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Cash rate cuts aren't enough - this is what we need to boost the economy

Sydney buildings in a cloud.

Australia’s labour market remains weak and continues to weaken with around 710,000 people unemployed and a further 1,150,000 underemployed.

For those of us lucky enough to have a job, it is a tough slog to get a decent wage rise with the average increase in wages over the past year just 2.3 per cent.

What’s more, business demand for labour is stalling with the growth in the number of job advertisements and vacancies stalling.

It is a multifaceted problem that is both the cause of the current economic problem (low wages and high underutilisation of the labour market holds back household spending growth) and a symptom of the weak economy (firms aren’t doing well enough in the sluggish economy to hire even more workers or to give them a decent wage rise).

What’s the RBA doing to help?

While the problem has been identified in one form or other by the Reserve Bank, Treasury and even the government, those who pull the policy levers, who can do something about the labour market sluggishness, seem reluctant to do much to fix it.

At its most simple, and it is simple, setting policies to grow the economy faster will generate stronger economic growth which will cause demand for labour (workers) to increase.

When this sees the unemployment rate fall towards 4 per cent and underemployment drop towards 6 per cent and lower, wages growth will inevitably pick up.

The Reserve Bank has been reluctant to put the economy into the fast lane, with its hesitant approach to cutting interest rates.

Two miserly interest rate cuts in the last three years – three years where it has missed its inflation target and seen wages growth stagnate – are not enough.

If the RBA was fair dinkum about doing all it could to boost growth and get inflation and wages growth back to acceptable levels, it would have already cut interest rates to 0.5 per cent, or less.

If the futures market is correct, the RBA is on track to cut rates that 0.5 per cent level, but not until February 2020.

Why the wait, you might ask?

It is a question where you will not get a satisfactory answer with the RBA Governor, Philip Lowe babbling on about workforce participation, global headwinds and the like, rather than taking policy leadership and setting policies to boost growth.

Morrison government is also under pressure

Pressure is also on the Morrison government to do its bit to help. After all, it does control a total of over $1 trillion of government spending and taxes and if it was serious about getting unemployment down and wages growth up, it could use its spending and tax policies to see GDP growth accelerate to over 3 per cent.

Alas, when quizzed on policies priorities, both the Prime Minister Scott Morrison and Treasurer Josh Frydenberg talk about the importance of a budget surplus and how it is more important to keep the surplus than it is to generate economic and employment growth at a pace that generate full employment and decent wages growth.

At the moment, it is not clear whether the ‘good’ parts of the economy – exports, non-mining investment and infrastructure spending – will be sufficiently strong to offset the ‘bad’ parts – retail spending, wages, inflation, dwelling construction – to deliver a pick up in the economy into 2020.

While this uncertainty abounds, there is a clear cut case for policy makers to do something to make sure it happens.

The RBA needs to return to cutting interest rates and the government needs to ease fiscal policy. I’ll leave it to the government to work out how best to tilt taxing and spending policies to deliver growth, but if it waits too much longer before it does something, the per capita GDP recession which has dogged Australia since the middle of 2018 might yet continue a while longer.

If that is the case the unemployment rate will continue to creep up and wages growth will remain in the doldrums.

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