Relish the pain game? Vote for Rudd

BY NOW most mortgage holders will have worked out how much more they'll be paying because of the decision to increase the cash rate to 6.5 per cent.

BY NOW most mortgage holders will have worked out how much more they'll be paying because of the Reserve Bank's decision to increase the cash rate to 6.5 per cent.

Few will have bothered to find out why the board, led by Governor Glen Stevens, bit the bullet. Before tuning in (or out) of the political discussion, it's worth examining Stevens' reasoning because his decision - not the rationale for that decision - has become the latest focal point in the federal election campaign.

At its simplest, the RBA put the brakes to the Australian economy because it perceived it to be in danger of overheating, even though the US economy (a reasonable indicator) is slowing down.

"Economic data in recent months have signalled a pick-up in the pace of growth in demand and activity," Stevens said.

"Capacity utilisation is high after a lengthy period of expansion and unemployment over recent months has continued to decline. Business and household confidence are strong.

"The demand for finance has strengthened, even apart from the temporary surge in June, particularly in the business sector. These conditions have been accompanied recently by higher-than-expected underlying inflation."

The RBA, not the Federal Government, sets the interest rates and it has acted prudently, as central banks should when they perceive economies are in danger of overheating.

With a modest rise in inflation, unemployment at an unprecedented low and huge demand for commodities, the bank's caution is understandable.

But it is important to understand the RBA's concerns are linked to what could be described as an overly successful economy, not one in need of respiration.

The RBA is reacting to what amounts to an extraordinarily prolonged period of prosperity and one which, because of the Howard Government's reforms, tax cuts and increased benefits, has delivered more to a greater number of Australians than any boom in the nation's history.

Evidence of the boom-time effect is everywhere but nowhere is it demonstrated more dramatically than in the housing market - where it appears as a double-edged sword.

Homeowners who have paid off their mortgages or have budgeted for not unreasonable mortgage increases can sit back and calculate the increased value of their properties.

Those who have stretched themselves to put down a deposit and meet a mortgage, or those trying to save to get into the market, are depressed.

However, as Aussie Home Loan chief John Symond told readers on The Daily Telegraph's website yesterday, many have over-borrowed.

Symond is worried about home affordability but, while acknowledging higher interest rates will make the situation worse, also believes they may create opportunities for some buyers.

With the US talking about two rate drops by Christmas, he doesn't think this rate rise was necessary and puts it in the same category as the hike of December 2004, saying, "It just hurt".

"Governments were reaping windfalls from stamp duty and land taxes as price doubled and trebled," he told me.

"State governments shifted costs to developers who passed them on to homebuyers. There were slow and inefficient releases of land. The housing industry hasn't been nurtured and now there is a threat to the social fabric.

"Borrowers think that the more they borrow, the bigger property they can buy and the more money they will make."

The unreal expectations remind him of the climate before the '80s crash when people "were losing jobs, homes and some were turning to suicide".

He hasn't heard a solution from either side of politics, though he says "Kevin Rudd is not addressing the problem".

The Federal Opposition Leader does reinforce the impression that Prime Minister John Howard's Government is solely responsible for the interest rate hike and, if the nation's prosperity is the RBA's biggest worry, it's probably one of the few truths uttered from the Opposition benches in some time.

To which faint praise must be added the reality that, despite Labor's mantra of five rate rises since the last election, interest rates remain some 5 per cent lower on average than at any time under the previous Labor government.

The question voters must consider is which political party can be trusted to safeguard and build the economy.

Labor has released no detailed economic policies beyond repeating its promise to roll back Work Choices.

The prospect of letting the states have greater control over more of the money they receive from the Federal Government - floated by Labor's treasury spokesman Wayne Swan - is scary.

Rudd continues to claim he is an economic conservative but his promise to kill Work Choices when employment is growing at the rate of a 1000 new jobs per business day shows he is anything but.

He won't need the RBA to slow the economy, the trade union-dominated anti-business ALP will kill it unaided.