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governing inflation « Previous | |Next »
February 21, 2008

So inflation is going to be above the Reserve Bank's band until 2009/10, by which time the recession in the US will have had a negative impact on the Australian economy. And the next two interest rate rises will only counteract the tax cuts. In a two speed economy the interest rate increases will have little impact on the boom states of WA and Queensland, but they will impact on NSW and Victoria, especially western Sydney.

Moirinflation.jpg Alan Moir

Senior Rudd Government ministers say they are very concerned by any proposal that would lead to election promises not being kept. Labor insiders want to avoid an electoral backlash if they do not deliver on their election promises. That means no support for the idea of completely scrapping the tax cuts - and turning them into retirement savings or superannuation. So any attempt to squeeze demand to bring it into line with supply is going to have to come from the cuts to the federal budget.

The talk in Questrion Time is that the Rudd Government is going to be tough on slashing the budget but the programmes that have been cut is tinkering around the edges of the Howard Government's excess--the regional rorts and less funding for Canberra. Rory Roberton on the ABC's 7.30 Report says:

I think you need much bigger spending cuts than are in prospect to have any major effect on the outlook for rates. I think the Reserve Bank would be impressed maybe with something of the order of $10 or $15 billion, one and 1.5 per cent of GDP. But I am not sure that's what's been flagged and some of the things that have been flagged are things that won't actually dampen inflationary pressure much at all. Cutting back on embassies offshore and cutting back spending on military equipment, that's not exactly going to dampen the pressures that the Reserve Bank sees pretty well across the board.

And Chris Richardson conforms this.He acknowledges that the Rudd Government has inherited a lot of extra spending in the Howard administration in its last handful of years and a lot of it is middle class welfare. But to get the $10 billion a year or even the $15 billion a year, is a very difficult thing to do.
... the maths certainly point to a major problem, we have existing inflation pressures and still chances are that demand will grow faster than supply in Australia. The net of an extra $25 billion over the coming year. Now, if that's the problem if you like, if that's the addition to the inflationary stresses we face, each interest rate rise of a quarter point out of the Reserve Bank is only taking about $3 billion away from a $25 billion problem and that's what the Government's up against. It's giving up $7 billion of tax cuts on 1 July. In a sense, it's handing us on the one hand pressures on the Reserve that add up to two interest rate increases. The question is what they can deliver on the spending savings to take that back out again.

| Posted by Gary Sauer-Thompson at 3:43 AM |