Australia's Political Balancing Act. Hawke keeps country in suspense, waiting for economy to improve before calling elections

THUNK! The Australian dollar drops. Zooom! Interest rates careen to record highs. Kerrr Pow! The trade deficit is knocked silly. Like characters caught in a bad comic-book script, Australia's ruling duo, Prime Minister Bob Hawke and Treasurer Paul Keating, are scrambling to rescue their economic policy. And, everyone's left guessing when the financial climate will improve enough to call an election.

This month Mr. Keating unveiled the biggest tax cut and social security package in Australia's history. The average family will get a tax cut of $25 a week (Australian; US$20). Pensioner and family benefits will be bolstered $710 million (US$570 million). Tied to the package is a 6.5 percent national wage hike in 1989-90 which the Australian Council of Trade Unions fought hard to win.

The linked package, promised nearly a year ago, was seen as a clever means of limiting wage hikes. The tax cut, made possible by a domestic budget surplus, was supposed to leave voters with a warm glow in preparation for a snap federal election.

But now, some pundits are calling it Keating's biggest gamble.

When it goes into effect on July 1, the $5.7 (US$4.6 billion) wage-tax package may open the throttle on an already speeding economy. The inflation rate is climbing. Imports are outpacing exports and making a shambles of Keating's forecasted $9.5 billion (US$7.6 billion) current account deficit. The March trade deficit figures, released this week, hit a record high. After several years of progress in lowering this deficit, Keating says another $15 billion (about 4.6 percent of Gross Domestic Product) could be added this year to Australia's $95 billion (US $76 billion) overseas debt bill.

The economy is surging for two basic reasons: a loose monetary policy following the 1987 market crash and soaring commodity prices. (Australia derives about 80 percent of its export earnings from such commodities as wool, coal, wheat, and iron).

``In retrospect, Keating should have tightened monetary policy sooner [to slow the economy]. He shouldn't have let the trade deficit blow out to the extent that he did,'' says Peter Smith, chief economist at State Bank of Victoria in Melbourne.

Now the monetary brakes are being applied. But tightening the money supply has sent home-loan rates rocketing to 16 percent. The prime rate is at 19 percent. Domestic indicators are showing signs of a slowdown. But most bankers predict interest rates will go another half to 1 percent higher before moderating.

`THE pressure is still upward on rates in Australia,'' says Bob Graham, Westpac Banking Corporation's chief economist. ``Imports must be brought down considerably, and the only thing to do is slow domestic demand.''

But when home-loan rates go up, a politician's popularity tends to sink. ``Obviously the community doesn't like high interest rates. I don't like them myself,'' Mr. Hawke told reporters this week. ``But it's necessary.''

Hawke and Keating have told banks that rates are high enough.

The next election must be held by mid 1990. Hawke's Australian Labor Party strategists would prefer some room to maneuver, but economics may limit the options. Early speculation was that Hawke would go to the polls in July, after the tax cuts took effect.

But most economists now predict it will be at least three months before the economy has slowed enough so that trade figures improve and interest rates ease. ``I'd look for an election in October,'' Mr. Smith says. The tax cuts won't be much of an economic stimulus. Rather, the risk will be that the economy will slow down too much. If Hawke waits until next year, there could be a recession. ``The window will probably be in the fall. He can point to an improving interest-rate climate and unemployment will still be low,'' Smith says.

Westpac's Graham says Hawk must wait until next year. With the ``too generous'' wage hikes and tax cuts, ``the risk is that high rates won't slow the economy enough.'' Consumer demand will keep the imports flooding in and the trade deficit out of whack.

Hawke may agree with the Westpac scenario. Last week he seemed to rule out an election in 1989.

In an Australian Broadcasting Corporation interview, he said: ``I can't see an election this year. Certainly, I'm not talking about an election this year.''