As the ABC’s copy slaves repeatedly informed us, an interest rate rise was the surest bet of the day on Melbourne Cup day. A 0.25 per cent rise in the official interest rate by the Reserve Bank of Australia had not only been factored in by markets, it had been widely predicted by economists. And so it came to pass.
The interest rate rise, the second in a row from the RBA, is further evidence that Australia’s economy is officially on the mend. The accompanying statement from Governor Glenn Stevens pointed out that "the global economy has resumed growth" and that "prospects for Australia’s Asian trading partners appear to be noticeably better."
In other words, Australia has avoided recession, and therefore interest rates will have to rise again from their current 50 year low. "The risk of serious economic contraction in Australia now having passed," Stevens wrote, "the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker."
This is good news for the Australian economy. It’s even better news for the Rudd Government, which only 12 months ago was staring down the barrel of an unprecedented global recession that threatened to derail Labor’s first term. Australia’s economy has not only weathered the storm, it has sailed out into blue water with a stiff trade wind in its sails.
Other countries, still mired in recession or jobless recovery, can only look on in envy. BBC News even had Nick Bryant on the line from Sydney yesterday, calling the Australian economy "the wonder from Down Under".
That trade wind is of course China’s demand for Australian resources, which is driving investment and employment in resource-rich states like Western Australia. But domestic demand has also rebounded briskly, helped by Kevin Rudd and Wayne Swan’s stimulus package — especially those $900 cash handouts that the Opposition so derided.
Does this mean the stimulus was a waste of money, as the Opposition claims? Not really.
Unemployment is still rising, and as Treasury Secretary Ken Henry noted recently, it’s hard to argue that Australia currently has too much private sector growth. In fact, as he told Senate Estimates in early October, winding back the stimulus more quickly could wipe 1.5 per cent off GDP and cost perhaps "100,000 jobs".
But that didn’t deter Malcolm Turnbull from his claim yesterday that interest rates "are going up faster and higher than they would otherwise need to be if the Government was more responsible in terms of its spending". This is junk economics — even for the Opposition. If the Government had spent less on the stimulus, interest rates would indeed have remained lower for longer — because the economy would have been weaker. In effect, Turnbull is arguing that interest rates are more important than jobs.
That’s crazy. Interest rates are at what Stevens himself calls "emergency levels", a full four percentage points lower than when John Howard was in office. Sure, Australia is running a small deficit to pay for the stimulus. But our debt levels are exceedingly modest by world standards. In fact, Australia will need to keep borrowing in the medium term if we are to finance the investment needed to plan for our growing population and increasingly out of date carbon-based energy infrastructure. And a growing economy is the surest path back to fiscal responsibility, because it will mean growing tax revenues from productive workers and enterprises.
Turnbull said yesterday that the Rudd Government "went into this big fiscal stimulus, this big spendathon on the basis that Australia was on the edge of an economic abyss". Does he seriously believe that Australia wasn’t on the edge of an economic abyss? Has he looked at data from the US, UK, Spain, Ireland, Iceland, Estonia or South Korea in the past year? In fact, Turnbull has travelled to the United Kingdom quite recently, so he should have witnessed first hand what an "economic abyss" looks like. This is the kind of cheap political point scoring that makes voters see red.
Mind you, when it comes to spending, Labor’s promises are indeed dodgy.
No-one believes Labor’s pledge to rein in public spending increases to just 2 per cent a year after 2012. A promise like that can’t be kept without abandoning key spending commitments in areas like climate change, defence, health and education — not to mention generating widespread industrial unrest as public sector unions fight for pay increases in line with state government and private sector wages growth.
In defence alone, the Australian Strategic Policy Institute has already identified tens of billions of likely cost blow-outs to planned weapons purchases like the next generation of submarines.
In education, universities starved for funds over a decade of Howard-era neglect are also facing the imminent retirement of swathes of their baby boomer workforce, requiring a big recruitment drive they are currently unable to fund.
In health, we know from dozens of government enquiries and reports that costs tend to rise at rates well above inflation, owing to the increased use of expensive medical technology and the increasingly fragmented nature of Australia’s health system.
And in climate change, the Government’s own Mid-Year Economic and Fiscal Outlook reveals that the proposed Carbon Pollution Reduction Scheme will actually cost more in hand-outs than it will raise in carbon permits — and will stay in the red until 2022!
In other words, on current assumptions, Labor’s promises on spending discipline simply can’t be kept. As usual, both the Opposition and the Government’s sound-bites on the economy are misleading or simply wrong.
Of course, none of this matters electorally. The next federal election is only a year away now, and by the time we go to the polls next year, the Australian economy will probably be humming.
Interest rates will continue to rise. But even with strong growth next year, most analysts don’t expect interest rates to go higher than 5 per cent. That should position Labor perfectly to fight an election on its superior economic management — a campaign strategy the technocratic and managerialist Kevin Rudd clearly covets.
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