Guy Beres

With an interest rate cut all but announced for tomorrow, I have been bemused to observe the public debate on interest rates once again focus on a red herring. Treasurer Wayne Swan has taken the brave and perhaps politically unusual step of declining to demand that Australia’s banks pass on the hypothetical interest rate cut to consumers. Shadow Treasurer Julie Bishop has taken precisely the opposite tack, criticising the government for not demanding that the banks pass on the cuts:

Reserve Bank governor Glenn Stevens has reportedly told Prime Minister Kevin Rudd that squeezing the banks too hard could make it unprofitable for them to lend and push the Australian economy into recession.However, opposition treasury spokeswoman Julie Bishop said passing on the full RBA cut would help keep people in jobs and the Australian banking sector stay strong.

“One of the most important ways to keep our financial sector strong is to ensure that Australians keep their jobs so that they can pay off their mortgages … their bank loans,” she told reporters in Perth.”

And that is why if there is an interest rate cut tomorrow it should be passed on in full so that people can keep their jobs and keep paying off their financial obligations.”

This debate raises some interesting questions about what Commonwealth Treasurers should and shouldn’t do, or perhaps more interestingly, what they realistically have the influence to do. Should Wayne Swan really be getting on the blower, as Julie Bishop seems to be suggesting, to the chiefs of the big five tomorrow and demanding that they immediately pass on the hypothetical cut to consumers? Does Julie Bishop, a so-called economic rationalist, have so little faith in the market that she feels the Treasurer needs to instruct individual private organisations on how they run their business? Put simply, it is an absurdity.

There are three points worth making here in rebuttal to Bishop’s foolishly populist demands:

1) It is not the Commonwealth Treasurer’s role to attempt to run the business of Australia’s big five banks by demanding that certain monetary policy actions be taken;

2) The Treasurer’s views are probably the least of the concerns of Australia’s big five. They are businesses answering to their customers and shareholders, not the fiefdoms of the Treasurer. here Any views that Treasurer Swan attempted to impose upon them would almost certainly be ignored;

3) It is almost a certainty that one of the big five will elect (if not immediately, than in the relatively short-term) to cut rates and seek to make their offerings more attractive to consumers. When this happens, there is a pretty good likelihood that the others will follow suit in due course.

This is not a good start from Bishop. One wonders whether the Turnbull Opposition is going to suffer for not having someone who can reliably score the odd point (e.g. the Opposition Leader!) against Swan opposing him in the Shadow Treasury.

Even without delving into the details, you can get a reasonable feel for what sort of federal budget Labor has just delivered by considering the published reaction to it. The Federal Opposition has predictably “slammed” the budget, describing it as a “typical Labor high-taxing, high-spending budget, which targets people that it doesn’t like”. I wasn’t aware that budgets could “like” or “dislike” people, but I guess that’s just Doctor Nelson not letting his use of grammar get in the way of his spittle-flying (and self-serving) rage. This budget is not adventurous enough to give Nelson the fillip he needs. Bob Brown has declared that the Federal Government has failed the country on climate change with its budget, without really highlighting why this is so. He does inform us, however, that this budget confirms that Kevin Rudd is no “Robin Hood” and that rather he is actually a “Little John”. What this means precisely is not particularly clear. Perhaps Brown has determined that Rudd is a kindly, overweight bear.

Other commentators are divided, although on balance opinion seems to be positive. Scott Murdoch has described the budget as “laden with common sense”. Business groups are positive about the message of fiscal responsibility that the budget has sent, with the opinion of prominent economists seeming to tend towards begrudging approval. Notorious but generally reliable economics grump Ross Gittins is a bit more negative, rating the budget as merely “ok” and highlighting some areas where he feels the government should have done better. Peter Hartcher in the SMH is quite uncharacteristically critical, questioning whether the budget will really serve to fight inflation, and making this fairly strong accusation about Kevin Rudd’s leadership and his priorities:

Kevin Rudd seems to think the election campaign is still under way. He seems to have trouble realising that the campaign is over. He is now supposed to be governing.

Tonight’s budget set out to please many and to upset few.

Hartcher is being just a little unfair on that last point. I am sure that every former Federal Treasurer in living memory has sought to please many and upset few with their respective budgets; let’s not delude ourselves that this is not the nature of the game. If, in the current troubled economic climate, the government has managed to tick most of the important boxes from a fiscal management perspective and keep most people happy, it has probably achieved something quite worthwhile.

Indeed, from what I can gather from Swan’s speech [PDF], this budget has delivered pretty much everything that has been foreshadowed and promised, with no big surprises or as the Treasurer describes then, rabbits. As much as the media may have become accustomed to budget night rabbits, the character of the new administration and the prevailing economic conditions have served to end the budget night rabbit season bonanza entrenched by the Howard Government over the last decade.

Budget night may be drabber as a result, but the country is better for it.

One question we will perhaps never truly know the answer to is how much Federal Labor really believes that the tax cut package it took the last election is truly the right way forward in a policy sense. Most readers will likely recall that Labor more or less just “stole” the lion’s share of the Howard Government’s proposed tax cuts for their own package, reducing the cuts slightly for those on high incomes to claim the “economic conservatism” high ground, and proposing some actual reform of the tax brackets for the nebulous future. The rationale for Labor’s approach would seem (at least for cynics like me) to have been born out of three brutally pragmatic political principles:

1) Beat or at least draw level with Howard in a contest of tax cuts. Despite the inflationary risk, people over the last decade have shown a keen desire to vote with their hip pocket.

2) Win the economic conservatism high ground. The Coalition’s merciless pursuit of Labor over the interest rates experienced during the Keating years was intellectually dubious but incredibly effective, so this was a must.

3) Don’t stuff it up - minimise risk. Going into the campaign proper, the Opposition had a sizable lead in the polls. The danger with proposing to do something daring and bold from Opposition on tax was that the Coalition would take the opportunity to do even better, or else find a flaw with Labor’s proposals. It’s hard for the Coalition to attack Labor’s tax policy if it is 90% theirs as well.

Thus far the Prime Minister and Treasurer Wayne Swan have repeated ad nauseam in the media that the tax package that they took to the election was the tax package they were going to deliver. This ensures that the government does not suffer the inevitable backlash should they deliver something different to what was promised, and also provides a degree of political cover should inflation continue to escalate. Sure, Labor may well be delivering an inflationary package of tax cuts to the electorate, but the majority of the electorate voted for it, so the average punter has some piecemeal responsibility for the state of the economy.

George Megalogenis takes a different critical tack in today’s The Australian, having a go at Wayne Swan over the Treasurer’s fairly muddled attempts to explain away why Labor thinks that its promised tax cuts amount to tax reform. The point he makes is technically correct, although in truth I think this column is somewhat on the pointless side, coming as it does after the government has already committed to the electorate that it will deliver the particular package of tax cuts that have already been outlined. Make no mistake, I don’t think Wayne Swan, Lindsay Tanner or indeed Kevin Rudd truly believe that the tax package they are planning to deliver to the electorate in May really amounts to tax reform; but when it comes to reform in the short-term, they are stuck between a rock and hard place. Their commitment to the tax cuts laid out during the election campaign has been mercilessly re-iterated. The implications of backing down now are all too clear and would give an almighty free kick to the Federal Opposition.

In short, Federal Labor is politically bound to the package that it proposed during the election campaign, and I don’t think Megalogenis or anyone else should be particularly surprised that the likes of Swan and Rudd talk up the package in the media. For the short-term, Labor have promised window dressing. That is what they are now politically obliged to deliver, regardless of the innumerable structural reforms that will go begging in the interim.