Differing politics on interest rates

Today's interest rate rise should on paper be a free hit to Labor to attack the Coalition's economic credentials. However, the politics of the issue are far more complicated than this.

The Coalition, either through good luck or good management, has had the fortune to have held power during a period of unprecedented growth. On top of this, Labor has been terrified to engage the Coalition on economic management with Beazley reserving his attacks to the GST, Latham ignoring the issue entirely and Rudd offering that 'there is not a sliver of light between us and the government on economic management'. On the question of macroeconomic policy, Rudd has launched half-hearted attacks on productivity, skills and infrastructure and attempted to offer an alternative path via his high-speed broadband network.

Rudd's overall dominance over Howard allowed the gap to close on economic management, but recent speculation over rate rises appears to have closed the gap. This is hardening Howard's vote and probably saving him from total obliteration, but as Possum Comitatus has shown, this superior economic management does not effect the Liberals' national vote.

Rudd's key success in this area has been to wedge Howard using his claim that Australia has never had such a strong economy, therefore Australian families have never been better off. However, this wedge is vulnerable if the macroeconomic conditions supersede the microeconomic position of the household budget. The most likely seats where this dynamic is viable are ones where the mortgagors feel they are going forward with an increase in the value of their home.

New South Wales, Victoria and Queensland are the three states where the issue of economic management has played a major role in the Coalition's victories. One of the biggest trouble spots for the Liberals is the former 'battler-heartland' of western Sydney. The median house price in Sydney has dropped by 9% in a year, while interest rates have increased. This perceived gap between household pressure and wealth improvement is showing up in polling. Add the insecurity of Workchoices and it is easy to see a reversal of fortune. The seat of Lindsay is swinging around 9%, likewise the seats of Macquarie and Parramatta. There is even talk of seats such as Macarthur and Greenway, with high levels of mortgagee sales, going to Labor with swings of 12-14%. Ditto that for the Central Coast seats of Dobell, Patterson and Robertson, showing swings well over 6%.

Coalition sources had previously been confident that they would hold seats in Queensland. The multitude of issues in the Sunshine state (traffic/ infrastructure issues, health, council amalgamations, Rudd's Queenslander appeal and nuclear power) dilutes the dynamic somewhat on economic management. However it is no coincidence that it was the Lair from Blair, Cameron Thompson, who was caught on tape calling the interest rate rise a positive for the Coalition. Houseprices in the Ipswich area in Blair have risen by 10% this year. Given the equity improvement, this would give hope for the Coalition that they could counteract the micro experience of workchoices and interest rate rises with the macro trend of increasing prosperity. That sense of making families better off feeds into confidence in the Liberals' economic stewardship. It won't save seats like Bonner and Moreton, but may just muddy the waters sufficiently in bigger margin seats like Bowman and Dickson. Blair is right on the knife edge.

It is likely that the swings in seats like Aston, Dunkley and Casey in the outer suburbs of Melbourne will be curtailed by the effect of increasing house prices. They are certainly not going to behave like their Sydney cousins where all the indicators point down for the Coalition.

Thompson's Garrett-esque candour may be more successful than Rudd's interest rate con argument in reversing Labor's fortunes. Rudd's purely factual argument that Howard has overseen six interest rate rises since 2004 reminds voters doing it tough that Howard has failed to deliver on keeping interest rates low. Adding the 'con' comment might be counterproductive. If the Liberals overtly claim they are using the rate rise to get elected it may open up open hostility among some voters.

The net effect of the interest rate rise in the wider electorate may be to reinforce Howard's economic credentials to undecided voters by having the election conducted on his turf. This deprives Labor of the ability to focus on workchoices and climate change. This may trim margins in seats like Eden Monaro but is probably not going to stop too many marginals going to Labor.