The RBA's steely infrastructure warning

Reserve Bank of Australia Governor Glenn Stevens fronted the House of Representatives this morning to provide testimony in front of its Standing Committee on Economics. Unfortunately, instead of asking insightful questions on the many challenges facing our nation’s future, the committee focused most of its attention on the central bank’s reserve fund. It was a desperate attempt to score political points on an issue that few people should care about.

Try as some might to make it a bigger issue, the reserve fund is a non-story. It is effectively $8.8 billion that will be sitting in an RBA account. If the dollar depreciates, as many expect it will, then the fund will not even be used. It is as much a symbolic gesture as it is something genuinely meaningful.

Fortunately, in brief moments of respite from the political theatrics, there were some genuinely interesting issues discussed.

First, Stevens does not believe that the cost of borrowing is holding back the economy. “Monetary policy can’t force spending to occur,” he said. Therefore we must ask ourselves whether further cuts (if deemed necessary) would have a sufficient effect on confidence. Stevens’ comments suggest that, at this point in time, fiscal policy may have more potency than another cash rate cut.

Second, Australians have become complacent following 23 years of uninterrupted economic growth. “It is hard to escape the feeling that we as a society have tended, for quite a long time now, to go about our decisions … while making the assumption … that solid growth of the economy will simply continue,” Stevens said.

We have lived up to the ‘lucky country’ moniker for a long time now – lucky enough to live through a period of extensive competition reform, financial deregulation, favourable demographics and then the industrialisation of China, which resulted in two commodity price booms. But these favourable developments are beginning to wind down and the challenges for our economy over the next decade are vast. It will no longer be as easy to succeed.

Third, and perhaps most pertinent (not to mention integral to addressing the last point), RBA Deputy Governor Philip Lowe pressed home the pivotal role of infrastructure and productivity to our very livelihood. “There are many projects we could do that would have a social return greater than the cost of financing,” he said. Lowe briefly touched on comments made in his excellent speech on infrastructure last month, which I discussed in detail at the time (Not just a bump, but a permanent economic thump and Get smart or face infrastructure chaos, November 26).

Governments have underinvested in the supply side of the economy – Australia’s productive capacity – for too long, despite this being vastly more important to our long-run quality of life than short-run fluctuations in demand. Too many roads are in disrepair, our public transport systems are overworked and our broadband policy remains in doubt. Governments must be more forward-looking and think beyond the next election cycle. If they fail to address our infrastructure needs, then an ageing population will eventually lead to a lengthy period of sub-trend growth and a stagnation in our standard of living.

Finally, don’t discount completely the introduction of macroprudential policy to cool the housing market. “We’ve never ruled out the possibility of using regulatory tools as an adjunct to our normal tools,” Stevens said today. “But I am not entirely convinced that they are going to be the silver bullet as some think.”

While I came out in favour of macroprudential policies recently (How to fix the housing market’s ills, November 20), I can understand that the governor is cautious about policies that remain largely unproven. New Zealand has taken the initiative on this, and given the similarities between Australia and our neighbour, it will be interesting to see how this plays out over the next year or so. If successful, we could witness a new era of housing regulation from the Reserve Bank and the Australian Prudential Regulation Authority.

While these parliamentary testimonies inevitably become more about politics than facts, there were clearly still some interesting takeaways if we push through the nonsense surrounding the reserve fund. Of all the issues covered, I hope that Dr Lowe’s comments regarding infrastructure investment gain some traction. It might not be the government’s immediate concern, but it is of the greatest concern to the nation – even if we don’t realise it yet.