Gary Hardgrave (Moreton, Liberal Party) Share this | Link to this | Hansard source

My question is addressed to the Treasurer. Would the Treasurer inform the House of the results of the Reserve Bank’s Financial Stability Review. What does this review indicate about the health of the household sector’s finances, and are there any threats to these finances?

Peter Costello (Higgins, Liberal Party, Treasurer) Share this | Link to this | Hansard source

I thank the honourable member for Moreton for his question. The Reserve Bank today published its six-monthly detailed assessment of the health of the financial system. It noted that in some countries around the world, particularly the United States, there has been a sharp pick-up in loan arrears in what is regarded as the subprime market. But its finding in relation to the Australian financial system is that it is in very good shape and very stable. To quote the Reserve Bank, it said:

In the financial sector, both the banking and insurance sectors continue to record high rates of return on equity, benefiting from continued balance sheet expansion, low levels of non-performing loans and the strong performance of equity markets.

The RBA noted that household finances remain very healthy in Australia, saying:

... the household sector remains in good financial shape, which is not surprising given the ongoing strength in the economy.

And it noted, of course, that one of the reasons why defaults on loans in Australia are so low by international standards is the very strong employment in this country, with unemployment now down at 4.6 per cent, around the lowest level in 30 years.

It is important, however, that in these circumstances, where employment is strong, we take care to ensure that wages do not run away and that inflation pressures in the economy are not heightened. One of the problems in the past for Australia has always been that, in periods of strong economic growth, wages have become unsustainable—certainly that is what happened during the terms of trade boom for the Korean War. It is what happened in 1981, when the metalworkers went after wage demands which were unsustainable, and it was certainly a contributing factor—although not the principal one—to Paul Keating’s recession that the Labor Party gave us in 1990.

It is important that we make sure that terms of trade improvements do not result in unsustainable wages. One of the reasons why the government is having some success with this at the moment is the Work Choices policy. The Work Choices policy allows wage increases in highly profitable industries, such as the mining industry, without them being automatically translated back to less profitable industries, such as the manufacturing industry, which is facing competitive challenges at the moment. As former Reserve Bank Governor Ian Macfarlane said, as quoted in the Sydney Morning Herald on 25 August 2006:

Obviously, it makes the job of monetary policy easier, the more deregulated the labour market is.

I would urge the Labor Party to think about that statement. Any reversal of the current industrial relations system, at a time when the terms of trade are strong, risks wages in the general community being unsustainable; risks, therefore, inflation; and risks thereby a monetary policy response. Any move back to the award system or pattern bargaining, which would open up the opportunity of taking a wage settlement from a highly profitable area of the economy back through less profitable areas of the economy, risks unsustainable wages, risks increases in inflation, and thereby risks a monetary policy response—which is why Governor Macfarlane said, ‘It makes the job of monetary policy easier, the more deregulated the labour market is.’

We have had the populist attacks from the Labor Party—but we had populist attacks from the Labor Party when we balanced the budget, and we had populist attacks from the Labor Party when we paid off $96 billion of debt. We had populist attacks from the Labor Party when we introduced the GST, we had populist attacks from the Labor Party when we introduced an independent monetary policy, and we had populist attacks from the Labor Party when we reduced tariffs. We had populist attacks from the Labor Party when we set up the Future Fund, when they claimed that it was not enough of a locked box and could be raided by the National Party. But it was all of those decisions that got the economy to where it is today, and it is the decisions in relation to Work Choices which are important to get it to where it has to be tomorrow, and the decision makers in this country are the coalition.