Sunday, August 05, 2007

"Labor can't manage money"

That's the title of an audacious new advertisement from the Coalition intended as preemtive strike should, as is expected, the Reserve Bank hike interest rates this week.

Here's my comment piece for tomorrow's paper, and below the fold, the news story:


COMMENT

Have you got the government’s message?

If the Reserve Bank pushes up interest rates this week, it’s Labor’s fault.

It’s as audacious as it is wrong.

For one thing, as the ACT’s Chief Minister says, John Howard and his crew were very happy to claim responsibility when interest rates were trending down, why won’t they also accept responsibility when they are trending up?

For another the argument mounted by the Prime Minister in this morning’s radio address would get him failed if he used it to answer a question in an economics exam at any time in the last 20 years.

It was once true. The Prime Minister says “when a government, be it state or federal, goes into debt it must borrow the money to finance that debt, thus competing with private businesses for available funds. This puts upward pressure on interest rates.”

For the last two decades, as a result of reforms championed by John Howard among many others, Australia has had open capital markets. Governments, as well as individuals, have been able to freely borrow from abroad. There is no longer a limited stock of “available funds”.

If one party (say, a state government) borrows more, it no longer means that another party (say, a private company or a home buyer) needs to borrow less or bid up the price in higher interest rates.

It would if the borrowing by Australian state government was huge on an international scale. But guess what? It’s not. Australia is a price-taker, not a price maker when it comes to international interest rates.

The Reserve Bank is likely to push up interest rates this week because it is worried about inflation. If John Howard really wanted it not to, he could have withheld the $21 billion in tax cuts he just pumped in to an already superheated economy.


THE PREEMPTIVE STRIKE


In a preemptive strike ahead of this week’s expected hike in interest rates the Coalition has launched an advertising campaign tagging Labor the party of high interest rates.

Entitled “Labor Can’t Manage Money” the internet advertisements say that “Kevin Rudd’s Labor Premiers” plan to borrow $70 billion over the next five years “plunging Australians into debt again”.

“Compare that to John Howard and Peter Costello who will borrow absolutely nothing. Never forget, it is governments who borrow money and get into debt who put upward pressure on interest rates,” the advertisements say.

The Prime Minister has reinforced the theme in this morning’s weekly radio address saying, “when a government, be it state or federal, goes into debt it must borrow the money to finance that debt, competing with private businesses for available funds. This puts upward pressure on interest rates.”

The Finance Minister Senator Minchin hammered home the theme on the Ten Network’s Meet the Press yesterday quoting a higher figure of $80 billion in state borrowing over the next four years.

He said that while he did not think that the Reserve Bank board should put up interest rates when it meets on Tuesday he was concerned “about the extent to which State Labor governments are putting upward pressure on interest rates.”

It, as expected, the Reserve Bank board does vote to push up interest rates tomorrow it will be the fifth hike since the last election fought and won by the Coalition on the promise of “keeping rates low”.

The ACT’s Chief Minister Jon Stanhope, one the Labor leaders targeted in the campaign, accused Mr Howard and Senator Minchin of hypocrisy.

“The federal government has been crowing about its low interest rates regime. They’ve accepted all the credit, and now that the worm begins to turn they insist that somebody else accept responsibility for the fact that interest rates are going up,” he said.

“You can’t have it both ways.”

Mr Stanhope said that while some states were indeed borrowing heavily for necessary infrastructure over the last ten years the ACT had had less debt than the Commonwealth. “To the extent that Senator Minchin is pointing the finger at deficits and high debt ratios he’s obviously paying a compliment to the ACT.”

Senator Minchin said there was no reason for the Reserve Bank to act this week because inflation was “under control”.

“The consumer price index is 2.1 per cent for the year to June, underlying inflation is 2.6 per cent, within the Reserve Bank’s target band of two to three per cent,” he said.

The investment firm TD Securities disputed the Minister’s analysis. Its Senior Strategist Joshua Williamson said that the Reserve Bank was charged with looking at where inflation was headed, not where it had been.

Since the release of the June figures referred to by the Minister data for July compiled by the Melbourne Institute suggested that the underlying rate of inflation had climbed above the Bank’s target band and was headed higher.

“Any sensible economist will tell you at the moment that economic growth is going to accelerate over the course of this financial year,” he said.

“We’ve got $21 billion of tax cuts that came into force in July. We’ve got heavy infrastructure spending which while great in the long run creates price pressures in the short run. Consumer spending remains strong, business investment has got a second wind, real wages are rising, unemployment is close to a 32 year low.”

“While the Minister talks about the headline yearly measure of inflation, inflation is now is accelerating and the Reserve Bank needs to act in order to contain it,” he said.