AS FINANCIAL markets plunge and bound, the State Government’s continuing belief in the importance of its triple-A credit rating seems touchingly naive. The collateralised debt obligations which have levelled Wall Street titans and City of London behemoths were similarly rated triple A. That is not to say, of course, that all credit ratings are nonsense, or that a triple-A rating is not desirable – just that we should keep it in perspective.
Instead, the Premier is clinging to it like a drowning man to a piece of wreckage. He has spoken to ratings agencies. He knows what must be done to keep NSW AAA. Now he is softening the public up for deep cuts in infrastructure spending. NSW voters are accustomed to this Government announcing a railway here or a bridge there, then unannouncing them months later, when the need for excitement has passed; come the November mini-budget, though, the letdown is going to be comprehensive and statewide. Everything’s gotta go – except, of course, those three big As.
The likelihood of a recession because of the market turmoil makes this look an odd strategy: recessions are when governments usually stimulate the economy by borrowing and spending. It is even odder in a state where population growth is likely to overshoot estimates by nearly a million by 2031. Mr Rees’s single-minded parsimony seems to be a product of Treasury advice – which has elevated preserving the triple-A credit rating above all other goals – even, it seems, investment in the state’s future. Investment in economic infrastructure at any time is not wasteful or irresponsible. If Mr Rees invested in the state’s economy, he would be ensuring a good credit rating for decades to come.
Treasury’s tunnel vision on this point shows the balkanisation of the NSW public service at its destructive worst. Administration is not about improving the state, but about public service fiefdoms winning battles with their rivals. The Roads and Traffic Authority has it in for RailCorp and CityRail; the antipathy is mutual; and both take a dim view of Sydney Ferries.
Treasury says no to everyone. That is why there is no co-ordinated transport strategy, and why there could never be an integrated ticketing system. You can’t devise such things in an all-in brawl. It’s time to break this shiny, golden intellectual shackle, stop the infighting and work together to give this state a future. Don’t bank on the Government
AUSTRALIANS expect the Federal Government to be on their side when it comes to restraining interest rates. However, the Prime Minister, Kevin Rudd, and the Treasurer, Wayne Swan, sound as though they are backing the banks. Certainly, the pair are busy damping down expectations that banks will pass on next week’s expected cut in the Reserve Bank’s cash rate. Here’s Mr Swan’s idea of talking tough: "If the banks think they don’t have to necessarily pass on that official rate cut, they’ll want to put forward a very good case." No wonder the Opposition Leader, Malcolm Turnbull, accuses the Treasurer of running up the white flag.
Why is the Government so accommodating? After all, Mr Rudd has lately been trumpeting the strength of our financial institutions. "Our major banks are in good order, their balance sheets are strong and they’re well regulated." And, the Prime Minister might have added, they’re very profitable, too. That being so, Mr Rudd and Mr Swan should be putting maximum public pressure on them to do the right thing by borrowers.
That’s not to deny that banks face higher borrowing costs, especially on money from overseas. But the impact will vary from bank to bank, depending on the size of their domestic deposit base, and how much they borrow offshore, for how long and at what price. The Government should be encouraging the strongest to set the most competitive rates. Long-term home loan customers are entitled to expect some protection from buffeting by short-term fluctuations.
Home lending is dominated by Australia’s major banks. Lately the big four have been increasing their share of that market as smaller lenders have found they can no longer compete for funds. That trend can only only encourage the natural inclination of banks to pass on the pain of interest rate rises to borrowers, and keep the benefits for shareholders. This cosy oligopoly hardly needs further encouragement from Mr Rudd and Mr Swan.
It certainly looks like the banks have been working behind the scenes to soften up the Government and its advisers. They did not want a repeat of Mr Swan’s insistence last month that banks pass on the rate cut in full. It appears the banks have let the Prime Minister and the Treasurer know that such tough talk this time round could leave them looking ineffective. If that was the warning, it has certainly worked.