Lowe paid a high price

RESERVE Bank of Australia governor Philip Lowe has proved a convenient whipping boy for federal Treasurer Jim Chalmers, as attempts to contain inflation start to bite.

The Reserve Bank controls the monetary side of economic policy, setting the agenda on interest rates for banks and other financial institutions.

And its monthly rate increases over the past year are having an impact.

The inflation rate has begun to ease, but not before significant pain has been inflicted on homebuyers, with increased warnings many might have to sell up because they can’t service their loans.

This led to Dr Lowe, as the public face of the bank, being axed. It has been his job each month to announce the board’s decisions.

When there was a concerted run of “no change” and the official interest rate was 0.1 per cent, that was a breeze.

Those who lived through interest rates of close to 20 per cent in the late 1980s were shaking their heads in disbelief.

But Dr Lowe’s gaffe was that, in 2021, he said rates would stay low until at least 2024.

Again, this seemed too good to be true – they are now 4.1 per cent – but many homebuyers took that advice at face value, apparently, and mortgaged themselves to the hilt.

Now they are paying the price, and so is Dr Lowe, even though he is simply the front man for a highly qualified board that includes leading Western Australian company director Mark Barnaba.

The other side of the economic strategy is linked with the federal government’s budget and policies, including wage rates.

It’s one thing for the Reserve Bank to attempt to place a brake on spending by raising interest rates, it’s another for the government to be running policies that include supporting generous pay increases and more migration.

Yet this is what Prime Minister Anthony Albanese and Dr Chalmers have been presiding over, with a ‘nothing to see here’ approach when it comes to inflationary pressure.

The recent disclosure that the federal budget surplus for the past financial year is now likely to top $19 billion will be promoted by Canberra as vindication of its “sensible spending” policies.

True, budget surpluses have been few and far between.

But this one deserves closer scrutiny.

First the revenue generated by the resources sector has been higher than expected, thanks to healthy export prices and conservative price forecasts by the Treasury.

WA projects are a big contributor.

Then there is the inflationary impact. Former Labor prime minister Gough Whitlam (1972-75) looked favorably on modest inflation because it generated extra tax revenue, which he believed would help pay for his big spending programs.

But the price increases also caused much pain, especially for low-income earners – and made many Australian exports less competitive.

 So, while Dr Chalmers has been happy for Dr Lowe – who was appointed under the previous government – to carry the inflationary can, the tactic has a time limit that is running out.

Dr Lowe’s term ends in September and he will be replaced by deputy governor Michele Bullock.

The treasurer will have less scope to be critical of the Reserve Bank when his own appointee takes charge.

The current challenge has also placed greater focus on productivity, where improved efficiency makes the economy more competitive.

In this regard Australia has been blessed, thanks – again – to the efficient resources sector.

But there are signs of complacency creeping in, including in the WA public service. The general view is that the private sector delivers goods and services at lower cost.

Brian Burke’s Labor government confirmed this when it closed the State Engineering Works in 1986.

Richard Court’s coalition government went further, selling off assets and outsourcing services in public transport, water supply and cleaning, and closing the Midland Railway Workshops in 1994.

This trend has been reversed in WA since the election of the current Labor government in 2017.

Union agitation has seen work in areas like hospital administration and support areas, and water supply, returned to public hands as contracts have expired.

Hopefully, improved efficiencies are being employed. But experience shows that lack of competition leads to complacency, reduced productivity and rising costs.

And that adds to – not eases – inflationary pressure.

A challenge for Ms Bullock.