The Leader of the Opposition Tony Abbott delivered a broad ranging speech to the Sydney Institute last night. It covered many issues, but one issue Mr Abbott noted was:
“Less borrowing means lower interest rates.”
This throw away line is dreadfully wrong.
Let’s start by looking at the last decade of Australia’s economic history. When the Coalition moved to eliminate Commonwealth Government net debt and reduced the amount of borrowing to almost nothing in the five years up to 2007, we witnessed the longest rate hiking cycle ever recorded from the RBA. From a low point of 4.25% at the beginning of 2002, the RBA hiked interest rates on 12 consecutive times through to March 2008, which saw the cash rate peak at 7.25%.
What’s more, as government borrowing increased as the budget slipped into deficit in late 2008, interest rates were slashed to a 50 year low of 3.0%.
And right now, a look overseas sees Japan with massive debt and borrowing, yet interest rates are anchored near zero. The US fiscal position is unsustainable with trillions of dollars borrowed by the government in the last couple of years, yet its borrowing costs, out to 10 years, are under 2%. I could go on.
Without going into the dynamics of the links between borrowing and interest rates, it should be obvious that many factors influence interest rates of which borrowing is of the third or fourth order. Not that that is the perception here in Australia.