Middle-income earners must be perplexed at the response of Treasurer Peter Costello to this week’s cut in interest rates. Mr Costello urged people to spend up for Christmas given they would be saving on mortgages and be getting a tax cut in the new year. Is this the same treasurer who has be bemoaning for several years now Australia’s low rate of saving?
Sensible Australians will not heed the Treasurer’s advice. They will not gear themselves into higher spending habits on such a fickle basis. Sensible people will use both amounts to pay the mortgage off a little faster to leave a bit of padding for the inevitable day when interest rates rise again and tax cuts are eroded by stealth. Moreover the parsimony of the banks has meant that the great majority of people will not see any money from the interest rate cut until well into January. So if they want to follow the Treasurer’s advice, they would have to use their credit cards. But the banks, again with typical parsimony, have not reduce the interest rates on credit cards, largely because, unlike the housing-loan market, their conduct has not been subjected to the stiff wind of vigorous local competition.
Those people who do not pay off their mortgages a little quicker will, if they are sensible, save their extra cash for durables and necessities rather than squander money on consumer junk at Christmas just to make retail sales figures good for the Treasurer.
The interest-rate cut is a good starting point to contemplate what should be the true aims of economic policy. It should be to increase the standard of living of Australians. But that should be in a reasonably equitable way. Moreover, standard of living should be measured in more than just monetary terms. Security of employment and housing, clean air and water, access to good health, education, recreation and other services, access to an equitable society that does not generate crime and racism, reasonable leisure time and so on are all part of the high standard of living that Australians aspire to.
Federal politicians rarely relate economic outcomes to other outcomes. Instead economic outcomes are related only to each other. We get a diet of levers and indicators relating interest rates, inflation, unemployment and foreign and government debt, each constraining the other.
The interest-rate cut was as much to do with the Reserve Bank’s perception of a sluggish economy as with a perception the Government intends to be fiscally restrained.
And of course that sluggishness is bound to continue if economic policy continues to concentrate on growth of the nation’s total material income as an end in itself. This is because people cannot have confidence in such a policy that has generated high unemployment, job insecurity and the fear that any day the Reserve Bank or the Treasurer can throw the levers one way or the other and cause even more uncertainty, threat of bankruptcy, or hardship through changes in interest rates. The last affects people both ways as the income of retirees often falls as interest rates fall.
To add to the climate of lack of credibility both the Labor Party and the Government have taken credit for this week’s fall in interest rates. The Government says its determination to be fiscally responsible, as evidenced by its Budget, has enabled to Reserve to be confident enough to lower interest rates by half a per cent without fearing an inflationary spurt. Labor says the fundamentals it had put in place are now showing through.
Neither party wants to claim responsibility for some of the other factors that might have informed the Reserve’s thinking: the stagnation in employment and general lack of confidence in the economy. Those factors, both sides argue, are the consequence of the other side’s policies.
With J-curves, and bacon not brought home by Labor followed by a call to spend and a message of confidence from a Treasurer who has preached saving and gloom for so long, why would anyone take the advice of a federal treasurer of any political complexion?
It’s piggy banks for Christmas.