Makin’ Your Mind Up

With the Australian economy showing signs of strength, the Government has been taking credit for avoiding the global recession by virtue of their stimulus spending package. In fact, despite the economic recovery, the Government is intent on continuing their massive fiscal stimulus whether it is warranted or not.

This puts them on a collision course with the Reserve Bank of Australia (RBA) which has just made the first of a number of expected interest rate rises.

I have been a critic of the quality and quantum of the Government’s stimulus package and here’s why.

Australia was in a much better economic position than other comparable nations when the global financial crisis hit. We were running surplus budgets for many years under the Coalition and unemployment was close to record lows. There was no net national debt and substantial investments for the future had been made.

This was in stark contrast to other countries that were labouring under high levels of public debt and budget deficits. Well before the financial crisis hit, the UK and USA both had close to record low interest rates in an attempt to stimulate their economies.

When that failed and the situation became worse, there was little option but to inject a massive stimulus into their respective economies lest they collapse entirely.

Australia was in a far different position. We had close to the highest interest rates in the Western world (around seven per cent versus two per cent or less). When the financial crisis hit, the RBA did the right thing and reduced interest rates by around four per cent. This saved people and businesses a great deal in repayments and that money could then be spent or saved.

If it was left at that, chances are we wouldn’t be facing a lengthy period of interest rate rises now. In fact, it could have sowed the seeds of a prolonged period of record low interest rates.

But the Government decided to inject tens of billions of dollars into the economy in what can only be considered a knee-jerk over-reaction. This resulted in the economy growing a head of steam built on the financial stimulus and the RBA trying to slow things down by increasing interest rates.

Do you see the problem? We now have two competing influences on the economy: the Government trying to speed things up and the RBA trying to slow things down. It reminds me of the song by Eurovision Song Contest winners Bucks Fizz, “Makin’ Your Mind Up”.

The end result will be that Australia’s economy will weather the global financial storm thanks to the hard work done over the previous decade. Yet our future will have interest rates higher than they otherwise need be and our children will have a debt that will take a generation or more to pay off.

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