Dr Phil urges Australia to spend, invest and believe

In his first major address for the year, Reserve Bank governor Philip Lowe came roaring out of the blocks with an upbeat message to fire up consumers and investors. Perhaps the Morrison government will break out of its defence posture, alert but not alarmed about the economic outlook. Dr Lowe maintained that the central bank’s outlook for GDP growth — 2.75 per cent this year, 3 per cent next year — was achievable. Still, drought, bushfires and the coronavirus outbreak will hold back the recovery from its insipid sub-2 per cent growth over the back half of last year. But markets took the narrow view: the next interest rate cut is further away, so dollar up, bonds down.

Dr Lowe took on critics of the bank’s three cuts in official interest rates last year, which have left the cash rate at a record low 0.75 per cent. To those who say the ultra-low price of money has been a confidence killer for consumers, the RBA chief points to bigger factors at play. Sure, it has unsettled some people, but Australians were already adjusting their spending due to subdued wage growth, a fall in housing prices and high debt levels. In his view, without the easing of monetary policy, household “balance sheet repair” would have been more difficult and the economy would have been weaker. Lower interest rates allowed people to pay down debt faster, plus their asset values were now higher. “It is reasonable to expect that things improve from here,” he said.

Echoing Josh Frydenberg, but with an official’s low-key messaging and technical credibility, Dr Lowe declared the nation’s “economic fundamentals remain very strong and they provide a solid foundation for us to be optimistic about our future”. He then rattled off reasons to be cheerful, parts one through to six: world-class endowments of natural resources; a highly skilled and innovative workforce; an established and predictable regulatory system; sound public finances; a diverse and growing population; and being well placed to benefit from strong growth in Asia, not only China but also populous countries such as Indonesia and India. “We enjoy a set of fundamentals and a standard of living that few other countries enjoy,” he argued. “It’s important that we do not lose sight of this.” Certainly the Treasurer did not resist waving this endorsement of Brand Australia across the chamber in question time on Wednesday. But there was a sting in the tail in Dr Lowe’s speech. “Strong fundamentals, though, can take us only so far,” he said. “If we are to turn these fundamentals into strong and consistent growth, we need to keep investing in our future.”

That’s been our consistent message to government, too. As a percentage of GDP, private investment has been on the slide for the past decade, while capital spending in the public sector has been more robust; state governments, especially in NSW and Victoria, have embarked on huge rail and road projects in recent years. Investment is the missing link in our economic story. It is the culprit in our “troubling decline in productivity growth”, says the RBA chief, who nominated a range of areas where fresh capital spending would improve our prospects: infrastructure, human capital, energy production and distribution, new data technology, and measures to deal with climate change and its effects. As well, he says there has never been a better time for companies and governments to contemplate longer-term investments. Why? Because future returns don’t need to be discounted as much (due to entrenched low inflation), financing costs are lower. And they’ll stay that way, as interest rates are likely to be low for some time.

So the medium-term task for the Coalition is clear: reforms that help businesses to invest, innovate and skill-up workers. Mr Frydenberg is likely to introduce a tax break for investment in the May budget, a second-best option. We’ve long argued for a lower company tax rate, red-tape reductions, more flexible workplaces and a coherent national energy policy to underpin a revival. It’s the supply side, stupid! The capital’s legislative dysfunction means the business lobby must take whatever it can get, so ad hoc will have to do in the short run. To Canberra’s credit, as Dr Lowe hinted, a balanced budget gives the government the option of a targeted sugar hit to boost consumer or investment spending if the world turns against us. But if Scott Morrison is to make the nation stronger, more secure and resilient to shocks such as the virus outbreak and likely downturn in China, his government will have to aim higher.