By guest contributor Ken Atchison, consultant, Atchison Consultants
A national day of mourning for the death of Queen Elizabeth has been declared by the Australian Prime Minister after consultation with the Australian state premiers. Mourning for the death of the Australian head of state is most appropriate. However, the cost of the public holiday has been initially estimated by economist Stephen Koukoulas to be in the order of $1.5 billion.
There will also be a loss to government coffers in terms of taxation revenue foregone. The loss may be small given the size of federal and state budgets but lower tax collections will mean government debt will be higher all other things being equal.
After some years of massive economic stimulus through government spending and minimal interest rates, it seems that sound financial management is still not on the agenda of Australian governments. An appropriate form of mourning surely could be determined without adding further to the debt burden on future generations.
The RBA’s cash rate target rate is currently 2.35%. Increasing the debt burden increases the likelihood that the cash rate will approach a level near the current inflation rate of 6.1%. Even so, this would still have investors behind the curve in real terms with inflation projected to peak at 7.75%. This is a sobering thought given the RBA’s policy target is for an inflation rate of between 2% and 3%.
The Federal Government’s actions reinforces the view that the RBA now has sole responsibility for slowing the Australian economy before persistent inflation takes hold. Last week, RBA Governor Lowe stated that the parliament must consider tax increases, cuts in expenditure and structural reform.
However, his call for greater fiscal discipline will likely fall on deaf ears. In the absence of tighter fiscal policies at the federal and state level, interest rates will have to increase significantly more than what they would have had governments returned to a more disciplined approach to taxpayers’ money.
The economic ramifications of higher interest rates inevitably will become apparent through a rapidly slowing economy and falling asset prices. Only then will governments finally become more fiscally responsible.