John Howard: “the pressures of prosperity” led to the nation’s “finely balanced economy”

This is from the people who have made several elections’ worth of fun out of the recession we had to have. The one that set up the decade or so of the prosperity for which House-sitter Howard is taking credit.

JOHN HOWARD has mounted a pre-emptive defence of a likely interest rate rise next month by claiming “the pressures of prosperity” led to the nation’s “finely balanced economy”.

The Prime Minister said his Government’s economic stewardship was needed to maintain that fine balance, while he blamed the Labor states for adding extra and unwarranted pressure to rates by going into debt.

Following yesterday’s inflation figures, economists were predicting a rate rise in early August, not long before the election. It would be the fifth since the 2004 election, when Mr Howard promised to keep interest rates low, and the ninth rise in a row.

Ouch. What struck me, though, was the handy counter-point, of a sort, on the same main page of the Sydney Morning Herald’s website:

Bush insists Iraq war keeps US safer

GEORGE BUSH has made provocative new assertions about al-Qaeda’s role in Iraq, using recently declassified information to make his case that the global battle against the terrorist network, and the safety of Americans at home, hinges on keeping US troops in Iraq to fight.

You may think comparing these two statements is a rather false sort of equivalency, which is fine. Comparing believing the two statements, which is what I’m doing, is not. Does anybody believe Old 25% Bush when he embarks on these lunatic ramblings?

And so to our Prime Minister. Having won at least one election with the threat of incompete Labor party interest rate increases, he’s overseen little else but, while simultaneously watching us leverage our guts out to buy houses – or anything else, if one is to include credit-card consumerism.

At the same time, ‘core inflation’ stalk us still:

While the figures show consumer prices rose 2.1 per cent in the year to June, the Reserve Bank’s preferred measure of core inflation – excluding volatile items such as petrol and fruit – rose by about 2.75 per cent. The bank had not expected underlying inflation to move into the top end of its 2 to 3 per cent comfort zone until mid-2008.

On the one hand this is fine – the job of a central bank is (principally long-term) price stability. On the other hand it is not fine: if petrol (Americans: gasoline) and food are not core household expenditures, explain to me what is. Rent and mortgages? Those are the first-most increasing costs, in Australia (the Australian Bureau of Statistics found childcare up 12.8% this year, as well – good news for the party of working families).

I just don’t see the space in the argument for the Prime Minister’s “what drinking problem? I drink, it’s not problem” sort of thinking. The same is true, here, with Bernanke insisting non-core inflation is not his problem, the CDO fall-out is not going to spread, etc. Was Nero’s problem simply tunnel-vision? Perhaps he just narrowed his focus so, he couldn’t see Rome burning.

How quickly does the Prime Minister put this on Labor? Faster than your mortgage is going up:

He said the labour shortage, which the Reserve Bank has said is helping drive inflation, was one pressure, but governments “by their own behaviour should not add to the pressures”. Labor states were needlessly adding to the pressure by borrowing, whereas his Government had paid off its debt and “vacated the field of adding to pressure on interest rates through its borrowing”.

Federal Labor would increase rate pressure further by abolishing Work Choices. This would lead to a wages break-out and wage inflation, despite Labor denying it wants a return to centralised wage fixing. “We have a low inflation environment, we have still very low interest rates.”

Mr Howard also said new house prices would increase by 3 per cent under Labor.

One can measure the desperation of the Prime Minister by the amount of scatter in his shots, lately. This one is bang-on his theme of wall-to-wall Labor equalling fundamentally disastrous. Which is fine: it is election-time, after all. But we, as the electorate, ought at this moment to be drowning in our own cynicism and skepticism. Tony Curzon Price wrote a neat comment in a previous post, here, in which he said that nobody in a game of poker ought to be considered properly lying, because mis-representation is the game. Electioneering is precisely the same, and the value of information from the government, beyond its worth as a signal, should be nearly zero.

To the matter at hand – that it is all the fault of the states:

Treasurer Peter Costello told the federal Liberal Council meeting in June that next financial year, 2006-07, the States are collectively forecasting a fiscal deficit of around $4.9 billion and a cash deficit of around $7.9 billion.

The States are collectively forecast to remain in cash deficit over the forward estimates to 2009-10, he said.

“This constitutes a reversal of the surplus position that the States have been in since the beginning of the decade. The States are borrowing to finance their deficits over the period to 2009-10 a cumulative sum of $58 billion, including borrowings by non-financial public corporations. ”

“In contrast, the Australian Government is forecasting a fiscal surplus of $11.9 billion in 2006-07 and a cash surplus of $13.6 billion. Underlying cash surpluses of between 1.0 and 1.2 per cent of GDP a year are projected across the forward estimate period. These cumulative surpluses will total $50.7 billion from 2006-07 to 2009-10.”

There are two things, here. First, the effect of budget deficits on interest rates in the long-term is not agreed upon (as though anything is, by economists). There is, though, little to no evidence to support the theory. Short-term, perhaps, but there will usually be a lot else happening. One might look, for example at the US federal – and state – budget deficits, vs. their official lending rates. Bear in mind there is also plenty of cash coming into Australia at the moment (itself a function of the inflation figures).

The second thing is this: why, if the federal government has such great reserves of cash, are states having to borrow? Why is the federal, Liberal, government crying rich while state, Labor, governments are crying poor? It seems to be that John Howard can hardly foist this blame onto states, who have borrowed money to maintain or replace ageing infrastructure, without increase their grants with his massive surpluses – something he can clearly afford to do.

Contrary to the assertions of the Prime Minister and Treasurer the federal government is not a nuetralised absence from the financial market, but an economically and politically relevant one. For our purposes, as citizens, we should not give a shit. We pay taxes, and we demand services, and we should care less who’s going up and who’s going down. We pay for Government, and we expect it, at all levels (Federal, State and Local) to be mature enough to sort itself out and operate as effectively and efficiently as possible.

Alternatively, you can take the easy route of the easy lie of team Howard/Costello. Interest rates are up because Labor governments are making a mess of their states. Let them in Federal government and they’ll soon mess that up, and nothing will save us.

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