Common goals

It is now clear that interest rates will rise in coming months as the Reserve Bank of Australia steps up its campaign to keep inflation under control. The central bank is mandated to keep a lid on prices and to push the economy as close to full employment as possible.

When it comes to prices, the RBA has been specific: it wants underlying inflation, which excludes volatile items, to remain in a 2 to 3 per cent band.

Full employment is a tougher concept to quantify but there’s a general consensus that it occurs when the unemployment rate is about 5 per cent.

The Reserve Bank board, when it meets on October 5, will discuss an economy with an unemployment rate at 5.1 per cent, which is near enough to be considered full employment. And according to Governor Glenn Stevens, inflation has bottomed at about 2.7 per cent and will start to climb.

So the board has little option but to raise interest rates if it believes inflation will head beyond 3 per cent. And it does.

Using interest rates to control the economy is a very blunt instrument. Miners may be booming and retailers may be struggling but a rise in interest rates will hit them both the same. It is a continual conundrum for the Reserve Bank to balance the needs of the stronger and weaker parts of the economy.

More subtle policy changes can come about in fiscal policy (government spending and taxation), wages policy and even banking regulation. And that’s where business should be looking if it wants some relief from difficult financial circumstances.

When the Reserve Bank starts to raise interest rates later this year, the federal, state and local governments should be thinking about helping out parts of the economy that need it by using fiscal policy. More generous concessions on research and development spending, very targeted handouts to business wanting to invest, lowering the company tax rate and providing temporary grants to companies under the hammer are ways in which fiscal policy can redress the (unintended) harm of monetary policy.

Wages policy – which it seems is not up for review in the current hung parliament in Canberra – can also help business. Changing the unfair dismissal laws, as they apply to small business, would be a good start. So, too, would dropping tax laws on “personal services” business that force contractors to pay tax like employees.

Banking policy is a more controversial, but still relevant, way of assisting business. Encouraging the banks to lend to small businesses or to relax terms and conditions that apply to loans are ways the government and regulators can work to help corporate Australia.

The problem for business, however, is that fiscal, wages and banking policy faces a log jam in the current parliament. As the debate over the Speaker’s role in the House of Representatives suggests, almost every piece of legislation will go through a tedious, time-consuming debate before enactment. It is hard to see how contentious legislation will ever make it through. And fiscal, wages and banking policy is always contentious.

The RBA won’t have much choice: it will have to lift interest rates. But governments do have choices and it is time Canberra and the states started to think of ways of working together, rather than opposing each other.

Sean Aylmer

BRW

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