Friday, October 26, 2007

Saturday Forum: Luck's end

Luck, diligence and a lot of support have given the team of John Howard and Peter Costello an enviable reputation for economic management over the last 11 years.

They have been trashing it for the last 12 days.

Day one began with a joint launch of Australia’s biggest-ever election giveaway – tax cuts worth $34 billion over three years, an average of $2,500 per voter.

By comparison the entire 2004 campaign produced promises worth only $1,000 per voter.

Standing in front of a backdrop that read “Go for Growth” the Prime Minister declared them “eminently affordable”; the Treasurer declared them “costed, funded, responsible”.

Neither made any references to what must have been a nagging detail in the Treasury’s Mid-year Economic and Fiscal Outlook which they released at the same time...

The Treasury had quietly boosted its inflation forecast from the middle of the Reserve Bank’s target range to the top quarter.

The next morning on AM the Treasurer denied that the tax cuts would boost inflation still further and by implication denied that his previous tax cuts had boosted inflation and would put pressure on interest rates.

“Let me make the point,” he said. “If you had spent the money you could have inflationary consequences, but to return it to people and to help them with their bills at a time when they are facing cost of living pressures, I think is a very responsible thing to do.”

He was two days away from the issuing of writs for the election and, under the caretaker conventions, losing access to advice from the Department of the Treasury.

It appeared to show in his panicky and reality-defying response to the very alarming set of inflation figures released on Wednesday.

The underlying figures, the ones especially calculated by the statistician to guide the Reserve Bank showed inflation already at or beyond the top of the Bank’s target band and heading higher.

Presumably acting without the benefit of his usual briefing from the Treasury the Treasurer welcomed “a very low average inflation rate, annual inflation rate, at 1.9 per cent and the 0.7 per cent in the September quarter, really right bang in the middle of the target range which the Government has set for consumer price inflation.”

The headline rate that he referred to was even more suspect than usual, and the Treasurer should have known it. In an unusual move the statistician had spent 5 pages of the 40-page document explaining why the headline rate was wrong.

A change to the way the childcare tax rebate was incorporated into the index meant that for that quarter and that quarter only the headline rate had been reported as being 0.2 percentage points lower than it really was; at 0.7 per cent rather than 0.9.

There was not a word from the Treasurer that on this occasion the figures he quoted couldn’t be taken seriously (on face value they implied that the price of childcare had fallen 33.4 per cent in three months!).

Instead the Treasurer denigrated the more figures dismissing them as “other measures of inflation, more technical measures”.

By Thursday the Reserve Bank’s preferred measure was being painted as suspect. Campaigning in Perth the Prime Minister said that it was “not entirely clear publicly how the underlying rate is determined.”

It is certainly clear to readers of the Canberra Times. The method of calculating the Bank’s preferred inflation measure was outlined on the editorial page on Tuesday.

But more importantly, for it not to be clear to the Prime Minister, himself a former Treasurer, and perhaps not clear to the current Treasurer calls into question how much they have really understood all along.

And then came the recession.

It is a sensational charge not usually bandied about during election campaigns (except for 1990 when Australia really was heading into a recession).

Peter Costello was trying to make the point at his press conference that Australia’s rate of inflation would be higher under a Labor government which he said would introduce union control of workplaces and an award system of wage setting.

He said it would “unleash such inflationary pressures in this economy as would end in recession”.

Once he had uttered the word he couldn’t take it back.

The journalists at the press conference had a new story. How soon would the recession come about? What exactly would bring it on? Could the Treasurer guarantee that under a continued Coalition government Australia wouldn’t have one?

The Treasury’s Mid-Year Review which Costello had released just days before said nothing about a recession. The Australian stock market wasn’t anticipating one. Even though Labor was odds-on favourite to win the election the market index wasn’t too far off its all time high.

Asked on Friday whether he agreed with his Treasurer that there would be a recession if Labor won the Prime Minister refused to back him up.

He said instead that if Labor presided over a wages breakout there could be “very significant falls in economic activity”.

Asked if this meant a recession he replied that there could be “recessionary tendencies” if there was a wages breakout. That was the closest he woulc come to using the word.

And he wouldn’t use the word tsunami either.

In a Friday morning newspaper interview the Treasurer warned of a “huge tsunami” he said was set to engulf global financial markets when China floated its currency.

He explained later in the day that when China decided to float its currency “you are going to get huge reversals of financial flows around the globe, which will affect all exchange rates, that's why I compared it to a tsunami.”

A real tthreat or not, it was a possibility not mentioned in his own department’s Mid-Year Economic Outlook which he had released days before, nor in its assessment of risks to that outlook.

When asked later to describe the time frame he had in mind for the tsunami he replied inpenatrably, “It could happen in a matter of years, it could take longer”.

The Treasurer denied that his prediction was aimed at persuading the Reserve Bank not to increase interest rates at its meeting on Tuesday week, but said he did want to make the point that a Labor Government “with no experience in economic management” would be ill-equipped to handle such a tsunami.

By the end of the week it was looking as if the Treasurer himself was somewhat ill-equipped, at least while temporarily denied access to the 850 people who work for him in the iconic Parliamentary Triangle building across the road from the National Library.

His relationships with Australia’s financial community weren’t looking good either.

On Tuesday the head of the National Australia Bank John Stewart said that cost pressures would soon force his and other banks to push up interest rates on mortgages and other loans by 0.10 to 0.20 percentage points over and above whatever rate hike the Reserve Bank imposed.

They hadn’t done it yet in deference to the election campaign.

“You don't want to stick your head above the parapet,” he said, but “once things settle and probably once there is no election looming prices will rise.”

The Treasurer’s response bordered on threatening.

“My reaction is it hasn't happened and it won't happen whilst I'm the Treasurer he told the ABC’s Kerry O’Brien.

Asked how he could stop a private bank chief such as Mr Stewart from setting prices as he saw fit the Treasurer replied, “the message that I have already given him has stopped him to date and the message will continue whilst we are in office.”

He appeared to be painting a picture of a government prepared and able to control prices through intimidation, or perhaps just a picture of a government rattled at the way in which the strength it campaigned on in the last election, its ability to keep interest rates “at record lows” now looks like a weakness.

This week the ANZ Bank declared that it expected the Reserve Bank to lift interest rates three more times before the middle of next year, along with an extra rise imposed by the ANZ bank itself which would take its standard variable mortgage rate up towards 10 per cent.

The Prime Minister denied that he had ever promised to keep interest rates at “record lows”. He said the words had been used in a television advertisment that was broadcast for two nights only “and then it disappeared and you didn’t get out of my mouth.”

Asked whether that Coalition advertising now looked dishonest he agreed but said that “what really matters now is which side of politics is better able to manage an increasingly hostile financial environment”.

Late on Friday the Labor Party pointed out that the election advertisement disowned by the Prime Minister had been launched by the Treasurer himself who played it to assembled journalists at a 2004 press conference lauding it as putting “squarely, front and centre of this campaign, the question of economic management”.

With four weeks of the current campaign to go there is still time for the Prime Minister and Treasurer to recover from the early largely-self inflicted damage to their reputations as economic managers, but working against this will be the timing of the Reserve Bank’s Melbourne Cup day board meeting.

It comes on Tuesday week. The rate hike will be announced the next morning, just 17 days before Australians go to the polls. A few days later every mortgage lender in the country will announce a hike in its rates, and perhaps even an extra hike over and above that set in train by the Reserve Bank.

The Bank’s move will expose both the Treasurer and Prime Minister as being wrong when they claimed this week that inflation was under control and that there was no reason for the Reserve to push up rates.

They will also be unable to credibly claim that it will be a one-off. The ANZ is predicting two extra rate rises. On Friday Westpac warned its clients to expect the next in December.

The Opposition has been able to languish in the economic shadows in recent days as the Treasurer and Prime Minister have inflicted damage upon themselves. That probably isn’t a bad strategy given Kevin Rudd now infamous statement a few weeks back that when it comes to fiscal policy “there is no slither of light between” Labor and the government.

It now looks as if a bolder strategy could have paid bigger dividends. Instead of endorsing most of the Coalition’s promised $34 billion of tax cuts in week one Kevin Rudd could waited until after the inflation figures in week two and promised instead to put the $34 billion into an infrastructure and social services fund, to be invested when inflation eased and no longer posed a threat to interest rates.

That fantasy would have come closer to good economic management than anything we are likely to see in the real-life campaign.

HT: anonymous commenter

3 comments:

Martin said...

Great summery. It has been a shocking week for Costello.

He is rarely this flustered which just demonstrates the trouble he thinks the government is in.

phil said...

Yes, all nicely put. I commented on one of your pieces a few days ago that Costello was incompetent, this just proves it. The ideological bullying, of course, we've got used to over the last 11 years.

LETTER said...

LETTER TO EDITOR, October 30, 2007

Declare allegiance

Life can be tough for governments during an election campaign. They are allowed no credit for an economy going ''gangbusters'' for, as Peter Martin constantly tells us, they no longer control the levers that control the economy.

However, when that same economy puts upward pressure on interest rates, they must bear the full odium.Writers of letters to the editor are expected to declare any political allegiance. Should this also be required of writers of ''comment'' and ''analysis'' articles?

Gordon Dickens, Gowrie

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