1.5% inflation = interest rate rise??

The latest RBA meeting on the 6th of October has signalled the end of what Glenn Stevens has called a 'mild downturn'. After holding interest rates at 3% for 12 months the cash rate has now started heading up (though only slightly ) after the RBA decided to put them at 3.25% on Tuesday.
After Lehman Bros in the U.S filed for bankruptcy in Sept 2008 the RBA cut the cash rate by 4.25% over a 6 month period in a bid to prevent major credit and AD issues in Australia.
Thus the signal that Australia's downturn is possibly over has been given by the RBA. If you want to read why G.Stevens believes Australia avoided the major problems experienced in the G7 in particular then read this concise summary.
The question remains- Is Australia out of the recession? and why is the cash rate rising when inflation is still below the 2-3% target range?
Wll the answer is a pre emptive strike, a move to curb excess borrowing at a low rate of interest and to send the market a signal.
Of note is that unemployment has fallen very slightly from 5.8% to 5.7% which is a further indication of a return to expansionary conditions. What will be interesting is that Glenn Stevens also said "a degree of policy discipline will be needed". This means that he expects fiscal policy will also slow down its expansionary phase and that spending will decrease- however will this happen in light of the fact that the next Budget leads up to the next election?
It will be interesting to see what the ALP does??

Budget Leaks and Wrecking Balls

As May comes around the chatter amongst economists and interested people regarding the Budget begins to build steam and this year it appears to have started to have happened quite early. With the background being the global financial crisis (or GFC as some have named it- sounds better) this means that many items on the ALP wish list will be placed on the chopping block.
Here are some of the items that have been considered;

• paid maternity leave (min 6 weeks)
• upgrade to the aged pension and unemployment benefits
• increased funding for universities
• continuation of 'Education Revolution'
• whether the incentives for first home buyers should be continued
• environment incentives e.g insulation
• tax cuts (which were introduced as part of election campaign in 2007)
  

However with unemployment heading towards 7% (which obviously increases transfer payments), company and income tax revenues down it is obvious that a number of these items will be merely wishes. At the least Australia is heading for a Budget deficit of $30-50 billion.

Compare these issues to this article from the SMH (by Jonathon Pearlman) regarding defence spending. What are your thoughts on defence expenditure and where the funds could/should go???

Illustration by Rob Homer , SMH.