Surplus Will Not Keep Lid On Rates

Sydney Morning Herald
22 January 2008
Jessica Irvine and Jacob Saulwick

KEVIN RUDD'S new target for the budget surplus is unlikely to stop the Reserve Bank raising interest rates next month should inflation figures due tomorrow show a rise is needed.

Speaking in London on Friday, the governor of the Reserve Bank, Glenn Stevens, said budget policy had had less effect on the bank's decisions over the past decade than was often imagined.

"It's not that we ignore it, but it's one of the factors. It's one among many, and it really shouldn't be given, I don't think, from a monetary policy perspective, more prominence than that."

Mr Stevens said spending should be judged on its merits and the quality of government programs being delivered.

"Fiscal policy is very important, but it should mainly be judged on the quality of the measures and on the long-run fiscal sustainability of the government's position which, of course, in Australia is extremely strong, and has been for some time."

The chief economist at ANZ Bank, Saul Eslake, said the spending cuts would not change the Reserve Bank's mind when it met next month, but could take some pressure off interest rates in the next two years.

But Mr Eslake said there was little else the Government could do to take immediate pressure off inflation. "They could renege on their promise to deliver $31 billion in tax cuts, but it would be politically naive and unrealistic to expect them to do that, and I'm neither of those things."

The federal Treasurer, Wayne Swan, committed himself to delivering the tax cuts in full, arguing they were "not necessarily inflationary" because they would encourage 65,000 more people to work.

The Opposition spokesman for the Treasury, Malcolm Turnbull, accused Mr Rudd of being "all spin and no substance" because the budget surplus was likely to rise to $18 billion simply because of the strong economy. "These Treasury forecasts are always on the low side ... they invariably get beaten on the up side in the budget."

A director at the economic forecaster Access Economics, Chris Richardson, agreed an increase of $5 billion in the budget surplus could be achieved "without lifting a finger" because of the stimulus to company profits from China.

Macquarie Bank's interest rate strategist, Rory Robertson, said the effect of the larger budget surplus would be minor. "It is better described as housekeeping than anything meaningful ... If you were talking about a dramatic cut in spending - and I'm not advocating that - then the Reserve Bank would be more impressed."

What economists say on Rudd and the Reserve

"It isn't going to change the Reserve Bank's view either way." RORY ROBERTSON, Macquarie Bank interest rate strategist

"They could renege on their promise to deliver $31 billion in tax cuts but it would be politically naive and unrealistic to expect them to do that and I'm neither of those things." SAUL ESLAKE, ANZ Bank chief economist

"While our economy is in good shape, to raise interest rates and cut spending when the US economy is slowing does lead to a risk of being heavy-handed, and that could drive our economy lower." CRAIG JAMES, Commonwealth Securities chief economist

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