Other economics
Will the Reserve Bank raise interest rates during the election campaign?
Next Wednesday, April 27, the ABS will publish the consumer price index for the March quarter. The following Tuesday, May 3, the Reserve Bank will hold its regular monthly meeting to decide short-term monetary settings, including the official interest rate.
Anyone who has been to a shop or a garage in the last three months knows that prices are rising. The CPI will confirm that impression, but because it covers only the January-March period, it will not pick up price rises that have occurred this month. Nevertheless its measure of underlying or core inflation will almost certainly be outside the bank’s comfort zone of two to three percent, and that should be the cue for a rise in official interest rates.
It’s apparent from the RBA minutes of their April 5 meeting that there has been a deal of disagreement among board members about inflation. Is this bout of price rises a temporary one to do with supply chains, the Ukraine war, and other one-off events, or it is a result of the government and the bank itself having over-stimulated the economy? If it’s only temporary, there may be a reason to hold off on raising interest rates.
It's notable that although the bank’s meeting was on April 5, they did not publish the minutes until April 19. It doesn’t take two weeks to write a set of minutes, unless there is substantial disagreement around the table.
Because of a convention of secrecy around RBA deliberations we don’t know what views different board members were expressing. Are these views about inflation as a transient phenomenon really a cover for the Bank avoiding any rise in interest rates just before an election? We get a strong hint that its next decision will be guided more by politics than by economic analysis in its concluding remarks, in which it summarises inflation evidence gathered so far (emphasis added):
Inflation had picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above 3 per cent. Wages growth had also picked up but, in aggregate terms, had been below rates likely to be consistent with inflation being sustainably at the target. These developments have brought forward the likely timing of the first increase in interest rates. Over coming months, important additional evidence will be available on both inflation and the evolution of labour costs.
Why over coming months? When they next meet they will have a surfeit of evidence from the ABS.
First home buyers – bipartisan bad policy
As soon as the Coalition promised to increase the cap on loans through the first-home-buyers’-loan-guarantee scheme, with a deposit of only 5 percent and without having to buy mortgage guarantee insurance, Labor promised to match the promise. The cap will now be at least $600 000, and higher in some regions – $900 000 in Sydney for example.
Affordable rural housing
One needs little economic insight to see the irresponsibility of this policy. It would be a demand-side injection into an over-heated housing market where in some urban regions prices have already peaked, where interest rates are set to rise sharply and where a significant proportion of recent entrants into the housing market are already on the verge of mortgage stress.
In a short session on the ABC’s PM Saul Eslake explains how such a move would push up the price of housing and actually worsen the problem of affordability.
The political appeal of this policy is that many people who own houses like to learn that the value of their houses is rising (don’t they realise that it’s just inflation?). On the same program Wendy Stone from Swinburne University confirms Eslake’s view, and calls for a national housing policy directed to affordable supply. (6 minutes)
The ABC’s Michael Janda explains the policy proposal in detail, relating the caps to median house prices in different regions. It has an immediate attraction for those seeking to buy their first house, but it carries significant risk of mortgage stress once interest rates rise.
Is this part of a Coalition scorched-earth political strategy? If it has little hope of winning the election, then it may as well leave behind some traps for the next government. That government will either have to go through with this policy, eventually taking some of the blame for a 2008-US-style housing crash, or to break an election promise. It is in the same class as the temporary cut in fuel excise, which will see prices reverting to normal levels on September 28.
Treasury’s PEFO: the Pre-election Economic and Fiscal Outlook – nothing much to see here
On Wednesday Treasury brought out the Pre-election Economic and Fiscal Outlook 2022. This document is required under the Charter of Budget Honesty. It is supposed to set out the economic and fiscal conditions against which people can evaluate competing parties’ election promises.
On a quick inspection of this 34-page document, it looks like a cut-and paste of the 2022 budget papers. In fact its major economic parameters (Table 2 on Page 5), are unchanged from the same table in the budget. (See the April 2 roundup). This is surprising in view of the IMF’s latest economic outlook forecasting higher inflation and lower growth, and in view of emerging Covid-19 problems in China. Also, while the budget documentation is laden with government spin and the most positive framing of economic data, the PEFO is supposed to be an apolitical document.
In an article in The Conversation, Steve Bartos has saved us the trouble of poring through the document: PEFO tells us Morrison has abandoned some secret promises, but his books are in order. He excuses the re-use of the budget’s economic assumptions. (Having been deputy secretary of Treasury Bartos would know that such an update would require a huge change in all the documentation.) He also finds hardly any change in fiscal figures since the budget, but in his PEFO analysis he comes across unjustified secrecy in the original budget documents. That secrecy seems to relates to intended spending that was never disclosed at the time, now having been spent on a range of programs in the pre-election period.
Michael Janda, writing on the ABC website, provides some detail of this spending: Treasury's PEFO reveals $700 million spending increase since March budget. True to Coalition form, it is largely about sporting facilities, local roads, and other boondoggles that have little to do with a federal government’s responsibilities.
Bartos defends the PEFO process, for it deprives an incoming government of the excuse that when they look at the books left by the outgoing government they find the cupboard is bare, giving them a chance to break their promises. (The 2013 PEFO, however, did not constrain Abbott from breaking almost all of his significant pre-election promises.)