Michael Pascoe: Guess what? The RBA does not run the economy

The Reserve Bank is seemingly blamed for all government economic failures, Michael Pascoe writes.

The Reserve Bank is seemingly blamed for all government economic failures, Michael Pascoe writes. Photo: TND

You could be forgiven for thinking the only thing that matters for Australian economic growth, unemployment, inflation, wages growth and the price of a litre of bread (credit Mad As Hell) is what the Reserve Bank board eats for lunch on the first Tuesday of the month.

Contrary to the concentration on what the RBA might do next (increase the cash rate a little) and when (sometime), monetary policy is not the biggest influence on production and living standards – it’s fiscal policy, what the federal government does, that matters most.

And it’s not purely a matter of monetary and fiscal policies that determine our performance either – population policy is in the mix as well, but that can be a little too sensitive to be given the attention it deserves.

One of the key lessons of the past decade has been the demonstration of how much more bang the economy gets for the fiscal buck than the monetary interest rate move – or how weak monetary policy by itself is in stimulating growth.

The RBA started a decade of ever-greater monetary stimulus in November 2011 when it trimmed the cash rate from 4.75 to 4.5 per cent.

rba economy virus

The RBA is best known for determining interest rate movements as part of monetary policy.

It’s really only when the federal government threw its fiscal switch to mega-stimulus with COVID that monetary policy could claim to achieve much.

Until then, through all the years when the RBA was begging the federal government to do more to get our lacklustre economy firing, monetary policy was pushing on the proverbial piece of string.

Cheap money by itself couldn’t lift business investment off the floor, slash unemployment or create faster wages growth.

Similarly, when fiscal and monetary policy pushed in the same direction during the GFC, stimulus worked. When they head in opposite directions, monetary has been coming second.

The big challenge for the Morrison government next month is to find the ticker and inspiration for fiscal policy that will provide sustainable economic growth – not just sugar-hit billions for mates and tax-driven pull-forward of investment.

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Treasurer Josh Frydenberg must deliver fiscal policy in the next budget to deliver sustainable economic growth. Photo: AAP

The omens are ominous a bit less than seven weeks out from Josh Frydenberg’s election budget. Indeed, the chook entrails are all over the place.

The Morrison/Frydenberg MO is to blow billions buying votes with poor investments – “carpork” comes to mind, never mind the Community Development Grants corruption.

But at the same time, the Coalition rhetoric is turning back to “where is the money coming from?” in attacking Labor and talk of drawing a line under spending.

And there is the miserable reality of a Prime Minister who declares he is not interested in “building back better” or leaving a legacy. Well, a positive legacy, anyway.

The prospects are for the government to be tightening fiscal policy – except for targeted political purposes – while the RBA starts inching up interest rates.

It looks like our economy and inflation are growing strongly enough to justify ending the crisis level interest rates we have been enjoying.

Source: Grattan Institute

The psychological impact of rate rises and the heavily geared nature of some households should mean rates won’t have to rise by much to achieve traction.

But if the federal government is simultaneously removing its sugar-laden punchbowl without investing in the economy, it will be setting us up for a difficult 2023 when our “excess” savings begin to wear off and the “wealth effect” of surging house prices turns negative.

It remains a curious thing that so many varied voices seem to blame the RBA for our economic underperformance over the past decade.

On Wednesday, Crikey’s Glenn Dyer and Bernard Keane examined the odd coalition that is calling for a review of the RBA.

I was making a similar point here in April with the view that the chorus wanting to blame the RBA was a great deflection from the real game.

And that deflection has continued.

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Future Fund chairman Peter Costello. Photo: TND

This month started with Future Fund and Nine Entertainment chairman Peter Costello joining the RBA review chorus.

That strikes me as a little rich given the Future Fund’s questionable governance.

The appointment of Mr Costello to the board in 2009 by Penny Wong arguably failed the ASX guidelines for independent directors.

Given that Mr Costello started the fund as Treasurer, you couldn’t say he had not had a “material relationship” with the fund for at least three years, as well as having had a say in who was on the board.

(2009 was in the days when a Labor government was trying to be nonpartisan in its appointments – a policy that was dramatically ripped up by the Coalition, quickly shafting Labor appointees regardless of suitability ahead of the wholesale stacking of various government bodies with the politically connected.)

There also is a matter of Mr Costello’s longevity.

The Australian Institute of Company Directors’ guidelines state that it “is a good idea for a director’s tenure to be limited to encourage renewal”.

When Mr Costello finishes this, his second five-year term as chairman, he will have been on the board for 15 years.

And another question of Future Fund governance is prominent Liberal Party donor John Poynton remaining on the board after having to resign from Crown Resorts over a “perceived lack of independence”.

But no doubt the usual problem of questionable ethics, money laundering and shady customers at Australian casinos is all the RBA’s fault, too.

The reality of concentrating commentary on the RBA is that it’s easy and everybody does it.

Everyone with a mortgage is quickly click-baited with a “rate rise!” headline.

Everyone concerned about asset price inflation (i.e. the housing price bubble) wants to see a change.

Everyone wanting to deflect attention from the government’s economic failure is happy to push the barrow.

After all, there is an unsubstantiated claim that the Liberal Party is a “better at managing the economy” to reinforce.

Anything less than good has to be someone else’s fault.

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