Labor v Coalition: The real story on interest rates

Given the great number of Australians currently struggling under heavy mortgage burdens, the election campaign has done little justice to a group whose votes will be so important in determining the election outcome. You could be forgiven for thinking otherwise but the outlook for home loan interest rates is very similar no matter who wins government this weekend. Coalition or Labor, budget surpluses and broad economic management will be very similar.

The die is cast on inflation. The Reserve Bank’s latest quarterly monetary policy statement shows it sees a challenge on its hands to keep it in check. That means we can expect to see interest rates more likely to go up in early 2008 than stay at current levels. Another 0.25 per cent rise early next year is likely with a similar rise in mid-year also a possibility.

The Howard government has sought to scare the electorate into thinking that Labor can’t be trusted on the economy. It’s raised the spectre of the 17 per cent mortgage rates that prevailed in 1989 under the Hawke-Keating government to suggest Australians might expect an interest rate blow-out under a Rudd government. This is highly unlikely for reasons outlined below. Interest rates may well go up in 2008, but will do so regardless of who’s in power and won’t reach double figures.

By the same token, Labor’s protestations over the six interest rate rises we have seen over the last three years are somewhat hollow – it is likely they would have come to pass if Labor had been in power too, perhaps give or take one of the six rises. Labor may claim that they would have been less extravagant with tax-cuts and handouts in the last three years. But if that is the case it’s likely they would have spent most of the massive surpluses in other areas. The pressure on interest rates from the Federal Budget would have been more or less the same.

A look at the spending promises of the Coalition and Labor for the next three years suggests not much will change. Both have shown the temptation to make the most of the current budgetary windfall and spend up big, confining the surplus to around 1 per cent of GDP.

The true perspective lost in this election campaign is that ever since the early 90s recession, mainstream political parties around the Western world – no matter whether they lean to the right or the left – have converged in the area of economic management. Australia is no different. The one great lesson learned from the economically unstable decades of the 1970s and 1980s is that inflation must be contained. It is priority number one.

The last recession, for all its pain, gave the developed world the chance to wipe the slate clean and start afresh. To a large extent, governments and their central banks have been successful in containing inflation over the fifteen years since, no matter which side has been in power.

The 90s and the Noughties could scarcely be more different to the 70s and 80s. It is absurd – and an example of lowest common denominator politics – for our current leaders to be arguing over who had the highest interest rates in those decades, which bear little relevance to today. The debate has done no justice to today’s borrowers under financial pressure who deserve an honest appraisal of the economic alternatives offered by both parties. And these differences largely don’t stretch to interest rates.

It is almost heresy to some in the political arena to say, but Governments have less control over the economy and interest rates than ever before – a lot less than the parties would have us believe. The biggest and most welcome reform the last 15 years has brought us – Australia and most OECD countries alike – is the taking of monetary policy out of the hands of politicians and giving it to independent central bankers. Add in the wholesale deregulation of financial markets and the globalisation of he world economy and the result is we are hinged to the fortunes of our OECD partners like never before – and there is little our politicians can do about it.

Governments can still wreck economies if they’re irresponsible enough, but the stark inflation lesson makes this much less likely. It would be improbable that any government would be allowed by its central bank and Treasury department to embark on a course of profligate spending and massive Budget deficits we saw in past decades. There will be recessions and budget deficits again no doubt, but they are unlikely to be any one government’s doing.

Whoever you vote for on Saturday, bear this in mind and don’t be fooled by the interest rate hype our politicians would have us accept.