Taking the prize, losing the plot

Date

September 4, 2013

Tim Colebatch

Tim Colebatch is The Age’s economic editor.

The Labor government oversaw one of the world’s best economic performances and then lost its way. Where is Tony Abbott heading?

World beaters: Australia v the rest.

Around the world, Australia is seen as an economic success story. It has become the first rich country to go for 22 years without experiencing a recession. Its economy has more than doubled in that time. Its standard of living has overtaken those of every G7 country except the United States.

The United Nations human development index ranks this as the second-best country in the world to live in. In the global financial crisis, Australia was one of just three affluent countries to avoid a recession. Since Labor has been in power, only four high-income countries have recorded faster growth.

As the mining states boomed, much of the rest of Australia’s economy faltered. Photo: Glenn Campbell

Rapid population growth explains part of that, but even growth per head under Labor has been the seventh highest of the 35 high-income countries, and second only to Singapore among the richer ones. Public debt is among the lowest in the West. Unemployment is in the bottom third.

The three global ratings agencies all rate Australia’s debt as AAA. Euromoney in 2011 named Wayne Swan as global Finance Minister of the Year. Isn’t Labor entitled to respect on economic issues for overseeing one of the world’s best performances?

That’s not how Australians see it. The Age/Nielsen Poll reports that Australians rate the Liberals as far better economic managers than Labor – in our last poll by 58 per cent to 37. Even one in five Labor voters think the Liberals would run the economy better.

That has been a consistent pattern since the 1990/91 recession. At federal and state level, the Coalition has kept telling us Labor can’t run the economy – and whenever things go wrong under Labor, it’s seen as proving them right. Even the Bracks and Brumby governments in Victoria, which always ran surpluses and were business-friendly, could not overturn the public’s view that the Liberals are better with money.

And under the Rudd and Gillard governments, things did go wrong with money, quite a few of them:

â–  The budget went from surplus to deficit, and refused to go back. The punters could forgive this when we were fighting off recession, but it kept hanging around even when Labor told us the economy was strong.

Wayne Swan insisted he would deliver a surplus in 2012-13, making it the test of good management – only to abandon it late in the game, and fail the test he had set himself.

When the global financial crisis first hit, Labor’s handouts to households worked a treat: retail spending growth accelerated in 2009, protecting tens of thousands of jobs and stores.

But then the government decided to direct more stimulus as an entitlement for every school to get a new building. This kept the construction industry growing when private sector demand plunged, but it was exploited by some, cost too much and kept going far too long.

The punters can’t forgive wasting money. The home insulation program seemed a good idea at the time, but was set up without adequate safeguards against poor workmanship. Rudd’s office ignored repeated warnings from Environment Minister Peter Garrett, and tragedy resulted.

With shock jocks on radio and in parts of the Murdoch press highlighting the flaws in both programs, people lost confidence in Labor’s fiscal management.

Yet the Orgill report found the overspending on schools was relatively minor. Flawed as it was, the program avoided far bigger losses the economy would have suffered had construction plunged into deep recession.

That fundamental Keynesian truth that we learnt from the Great Depression was ignored in public debate. The Coalition airbrushed the global financial crisis from its economic narrative.

â–  Labor introduced two important tax reforms, but made a spectacular mess of them.

The mining tax was a good idea in principle, and remains popular with voters. Had the government taken its well-established resource rent tax on oil and gas, and simply extended it to iron ore and coal, it would have won the debate.

But the Henry review decided to reinvent the wheel, and came up with a new tax design, which effectively amounted to partial nationalisation of the industry. By the time the government threw that out, Rudd himself had been thrown out, and Julia Gillard’s mining tax mark II was so watered down it raised virtually no revenue.

An emissions trading scheme had been Liberal policy under Howard, and Rudd campaigned hard on it in 2007. But instead of working with the Coalition under Brendan Nelson or Malcolm Turnbull to produce a bipartisan scheme that would give investors certainty, Rudd tried to use it to divide the Coalition – with such success that Turnbull was overthrown by Tony Abbott, on a platform of scrapping the scheme.

Gillard and Swan then persuaded Rudd to abandon it rather than stand and fight, and the rest is history.

Even if an Abbott government succeeds in scrapping the carbon price – which could require Labor to support it – there is a widespread view that it will return, probably before 2020.

Global warming is clearly not going away – Australia has just had its hottest 12 months on record – and China, South Korea and California are all introducing emissions trading schemes as Abbott plans to abolish ours.

â–  Economic growth has slowed under Labor, and unemployment has climbed. Growth in GDP (gross domestic product) averaged 3.7 per cent under the Howard government, but just 2.5 per cent under Labor.

The real bottom line, GDP growth per head, slowed from 2.35 per cent to 0.75 per cent. So far in 2012-13, domestic demand has been completely flat; spending has not grown at all.

When Labor took office, unemployment was 4.3 per cent; now it is 5.7 per cent, and expected to soon be 6.25 per cent. The Bureau of Statistics’ broader measure of under-utilised workers – including those unable to find full-time work – has swollen by almost half-a-million workers in five years.

Figures barely hint at the personal losses suffered by those who have lost their jobs, are unable to find work, or are struggling to save the business in which they have invested so much of their lives.

Moreover, the growth was mostly in remote areas where the mines and their infrastructure were being built. If you can believe the bureau’s figures, half of Australia’s economic growth in 2011-12 was generated by mining investment, mostly in outback Western Australia and Queensland.

In the two years to September 2012, 70 per cent of all growth in demand was in the mining states (which have 30 per cent of the population).

The south-east was another country. Tasmania is clearly in recession. Victoria and South Australia are arguably in recession, with spending in their economies shrinking for three quarters in a row, and unemployment climbing.

In Melbourne and Sydney, hundreds of cafes and restaurants have closed as cautious patrons dined out less, drank less and ordered more sparingly.

The reasons are complex. First, the mining investment boom pushed up the dollar to levels that made many other Australian businesses uncompetitive, not only in export markets but also at home.

For 30 years, manufactured exports had grown at almost 10 per cent a year; now they have shrunk by 5 per cent in five years. Overseas holidays became an annual treat. Import volumes swelled by almost 250 per cent in a decade.

Second, the boom of the Howard years – and the Hawke-Keating years – was fuelled by surging debt. In a generation, household debt grew from 36 per cent of our disposable income to 153 per cent.

That debt was mostly due to soaring house prices, which in turn were driven by Australians’ unique tax breaks to encourage people to become negatively geared landlords.

It had to stop sometime, and it has. A decade ago, households spent more than they earned. Now they save 10 per cent of their income, and the shops and service providers are hurting.

The Reserve Bank deserves part of the blame. It sat on its hands as the dollar rose, fearful of higher inflation if it intervened. It misread the game, got the policy balance wrong, and raised interest rates seven times in a year or so; eventually every one of them was taken back, but far too slowly, and only after they had done a lot of damage.

But the Reserve Bank does not face election. The government does. Swan and prime minister Julia Gillard were deaf to the damage done to high street businesses by excessively tight policy.

They paid too little heed to warnings after the 2010 election from Treasury and the Department of Finance that revenue growth had collapsed, and that it would be hard to deliver a surplus in 2012-13 without deep spending cuts. They failed to challenge the Reserve, and pressed on with new big spending policies – notably, disability care and the Gonski education reforms – without any plan on how to pay for them.

If the polls are right, it will now be the Coalition’s turn to switch from being wreckers to managers. On many issues, its differences with Labor have shrunk as the election has drawn near.

For years, their economic criticism has focused on excessive deficits and debt. Now all they will promise is that they will produce a better bottom line than Labor – but are reticent about telling us how.

Joe Hockey, as treasurer, has promised a wide range of inquiries – into tax reform, competition policy, the financial system, retail landlords and tenancies, future support for the car industry, workplace relations, not to mention the usual commission for audit, set up to find where spending can be cut.

Hockey says the commission will do this by suggesting areas from which governments should withdraw, and where the Commonwealth should leave activities to the states.

Abbott has promised no cuts in education and health. The public service will be cut by 12,000, taking it back below the levels it was at when Labor came in. He will refuse to finance any new rail projects in the cities, and instead put all the federal government’s infrastructure eggs in the roads basket.

Two big questions remain unanswered: will the new government set out to return a wide range of functions to state government control, and if so, where will the states get the money to finance them without an increase in the GST?

Second, will the new Senate be one an Abbott government can work with, or will a plethora of minor parties holding the balance of power ultimately blunt his plans to remake Australia as a more small-government, low-tax, business-friendly country?

Tim Colebatch is The Age economics editor.