Tuesday, May 13, 2008
They were going to take pressure off interest rates.
They said so, repeatedly, while in Opposition and in the lead-up to the Budget.
But last night in the Budget speech Wayne Swan made not a single claim about rates.
The nearest he came was saying that he was “working to put downward pressure on inflation”.
He hasn’t cut spending enough to ensure that the Reserve Bank won’t push up rates again. His own budget papers hold open the possibility that they will...
The papers forecast that “tighter monetary policy” will ease inflation without making clear whether they are referring merely to the tightening to date or to extra tightening to come.
There’s a hint in the budget forecasts that the Treasury does expect another interest rate hike. Its inflation forecasts are lower than those of the Reserve Bank published in its Quarterly Statement on Friday.
The Bank prepares its forecasts using the technical assumption that rates will stay steady. The Treasury is allowed to factor in the lower inflation that would result from another rate hike.
Wayne Swan has been gentle with government spending – perhaps too gentle given the importance he used to say he attached to taking pressure off mortgage rates.
Government spending will climb by 1.1 per cent in real terms. In Peter Costello’s horror 1997 budget he cut it.
The citizens of Canberra will be pleased and relieved at what Wayne Swan hasn’t done to them.
And then they will go out and spend and resume buying houses, putting pressure back on the Reserve Bank to push up rates.
The scenario will be played out (more modestly) Australia wide.
Wayne Swan has squibbed too in not personally owning all of the spending cuts that he is imposing.
Departments themselves will have to silently save $1.8 billion over the course of five years by making small cuts here, small cuts there in order to hand the government its efficiency dividend.
Wayne Swan won’t have to wear today the pain that he forcing them to impose on us.
But he is asking us to trust him.
The new $20 billion Building Australia Fund, the $10 billion Health and Hospitals Fund, and the $11 billion Education Investment Fund allow him to have his cake and it eat too.
Peter Costello discovered the technique last year.
He can ask to be rewarded for building up a surplus while at the same time being rewarded the choice of fund he chose to park it in.
Except that Peter Costello was only ever able to spend the earnings of the fund he set up – the Higher Education Endowment Fund.
Wayne Swan has allowed himself to spend both the capital and earnings.
He has given himself three multi billion dollar money pots – worth $41 billion in total – and allowed himself to dip into them whenever he feels the need (subject to listening to independent advice from groups such as Sir Rod Eddington’s Infrastructure Australia).
Spent wisely, at the right time, the money pots could be enormously useful in buoying Australia during economic downturns.
Spent when inflation is high and the economy can barely cope with the spending we have, unwise use of the money pots could ruin us and guarantee further interest rate rise.
Politically this is a safe budget. It delivers election promises, delivers a reasonable surplus, and holds out the prospect of spending it as well.
First budgets are traditionally those in which new governments take their toughest decisions.
It that’s right, Wayne Swan’s future budgets will be even safer.