Governments should take advantage of low interest rates and boost infrastructure spending, but politicians should not have final say over which projects go ahead, Reserve Bank governor Philip Lowe has said.
Lowe on Monday said governments should be spending more on infrastructure, and should be prepared to spend even more if the economy slows down.
“There tend to be quite high multipliers from public investment in infrastructure,” he told a Canberra forum.
“There’s a lot to be said for further spending on infrastructure. Governments here and right around the world should have their top drawers full of really good ideas that are shovel-ready, in case global growth slows.”
Lowe said economic conditions in Australia and abroad mean governments can borrow to build infrastructure at an interest rate of just 2 per cent.
“If the Government can build productive capacity while borrowing at low interest rates that seems like a good thing to do, as long as there are projects out there. Given how fast the population’s been growing over a long period of time, and chronic under-investment in infrastructure, I’d conjecture there are a lot of projects out there with a risk-return greater than 2 per cent.”
But Lowe believes politicians should not be making final decisions. Instead those decisions should be transferred to an independent body, similar to how interest rate decisions were transferred from politicians to the RBA in the 1990s.
“If we don’t get [project selection] right the public doesn’t trust the government to build infrastructure, because they see it as being driven by political considerations,” he said.
“I think there’s a parallel with monetary policy. Thirty years ago, it was considered crazy to give people like me and my board the power to set interest rates. It was too important; it needed to be done by the government. But society correctly decided we got suboptimal outcomes by leaving those decisions to the politicians. You’re better off giving them to people like me and my board; you get better outcomes over time. I think the same logic can be used in infrastructure selection, finding a way that the public can have confidence that the right projects are selected.”
Talking bigger picture, Lowe, who recently attended a meeting of G20 finance and treasury leaders in Japan, said the global economy faces the risk of a slowdown in activity as a result of uncertainty due to the US-China trade and technology dispute, and Brexit.
“This uncertainty is now having a major effect on investment around the world: investment plans are weakening; capital spending is declining. In a way it’s not surprising, because uncertainty increases the option value of waiting, and what we’re seeing right around the world is firms wait before deciding to take on an investment.
“They’re sitting on their hands,” Lowe said. “If enough people sit on their hands then it’s going to have a major effect on the global economy.”