An Open Letter to Treasurer Wayne Swan

Dear Mr Swan

Congratulations on being the World’s Best Treasurer.

I have a couple of questions for you that I feel need to be answered in light of today’s official interest rate cut by the Reserve Bank of Australia.

1) Why are you so committed to a budget surplus? Obviously you know that according to Keynesian economic thought, Government budgets are one of two arms of economic management, known as Fiscal Policy. (The other arm being Monetary Policy). Budget surpluses are part of a restrictionist economic policy stance and budget deficits are part of expansionist economic policy. Help me understand then, whilst Governments all around the world are spending hundreds of billions of dollars on running huge budget deficits to stimulate their economies, why are you seemingly hell bent on putting the brakes on the Australian economy, by running a budget surplus?

2) In light of  Question 1, where you are very committed to a restrictionist economic policy stance,  help me understand then, why the Reserve Bank of Australia has today made a substantial move in the direction of loosening Monetary policy by reducing the official cash rate by 50 basis points? To me it seems that Monetary and Fiscal policy stances are opposing each other.

3) I understand we have a two speed economy due to the Resources boom. As interest rates decrease, foreign demand for our currency reduces as investing in Australia is less attractive, which means that the Aussie dollar falls. This means that our resources become cheaper to foreign buyers, which increases demand for these resources which exacerbates the two speed economy problem. Wouldn’t it be better to actually have a tightening of Monetary policy and a stimulatory stance through Government Budget Deficits, in order to stop the widen gaps in the Australian economy?

4) With the Reserve Bank of Australia dropping interest rates by the substantial amount of half a percent, do you think this is a significant statement on the true health of the Australian economy? What is the RBA seeing in the economic future of the  country that has caused them to act so decisively? And should we be worried?

5) What is your plan if the big four banks don’t pass on, all or the full interest rate cut. See to me, the decision by the banks to not fully follow the moves of the RBA, actually reduces the effectiveness of this  major arm of national economic strategy? 

6) Why do the banks not fully pass on interest rate cuts but fully pass on interest rate increases? How can this be interpreted as anything but economic gouging of the domestic market? And why do you as the Government allow this to take place?

I look forward to your reply

Peter Pilt

Categories: Australian, Current Affairs, Financial

Tags: , , , , ,

3 replies

  1. point 1 – reason politics – the mad monk
    point 2 – refer to point 1
    point 3 – focus should have been on the MRRT as this would create better value in our resources while allowing weaker areas of the economy to benefit from the weaker dollar. ie manufacturing and tourism and retail on the side.
    point 4 – models have changed
    point 5 – free market, switch if you don’t like it
    point 6 – free market switch if you don’t like it

    On behalf of the big T

  2. 1. It’s a political issue. They don’t need to be so hell bent on reaching a surplus so quickly, however they have been threatened by the ratings agencies with a downgrade if they don’t show a clear path to a near-term surplus. This is even more important because of the implicit guarantee that the government provides to the local banks. If the Fed Govt is downgraded then the banks will be also, further raising funding costs and placing the banks on even more shaky ground in the eyes of international investors.
    2. They are opposing each other. I think because of political stupidity and the ratings issue mentioned above.
    3. I don’t think so. A 2 speed economy (or Dutch Disease) is usually caused by higher exchange rates and interest rate settings due to the resources boom. This squashes the local trade exposed sectors e.g. tourism, education, manufacturing exporters.
    If the AUD falls as a result of the RBA moves then this will increase the competitiveness of our manufacturers and boost tourism and education. If we decide we need to slow the resources sector to make room in the economy then the MRRT funding an SWF would work. Norway and Chile have had success following this path.
    4. It does show that things are deteriorating faster than the RBA expected but it also shows that the RBA knows that the banks won’t pass on the full cut so they wanted to cut enough for it to have an effect.
    5. That’s true, the effectiveness of monetary policy in Aus has been hurt but the banks out-of-cycle rate hikes. The government should never have allowed the banks to borrow so heavily from the international bond markets during the massive credit boom in the noughties.
    6. It is gouging but the cost of funding has increased significantly and will continue to increase as the Euro crisis continues to unfold. The banks need to hike rates to maintain NIM and their profit levels… they could take the hit and see profits fall but shareholders wouldn’t be pleased.


  1. An Open Letter to Prime Minister Tony Abbott « peterpilt

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