THE sharp rise in the dollar has underlined the significance of Reserve Bank governor Ian Macfarlane's decision to put the negative gearing issue centre stage.
If the politicians don't listen on negative gearing and Macfarlane continues with his interest rate increases, the dollar will be boosted even higher, endangering many manufacturing and farm businesses.
In effect, Macfarlane has thrown down the gauntlet to the politicians by indicating there are two ways to curb the housing boom -- either higher interest rates or a tightening of the negative gearing rules.
What he seems to be trying to tell them is: "Unless you act, I am going to spike the housing boom via higher interest rates and if, in the process, the economy slows or the dollar rises and destroys parts of the manufacturing or farming industry, then so be it."
The trouble is that Macfarlane does not (and cannot) use those words because the Reserve Bank charter makes it very difficult to attack a specific asset class such as housing. Instead, he talks about underlying inflationary trends -- which is in line with the charter. Then, separately, he talks of the problems of negative gearing.
You have to know how to put the two together and it is hard for the average politician to grasp the message. And because negative gearing is political dynamite, no one in either party wants to face the truth. It's politically correct to stay confused.
However, at The Australian/Melbourne Institute Outlook conference last week I put to Macfarlane the fact that outgoing Holden chief Peter Hanenberger stated that if the Australian dollar rose markedly above US75c, it would harm manufacturing.
Macfarlane would not comment on the dollar but pointed out that a big chunk of the dollar rise reflected the fall in the US dollar.
But his body language was one of a person who has a mission and that manufacturers' bleating would not change it. They had to simply adapt their work practices and other strategies to the dollar.
After Macfarlane publicly targeted negative gearing last weekend, the real estate community immediately ridiculed him by referring back to the 1980s when Paul Keating abolished negative gearing and it caused a shortage of housing rental stock.
If the real estate industry continues with that argument, they may get into trouble because Macfarlane is not suggesting that Australia follow Keating -- rather that the negative gearing rules simply be made less attractive.
In addition, the tenants' union is on Macfarlane's side because it says that negative gearing is boosting housing prices and in turn that will increase long-term rentals. As a result, the 1980s argument will have trouble gaining momentum.
Robert Gottliebsen writes for The Australian and hosts Business Daily on ABC Asia Pacific email@example.com
© Copyright 'The Australian' November 20, 2003 Finance p19