The Albanese government has many, deep flaws. But it’s the only reason Australia isn’t in a recession right now. Its decision to switch to a deficit for the current financial year has been vindicated, and then some, by the September quarter national accounts.
Growth of just 0.3% for the quarter comes after three previous quarters of 0.2% growth. That means yet another quarter of per capita negative growth (forget the per capita recession, it’s now a per capita depression). In a nutshell, government spending and public investment (together, 0.6%), offset the running down of inventories (-0.4%), with a little help from net trade (0.1%) while private demand contributed zip, despite some signs of life on the household front and a welcome lift in the household savings rate (thanks to Labor’s much-criticised tax cuts).
Media coverage, led by the Financial Review and the Fairfax papers, portrays this outcome as Treasurer Jim Chalmers’ problem. In fact, it is a problem entirely created by the Reserve Bank. The RBA’s interest rate settings have smashed businesses and households. The only thing propping up growth — and keeping unemployment from rising — is government spending. Without that spending, we’d not merely be in technical recession, we’d be looking at much higher unemployment.
For the ideologues in the commentariat, this isn’t good enough: Labor should be running up another big surplus (not that the government has been given credit for the two it’s already produced), unemployment should be rising, mortgage defaults surging, and all signs of life being choked out of the economy in the name of purging a demand-driven inflation that, to the extent it was ever the cause of the post-pandemic surge in prices, has long been replaced by profiteering from the likes of Coles and Woolworths and Qantas — joined this week by the Commonwealth Bank with its fees try-on.
But whatever political problems the GDP data will cause for the government, they leave the Reserve Bank badly exposed. The evidence is clear now: there is no reason why it should not cut interest rates next week. That underlying inflation remains above the RBA target is irrelevant (headline inflation, i.e. the prices consumers actually pay, is currently within the target band as a result of the government’s power bill and rent assistance measures). Both the US Federal Reserve and the Reserve Bank of New Zealand began cutting rates while inflation was still above target.
If the RBA fails to cut rates, there can only be two reasons: either it is in the grip of ideologues who genuinely want to wreck the economy in the name of destroying a mythical demand-driven inflation, or it is acting politically to avoid doing anything that could be interpreted as assisting the government. Such a failure will mean Australians can no longer have any faith that the RBA is seriously committed to acting in their best interests — or even knows how to.
And if the central bank doesn’t like this fate, it has only itself to blame, with too many rate hikes and a stolid refusal to accept, despite four quarters of rotten GDP growth, that it is smashing the economy for no valid reason.
The point of central bank independence is supposedly that politicians can’t be trusted to sensibly manage the economy, and unelected central bankers have to do it for them. But over the last decade, it has been politicians who have got the big calls right. Tony Abbott’s 2014 budget was a political suicide note but it was the right move macroeconomically — it maintained a large ($40 billion) deficit in the face of a sluggish economy. Subsequent governments lowered the deficit at a measured rate, then the Morrison government turned on the spigots in response to the pandemic, before Labor banked a surge in revenue to produce the first double surplus since the Howard years.
What’s been the RBA’s record over that decade? It held interest rates too high, for too long. It held rates static for nearly three years despite deep and damaging wage stagnation, before finally caving to reality and undertaking repeated cuts across 2019. It responded, infamously, to the pandemic by suggesting there’d be no rate rises until 2024, then let rip with 13 rate rises over 2022 and 2023, the last of which (and perhaps the last three of which) was unnecessary.
And now, it presides over the immolation of private sector growth in the economy. Jim Chalmers has done his job. When will those running the RBA do theirs?
Have something to say about this article? Write to us at letters@crikey.com.au. Please include your full name to be considered for publication in Crikey’s Your Say. We reserve the right to edit for length and clarity.
