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Central bank bosses are renowned for their discretion about political leaders and government economic policies. But former Reserve Bank of Australia governor Phil Lowe is no longer constrained by such etiquette, so has let fly on what he really thinks, and it makes for difficult listening for the government.
Lowe has effectively issued a challenge to the government to restrict government handouts and use its policy powers to increase productivity or risk consigning the economy to higher interest rates and lower growth for longer.
Prime Minister Anthony Albanese was clearly stung by such critical commentary, saying in effect that Lowe was suffering from relevance deprivation rather than attempting to address the substance of the former RBA governor’s criticisms.
As current governor of the RBA, Michele Bullock is far more guarded about the government’s contribution to inflation and the interest rate rise that was introduced this month to combat it.
Indeed, she was at pains to suggest that it was not the Albanese government’s spending that was primarily responsible for inflation picking up again.
At a press conference after the RBA rate increase this month, Bullock dead-batted questions on whether government spending was making the RBA’s task of managing inflation more difficult.
In response to questions posed during a recent parliamentary committee, Bullock listed a series of inflation contributors, including strong employment and rising real wages, private consumption and business spending, alongside government spending.
Unsurprisingly, Albanese and Treasurer Jim Chalmers say that government spending isn’t the problem.
RBA governors tend to stay in their lane of setting monetary policy rather than drifting into commenting on fiscal policy, which is the government’s turf.
When central banks are independent, the government also steers clear of commenting on interest rate settings.
(The obvious and extreme exception to this is US President Donald Trump’s lambasting of the Federal Reserve chair Jerome Powell for keeping rates too high.)
Lowe certainly isn’t the first economist or business leader to suggest that Australia’s prolonged productivity stagnation needs addressing. The chorus of calls for the government to attack productivity is deafening.
But when Lowe, who had until September 2023 as head of the RBA been the most influential person in the country for setting interest rates, speaks, his words carry weight.
His famous misplaced forecasts on interest rates aside, Lowe is a highly regarded economist with intimate knowledge of what contributes to inflation.
In an interview with Nine masthead The Australian Financial Review, he said government spending on handouts increased demand at a time when the nation was experiencing capacity constraints.
This combination inevitably leads to inflation.
“Productivity capacity of the economy is not growing very quickly, and the government wants to keep spending and wants to keep offering people handouts, which adds to demand, which in the normal course of events would be fine. But if the supply is not growing, you can’t do it and if you try to do it, then interest rates have to go up,” Lowe said in the interview.
We need to wait to see whether the upcoming federal budget will introduce its promised meaningful productivity package in May.
Economists have produced a long list of measures to tackle the issue, starting with recalibration of tax, less onerous regulatory settings, and improved use of innovation.
Lowe appears frustrated with the lack of action.
“There’s been endless reports, we know … we tax income and wealth generation too highly and consumption too lightly,” he told the Financial Review. “The way we tax land is all screwed up, on education we’re going backwards, our energy system is high cost and unreliable, we haven’t planned the growth in the housing stock for the growth in the population, and skills are going backwards in some areas.”
This is not the kind of advice a serving Reserve Bank governor would proffer.
But the shackles on Lowe are off and now he can let fly.
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