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a winter discontent « Previous | |Next »
May 5, 2006

The Reserve Bank's decision to raise interest rates was line ball--it could have gone either way. Presumably, it is justified on the grounds that it headed off more drastic increases latter. It's an insurance policy against the inflationary pressures that are formimg, and presumably gaining the upper hand. As the economics of the decision goes it's a cautionary move, a minimal step and in step with the actions of central banks in other countries (eg., Canada). It's good economic governance--and so on.

The politics is another matter entirely. It's not just a question of the Treasurer being grumpy and taking issue with the Reserve Bank's analysis of the trajectory of growth of the world economy It goes deeper than this.

LeakA20.jpg
Bill Leak

Leak exaggerates but the exaggeration contains a truth. The RBA decision places a question mark over the Howard Government's economic management, which fought the last election on the promise of keeping interest rates rates low and the fear of rising interest rates under a Latham-led ALP government. Despite the resource powered boom, the new message is one of economic restraint and belt tightening; especially when coupled with rising petrol prices, warnings about more interest rates rises in September. Merge that with the stories about reduced wages and working conditions from the industrial relations reforms, and we have a winter of discontent for debt burdened households.

A winter that may shift into the Howard Government facing a federal election in late 2007 with high interest rates depressing the economy.

This is new political terrain for the Howard Government---a question mark over its economic management credibility. That question mark fuses with what others are saying: that the blame for limited spare capacity, scarce suitable labour supply, an underfunding of education and the lack of investment in infrastructure can be directed at Costello and Howard. Costello is not much an economic reformer. Reform deficit is the mantel he now wears.

Sitting in the background is Australia's widening trade gap with the rest of the world---it widened in March to $1.5 billion. This is the 48th consecutive monthly shortfall in Australia's trade balance---and the longest run in the red in 20 years----and is due to declining exports. The Treasuer patting himself on the back about his budget supluses and paying off debt---the message is always that deficits and debts are the height of economic irresponsibility--- cannot disguise the worsening trade deficit.

The commentariat continues to remain silent about the trade deficit.

| Posted by Gary Sauer-Thompson at 1:02 PM | | Comments (0)
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