Wayne Cole

SYDNEY, Reuters – Australia’s elections on Saturday will determine which party is in power. The economic landscape of Australia has many potholes, including runaway inflation, rising interest rates and ballooning debt, as well as an unstable housing market.

Although a large portion of this situation is out of the government’s control, those who win will continue to be pressured to address the cost-of living crisis and stimulate inflation.

They’ll also be responsible if rates are raised so quickly that the economy is in recession.

The centre-left Labor party seems set to overthrow the Liberal National government’s nine-year-old reign at May 21, although there is always the possibility of a hung parliament.

Labor pledges to address the rise in living costs by supporting wages growth that is commensurate with their income. This pressure has been placed on Scott Morrison, Prime Minister. He could not promise that wages will increase until unemployment falls.

The official data on wage growth showed a 2.4% annual increase, which is less than the 5.1% rate of inflation.

Labor claimed ordinary Australians were falling behind in real wages and this while the Reserve Bank of Australia was increasing borrowing costs.

At its May 3rd policy meeting, RBA reaffirmed its resolve to fight inflation. This was the first increase in interest rates for 11 years. It also marks a rare move during an election cycle.

According to financial markets, it is likely to increase rates each month over the course of the year. This will take the rate from the currently lowly 0.35% up to the high-end 2.75% by Christmas.

It would likely be one the most severe tightening programs in modern history. This would also create a huge burden for homeowners who have a record A$2 Trillion ($1.4 Trillion in mortgage debt).

The average monthly payment would be more than A$700. This is at a moment when inflation has already reached an unprecedented 5.1% over the past two decades, and will likely rise to 6.1% by year’s end.

MORE DEBT

National mood is bleak just because of the potential rate hikes. This month’s Westpac survey showed that sentiment was at its lowest since August 2020, when Melbourne was being locked down by the coronavirus pandemic.

Gareth Aird is chief economist for the largest national mortgage lender CBA. “The Australian household sector has the highest level of debt in the world so they are more susceptible to interest rate changes than any other time.”

The RBA should tread carefully with the rate rise needle because of the household’s high level of indebtedness.

Rising borrowing costs are also threatening to disrupt the housing market, which had its best year in 2021 with values rising 25% all across the nation.

Price drops have already begun in Sydney, Melbourne, and even the RBA estimates that prices could drop as low as 10% if rates for mortgages rise 200 basis points.

Public sector is facing debt difficulties of its own, having run up massive budget deficits due to the pandemic as well as a huge debt load of A$900billion.

A total of A$185 Billion more of red ink are projected for June 2025 when the term ends. All borrowing costs will rise as the bond yields go up.

Three years ago, the government could borrow at zero percent for three consecutive years. The current cost is about 3%.

Both major parties are committed to spending more, not less. They also promise to make drastic cuts to income taxes starting in mid-2024, which will cost A$184billion by 2031.

Many economists believe this is impossible to afford given increased spending on climate change mitigation, defense and health. The outcome of this dispute could determine the outcome of the next election.

($1 = 1.4259 Australian dollars)