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RBA governor endorses lifting public sector wage caps to stimulate economy

RBA governor endorses lifting public sector wage caps to stimulate economy

The Reserve Bank of Australia has slightly reduced its growth forecast and endorsed abandoning caps on public sector wages as part of a suite of non-monetary policy measures to stimulate the economy.

Appearing before the house economics committee on Friday, the RBA governor, Philip Lowe, said “things will be OK” even if governments do not take further steps to boost growth but Australia should “aspire to better” and “lift our sights higher than OK”.

Lowe warned that Australia has “a lot riding” on the dissipation of political shocks, including the US-China trade war, because there is little the RBA can do to stimulate the economy if the international situation “takes a turn for the worse”.

With interest rates at a record low 1%, inflation below the 2-3% target band and wage growth still sluggish, the RBA is in a difficult position attempting to lobby governments to use other economic levers while the Morrison government warns it not to talk down the state of Australian economy.

Lowe said the RBA’s forecast is for growth of 2.5% this year and 2.75% over 2020, a downward revision from 2.75% in 2019, which he attributed to “weak consumption growth”.

“It has become increasingly clear that the extended period of unusually slow growth in household incomes has been weighing on household spending, as has the adjustment in the housing market,” he said.

Lowe said it was “good news” that increased demand for labour had been met with greater supply by women and older Australians but the increased participation made it harder to generate a tight labour market and lift wages.

The RBA forecasts that unemployment will fall from 5.2% to 5% in 2021 but Lowe said “it is probable that we will still have spare capacity in the labour market for a while yet”.

“This means that the upward pressure on wages growth over the next couple of years is likely to be only quite modest, and less than we were earlier expecting.

“Caps on wages growth in public sectors right across the country are another factor contributing to the subdued wage outcomes. At the aggregate level, my view is that a further pick-up in wages growth is both affordable and desirable.”

The commonwealth and Victorian governments have capped public servants’ pay increases at 2%, while other states including Queensland and New South Wales apply a 2.5% limit.

Lowe nominated wage growth of 3% – in both the public and private sector – as “a reasonable medium-term aspiration” based on target inflation of 2.5% and 1% in labour productivity growth.

“I hope we can do better but I think we should be able to do that. So I would like to see the system return to wage growth starting with a three.”

Lowe also reiterated that “monetary policy is not the country’s only option” if Australia wanted to reach full employment, warning there are “certain downsides from relying too much on monetary policy”.

He cited government spending on infrastructure and structural policies to expand investment, innovation and employment as other possible levers.

While acknowledging there were “some capacity constraints” he encouraged governments to look for opportunities to invest in infrastructure, citing cheap borrowing rates, which allow Australia to borrow for 10 years at less than 2% interest.