Event Adam Boyton interview with Will Koulouris, CNBC

Speaker Adam Boyton

Date Tuesday, 2 July 2019

Topics Interest rates, personal income tax cuts, and investment

E&OE

CNBC journalist, Will Koulouris: Good morning. Well it is pretty much a given that we are going to see some language in terms of household consumption. Now this has been a long running issue for the Reserve Bank because it has languished over the past couple of years here in Australia. Some of that is to do with the wealth to debt ratio because we have seen peak to trough levels in house prices, fall about 15 per cent and that's the biggest it ever has been since 2017. And, joining me now to cover off on a little bit of that is Adam Boyton, he's the chief economist at the Business Council Australia. Adam Thank you so much for joining us.

Business Council chief economist, Adam Boyton: Good morning.

Will: As I just mentioned, we do have the issue when it comes to housing prices. We've seen that huge peak to trough slide, is there a risk moving forward that if the RBA does cut rates, it's going to prop up the housing market a little bit and then maybe cause households to struggle even further under the excessive debt that they're now facing when it comes to the debt to income ratio in Australia.

Adam: I think really an interest rate cut from the Reserve Bank is probably going to just stem the pace of house price declines and I think that's probably appropriate. You don't want to be in a situation of significant falls in house prices. That puts pressure on households. You see a feedback into household consumption through the negative wealth effect, but I don't think an interest rate cut today following on from the one last month will send us back into a boom either. It'll probably just give you that long period of sideways movements in house prices that are enables any overvaluation to correct over time and that's probably a lot better for the economy than what we've seen over the past year.

Will: Do you think though that the RBA should be engaging in that kind of policy but rather instead waiting to see what the effects of those government tax cuts, that they are trying to push through this week, and how they are going to impact consumption moving forward?

Adam: Well, I think it's probably useful if you can get a few things happening at the same time. And so, one of the debates in the economy at the moment is should it all be down to interest rates? And I think the benefit of having the tax cuts coming through, plus interest rate reductions is that you've actually got stimulus coming from a few different channels. That's going to be much more effective than just trying one thing. So, I think it's actually good that we've got a few things going on at the one time, rather than just putting all your eggs in say, the interest rate basket or the tax cut basket.

Will: In terms of tax cuts, now it has been like a source of contention, especially when you factor in the fact that the business tax cuts didn't get through, that 25 per cent rate for business. Is this something that the government should be looking at as well moving forward considering the fact that there is going to be a heavy reliance on these personal tax cuts driving growth when business is also, when you consider OECD levels, we're one of the highest taxed business countries?

Adam: It is true that we have a very high statutory company tax rate in Australia compared to the rest of the world. The parliament made a decision on company tax last year, but I do think that the question, the broader question of what can we do to get business investment growing again is an important question. It's one the Reserve Bank has been alluding to in some of their statements about the need for structural policies that get businesses investing and employing. The labour market has held up over the course of this year, but we do need to think about something to grow investment. Now, that might be an investment allowance, it might be looking at the cumulative burden of regulation in Australia and seeing what that's doing the hold back investment. But I think you're right, it would be nice if we can complement what's happening on the household side with something on the business side as well.

Will: Now getting back to the RBA in terms of policy, infrastructure is a big part of this government's plan as well in order to drive growth, should the RBA be looking at a little bit of QE in order to fund some of those infrastructure projects that would again boost productivity in Australia.

Adam: I think if you look around the world QE is where you go once you're close to what we call the zero bound, that is once you've run out of space to cut interest rates normally, then you look at QE. I don't think anyone's suggesting that's on the cards for today. Long term bond yields are already very low in Australia. I think there are things we can do on the infrastructure space well before you talk about quantitative easing and that's for example, making it easier and quicker to get major projects up and running, having clear infrastructure pipelines so that we know what we're building next after the current batch of projects and making sure that we're building the right projects for the right price and using the expertise we have in bodies like Infrastructure Australia to really drive value for the infrastructure dollar. I think they're all things that you put on the table and do first before you started thinking about quantitative easing.

Will: Now, it is very likely that any kind of rate movement is going to be heavily predicated on the labour market in Australia. They have that NAIRU target of four and a half per cent. Do you think though that that is something that needs to be looked at? Do you think that the unemployment rate, considering 5.2 per cent when you go across the global picture isn't that bad, do you think that might need to adjust out a little bit? Do you think it's pushing it too far down?

Adam: If you look at say the US or the UK, you've got unemployment rates that are even lower there. I actually think this is an almost wonderful opportunity to get as many people as we possibly can in jobs. When I first started out as a professional economist in the mid-1990s you would have said the NAIRU or the full employment rate in Australia was seven and a half. If we can get that to five or four and a half or even lower, I think that's a wonderful thing because what it actually means is more and more people are employed and fewer people are unemployed. What we do need of course is the wage growth that comes with that. We are starting to see some signs of a pick-up in wages growth in the private sector, that's certainly been the case in the wage price index over the past year. But the lower we can get the unemployment rate down, the more people we can get in jobs, the more wages growth we should get. And that all needs to come with faster GDP growth. So, all these things go together, which is why it's not just interest rate cuts, we should be thinking about, tax cuts are incredibly important too, for the household sector. And then we do also need to look at what can we do to drive business investment.

Will: Adam, thank you so much for your time, we're going to have to leave it there. That was Adam Boyton there, the chief economist at Business Council of Australia.

Download the Business Council’s  Plan for a stronger Australia here.