Macro

Back in November 1990, with the Australian economy deep in the doldrums, Treasurer Paul Keating uttered his now famous remark that this was “a recession that Australia had to have”. It was, remarkably, Australia’s last recession. Today, with our economy again looking into the abyss, I believe there is a simple measure the government could take to prevent the next one.

The Australian economy is barely growing. Australia’s economy, as measured by GDP, grew most recently at an annual pace of just 1.4 per cent, which was the slowest rate of growth since the 1.7 per cent growth recorded during the GFC, and the lowest rate since the Tech Wreck of 2000. Seasonally adjusted, Australian retail turnover fell 0.1 per cent in July, according to the Australian Bureau of Statistics. In NSW – Australia’s largest economy – state final demand, which is a broad measure of spending, stopped in the quarter to June 30.

Meanwhile, the Reserve Bank reported earlier last month that Australians had nearly twice as much debt as income. Debt-to-income rose 191.1 per cent in the June quarter, up from 189.4 in March. Household debt-to-income jumped to 140.4 per cent from 139.8 per cent.

And it’s income that is now in recession for many Australians. With term-deposit rates of less than 1.75 per cent, many retirees have been enduring a worsening ‘income recession’ for some years.

It’s a vicious spiral. Rates are cut to spur investment, but for the oldest individuals and couples in the largest cohort of the population – the baby boomers – incomes fall and spending must dry up. The consequent slowing in the economy requires more rate cuts and the cycle continues.

Rate cuts are clearly insufficient to get the economy going and the heavy lifting must be accompanied by fiscal measures, meaning government spending and/or tax cuts.

For Australia, however, it could get a whole lot worse soon.

Residential building approvals, which we have warned about for more than a year, are down 40 per cent. It’s a leading indicator for construction activity, meaning the ranks of those suffering from income reductions will include architects, surveyors, landscape gardeners, brickies, sparkies, plumbers, chippies, tilers, painters and roofers. That’s more than 3.5 per cent of the nation’s workforce who, by Christmas or early in the new year, will be earning less income even if they keep their jobs or their contracts. In turn, that could have an adverse impact on retailing, which is the country’s second largest employer.

As you can see, giving 3.5 per cent of the workforce 40 per cent less work will mean less spending at the shops, which of course could lead to store closures or cost cuts, leading to unemployment in retail. Add to the multitudes of retirees already tightening their belts and Houston we have a problem.

“I used to like to go to work but they shut it down

I’ve got a right to go to work but there’s no work here to be found

Yes, and they say we’re gonna have to pay what’s owed

We’re gonna have to reap from some seed that’s been sowed.”

Telegraph Road, Mark Knopfler, Dire Straits

Forget the official definition of a recession, a large portion of Australia is already in an income recession and a bunch more are about to enter one.

It makes perfect sense therefore that our Reserve Bank would cut interest rates. Unfortunately, what I know from my conversation with the RBA’s Assistant Governor is that while the intention – to help keep people in a job – is to be commended, rate cuts incentivise businesses to invest in technology that displaces labour.

As revenues fall, businesses are forced to find cost-out solutions and automation is high up on the list, especially when there are tax rebates for doing it.

The labour displaced by automation and robotics is a major reason interest rates are as low as they are globally. Low rates have spurred a boom, and perhaps a bubble, in AI, 3D-printing, electric vehicles, autonomous vehicles, and the list goes on. The primary purpose of some of this technology, of course, is to lower costs by replacing humans.

So as central banks cut rates, they incentivise investment in technology that displaces labour, forcing central banks to cut rates further.

The other issue of course is that rate cuts are justified on the basis of a global savings glut, the currency war, inflation being low and on the basis of the aforementioned desire to improve employment. Any recession is anathema to central banks; however, more frequent shallow recessions are much better than deep prolonged slowdowns, even if they are less frequent.

Meanwhile, rate cuts also help lift the price of real estate which benefits those who already own assets but does nothing for those bereft of assets. And so, rate cuts widen the inequality gap.

What’s needed are permanent and enduring tax cuts for those on lower incomes. Lower income earners spend a higher proportion of their income and cutting rates for lower income earners increases the velocity of money – the frequency with which it passes through the economy.

As the economy continues to slow you’ll be hearing a lot more about the need for government spending on infrastructure to stimulate the economy. The problem with this, of course, is the long lead times. A better idea is the NSW schools maintenance program that has just been announced by the NSW Government. This is more immediate and employs more people than a tunnel project. In its economic effect it should be akin to the school building program run during the GFC.

While governments and their advisers might be more inclined to pay for one-off projects, such as a few schools to be fixed, or for a hospital to be given a coat of paint, the pace and potential depth of economic slowing may require something broader and more permanent. A tax cut for lower income earners is a strategy that needs to be considered to avoid a recession we don’t have to have.



Marvin Cathey

A tax cut to low income earners won’t help the Australian economy an any meaningful way. Their rates of tax are not significance now to cause a rise in spending if reduced. However a significant drop in the corporate tax rate could flow on in dividends and increased jobs. This almost free money experiment must surely end in a major correction to reset and recalibrate economies. This long slow strangulation doesn’t help anyone. Even the politicians!

David Jameson

Totally agree with the tax cuts for low income earners, avoids the rorting seen with the school building program, insulation program and the solar panel program

John Forest

I am intrigued that payroll tax seldom gets a mention. Jurisdiction may be separate but we still tax companies to employ real people. Ridiculous.

Mark Dawson

Totally agree Roger. The government should go on the warpath and pump loads of money into nation building infrastructure. We definitely require more dams, high speed rail, Infrastructure building in regional centres. These sought of massive infrastructure projects keep the money going around.

Yvon Dee

The RBA thinks that interest rate cuts are beneficial to our economy and will increase consumer confidence and spending. They forget or ignore that the myriad of full pensioners and similar welfare recipients don't benefit at all for any of the recent monetary easing measures recently brought into play. No tax cuts unless earning some taxable income No benefits from interest rate cuts on home loans as pensioners cannot get a home loan without other income. Interest rates on credit cards are on the rise again, probably to cover the lowering of house loan rates, to name a few examples. So where is the incentive to spend extra when all I have received is the paltry $9 per fortnight pension rise, which is already taken up by increases in electricity, water rates, petrol rises (rural area, no public transport) and grocery price fluctuations. Our economy is on a roller coaster ride, driven by hope and despair, extra debt to cover lifes emergencies for the lower income end of the market.

Tulshyan

Another little suggestion: The Government could accept deposits from pensioners up to a certain maximum limit and pay a decent interest on it which should be a minimum of say 5% p.a. regardless of cash rates or market rates being much lower.

Alasdair Wardle

I agree that more Federal Government spending is essential if the economy is to turn around. I also agree that spending has to be local, quick and direct. One of the simplest approaches would be to increase unemployment benefits by $100 a week. States have started to reduce or eliminate TAFE fees, but this could be extended to writing off all HECS debts. Anyone who knows anything about Modern Monetary Theory would realise that a 'surplus' is the last thing Australia needs at the moment.

rahul rustogi

Roger, don't you think Australia needs to get manufacturing going?, Investment in research and development?.

Mr Lee Wells

A long term stimulus of economic demand for goods and services could be to increase the number of live births.

Trevor Ridgway

Roger : You say "A tax cut for lower income earners is a strategy that needs to be considered to avoid a recession we don’t have to have." Lower income people DON'T PAY TAX , they receive CONCESSIONS which means that about 50 % of Australians receive some form of Government assistance NOW ! https://theconversation.com/factcheck-is-half-to-two-thir... Construction projects means increased taxation. The Government has no money of it's own....it gets it from us ! Taxpayers ! So Roger : That's NOT going to work either is it ? We really need to be MORE PRODUCTIVE and CREATE MORE WEALTH individually so the companies make more profit and can pay higher wages. But most people would rather not......they want a LOTTO WIN ! The recession will reset everything by lowering peoples demands and the elevated "entitlement and expectations" that are driving this avaricious society ! So.....sorry.......but for once....Paul was right !

Roger Montgomery

Great discussion, thanks for all of your comments.