Jim Chalmers is under pressure to secure long-term reform outcomes at next week’s economic roundtable that will end Australia’s productivity crisis, after the Reserve Bank slashed its productivity assumptions and warned of slower growth in living standards.
Amid flatlining productivity fuelled by red tape and over-regulation, the RBA on Tuesday lowered the cash rate by a quarter of a percentage point to 3.6 per cent and delivered a shock downgrade to several of its key projections.
Released ahead of the Treasurer’s three-day roundtable, the central bank is now expecting annual productivity gains of just 0.7 per cent over the medium-term, down from 1 per cent.
While a third rate cut in six months delivered relief for millions of household borrowers, Dr Chalmers acknowledged Australia was facing a serious “productivity challenge” that threatened living standards and long-term wages growth.
The statement on monetary policy released by RBA governor Michele Bullock on Tuesday included 297 references to productivity and a concession by the central bank that it had consistently over-estimated productivity forecasts that never “eventuated”.
As the government considers reform proposals floated by the Productivity Commission, unions, big and small business, think tanks and industry groups, Dr Chalmers said the RBA forecasts reiterated that productivity growth was Australia’s “most serious” economic challenge.
Due to weak productivity, the central bank now expects that the economy can only sustain a GDP growth rate of just 2 per cent before it starts overheating, down from its previous projection of 2.3 per cent. But it will also stem the economy’s capacity to supply goods and services, aligning more closely with subdued demand and helping keep inflation within the RBA’s 2 to 3 per cent target range.
Dr Chalmers and Ms Bullock said that despite a third rate cut since February, households were still facing economic pain from higher costs baked in from high inflation that was now moderating.
“Our productivity challenge has been structural. It’s been a feature of our economy now for the last couple of decades. It’s a very serious challenge. We’ve put it at the very centre of our economic strategy, turning around this poor productivity performance,” Dr Chalmers said. “If you could fix one thing in our economy over the medium and long term, it would be this productivity challenge, which has been a feature for too long. Our economy is not productive enough.”
The RBA, which lowered forecasts for capital expenditure, wages and household consumption, warned that other sections of the economy would be impacted if Australia could not reverse a decades-long trend of anaemic productivity growth. Heavy regulation, high growth in labour costs, weaker competition and stagnant business investment have been identified as pressure points that must be urgently addressed to lift productivity.
The Albanese government’s mission to cut red tape and speed up approvals across all jurisdictions is also motivated by Labor’s scramble to achieve its housing and clean energy targets, including building 1.2 million new homes by mid-2029.
Australian Industry Group chief executive Innes Willox said Dr Chalmers must “mix short-term wins with long-term visions” to achieve higher productivity.
“In the absence of meaningful productivity growth, wage increases will continue to push up inflation and require tighter monetary policy than otherwise,” Mr Willox said. “This tension points to the need for immediate productivity-unlocking reforms.”
Council of Small Business Organisations Australia chair Matthew Addison called for “brave economic reform” to turn around flatlining productivity growth. He said the government should embrace systemic long-term economic reform including “cutting the company tax rate to 20 per cent for small businesses”.
Ms Bullock, who will deliver a presentation on productivity on the first day of the roundtable meetings in Canberra next Tuesday, refused to publicly comment on productivity proposals put forward to date. “We are interested in productivity conversations but ultimately we don’t have control over that and I don’t feel in a position to comment on any particular suggestions for productivity,” the RBA governor said.
Asked if the Albanese government would increase its $900m national productivity fund to help states and territories turbocharge cuts to red tape and boost the housing sector, Dr Chalmers said he wouldn’t immediately commit to extra money.
Ahead of meeting state and territory treasurers on Friday, Dr Chalmers said he was committed to progressing a road-user charge that would hit electric-vehicle drivers to offset projected losses to fuel excise revenue used to fund roads across the country.
EY chief economist Cherelle Murphy said the RBA’s weaker productivity assumption underlined the need for the roundtable to embrace “new ideas and implementable solutions” that would deliver real improvements.
Master Builders Australia chief executive Denita Wawn said the rate cut was a boost for the construction sector and borrowers but warned “unless we address the productivity challenge in building and construction, the cost of borrowing will continue to weigh on businesses and households”.
“The industry’s ability to build is constrained by declining productivity including labour shortages, stifling red tape, and poor planning systems,” Ms Wawn said.
While economists predict a fourth rate cut by December and potentially another in the first half of next year, Ms Bullock would not comment on the depth or speed of rate cuts. “You’ll note that in the forecasts, we have inflation coming back down to target, and the unemployment rate remaining where it is with a couple of more catch rate cuts in there, that’s the best sort of guess,” she said.
For household borrowers with a typical $600,000 mortgage, the impact of the latest cut, combined with rate reductions in February and May, will reduce monthly repayments by almost $300.
In response to the RBA’s unanimous rate cut decision, opposition Treasury spokesman Ted O’Brien said higher borrowing costs would be “a new normal” under the Albanese government. “There’s no major relief in sight from Labor’s cost-of-living disaster,” Mr O’Brien said.
Given continued weak productivity, elevated government spending and a still-tight labour market, economists are not tipping another rate cut at the RBA’s next meeting in late September.
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