Rates up, taxes to follow, says RBA boss Philip Lowe

RBA governor Philip Lowe has urged Jim Chalmers to take tough decisions on tax, spending and economic reform to tackle the budget deficit.

Reserve Bank governor Philip Lowe. Picture: NewsWire / Monique Harmer

Reserve Bank governor Philip Lowe has urged Jim Chalmers to take tough decisions on tax, spending and economic reform to tackle the budget deficit, warning Australia cannot keep using the “national credit card” to pay for unsustainable spending commitments.

Dr Lowe, in an appearance ­before a parliamentary committee, signalled official interest rates were likely to increase again when the Reserve Bank board next met on October 5 and said he would not be surprised’ if house prices fell 10 per cent from their recent highs.

The central bank chief said he never promised nor committed to keeping rates low until 2024, but he accepted people understood his “conditional” statements as late as last year to mean that.

Dr Lowe acknowledged that five consecutive rate hikes this year had been “unwelcome for many people, especially those who have borrowed large sums over recent times”.

He also acknowledged the deteriorating outlook for the world economy made the “narrow path’’ of taming inflation through rate rises and avoiding a recession more difficult to navigate.

Dr Lowe used his first appearance before a parliamentary economics committee since the election to highlight the “significant issue” of massive deficits at a time when unemployment was at a 50-year low and booming ­commodity prices had pushed the terms of trade to their highest in history.

As the Treasurer frames the October 25 budget, Dr Lowe said the government faced some “very difficult” decisions on how to return the budget to surplus in coming years.

“The community wants the government to provide a whole range of services, understandably,” he said. “We want really high-quality aged care, great education, world-class disability care, fantastic national defence, great infrastructure.

“The community wants all these things from our governments. What we haven’t worked out as a community is how to pay for it, and this is why we’ve got these budget deficits despite full employment and the record terms of trade.”

Dr Lowe flagged three ways to pay for structurally higher public spending. “You can raise more taxes to pay for the things the community want,” he said. “You can cut back in other areas. Both of these things are very difficult. Or we can get the economy to grow more strongly so the pie is bigger, and that requires hard choices on a whole bunch of structural reform issues.

“Taxes, cutting back and structural reform – we have to do one of those three things, maybe all three of them, if we’re going to pay for the goods and services that the community wants from our governments. I would hope during this term of parliament, that you could start addressing probably each of those three things.”

Dr Lowe said he did not have any particular concerns that fiscal policy settings were making the RBA’s task of taming inflation harder. Four consecutive hikes of half a percentage point have taken the cash rate to 2.35 per cent, and the central bank governor said the board would discuss at its next meeting whether to slow the pace to a more typical 0.25-percentage-point rise.

“The fact that we’ve raised interest rates by quite a lot already increases the strength of the argument for smaller increases going forward,” he said. “We’re closer to a normal setting now, which means that the case for large adjustments in interest rates has diminished.”

Economists said Dr Lowe’s comments about the pace of rate hikes needing to slow at “some point” suggested a higher likelihood that rates would move from 2.35 per cent to 2.85 per cent, rather than 2.6 per cent, next month.

Dr Lowe acknowledged that higher interest rates were putting pressure on households, at the same time higher petrol prices and grocery bills were squeezing budgets. “So it is a difficult and a concerning time for some people,’’ he said.

“The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”

Dr Chalmers has said his budget late next month would be focused on auditing the “rorts and waste” of the Morrison government, as well as budgeting for election commitments, such as expanded childcare and prescription medicine subsidies.

The Treasurer said it would take time to tackle the structural problems in the economy and the budget “but the work has begun”.

“Government has a role to play to support monetary policy, by providing responsible cost-of-living relief that isn’t counter-productive, boosting the capacity of the economy, and beginning the hard task of budget repair,” Dr Chalmers said.

“That’s what our agenda is all about – making childcare and medicines cheaper, investing in skills, energy and the NBN, and trimming wasteful spending.”

Opposition Treasury spokesman Angus Taylor said the Coalition was “open to supporting sensible economic reforms, but that doesn’t extend to supporting an old-fashioned high-taxing, high-spending Labor agenda”.

The RBA governor said the bank was treading a “narrow path” in not raising rates so high they tipped the economy into recession, but increasing them by enough to prevent the “scourge” of high inflation, running at a 30-year high of 6.1 per cent, becoming entrenched. A “deteriorating” outlook for the global economy was making this task harder, he said.

“It will be difficult for Australia to stay on that narrow path to a soft landing if there is further material bad news on the global economy,” Dr Lowe said.