We're past the half way mark. Week 4 is nearly over and the penultimate week beckons.
This week the economy takes centre stage; Labor launches its campaign in Perth, we look at the Treasurers' Debate and the PM's language on interest rate hikes.
It’s the economy, stupid!
James Carville, legendary Democratic Party strategist and political campaign advisor to Bill Clinton in 1992 coined the term, "It's the economy, stupid". At the time the US was experiencing a recession in the midst of a presidential election campaign and Carville knew that the state of the economy was really all that mattered to the voting public.
With the economy bursting onto centre stage - this phrase once again comes to mind. As soon as a 5.1% inflation number was released, the election was destined to become a referendum on who is best placed to manage increasing costs of living. Interestingly, polls give Labor a significant lead on that question.
Now that inerest rates have moved from 0.1% up to 0.35% and the major banks have started to pass the increase onto customers, it is worth considering the real impact of rate rises, as set out in the following table (credit: RateCity.com.au).
The table shows us is that the first two or three rate rises will be manageable for most. Assuming a consistent pattern of 25 basis point increases however, by the fourth rate increase we will hit 1.1%. On a $750,000 mortgage that’s around 400 extra per month. On a $1.5 million mortgage, it is close to $800 extra each month. It becomes pretty clear that when rates get to just over one per cent, that the cumulative impact will really begin to bite on some households.
As the rate hiking cycle continues, more households will start to defer consumption in order to afford their repayments – with an impact on the broader economy, particularly in relation to discretionary items.
Of course, if this kind of analysis is correct, then potentially the work of controlling inflation and getting it back into the RBA’s 2-3% target range may well be done with a comparatively modest number of rate rises, and fewer than the eight being predicted by some analysts.
The Labor Launch
The Labor Party’s campaign launch was held on Sunday in Perth.
The event went smoothly, with the notable absence of former Prime Minister Julia Gillard, who was invited but wasn’t able to attend due to international charity work commitments in London.
The centrepiece of the launch was a "Help to Buy" scheme for government to invest up to 40% of the equity for low and middle income home purchasers, earning up to $90,000 a year for individuals, and $120,000 for couples.
Home price caps vary across the states, with $950,000 in Sydney being the highest.
Labor’s Housing and Campaign spokesperson, Jason Clare made a reasonably complicated concept, reasonably straightforward. In response to detailed questions on the scheme, Labor has said that the alternative would simply be for people to perpetually rent.
The scheme is one of the boldest announcements from Labor to-date, though it is probably still fairto refer to the Labor campaign as running a small target strategy.
The Treasurers' Debate
Treasurer Josh Frydenberg and Shadow Treasurer Jim Chalmers went head-to-head in a televised debate on Wednesday at the National Press Club. Both were impressive and have an excellent grasp of their subject matter. The debate was respectful and well mannered, with each alternative Treasurer essentially sticking to their tested and approved debating lines.
These were:
Liberal
· These are difficult economic times.
· Labor will tax higher than the Coalition. That is what they do.
· We are the experienced team. You can trust us to get it right.
· Only the Coalition has a plan.
Labor
· Everything is going up except wages
· Cost of living will be managed by lowering the cost of child care, better funding aged care
· Wasteful spending of the Coalition has left us with a $1 trillion debt, with nothing to show for it.
· Only Labor has a plan.
Key moments
The most interesting moment of the debate was when Mr Chalmers responded to the Treasurer saying that Labor will tax more than the Coalition. Mr Chalmers’ response was:
The Treasurer has just lied to you.
In every way that you measure tax in the budget, this government has taxed more than the last Labor government – that’s just a fact.
They have taxed more in total, they have taxed more as a share of GDP, they have taxed more per person and they have taxed more adjusted for inflation. So that’s a lie and we need to call it out when we see it.
It was a startling moment in such a “gentlemanly” debate, and one which was probably also jarring to the Treasurer.
Meanwhile Mr Frydenberg said, when being attacked on the cash rate increase:
The main driver of inflation has been international factors. You had Moody’s come out yesterday and criticise the Labor Party for trying to politicise the cash rate increase.
The point here is it’s been the COVID pandemic and it’s been the war in Ukraine which have been the main drivers of the inflation.
Is the PM at risk of gaslighting the Australian people?
The Prime Minister has consistently sought to prosecute the case that the Coalition are better economic managers than Labor.
His argument has been that with high inflation, interest rates increasing, and geopolitical uncertainty, the Coalition is best placed to steward the Australian economy through these troubled times.
This argument may have some resonance with parts of the population. The question is whether these are people who will be voting for the Coalition in any case.
In a sign perhaps that it wasn’t resonating sufficiently, the Prime Minister has moved to a refined message that the economy is going so well and is in such good health that the RBA found it necessary to respond by increasing interest rates, and that the economy will be able to absorb and sustain this.
On an economic level, this is a justifiable and reasonable proposition. On a ‘human’ level, it is a risk.
In the 2007 election campaign, when then Prime Minister John Howard was required to respond to an increase in interest rates, he apologised to the Australian people, and sought to empathise. Mr Morrison has taken a different path, seeking to normalise the increase, saying that rates could not stay at emergency levels forever.
There are two problems here for the Prime Minister.
First, when Australian feel secure, they are often willing to consider the economy in an abstract sense with indicators like GDP growth, the unemployment rate and national debt being their metrics of choice. At present however, Australians do not feel secure. The economy is at an inflection point, and perhaps the pandemic continues to weigh on the minds of many. In these circumstances, more personal economic metrics are front of mind, like: percentage of income going to the mortgage, inflation, wage rises versus cost of living – and these are the political issues being pursued by Labor.
Second, property prices have risen very substantially in recent years. According to the ABS, the eight city weighted property price index rose 23.7% over the 12 months to December 2021. One million mortgage holders have never experienced an interest raterise. This means that a low interest rate number is not what matters, but rather how much any increase will hurt is the key issue – and a small rate increase on a large mortgage hurts more.
Telling the voter that the economy is going great will not help unless it is going great for them, on an individual level. The more the Prime Minister says the economy is going great, the more he runs the risk of being perceived as further and further out of touch.
Worse still, voters may feel like they are being gaslit.
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