Transcript of Question & Answer Session Price Stability, the Supply Side and Prosperity

Thanks very much, Governor. That’s certainly a lot for us to think about and digest. We’re going to run a Q&A session, so you’ll be able to ask questions live in the room as well as use the Pigeonhole app, which is up on the screen now. You can also vote for your favourite question, if you’d like to do that. I’ll try to keep an eye on the app and any hands that I see. If you do wish to ask a question, just pop your hand up, and some of the CEDA staff will come around and we’ll get the mike over to you. Perhaps to start us off, Governor, I might start with an upbeat question. You talked about how lucky we are to be in Australia and that you wouldn’t swap our position for anyone else’s. I wonder if you could talk a little bit more about why that’s the case and what we need to do to make sure we stay in that position.

Thank you. The level of output in Australia is significantly above where it was before the pandemic. Think about it, in the United Kingdom, their current projections are that they will not get back to the level of output before the pandemic until the end of 2024, by which time we’ll be five or six or seven per cent above where we were before. So that’s a big difference and part of it is the way we managed the pandemic. The other very positive element of the Australian economy at the moment is that we’ve got full employment, we’re perhaps past full employment. Now, we haven’t been able to say for 50 years that in Australia, if you want a job, you can get one. We’re not quite there but, most people who want a job in Australia can get a job. Youth unemployment, the lowest it’s been in many, many decades, and that’s a fantastic thing for the society because people get a job, they get on a ladder of opportunity, they develop skills and they can participate more constructively in society. So not many countries are in the same position. Labour force participation has risen a lot here. Never before in Australian history have we seen a higher share of the population with a job than today, that’s remarkable. Our terms of trade are very strong, the high commodity prices, the budget position has improved a lot, and people have got jobs. So there’s a lot to like, isn’t there? It’s a result of, I think, our response during COVID that, both on the health side and the economic side, a lot of monetary and fiscal stimulus was delivered. And that’s put us in this good position, and we’re benefiting from the higher commodity prices, and Australians are participating in the labour force. Now, in the UK and the US, the labour force participation has declined … but Australians are participating like they’ve never done before. So I wouldn’t want to swap our position for anyone else’s. Longer term, we’ve got very significant opportunities in renewable energy, and one imagines and hopes that we can take advantage of those over time. So the combination of our natural resources, our ingenuity and the fact that the population is growing again. In the last quarter, the population grew as fast as it was growing before the pandemic. People want to come and live in this country, they want to work, they want to prosper, and they make the society better. It’s a pretty good place. We’ve got problems, but I think we’ve got to remember that … most people in Australia would want the position we have and not many people would say they’re in a better position than us. You’ve got to remember that.

That’s a good reminder for us all. One of the things that Diane touched on in her opening remarks also was the importance of resilience, and I think that’s one of the things that we’ve learnt with these unknowns that can hit us, the importance of being resilient. What do you think we need to get right or perhaps get better, in terms of our fundamentals, to remain resilient in the eye of things that may be coming that we don’t know about?

Well, there are a few elements to this. Resilience requires diversification, it doesn’t require closing the borders and doing everything here … in the end, that would be a bad step. Some things we’ve got to do here, but the best response to problems with resilience is to diversify, not close the borders. I think, as I said in my prepared remarks, we’ve got to return to the productivity agenda and we’ve got to make sure that our economy remains flexible because the environment that I was sketching was a world where there’s more shocks. And, in a world of shocks, you need flexibility. If you have a rigid economy where labour and capital cannot move freely, the shocks are much more damaging. So we’ve got to be strategic about keeping flexibility in the economy and re-energising the productivity agenda, and I know the government is focused on that.

Speaking of shocks, you talked about the inflation target and that it is a narrow target but you expect there will be some variability outside that. Does that provide a communication challenge for the RBA in talking to the economy about ‘that’s our target but expect variation’?

We want people to understand that, over time, inflation in Australia will average two-point-something (per cent). But it will vary. I don’t know how low it will go and how high, but it will vary around that. And, when it varies, that isn’t a policy failure. That is a result of the world we live in. But, when it does vary, I want you all to be very confident that we will take the action that is necessary to get it to come back, and our job will be easier if people believe us. This is why I highlighted the possibility of a wage/price spiral here because, if you don’t believe inflation is going to come back to two or three per cent, then you would naturally want to have much bigger wage rises and to have those baked in. But if you’re confident that inflation is going to come back to two-point-something, then it’s easier to ride through these swings in inflation. So it’s … I think it’s going to be more difficult. Now, we talked about, up until maybe five or six years ago, the Great Moderation. I mean, Alan Greenspan and Ben Bernanke; they were talking about the Great Moderation. Everything seemed stable and there were small fluctuations in aggregate demand …

It was pretty boring.

Well … I didn’t find it boring. It was … The central banks took a lot of the credit for it and sort of said: ‘We kind of managed this.’ Well, the truth was our job was a lot easier, and I think it’s going to become harder.

Speaking of wage/price spiral, there was an article today in the Fin Review from Craig Emerson and he wrote that, in his view, what we’re seeing now is something closer to post-1940s supply-side inflation issues because supply-side issues put pressure on inflation and, therefore, he was saying that perhaps there isn’t as much need for a further increase, certainly not in December, because we need to see how that plays out, and perhaps the risk of wage/price spiral is being overstated. I just wonder if you have any thoughts on that?

Certainly the supply-side things have pushed prices up and now they are rectifying, so I think we will see some of the price pressures that you’ve experienced in your businesses start to dissipate. Many prices involved in global markets have come down and the supply side is freeing up and delivery times are shortening, so that is going to help and that will bring inflation down. The issue that many central banks have been worried about — and I include us on this — is this period of high inflation will lead the workforce to say: ‘Well, inflation is high, I need full compensation for that.’ And let’s say we all accepted the idea, which there’s a natural appeal to this: ‘Inflation is seven per cent; I should be compensated for that in my wages.’ If that were to happen, what do you think inflation would be next year? Seven per cent, plus or minus. And then we’ve got to get compensated for that, seven per cent and seven [per cent]… And this is what happened in the 70s and 80s and, as I talked about, that turned out to be a disaster. So I know it’s very difficult for people to accept the idea that wages don’t rise with inflation … and people are experiencing a decline in real wages, that’s tough. The alternative though is more difficult. And, if we can ride through this period with wages growth staying broadly in the current range, maybe a bit higher but broadly in that range, and the supply side problems resolve, then inflation will come down and it can be painless, relatively. But, if we all buy into the idea that wages have to go up to compensate people for inflation, it will be painful. So best avoid that.

A couple of questions off the app before I head up the back. One of the questions that has come through is that it’s been suggested that climate change and net zero should be made two of the RBA’s top economic goals. Would you support such a change to the RBA’s charter?

Well, they’re certainly things we think a lot about and I talked a bit about them tonight. But I set the short-term interest rate, as much as I wish that could help solve climate change, it can’t. So I really struggle. Even if … it was added to our charter, what could it mean in practise? But what we need to do is to understand how it’s affecting the economy, investment decisions, pricing decisions and inflation. So we’re spending a lot of time and resources understanding those things, but I think it would be a mistake to add that to our objectives because we cannot do anything about it.

We talked about this earlier in the evening, but there’s a question here regarding … There are a large number of households rolling off fixed rates next year. How will you be factoring equity into decision-making?

Yes, that’s a good question and one we’ve thought about a lot as well. We all know that monetary policy operates with a lag. All of our models say that, when we tap the interest-rate brake, the maximum effect on output is 18 months to two years, so we operate with a lag. I think at the moment it’s quite likely the lag is going to be a bit longer than it normally would be, and that complicates our task as well, and I say that for a few reasons. The first is that, over the past couple of years, Australians saved an extra $250 billion over what they would normally save … that’s a lot of money. So that’s sitting there and that’s supporting consumption. A second thing we saw during the pandemic was people take out fixed-rate loans. In Australia, in the past, maybe 10 per cent of the population would take out a fixed-rate loan. Well, during the pandemic, it got to 50 per cent. So a lot of people took out fixed-rate loans. So they’re not yet paying the higher interest rates, but they will start paying them next year …

[Audio interrupted]

The government doesn’t give me advice on monetary policy, so I’m not going to give them advice on fiscal policy. I think there’s a serious point here though that, in a world with a lot of shocks, we need fiscal and monetary policy to have the flexibility to respond to that, and we will only have the flexibility with fiscal policy if the structural budget position is sound. We saw that going into both the Global Financial Crisis and the pandemic, because of two or three decades of good fiscal policy in Australia, we had a very sound structural budget position and we were able to use the public balance sheet to shield the public from very large shocks. And I know it’s controversial, but I think that was the right thing to do: to use the public balance sheet to help the private balance sheets in a very difficult period. But you can only do that if the public balance sheet is in a good position, and we’ve got work to do. As you say, the public are very desirous of services provided by the government: aged care, education, training, fantastic healthcare. We all want those things, we just need to work out how to pay for them. In my view, the best way to do it is to return to productivity growth to make sure the pie is bigger because, if the pie is bigger, we can afford these things. But if you’re dealing with a small pie, it’s very hard. So that’s the challenge that lies before the political class and I think us as a society, how do we align up our desire for government services with our lack of desire to pay for them? We have to confront that.

A slightly related question has come through in relation to infrastructure projects and whether the high government expenditure or how much has the high government expenditure contributed to our eight per cent inflationary environment?

Well … it’s contributed a bit, but I don’t think that’s the main factor. The main factor underlying the high inflation is COVID, Russia and the fact that we took out this insurance policy that in the end we didn’t fully need. When you look at the cumulation of the fiscal support and the monetary support, it was extraordinary. Still, we thought it was the right thing to do at the time and, given what I knew at the time, I still think it was the right thing to do. But in hindsight, we took out too much insurance and so people have more money and they’re spending it, and that’s why we’ve got high inflation. And the extra spending that has come from infrastructure is adding to it, but it’s not the primary cause here. It’s these … it’s the insurance policy, Russia and supply problems with COVID.

Another question from the audience?

Thank you for your presentation and for your overview. You made a number of comments which enlivened my desire to ask this question. We’re aware of the current state of affairs both globally and in Australia. You’ve also touched upon the working-age population and labour productivity and other issues and their impact on the economy et cetera. I’d like you to comment on, what is the impact of the fact that Australia, as a nation of immigrants, has always relied on a robust immigration policy as an economic and population policy? We are an ageing population, we have got 3.4 per cent unemployment, a 50-year historic low. If I may say so, respectfully, I would have expected you to say more about the impact of that, particularly in the current environment when we’ve reopened our borders. Thank you.

Thank you. Well, there are a number of ways of coming at this. The first way is from a longer term perspective. In the last census, I think 28 per cent of Australians were born overseas — 28 per cent of us were born overseas — and another 20 per cent have one parent who was born overseas. So 48 per cent of us are either immigrants ourselves or a child of an immigrant, and no other Western country can report figures anywhere like that. So we are a great immigrant country. People come here to study, to improve their lives, to work, to participate, to build a better future for them and their children. So … I think it’s one of Australia’s core strength. It certainly helps GDP growth because there are more people, but it brings a dynamism to our society and an energy that we otherwise wouldn’t have. So I think it’s incredibly important and it’s one of the things we should celebrate. It also means our demographics are better than in many other Western countries because the average age of immigrants is lower than the average age of people who are already here. So we’ve become a bit younger. Eventually, that catches up with us but we’ve got a dynamism from immigration. You feel this in Melbourne and in Sydney as well. So that’s a longer term perspective. In the short term, the fact that the borders are open allows businesses to hire workers where the skills are in short supply. And that will take some of the pressure out of the labour market, which I think is positive, and it will also allow firms to undertake investments that they mightn’t otherwise do. In the last couple of years, I spoke to a lot of businesses saying, well, they really want to invest, but they can’t get the person, the technician, to come from overseas, or there’s a shortage of people with specialist skills. The borders are now open and those specialist skills can come in, and that’s relieving bottlenecks in the economy and that’s going to help us as well … The low unemployment is not because we closed the borders, because lots of countries have fairly low unemployment at the moment and some countries still had their borders open and others didn’t. We’ve got low unemployment because we had a very large fiscal and monetary response and our firms needed extra workers to help with the pandemic. But a strong lesson for me from the last couple of years is that a very, very deliberate monetary and fiscal response can generate lower unemployment. It worked. More Australians today have a job than ever before, and almost everyone in the country who wants a job can find a job. It mightn’t be the job they want, but we haven’t been able to say that for 50 years. For the last 50 years … a problem in our country was that people who wanted jobs couldn’t find them. And that’s not because we closed the borders, it’s because of the policy response. Thank you, a good question.

There’s a question coming through on the app sort of related to that topic. Given that wages have not kept pace with productivity growth during the past decade, what incentive do working Australians have to further increase their productivity?

We should have a collective incentive because we know that, at the end of the day, the driver of growth in real wages is productivity. We can only pay ourselves more in real terms if we get better at doing stuff. So that’s the underlying incentive. And if we have strong productivity growth, then the pie, the fiscal pie, is bigger and we can afford all these wonderful things that the public want from government. So the pie will be bigger, we’ll enjoy higher real wages and the value of our real assets will be higher as well because of their income-generating potential size. So that’s the incentive we should all have. And our society has to work out how to share the benefits of that productivity growth. That’s been the problem, I think, of the last decade or so that … those benefits weren’t being shared sufficiently equally and that was creating disillusionment. But it shouldn’t make us doubt the benefits of productivity growth. If we can’t get better at doing stuff, then we’re not going to be paying ourselves more. The value of our assets won’t go up and we won’t have the money to pay for all the goodies. So we’ve got to get better at doing stuff, haven’t we?

Thank you. I think there’s time for one last question from the audience. Thank you.

I have two questions. Firstly, you’ve warned about the dangers of wages going up too quickly and, in another place, the Prime Minister is talking about how we need to get higher wages, who wins that argument? Secondly, you talk like your brethren about how we need higher productivity growth. I’d be interested to get from you three specific things we can do to lift productivity growth in Australia.

Good questions. Well, I don’t think there is an argument here that has to be won or lost. I mean, we both share the vision of stronger growth in real incomes for people, and I think the Prime Minister and the Treasurer have both spoken about the need to have stronger growth in real incomes, and I share that objective as well. For many years — probably in previous CEDA speeches — I bemoaned the low wages growth because it was too low and I thought it was problematic and the benefits of productivity growth weren’t being sufficiently equally shared. We’ve just got to be careful we don’t jump way to the other side here. I don’t think we will, but I’m just cautioning people, as I did in my earlier remarks, that, if we do, we’ll have problems. But we’ve got to make sure that real wages rise and if we accept the idea that nominal wages have to match inflation, then that will mean higher inflation, higher unemployment and worse real wages, and you’ve heard me on that. The specific things on productivity again, I don’t like providing specific advice to government because they don’t provide advice to me, as they shouldn’t. But I have, in my spare time, read endless reports from the OECD, the IMF, the Productivity Commission. The New South Wales Productivity Commission, I think, had one today about skills and training. So there’s a long list of things at a very broad level that people point out. The taxation system needs further reform. The combination of the taxes on effort, wages, consumption and land, I don’t think many people would say that’s optimal. The way our society is responding to digital innovation and opportunities there, we need further training. I don’t know, I’m presuming many businesses are like the Reserve Bank, we can’t find the people to do the stuff and so we need to invest more in our people and the digital economy. The third thing I would highlight is the selection of infrastructure projects, the way we manage the construction costs and the way we price infrastructure. And the fourth thing would be the university system, to make sure that’s fit for purpose. So I don’t have … specific policy proposals on each of those areas, that’s not my area, but I think they’re the areas to look at. And you can look at all those reports, lots of good ideas … The trouble is every one of those good ideas is contested, so we need business and the community to help the government work through those issues because the good news is that there are lots of things we can do; we’ve just got to do it.

The very last question. You’re in charge of banknotes. This five dollar note, is this a collector’s item, with the head of state on it, do you think? Will we see another one?

Well, I don’t know if it’s a collector’s item, there are a lot of five dollar notes out there. But I like sharing the statistic on our 100 dollar notes. There are 18 100 dollar notes out there for every person in the country — 18. If I ask everyone to empty their wallets and purses out, we probably wouldn’t find 18 in this room. So there’s a lot of 100 dollar notes out there and despite banknotes not being used very much for day-to-day transactions, a lot of people have got them at home, under the bed, in the cupboard, I don’t know. And on the five dollar note …

Well, 48 per cent of people are migrants, so I think that’s where I’d start, including me, including me.

But the five dollar note … We’ve had the monarch on one of our notes since 1923 and up until 1953, the monarch was on all our notes. So there’s a long tradition of having the monarch on our notes. We know it’s an issue that the public and the political class have a strong interest in. And, while it’s ultimately the Reserve Bank’s decision – the design of the banknotes – I thought it wise to consult the government to hear their view on what the new five dollar note, or whether the new five dollar note should have the monarch on it, so I’m waiting to hear back. If they said: ‘Well, we don’t think it’s appropriate anymore’. If they said that, and I’m not saying they will, then we would explore an Indigenous design. But, if the government of Australia says: ‘We think it’s the right thing for Australia to have the monarch on one of our notes’ then we’ll add King Charles’ portrait.

Thank you, Governor.