Interest rates up – economic growth down. Coming on top of the biggest current account deficit of all time, today shapes up as one of Peter Costello’s worst in public life.
Yesterday, the Treasurer was dreaming of life in The Lodge. Today, he faces his political nightmare. He has to face down the markets, his political critics, and his own colleagues as the clamour for solutions to the looming economic crunch inevitably grows.
It’s time for him to put the leadership baton back in his knapsack, and face the reality of a new political atmosphere, and a government that, suddenly, is under pressure. In the words of John Durie’s provocative Chanticleer today: ‘Pull your finger out, Costello’.
And it all could have been so much different. If only the Treasurer hadn’t applied overt pressure on the Reserve Bank 12 months ago not to increase interest rates in an election year.
The political constraints placed on the bank back then have come home to roost, as the bank increases rates just as the economy starts to stall, a double blow to Howard’s heavily-mortgaged battlers.
Simply put, a mild rise 12 months ago would have sent the necessary warning to credit-happy consumers – slow down on all the plasma TVs and new cars. And the massive $15 billion current account “Banana Republic” deficit could have been avoided.
The steam would have come off the economy in a more orderly fashion. Instead, what did both sides of politics do? They went on massive spending election sprees: Labor’s unfunded spending promises like Medicare Gold vs the Coalition’s $60 billion spending and tax cut spree.
Certainly, for the first time since the introduction of the GST, when economic growth fell, Peter Costello’s been forced onto the back foot. His problem is, of course, that the infrastructure solution to easing capacity constraints on the economy is a long one. You don’t just build port facilities overnight.
There’s a strong argument – given today’s stunning growth figures – that the Reserve Bank made the wrong call lifting interest rates. And the Government’s at sixes and sevens over this: John Anderson expressed his disappointment at the rate rise, while Costello was damning in his faint praise of the Bureau of Statistics growth figures today.
Two things are for sure: the rate rise will hurt low income earners – who didn’t get a tax cut in last year’s Budget. And next week’s resumption of Parliament will be a beauty.
Henry Thornton on interest rates and the national accounts
Henry Thornton looks at the RBA rate rise (better late than never) and the confusion of the national accounts. See it all here: http://www.henrythornton.com/article.asp?article_id=3136
Check out the statement from Reserve Bank governor Ian Macfarlane here: http://www.rba.gov.au/MediaReleases/2005/ mr_05_04.html
And read the December quarter National Accounts figures from the ABS here: http://www.abs.gov.au/AUSSTATS/abs%40.nsf/mf/ 5206.0?OpenDocument