The interest is on next week

Given that next week is to be a Horror Budget ©, the one thing the Govt needs to get across is why it needs to be such.

The simple maths the Government can try and get across is that inflation is rising and a flabby budget will increase this pressure – and thus “horror” is needed. It’s true that any budget deficit is by nature “expansionary”, but that doesn’t automatically mean it will increase pressure on inflation – it depends where the spending is and what it is spent on, it also depends on what is happening elsewhere in the economy (and outside the economy).

The biggest reason why increasing inflation is bad – there are others, but mostly we don’t care too much about them – is that of course interest rates will rise. The RBA today announced that the cash rate would, for the six month in a row, stay at 4.75 per cent.

Now the media pretty quickly seized on the Governor's statement to suggest that the next interest rate movement will be a rise (not earth shattering news) and that it could be sooner rather than later.

However, the RBA Governor's statement can be a bit of Rorschach test where interest rate hawks and doves will both see what they want to see. So too with this one:

The natural disasters over the summer have reduced output in some key sectors and the resumption of coal production in flooded mines is taking longer than initially expected. It is likely this caused a decline in real GDP in the March quarter. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.

The cyclone has reduced GDP – so no rate rise, but there will be a boost in demand in the months ahead – so a rate rise. But the RBA knows this is just because of the lag effect of the cyclone rebuilding – no rate rise.

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

Employment growth moderating and slowing – no rate rise. Skills shortages – rate rise. Skills shortages only in mining so far – no rate rise. Growth in wages returning to pre-GFC levels – rate rise.

The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector.

he exchange is hurting, but this is also reducing pressure on inflation – so don’t expect a cut (not sure who would be)

Recent data on inflation show the effects of production losses due to the floods and Cyclone Yasi. The affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead.

Yep, bananas went up, but we know why. (So no rate rise). CPI will be close to target (which means a rate rise if you are the type who thinks mention of the target means bumping above 3 per cent. Or no rate rise if you are the type who thinks the RBA is happy for it to be close to target).

Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.

Inflation looks to be going back up (rate rise for sure!!).

 At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

Future meetings?? Assess carefully?? Rate rise! (or not!)

One of the biggest interest rate “hawks” is Rismark International's Christopher Joye. He wrote last week when the inflation figures came out:

But the much more concerning story was around core inflation. The trimmed mean printed at 0.9% (or +3.6% annualised), significantly above the market estimate of 0.6-0.7%. The weighted median printed at +0.8% (or +3.2% annualised), also way above consensus. The average was obviously +0.85% (or +3.4% annualised). Even the CPI ex volatiles measure printed at a stunning +0.9%.

 Joye likes to annualise the quarterly inflation figures, whereas the RBA adds together the most recent 4 quarters. It could be argued that the quarterly figures give a better indication of what inflation might be than the RBA measure which is a look at the past. But as you can see from below – the annualised figure does jump around a bit and is not for the skittish:

The jumping up and down gets even more exaggerated when you focus on the short term – say since the 2007 election:

You can see that the annual inflation rate (I’m using the RBA’s underlying inflation measure, not the CPI headline rate, which really jumps around) has been nicely declining since July 2008 – because, well the GFC not the begeezus out of inflation.

Joye would have you focus on the red line jump. The RBA for the moment is saying, let’s wait till we see what the blue line does.

Swan will be trying to tell us that the red line is the warning – and that is why the budget must be a “horror”.

An interesting graph to look at is inflation versus the cash rate over the last 10 years (cash rate on the right axis, inflation on the left)

As you can see in the last 2 years for pretty much the first time the cash rate has been going up while inflation is going down. The RBA has done this because it was worried that not acting early after the end of the GFC would have seen inflation start going up too soon. If inflation has actually bottomed out, at least it has bottomed out nearer 2 per cent than 3 per cent. That 2-3 per cent band is whee the RBA wants it to stay. It has only been under 3 per cent for the last 13 months – and was above it from July 2007 to March 2010.

Swan will have to be aware that if his Budget is judged by the commentators as being flabby, it will be easy for any future rate rises to be pinned on him. If his budget is shown to be “a horror” any rate rises will still be pinned on him but at least he’ll have a stronger case to make that the rate rises are due to a strong economy, outside pressures etc etc. (whether he can sell this is another matter).

Bear in mind though that the RBA already considers interest rates to be mildly restrictive, but historically it is still under average. The rolling 10 year average cash rate is currently 5.13 per cent, which, given the current rate is 4.75, means a couple rate rises would still have it around the average. When Howard lost office, the 10 year average cash rate was 5.29 per cent. But of course don’t worry – interest rates will always be lower under a Liberal Govt…

***

Last year during the election there was an announcement by Tony Abbott of disability education funding. The press conference after his announcement was not particularly edifying. Not one question was about the policy – it was all politics and trivia. I wrote a blog about it. A few people noticed, so too did a few journalists.

Today Julia Gillard revealed some new disability education funding that will be in next week’s budget.

The press conference this year was slightly better.

There was one question on the policy.

The first few questions were about the selling of the budget, and whether or not Wayne Swan was giving out mixed messages. In other words, stuff that I as a political tragic find interesting, but which is of zero importance to the real world – and certainly not to parents of kids with a disability (which I also am).

But when Dan Harrison the education reporter from The Age got to ask a question that focussed on the policy well it was a cracker:

JOURNALIST: Prime Minister, or Minister Garrett, can you tell us how will the funding, the $200 million, be divided or be allocated between the schools, and secondly, a theme that's emerged in submissions to the school funding review is that students with disabilities who go to non-government schools aren't able to get the same levels of support, levels of funding, that students with disabilities in Government schools can get. Do you accept that that's the case, and if so, what do you intend to do about it?

The question had particular relevance to me because yesterday my wife had investigated enrolling our daughter, who has Down Syndrome, in the very school in which the press conference was being given because it has a great reputation for dealing with kids with intellectual disabilities, and the nearest school to our house – a non-government school – does not receive the same amount or funding for intellectually disabled students.

Julia Gillard immediately handpassed the question to Peter Garrett – as sure sign that it was a good policy question – the PM wanted nothing to do with it – give it to the guy who is actually responsible for the policy.

Garrett gave a bit of a non-answer – mostly broad brush strokes – but at least gave us some information:

MINISTER GARRETT: Thanks, Dan.

The national partnership will deliver the funding to the States on a proportional basis according to the equivalent enrolments of each State, and then the national partnership will provide for the States those opportunities into Government schools to deliver funding on the basis of those student identified with disability, and in the non-Government sector, across those other sectors, in the same way.

My expectation is that they will be decisions that will be taken both by sectors and the States, as they do now in terms of do now in terms of making sure that there is provision for services and support for kids with disabilities in those schools.

Harrison didn’t let him off the hook and followed up:

JOURNALIST: On the question of, do you accept that there’s a disparity between the levels of support that students with disabilities can get in non-government schools compared to those in Government schools and, if so, do you intend to fix that?

Garrett responded:

MINISTER GARRETT: Well, I guess the point to make about this is that we've already got significant investment which can potentially be delivered to kids with disabilities in Government systems through some of the national partnership money that’s already out there.

So, if you want to try to disaggregate where existing investment at the Commonwealth level is going, in terms of supporting students with disabilities, that's an exercise which will happen over time as we review those partnerships.

What I'm confident about is that this will make a significant difference to schools in both sectors, government and non-government, and that the education authorities or the school system drivers will make sure that they focus on kids with disabilities in a way which assists them in the teaching of those kids in their school systems.

Which is nice and all, but you could see in the vision that it was not an easy question. He got through it OK, but was not totally comfortable (and the PM sure as hell was not going to jump in and help him out!).

After that, the questions went back to non-education issues. I will say that most of the questions that followed were pretty good and on issues that are definitely news-worthy. But none of them troubled her, and few elicited any more information than we already knew from interviews she had given earlier in the day.

But at least this year there was some good reporting on the policy. Malcolm Farr for news.com.au gave an excellent summary of the announcement – who it affects, why, how, when etc etc (you know – stuff parents would like to know).

It would help pay for:

* New services such as speech and occupational therapy delivered at school by health and student welfare professionals

* Access to special equipment in classrooms such as audio and visual technology so that students can more easily learn and engage with their classmates and teachers

* Additional hours of in-class support from staff including teachers aides, health and allied health professionals as well as enhanced support through team teaching

* Adapted curriculum tailored to their needs based on the latest research and expert advice.

From July 1 July, eligible children under six year with sight or hearing impairment, Down syndrome, cerebral palsy or Fragile X syndrome will get access to up to $12,000 for intensive early intervention therapies and treatments from allied health professionals.

A good policy. A small step perhaps, but welcome nonetheless. And at least it got some coverage this year!