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Nothing new under the sun

By Graham Young - posted Friday, 15 September 2000


True, domestic economic activity is strong, bloated by Olympic and infrastructure expenditure, and the low Aussie dollar, but the capacity restraints are lower than they were in the 70s so this is less of a risk.

While the high price of oil is on one hand inflationary, on the other it is potentially deflationary. It is a question as to how its increase in price is handled. Central Banks exert power through the monetary system, but money is just a commodity with some unique features. The reason that it is potent in terms of managing the economy is that it is involved in almost all transactions, but then, so is fuel. Probably more so, because the increase in the price of a commodity such as money affects large borrowers, like business and new home-buyers, more than any other category, while practically everyone is touched by the price of oil. The increase in the price of an input like oil will be just as effective as the increase in the price of another input like money if all other things are able to be kept the same. An open economy ensures that most other things can be kept the same.

However, oil has a further advantage over money – it has in-built fiscal stabilisers that will slow the economy without the need of interest rates, actually allowing rates to drop. As the price of Australian petrol is almost 50% tax, any increase has a bearing on fiscal policy. Higher oil equals higher taxes, equals higher national savings, as long as the government does not cave in to demands to spend it. That is not to argue that tight monetary policy is the solution to this problem, just that it actually delivers the Reserve a fiscal tool that it can use.

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If the government does not win that argument, it will face an election in twelve months time with high interest rates, a plunging stockmarket and employment growth heading in the wrong direction. This is bad news for a government that will be relying on its record as a good economic manager more than anything else for its re-election.

If the Opposition does not take a responsible course on the issue, it risks being in government in 12 months time with no credible basis for dealing with a problem that may still be around.

No wonder John Howard has been talking about retiring. He has been in politics long enough to have seen most of it before. In this instance that should give him an edge.

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About the Author

Graham Young is chief editor and the publisher of On Line Opinion. He is executive director of the Australian Institute for Progress, an Australian think tank based in Brisbane, and the publisher of On Line Opinion.

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