Former Reserve Bank of Australia (RBA) Governor Philip Lowe says the country lacks the “political will” to improve stagnant productivity growth, which has ground to a slow crawl in recent decades.
During a webinar on July 4, Mr. Lowe shared his insights about Australia’s current economic situation with shareholders of the philanthropically-focused listed investment company Future Generation.
Mr. Lowe assumed the chairman position of the group after his RBA governor term concluded in September 2023.
While the former governor said he was optimistic about Australia’s future, he was concerned that the economy was drifting into a “period of mediocrity.”
“Right now, productivity growth is weak, the demographic dividend is behind us, and demographics are moving against us,” he said.
“It’s unlikely that the price of our exports keeps rising relative to the price of our imports.
“So those three drivers of growth over the past 30 years have diminished.”
Mr. Lowe warned that if Australia could not raise productivity or “get lucky” from some other areas of the economy, Australians would have to accept slow improvement in their living standards.
“That’s going to come as quite a shock to the community,” he said.
Australia Lacks Political Will to Improve Productivity
While Mr. Lowe said there were ways to improve productivity, he said Australia lacked the political will to do that.The former RBA governor said there were several areas that the government needed to focus on: tax, infrastructure, skills, public services, and energy.
However, he noted that those areas were all “very politically difficult” and not much had been done to change the status quo.
For example, regarding tax, Mr. Lowe said there were many problems.
“We still tax income and wealth generation heavily and consumption too lightly,” he said.
“The way we tax land is all screwed up. We have a tax on mobility, that’s stamp duty, that’s kind of crazy.
“There’s kind of a whole bunch of things on the taxation side we could do. They’re all politically difficult, so none of that is being done.”
On the issue of energy, Mr. Lowe emphasised the importance of getting the energy system right.
“A strong economy needs an efficient, reliable, relatively cheap energy system. We don’t have that,” he said.
Similarly, the Mr. Lowe said Australia did not do well regarding investing in infrastructure and developing skills for the workforce.
“As I would say to the politicians, the issue isn’t a lack of good ideas. It’s a lack of political will to actually execute effectively some of those ideas,” he said.
Further Interest Rate Hikes Possible
Mr. Lowe said there were two issues with the current inflation situation in Australia.The first one is the level of demand in the economy keeps pushing up against supply.
“The most obvious example is the housing market where there’s very strong demand and the supplies are coming forward. What happens? Prices and rents go up,” he said.
“But the housing market is just one example. There are a lot of other examples where demand and supply aren’t in balance.”
The second issue is weak productivity growth causing the cost of doing business to go up quickly.
“If you’re not getting strong productivity growth, your costs are going to rise more quickly, and when your costs rise more quickly, then prices go up. That’s how it works,” he said.
As a result, the former RBA governor said Australia had persistent inflation and that the central bank needed to take necessary steps to bring inflation down to the 2 to 3 percent target band.
Given the current demand and supply imbalance, weak productivity growth and uncertain future outlook of the economy, Mr. Lowe said it was possible that the RBA would raise the official cash rate again.
“I know most people hope that doesn’t need to take place, and it may not need to, but it’s entirely possible,” he said.
Mr. Lowe also noted that the upcoming quarterly consumer price index data would be crucial to the RBA’s next interest rate decision.
