Tuesday, 24 April 2012

Gillard derailed yet again by poor judgement

Last week Julia Gillard was following a political script which was intended to culminate in a successful budget in early May.

First there was the statement about interest rates, and then the aged care announcement. A lot of work would have gone into both statements, but both issues were blown away by Saturday's allegations about Peter Slipper.

The truth is that the elevation of Peter Slipper to be Speaker was widely expected to be a problem for Julia Gillard.

She can't blame the Coalition; she knew when she anointed Slipper that the Coalition was trying to get him out of the Parliament altogether.

Julia Gillard makes so many bad decisions, it makes you wonder what she is thinking. Surely she must realise that hanging on to Peter Slipper and Craig Thomson is consigning her government to oblivion?

And it makes you wonder who is making the decisions. Are her gaffes the work of the real Julia or is she captive to the political judgement of her staff?

Obviously, the more serious the allegation, the more likely an MP or minister will have to stand down or resign. But the real rule in these situations is that if the furore over the alleged misdemeanour is doing damage to the government, then the alleged sinner has to go.

This issue is not going to go away. The ruse of standing aside will not last. It is unlikely the police will finalise their investigations before the budget. The public will soon work out that Slipper is now doing nothing for his continuing $275,000 salary.

There was also a lack of political savvy in the Prime Minister's speech last Thursday in Perth on interest rates. They undermined her position in one regard and opened the prospect of other trouble in the future.

The claim that interest rates could fall as a result of the forthcoming budget was just too smart by half. As many commentators observed, the claim made last week on the effect of fiscal policy on interest rates was an own goal because Gillard contradicted Labor's position in the stimulus debate in 2008 and since.

The second matter is more important. Although Gillard skated close to undermining the independence of the Reserve Bank of Australia (RBA), I would say for now she got away with it. It was very carefully worded and undoubtedly coordinated with the Treasurer and Treasury advisers.

The Treasurer has not given any suggestion or even a whiff that he would entertain any change to the McFarlane/Costello agreement that was established on the initiative of treasurer Peter Costello in 1996.

That is the right approach.

But the tone of the speech may encourage others to press the Government to think more about the role of the RBA. This could be difficult for the PM because the unions are pushing for change and they installed her in the first place.

The likes of Paul Howes of the Australian Workers Union and Garry Weaven would scrap the conventions and provisions that protect the independence of the RBA.

Weaven was formerly an ACTU apparatchik and obviously still thinks like one. Paul Howes is a young union boss with a high opinion of himself who plans to enter Federal Parliament and has already done a lot of damage to manufacturing by supporting the carbon tax.

Before further questioning the role of the RBA and its relationship with the Government, they should revisit the debates in the late '80s and early 1990s in Australia, NZ and elsewhere.

There is plenty of literature from both the right and left of politics that demonstrate the benefits of independence for central banks.

At this stage there is little reason for concern. But if the RBA does not lower rates and if the union movement pushes a populist line, then a desperate Gillard Government could do or say anything.

And some of its key supporters are interventionists and like to push their weight around.

Australia has had this debate in the past but we now have a bipartisan approach. Any tampering with the independence of the RBA would be a major blow to good economic management.

Under Gillard and Rudd, Australia has already gone backwards in workplace reform. Australia does not now want to go backwards on monetary policy as well.

The conduct of monetary policy between 1983 and 1991 was one of Labor's greatest failures under Keating, according to an independent analysis conducted by well known economist Dr Michael Porter and Mr Peter Hartley. Their comments are still relevant:

... the major explanation for the extremely high real interest rates was the variable and unpredictable nature of monetary policy. This, in turn, can be traced to two factors. One was the interventionist policies of the Treasurer. Mr Keating took pains to assure the financial community that he had his hands continuously on the 'economic policy levers'. Such intervention greatly raised the risk of investing in Australian assets, and raised interest rates relative to those in the rest of the world. The other was the official appearance of the Reserve Bank to a vague 'checklist' approach to monitoring policy ('Treasurer Keating's Legacy', Tasman Institute, July 1991)

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