At any rate, Labor has advantage of incumbency

THE interest rate rise yesterday will shift the political debate to how the Rudd government can manage the economy without suffering at the hands of households under mortgage rate strain.

The answer is partly dealt with by the increasing acceptance in the community that it is not the government that sets interest rates, but the independent Reserve Bank. In other words, unless things get very bad, voters won't blame Labor for the rates going up.

This makes it more difficult for governments to claim credit when rates are low, but they are somewhat insulated from criticism when they go up, like yesterday.

The opposition will try to link rate rises to what it calls the unnecessary stimulation of the economy by government spending.

But while fiscal policy certainly has an impact on the setting of monetary policy, ever since the Coalition over-egged the pudding on the management of interest rates in 2004, voters are tired of claims that political decisions have a major impact on rates.

The 2004 election was marked by the moment when John Howard asked voters who they trusted to manage the economy and keep rates low. That was the way he launched his campaign. On polling day, voters answered the question by re-electing the Coalition for a fourth term with an increased majority and an increased percentage of the two-party vote.

But the strategy meant that just as Howard had claimed credit for low rates, he had to wear the blame for the consecutive rises of the following three years, caused by a booming economy.

Labor successfully reminded voters of Howard's pledge all the way through to the next polling day in 2007, including when rates went up for the first time in a political campaign just ahead of the election.

Kevin Rudd was careful not to suggest he could keep interest rates low when elected -- he simply reminded voters that rates were set independently, at the same time condemning Howard for giving people false hope he could control them.

While the Rudd government will be planning how to fight an election during an economic recovery, with the attendant interest rate and inflationary pressures that follow, it will also have an eye on the global economy and the uncertainty of economic conditions around the world.

It is possible, although unlikely, that interest rate rises now are a red herring, offering no guide to how the economy could be functioning or malfunctioning by the time of the next election.

Sovereign risk is driving the doubt about the global recovery. Greece is only the highest-profile nation to be at risk of defaulting on its national debts. Others include Latvia, Iceland, Spain and Portugal. Even traditional economic powerhouses such as the US and Britain are weighed down by sovereign debt. Difficult questions are also being asked about the fiscal position of Japan.

This is a problem for the developed world, including Australia.

While rescue packages are likely to prevent sovereign defaults -- the most cataclysmic outcome for the global economy -- they don't guarantee permanently staving off depression economics, as Paul Krugman likes to call it.

Governments, businesses and individuals remain over-leveraged. In fact, leveraging has been encouraged by policies to stimulate us out of recession.

The Rudd government's preparedness to go into debt to stimulate the economy in late 2008 and early last year was controversial at the time, but the debt it accrued is but a fraction of the burden taken on in other parts of the world.

Australia went into the global recession better placed than any other nation, which is one of the reasons we have come out of it better placed.

But that doesn't mean we are guaranteed to be insulated from pain if a double dip occurs on the financial markets. And it certainly doesn't answer concerns that businesses and households are overburdened with debt, something yesterday's rate rise will have an adverse impact on.

Australia's dependence on China means that if its economy falters this year, so will ours, and that would change the dynamics of the next election considerably.

It is worth noting that the Chinese government recently took the decision to clamp down on borrowing because it was worried about the debt burden of sections of its economy, as well as the risk of asset bubbles.

If economic conditions worsen later this year, which side of politics is likely to benefit? The answer is the incumbents, which happens to be the Labor Party.

Incumbency is a major advantage in political campaigning. While incumbents do need to defend their track record, which can put them on the back foot at times, for the most part they are able to draw on the resources of government and use their dominant media position to stay one step ahead of the opposition, and therefore ahead in the polls.

Importantly, governments can rely on the natural conservatism of voters: if it ain't broke, don't fix it. In other words, as long as a government isn't inept, voters are likely to give them the benefit of the doubt and retain their services at elections.

Rudd will want to ensure the botched roof insulation scheme doesn't become a symbol of how he governs. So long as that doesn't happen, voters would be more inclined to support the party that steered Australia through the last global downturn than an untried opposition with a finance spokesman who is constantly putting his foot in his mouth.