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Which party really has the economic smarts?

  • 13 August 2013

Debates between the major political parties in the lead up to the election have resulted in the usual exaggerations. The economic challenges are clear enough and neither side has obvious room to move. Revenue is falling, causing the projected budget deficit to rise and putting pressure on government spending. There is a bipartisan acceptance that deficits are a bad thing, requiring 'unpalatable choices'. Needless to say, neither side is being too fulsome about what those difficult choices will be.

So far, so obvious. The Coalition is pointing out that the Howard Government was better at reducing government debt than the Rudd Government, which is true. It fell from about 10 per cent of GDP to 1 per cent at its bottom. Under Rudd and Gillard government spending returned to 10 per cent of GDP. Most of this was due to treasurer Peter Costello, who almost unthinkably paid down debt in good times — a rare, if not unique, strategy in the developed world. Usually, politicians are happy to spend when the economy is strong because, well, they can.

When, in 2008, the consequences of the global financial crisis were neatly hand-passed by the banking sector to governments, Australia's low levels of government debt gave it an advantage enjoyed by few nations. It was as much psychological as real. Because of the low federal debt, the government's bank guarantees of deposits and the banks' wholesale funding looked much more credible than similar attempts by other governments to shore up their faltering financial systems.

Yet to look at government debt alone, without considering the context, is close to meaningless. For one thing, the increase in government debt is paltry when compared with Australia's overall debt. Under Rudd and Gillard, government debt rose by about 8 per cent of GDP, but household debt fell by twice that, from 160 per cent to about 143 per cent of GDP. Under the Howard Government, household debt doubled from about 80 per cent to 160 per cent of GDP, because of the housing bubble.

The Rudd Government also had to deal with the worst global downturn since the Great Depression. Just as it makes sense to save in good times, it makes sense to spend in bad times. The Australian Treasury estimated that without the Rudd Government's 2008 'cash splash', GDP growth in the December quarter of 2008 would have been negative 1.1 per cent, instead of only negative 0.6