https://www.smh.com.au/money/super-and-retirement/let-s-try-fiscal-first-and-super-can-help-20190618-p51yv8.html

 

The RBA utilised the cash rate as a pre-emptive instrument to influence the demand for credit. Hence with the RBA lowering the cash rate down to 1.25% at the beginning of June, after 3 years at 1.5% it has put downwards pressure on interest rates. This makes it cheaper to borrow for consumer and businesses hence leading to a rise in consumption and investment demand in the economy, which would increase economic activities.

 

However, though the RBA intends to cut interest rates further to support Australia’s economy at a time of low inflation that has resulted in low levels of growth and rising unemployment, the article raises questions about the prominent Government objecting of increasing economic activity in Australia to boost growth. This comes from examples from the past about other nations economies utilising monetary policies, suggesting that Australia to be more circumspect as to whether such a course of action is appropriate for Australia’s economy. Hence, RBA’s governor Phillip Lowe has suggested the Federal government to take action against managing the downside risks to the economic cycle in recent speeches in order to demonstrate an ability for strong economic management.

 

Thus, rather than being reliant on the cash rate Lower has suggested the following:

• Tax cuts
  • Address bracket creeps, which has resulted in households paying above-average proportion of their incomes in tax, offsetting the boost to incomes from the RBA lowering the cash rate to 1.25 per cent.
    • This would encourage consumption leading to increase in economic activity, as well as potential in decreasing the gap in the distribution of income and wealth
• Enhance reforms
  • Australia’s government should be encouraging and promoting advancement in technology, improving work skills and increasing education standards.  
    • This would allow more individuals to be equipped with more skills and avoid the possibility of unemployment with a decrease in a mis-match in skills set.  Thus, this leads to a decrease in unemployment, increasing productivity as well as alleviating the reliance on Government welfare support.
      • Further, Michael Brennan the Productivity Commission has highlighted the importance of a reform to underpin a  growth in living standards.
• Increase government spending on infrastructure
  • This would decrease unemployment, by introducing new job opportunities
  • Further, this would alleviate the burden on the finances of the States that they are currently under with more budgetary pressure than the Federal government.

 

• Further government utilisation of Australian superannuation funds
  • Allows assistance in government’s infrastructure funding burden. This would be an asset recycling that could potentially be seen as a positive driver for infrastructure investments. This would create a continuous cycle, allowing an in investments and increasing economic growth.

 

Hence, with Australia’s economy evidently becoming over-reliant on monetary policy and though it has been relatively successful in influencing the economy levels. It has a time lad of 6-18 months before the full impact of interest rates changes are felt in the economy. Hence, by relying to heavily on the cash rate it can pose problems for policy makers. Thus, Lowe’s suggestions not only complement the influence of the cash rate, but it also allows the government to reflect a strong understanding of economic management. This would reassure domestic consumers and business spending and investments, which increases levels of economic activity.