Australia has one of the highest levels of household debt among developed economies. Indeed, our collective household debt is greater than the size of our entire economy – at an eye-watering 112%, or more than double the European average. Most of that’s in our mortgages, with average home loan debt of nearly $670,000, but more than half of Australians also borrow on credit cards, and about one in eight of us take out personal and/or car loans.
So it’s no surprise that millions of Australians breathed a sigh of relief as the Reserve Bank of Australia cut interest rates on Tuesday for the third time since February this year, albeit only by a quarter of a percentage point. While financial markets and most economists expected this latest cut as inflation continued to improve, the July decision not to move on rates still had many biting their nails.
The RBA’s “dovish” tone that accompanied the May rate decision appears to have been a temporary blip, a reaction to global financial market gyrations in the wake of US President Trump’s initial tariff policy announcements (and re-announcements). Now, the central bank has moved back to the more “hawkish”, or conservative, stance that we have been used to for at least a year. Both upside and downside economic risks have been flagged with this latest decision, and growth forecasts have been nudged down, but the emphasis is clearly on upside risks to inflation. This is despite global uncertainty levels now reaching historical highs according to some measurements.
Indeed, the RBA tells us that US tariffs are now higher than was expected at the time of the May decision.
For many, the debate will now turn to the next step for interest rates. Expectations among economists are not aligned on this front – I’ve seen arguments against even this latest cut, with others expecting two more between now and February. And the RBA’s “guidance”, if we can call it that, is completely opaque.
Sign up: AU Breaking News email
The good news for indebted Australians is that the RBA’s forecast for inflation over the next two years remains on track with at least two further rate cuts built in. The bad news is that there is “uncertainty” everywhere, not least in the RBA’s confidence in its forecasts, it would seem.
As good as this news might be, amid tepid growth and uncertain consumers, perhaps the Australian obsession with interest rates is keeping us from having an even more important discussion on our economic future. Interest rates alone are not the potential saviour, or otherwise, of our economy.
For many, that saviour is productivity. As one of the world’s best-known economists (if that is not a contradiction in terms!), Nobel prize winner Paul Krugman, famously said, “productivity isn’t everything but, in the long run, it is almost everything”.
But productivity has been declining across almost all countries including Australia, other than the US, for a number of years now. That means our standard of living is also lower.
Australia is no longer the “lucky country”, able to rely on commodities alone to pay our way. One in four Australians receive “most” of their income from government (and one in two receive some form of support), which is a sobering figure.
In response, the Australian government will hold an Economic Reform Roundtable over three days later this month. The topics up for debate and discussion include all the usual suspects for this type of event, such as tax and budget reform, regulation, competition, skills, AI and innovation.
However, the agenda gives each of these topics less than three hours each. Even with invites to participate scarcer than hens’ teeth, this is hardly sufficient time for breakthroughs in policymaking.
The treasurer tells us the aim of the roundtable is to build “consensus on long-term economic reform, with a focus on resilience, productivity and budget sustainability”. Even three weeks would be unlikely to build consensus between policy wonks, business and unions, let alone three days or three hours. But that is not the point.
The greater aim of this gabfest, perhaps, is to arouse conversations at the kitchen table, just as Paul Keating did in 1986, albeit in a far less subtle way, with his “banana republic” comment. Compared to 1986, however, when our current account deficit soared and our dollar sank, it’s hard to pinpoint a similar type of crisis that could spur widespread community support for the reforms we need to make our lives better. Without a bigger (but sustainable) economic pie, we are condemning our kids, and their kids, to worsening living standards.
And that should be the trigger for many. That sinking feeling that consumers have every time they go to the supermarket, or even buy a cup of coffee, is a reflection of how our living standards have been shrinking over the past few years. We cannot keep on the same policy pathway and expect our lives to improve.
Of course, none of this is easy, and it’s hard to focus on the country’s challenges when our personal challenges seem so great. But we must confront them if we want things to change.
I have heard the treasurer say that the government can do big things, slowly. Shifting our focus beyond interest rates to the even greater economic challenges we face today, and building a groundswell of support for reform (beyond those with a seat at the roundtable), is a good place to start that process of change.
• Nicki Hutley is a consulting economist
