Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. HereÔŅĹs how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The politics of a rate rise

By Andrew Leigh - posted Monday, 20 August 2007


Another RBA decision, another dose of rate rise rhetoric. Did you know that rates are now higher than they’ve ever been this millennium? Or that the last time the cash rate was this high, the Spice Girls were on the pop charts, Fitzroy was still in the AFL, and most Australians had never used the Internet?

Economically, there is little to complain about with the RBA’s latest decision. In announcing that the cash rate would increase to 6.5 per cent, Governor Glenn Stevens pointed to the upswing in underlying inflation, coupled with high capacity utilisation, strong business confidence, and relatively low unemployment. It’s difficult to imagine that there was much wrangling among board members about the economic fundamentals.

A tougher question is whether the RBA should have waited until after the federal election to raise rates. For two decades, it has been an unwritten rule that rates do not rise in an election year. While the recent decision broke that rule, the alternative may well have been worse. In the face of an overheating economy, should we expect the RBA to wait for a non-election year before taking action? Just because of our ridiculously short three-year election cycles, it’s hard to see why an independent central bank should be forced to put monetary policy on ice one-third of the time.

Advertisement

Politically, the challenge for the Howard Government will be to deflect questions about interest rates. In 2004, Howard opened the campaign by asking voters “Who do you trust to keep interest rates low?”. Although a Reuters survey of 14 financial market economists found that none believed the party in government would affect interest rates, many felt that interest rates were critical to his victory.

Perhaps they were, but not directly. While some commentators argued that mortgagees were responsible for Latham’s loss, the evidence provides little support for this. Analysing seat-by-seat swings, Newcastle University researchers Steve Easton and Richard Gerlach found that (holding constant voters’ level of education), electorates where more voters were paying off their homes were no more likely to swing towards the Coalition.

However, interest rates may have affected the result in a different way. At its core, Howard’s claim that rates would be lower under a Coalition government was a challenge to the ALP’s economic credibility. Having planned its campaign messages, Labor was forced to change tack midway, hastily rolling out advertisements to counter the interest rate “scare campaign”. After the election, the Australian Election Study found that voters tended to prefer the Coalition’s stance on taxation, unemployment, and industrial relations; and Labor’s policies on the environment, health and education.

The big challenge for the ALP will be convincing the electorate that it can run the economy almost as well as the Coalition. “Almost”, because the belief that right-wing parties are better economic managers is so pervasive in developed democracies that few can hope to topple it from opposition. Even on the eve of British Labour’s 1997 victory, a majority of UK voters thought that the Conservatives would do a better job of managing the economy than Labour. But because they thought that Labour would be a lot better on social issues, the opposition won in a landslide.

The ALP’s economic credibility is now less likely to be hit - as it was in 2004 - by claims that interest rates will rise under Labor. The rate rise probably ensures that that the term “interest rates” is likely to join “WorkChoices” and “Iraq” on the Coalition’s list of unmentionables. Yet given that Labor devoted a considerable amount of energy in the last election to pointing out that governments do not control interest rates, it would be difficult for them to now turn around and blame high interest rates on the Coalition. Hopefully this double-edged sword will ensure that interest rates are not a first-order campaign issue, thus making room for more meaningful policy debates.

This would be good news indeed. Another “keeping rates low” election would not only be mind-numbingly boring - it would also represent a missed opportunity to discuss some of the real challenges that Australia faces as a nation. Forget interest rates: let’s talk about something the government can affect, like improving the performance of our schools and universities, how to decide on our infrastructure priorities, or getting the tax mix right.

  1. Pages:
  2. Page 1
  3. All

First published in the Australian Financial Review on August 9, 2007.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

Other articles by this Author

All articles by Andrew Leigh

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Andrew Leigh
Article Tools
Comment Comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy