One of the more curious things about economic policymaking in Australia is how certain policies manage to endure for so long in the face of overwhelming evidence that they don’t work.
The continued belief in the power of lower interest rates to spur growth is a case in point. For at least the last 10 years, some would say much longer, governments and central bankers have attempted to drive economic activity by making it easier for people to borrow money.
A quick glance at the trajectory of the RBA cash rate shows the extent of this trend.
But this succession of cuts has failed to deliver any discernible boost in output.
Inflation has struggled to reach the RBA’s target band for five years in a row.
And private sector wage growth has barely kept pace.
One could be forgiven for thinking cutting interest rates doesn’t achieve very much at all, but that’s not quite right. Because while rate cuts have done little to boost the real economy, they have helped put a rocket under house prices.
And household debt.
But despite the persistent failure of rate cuts and easy credit to stimulate anything other than house prices, many policymakers continue to insist the solution to our current economic woes is more of the same.
The RBA is now widely tipped to cut rates again, perhaps as soon as next month, while the government has announced plans to scrap the responsible lending provisions in the National Consumer Credit Protection Act to “increase the flow of credit to households and businesses”.
Financial counsellors and social services groups were quick to question the logic behind this decision. Some raised concerns about the potential for aggressive selling of unsuitable credit products to vulnerable customers. Others made the reasonable observation that an economy already ailing under a mountain of household debt is unlikely to be cured by adding more of it.
Of course, it’s always easier to criticise than to govern, and leaders the world over are struggling to stimulate economies still hamstrung by restrictions on movement and gathering necessitated by COVID-19.
To date, income support payments have prevented the worst of the recessionary horrors. That support is being wound back and the key question is whether the private sector is ready to pick up the slack.
If there are no further outbreaks, it is conceivable that things could snap back with only those sectors heavily exposed to international travel requiring ongoing support. But it is equally possible for private demand to remain subdued in the face of ongoing uncertainty about the prospects for a vaccine, not to mention what appears to be the onset of a second wave in Europe.
If this scenario eventuates, governments will face ongoing pressure to backfill the gap in demand. The trick will be to do so in a way that doesn’t risk crowding out any nascent private sector activity.
The solution is in the public sector, not the private
In the construction industry at least, there is an obvious solution, albeit one the government has so far proven reluctant to embrace.
Instead of trying to stimulate private sector demand by making it easier for marginal and sub-prime borrowers to get loans, the Commonwealth could generate real and productive economic activity by directing its attention to the other end of the housing spectrum.
There are currently more than 150,000 households on social housing waiting lists across the country and the official figures capture just a fraction of the true level of need. The HIA, meanwhile, is forecasting construction activity to fall to its lowest level in almost 10 years with no meaningful recovery in sight until at least 2025.
Put together, those two factors mean there has never been a better time for the government to make a truly nation-building investment in social housing.
As well as supporting thousands of jobs that would otherwise be at risk, a program of this nature would ensure low income households can afford to live with dignity and participate more fully in the social and economic life of their communities.
According to the most recent census data, approximately 40 per cent of households renting privately experience housing stress. Many of these people have met all the relevant eligibility criteria for social housing but are being denied access due to the enormous shortfall in supply.
Social housing is the only form of government assistance to which access is rationed in this way. In addition to the obvious social benefit, a nation-building investment in social housing would have an enormous stimulatory effect on the construction industry.
Unlike initiatives such as HomeBuilder, which tend to simply bring forward and subsidise work that would have happened anyway, social housing creates a pipeline of entirely new projects. It’s a bona fide win-win that makes its absence from the 2020 Budget even more perplexing.
Alternatives that seek to generate prosperity through increased indebtedness only take us further down the path to nowhere, and will ultimately act as a drag on consumption as more and more productively earnt income is devoted to the unproductive servicing of debt.
Martin Kennedy is the manager of research & public affairs, corporate services at Compass Housing.