Opposition claims on debt dismissed

Chief economists from Westpac, Access Economics and the Commonwealth Treasury told the Committee for the Economic Development of Australia's annual conference that they could see no link of the kind identified by the Opposition between the Government's borrowing plans and the move by the Commonwealth Bank to lift its mortgage rates 0.10 points.

"Australian banks borrow offshore," said Westpac chief economist Bill Evans. "The cost of that money is going up because loans taken out before the crisis are expiring and being replaced by new loans at higher rates. That's what's putting Australian mortgage rates under pressure."

The head of macroeconomics at the Australian Treasury, David Gruen, told the conference that his reading was that Australian bond rates largely followed US bond rates, which were climbing for other reasons.

In Parliament, Prime Minister Kevin Rudd said the Australian Government's contribution to the global bond market amounted to 0.001 per cent.

Opposition Leader Malcolm Turnbull persisted with the claim, asking whether the Government's "reckless spending and debt binge" had helped push up bank borrowing costs.

Mr Rudd said the Government's decision to guarantee bank borrowing following the collapse of global financial markets had enabled the banks to borrow at rates that would have otherwise been unobtainable.

Access Economics director Chris Richardson told CEDA that not only did Australia's proposed government debt "not scare" him, but that he wasn't worried about the debt being run up by other governments.

"After World War II many governments had very large public sector debts. What's important is how economic management is handled and whether that translates into inflation," he said.

"The point is that we needed to stomp on the accelerator in Australia. Do I think our stimulus packages were perfect? No. Do I think they were much better than their international equivalents? Yes, I do.

"Does the amount of debt that they create worry me? No. But at some stage we will need to find a sustainable path for the federal budget."

Lending figures released yesterday showed business borrowing had continued to decline, suggesting the Government's proposed borrowing program was unlikely to get in the way of corporate demand for funds.

Commercial borrowing slipped 12.9 per cent in April, retracing a gain in March, to be down 0.1 per cent in trend terms. Lease financing slipped 3.3 per cent in trend terms with housing finance the only bright spot, climbing a further 2.9 per cent in trend terms.

Outside the conference, Treasurer Wayne Swan warned other banks against lifting their mortgage rates in line with the Commonwealth Bank, saying rises would spark "understandable community outrage".

"The Government and community need to work together. That's why this decision from the Commonwealth Bank is so disappointing," he said.

KEY POINTS

Opposition claims government debt saw mortgage rate rise.

Economists say debt has no connection to rate rise.

Conference told historically government debt not a worry.