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Thursday, 20 September 2007
Page: 141

Mr McARTHUR (11:41 AM) —I would like to make some comments on the Review of the Reserve Bank of Australia Annual Report 2006 (Second Report), which was tabled some days ago. It is very relevant in the current economic climate. I note that overnight the US reserve bank governor reduced the US interest rate to 4.75 per cent, a reduction of 50 percentage points. There has been a lot of debate in the public domain about the activities of the US reserve bank governor, the interest rates in the US and their impact on the Australian economy. The subprime rate is a major difficulty for lenders in the US. I think the US subprime rate difficulties are fundamentally a problem that emerges from the fact that the lender and the borrower have been separated and that those borrowings have been segregated to another segment of the market. Of course the ability to service those borrowings and the interest rates that are attached to those borrowings have been under a lot of pressure. In my view, an irresponsible position has arisen. Also, the ability of those borrowers to service their loans and the deposits has been a matter of ongoing debate. It has impacted on Australia’s position with the Reserve Bank and on our position to maintain our economy in a stable position.

In my opening remarks I compliment the Reserve Bank and our outgoing chairman, Mr Bruce Baird, the member for Cook, for the congenial way he has conducted the committee hearings, allowing members of the committee to participate and ask questions. I put on the record his great skill and his contribution both to the parliament and to the committee. As a member of that committee, I appreciate the fact that the Reserve Bank now twice yearly conduct these open hearings with members of the committee and the broader public. This is a step in the right direction in that the Reserve Bank, which historically has been somewhat a closed shop, now is prepared to discuss these major issues with members of this parliament and put them on the public record.

Going to their report, it is worth noting that the Reserve Bank raised the cash rate here in Australia on 8 August by 25 basic points to 6.5. That was regarded as a step in the right direction, given the strength of the economy. In my own view, it is a reflection of prosperity that the demands within the economy were such that the bank took action that it deemed fit to restrain demand and restrain credit. The Reserve Bank were indicating that growth picked up sharply in December and that the real GDP is estimated to expand about 3.7 per cent in the year to March. So on their own figures they were suggesting that this economy was buoyant and had the possibility of overheating.

They also noted the global economy remained strong, with estimates for growth in 2007 at over five per cent and, in particular, the growth and demand from China and India being very significant. I guess we all know of the impact of China in particular on the Australian economy, and we need to be very cautious about and take into account their huge growth rates. The bank also noted that growth in the domestic economy remains strong, as I have mentioned, and that the strength of commodity prices together with higher interest rates in Australia have underpinned the rise of the Australian dollar against the US dollar. These things, as you well know, Mr Deputy Speaker Secker, are matters for rural Australia and all our exporters.

The Reserve Bank, in their charter, suggest that inflation is likely to be around three per cent over the coming year and near the top of the target zone in the following year. With all the debate about inflation and the control of the economy, this is in the top of the target area. I suppose the government and any thinking Australian would like to restrain inflation at that lower band. I note the importance of the Reserve Bank conducting monetary policy and that in the board’s opinion their independence will contribute to the stability of the currency of Australia and the maintenance of full employment, economic prosperity and the welfare of the people of Australia. Again, I put on the record the importance of the independence of the Reserve Bank. Beyond political pressures they can, in their own view, maintain the strength of the economy, and I think the current board and the current governor have done that very well.

On the matter of interest rates, I raised with the Governor—and Chairman—of the Reserve Bank the suggestion that the raising of interest rates was a blunt instrument of monetary policy. I was interested in his response, which was that around the world the use of interest rates to maintain and control inflation has been adopted by most Western countries and that higher interest rates did restrain individuals and companies from extending too much credit and then moving the economy into the inflationary cycle. I was particularly interested in that very important policy point, as I judge it, compared to some of the other measures that have been used over past decades to control inflation and have demonstrably failed. The Governor of the Reserve Bank said, ‘We have had a look at all the other possibilities and we generally agree that interest rate mechanisms are the way to help in the controlling of inflation.’ There are other factors, of course, and nobody would be foolish enough to suggest that interest rates are the key feature.

I will move on to the unemployment rate, which is running at its lowest in 30 years, at 4.3 per cent. The tight labour market was emphasised repeatedly by the Governor of the Reserve Bank. He also said there had not been a wages breakout leading to inflationary pressure. The flexibility in the wages system was examined and Mr Stevens stated:

That is clearly, I think, a much more flexible labour market handling the shock much better than it would have 20, 30 or 40 years ago. I think that has been quite important.

He was discussing the problem of the mineral boom in Western Australia and the possibility that that would be reflected across the rest of Australia. We know that in 1981 under Prime Minister Fraser the mineral boom moved to other parts of Australia, with an outbreak of huge inflation at that time. I note that the Governor of the Reserve Bank in careful language was supporting the government’s position of a more flexible labour market. That will be a matter of some discussion, obviously, during the forthcoming election.

The other matter I draw to the attention of the House is housing affordability, which has been at the forefront of political debate in recent days. The committee challenged the Governor of the Reserve Bank about this issue. I well recall other discussions with the previous governor about Sydney house prices having gone through the roof, so to speak, although they have come back to more reasonable levels in more recent times. When the Governor of the Reserve Bank was challenged about this at the hearing on 17 August, he made the comment:

Household assets are still rising, debts rising too but for most people I think that is manageable. By all indications, confidence is high, incomes are growing well and contrary to what we sometimes read in the papers, about servicing debt and so on, the evidence from what the lenders have, and they are the people with an interest to know, is that the proportion of loans where there is a real struggle going on, it has gone up a bit. But it remains very, very low. So I think on the whole, households are in good shape.

The Reserve Bank governor is basically saying that people have jobs, they have good sources of income, incomes are rising and, on that basis, people are able to handle their housing debt. Again, I recall there was some discussion about this household debt and it was pointed out by the board that, whilst household debt has risen and that has been a focus of public commentary, on the other hand, housing equity has risen.

It has been as a result of the government’s good economic policies that people are in jobs and have received a 21 per cent increase in real wages since 1996. They have the capacity to service these higher debt levels for their domestic dwellings. The lower interest rate regime under the current government has also been an incentive for people to borrow just a little bit more and that has encouraged people to take out bigger loans than they might have done under a previous regime. They have had the confidence to do that. I concede the point that the first home buyer has always found it difficult to get into the housing market. Obviously, it is just a bigger leap of faith and some of the commitments and the problems facing the first home buyer are a problem for all younger Australians.

In the time available, Mr Deputy Speaker Secker, I want to refer to the report of the New Zealand parliamentary committee exchange that took place from 15 July to 19 July in which both you and I were participants. This report was tabled yesterday and I would like to make a few remarks about our visit to New Zealand. Personally, I have an interest in New Zealand and in how they have handled their economy. They were the leaders in a deregulated economy and in deregulated labour markets. I went there on a previous occasion to look at the operation of the GST in New Zealand.

On this occasion, the situation with New Zealand’s economy was not as clear cut. They are Australia’s sixth largest market, accounting for about six per cent of Australia’s exports. We have a close association with them. The CER has been the basis of an argument going back to 1983 where Australian dairy farmers were very worried about the outcome. We were concerned about the exchange rate, about their higher level of interest rates at, I think, 8.3 per cent and the cash rate at 8.25 per cent. So there was a lot of discussion about the state of the economy in New Zealand, their higher interest rates and some of the problems confronting them.

There are two things I would like to make an observation about in the few minutes left. The wages and salaries of New Zealanders are 25 per cent lower than in Australia. I quote from our report:

Wages and salaries are around 25 per cent lower on average than those in Australia. As the cost of living is comparable to that in Australia and with easy work entry across the Tasman (including mutual recognition of qualifications), skilled labour has been migrating to Australia.

There are approximately 1 million New Zealanders working offshore. With a population of 4.2 million ...

I think the major problem facing New Zealanders is that over time their wages and productivity have declined. When I raised this with senior officials, they said there had been a reduction of the productivity on a year-by-year basis such that now there is a 25 per cent differential. I think that is a real problem for our friends in New Zealand.

Finally, I want to talk about the ‘white gold’ boom. This is to do with the dairy industry. There was a lot of emphasis from our friends in New Zealand placed on the idea that their economy will be saved by their dairy industry. You know about the dairy industry, Mr Deputy Speaker, in your good seat of Barker. Some of the figures now emerging with the boom conditions in the dairy industry in New Zealand are very interesting. The dairy industry is very efficient. It is based on grass not on fed animals. The increased cost for feedstock for the dairy industry in other parts of the world brought about by biofuel discussions and competition has meant that New Zealand dairy farmers are competing very strongly with other countries. Prices for dairy products around the world have gone up by between 30 per cent and 40 per cent, so there is an appreciation in New Zealand that the dairy industry could be the salvation of their export problem.

In my assessment New Zealand has a difficult parliamentary system, where no real conclusion is given to the ruling party because of the remarkably complex quasi proportional system, which is even a bit hard for me to understand. The net result is that it does not give a final position to the ruling party. It means that what I consider to be bold decisions in the economic area are not being made.

I hope New Zealanders do recover from some of these difficulties of higher interest rates and lack of productivity. They are wonderful people, but I do fear for their future, unless there is a dramatic change in some of the approaches to productivity, labour relations and some of the welfare arrangements provided by the New Zealand government. We enjoyed the trip. I thank all those associated with the trip, particularly our leader, Mr Bruce Baird, the member for Cook.

Debate (on motion by Mr Randall) adjourned.