Another day, another twist in The Abbottalypse, from the AFR:
The latest monthly Fairfax/Ipsos poll shows the Coalition trailing Labor by just 51 per cent to 49 per cent on a two-party preferred basis.
…Mr Abbott still remains highly unpopular and Malcolm Turnbull has stretched his lead by 4 points to 39 per cent as the most preferred Liberal leader. Julie Bishop has moved into second place on 24 per cent, ahead of Mr Abbott on 19 per cent.
Mr Shorten’s rating as preferred prime minister fell 6 points in a month from 50 per cent to 44 per cent and Mr Abbott’s same rating rose 5 points to 39 per cent.
Two explanations are abroad, the first is that Abbott’s national security agenda is gaining traction. Strangely, nobody mentions the foreign property investor restrictions which are also very popular. The second is that Abbott is benefiting from the rise of Malcolm Turnbull. That is, Abbott’s imminent departure is making the Liberal Party more popular.
Perhaps it is both, but I see no end to the chaos either way. The reason why is that nobody is addressing the real driver of the shambles, the economy.
As I have explained many times, Australia’s economic model is best understood as a “dig and debt” enterprise. We earn our way in the world via an huge commodity dependency. The income from mining is shared via three channels, high wages in mining sectors, sharemarket equity and, most significantly of all, via the Federal Budget which can run low household taxes and a surplus.
Private income is then leveraged-up in offshore markets by our banks and channeled into huge mortgages and inflated house prices, making us all feel immensely wealthy. This, in turn, feeds spending in the services economy.
This is a current account deficit model of growth that over-invests in unproductive assets but so long as the income from dirt keeps rising so too can the leveraging. When trouble strikes and the external funding is threatened, the Budget surplus is deployed as a guarantee to the private borrowing. It’s been a beautiful machine that evolved very much by accident over fifteen years, three business cycles and two booms.
Returning to the travails of today’s politicians, now consider what happens when the income from dirt exports starts to fall, or even just plateau, and a whole series of pro-cyclical factors go into reverse. Wages atrophy and the sharemarket struggles. Without new income the private leveraging can only continue by making debt cheaper, which is what we are seeing in falling interest rates. That widens the gap between the income and debt-accumulation, worsening the current account deficit, which is also underway.
But the most obvious casualty is the Federal Budget, which now faces two conflicting needs. On the one hand, its mining revenues tumble and it begins to run large deficits. On the other hand, the ongoing private sector leveraging (that is needed now to grow at all) must still be protected from an external shock via a public surplus.
Thus a virulent Budget crisis is introduced unusually early in the business cycle. Nobody talks about the real reason why lest they upset the “confidence” driving the private leveraging process but the deficit must nonetheless be repaired or in the next external shock there will be no public balance sheet to guarantee the private. Standing behind the government are the credit ratings agencies that can see the massive private debt load and consider it a “contingent liability” for the Budget. So they rather sensibly insist that the deficits end in haste.
And so we come to politics. If it wants to sustain this economic model as commodity income slides, the Government of the day must cut spending or raise taxes even though the other channels of commodity income – wages and shares – are already eroding the economy. Pressured growth slows further, unemployment rises, standards of living fall and people start to wonder what the Hell their leaders are doing. But because the elite can’t tell them what’s actually going on (or don’t understand it) in the name of protecting “confidence” everyone starts to get really confused and pissed off. Confidence falls anyway, growth is eroded further and governments find themselves sinking inexplicably for doing things that used to promote long durations in power. Turnover in the ruling class rises.
The key point is that no matter who is in power as this model unravels, they must raise taxes and/or cut spending. The Rudd Government chose to do it via rent-taxes for the commodity producers. The Gillard Government did it via sharp spending cuts. The Abbott Government tried to do it by “ending entitlement” and stripping payments to middle and lower income earners.
Each was destabilised in different measure by this impulse but each equally had no choice because they remained committed to the current account deficit model of growth which meant their only discretion was to decide who was going to pay to repair the public balance sheet.
So far, when asked to take that pain, nobody has put their hand up except to point the finger of blame straight back at the government. A Turnbull Government will face precisely the same problem unless it comes clean.