The election debate kicked off with Kevin Rudd accusing the prime minister of short-term thinking and Mr Howard calling the Labor leader a pessimist.

Both leaders started the debate with a two-minute statement, with Mr Howard looking confident and Mr Rudd a little nervous.

Mr Rudd went first, saying working families were looking for a new direction.

"This election is about the future - the future of our families and the nation," Mr Rudd said.

"Right now I have put before the Australian people a long term plan for the nation's future, I fear Mr Howard has put before them a short-term strategy to win the election.

"I submit new leadership for the nation's future."

In his opening statement, Mr Howard said he had an optimistic view of Australia's future, whereas his Labor opponent was pessimistic.

"Mr Rudd believes that our current prosperity as a nation is entirely due to the resources boom, whereas I believe that our current prosperity as a nation is due to the fact that over the past 10 to 20 years, we have built in Australia a new society," Mr Howard said.

Australian society had been redefined in the past two decades but the government had not abandoned the fair go, he said.

"We've built a society based on greater risk-taking, on more entrepreneurial flair, a society that has been built on the efforts and rewarded the hard work of millions of Australians - of men and women in small business that have mortgaged their houses and have taken risks and have employed Australians by their tens of thousands," Mr Howard said.

"I believe that what we have done over the past 10 or 20 years is to bring about a unique blending of all the good things of the old Australia - the fair go - but we've also embraced a new mood, a new optimistic mood.

"We are strong and prosperous as a nation because we have been courageous and dedicated in undertaking economic reforms."

Mr Howard said Australia had the second highest minimum wage among developed countries, and urged voters to embrace economic growth rather than "turn backwards".

"We should maintain policies that continue growing Australia, we must maintain our economic reforms and we must seek to drive unemployment even lower," he said.

The prime minister did not mention Work Choices during his opening statement.

As the leaders moved on to a free-flowing exchange, Mr Howard denied there was a need for new leadership just for the sake of it.

"I don't think it's better to turn backwards on the reforms we've undertaken over the last few years," he said.

"Mr Rudd is talking about new leadership, yet his ideas are very old.

"He essentially has a Donald Horne (A) Lucky Country view of Australia. He thinks that it's all due to providence having given us resources and nothing else, that we are successful despite ourselves.

"I think that is a very pessimistic view of Australia."

He also attacked Mr Rudd's old-fashioned views on industrial relations.

"I believe trade unions have a legitimate role in Australian society, but I don't think it should be a controlling role," Mr Howard said.

"I think it's a very old outdated idea to bring back an industrial relations system that would return a monopoly of the bargaining process in our workplaces to the trade union movement."

Mr Rudd says he is an optimist because when he travels around the country he finds a spirit of enterprise and enthusiasm.

"But I'm also a realist," he said.

"And when Mr Howard talks about record levels of growth he ignores the fact that right now globally we're experiencing record levels of growth."

Mr Rudd said the question was why hadn't all of the commonwealth's money been invested more wisely?

"Where is the investment in the future, where is the investment in dealing with climate change and water?

"Where is the investment in our education system to make it the best in the world?

"And where is the investment in our national hospitals?

"My charge is this: these opportunities have been squandered by the government."

Mr Rudd says he is an "economic conservative" and will have policies to keep downward pressure on interest rates.

"But you know what, economic management goes beyond that and it goes to the question of how do you build long-term prosperity for when the mining boom is over."

Asked whether he was prepared to reconsider his planned tax cuts if need be, Mr Howard said: "No, I think the tax cuts are eminently responsible".

"And, to the extent that they meet some of the cost of living pressures of Australians, they will dampen wage demands that might otherwise be much stronger because of those cost of living pressures."

Mr Howard said tax cuts could not looked at in isolation from other things that occur in the economy.

"And to say to the average Australian family, we have an enormous budget surplus and we're going to, in their eyes, horde it and not hand any of it back to them, despite the fact that even in this very strong economy there are cost of living pressures, is to be unrealistic and is to misunderstand the incentives and attitudes of ordinary Australians."

Mr Rudd went on the attack over the coalition's harping over the economic record of the previous Hawke-Keating Labor government, when interest rates hit 17 per cent.

The Labor leader reminded Mr Howard that when he was treasurer under Malcolm Fraser interest rates were 22 per cent.

"(Those were) the highest interest rates that we'd seen since the war," he said.

"Let's just put all that into context."

Mr Rudd also took issue with coalition claims that Labor routinely produced budget deficits.

"Mr Howard, when you were treasurer of Australia, you produced five budgets, four of them were deficits. Let's have some honesty on the table here. Let's get the record straight.

"We have all learnt from the mistakes of the past. Labor's made mistakes in the past and I dare say you've made some mistakes in the past when you were treasurer."

Mr Howard acknowledged families were facing cost-of-living pressures but said his planned $34 billion in tax cuts would help ease the strain on households.

"Here's some extra money, you decide how best you are going to spend it," he said.

"You decide how best you're going to relieve your cost of living pressures."

Mr Rudd said things like child care and grocery bills were at the top of families' cost-of-living pressures.

He spruiked his $2.3 billion policy to give parents 50 per cent rebates on the cost of computers, internet access and education-related items for their children.

Mr Rudd said his plan to increase the childcare rebate from 30 to 50 per cent and lift the cap to more than $7,000 would put several thousand dollars extra into family budgets.

But the Labor leader rejected suggestions his spending promises would put upward pressure on interest rates - pledging to spend less than the government.

"When this election is done and dusted, our spending promises will be more modest than those which are offered by those opposite," Mr Rudd said.

Labor would invest in expanding the capacity of Australia's economy, build infrastructure and tackle skills shortages which were becoming an inflationary pressure.

"That's where it lies to keep downward pressure on interest rates," Mr Rudd said.

"That's where we represent a fundamental difference to Mr Howard's government."

But he refused to commit to an interest rate guarantee, saying it was "completely wrong" of Mr Howard to promise at the last election to keep interest rates at record lows.

"Since then interest rates have gone up five times," he said.

Mr Howard said Labor governments equalled budget deficits, and Liberal governments equalled budget surpluses - which put downward pressure on rates.

"In the time that Mr Rudd has been in parliament, he and his Labor colleagues have consistently voted against measures that have been designed to improve the fiscal position of the budget and thereby take interest-rate pressure ... away from the Reserve Bank," he said.

"I am very happy any time to compare the interest rate record of the coalition government with that of the former Labor government.

"There is one interest rate figure that is seared in the memory of most Australian families, and that is the level of 17 per cent on housing interest rates that was reached during the Hawke-Keating years."

Labor's industrial policies would recentralise wage fixing and put upward pressure on rates, Mr Howard said.

Asked to apologise for the five successive rate rises since the 2004 election, Mr Howard declined.

The debate began with forced politeness, but tempers began to fray 35 minutes into the debate.

Treasurer Peter Costello was reprimanded for interjecting from the floor and Mr Rudd and Mr Howard traded insults over an OECD report which found education funding had gone backwards under the Howard government.

Mr Howard said Mr Rudd was dishonest to bring up the report because it did not take HECs arrangements into account, nor did it include the proposed Higher Education Endowment Fund and the recent investment in vocational skills colleges.

But Mr Rudd hit back.

"You've been in for 11 years - the changes you've just referred to are in the last two or three (years)," Mr Rudd said.

That brought a testy response from the prime minister.

"The point I made, Mr Rudd - I corrected your improper use of that OECD report and talking about 11 years doesn't alter the fact that you were trying to mislead the Australian public," Mr Howard said.

But Mr Rudd said Australian officials at the OECD could have put forward additional information if there was a grave problem with the report.

"No, that's pathetic," Mr Howard said.

"You were wrong and you knew it and you shouldn't have said it."

Mr Rudd refused to withdraw, saying: "Mr Howard, I stand by everything the OECD has said, it's not the Labor party."

Mr Rudd concluded by saying he wanted the best for the country and for his children.

"But you know something, if you're going to craft out a future for Australia, you have to lay out a plan as well and not just hope it's going to be okay in the morning," he said.

Mr Rudd said he was disappointed Mr Howard spent so much time during the debate talking about unions, rather than spelling out his plans for the future.

Mr Howard concluded by reiterating he was optimistic about Australia's future.