About interest rates

Fumbling the economy - Opinion - theage.com.au

Tim Colebatch writes about how the Howard government policies affect inflation and interest rates. It's interesting reading, but I remain sceptical about 2 points:

1. As per the Labor line, Colebatch argues that skills shortages lead to increased wages, which lead to inflation and higher interest rates. Howard is blamed for dismantling "Working Australia", which (in theory) would have skilled people up for the boom that was to come.

My scepticism is about just how big a factor this can really be. My intuition is that, in the big scheme of things, increased wages for tradesmen and other skilled workers is not likely to be that important.

2. Colebatch writes:

...instead of using budget policy to ease pressure on interest rates, as in the past, Howard has increased the pressure by shovelling money into voters' pockets while the Reserve tries to slow their spending. On Treasury projections, personal income tax will shrink from 12.1 per cent of GDP in 2004-05 to just 10.3 per cent in 2008-09 — adding $20 billion a year to consumers' spending power.

In past booms, monetary and fiscal policy have worked together. More jobs and higher wages increased tax revenues, reducing the need for rate rises to slow the economy. Now the Government has dropped its end so it can deliver big tax cuts.

But how legitimate is it to keep surpluses high as a means of controlling interest rates? Sounds a bit odd to me.

Colebatch does also list the ways that Howard can either claim credit for helping rates stay under control, or simply say that certain matters are not really within its control.

It's worth reading, despite my scepticism about some of his points.