Recession? The Treasurer’s pledge

The Treasurer, Wayne Swan, says he will do “everything in his power” to avoid a recession.

That pledge, made in a television interview yesterday, seems odd. The Australian economy is booming. And “help wanted” signs are out everywhere.

But inflationary pressures are also at a 16 year high. And a weekend newspaper report said the Reserve Bank wants to cut Australia’s growth rate from the 4 per cent level seen over recent years to something like 2.75 per cent.

And the bank has just one weapon at hand. That, of course, is interest rates.

There is no doubt that the bank is prepared to use it, even though it knows that the consequences fall unfairly.

Home buyers are hit hardest. But that’s only one third of the community. The rest either rent, or already own their homes outright.

Business suffers, too. Indeed, this is a dangerous time, as many have already discovered, to be running a business based on high levels of debt.

But the boom is strongly based, too. Not only are commodity prices at record levels. The government’s advice is that they are likely to rise even higher.

That, of course, will make the government’s job of curbing inflation even tougher. Australia already has a two speed economy, with the commodity States, Western Australia and Queensland, roaring. Things are not so strong, though, in New South Wales, Victoria or Tasmania.

This, too, complicates economic management. The powers that Canberra has, to complement the Reserve Bank’s attack on inflation, are all national in character. There is little a Federal government can do to promote growth, say, in South Australia, while curbing it in Western Australia and Queensland.

There are some tough times ahead.