EMMA ALBERICI, PRESENTER: And now to breaking news, Lateline understands the Coalition plans to announce a 1.5 percentage cut to the company tax rate starting in July 2015 at a cost of $5 billion. It's set to be the Coalition's major campaign announcement tomorrow.
And now back to our top story, the Reserve Bank's decision to drop official interest rates by 25 basis points to 2.5 per cent. To discuss the discussion I was joined a short time ago from Canberra by Professor Warwick McKibbon, a former member of the RBA board and head of the Australian National University's School of Public Policy.
(To Warwick): Warwick McKibbon, Welcome back to Lateline.
WARWICK MCKIBBON, AUSTRALIAN NATIONAL UNIVERSITY: Happy to be here, Emma.
EMMA ALBERICI: Was Joe Hockey right when he said the Reserve Bank board's decision to cut rates today was an indication that the Government had lost control of the economy?
WARWICK MCKIBBON: Well, I think it was an indication that the economy is weak and the policies that should have been followed haven't been and so it's really now down to the Reserve Bank to try to keep things together.
EMMA ALBERICI: Policies that should have been followed?
WARWICK MCKIBBON: Yeah, I think the basic problem we face is high input costs so even though the currency's down lower, it's the input costs of energy, of labour, etc, which are hurting the economy and it's the loss of confidence because of the lack of any political certainty on both sides of politics. And so the uncertainty plus the adjustment in China is really also important but it's really those Australian specific factors that I think are driving the economy slower than it otherwise should be.
EMMA ALBERICI: What could the Government have been doing to reduce energy and labour costs?
WARWICK MCKIBBON: Well, a lot of reforms that could have been undertaken. The carbon pricing model was flawed. We do need carbon pricing but not of the nature they did with such high costs. We need much better improvements in productivity, improvements in labour regulation, we need a fairly substantial infrastructure program. I think the best way to raise private sector productivity is to raise the amount of infrastructure in the system for the private sector to work with. So these are policies that take some time to implement and to have an impact but really we should have been doing this two or three years ago and we're still delaying it because of the nature of the hung Parliament.
EMMA ALBERICI: You're essentially saying that the Government should have been growing the economy faster but that's easier said than done, isn't it?
WARWICK MCKIBBON: Well, again, I mean the focus has been on the change in circumstances in China but the problems in Australia have been building for quite a long time. We have an inefficient economy in various parts of particularly manufacturing but we keep throwing subsidies to producers instead of helping them reform what they do and I think that's a short term problem but it's a long term problem as well. We have to adjust to new circumstances in the world but we're in a great position to take advantage of the next 20 to 30 years of world growth and we're just letting it slide further behind.
EMMA ALBERICI: In an interview with the Australian 'Financial Review' this morning you blamed the current state of the economy on weak confidence driven by political incoherence. What do you mean by political incoherence?
WARWICK MCKIBBON: Well, the Government policies seem to be fairly random. A policy here, a policy there, people don't know what to invest in because they're uncertain about whether or not some regulation will change. They think that if they do invest the taxes, if they're successful, may go up. There's a lot of uncertainty by the Government and the Opposition policies are still yet to be tested and it's not clear yet exactly the details of many of the alternative policies. So I think at the moment it's the problem with the Government but we do need whatever party takes over for it to be leading this country.
EMMA ALBERICI: The Punch and Judy show over interest rates that's emerged in Canberra over the past couple of days, does it threaten to re-politicise Reserve Bank board decisions, do you think?
WARWICK MCKIBBON: Well, it's a danger. It also reduces confidence. If rates are being cut because the economy's weak, which is the reality, and people are speculating whether or not they will be cut further, that is not that's not a good situation to be in. The bank shouldn't have been in that position. Again, the problems we face are to do with supply side, with infrastructure, with the nature of government spending and the nature of taxes. It's not really to do something that the level of interest rates can fix. It can temporarily stimulate the economy but when the economy's weak because of lack of confidence it's very hard to see how these interest rate reductions will do anything other than be passed through by people saving more and by people on fixed incomes becoming poorer. And that's an unfortunate redistribution of income in the economy that we don't really need at this point.
EMMA ALBERICI: But to be fair, interest rate cuts are designed to bring down the Australian dollar, to stimulate demand by households and investment by businesses. These are things that can't be achieved quickly by governments, are they?
WARWICK MCKIBBON: They can't be achieved quickly but again it's like the old joke, I wouldn't start where I am now and the problem has been a lack of vision, a lack of infrastructure, real infrastructure that raised productivity. It's also a serious problem, as I said, on the input costs side. The carbon pricing system was really a bad policy to introduce at the time it was done and I think that was unfortunate. You could say we're the unlucky country for the last five years which in fact we have been. Thankfully we've been helped by China but that help is gradually disappearing.
EMMA ALBERICI: And just to clarify, you worked for the Howard Government and John Howard himself installed you on the Reserve Bank board. Do your politics colour your views at all?
WARWICK MCKIBBON: Well actually I've never worked for the Howard Government. I was appointed by the Prime Minister in Mr Howard to a couple of independent committees but I was never employed by the Howard Government. I've been as neutral and criticised the Howard Government as much as I started to criticise the Rudd Government. My role as an academic is to criticise bad policies and there's just been proportionately more bad policies this time around than there was last time.
EMMA ALBERICI: In what way could the Government realistically be growing the economy at a time when economic activity in China, Australia's biggest trading partner, is weakening, commodity prices are falling and the terms of trade are slowing?
WARWICK MCKIBBON: Again, the commodity price fall is reducing the rate of growth of our income. It's not that China has stopped growing, the nature of the Chinese growth will change. So we need to be in a situation where we can adjust to the changing nature of China. China's incomes are 15 per cent of the US per capita. There is an enormous amount of growth left in China, in Brazil, in India. We should be adapting our economy to deal with this highly competitive world but our input costs, our regulatory costs, our energy costs, everything on the input side is making us uncompetitive. The weak currency, people have advocated a falling currency will save Australia. It actually won't if we don't deal with the input costs. It will just reduce our purchasing power in other markets. That's a bad outcome, not a good outcome.
EMMA ALBERICI: Kevin Rudd and Chris Bowen are projecting a return to surplus in 2016/17. By then the unemployment rate after having peaked at 6.25 per cent will have returned back to five per cent according to the Government's economic statement, are those figures credible?
WARWICK MCKIBBON: The unemployment profile is very unusual. I haven't had an opportunity yet to dig into those numbers but it would be very hard to generate that sort of profile. Again, we shouldn't be basing policy or debates on the forecasts. What we should be doing is looking at what are the best policies under current circumstances and under different scenarios about the future. That's why I think these arguments about deficits or surpluses at a point in time are completely the wrong way to do policy. Policy's about managing uncertainty and putting the economy in a good position no matter what emerges in the future and I just think that debate is a hollow debate and it has derailed the Government for quite a few years.
EMMA ALBERICI: With all this talk of an economy in transition away from the mining sector, is it clear to you where the economy is transitioning to? I mean do you have any clue as to where those jobs will be coming from, that the Government's counting on to drop the unemployment rate back to five per cent in three years' time?
