Monday, October 15, 2007

Strap yourselves in (and expect still higher interest rates)

The Treasurer Peter Costello likens himself to a leather-jacketed daredevil speedster. To him the economy is “a highly engineered racing car - one missed cue, you take one corner a foot too wide and it will crash”.

Yesterday, standing with the Prime Minister in front of signs that read “Go for Growth” he slammed his foot down further on the accelerator.

We had been accelerating at the time.

The Treasury’s forecast for economic growth this financial year has jumped from 3.75 per cent to 4.25 per cent in a matter of months. Its forecast for inflation has ramped up from 2.5 per cent to 2.75 per cent.

Promising to add an extra $34 billion to consumer spending power at a time when retail spending is increasing faster than it has increased in years and when inflation is spiraling to or beyond the top of the Reserve Bank’s target band looks suicidal.

But it’s okay. The economy won’t crash. There’s a co-pilot in the other seat.

The Reserve Bank Governor Glenn Stevens has his foot hovering just above the brake...

There’s no doubt that he’ll use it. In the last five years the Treasurer has cut income tax rates 5 times and the head of the Reserve Bank has pushed up interest rates 9 times.

Does anyone see a pattern?

Peter Costello has just promised another 5 years of income tax cuts, and that’ll mean… well it’s too awful to think about if you have a mortgage.

So awful that Peter Costello has left himself some wiggle-room. The first three years of projected tax cuts are a rock-solid commitment. The following two year’s are aspirational targets that can be abandoned or postponed if circumstances change.

Circumstances will change. We are either going to have mortgage rates so high that our monthly repayments will dwarf those in the earlier years about which the Coalition used to remind us – effectively banks and other lenders will be collecting tax from us instead of the government itself.

Or changed international circumstances will mean that Australia’s economic boom will abate, removing the need for the Reserve to push up rates, and removing the projected income that the Treasurer has put aside for tax cuts.

Handing $34 billion in income tax cuts to people who’ve already enjoyed five continuous years of income tax cuts, as well as extraordinarily generous cuts in the tax on superannuation is standard operating procedure for Australia’s Treasurer.

A different tack would have been to have set aside $34 billion to fix up Australia’s hospitals.

The Prime Minister says he will be making an announcement about hospitals in the weeks to come. Yesterday’s updated Treasury figures suggest it’ll be a package worth several billions of dollars.

But not tens of billions. That’s for tax cuts that many or us may want, but our economy doesn't need.