Economics, Politics & Interest Rates

Last week, the Reserve Bank raised the cash-rate by 0.25%. The banks have quickly followed suit on the interest rates they charge on home loans; personal loans and credit card rates will follow very soon.

The Australian economy has, for years, been a consumer-driven economy. As a our manufacturing sector now contributes 10% or less to our GDP, mining and consumer spending are the big contributers.

Consumer spending is critical to maintaining employment (think retail, commercial & tourism), but is funded by an ever-increasing debt - personal, corporate and national. This debt has increased not only in monetary terms, but also as a per centage of GDP. Debt now exceeds the value of GDP per annum.

The Federal Government's "gift" to consumers of a tax-cut from 1 July was heralded as "relief" for taxpayers struggling with high petrol prices. But history shows that such tax cuts are often used to finance new consumer spending, rather than managing with what we (collectively) have, nor is it used to reduce our collective debt.

All this spending and debt contributes to underlying inflation. The rate of underlying inflation influences the Reserve Bank to adjust interst rates to curb spending and control inflation.

On the one hand, then, we have the "generous" Federal Government giving us a tax cut, which makes it more popular. On the other hand, the Reserve Bank has had to raise interest rates to curb our collective propensity to spend when we shouldn't. Fiscal (budgetary) policy is largely politically driven by a government that wants to be popular, but is at odds with monetary (economic) policy.

How does this sit with the Liberal/National Parties' claims to be good economic managers?

The Analyst