Tighter times ahead

Federal spending is to be slashed and interest rates will rise.

That’s the tough prospect Australia faces, as the government and the Reserve Bank work together to curb inflation.

The Prime Minister Kevin Rudd plans to explain his strategy to business leaders in Perth today.

He is aiming for a surplus of some $18 billion, even though he will still proceed with the staged, $31 billion of tax cuts that he promised before last year’s election.

That can only mean one thing, in the present circumstances. That is big spending cuts.

There is plenty of room for that. Despite its small government rhetoric, the Howard government was both a big taxer and a big spender. The slices of GDP it took in taxes – and then spent – made even the Whitlam government look pale, by comparison.

Rudd’s cuts are likely to trim the Federal public service, in particular. The Department of Foreign Affairs and Trade may well be a particular target.

It will, however, fight back. The government is keen to increase Australia’s exports to both India and China. It will need its own people on the ground, in both places, to do that.

Meanwhile, the Reserve Bank Governor, Glenn Stevens, has signalled as clearly as he can that further interest rate rises are needed, possibly as soon as February 5, when the bank’s board next meets.

He did that on Friday. London time, in address to expatriate Australian business leaders.

Mr Stevens said he did not like the pattern of price rises, that is now appearing in Australia.

“Prices for foodstuffs, energy and raw materials and for industrial processes are quite high,” he said.

“The synchronised nature of the increases has been quite marked, as well, in a fashion eerily reminiscent of the early 1970s.”

Hints don’t come much clearer than that.

Mr Stevens let all who are interested know, in the most forceful way possible, that the Reserve Bank now has its eyes firmly fixed on inflationary pressures in Australia.

And it is not content to stand idly by, hoping that a slowdown in America will kill inflation in this country.

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