The Reserve Bank’s second rate hike shows the RBA’s belief in the strength of the Australian economy.
The Reserve was never as negative as Treasury during the economic crisis of 2008 and provided much-needed leadership at a time when a new government and a politicised Treasury showed signs of panic.
Treasury’s initial forecast included the rate of unemployment peaking at 8.5%, now clearly seen — including by Treasury — as way off the mark.
Henry (Thornton not Ken) does not wish to be too critical here, as for a time there was massive uncertainty and a distinct possibility that the world economy might slump into depression. But Treasury’s massive overestimate of the downturn naturally implied the recommendation of massive fiscal stimulus. “Go hard, go early, go consumers”.
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The puzzle is this. Now that Treasury expects a far smaller downturn, why is it not advocating as much fiscal saving as possible?
There is also the evidence of considerable (probably inevitable) waste and mismanagement in the stimulus packages and the fact that the handouts to consumers sent such confusing messages at a time when Australia should be focusing on productivity and efficiency.
Treasury’s failure to alter course to a more traditional direction is evidence of its politicisation.
Leaving the stimulus in place maximises the chance that the economy will be looking good in the lead up to the 2010 election.
A strong economy will allow Kevin Rudd again to campaign as a fiscal conservative, as well as the messiah who protected Australia from world depression, correction, severe downturn.
The winner is … Kevin Rudd and his chief economic adviser, Dr Ken Henry.
The independent Reserve Bank raising interest rates has the potential to rain on this parade, so expect increasing levels of criticism from Canberra, especially is the Reserve decides inflation is a big risk as recovery continues in the year ahead.