BetaShares’ chief economist David Bassanese responds to the suggestion that The Reserve Bank should face its first independent review in 40 years under a proposal from the OECD, which says it is time to address the central bank’s failure to meet key economic targets in recent years and deal with long-term risks posed by the pandemic.
The OECD’s regular “report card” on the Australian economy is often an ivory tower wish list of policy proposals – often with the tacit blessing of Treasury – that have a snowball’s chance in hell of ever making it through Australia’s political system.
Raising and broadening the GST in favour of lower corporate and personal income taxes is a case in point, as is the idea that Australia will suddenly reconsider a broad-carbon tax.
In my opinion, a better and potentially easier way politically to embrace tax reform is to ditch pre-digital ways of collecting tax. Rather than tinkering with the current cumbersome GST and personal tax system, Australia should explore more efficient ways of raising revenue through the electronic payments system. A small tax on all electronic taxations, for example, could raise billions in revenue fairly and effortlessly while reducing the compliance burden on small business.
With respect to the Reserve Bank of Australia, the key criticism appears to be that it has failed to reach its inflation objective in recent years. But this is true globally – the RBA is not alone – and reflects the structural disinflation forces brought about from technology innovation and globalisation. Somewhat more controversially, the RBA has also argued greater use of offshore workers to deal with local skill shortages has also kept a lid on local wage pressures, and hence price inflation.
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Given these structural forces and added labour market “flexibility” due to the use of foreign workers, it is far from clear much lower interest rates in recent years would have meant much higher wage or price inflation – even if the unemployment rate were also somewhat lower. What lower interest rates would have more clearly achieved is greater upward pressure of house and share prices and could have led to financial stability concerns.
That said, global central banks – including the RBA – are now responding to past criticisms and seem intent on keeping interest rates low enough to get labour markets hot enough to generate decent wage inflation once again. It’s a policy experiment that may or may not work in achieving higher inflation but will almost surely succeed in pushing up asset price valuations.
To my mind, the RBA’s operating framework is working well enough, and “what isn’t broke does not need fixing.” One potential policy change – which could be easily achieved through the next agreement with the Federal Treasurer – would be a lowering and broadening in its inflation target, to be more in line with global norms and better reflects the structural decline in inflation in recent years.
Indeed, with a mid-point target of 2.5%, Australia now has one of the highest inflation targets in the world. A more appropriate target might be 1 to 3%, with a mid-point of 2%. That small change would reduce the pressure on the RBA to keep interest rates near zero for year to come, in a potentially futile effort to get inflation consistently around 2.5%.
