The Coalition may soon have good reason to be glad that they lost Saturday’s election. Why? Because John Howard’s boast that he left Australia ‘strong and prosperous’ is only a small part of the truth.
Look at the challenges Kevin Rudd will face, as he takes office. Australia’s interest rates are still rising. So is inflation. The long drought has not yet broken. And world financial markets are being shaken by tremors that started with the sub-prime mortgage crisis in the United States.
John Howard said he wanted to see Australia become a land of ‘opportunity.’ In an odd way, he has. At least for the Coalition.
If they can maintain discipline, over the next three years (which is doubtful) they might well come back for a very long time. As one political junkie in Canberra explained: ‘Three years out of office then back for 30.’
Although certainly strong, the economy Kevin Rudd has inherited is every bit as treacherous as that which confronted Gough Whitlam when he saw world oil prices quadruple, shortly after he took office in 1972.
The Reserve Bank of Australia is optimistic about the future. Yet Australia risks another bout of painful economic adjustment for which Labor could easily be blamed.
Family debt levels are high. High debt and rising interest rates are a toxic mix particularly so when inflation is also rising, as it is now.
Think of the debt-soaked families on the outer fringes of Australia’s mortgage belt. They have already had to cope with no less than six interest rate rises since the 2004 Federal election. A seventh and perhaps an eighth are now imminent.
A shakeout of the financial markets, in which many Australian families lose their homes, is a distinct possibility. Property values would fall, if that happened on any significant scale.
And Australians, generally, would be eager to blame any government which allowed that to happen.
Already, several big houses have been quietly put onto the market in Canberra. Our political junkie, a neighbour, spoke on the pavement one evening, after returning from inspecting a million-dollar-plus home in the once middle-class Canberra suburb of Hackett. That house had a very fancy and hugely impressive indoor swimming pool.
Months before the election, the Treasury Chief, Ken Henry, warned against recklessly expensive political promises. The politicians ignored his advice. But the last thing Australia needs at present is a fresh surge in consumer spending, fuelled by the dazzling prospect of $31 billion worth of tax cuts.
Kevin Rudd signalled a big bout of heavy government spending, too, in his acceptance speech, promising Australia ’21st Century infrastructure for the 21st Century.’
That might be thoroughly justified, as bottlenecks, like pathetic port facilities in Newcastle, already cost the nation billions of dollars each year in lost exports. But timing is everything, particularly with big spending programs like road, port and rail projects.
Kevin Rudd has absolutely no room to make mistakes, in his early months in office. Especially as fresh food prices are now certain to rise sharply, as the fruit and vegetables from Australia’s parched orchards and market gardens become scarce. And fuel prices are also rising sharply, with world oil prices already pushing $US100 a barrel.
Meanwhile, Australia’s banks are reviewing their lending policies in light of the US debacle no lender can afford to ignore lessons like that. It was once said that all an Americans needed to get a credit card was a pulse. Similar standards, extended by US banking shonks to home loans, have produced the sub-prime disaster.
All lenders, including Australia’s banks, have been watching that situation closely. It’s not just borrowers, though, who will be hit by the US credit crunch. At least two local councils in Australia are already looking at substantial losses, arising directly from investments that were hit hard by the crisis.
The US crisis is shaking world share markets, too. No one knows when that will stop. Rudd would be wise to regard these developments as just the first of the local problems to emerge from the US credit crunch.
Many people believe, however, that the good times will continue to roll in Australia regardless of what the politicians do. That view, which is overwhelmingly based on the big orders that Australia’s miners still have from China and India, is altogether too simple.
China has, certainly, earned its new reputation as the world’s workshop. But workshops can fall idle if they can’t get the orders they need to keep running at full speed.
This poses a critical question. Can US consumers keep spending, at the high rates they have over recent years? There is good reason to doubt that, in the new era of tighter credit now dawning in the US which has already caused American authorities to cut their domestic growth forecasts.
Rudd will have to deal with the self-inflicted wound of unsustainable voter expectations. Despite that wonderful ‘Pennies from Kevin’ headline, in the Sydney Daily Telegraph, Rudd wasn’t much more restrained than John Howard, in the election campaign when it came to pledging our money to buy votes.
The likely new Liberal leader, whoever that is, is likely to have a field day, if Rudd is forced to curb those promised cuts. Remember the fun the Liberals had with Paul Keating’s ‘L.A.W. law tax cuts,’ when reality forced the last Labor PM to put the second tranche of his promised tax cuts onto the never-never? That could happen again, in spades, even though the Coalition promised even bigger cuts during the campaign, that would have been worth $34 billion.
And then there are the new and high costs associated with rapid adjustment to climate change.
Kevin Rudd is going to need all of the economic conservatism he can muster in the months ahead.
He can’t expect to be popular, much longer, either.
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