EDITORIAL: by Peter WestmoreNews Weekly
The economy: John Howard's Achilles' heel
, August 18, 2007
Mr Howard faces the 2007 federal election with his economic reputation under serious challenge.Having campaigned for years on the basis of his economic credentials, John Howard faces the 2007 election with his economic reputation under serious challenge from rising interest rates, mortgage stress, job insecurity and fears of a downturn in economic activity.
Following massive losses in the high-risk US sub-prime mortgage-lending market, global stock-markets fell across the board, giving the Reserve Bank board reason for delaying what would otherwise have been an inevitable rate rise.
Despite the apparent health of the Australian economy, particularly in industries directly or indirectly connected to the mining boom, oil prices have been very high for months, and wintry weather has pushed up the price of fresh fruit and vegetables, putting severe pressure on family budgets across the country.
As the Reserve Bank board was considering an expected rate rise, the Housing Industry Association reported a decline in the construction index, due to a decline in house-building, exacerbating a serious shortage of housing accommodation which has helped push up house prices over recent years.Home affordability
Coincidentally, the Urban Development Institute of Australia (UDIA) reported a dramatic decline in house affordability across Australia over the last six years. "Australia's housing market is currently undersupplied by at least 20,000 homes and this could well continue until there is undersupply of approximately 120,000 homes," the UDIA's Grant Dennis said recently.
For John Howard, whose political longevity has been based on sound economic management, the signs are looking distinctly ominous.
Additionally, party polling suggests that despite strong support for the government on contentious issues such as its anti-terrorism laws and protecting Aboriginal children in the Northern Territory from sexual abuse, these are not crucial issues for most Australians.
The "Howard battlers" - often working-class people who usually vote Labor but switched to the Coalition because it offered a better future for them and their children - now believe that the Government has failed to deliver.
The Government points to both low levels of unemployment and low levels of the Consumer Price Index.
But the official figures for both are flawed. Official unemployment figures do not include many people who are out of the workforce, including the large number of people on disability benefits, people in education, and those in part-time work wanting full-time work.
In addition, low unemployment levels in the mining states disguise high unemployment levels, particularly among young people, in many rural and regional areas of the country.
For example, official figures show that for teenagers, the national unemployment rate is between 13 and 16 per cent.
In relation to inflation, people no longer believe that it reflects changes in household expenses. They know that the housing market is not included in the Consumer Price Index (CPI), nor are taxes (federal, state and local), and nor are interest rates. All these have a major effect on families.
While the CPI has changed little over recent years, there has been a massive inflation of asset prices (e.g., shares and house prices), which have dramatically widened the gap between rich and poor, contributing to the belief by many that they are not sharing in the benefits of an economic boom.
Mr Howard has tried to shift responsibility for rising inflation to the states. But most people understand that the main forces at work are international, the upward trend in interest rates across the Western world and rising fuel prices.
His problem is compounded by the fact that the economic boom in Australia over recent years has been largely driven by increased foreign debt.
In an era of historically low interest-rates, foreign lenders have been relatively complacent about debt levels; but interest rates are on the rise, and, as we have seen in the US recently, lenders will suddenly withdraw their money if they believe their money is no longer secure, or if they can obtain higher returns elsewhere.
In the first 80 years of the 20th-century, Australia's net foreign debt rose to about $23 billion. Between 1983 and 1996, it rose to $180 billion. Over the past 11 years, it has rocketed to over $520 billion. The alarm bells have been sounded by many people, including Dr Chris Richardson of Access Economics, Dr Peter Brain, and John Edwards, chief economist of HSBC.
To cut the risk, the Federal Government needs to address the growing debt mountain, by encouraging import substitution wherever possible by commencing a process of rebuilding Australia's primary and secondary industries.
A component of this is to build a large-scale biofuels industry - as Brazil has done - based on mandated ethanol in petrol, to reduce Australia's dependence on imported petroleum.
If this were done, it would send a clear signal that the Federal Government is committed to the future of Australia's agricultural and manufacturing industries.- Peter Westmore is national president of the National Civic Council.