The Australia Institute’s chief economist, Richard Denniss, has written an incredibly detailed (but long) article in The Monthly examining the myth of the Coalition’s ‘strong economic management’. The article examines both the performance of the Howard/Costello years, as well as the current Abbott/Hockey Government.
Below is an extract. Again, the article is incredibly detailed (over 6,000 words) and covers lots of ground, so I recommend that you read it in full yourself.
Peter Costello played a simple trick on the Australian people during the Howard years. While economists see budget deficits and budget surpluses as tools to help manage the economy, “Profligate Pete” redefined the budget outcome as the ultimate objective of economic management. Put simply, he told us that surpluses were good and deficits were bad. So if he delivered a surplus, he must have done a good job. Right? Wrong.
Costello squandered a mining boom and convinced millions that he’d saved the country. And Hockey and Abbott have been trading on the myth of Coalition economic management ever since…
The ups and downs of the Australian economy are known as the business cycle… By the middle of the noughties Australia was about “due” for a recession. But we got lucky. Instead of a slowdown we got the biggest resources boom we had seen in a century. The prices for our biggest exports rose rapidly, and so did corporate profits and corporate tax receipts. The impacts were obviously good for the budget’s bottom line.
Rather than stockpile the windfall, Costello and Howard introduced permanent tax cuts in response to a temporary increase in revenue. Costello cut by half the tax payable on income from capital gains. He trebled the threshold for the top tax bracket. He made income from superannuation entirely tax-free, even for those who earnt millions per year. He also handed out tens of billions of dollars worth of benefits to middle- and high-income earners, while arguing that the government couldn’t afford to increase unemployment benefits, disability benefits or the age pension.
The windfall revenue was so great that, despite his largesse, the budget was still in surplus. With repetition, and with vocal support from a cheer squad of “business leaders”, he convinced people that simply delivering a surplus proved that he was doing a great job.
The idea that a budget surplus is proof of good policy has no basis in economics…
According to the pinko lefties at the IMF, Peter Costello hosed the mining boom up against a wall. Indeed, according to the Reserve Bank of Australia, Costello’s tax cuts and middle-class welfare pumped so much money back into the booming economy of the late 2000s that he forced it to increase interest rates to “take the heat” out of the economy…
Tens of billions of dollars worth of tax cuts and new benefits were pumped back into an economy that was already booming…
Costello must have known his tax cuts and middle-class spending splurge was economically irresponsible. Treasury told him. The RBA told him. And the IMF told him. He wasn’t doing economic policy; he was doing politics…
Poor Joe Hockey. It’s not his fault that Chinese demand for resources is collapsing, and it’s not his fault that Costello’s tax cuts and concessions have made the budget impossible to balance. But the job of managing those problems landed on his watch. He put more effort into blaming Labor than developing a workable plan…
Since Hockey became treasurer, the number of unemployed people has grown from 688,700 to 725,200. But while mining busts always follow booms, somehow the recent collapse in mining investment took the Coalition by surprise. What’s worse than their foresight is the lack of any clear agenda for the broader economy. While Abbott believes “coal is good for humanity”, the world’s most populous country is committed to buying a lot less of it. Just as he ignores his treasury secretary on the housing bubble, the prime minister ignores economic trends that don’t fit in with his politics.
So far the policies of the Abbott government have made the impacts of the mining bust worse, not better. Rather than help the manufacturing industry recover as the exchange rate finally began to fall, it decided that the end of the mining boom was the right time to end all assistance to the car industry. Ford and Holden will soon leave Australia once and for all…
Although Abbott came to power having explicitly promised to leave the Renewable Energy Target in place, he decided to put identity politics ahead of stable policy. As a result, investment in large-scale renewable energy fell from almost $2 billion in 2013 to just $207 million last year – a fall of 90% in 12 months…
Virtually every economist would agree that, in the long run, investment in education is the best way to boost productivity, labour-force participation and GDP growth. In its first budget the Abbott government decided to cut funding for schools education by $30 billion over ten years, one of the few big measures it decided to stick with in its second. Investment in research and development is also important; it cut spending on the CSIRO as well…
Put simply, if Hockey wanted to prioritise reducing unemployment, he would have called for greater government spending and bigger budget deficits… In a recent speech, the Reserve Bank governor, Glenn Stevens, warned that the next round of growth figures were likely to be weak, and he called for extra infrastructure spending by governments…
Regular readers will know that I agree with many (but not all) of these views.
While I also believe that the Howard/Costello Government made many short-sighted and damaging decisions – particularly around superannuation concessions, the capital gains tax discount, freezing the fuel excise, and middle-class welfare – I support their cuts to income taxes. After all, does anyone really want to see the top marginal tax rate kick in at $80,000 – as it would if the income tax cuts made after the GST was implemented never occurred? In any event, bracket creep will claw back these tax cuts over time.
Regardless, like Denniss, I do also believe that the Coalition’s so-called superior economic management is more myth than reality, and based on the incredible luck of the Howard years.
Now that this luck has run out, we are starting to see what the Coalition is made of, which isn’t a lot. Not that Labor is necessarily any better.
