Opposition Leader Tony Abbott has given a guarantee he would keep interest rates lower than a Labor government in a move that could backfire on him as it did for former prime minister John Howard.

Mr Abbott on Sunday said Labor policies and the size of the government’s debt were pushing up living costs and putting upward pressure on interest rates.

But in comments reminiscent of a promise made by Mr Howard during the 2004 election campaign, Mr Abbott suggested a coalition government would be able to keep interest rates lower.

If the media in this country bothered to give even a cursory look at recent economic history they would find that interest rates have been lower under the Coalition than the ALP for the simple fact that the Coalition has in past avoided the worst aspects of fiscal debt so common with the ALP.

What part of economics 101 doesn’t the main stream media understand? Fiscal debt  in a growing economy = higher interest rates. It isn’t rocket science. Even Rudd at the height of his arrogance admitted that the ALP’s debt was going to impact interest rates. In other words, see them go north beyond what they would have otherwise done without the debt and spend agenda of the ALP.

Count this as the third great media lie about Abbott during this election campaign. The first being that Abbott only recently decided to not push through Work Choices Mk II and secondly that boat people arrivals isn’t the real problem Abbott is making it out to be.

Further analysis here. Despite Treasury’s best efforts over recent months to blame the budget mess on the Howard government, international analysis suggests that the structural deficit is all Rudd’s fault:

Treasury has now replied that “significant structural changes in the economy over the past quarter century” meant it would be inappropriate to stretch its methodology back to the 1970s. Instead, it presented structural balance estimates going back to 1971 from the Organisation for Economic Co-operation and Development and to the 1980s from the International Monetary Fund. As Costello points out, these OECD and IMF estimates suggest that the budget remained in structural surplus until the end of the former Coalition government. Treasury used to show him such numbers, he says.

“In fact, the only occasion in 40 years when a government managed to produce a structural surplus was between 1998 and 2007 — the 10 surplus budgets which I brought down,” Costello says of the OECD and IMF numbers.

A structural deficit/surplus is how the budget looks when the business cycle is taken out of the analysis. So if the economy was at peak output, would the budget still be in deficit? If it is then it is a structural deficit, meaning that spending is too high relative to tax rates and regulations. The budget would never go into surplus, only on the back of cyclical movements in the economy, like commodity prices, etc….

There is a negative relationship between initial government debt and subsequent per capita GDP growth. The fitted line (OLS) of a scatter plot of initial debt against subsequent growth over five-year periods shows a coefficient of initial debt of -0.025 (Figure 1). Taken at face value, this suggests that a 10 percentage point of GDP increase in initial debt is associated with a slowdown in per capita GDP growth of 0.25 percentage points. This magnitude is consistent with that obtained using econometric estimation (see below). Second, the average growth rate during periods of rising debt is lower than that during the periods of falling debt (Figure 2). 

The graphs are revealing, accessed through the link on page 63 of the report. They obliterate Rudd’s tax-spend-debt agenda.

A recent article in the WSJ by Allan Meltzer, professor of economics at Carnegie Mellon University makes much the same point:

Keynesians who think reducing public spending during a recession is a disastrous error should recall that they warned British Prime Minister Margaret Thatcher in 1981 that Britain would never recover if she continued with her tight fiscal and monetary policy during Britain’s deep recession. Mrs. Thatcher declined to take their advice. Expectations about Britain’s future changed for the better, and a long, productive recovery began soon after.

Greece’s government should take heart from her example. The new government in Britain might remember this as well. And so might the Keynesians in the Obama administration.

More historical background here. Peter Costello outlined in his book that he was given much the same warning when he took the Treasury reigns, and look what happened to the economy and budget.

GAS producer Santos has joined the revolt by big mining against the Rudd government’s resources super-profits tax, deferring for up to six months a decision on whether to build a $15 billion LNG export terminal in Gladstone.

…Mining giant Rio Tinto yesterday confirmed that it was reviewing all its Australian projects, including an $11bn Pilbara expansion plan, while it assessed the potential impact of the government’s resources super-profits tax.

I wonder how the state ALP governments are going to react? Will they join WA in the long list of dissatisfied parties? Rudd is essentially destroying the value of private property, Hugo Chavez style. Sinclair Davidson, professor in the School of Economics, Finance and Marketing at RMIT:

This week, however, the Rudd government moved into serious sovereign risk territory. The Henry Report defines sovereign risk as the risk that future government policy will reduce the value of investments. People are going to start noticing that property rights are under attack.

One of the more bemusing aspects of the Henry Review occurred when it acknowledged that changes in government policy create perceptions of sovereign risk but then claimed that the mining tax would lower that risk. That’s not what market participants seemed to think. It isn’t really appropriate that some Canberra bureaucrat lecture investors on the incidence of sovereign risk.

Well when you have a couple of confused individuals like Ken Henry and Heather Ridout running the review what do you expect? How about levying a super profit tax on the job-network sector that made Rudd’s wife so wealthy?

A more surprising bit of opposition comes from regulators in Canada and Australia. Those countries survived the bust better than most, in part because of tougher oversight of their financial sectors. Now, with the International Monetary Fund suggesting a globally coordinated bank tax, Canadian and Australian officials are saying that their banks shouldn’t be punished alongside American and European banks.

Ah, no. Banking regulation in Australia at least is far more liberal (not in the American sense of the word) than in the USA. Australian banks avoided the sub-prime crisis for two main reasons:

1. Then Treasurer Peter Costello made a gentleman’s agreement with the banks that they would not involve themselves in the sub-prime mortgage market. By contrast, US regulators and some law makers encouraged and at times forced banks to make sub-prime loans to customers of dubious credit history. There was no regulation stopping Australian banks from issuing sub-prime loans to customers. They just chose not to because if they lost money they knew there would be no government bail-out.

2. Australia and Canada do not have the socialised mortgage policies of the USA, which is the main cause of the financial crisis. The greed that resulted was merely a symptom of the problem, but not the cause.

I’ve previously linked to the following WSJ article about the differences between the Canadian and American mortgage markets. Here it is again:

Canada has no housing GSEs. Mortgage interest is not tax deductible. It does not have 30-year fixed rate, freely prepayable mortgage loans. Mortgage lending is more conservative and much more creditor-friendly….Canadian mortgage lenders have full recourse to the mortgage borrower’s other assets and income, in addition to having the house as collateral. This means there is little incentive for borrowers to “walk away” from their mortgage…..Most Canadian mortgage payments are made through automatic debit of the borrower’s checking account—a technical but important point….Canadian fixed-rate mortgages typically have prepayment penalties to protect the lender and the interest rate on the loan is fixed for only up to five years.

Same in Australia. Most US mortgage products are backed by two government business enterprises in Mae and Mac. Enterprises that are bleeding money and create a massive moral hazard problem for banks in managing risk. When borrowers and lenders do not have to take the full risk of the lending product upon themselves, then there is little incentive to scrutinise customers. Especially when the government demands loans be made to customers based on grounds that have nothing to do with their capacity to repay the loan – like race, etc… The issue is not about how much regulation, but the right sort of regulation. Something clearly lost of the NYT and their campaign to tax banks around the world. The NYT continues:

So if the United States and Europe decide a bank tax is in their best interests, they do not need to be dissuaded by Canada and Australia. No matter what, we can be confident that the world’s banks won’t all move to Toronto and Sydney.

The rest will just move to Japan and Hong Kong and escape the clutches of ill-considered banking regulation.

The Treasurer said the government had concerns about the IMF proposals because they were broader in scope than just dealing with the costs of a particular corporate failure. “They encompass a discussion about the impact of financial failures on the wider economy and how that should be dealt with,” he said.

Australia was among countries including Japan, Canada and Switzerland that raised objections to the IMF’s proposal for a bank tax at the G20 finance ministers meeting.

The US and much of Europe took a positive view. US Treasury Secretary Tim Geithner said the US would go ahead with a bank tax, subject to Senate approval, and he believed other countries would follow.

More like other failed countries will follow. Swan is even opposed to raising capital ratios in Australia. So Swan is hanging tough. I suppose he has other things on his mind, like the May budget. This from Canadian Finance Minister:

Mr. Flaherty said his Western counterparts could learn from Canada and Australia, which have sketched out plans to return to budget balance. And he warned the economic forecasts from certain developed economies incorporate “too much optimism,” in terms of projected growth and the health of their balance sheets.

So much for the economic benefits European unification was meant to bring.

Mining company executives, who have been expecting a new tax, told The Weekend Australian yesterday the federal resources rent tax on top of state royalties was the “worst-case scenario” and a “thermo-nuclear option” that could stop projects going ahead or limit expansion.

The federal resources tax is one of the main recommendations of the tax review conducted by Treasury secretary Ken Henry aimed at offsetting the rising cost of public health.

The review is believed to recommend the rate be set at 40 per cent of mining industry profits and replace state royalties, which vary around the country depending on the industry and project.

….Financial market analysts estimate it would cost BHP Billiton and Rio Tinto – the nation’s two biggest miners – $5bn.

It is the sort of ill-conceived hair-brain idea that socialist Ken Henry would propose and that Kevin Rudd in his distinctively un-analytical way would likely follow. It would be a total disaster for the free-market and Australian economy. It would lead to job losses, a loss of current and future investment across the country, the decline of the country’s standard of living and general wealth and would make more and more parts of the economy slaves to Rudd’s spend-debt-tax spiral of failure and future mediocrity, aka the UK.

….Some nations, including Canada, oppose any new bank taxes.

However no country has yet introduced taxes to pay for future bailouts – arguing that unless the rules were brought in on a coordinated basis, institutions would simply “cherry pick” where they operated, moving to jurisdictions with less tough financial regulation.

It is pretty simple then, just have a policy of no bail-outs therefore no tax needed. A preemptive tax policy could just about justify any tax increase imaginable.

Our own treasury has been dirtying their hands on the document. At least their named as a source. Ken Henry seems to have a strong appetite for tax increases.  No doubt Rudd will loyally follow.

UPDATE

Is this an allusion to Australia:

Canadian officials say they believe they have allies in their opposition to the bank tax. They said a number of G20 members, without naming them, would express little enthusiasm for the levy. These nations, they add, didn’t see their banks collapse, and politicians were not forced to bail out institutions with taxpayer money.

“The aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to the boiling point”, said the Swiss-based bank for central bankers — the oldest and most venerable of the world’s financial watchdogs. Drastic austerity measures will be needed to head off a compound interest spiral, if it is not already too late for some.

The risk is an “abrupt rise in government bond yields” as investors choke on a surfeit of public debt. “Bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,” said the study, entitled “The Future of Public Debt”,by the bank’s chief economist Stephen Cecchetti.

While the report does not discuss Australia, one can just picture the RBA board and their decisions on interest rates while reading the following BIS statement:

“The question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics — in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels — are already clearly on the horizon.”

Our heavy dependency on foreign capital, already high treasury yields, record unproductive spending across all levels of government and very high levels of household debt thanks to record immigration and housing supply problems care of ALP/Green governments, means that we are one of those countries that are highly susceptible to ‘unstable debt dynamics’.

Higher government spending = higher debt levels =  higher unproductive spending = higher inflation = increase risk for economy and therefore for government bonds = higher government bond yields = higher corporate bond yields for our banks, all of which = higher interest rates