Oh dear. When Nassim Khadim from The Age asked me to comment yesterdy on the electoral assertion being made by the Liberal Party–that rising State debt was putting upward pressure on interest rates–I responded that the assertion was:
“Total, total bullshit. It’s like saying that somebody dropped a pebble into the ocean and that caused a tsunami. And you can quote me on that.”
Well, I expected just to see the “pebble and tsunami” analogy turn up in the report. Instead, I saw the first two sentences of the above–and learnt the hard way that editorial standards at Australia’s major dailies are no longer as reserved as I took for granted:
States ‘not responsible’ for inflation: The Age, August 7 2007
I am sure I’ll wear more stick for the “bullshit” than I do for the analogy; but all I can blame for that is truth in reporting. So I had better back up my comments.
What was missing from the article–and clearly for reasons of space–were the reasons I gave for the comment.
They were that, as far as I can ascertain, the $70 billion in State debt that the Liberal Party advertising refers to are in fact forward debt commitments, largely for infrastructural spending, between now and 2011. There are many reasons why it is, yes, “total, total bullshit” to blame those debt commitments for inflationary pressures, and hence upward pressure on official interest rates.
Firstly, and most importantly, that $70 billion over 5 years pales into insignificance beside the $204 billion by which private debt expanded in the last twelve months. It is even less than the $97 billion by which mortgage debt alone expanded in the last year. On an annual basis, it is no more than personal debt–largely credit card debt–grew in the last year. That’s why I gave the pebble and tsunami analogy. If any form of debt is adding to inflationary pressures now, it is private debt–and specifically, household debt.
Secondly, most of that State  spending is earmarked for infrastructure, at a time when some of the commonest reasons given for inflationary pressures are bottlenecks on supply caused by inadequate infrastructure. There are good reasons to expect that, in the current economic climate, these planned debt-financed projects will reduce future inflationary pressures, not add to them.
Thirdly, most of these hypothetical debt do not yet exist. These are forward commitments–out to 2011, which is more than one Federal election away. They can’t be a factor in the current movements in economic variables of any description–and until the Liberal Party advertising campaign on this furphy began, I doubt that they would even have figured in the conversations at this morning’s RBA meeting, which will decide whether rates do or do not rise tomorrow.
Finally, and of great importance to whichever Party wins the next election, there are good reasons to expect that Federal debt will blowout in the future, and not to fund infrastructure, but to cope with an economic downturn caused by excessive private debt. Just as the “keeping interest rates low” electoral campaign of 2004 backfired very badly on the Liberal Party in this election, so could any claim to keeping government debt low in this election.
If a recession occurs during the next Federal term–and given what is happening in the USA right now, there are good odds on this “if”–then whichever party is in power will find its tax revenues diminish, and its expenditure on social security rise. It will go into deficit, and in the circumstances, this will be an entirely justifiable development: in a private-debt-driven downturn, government deficits enable the private sector to refinance. To try to maintain a surplus in such an environment would be economically irresponsible.
So though my comments may be interpreted in a partisan or Party-political way, they were not. I have been scrupulous to keep my personal political preferences out of my commentary, and I am available to discuss economic policy on the issue of private debt with any registered political party.
My interests are also in the much longer term than the simple issue of which Party will win the next election–and in that spirit, I would advise the Liberal Party that it would be unwise to continue with this campaign of blaming the States for the probable rise in official interest rates tomorrow. If one looks beyond this year’s election, then if the Liberal Party wins, and there is a recession, and the Federal Budget necessarily goes into deficit, then:
- It would be economically irresponsible to respond to that budget shift by further budget cutbacks, which would only exacerbate the downturn; and
- At the election after that, the ALP would have a perfect weapon to beat the Liberal Party over the head with–two failed promises in a row, one on interest rates 2004–2007, the other on deficits 2007–2010–and the Liberal Party would probably lose the 2010 election in the biggest electoral landslide in Australia’s political history.
So for the sake of Australia’s economic future, and yes, for the sake of the continued viability of the Liberal Party after the 2007 election should the Party actually win, I respectfully submit that this particular electoral campaign should be dropped. It is, truthfully, “total, total bullshit”.
