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Which party really has the economic smarts?


A depiction of a person's mind as a series of cogs and gears, one of which is marked with a dollar signDebates 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 per cent; and that the economy would have shrunk by 0.2 per cent in the March quarter of 2009, instead of recording modest growth (0.4 per cent) and avoiding a recession.

The effect of the Labor stimulus was especially obvious on retail spending. Around the developed world, retail spending fell off a cliff in Christmas 2008; but in Australia, it rose. This was because while most governments were desperately shovelling tax payers' money into the banks — money that was for the most part gobbled up rather than passed on — the Rudd Government did something unthinkable. It boosted economic activity by giving money directly to the people, who then spent it.

The uncomfortable conclusion for political partisans is that, in terms of macro-economic strategy, Australia has been reasonably well served by both sides of politics. The main problem, which is a legacy of the Howard Government, is excessively high levels of household debt, a consequence of negative gearing and other reckless tax policies. It has left a weighty burden on the economy, but falling interest rates should mean that the process of working through the debt will take time, cushioning at least some of the negative impacts.

Having avoided the macro-economic problems posed by the GFC through a combination of good management and good luck, the challenge now is to micro-manage Australia's finances better. As the China boom fades Australia is experiencing a delayed version of the GFC, without the banking crisis. Rather than aggressive macro-economic shifts, this will require a way of dealing with more mundane economic issues like productivity and efficiency.

Neither side gives the impression it has many good ideas about how to achieve the required structural shifts. Little money has been put aside from the mining boom, in part because it occurred at a time when the world economy was teetering, and in part because the Rudd Government failed to come up with a credible levy of mining profits. That opportunity has been lost.

Given that both sides of politics believe government spending is off the table when the budget is under pressure, it is hard to see what the options are for either side. The Coalition talks about making the labour market more flexible. Labor is talking about making the work force smarter. Both are fiddling at the edges, mouthing ideological clichés. Rather than steering our economic course, the party that gets into power will instead find itself hostage to much larger economic forces. It will be managing after the fact.

Consider, for example, the productivity issue. Much of the decline in productivity is due to the heavy capital investment into the mining and utilities sector, as the Reserve Bank has documented. When more money flows in, then the output per dollar (the productivity) falls. But that is a consequence of too much capital, not labour costs or work force inflexibility. And as the mining boom eases and less investment comes in, then productivity will rise.

The currency is another area where government has no power. The biggest impact on rebalancing the economy will be the fate of the Australian dollar, but that is not in the control of the government. Likewise, the cost of capital, interest rates, is not in the hands of government. Neither side will be interested in challenging the structural problem that really matters, Australia's intensely oligopolistic industry cartels (Coles and Woolworths, for example, both rank in the top 500 companies in the world on revenue).

When there is a bipartisan assumption that markets should be left alone and budgets should, whenever possible, be balanced, then the art of government becomes, at least in economic terms, a marginal activity. Both sides of politics gleefully exaggerate their opponent's economic shortcomings. But in truth the differences are small.

David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.

Thinking money image from Shutterstock

Topic tags: David James, franking, company tax, superannuation, GFC, Kevin Rudd, John Howard, Tony Abbott



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Existing comments

The clear difference is in the previous experience of the teams. I would expect that someone who has had financial management experience in the private sector would be somewhat better at managing the budget than an ex union official, unfortunately. And coming from the private sector, better at controlling the bureaucracy's inherent bloating tendencies....

Ian | 13 August 2013  

Ian I take your point that the apparatchiks in the ALP have never had a 'real job', but if you look closely, the situation on the other side is little different, over-stocked as they are with corporate lawyers and their own party apparatchiks. And in any case, aren't we in danger of conflating two quite different issues, on the one hand the management of the government's finances, of which either party will make a reasonable fist, and the shaping of the economy over the long term, of which neither party has a clue. Isn't that the point that David is making, that 'when there is a bipartisan assumption that markets should be left alone...then the art of government becomes, at least in economic terms, a marginal activity'. Instead, both parties are content to go with the flow and let whatever happens happen. Poor fellow my country!

Ginger Meggs | 13 August 2013  

When I started married life I decided to build a house to provide a comfortable base for my future family . In order to build I needed to take out a loan and so was in deep debt for an extended period ,but not unduly worried as . I had acquired an asset . Perhaps this should be the way that we think about our national debt. That is as a means of acquiring national assets for us now and for future generations. National Health Insurance , NBN and education expenditure seem to be in this category of assets. Though I am not an economist, just an old retired fellow.

David | 14 August 2013