Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics, I present the committee’s report entitled Review of the Reserve Bank of Australia annual report 2010 (first report), together with the minutes of proceedings.

Ordered that the report be made a parliamentary paper.

Over the last several years the Australian economy has, by any reasonable standards, been an outstanding performer. While many leading economies across the world continue to suffer from the effects of the global financial crisis, Australia has experienced steady growth throughout its economy as a whole, with significant gains in key sectors, such as the export orientated mining industry. The committee’s hearing confirmed the wisdom of the economic reforms that Australia has undertaken over the last generation—reforms that have provided us with a legacy of hard-won economic resilience.

The forecasts for Australian growth and stability provided by the Reserve Bank of Australia in late 2010 were positive. At the time of the hearing, Australian consumer price inflation was about 2½ per cent in underlying terms and about 2¾ per cent in headline terms and the bank forecast was for the economy to grow by 3½ per cent on an annual basis from the December quarter 2010, rising to a possible high of four per cent by the end of 2011.

This forecast, of course, preceded the cataclysmic flooding that swept across the eastern states of Australia, especially Queensland, and shall most likely be revised subject to a systematic reconsideration of the latest developments. Exactly to what extent in the longer term the flooding will impact on the forecast is unknown. The rebuilding of flood affected regions across Australia is going to be an immense national challenge. It is estimated that $5.6 billion is needed to rebuild flood affected regions across Australia. This will help communities to recover and get back on their feet. Budget spending cuts and reprioritisation will deliver two-thirds of the $5.6 billion needed to rebuild flood affected regions. The rest, as we know, will be provided by a modest one-year temporary levy.

Yet, regardless of what revised form the updated forecast ultimately takes, the November hearing offered us a valuable insight into the Australian national economy before the floods. Largely due to our favourable terms of trade—made possible by the urbanisation of China and India, with its resultant pressure on the price for minerals and fuel—Australia was rapidly closing the gap between actual and potential output. The principal drivers for economic growth were increases in private investment, robust income growth and a strong labour market. In the view of the RBA, the great challenge ahead was to raise productivity and expand the supply side of the economy. While inflation was lower than expected, the bank board expected that the prospect of further increases in the cash rate was sufficiently serious to justify their decision to raise interest rates in early November.

There was a rigorous investigation of this position by members of the committee, particularly in light of recent bank profits. The RBA continues to aim to keep inflation within the two to three per cent target range but without crushing the real economy in the process. Inflationary pressures that can be expected include the 10 per cent growth rate in China, the ebb and flow of the European economies and the fact that the US was not falling into another recession.

Other important factors that will have a bearing on a continued strong Australian economy include the fact that wages remaining steady—the pick-up in wage growth was no faster than was to be expected. The RBA governor’s view is that we should not grow the economy too quickly over an extended period; otherwise there is the potential for ‘getting into trouble’. The RBA governor made positive comments about the fiscal stimulus winding down, saying there were good signs that handing over of public spending to private spending was positive, with substantial increases in business investment. Of course, the government is doing a great deal in relation to improving competition in banking, including the banning of exit fees—which is being opposed by the opposition—boosting consumer flexibility to transfer deposits and mortgages, introducing a mandatory key fact sheet for new home loan customers and empowering the Australian Competition and Consumer Commission to launch more prosecutions in this area.

Australia continues to enjoy economic conditions that would be a welcome relief to almost all other industrialised countries. Inflation remains within the targeted range and unemployment remains relatively low in historic terms. On behalf of the committee, I would like to thank the Governor of the Reserve Bank of Australia, Mr Glenn Stevens, and other representatives of the RBA for appearing at the hearing on 26 November 2010. I would like to put on record my thanks to the secretariat for the fine work they have done in helping produce this report.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I rise on behalf of coalition members of the Standing Committee on Economics in support of this report, which was put forward with the support of both sides of this chamber. At the outset I would like to thank the hardworking, diligent economics committee secretariat for the good work that they did with respect to the presenting of this report and supporting the members of the committee over the entire period, including preparation of documents and the arrangement of an economist to brief the committee prior to and post the Reserve Bank’s presentation. I would also like the thank the Reserve Bank governor and other members of the Reserve Bank for their testimony and for their full and frank discussion with members of the committee.

In terms of looking at monetary and fiscal policy settings in this country, it was an important part of the committee’s work to have a frank discussion with the governor. It is part of the accountability mechanism that the committee has with the Reserve Bank to ensure that monetary policy settings in this country are appropriate in the views of the parliament, bearing in mind of course that the Reserve Bank is independent. We touched on a large number of areas in our discussions with the Reserve Bank. I must say that there were a number of issues raised which sparked concern for me and other members of the committee. There was also the opportunity to explore more fully the impact of some of the government’s policy settings on monetary policy.

There is no doubt, as the chair of the committee has outlined, that Australia has enjoyed a relatively benign economic environment over the past several years. That is not to understate in any way, shape or form the fact that unemployment has gone up, the fact that a large number of Australians are doing it very tough and the fact that for many there has been a great deal of economic uncertainty. Notwithstanding that, Australia has weathered the GFC much better than many other countries. The important question, though, was: ‘Why?’ This was a point that was put to the Reserve Bank governor. We know that the Treasurer and government members opposite claim it was all their brilliant economic stewardship but I suspect, as the report outlines and indeed as the chair of the committee touched upon, there is a lot more that has driven this than the recent policy settings of the government. Of course the fiscal reforms that have taken place over many years under both guises have been a key part of this, but the role of the Reserve Bank in setting monetary policy limits at an appropriate level has also been key.

I questioned the Reserve Bank governor on this point, and he made what I thought was a fairly interesting comment with respect to the relationship between fiscal stimulus—which of course was the centrepiece of the government’s response to the GFC—and monetary policy settings. Paragraph 2.30 of the report states:

When pressed on what would have happened with the cash rate had there been less fiscal stimulus, the Governor stated that it would have been lower, but qualified that observation by noting that it would not necessarily follow that this ‘would…be a better mix of policies’.

The important point I felt as a member of the opposition was the unqualified statement the Reserve Bank governor made that there would have been a lower set of interest rates, a lower monetary policy setting, had the government not borrowed tens of billions of dollars and pumped it into the Australian economy. So we know in part that there is now some economic price to be paid as a result of this massive stimulus that we saw from the government.

In addition, there was a chance for me to question the Reserve Bank governor about labour market flexibility, and again the chairman of the committee touched upon this. I note with respect that when it comes to labour market flexibility some concerns were raised. In fact, to quote the governor, paragraph 2.25 of the report states:

As to the regulatory changes,—

those are in fact the industrial relations changes—

it is an important question to what extent these changes may have flexibility. It is very hard for me to tell. Many people that we encounter from a business background are quite concerned. It is not uncommon, of course, that when there has been a change for there to be uncertainty about how the new system will work. In some respects, I guess, one would have to say it is as much in the implementation and administration of it as in what the legal provisions themselves say.

In other words, we need to watch in great detail what happens to wage price inflation. I commend the report to the House.

Harry Jenkins (Speaker) Share this | Link to this | Hansard source

Order! The time allotted for this debate has expired. Does the member for Dobell wish to move a motion in connection with the report to enable it to be debated on a future occasion?

I move:

That the House take note of the report.

In accordance with standing order 39(d), the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting and the member will have leave to continue speaking when the debate is resumed.

Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

I move:

That the order of the day be referred to the Main Committee for debate.

Question agreed to.