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Making It Easier To Borrow Money Won't Ease One Of The Worst Debt Burdens In The World

Just how strong is Australia’s economy really?

Barely two weeks after the Coalition’s “miracle” election victory, powered largely by its claims to be the most competent economic managers, it’s now clear the economy is headed for a significant slowdown. Perhaps even a recession -- the first in nearly three decades.

The Reserve Bank of Australia confirmed this ominous outlook on Tuesday by cutting its benchmark interest rate to just 1.25 percent -- the lowest in history.

It’s the first interest rate adjustment in almost three years. But it represents the 13th consecutive time the central bank has cut the rate: a streak of rate cuts dating all the way back to November 2010 (the last time the economy was strong enough to justify an increase).

Rate cut no. 13 isn't feeling too lucky...

This week’s rate cut was a foregone conclusion. Financial markets are near-unanimous there will be another before year’s end.

READ MORE: Australian Interest Rates Could Be Slashed To 0.5 Per Cent

And in fact, there was ample reason for the RBA to cut rates months ago, as evidence accumulated about weak investment, stagnant wages, falling inflation, and consumer pessimism. However, the Bank’s leadership apparently wanted to sit out the election campaign: fearing that a mid-campaign rate adjustment could be interpreted as a “political” act. It would have been especially damaging to Coalition boasts of superior economic credentials.

Now the votes have been counted, and the Bank is once again free to do its job. But will a rate cut do any good?

A quarter-point reduction in interest rates, already at historically low levels, won’t have any dramatic impact on the stumbling economy. If the commercial banks pass on lower rates (and, based on history, that’s a big 'if'), consumers will eventually benefit from reduced borrowing costs. That could stimulate more borrowing and spending.

Meanwhile, some banks be like...

But those effects take time, typically up to two years. And lower interest rates are swimming against powerful tides flowing in the opposite direction. Consumer spending is currently weaker than any time since the Global Financial Crisis -- partly due to minuscule wage increases being paid to Aussie battlers, and partly because consumers are already in hock up to their eyeballs.

Personal debt in Australia equals 200 percent of disposable income -- one of the worst debt burdens in the world. Making it a bit cheaper to borrow even more money will hardly send consumers rushing for their credit cards.

READ MORE: Is Now The Best Time For First-Home Buyers To Pounce On Property?

READ MORE: Why Mark Twain Would LOL At The Liberals' Budget Number Crunching

Even bigger worries stem from the business side of the economic equation. We’ve already had six years of a purportedly “business-friendly” government in Canberra -- but you’d never know it from the terrible state of business capital spending. Business investment has fallen by one-third as a share of GDP since the Coalition returned to power in 2013.

And despite rose-coloured projections by government forecasters, it’s not bouncing back at all: in fact, real capital spending fell another 1.7 percent in the March quarter.

That decline in investment spending was just one of the negatives dragging down Australia’s overall GDP growth in the March quarter, which slowed to 1.8 percent on a year-over-year basis in the March quarter, according to data released Wednesday, June 5, by the Australian Bureau of Statistics. That’s the slowest annual growth since September 2009 -- and in per capita terms, GDP fell for the third straight quarter.

Coalition policy-makers have a one-note response to anything that ails the economy: cut taxes. But small business tax cuts have not ignited hiring or investment among smaller firms sector; in fact, they’ve done worse than larger firms. And now the government admits its election promise to reduce personal taxes on July 1 (by at most $550, for a carefully targeted subset of taxpayers) won’t be fulfilled. Even if it was, the impact on the macro-economy would be invisible.

READ MORE: Why Cutting Interest Rates Won't Juice The Economy

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The worsening slowdown will also wreak havoc with Coalition’s fiscal promises: especially its ‘Back in Black’ boast to have “balanced” the budget. That was always just a projection of what might happen during the 2019-20 fiscal year (which hasn’t even started yet), not an actual achievement. And now even that hope is likely to slip through the government’s fingers, as the slowing economy drags down government revenues.

In sum, it’s pretty ironic that the party that squeaked back into power on a promise to keep the economy strong must immediately face a major slowdown that is at least partly of its own making. And there’s no indication that conventional remedies -- like lower interest rates and lower taxes -- can stop it.

Instead, government needs to more directly boost spending power in the economy: by supporting stronger wages, reversing its own spending cuts, and accelerating infrastructure investments.

The Government wants us to be like...

Most sports now allow a team to challenge an official’s on-field decision by sending a controversial play to the video referee. If the original call was wrong, the outcome is reversed. The Coalition’s central promises of immediate tax cuts, a balanced budget, and a strong economy were always far-fetched -- and are now falling to pieces within weeks of the election.

As an already-weak economy loses more steam, many Australian voters may be wishing we could send this call for video review as well.