Interest Rates and Politics. Which side of politics does "best"?

When should a new government take responsibility for current economic conditions?   Or rather, when does the implementation of new policies have a meaningful influence on the economy, inflation and even interest rates?

The issue arises with comparisons about interest rates under the current Labor Government (election day 24 November 2007 and sworn in on 3 December 2007) and the Howard Government (election day 2 March 1996 and sworn in 11 March 1996).

Should the economic management of this Labor Government be marked the instant it won – from December 2007 to now – or from some other date?   So too for the Howard Government and its election victory in March 1996.

The easiest and cleanest way to make comparisons is to have it ring-fenced the month the new government is sworn in and then “sworn out”.  But this is clearly erroneous given that policy adjustments could not and would not be effective for some months after the Government is formed.

The Labor Government’s influence on employment, for example, should not start from December 2007.  Nor should its influence – to the extent this is a factor – on interest rates be judged from December 2007.  So too the Howard government start and end dates.

The more difficult question is when do you start?

Is 3 months too early?  Probably.  6 months?  Maybe there are some clear influences coming through.  12 months?  Maybe too.  In a year a new government will have delivered a Budget, there is a year of policy delivery and an influence on the business and household sector as the new governments issues are digested, debated and implemented.

Let’s look at interest rates.  This issue was highlighted by Shadow Treasurer, Joe Hockey with this Press Release a couple of days ago.  http://tiny.cc/6bfdr

I also used the timelines in Questions 13 to 17 in this; http://stephenkoukoulas.blogspot.com.au/2012/02/great-big-new-economic-and-market-quiz.html

As mentioned, this was done because it is neat and easy to understand when each side won and lost office.  That said, it doesn’t necessarily make it accurate.

Obviously, the level of interest rates has many parents of which broad government policy settings are just one.  Indeed, global events, the terms of trade, housing bubbles and busts, wage momentum, the unemployment rate and about 247 other factors all have some influence on the RBA and its decision on setting interest rates. 

Whatever these influences, I have prepared an interest rate comparison on several grounds.  I think it makes interesting reading.  Using the swearing in dates as a benchmark, it is clear that the cash rate is a little lower under Labor, while the mortgage rate has been a little lower under the Howard Government.

	Official Cash Rate	Standard Mortgage Rate
Howard Govt (Mar 96 to Nov 07)	5.43	7.26%
Rudd/Gillard (Dec 07 to now)	4.77	7.50%

If we work on the assumption that the government cannot claim to be responsible for interest rates until they have had 6 months to change the economic landscape, the next table shows how the averages look with that 6 month lag.  The cash rate is markedly lower under Labor but mortgage rates are line ball.

	Official Cash Rate	Standard Mortgage Rate
Howard Govt (Sep 96 to May 08)	5.41	7.22%
Rudd/Gillard (Jun 08 to now)	4.46	7.29%

Let’s look at the issue with a 12 month lag:

	Official Cash Rate	Standard Mortgage Rate
Howard Govt (Mar 97 to Nov 08)	5.42	7.24%
Rudd/Gillard (Dec 08 to now)	4.11	7.02%

The averages starting and ending 12 months after the change of government show a remarkably lower cash rate under Labor (GFC related of course) and a slightly lower mortgage rate.

The bottom line of all of this is:

• Which ever way you cut the record of interest rates under the Howard government, the cash and mortgage interest rates are basically the same – cash a tick below 5.5% and the mortgage rate 7.25%.  Moving further away from the legacy of the Keating Government makes no difference to these averages.
• For the Labor government, there is a difference as you get further away from the hangover of the Howard Government spending spree and reckless cash handouts. That difference is a markedly lower average cash and a moderately lower mortgage rate.

To be fair, another year or two is needed to have a better (bigger) sample size for the current government.  Let's see how it looks in a years time.