Terry McCrann: RBA did right thing, but it’s just the start of economic stimulus plan

 

The Reserve Bank’s cut to the cash rate is the first move in a co-ordinated monetary plan that will boost the economy, writes Terry McCrann.

 

https://www.heraldsun.com.au/business/terry-mccrann/terry-mccrann-rba-did-right-thing-but-its-just-the-start-of-economic-stimulus-plan/news-story/c0a098301b9c83baea4a1882156651b2

 

We are about to see the first co-ordinated fiscal and monetary action to boost the economy since the Rudd government’s “go hard, go early and go to households” spending splurge when the Global Financial Crisis struck in 2008.

 

The Reserve Bank had to cut its official rate on Tuesday.

 

There was no way a responsible central bank could have chosen to “sit out” March — to see how the virus itself and its impact on both the global and local economies and financial markets developed, and what the major central banks might do — through to its next meeting in early April.

 

Going into the eruption of the virus, through the end of 2019 and into the opening weeks of 2020, both the local and global economies were already paddling. That “invited” the RBA to start at least thinking about a rate cut.

 

Then the virus erupted — not only in the country that is the single most important for our economy but is now so central as a supplier to all economies, including most importantly the biggest economy in the world itself — the US.

 

So an immediate rate cut became a no-brainer. But a rate cut which on its own would be all but ineffective. For two reasons.

 

First, because of where the RBA is starting from — an official rate of just 0.75 per cent. At most it could deliver three rate cuts; in practical terms it would only be two, cutting by just 0.5 per cent, going down to 0.25 per cent.

 

Contrast that with 2008. Then the RBA was starting from 7.25 per cent. Between September and Christmas it slashed its rate by three full percentage points, going down from 7.25 to 4.25 per cent. And still had plenty of rate to cut.

 

Secondly, a rate cut — even with another one or two to follow — won’t directly hit the target or targets: Those industries like tourism and education which have been most directly hit.

 

So a rate cut — even cuts plural — would not only have been a case of “one hand clapping”, but in any event not even clapping, barely finger-stroking the other palm.

 

The rate cut absolutely has to be accompanied by and indeed had to be predicated on the “other hand clapping” — significant and targeted fiscal action.

 

It is my understanding this will now follow in the next two weeks. It certainly has to happen before the RBA’s next meeting in April.

 

Even more fundamentally, the government can’t wait for the Budget, yet a month later in mid-May. Too many (economic and financial) bodies — to stress, metaphorically speaking only, we hope — would have started to pile up before then.

 

To be both effective as a fiscal measure and to effectively co-ordinate with the RBA’s rate cut or cuts, the government’s “pre-Budget mini-Budget” has to focus on three elements.

 

It has to support business cash flows directly and immediately, and encourage investment. And it has to be targeted at jobs broadly across the economy but also those most directly in sectors hurt by the economic consequences of the virus and the government’s policy decisions.

 

This suggests the two central policy elements will be an investment allowance, structured to maximise upfront cash tax rebates; and some form of direct fiscal support for employment.

 

If you read “politico-speak” correctly, Treasurer Josh Freydenberg has hinted such a “pre-Budget mini-Budget” was coming, when he said he couldn’t give updated figures for the Budget in the context of the virus because Treasury was still working through the numbers.

 

Indeed, they are. Treasurer and PM have their own two jobs to do.

 

The first is walking back their confident — arrogant? — claims of a Budget surplus. You can see that in the Treasurer’s subtle change to talking about a “Budget in balance”.

 

OK, we’ve got back to balance; now we can put that “good fiscal position to work” with an “emergency shift to deficit”. Just like the RBA has made its “emergency rate cut”. And both to co-ordinate with it and to validate it.

 

His second task, shared with Treasury, is developing, deciding and implementing the fiscal measures; that will deliver both the greatest bang and the most effectively targeted bang for, our, precious bucks.

 

Will it include tax cuts, like bringing forward the already legislated ones?

 

The big imperative must be to directly boost business cash flows.

 

Any tax cuts or bring-forward could sensibly be left to the Budget.

 

This is especially the case as the RBA cuts will put cash into the hands of people directly and immediately — especially with the banks passing on the cut in full to borrowers and as they won’t be able to cut deposit rates across the board and so, neutralise that benefit by hurting savers.

 

The banks are clearly going to take — at least for a while — the hit on their profits.

 

Hence the market reaction after their “good news” statements of delivering the cut in full.

 

VANISHING SURPLUSES

Perhaps Josh Frydenberg might now have just a little bit of sympathy for Wayne “four surpluses” Swan.

 

Frydenberg and his surplus has just been ambushed by the virus rampaging out of left field — just as Swan got ambushed in 2008 by an event called the GFC, also rampaging out of left field.

 

But only a little bit.

 

In Swan’s case it wasn’t actually his surplus, but Peter Costello’s.

 

And that was 2008. In 2012 the “four surpluses I announce tonight” and the four deficits that he actually delivered were all his own, well, work.

---

Archr LLP is Authorised and regulated by the Financial Conduct Authority (FCA reference 617163).
Archr LLP is not covered by the Financial Services Compensation Scheme (FSCS).
Archr is registered in England and Wales No. OC371018. Registered office 115B Drysdale Street, Hoxton, London, United Kingdom, N1 6ND

This message may contain confidential or privileged information. If you are not the intended recipient, please advise us immediately and delete this message. The unauthorised use, disclosure, distribution and/or copying of this email or any information it contains is prohibited.

This information is not, and should not be construed as, a recommendation, solicitation or offer to buy and sell any securities or related financial products. This information does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

You are receiving this email because you are a valued client of Archr.