Finance Finance News Reserve Bank expected to cut rates amid calls for more government spending

Reserve Bank expected to cut rates amid calls for more government spending

Australia's economic managers are under pressure to fight off the coronavirus. Photo: TND
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Financial markets expect the Reserve Bank to slash interest rates to a new record low on Tuesday morning.

The revised forecasts come as Australia’s economic managers scramble to mitigate the economic impacts of the novel coronavirus.

Australia’s sharemarket fell for seven consecutive sessions and closed trading at a six-month low on Monday.

And a perfect storm of travel bans, port closures and shuttered Chinese factories are disrupting supply chains and costing the education and tourism sectors billions in lost revenue.

NAB chief economist Alan Oster said an interest rate cut would “help cash flows, lower the exchange rate and potentially boost confidence”.

But he said the federal government should also delay tax payments for virus-affected companies and consider other policies to boost consumer spending and business investment.

For while the coronavirus and devastating bushfires will undoubtedly have a major impact on the Australian economy, the headwinds come after heavily indebted Australians had already cut back on spending in response to stagnant wages and sluggish economic growth.

Despite the RBA’s interest rate cuts and the government’s tax rebates, household spending growth over the September quarter dropped to its slowest pace since the global financial crisis, with nervy consumers choosing to either save the cash or pay off some debt.

Former ANZ chief economist Warren Hogan cited the slump in household spending as the main reason why another interest rate cut would do little to help the economy.

He told The New Daily Australia would benefit more from direct financial assistance to affected firms than a rate cut or economy-wide cash handout, as neither of the latter two policies would minimise panic and encourage people to spend more.

“Right now the government needs to provide leadership and stop any panic – minimise the panic buying and minimise people’s lack of engagement with their normal lives,” Mr Hogan said.

“And the next one is they’ve got to use fiscal policy in a very targeted way to support demand – and I think the government has made it quite clear that that is what they’re looking to do.”

The Queensland government announced on Monday it would give a six-month payroll tax holiday for small and medium-sized businesses that have been affected by the virus.

Mr Hogan said the federal government should consider introducing similar policies, such as grants or low-interest loans for affected companies, to prevent job losses without wasting taxpayers’ money.

“I just don’t know if a rate cut or an [economy-wide] cash handout, which are very blunt instruments, are going to change the underlying dynamic, which is people not spending,” he said.

Support needed for quarantined workers

Centre for Future Work director Jim Stanford, however, said such measures would not be enough to help Australians weather the financial storm.

Dr Stanford said a rate cut on Tuesday was far from guaranteed and would do little besides boosting property prices.

But he told The New Daily the economy needed an ambitious set of government policies to ensure workers did not bear the brunt of the economic fallout – not least because governments had already asked many Australians to voluntarily self-quarantine for two-week periods.

“When it’s a voluntary individual action, you have to make that as realistic as possible – and that means guaranteeing some income,” Dr Stanford said.

“So I think we need some direction from the Commonwealth government and from the Fair Work Commission to make sure people are not penalised financially for doing what they are asked to by government.”

Although workers have sick day entitlements under the National Employment Standards, Dr Stanford said some people who have been asked to self-quarantine may have already maxed these out.

“We have to make sure that they aren’t penalised for taking extra days  when, in some cases, they are not necessarily sick,” Dr Stanford said.

“And then you have the whole area of contractors and gig workers who don’t even have sick days.”

‘Go early, go hard, go households’

Dr Stanford added that demand in the economy was so weak that the federal government should consider giving households a similar cash handout to the $900 cheque provided by the Rudd government in the wake of the GFC.

“And perhaps it could come with a requirement that it be spent, not saved – that way you’re going to reduce the amount of stimulus that is leaked,” Dr Stanford said.

“This is a new scenario, so I think we have to be creative and ambitious in how we respond.”

Angela Jackson, an economist with Equity Economics, also said the federal government should consider GFC-style cash handouts, as well as more “shovel-ready infrastructure projects” and tax deductions for business investments.

But she told The New Daily the RBA should simultaneously cut rates to help the economy bounce back once supply chains were back up and running.

“A cut in interest rates can’t fix supply chains, but coming from that you will have a reduction in economic activity that will hit consumer confidence – and monetary policy (rate cuts) can help there,” Ms Jackson said.

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