RBA governor Philip Lowe on Friday called for a “laser-like focus” on lifting productivity, when asked about ways to boost moderate wage growth during an appearance at the House of Representatives economics committee.
“The key to boosting the real income of households is lifting productivity. I encourage you to keep examining ways to do this,” Dr Lowe said.
“The IMF, in its various reviews of Australia, talks about the tax system, the balance between income and consumption tax and, importantly, the way we tax land.”
The RBA boss said he believed the “first order” priorities should be, “the pricing and provision of infrastructure, the way we accumulate human capital, the incentives we have for innovation and the tax system.”
“In the absence of following those ideas, I think we’ll have okay but not really good productivity growth, and that means okay growth in real wages, not fantastic growth in real wages,” he said.
Dr Lowe said on Friday the more immediate central scenario for the domestic economy was “a positive one” – characterised by “above trend growth, low and stable inflation, and low unemployment”, with the jobless rate at the lowest levels since the 1970s in NSW and Victoria.
However, he admitted downside risks had increased in recent months, chiefly because subdued wage growth and falling house prices may force consumers to cut their spending.
The IMF forecast economic growth to moderate from about 3 per cent in 2018 to 2.7 per cent this year.
The IMF foresees non-mining business investment and government infrastructure spending offsetting a looming fall in home building as property prices ease in Sydney and Melbourne.
“The baseline forecasts entail a soft landing in the housing market, but a stronger market correction remains a risk. Overall, near-term risks to growth are to the downside, mirroring the global risk picture, with the impact of shocks potentially being amplified by high household debt,” it said.
The fund projected medium-to-long-term growth would be a moderate 2.6 per cent from 2020 onwards, almost 10 per cent below the 3 per cent the Treasury and Reserve Bank of Australia are projecting and which historic growth rates have approximately averaged.
The slowdown in potential growth rates coincides with similar challenges facing other advanced economies since the 2008 global financial crisis, due to subdued productivity, moderate business investment and lacklustre wage increases, despite strong employment growth.
The IMF’s Article IV Economic and Financial Sector Assessment Program said that since a 2012 appraisal the financial system’s resilience had been bolstered by toughening up bank regulation for capital and liquidity.
It recommended further steps to bolster financial supervision as well as to reinforce financial crisis management arrangements in the case of a bank failing.
It also outlined risks emanating from high household debt.
“Under an orderly correction, house price overvaluation and average household debt both decline over time,” the IMF said.
Yet even if the household debt to disposable income ratio falls from almost 200 per cent to 165 per cent, it “is expected to remain elevated in international comparison over the next few years, as will related vulnerabilities”.
The IMF backed the Coalition government’s planned return to surplus in 2019-20.
Treasurer Josh Frydenberg said the IMF had recognised Australia’s “above-trend growth” in its annual assessment of the Australian economy and welcomed the steps taken “to further strengthen the financial system” in financial stability assessment.
“The IMF finds that Australia’s economic momentum has resulted in improvements in labour market conditions and with the economy moving towards full employment the IMF notes that wages growth has picked up,” Mr Frydenberg said.
“The Coalition government’s plan is delivering strong economic and jobs growth. We have just completed our 27th year of economic growth and more than 1.2 million additional people are in work than when we came to office five years ago.”