Stephen Walters interview with Ross Greenwood, Business Now, Sky News

01 February 2023

Event: Stephen Walters interview with Ross Greenwood, Business Now, Sky News
Speakers: Ross Greenwood, host, Business now; Stephen Walters, chief economist, Business Council of Australia
Topics: Business Council 2023-24 budget submission; investment; interest rates; inflation


Ross Greenwood, host, Business now: Stephen Walters is the Business Council of Australia’s chief economist and joins me now from our Canberra studio. Stephen, the one thing that Australia can ill afford right now is a lack of investment in key business infrastructure, surely?

Stephen Walters, Business Council chief economist:  You're right, Ross. When you look at investment as a share of GDP, it's actually at the lowest level in three decades. So that was before we saw this new approach to, perhaps some people think is threatening, some of the investment outlook for Australia. It's not like we’re in the midst of an investment boom that we're all enjoying here and there's all this great innovation going on and a new infrastructure and new capacity being put in. In fact, it's the lowest in 30 years since the last recession or the last deep recession in the early 1990s. We have to be careful here. Business is already a bit reluctant to be risking their capital over the long term. Remember, that's the nature of investment, right? It's not like a very near-term return on this investment. Often, it's over multi years, even decades. We need to be mindful of the environment for investment and of course interest rates are going up. That's not the main constraint on investment. As we know, our members are always telling us the cost of capital is not the main constraint on their investment. It's things like policy certainty and the long term returns they're going to get on that investment.

Ross: This is one of the things, and you even heard it as we played earlier on, Caltex today in a Senate estimates indicated that because of a change of policy on clean fuels, but also high inflation. That's the key there, the high inflation, that they're considering investments of many hundreds of millions of dollars to upgrade plants. But of course they've got to look at all of those things in the mix. Why is inflation so important to that and why is it important the Reserve Bank and the government makes certain that this inflation does not remain really out of control?

Stephen: I'll start with the last part of that, Ross. Inflation is the real scourge and I think Phil Lowe, the Reserve Bank Governor, said it late last year that it's the real scourge, and I think the Treasurer's even said the same thing in some of his public comments. We know inflation is very damaging. It really distorts the economy. It rewards certain types of investment, particularly unproductive assets. Of course, the Reserve Bank is doing what they should do when we've got a highest inflation rate since the early 1990s, they're putting up interest rates. Now, all of that adds to uncertainty. I won't talk specifically about the Caltex example, but there is certainly a lot of businesses out there that are competing in a global market for capital. Capital can very easily move across borders and already we've got a pretty uncompetitive tax regime for corporates. We know that. Our budget submission this week outlined things we can do about that, but inflation really just adds to that extra layer of uncertainty. Let's not forget there's a war going on in the Ukraine, so it's pretty hard to say inflation has peaked. Like the Treasurer, I hope it has. I'm just not as convinced as he sounds that perhaps it's peaked here. Look, it's running at nearly 8 per cent. Now, the last time we had inflation at 8 per cent was after the recession in the early 1990s. This is not a little blip in inflation. It's a pretty serious - what seems like a pretty structural change in pricing and therefore interest rates are going to keep going up for some time, including next week.

Ross: Okay so then the government surely also has a role in controlling inflation. It's about controlling its own spending, and yet we don't have any limits right now on the amount that the government can spend as a percentage of GDP in the budget. Is that really an error that the government needs to fix?

Stephen: I wouldn't call it an error. I'd call it a risk, Ross. We know that last year, the government's budget in October saw the expenditure share of GDP drifting up to about 27 per cent of the economy. Now, typically this is closer to 25 per cent of GDP, so I think the Treasurer needs to be very careful that he doesn't pour what we'd call fiscal stimulus into the economy. At the exact same time, the Reserve Bank has just delivered the most aggressive interest rate hikes in a generation. You do not want to have those two main arms of policy pulling in opposite directions. The risk here would be that yes, the government perhaps gives some more cost of living relief in the budget coming in May. The Treasurer has said that is going to be one of the centerpieces of his budget. That can be done. You can help vulnerable Australians and those that are really struggling with their energy bills particularly, but you don't want to be spraying too much of this government's fiscal fire power around the economy that's already at its full capacity. We know we've got the lowest unemployment rates since Gough Whitlam was Prime Minister, that's 50 years ago. You don't want to be sprinkling too much money across an economy that is at capacity because it'll make the inflation problem worse. Therefore, as we just discussed, the Reserve Bank will start lifting interest rates even more aggressively, and that'll hurt the very people you're trying to help with these cost-of-living programs.

Ross: Stephen Walters, chief economist at the Business Council of Australia. Many thanks for your time today.

Stephen: My pleasure, Ross.


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