Treasury boss John Fraser has warned the disappointing revelations coming out of the royal commission into the banks could lead to tighter credit conditions.
In a largely upbeat appraisal of both the global and domestic economies, he told a Senate hearing higher short-term interest rates in the US seemed to have already resulted in higher wholesale borrowing costs for Australian banks.
He said there was also a risk of tighter financial conditions because of reactions to the royal commission.
‘But it is early days yet to make an informed judgment on that,’ Mr Fraser said on Tuesday.
Mr Fraser, himself a former head of an international Swiss investment bank, said he took no joy ‘whatsoever’ from watching developments in the royal commission but conceded some of its findings were not surprising.
‘It is very sad, it is very sad for our country and it is very sad for the industry,’ he said.
However, he is confident the strength being seen in the global and Australian economies is sustainable.
‘This cannot be guaranteed and there may be twists and turns, but the direction is very encouraging,’ Mr Fraser said.
The budget papers released earlier this month predicted the economy will grow by 2.75 per cent in 2017/18 and then accelerate to three per cent over the next four financial years.
Mr Fraser said these forecasts are not out of kilter with other forecasters.
‘We have a solid forecasting record… in recent years, we have done especially well,’ he said.
He expects strong employment growth to continue and lead to a pick-up in wages growth as economic growth picks up and excess capacity in the labour market is absorbed.
‘Indeed, companies are now reporting that the biggest problem constraining the growth in their business is difficulty finding suitable labour,’ he said.
Economists have questioned Treasury’s projection for wage growth accelerating to 3.5 per cent in three years time when it has been stuck around two per cent in recent years.
Treasury insists it is using the best available assumptions and methodology.
‘We and everybody else has been surprised how moderate wage growth has been over the past few years,’ deputy secretary for Treasury’s macroeconomics group Nigel Ray told the hearing.
However, he said the fact wages have been relatively flexible has meant employment growth has been stronger than it otherwise would have been.
But if Treasury’s wage and price inflation outcomes are 0.5 percentage points below what is expected for 2018/19 and 2019/20 it would result in a deterioration in the budget bottom line of $4 billion.
Mr Ray said it was still quite possible to achieve Treasury’s 2.25 per cent wage forecast for the 2017/18 financial year if the June quarter grows by around 0.6 per cent compared to 0.5 per cent in the March quarter.