Wednesday, November 07, 2007

Congratulations on winning, here's the bad news

Within hours of the last victory that swept Labor to power on the morning of Sunday March 6, 1983 the newly elected Prime Minister Bob Hawke and his Treasurer-elect Paul Keating met the head of the Treasury John Stone in the bar of Canberra’s Lakeside Hotel.

Stone brought with him a folder containing grim news. Whereas the previous Treasurer John Howard had published estimates that put the projected budget deficit at $6 billion, the actual deficit was likely to be $9.6 billion. They wouldn’t be able to pay for their campaign promises.

A generation later most of the names have changed. Ken Henry is the Treasury Secretary and the incoming Labor Prime Minister and Treasurer are Kevin Rudd and Wayne Swan...

The outgoing Prime Minister is the same John Howard who back then was the outgoing Treasurer.

Yesterday’s Reserve Bank statement on monetary policy, in which Ken Henry was in some way involved through his membership of the Reserve Bank board, provides a clue as to what is likely to happen on or just after Sunday November 25.

The incoming government will quite likely be told that far from “going for growth” as John Howard had been talking of doing (in an eerie reprise of his government’s 1983 slogan “we’re not waiting for the world”) what is urgently needed is something to slow down an economy accelerating dangerously fast.

The Reserve Bank has been repeatedly pushing up interest rates in an attempt to keep a lid on spending and inflation but five years of repeated tax cuts have made its work hard. And now the incoming government, along with the outgoing one, have promised five years more.

If Rudd and Swan proceed with the tax cuts they have promised they will force the Bank to push up interest rates for five more years (unless the minerals boom ends and Australia slides towards recession in which case the tax cuts would be welcome).

Even with those continued interest rate hikes and the enormous associated damage there is no guarantee that by itself the Bank can continue to hold back inflation any longer.

For the sake of the country the tax cuts have to be stopped. Or turned into superannuation contributions or an infrastructure fund or something that can’t be spent until the minerals boom passes.

They are in government now. They have to take responsibility.