RESERVE Bank of Australia governor Glenn Stevens says Australia can no longer muddle through without tackling productivity reforms that boost growth and confidence, suggesting the capacity of further interest rate cuts to stoke the economy is almost exhausted.
In almost three hours of parliamentary testimony, Mr Stevens repeatedly challenged Canberra to wake up to the need for wide-scale reforms that spur economic growth as the resources investment boom ends in coming years.
While the Reserve Bank could "lead the horse to water" via record low interest rates, the governor said he could not force consumers to drink until confidence and the impetus to invest was restored.
At the same time, he warned that the long-term drivers of national prosperity would not come "from manipulating interest rates or the exchange rate". "It comes from the productivity efforts of the million-plus enterprises that are out there in the economy," he said.
Mr Stevens reiterated his view – first revealed in an interview with The Australian Financial Review last week – that the dollar should probably be below US$90¢ given falling commodity prices, and said he retains an open mind on lower borrowing costs; he forecasted the US Federal Reserve would begin tapering its bond buying program in the first six months of 2014.
He indicated the Reserve Bank had not undertaken any currency intervention of late, and questioned whether Australia's agriculture sector was doing enough to capture the growing wealth of Asia and its demand for protein, declaring the nation was "not just about digging things out of the ground."
Mr Stevens dismissed recent claims from some quarters, including unions and the Greens, that the decision by GM Holden to exit local manufacturing could tip Australia into a recession, saying that assessment didn't "bear much scrutiny".
Despite Wednesday's testimony being almost completely overshadowed by attempts from both sides of politics to score points over an $8.8 billion cash injection to the central bank, Mr Stevens' primary goal was to confront the committee with a warning that Australia's recent history of strong economic growth could not be taken for granted. He suggested it was up to policymakers – and in particular the parliament – to deliver reform that would spur confidence among businesses and households to invest.
This included the "myriad things" that would make it easier for businesses to innovate, "to avoid unnecessary costs and to be more productive," he said.
Australia had "for quite a long time now" assumed "solid growth of the economy will simply continue and that it won't be affected by these other choices of various kinds". He said, "we are at a moment now when that assumption has to be questioned".
Asked by Liberal National Party MP Scott Buchholz how productivity could be boosted, Mr Stevens said, "there is no 'productivity lever' that anyone sitting here can pull – certainly I cannot.
"The things that you do in the Parliament have more bearing on it."
The governor's focus on productivity – which mirrors similar calls from senior officials such as Treasury Secretary Martin Parkinson – is being driven by a growing realisation that monetary policy alone won't be enough to shield Australia from the end of the mining investment boom and generate enough economic growth to provide Canberra with the revenue it needs to deliver on its spending commitments.
In remarks that reinforced financial market views that the Reserve Bank is most likely finished cutting rates, Mr Stevens indicated further reductions were unlikely to generate additional growth. "As we sit here right now, I do not think there are too many people saying, 'These interest rates are so punishing they are holding the economy back'," he said.
"Monetary policy is playing its part."
Peter Anderson, chief executive of the Australian Chamber of Commerce and Industry, said Mr Stevens had delivered a "powerful and very timely reminder" to the government and voters that a new round of regulatory, fiscal, competition and labour market reform is crucial to lifting productivity and retaining living standards.
"For too long now, monetary policy has had to compensate for the damaging impact of policy instability at the federal level," Mr Anderson said.
"The cash rate has been pushed to a 54-year low and still the economy struggles to maintain below-trend growth. Monetary policy is losing traction because of the dysfunctional policy environment that has emerged in recent years."