Well at least Labor voters can’t complain. John Howard said that if you voted Labor you’d get a government that couldn’t take the tough decisions and you’d get higher interest rates. Well you voted Labor. And now it's all coming true! You kept your part of the bargain and so is he!
We’ve just had an election campaign in which policies were a kind of shadow play for the real content of the campaign which, like other recent campaigns, went on deep in our psyches. Remember, this was a campaign which was won by the party that made us think about responsible economic management and the importance of keeping interest rates low while doling out billions of dollars at each whistle stop of the campaign.
As recently as last December our Reserve Bank saw "no pressing need" for interest rate rises. But now it’s suggesting that it has been debating rate rises internally, that so far it has desisted “on balance”, but that rate rises are likely in future.
In its latest quarterly statement on Monetary Policy, the bank says that the party we’ve been having for the last 14 years is starting to look fragile. For many years now the economy has been crying out for more investment on research and development, workforce skills and on infrastructure (something you can reflect on as you wait in the traffic jams from the Sunshine to the Gold Coast). Now those shortfalls are beginning to bite, reducing our productive capacity and so putting pressure on inflation and on our (already woeful) export performance.
Our election wasn’t about how to check these trends, it was about the cheque in the mail, whether it was $100 for pensioners, $200 for self funded retirees, $600 for families or $800 for apprentices. (That last bit was for a tool kit would you believe? A skills policy with all the sophistication of the episode of Bob the Builder from whence one imagines it came.)
While all this was going on six economists (including yours truly) drew attention to some of these problems. We pointed out that Australia’s share of world export markets had fallen below 1 per cent for the first time since the advent of steam ships, that each year we were spending around 6 per cent of GDP or $50 billion more on payments for imported goods and services, interest and dividend payments to foreigners than we were receiving in return. (The bank now suggests the current account is rising towards 7 per cent.)
The six economists tried all the tricks - our suggested policy agenda appearing under headings that allowed the unalloyed allure of alliteration. We called for policies promoting "Prudence, Participation and Productivity". The statement made quite a splash - being published, quite fortuitously, on the morning of the debate between Treasurer Costello and Shadow Treasurer Crean. But neither man mentioned it. When finally prompted by media questioning, both returned to their more familiar bickering about tax winners and losers.
Both men had good reasons for not dwelling on the potential weaknesses of our economy. Acknowledging them would obviously take the gloss of the Government’s subliminal election campaign, associating continuing strong growth with good economic management. And both were bidders in an auction of giveaways. Larger surpluses and or a greater proportion of outlays on investment rather than goodies for the electorate would have cramped their style.
And both parties were playing “you show me yours and I’ll show you mine”. Each wanted to steal the other’s thunder, and both were manoeuvring for the title of most fiscally responsible (by being least fiscally irresponsible). This acquires an additional degree of difficulty when one is looking in the rear vision mirror trying to spot how much cash your political opponent has littered in his wake.
Now we’ll pay the price in higher mortgage payments. The good news is that rate rises will probably be quite modest - half or even a quarter of a per cent may be all that is needed. But there’s a sting in the tail.
We do need to take our medicine, but the medicine the Reserve Bank is being forced to use comes with nasty side effects that could have been avoided. Higher rates will depress consumption. So far so good. But they’ll also depress production, and they’ll particularly depress production for export because they increase the exchange rate. They slow the party down just like we want, but they make it harder to redirect our energies to where they should most go - into research, increased skills, infrastructure investment and export.
We don’t really need to depress our economy which seems to be already slowing. We need to reallocate resources consumption to production and export. The faster we can do it, the more people we can employ today and the richer we’ll be tomorrow.
So we’re guaranteed pain, but not the gain that might have come from other measures. Higher surpluses (or failing that, tax cuts or those cheques in the post paid to us as superannuation contributions) and government investment in keeping the economic miracle going - infrastructure, skill development, research and development incentives.
What a pity our politicians didn’t show a little more leadership - oh and of course we didn’t show a little less credulity.
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