Howard's economic wrongs THE "Whitlamesque" spending of the Howard government, coupled with Kevin Rudd's promise to deliver $31 billion intax cuts, have left the nation'sfinances in such a fragile state that inflation and interest rates are likely to rise in coming months. And the economic forecaster Access Economics warns that the new Government will have to slash commonwealth spending by as much as $10 billion a year to reduce the risk. Access Economics director Chris Richardson said that although the figure appeared enormous, the Howard government saved more in its first budget, after taking into account inflation. "There has never been an incoming administration with a richer vein of potential spending cuts to attack," he said. But he said much of the growth in spending under John Howard had been in areas such as security and family benefits, and the new Government would require political courage to make cuts in these areas. The Howard splurge Mr Richardson described the Howard government's spending in recent years as "positively Whitlamesque", saying the Coalition had handed back more than half the China-driven revenue windfall in a series of personal income tax cuts, with the rest directed to increased spending. In the past five years, new government spending initiatives had added $40 billion a year to the budget, he said, with another $45 billion a year of revenue handed back as tax cuts. Mr Richardson warned that the extra spending was fuelling inflation, forcing the Reserve Bank to raise interest rates. Another rise in February to 7 per cent was almost inevitable. "With surging demand running into capacity constraints for the first time in 30 years, the last government's decision to spend every red Chinese cent of its windfall further boosted that demand, leading to an upsurge in imports and a lift in inflation pressures," Mr Richardson said. Tax cuts give $5.8bn back Howard government tax cuts over the past five years had put an additional $5.8 billion a year in consumer pockets, he said. From July next year, the Labor Government's promised tax cuts would add a further $7.1 billion. Domestic demand, after inflation, is expected to reach a growth rate of more than 6 per cent over coming months - a figure Mr Richardson said was "off the charts" and would alarm the Reserve Bank. "Either the rest of the world economy gets a lot worse as a result of the financial turmoil, and we don't think it will, or Canberra will really have to get its act together," he said. Otherwise, people with mortgages would be facing interest rate increases of 0.65 per cent or more by the middle of next year. Rate-rise inevitable Mr Richardson warned that a 0.25 percentage point increase in February was almost inevitable, with the banks likely to add an additional 0.15percentage points to cover higher funding costs. A further 0.25 percentage point rise from the Reserve Bank was likely by the middle of the year. Access believes that based on no further policy initiatives from the Rudd Government, the budget surplus should be $700million higher than expected this year, and $600 million above budget in 2008-09. However, Access believes the China boom will start to fade beyond that, exposing the budget to considerable risks. The firm believes the budget surplus would drop to only 0.6 per cent of GDP by 2010-11 - breaking Labor's promise to maintain a surplus of 1 per cent of GDP.