Interest rates

Interest Rates Rise, Risks Rise, So Government Must Exercise Caution

When new governments come to power in Australia, they inherit a budget from their political opponents.

So they throw it away and produce their own, to fund their own political agenda.

But some incoming teams turn the event into political theater.

In 2013, the Abbott government made much of the alleged unsustainability of the previous Labor government’s fiscal position, saying the country was facing a “debt and deficit disaster”.

When Gough Whitlam won the 1972 election, he asked “task force“to examine the spending programs of the previous coalition government to see if any could be cut, so that it can finance its own political priorities.

And now Australia’s new federal treasurer, Jim Chalmers, is shining a light on the fiscal situation he just inherited from the Morrison government.

He has already promised a thorough audit of “waste and error” in Commonwealth grant schemes, after so many schemes have been abused in recent years.

However, he also warns voters that the economy is in a more precarious position than the figures suggest.

And he doesn’t need to dramatize.

Reserve Bank in mood to raise interest rates

Last week, the Bureau of Statistics released its economic growth data for the March quarter.

It showed the economy grew 0.8% in the first three months of this year and 3.3% annually, beating analysts’ forecasts.

Dr Chalmers said there were ‘pleasant elements’ to the figures as strong demand was supported by a tight labor market.

However, he warned, the headlines mask a disturbing reality.

“National accounts are notoriously backward-looking,” said the treasurer.

“If you think about what’s happened in our economy since the end of March: inflation is higher, we’ve had interest rates rise, gasoline prices are up 12% since the at the end of April, wholesale electricity prices increased by 237% since the end of March, gas is more than 300% higher than the average of the last two years.

“We have labor shortages. We still have COVID absenteeism. And the international environment has also become more difficult.

“There is no point in mincing words about the kinds of conditions we inherited,” he warned.

These economic conditions are serious, and they are aggravated by uncertainty.

Take a look at the Reserve Bank Board Minutes May meetingwhere its members agreed to lift the cash rate target amid the federal election campaign.

The minutes include the word “risk” six times, variations of the word “uncertain” nine times and “inflation” 39 times.

RBA Board members discussed an unusually high number of sources of risk and uncertainty in the global economy.

They said they don’t know how or when the global supply side issues will be resolved.

And they didn’t know how household spending in advanced economies, including Australia, would respond to rising interest rates and falling real wages.

They said house prices in Australia could prove more sensitive to rising interest rates than expected, as households had taken on so much debt in recent years and many had not seen a rise. rates.

And they didn’t know how prices and wages would behave at such low levels of unemployment, because there was limited recent historical experience to draw on.

They could not say, with certainty, how reopening Australia’s international border would alleviate severe labor shortages.

And there was the obvious risk that Russia’s invasion of Ukraine and responses to COVID-19 outbreaks in China could push inflation even higher than expected and hurt global growth more than expected.

That was not all.

This is why today’s RBA Board meeting will be so carefully watched.

We are living in one of those moments in history where we are all forced to admit how uncertain the future is. still is, before we go ahead anyway.

The history of “budget revisions”

Be that as it may, the current economic situation, in June 2022, puts into perspective the seriousness of certain past “budgetary revisions”.

Take the last to occur at the federal level.

When the Federal Coalition came to power in September 2013, under Tony Abbott, it made a lot of noise about the state of Commonwealth finances.

A month after the election, he set up a so-called “National Audit Commission” to look into the Commonwealth’s budget situation, appointing businessman Tony Shepherd as chairman.

Announcing the review, Treasurer Joe Hockey and Finance Minister Mathias Cormann said it was an essential step in tackling the “work’s record of waste and mismanagement.” “.

“It is also essential that the Commonwealth government lives within its means and begins to pay down its debt,” they said.

To “live within your means”. There is still the old household fallacy.

This mistake has been used to justify a series of severe cuts in recommended spending on elderly care, health care, education, unemployment pensions and benefits, national disability insurance, aid to industry, the public service, etc.

At the time, the Parliamentary Library published a list of more than 20 budget reviews that had been carried out in Australia in the past.

He said the first attempt to systematically examine the finances of a jurisdiction in Australia was that of 1873 by the West Australian Legislative Council. Report on Departmental expenditures.

See the list below.

Library researcher Daniel Weight said the Abbott government’s audit commission was “just one in a long line of budget reviews”.

He said it was “striking” to see how the same issues recurred in every review, regardless of the context of the review or the political persuasion of the sponsoring government.

“Most budget reviews have revealed dire fiscal circumstances and sought to warn governments and the general public of the consequences of not taking corrective action,” he said wryly.

“Comments [that] have examined the fiscal affairs of governments have often revealed previously undisclosed liabilities, or fiscal “black holes.”

“[And] poor capital investment decisions by government enterprises have been a recurring theme in reviews,” he said.

Mr Weight said budget revisions were often controversial because they had obvious political overtones.

“The main areas of controversy include the conduct of the reviews themselves and the suspicion that these reviews were preordained to draw certain conclusions,” he said.

“Furthermore, the predominance of businessmen in the various journals has led some to conclude that they are vehicles through which to advance the interest of business over others in the community.”

So what should we make of Treasurer Chalmers’ plan to audit the multitude of Commonwealth grant schemes that have been abused in recent years?

The Australian National Audit Office (ANAO) was the body that sounded the alarm about subsidy schemes.

And the ANAO is not a random entity.

Australia’s first Commonwealth Parliament in 1901 used its Fourth Act to establish the Office of the Auditor General (the Audit Act 1901).

The Auditor General, an independent official, was given sweeping investigative powers to examine how Commonwealth officials spent public money.

It is one of the few Commonwealth bodies whose origins can be traced back to the federation, making it a pillar of Australian democracy.

The Labor Party’s decision to pursue a formal audit of Commonwealth grant schemes, after years of warnings from the ANAO, is entirely justifiable.

However, he said nothing about creating another “Audit Commission”, an exercise only used in the neoliberal era, to recommend severe budget cuts and dismissals of civil servants.

Perhaps the times are too serious for that.