RBA short-sighted in not lowering rates
The RBA decided (in its wisdom) to not continue to lower rates. In its minutes it argued that the world economy will continue to recover in the second half of 2009 and that Australia’s trading growth will rebound strongly to just under trend in 2010. At the same time for months they have been saying cynically that unemployment will rise to 7%. Within days of their inaction the ABS already started showing that 53,000 people had lost their jobs. Continuing this fact, which would indicate that the Reserve Bank had made another “serious error of judgement” (PM’s quote from 2001).
Another fact that was released after the RBA’s inaction was that in the last quarter non-farm production dropped 0.5%. This meant that people simply weren’t spending enough to create production and jobs. At the same time it was calculated widely in the media that a series of rate drops since November put an extra $800 plus in household pockets each month. The figures show that this has found its way into bank savings accounts. This is a natural and normal reaction as people respond to negative news on the economy in the media. Had interest rates dropped another 1% the savings would jump to $1,000 a month and again find its way into savings accounts.
At least, isn’t this better than finding its way into banks’ net profit? How does this assist the economy and create jobs? Particularly as the banks have a monopoly on funding in construction. We have seen them turn the tap off and the chronic shortages of housing escalate into a national disgrace. An efficient economy needs an efficient banking system. We don’t have that.
The securitised market is empty of funds and it is these funds that would provide competition to the banks. That, in turn, would force them to open their vault and start lending and put liquidity into the markets. 100,000 new dwellings are badly needed right now and would create 500,000 new additional jobs in the economy. With one fell swoop – the recession talk would be finished – employment would be back to full.
After the initial conservative reaction to the “recession” talk people realise their savings are attracting little in the way of interest and even this, though it is below the inflation level, is being further eroded by income tax! Then they look for a safe haven to put their money that will give them a better return. This means property. This is starting to happen now but is being hampered by the banks’ monopoly on providing funds to this market. Here Rudd can take two separate courses of action immediately. Pumping funds into the securitised market that can only be accessed by the non-banking sector. The sector that introduced competition to the banks from 1995. Competition saw the banks’ margin drop from 3% down to 1.8%. It is now back up to 3% without this competition.
At the same time Rudd can cancel GST on all new dwelling construction that is partially completed or completed! This could remain in force for six months and then gradually come back at the rate of 1% GST per month. So that after six months we would have 6% GST per dwelling construction. People taking advantage of this short-term discount would act quickly and this would quickly stimulate the economy and aid other parts of the economy supplying things like furniture, glass, home wares etc. into these dwellings. To avoid disrupting the markets any of these properties sold within six years would have to pay the full GST back to the government.
It is only extra supply into the housing market that will see the rapidly rising rents start to fall and affordably return back to the housing sector.
This action would not hurt the surplus. The government would simply be foregoing GST it was never going to collect anyway. But on the other hand it would get bonus income tax from the 500,000 newly employed! A bonus to the budget (not a negative) that flows from these one-off hand outs that provide overseas jobs or cash into our greedy, bloated banks.
While I am on this, the states can do their bit to constructively help stimulate the economy. They should immediately cancel pay-roll tax on all net additional employees put on over the next six months. This moratorium on pay-roll tax should then last for the next two years. This would greatly encourage employers to take the risk and put on new staff. The flow-on effect would be immediate.
In conclusion, there is no justification for the RBA’s inaction. They can’t point to any negative from lowering rates – so why not? We urgently need an inquiry into the inefficiencies of our total banking system.
Regards
Kevin
