As monetary policy reaches breaking point, and fiscal stimulus takes over as the main driver of the economy, calls have grown for RBA to create money to directly finance government spending.
But governor Lowe has labelled so-called “modern monetary theory” as “trickery in financing” and said that it isn’t on the RBA’s agenda.
“The reality is that there is no free lunch,” Governor Lowe told the standing committee on economics. “There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently.
“The separation of monetary policy and fiscal financing is part of Australia’s strong institutional framework and has served the country well. The Australian [government] and the states and territories have ready access to the capital markets and they can borrow at historically low rates of interest.”
Governor Lowe warned that the only way out of the COVID-19 recession was to grow the economy – and that would mean sweeping industrial relations reform, changes to the financing of research and development, a more streamlined approach to regulation, and ensuring the workforce “has the right skills and is adaptable”.
“There are many political issues here, but I think we know the general areas we should be looking at,” Governor Lowe said. “The challenge is to actually implement some of those ideas in difficult times.”
Governor Lowe also noted that there was an imbalance between state and federal spending on economic support and the recovery.
“In aggregate those (state) measures are smaller, they’ve largely focused on supporting businesses through the difficult period, extra spending on health, and in some states there’s been extra spending on infrastructure and on housing and skills development,” Governor Lowe said. “Going forward the challenge the we face is to create jobs, and the state governments do control many of the levers here.
“I would hope over time we would see more effort to increase public investment in Australia to create jobs, and the state governments have a really critical role to play here.”
