Treasury plans to fill the RBA’s interest rate vacuum
Is it cause for alarm, or an inevitable trend, that the Treasury is planning to take over key elements of the traditional role of the Reserve Bank as the main economic stabiliser that offsets economic shocks like the current corona pandemic? Not that readers of Australia’s finance media would be aware of this intention that received no publicity despite being clearly stated last week by Treasury secretary Steven Kennedy in his post-budget speech to Australian Business Economists. ‘Given the lack of (Reserve Bank) conventional monetary support available’ (after last week’s cutting the cash rate to next-to-nothing at 10 basis points), and the likelihood that very low interest rates will persist for some time, Kennedy warned that ‘without a strong fiscal policy response the recovery could falter leading to years of anaemic growth… More and more unemployment would become entrenched, reducing the productive capacity of the economy. Lower growth also means that inflation and wages would likely remain lower for longer.’
To avert that, Kennedy strongly supported the Morrison government’s big-spending rescue package with ‘its wide spread of levers to support aggregate demand’ that has already brought ‘significant early steps towards recovery’. And in a controversial (Keynesian?) defence of big spending, he asserted that this discretionary fiscal policy response is not the real driver of Australia’s increased debt, which is due to the impact of the shock itself, with an IMF study showing that most recessions are followed by sustained periods of lower output, resulting in higher levels of unemployment and substantial welfare costs. Lower prices would also have significant long-term implications for government revenue, spending and debt. ‘Fiscal policy can help limit these welfare losses by generating economic growth, and then pay for it in a way that spreads the burden equitably over time and across society’.
Of much greater significance was Kennedy’s floating the idea that Treasury’s fiscal levers should play a bigger role in economic policy in the future. ‘This raises the issue of the appropriate role of fiscal policy as a cyclical stabilisation tool… Should the threshold for fiscal policy intervention be lowered?… Monetary policy setting through central banks has traditionally been the preferred macroeconomic stabilisation tool with fiscal policy focused on structural and sustainability issues This has been the accepted wisdom in advanced economies for the past 30 years… because central banks can make timely decisions using an appropriately nimble instrument which helped to manage demand but was considered to have a broadly neutral impact on resource allocation in the long-run’. And he acknowledged that central banks also benefit from high levels of external credibility, based on independence, transparency and accountability against a clear mandate. But now that the Reserve Bank ‘has limited scope to provide sufficient stimulus’, having interest-rated itself out of its traditional monetary policy role as the economic stabiliser (apart from buying bonds and printing money), Kennedy revealed that Treasury is considering ‘how our processes can be adjusted to make more up-to-date assessments of the appropriate stance of fiscal policy’. Kennedy had a useful message for those (the Labor party should take note) who would welcome a lessening of fiscal discipline following the bi-partisan acceptance of emergency big-spending; ‘Any move towards more active fiscal policy needs to be pinned to credible long-term anchors. For Australia, this is achieved through a continued commitment to sound public finance underpinned by the tax to GDP cap, balanced budgets and stabilising and reducing debt in the longer term’.
And in a comment on the need for productivity (one of the three Ps along with population and participation) to promote growth, Kennedy pointed to Treasury research that highlighted declining competition as contributing to the fall in labour productivity growth in the private non-financial sector.
The government spent $410 million of taxpayers’ money in bonus payments to public servants in the same year, 2018, as the $20,000 watches ‘bonus’ that led to Australia Post’s Christine Holgate having her reputation trashed and being forced to resign by an ill-advised Prime Minister Morrison. Although reduced by the corona pandemic’s ‘restraint’ call, there are still multi-millions of taxpayers’ dollars being spent on what the audit office has described as an expensive ‘work in progress’ and a ‘significant investment that appears to be delivering only patchy results and uncertain benefits’ that the government has been gradually winding down over recent years. Since my 31 October defence of Ms Holgate on this page, she has stood down to end ‘a significant distraction that I do not believe is good for either Australia Post or my own personal wellbeing’. The Holgate saga highlights the impossible conflict between the commercial imperatives of a competitive business enterprise and the nature of its ownership by the government. The watches bonus, to four Australia Post executives for pulling off a deal worth $66 million in revenue, were paid for out of Australia Post’s more than $7 billion commercial revenue stream, not the taxpayers’ funds that paid for Morrison’s public service bonuses. But the nature of the gift was a political problem; a cash payment would have been submerged among the $87 million in bonuses to Australia Post’s 35,000 employees in that year.
It was five years ago that the Coalition began falling out of love with the ‘incentivising’ of the public service with cash bonuses that the Howard government had extended from senior executives into lower levels of the public service. Senator Eric Abetz, then minister for Employment and the Public Service told the Canberra Times that ‘The public service doesn’t quite lend itself to such a neat assessment, and that is why I do accept that judging performance is sometimes more difficult in the public sector’. So the number of APS employees receiving performance bonuses has decreased by 46 per cent since 2015 after the latest 15 per cent drop in 2019 that reduced the proportion of the bonus-receiving workforce from 2015’s 17.6 per cent to 9.9 per cent.
All this without any government statement on its changed bonus policy; Ms Holgate could have done with one.
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