Sugar-coated record low interest rate won’t fix Australia’s economic outlook

The Reserve Bank’s decision to follow in the footsteps of other central banks by cutting official interest rates to a record low 2.25 per cent is a short term sugar fix that runs counter to lifting business and consumer confidence required to fix Australia’s long term economic needs, says leading national accounting and wealth advisory group Chan & Naylor.

The RBA’s decision yesterday to cut rates is intended to foster sustainable growth and inflation outcomes that will help support demand. However Ken Raiss, Managing Director of Chan & Naylor, argues that whilst this may help keep down a persistently high Australian dollar, lower savings income and unproductive demand, it is unlikely to provide the stimulus required to stave off weakening inflation and higher unemployment caused by ongoing low business confidence.

“Whilst the RBA has acted cautiously with limited means in the hope of balancing the Australian economy, there is no getting away from the fact that interest rates are an indicator of economic health, so the longer we have to wait for a rate rise means the longer Australia is in the doldrums,” said Mr. Raiss.

“You can’t put a price on confidence, but perception is everything,” continued Mr. Raiss. “Businesses both large and small simply won’t hire or make any other form of investment whilst sentiment and demand remains so low, and with reduced tax rates unlikely from a government in debt, we are now caught in a ‘catch-22’ that requires the present government to cease abrogating monetary policy to Treasury and focus instead on restoring health to the vital organs of a functioning economy, namely employment, growth and sustainability.”

According to Mr. Raiss, who believes that Australia has been too rigid and slow to adapt with changing circumstances, a carefully considered band of successful economic growth orientated policy initiatives that stimulate business activity could help set the framework for improved consumer confidence, sustainable employment and investment conditions which in themselves would probably lead to increased interest rates to ensure the economy does not get out of control.

“A healthy and growing economy means more business profits, more tax collection, more jobs and increase living standards which would more than offset increase interest rates that are managed within the Reserve Bank Charter,” said Mr. Raiss. “This would lead to governments being able to fund polices not look at reducing the pressure on the budget.

“A future rate rise may make borrowing more expensive, but enlightened homeowners that have jobs will be happy to pay this slight impost, as will those who depend on their income and living standards from higher interest rates.”

Serious tax reform questions, including a review of GST, may again now be asked.

“We need to review the GST and how it is allocated, which does not necessarily mean increasing the rate or the base of the tax,” says Mr. Raiss. “Treasury should look instead at increasing the co-operation between the States and review regressive taxes such as stamp duty, land tax and pay roll tax which are all disincentives to employment and productivity.”

Mr. Raiss believes that as the Australian economy inevitably restores itself back to growth, so too will the rate of money going through the fiscal system if the Government adopts a more commercial approach to ‘growing the pie’. However the immediate issues that need address include reigning in expenditure and managing the increasing and unsustainable welfare net coupled with a nervous superannuation and saving regime.

“These may be bitter pills to swallow but the alternative may well be much worse, particularly for future generations. Australia requires stable and sensible regulations for SMSFs, labour, banking and tax as well as incentives and investment to encourage national productivity. It is this combination that will grow confidence to generate spending, business cash flows and employment,” says Mr. Raiss, who reiterated his view that the Abbott Government must start operating as a business with a social conscience if it is to increase Australia’s productivity and long term wealth.