Morrison, Albanese and RBA must look at economic woes during Whitlam era for answers: Robert Gottliebsen

Rising rate hikes are a big concern, particularly given Australians have borrowed $650bn in home mortgage loans over the past two years. Picture: Sam Ruttyn

Not since Gough Whitlam came to power in 1972 has an incoming government and the Reserve Bank faced a Hobson’s choice – live with much higher inflation or bring on a severe downturn.

Sadly neither our political leaders nor the Reserve Bank have prepared Australians for the inevitable consequences of a March quarter annual inflation rate that reached 8.4 per cent. We even fool ourselves by using a concocted 5.1 per cent rate.

The grim reality facing the Australian nation is that in the last two years Australians have borrowed a sickening $650bn in dwelling mortgage loans.

Those loans were issued at token interest rates and now represent an incredible 30 per cent of total housing debt. I thank the head of Australian economics at CBA Bank, Gareth Aird, for those revelations.

The CBA calculates that once interest rates rise by more than just 1.25 per cent the vast majority of those holding the $650 billion mortgages will start to struggle and will be in desperate trouble if interest rates rise just another one per cent – a total rise of only 2.25 per cent and way below market expectations.

Australia faces a Hobson’s choice: Choice one – slash the big spending promised by both parties but particularly the ALP and raise interest rates by, say, two or three per cent so creating a significant down turn. Choice two – keep interest rates low and do a Gough Whitlam by honouring big spending promises and let inflation have its head. We then take the risk of becoming an Argentina.

Some argue we should take the second choice in the hope small interest rate rises and a world down turn will curb Australian inflation.

In actuality, we are going to elect either a fully fledged Gough Albanese (his big spending far outweighs his cuts) or a semi Gough Morrison (he has not promised to slash expenditure to take pressure off interest rates).

And we will have alongside them a discredited Reserve Bank who played a key role in creating this mess by not only leaving interest rates too low for too long but promising unsuspecting Australians that interest rates were likely stay at token levels until 2024.

So let’s go back to December 5, 1972, when Gough Whitlam became the 21st Prime Minister of Australia because that will help us understand what is likely to happen next.

The Whitlam problem actually started in 1971. With the 1972 election approaching the then Prime Minister Billy McMahon ignored the fact that inflation had jumped from the 1969 level of 3.0 per cent to 5.7 per cent in 1971.

Instead of restraint, McMahon embraced a massive stimulus program including lower taxes and higher pensions. Because 50 years ago bank lending for housing was restricted the associated housing stimulation was much less

Enter Gough Whitlam with a plan – further massive spending and a promise to lift wages to cover cost of living increases – mirror image of “Gough Albanese” 50 years later. The ACTU was headed by arguably the best higher wages advocate we have ever experienced – Bob Hawke.

Into that cauldron of economic dangers came a huge boost in oil prices, in the wake of the 1973 Arab-Israeli war. Fifty years later, we have the Ukraine war which boosted oil prices just before the election but, like 1972, the overseas price increase momentum has further to run.

To be fair to Whitlam he recognised that his big spending and wage rise policy might boost inflation so he increased the value of the then fixed Australian dollar, lowered tariffs, increased taxes and established a prices justification tribunal. None of those actions were effective against the government’s massive wage increases and unrestrained government spending. The CPI increase exceeded 15 per cent and mortgage rates hit nine per cent.

In 1975, there was the inevitable recession. And we all know what happened on November 11 1975 – just short of three years after the 1972 election.

The lesson from the Whitlam era is that if you keep pumping government money into the community and have low interest rates at a time when costs are rising sharply then inflation skids out of control.

Economic theory says that the only way to stop it is to bring on a slowdown by using a combination of lower government spending, and higher interest rates. Lower share and property markets also help.

If the economy is slowed wage pressures fall and companies restrain prices often by increasing productivity.

But politically that cocktail is extremely difficult to achieve and currently it is made even more difficult by the prosperity of a lot of Australians. But now we have 8.4 per cent inflation sadly that’s the task ahead if we want to avoid Whitlam’s 15 per cent inflation rate and the danger of Australian becoming an Argentina.