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IAN KIRKWOOD: It’s time to toughen up

IT’S an April ritual. Every year, the federal treasurer steps up to the microphone and warns about the dire threat to the economy and the dramatic steps the government is going to have to take in the forthcoming budget to steer the ship of state back on course.
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And, more often than not, by the time we get to budget day, the bad bits have leaked to the national media – and were not so bad in the first place – and the general consensus on budget day is that the government has squibbed another opportunity to administer the strong medicine that many in the electorate would be ready to accept if short-term pain resulted in long-term gain.

It will be interesting to see if Treasurer Joe Hockey is made of sterner stuff than some of his predecessors.

For weeks now, Hockey has been banging the drum about the impending ‘‘end of the age of entitlement’’ – although the impact of that message has been softened somewhat by Senator Arthur Sinodinos and the limousines booked to the taxpayer by Australian Water Holdings.

But, like other treasurers before him, Hockey has been careful to scare as many of society’s sectors as possible, while steadfastly refusing to identify any measure at all as being in his budget, or out of it.

Given that Australia’s public and private sector finances remain heavily influenced by the workout from the global financial crisis, it stands to reason that our future prosperity, or lack of it, lies in the hands of a global monetary system that we, as a nation, have little influence over.

With interest rates at zero or close to it in many developed economies, the European Central Bank has confirmed it is thinking of joining its counterparts in the US and Britain by embarking on a program of ‘‘quantitative easing’’ – a process that some equate to printing money, in which the central banks buy billions of dollars a month worth of mortgages and bonds from governments and financial institutions.

It is theoretically supposed to stimulate a stagnant economy but five years after the peak of the GFC, there’s a case for arguing that its main impact has been to artificially bolster the world’s stockmarkets while doing little, if anything, for investment and employment in the ‘‘real’’ economy.

Sooner or later, interest rates have to return to more normal settings. In broad terms, the global response to the GFC is very similar to the path Japan took after its financial crisis in the late 1980s and 1990s.

Many economists accept that 20 years of low or negative interest rates in Japan have done little, if anything, to help that nation’s economic recovery and ‘‘the lost decade’’ – as the first 10years after the collapse in Japanese property prices was called – is now viewed as ‘‘the lost 20 years’’.

Yet, central banks around the world pursue similar policies.

I’ve often wondered why we don’t just put interest rates back to normal; that way savers would be encouraged to put money away, and people borrowing for houses might think twice before they bid a place through the roof. Obviously, it’s not that simple, but if people and businesses lack confidence, no amount of lowering the rates is going to convince people to borrow, especially when the GFC had its basis in unwise borrowing and lending.

Interestingly, the federal government appears to want to keep rates lower for longer, if the conflict last week between the treasurer’s office and the reserve bank, as reported in the Australian Financial Review on Tuesday, is any guide.

Across the ditch, the Reserve Bank of New Zealand has lifted its official cash rate twice since March, going in two 0.25percentage-point increases from 2.5per cent to 3per cent.

In August last year, the Australian cash rate fell from 2.75per cent to 2.5per cent, where it has remained ever since.

But an improvement in key economic indicators, including inflation, led the bank to recently indicate it had finished with a two-year cycle of rate cuts. A tough Hockey budget will set the scene for the next 12 months but, as reserve bank officials ‘‘hinted’’ to the Fin, the direction of the Australian dollar – one of the government’s biggest worries – is more likely to be influenced by the US Fed than anything Australia’s central bank could do.

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