CANBERRA OBSERVED by national correspondentNews Weekly
Is Canberra too dependent on interest rates?
, April 25, 2015
Since the establishment of the Reserve Bank in 1960, the RBA has effectively controlled interest rates in Australia through the cash rate, which is the interest rate on overnight loans in the money market. It does not directly control the exchange rate, which floats and is set by market forces, but its control of monetary policy certainly influences the exchange rate.
NAB's Gavin Slater
Nor does it control the amount of money in the economy. The cash which the RBA puts in circulation is just a small part of the available credit which includes bank deposits, credit card advances, bank loans, and so on.
The RBA’s decision to hold interest rates at 2.25 per cent, despite the slowdown in the economy as a result of the end of the mining boom and the collapse of commodity prices, particularly iron ore and coal, surprised many economists.
They had predicted that it would lower the rate by 25 basis points to 2 per cent. As a result there has been widespread speculation in financial markets that the RBA will cut rates in May. But they had expected a drop in interest rates in April, so their predictions are speculative.
In his statement, Reserve Bank governor Glenn Stevens said that interest rates were low by historical standards, yet overall domestic demand remained “quite weak” despite the fact that “financing costs for creditworthy borrowers remain remarkably low”.
This is self-evidently true, as anyone who remembers double-digit interest rates in the 1990s will recall.
There is arguably little benefit from further cuts in interest rates.
Certainly, that is the view of National Australia Bank’s head of personal banking, Gavin Slater. He told Fairfax Media recently that with interest rates at historic lows, the reasons for Australia’s poor economic growth were to be found elsewhere.
He said: “Rates are at an all-time low. Is another rate cut sufficient stimulus to be the trigger everyone’s looking for to generate increased economic growth in the business sector? That’s the big question.
“I think it’s much more, and most people would acknowledge it’s much more than a rates issue. There are broader confidence issues.”
Not mentioned in the RBA governor’s statement is the fact that low interest rates have fuelled a speculative binge in the property market, with residential prices in Australia’s largest cities, Sydney and Melbourne, rising at the fastest rates.
According to NAB’s residential property survey, Sydney house prices rose 16 per cent in 2013, followed by nearly 11 per cent last year. Melbourne’s rose by 10 per cent in 2013 and 5 per cent last year.
All these figures are way above the inflation rate and average weekly earnings, and help to explain the increasing unaffordability of houses for many young families.
While increasing the availability of land in the capital cities is undoubtedly one of the causes, there are many others, including the increased use of houses and apartments as investments, and the influx of foreign money.
According to the NAB survey, almost a third of all homes purchased in Victoria were bought by foreign owners. As most of their acquisitions are in Melbourne, the foreign buyers undoubtedly make up more than a third of all property sales in this city.
Arguably, the low interest regime is actually diverting money which could be used for investment in business and industry into highly profitable speculation in housing.
If that is true, the government must increase the incentives for saving and productive investment. At the moment, it does neither, and encourages spending rather than saving.
The problem for a government that wants to support industry and increase employment is that it has surrendered almost all the tools which governments have traditionally relied upon, including interest rates, the money supply, industry support and taxation concessions.
The government’s problems are compounded by the failures of a taxation system which places a heavy burden on individuals, small businesses and farmers, but leaves the door wide open to exploitation by the top end of town.
The latest revelations indicate that large-scale tax avoidance has been used routinely by many of the large technology companies, including Apple, Microsoft and Google, and even large mining companies such as Rio Tinto and BHP Billiton, to reduce taxes paid in Australia.
The methods used vary, but are based on transfer-pricing, where goods actually sold in Australia, to Australians, are nominally sold in foreign countries like Singapore, where tax rates are far lower. This is good for Singapore … and bad for Australia.
The taxes paid by these extraordinarily profitable companies are surprisingly small. In Senate Estimates hearings, it was disclosed that Microsoft earned about $2 billion from Australia in 2012-13 but paid just $100 million in company tax.
Apple’s revenue was $6 billion, but it paid only $80 million in tax; while Google earned $358 million in Australia but paid $7 million in tax.
Next month’s budget needs to tackle this issue.