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Rate cut as opposition wriggles away from surplus timetable

The interest rate drop of 25 basis points to 2.5% - a new half century record low – will be a relief to mortgage holders focused on cost of living, an issue biting in this election. It’s positive news…

Joe Hockey says the interest rate drop reflects poor management of the economy. AAP/Julian Smith

The interest rate drop of 25 basis points to 2.5% - a new half century record low – will be a relief to mortgage holders focused on cost of living, an issue biting in this election.

It’s positive news for the government – in contrast to the last time rates were altered in a campaign. A rise in the 2007 campaign was a blow to a government heading for defeat.

But whether, or how much, the fall will actually help Labor is debatable. It may ease some voters' concerns about their finances, but will it make them feel warmer towards the government?

The Reserve Bank, like last week’s economic statement, pointed to growth being “a bit below trend”, which was expected to continue in the post mining boom period.

Treasurer Chris Bowen wrapped the lower rate around Labor. “The fact is that, under Labor, interest rates are at record lows,” pointing out that a family with a $300,000 mortgage would be paying $500 less a month than when the Coalition was last in office.

The interest rate fall has been slippery ground for the opposition.

In the run up to the Reserve’s decision, its message was that a rate drop would just show what a bad state the economy is in. Shadow treasurer Joe Hockey said on Monday: “The fact of the matter is, we should not be in a position where interest rates are being cut because the economy should be growing faster.”

RBA rate cuts in 2013

Hockey often doesn’t anticipate the political effect of his words. Clearly this line could easily be turned into an assertion that the opposition didn’t want rates to fall, and Kevin Rudd was, as he might say himself, in like Flynn. “That is a kick in the stomach to Australian families,” he said.

Before the rates decision was announced, Abbott today was out trying to balance the opposition’s lines. “There is no doubt that a reduction in interest rates is a good thing”, he said, “but you have to ask yourself why are interest rates likely to be cut”.

The old, once very effective Liberal mantra – that interest rates would be always lower under the Coalition than under Labor – is now not only not true, but has become awkward.

When Abbott was asked whether he would have interest rates lower than Labor, he replied: “We won’t chloroform the economy. … What I say is that the economy will always be stronger under a Coalition government”.

John Howard, who pushed the “always lower” line in 2004, said today it was all a matter of “context” – the current low rate was not because economic management had been good.

If the economy did become stronger, interest rates would obviously rise although Hockey, asked to promise that rates would always be lower under the Coalition than under Labor, told his news conference this afternoon that “on average, over the political cycle, that is the truth”.

On another economic front, the Coalition has made the provocative decision that it will not release before the election a time for returning to surplus. It is using the argument that, after Treasury’s revisions between the May budget and last week’s economic statement, it won’t be able to trust the final fiscal figures that will come out in a few days under the Charter of Budget Honesty. These are expected to be in line with those in last week’s economic statement.

Hockey told Guardian Australia that last week’s figures in the economic statement were not credible. “These numbers just look stupid so we won’t be adding up our our policies. It would simply produce a meaningless document if we were to do that”.

Abbott again had to get out the fire hose: “What we will be doing in the campaign is fully funding and fully costing all of our commitments. … The budget bottom line will be better under the Coalition than under the Labor Party.

“You will be able to see, do the arithmetic and you will be able to see that the budget bottom line will be better under the Coalition than under Labor.”

Bowen countered: “How can the opposition claim that they’ll be returning the budget to surplus if they refuse to tell the Australian people what they think the impact of their policies are on these surpluses and deficits over the next few years?”

Hockey said this afternoon that the Coalition would publish the total cost over four years of its promises and the ways it would pay for them. “But we are not going to make the mistake Labor made and make rash forecasts about what a surplus or a deficit will be in the out years because the starting point is unbelievable”, he said, declaring there should be more “realistic assumptions” in the official numbers released in the campaign.

Its decision opens the opposition to much criticism. That Treasury/Finance fiscal figures are coming ten days into the campaign is the result of a Howard government (very good) initiative. Yet the opposition is now cynically spurning that.

But that cynicism will also leave the Coalition with more flexibility if it becomes the government. As Labor knows, and Hockey recognises, precise timetables for returning to surplus can become nightmares.

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25 Comments sorted by

  1. Gordon Comisari

    Resort Manager

    Comment to be erased by moderator if posted!

  2. Guy Curtis

    Senior Lecturer at School of Psychology and Exercise Science, Murdoch University

    Today has seen the most spectacular contortion work in history from Abbott and Hockey. Apparently low interest rates are a sign of good economic management under a coalition Government and a sign of bad economic management under a Labor government, they are both desirable and undesirable, and a result of both surpluses and deficits.

  3. Dao Nguyen

    logged in via Facebook

    I am confused! Interest rate is an economic instrument or an economic indicator or a tool for the politicians!
    If it is an economic instrument that can help money flow faster for the sake of economic growth, then please the polies stop all the nonsenses about lowering interest rate implies economic weakness caused by bad economic management. Please stop the blame game and get on with finding asound measures for economic progress!

  4. James Hill

    Industrial Designer

    This and other interest drops can be construed as an unavoidable response to the massive private debt accumulated during the Howard years.
    Labor and the Reserve bank understand the argument, that lower interest rates are necessary to relieve the Howard era private debt burden, and counteract its deleterious effects on the rest of the economy.
    There can be no going back, but Abbott and Hockey prefer that the public not understand this, in which desire they are aided an abetted by too many in the media, for whom the argument is incomprehensible, and this on account of their lack of basic numeracy (of which they are inordinately proud), and fear and loathing of those who can count as well as write.
    So Abbott and Hockey hold out the prospects of a return to a "Golden Era" of conservative, superior economic management, when it is clearly only a myth of the conservative faithful.
    Is this how to run an economy?
    On blind economic faith?

    1. Osk Archer


      In reply to Peter Ormonde

      When you need *Tony Abbott* to "get out the fire hose" and smooth things over after you open your mouth about your own portfolio, there's no hope for you.

  5. Greg Young

    Program Director

    As always with these announcements on interest rate movements, we only ever hear from mortgage-holders. Apparently savers, many of whom who rely on higher interest rates to fund their retirement, aren't worth even a mention.

    As with most macro-economic changes, there are both losers and winners when each shift occurs. For some reason, our political coverage seems incapable of capturing that.

    1. James Hill

      Industrial Designer

      In reply to Greg Young

      Certainly, there are people who use interest on their savings to fund their retirement income.
      But sympathy for their plight is restricted by the knowledge that for those years that they have left to live they could just as easily "consume" their savings.
      If enough of them did so then the reduction in money available for loan would jack up interest rates.
      So who among this section of the community blighted by low interest rates will begin the great sacrifice to "consume" their own savings, and so lift interest rates for everyone else.
      The solution is in their own hands but it is always the government that has to do the work.
      So a sudden halt to all government spending and borrowing by a conservative government, thereby creating a shortage of money in the economy, will restore those high interest rates and those living off them will be able to pass on their wealth instead of consuming it in their declining years.
      Is that what you are on about, Greg?

    2. Greg Young

      Program Director

      In reply to James Hill

      No, merely pointing out that there are two ides to the story, and only one ever gets reported.

  6. Lee Emmett

    Guest House Manager

    'The Reserve Bank, like last week’s economic statement, pointed to growth being “a bit below trend”, which was expected to continue in the post mining boom period.'

    So what's the difference in the responses from Labor and LNP?

    Labor, with the aid of Treasury, revised its economic statement. This is a realistic action, even if the figures
    seem rather unpalatable.

    Joe Hockey, on the other hand, responds with wishful thinking (“The fact of the matter is, we should not be in a position where…

    Read more
    1. Greg North

      Retired Engineer

      In reply to Lee Emmett

      " So what's the difference in the responses from Labor and LNP? "
      You could in brief say Labor accept the situation whereas Jo Hockey has indicated he would rather the country be doing better.
      That's difficult when the government has engineered for all Australians a massive debt burden and yet just keeps on borrowing for more nebulous spending.

    2. Henry Verberne

      Once in the fossil fuel industry but now free to speak up

      In reply to Greg North

      There is no massive debt burden Greg. You keep repeating this nonsense when it is has been refuted by others more qualified to comment on this aspect of economics.

    3. Greg Young

      Program Director

      In reply to Greg North

      "Massive debt burden" = out-and-out lie. Tired of repeatedly posting the proof of this.

    4. Greg Young

      Program Director

      In reply to Lee Emmett

      "Joe Hockey knows that it's untrue that interest rates will always be lower under the LNP, so modifies this to “on average, over the political cycle, that is the truth”. "

      I wonder how any honest political party can promise this, given that the RBA sets interest rates and are enitrely independent of government influence. The only way Joe could guarantee delivering on this is to do away with RBA independence; he'll never try that, so this is just a complete lie.

  7. Greg North

    Retired Engineer

    Howard is correct about considering the context of interest rate moves and Hockey has commented on the situation around about 2004 when the economy was growing at about 4% and unemployment was just on 5%, inflation in check and what you would call balanced conditions with minimal national borrowing and a balanced budget so the interest rate was also kept down.
    Comparing that to what we have now with an obviously slowing economy, and both unemployment and debt growing, there is what one would expect…

    Read more
    1. Phil Dolan


      In reply to Greg North

      Which is why the Reserve Bank cut interest rates. It's a bit silly to dress it in any other way. Hockey is stumbling.

    2. Peter Ormonde
      Peter Ormonde is a Friend of The Conversation.


      In reply to Phil Dolan

      Stumbling? Too kind.

      Swinging wildly like a bar-room brawler more-like.

      Oooh Andrew Robb's on ... he's been even better on fine matters of technique and economic approach .... it's like that game where you have little moles sticking their heads up out of holes and you whack 'em with a hammer. Facile but fun.

    3. Greg North

      Retired Engineer

      In reply to Phil Dolan

      He is hardly stumbling Phil when you look at the truth of the matter and that is as you say why the Reserve Bank has cut interest rates and even sees another possibly looming - the economy is not exactly booming.
      For Rudd to claim this is an insult blah blah because it'll ease cost of living is just clouding the issue and he attempting to make mileage on it for aside from mortgage holders who does it really ease the cost of living for?

    4. James Hill

      Industrial Designer

      In reply to Greg North

      Ehh? small business people surviving on six month overdrafts and hoping for an economic upturn, might be happy to be paying less interest?
      "Who does it really ease the cost of living for?"
      Everyone paying off debt?

    5. Greg North

      Retired Engineer

      In reply to James Hill

      Rudd was the one who raised the cost of living pressures re home buyers and agreed there are many people with debts though business loans will not necessarily see a reduction in their loan interest rates nor those people locked into a fixed rate.
      Your small business people would I suspect much rather have the economy bubbling along to improve their turnovers and profitability so as to be less reliant on any form of financing.

    6. James Hill

      Industrial Designer

      In reply to Greg North

      Your small business people would like to have some of the interest payments on the $1.75 trillion of private debt.
      Give us an annual number for that, Greg.
      I dare you to do the calculations.
      Thank you Mr Howard.
      Who gave us an economy bubbling along on massive new debt, with delirious and euphoric voters reeling into the ballot boxes to keep the delusion of wealth, wealth wealth "going on for ever", and now interest rates have to be low to stop it all collapsing.
      But do ahead and vote for the inevitable Abbott Recession, the other side of the Howard era debt orgy coin.