On Wednesday morning, the Treasury secretary, Dr Steven Kennedy, appeared before the Senate estimates economics committee. It became very clear from the shadow finance minister, Senator Katy Gallagher, and her opposite, Senator Simon Birmingham, that interest rates are going to be a big factor in the election campaign.
To an extent you can understand why – the latest market expectations for rate rises have increased sharply over the past month.
At the start of January, the market expected at most the cash rate getting raised to 0.75% by the end of the year. Now the market expects the Reserve Bank to raise the cash rate five times by the end of the year up to 1.25% and to 2.0% by June next year:
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Even worse for the government, the market rates it a 50:50 chance that the RBA will increase rates on 2 May – right in the middle of the election campaign.
I actually think this is unlikely, because I suspect the Reserve Bank will wait to see the March quarter wages figures, which only come out on 18 May.
But even if interest rate don’t go up in May, Gallagher’s question of whether interest rates will go up before the election and the awkward rebuttals by Birmingham demonstrate that this remains a potent political issue.
Which, to be honest, is quite weird.
Has anyone noticed that the cash rate is at 0.1% and that if it remains there that means not only is inflation not rising, but neither are wages?
Shouldn’t we want wages to rise by more than 3%?
Questions about interest rates always go to the issue of the budget deficit and government debt – and the belief that deficits and growing debt levels lead to increased interest rates.
And yet what we have seen since the global financial crisis and especially through the pandemic is that government spending has been the big driver of economic growth.
The Grattan Institute asserts that the combination of fiscal spending and the extraordinary monetary policy of buying bonds and cutting the cash rate to 0.1% added over $5,000 to Australia’s GDP per capita.
My colleagues at the Centre for Future Work, Jim Stanford and Alison Pennington, sagely note that this spending not just “stabilised macroeconomic conditions” but also demonstrated that “governments were not restrained (at least initially) by conventional concerns about the impacts of these enormous interventions on either fiscal balances or on the purported ‘incentive to work’.”
The jobkeeper program and increased jobseeker rate showed that not only is poverty largely a government choice but so too is the unemployment rate, while programs like “work for the dole” are more about politics than economics.
On Wednesday, the Treasury secretary talked of the generational opportunity to reach full employment, which given we are in a pandemic should have us wondering what we have been doing over the past decade.
Because what we had been doing was worrying too much about the debt and deficit.
After the GFC, the ALP government sought to get back to a budget surplus and slowed public demand:
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This desire was shared with the following Coalition government.
And so the view that a budget surplus equals better economic managers saw Australia’s domestic economy falter.
In 11 out of the 14 years before the GFC, Australia’s gross national expenditure grew by more than 4%; in the 12 years since, it has happened just once – back in 2011-12.
No doubt in the election campaign we will hear about how the Coalition government has increased net debt from $156bn in 2012-13 to a forecast of $915bn in 2024-25.
But would we wish it otherwise?
That spending has prevented a long recession and has alleviated poverty at a time when, had the labour market been left to itself, the unemployment rate would have hit 14% rather than peaking at 7.4%:
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If you were still wondering if Keynes was right when it came to how governments should act during economic downturns, the Covid pandemic was the biggest economic mic drop.
But what about all that debt?
Here in Australia, government debt is expected to reach over 37% of GDP, and yet the interest repayments are expected to be a mere 0.7% of GDP – the same level they were in the Coalition government’s first year of office in 2013-14:
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Ahh yes, but wait till interest rates go up, I hear.
Except, well, they are not really going up all that much.
Given the recent surge in inflation, it’s not surprising that both here and in the US, government bond yields (ie interest rates) have risen since the pandemic nadir:
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And yet both are still around 2.0% for a 10-year loan – historically low and below long-term inflation targets.
The Treasury secretary is right to suggest that full employment is within our grasp. And yet without continued government support and investment, hopes for productivity gains that will lead to improved economic and wages growth will dissipate.
When in 2007 interest rates were rising, Kevin Rudd was right to suggest “this reckless spending must stop”. And the Morrison government certainly has shown a knack for reckless spending.
But stopping reckless spending does not mean stopping government stimulus, and it would be a sad thing if the economic debate in the election is stoked by fears about rising interest rates and about which party will have lower debt levels.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
