Lowe departs with clear messages to Labor

Former RBA Governor Philip Lowe. Picture: NCA NewsWire / Nikki Short

Where is the internal policy co-ordination within the Albanese government? Labor has just dispatched Philip Lowe as Reserve Bank governor but in his farewells Lowe has lobbed a series of policy time bombs on the landscape of the government.

Lowe is gone but won’t be forgotten. Indeed, if Labor fails as a government the diagnosis might be traced back to the warnings from the departing governor. Drawing a line through his comments the theme seems clear: politicians must lift their game, recognise the limits to monetary policy and confront the structural obstacles holding back wages and living standards. Memo to Labor: it’s time for politicians to seize the policy banner.

Lowe is a model of politeness but speaks with clarity – and that got him into trouble. In his departing public event he rejected the personal dictum of famous US Federal Reserve chairman Alan Greenspan, who said: “If I turn out to be particularly clear, you have probably misunderstood what I have said.”

“I can never understand Greenspan’s kind of perspective here,” Lowe said. “My perspective is kind of diametrically opposed to it. I’ve always sought to explain things as clearly as possible. Australians should expect that of us.”

That’s what Lowe has been doing for some time. Being unpopular probably helped his frankness. His remarks have focused on our great dilemma: how a flawed political system struggles to address Australia’s economic challenges. In the process he offers critical insights into the structural issues that beset the Albanese government. The first is that the world has changed. For a government obsessed about the cost of living, Lowe doesn’t believe Australia or the world will return to the days of stable, low inflation. Slight problem for Labor? No, big problem.

Pointing to the transformed world, Lowe documents the scale of transformation: “the increased prevalence of supply shocks, deglobalisation, climate change, the energy transition and shifts in demographics”.

New RBA Governor Michele Bullock. Picture: NCA NewsWire / Martin Ollman

He doesn’t dispute inflation can be reduced to the 2-3 per cent band but the future will be fluctuations “around that target”. In short, inflation management by the bank will become an ongoing task. That’s a different world from the great moderation of the pre-pandemic age.

Lowe has a lot to say about fiscal policy – and he seems to distrust governments and politicians. This is sensitive stuff for governors. Lowe believes in “strong, credible frameworks for economic policy”. He recognises Australia’s achievements but notes “we are not immune to the pressures on the public purse and these pressures are growing”.

He says a strong commitment to a fiscal framework “would help”. He wants a better model of cost-benefit analysis for public investment to give the public “greater confidence that money was being spent wisely”.

Memo to Labor: devise a better anchor for fiscal policy.

But Lowe wants more. He floats the notion of giving “an independent body limited control over some fiscal instruments”. This borrows from the notion of an independent central bank, able to take unpopular decisions. Both Labor and Liberal reject the idea, correctly. It won’t fly; it undermines political accountability on tax and spending. They cannot be outsourced. But it’s revealing – it suggests Lowe is sceptical about the ability of politicians to take the fiscal decisions necessary for the country.

Without mentioning the Morrison government by name, Lowe praises the fiscal and monetary policy co-ordination during the pandemic, saying this was its “most effective” period in his seven years as governor. Referring to the massive fiscal stimulus and monetary policy action, Lowe said “we saw just how powerful it can be when the government and the RBA work very closely together”.

He makes clear at other times this has not been the case. Yet in the pandemic, the shared approach “worked”. Lowe conceded “with the benefit of hindsight” that “we did do too much”. But he sees the pandemic example of government-bank co-ordination as the exemplar.

Memo to Labor: ensure for the future the bank and the government swing together.

Lowe alluded to his major blunder. “By far, the biggest challenge I faced was the pandemic,” Lowe said. He acknowledged again his misleading forward guidance on interest rates when he said he didn’t expect the cash rate to be increased until 2024, later conceding it was an “embarrassing” error. In his final speech he said this guidance “defined my term” more than any other issue. That’s right.

He asked people to remember the circumstances: “It was a very scary time. An unknown virus was sweeping the world, our international borders were closed, people couldn’t move across state lines, we were being told to stay in our homes, temporary morgues were being set up and a vaccine was thought to be years away.

“There were credible projections that the unemployment rate would rise to 15 per cent and that there would be a deep and lasting economic contraction.”

The bank wanted to leave no stone “unturned” in trying to salvage economic confidence. This memo goes to his successor, Michele Bullock: a faulty communication can be fatal.

Lowe’s strongest recent message – directly pertaining to the Labor government – is the importance of lifting productivity growth. He said of this priority: “It means rising living standards, higher real wages, a lift in our collective wealth, a bigger pie to help finance the public services the community values and less inflation pressure.”

For Lowe, the problem “is not a lack of ideas”. The problem originates in politics. “It is in building the consensus within society to implement some of these ideas,” Lowe said. “This is, fundamentally, a political problem, and it is a major problem. If we can’t build a consensus for changes, the economy will drift and there is a material risk that our living standards will stagnate.”

He listed policies long canvassed in areas of tax, human capital, energy, infrastructure, city design, competition policy, industrial relations and government services, and said, significantly, there are “improvement opportunities in all these areas”.

Here was a retiring governor delivering a warning about the threat to living standards, listing the policies that are needed and declaring productivity gains existed virtually across the public policy waterfront.

Lowe didn’t say this – he couldn’t – but while the politicians blamed Lowe for high interest rates, Lowe has finished by asking whether the politicians have the bottle needed to pioneer the reforms Australian needs. This goes to Anthony Albanese’s election pledges. Productivity growth is essential to deliver Labor’s core promise of sustainable real wage gains. Memo to Labor: lift your performance on economic reform and productivity.

Addressing Australia’s housing price crisis, Lowe was blunt: don’t blame the Reserve Bank, blame society and politicians. Lowe said: “The reason Australia has come of the highest housing prices in the world isn’t interest rates, which have been at roughly similar levels across most advanced economies. Rather it is the outcome of the choices we have made as a society: choices about where we live; how we design our cities, and zone and regulate urban land; how we invest in and design transport systems; and how we tax land and housing investment. It is by tackling these issues that we can address the high cost of housing in Australia.”

Memo to Labor: the housing crisis demands strategic co-ordination and action by governments and authorities.

Postscript: Lowe didn’t send any memos to the government. That’s just journalistic construction. But he did say he wasn’t Greenspan: that means you’re supposed to understand what he said.