Who has a plan for the economy?

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Elections are always strange but it seems to me that this one is operating in the Twilight Zone. One side of politics sees itself as having a plan to transition the post-mining boom economy:

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In this very uncertain world, Australia needs a strong economic plan for jobs and families.

Australia is transitioning from the mining construction boom to a new and more diverse economy – fuelled by innovation, the opening of new markets and more investment in Australian enterprise.

The Coalition’s Plan for a Strong New Economy is supporting this transition.

Our Plan will provide growth, jobs and a secure future for Australian families through:

  • An innovation and science programme bringing more great Australian ideas to market, providing tax incentives to invest in start-up businesses and helping prepare our children for the jobs of the future by boosting participation in science, technology, engineering and maths (STEM).
  • A defence industry plan that will secure the nation and supports innovative Australian companies, local advanced manufacturing and hi-tech jobs, particularly in regional Australia.
  • Export trade deals to generate new business opportunities, give our farmers a competitive edge and open doors into expanding markets for our service industries.
  • Tax cuts and incentives for small businesses and hard working families.
  • A sustainable budget with crackdowns on tax avoidance and loopholes.
  • Guaranteed funding for health, education and roads.
  • The restoration of the rule of law in the construction industry by re-establishing the Australian Building and Construction Commission. We are restoring honesty and fairness to the workplace relations system.

Our Plan will deliver the benefits of a growing economy and a better community to all Australians.

Our Plan will deliver a strong new economy with more than 200,000 new jobs for Australian workers.

Our Economic Plan is seeing results:

  • The Australian economy is growing at 3% a year – faster than any of the G7 economies.
  • Around 300,000 new jobs were created last year, the strongest growth in employment since 2007.

But there is more work to do to continue the successful transition of our economy.

That’s why the Coalition is directing every lever of policy to secure our nation’s prosperity and economic security for the 21st century.

The centerpiece of this singularly thin and vague “plan” is an afterthought company tax cut that will probably benefit GDP at the margin over the very long term while costing it in income as the tax cuts flow offshore to foreign equity holders. Everything else on the list is bipartisan policy.

In truth, the Coalition plan is to ‘not disturb the horses’. It is acting on the advice of Treasury and the RBA that a weak economy is now completely dependent the housing bubble that the two inflated to float Australia over the mining bust that they never saw coming. In order to this, all three have had to lie about Budget prospects and to shelve all meaningful reform.

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Labor, on the other hand, appears to have no interest in an economic plan at all:

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The Labor platform nudges things around a little differently to the Coalition but in truth it’s only major difference is to refuse a company tax and reform negative gearing instead. Yet even this policy is represented in the context of fairness not reform.

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One can only assume that behind closed doors Labor understands how economically transformative its negative gearing reform policy really is even if it doesn’t want to say so. Cutting negative gearing is the single most important structural tax reform in twenty years and probably longer. It will remove an huge pillar from the housing inflation and consumption model that has dominated Australian growth for four decades. It will flat-line house prices (and see initial falls), lower interest rates and the currency, and dramatically boost Australian competitiveness so that we can grow instead through sustainable investment in the 40% of the economy that is tradable – exporters and import competers. It will also radically boost productivity growth and begin to deleverage the economy.

It is a decade overdue and absolutely necessary. From Morgan Stanley via the AFR:

Australia's total non-financial debt/GDP has increased to 243%.

Ballooning government and household debt has failed to produce a meaningful economic growth dividend and is increasing risks to the economy, according to damning research by Morgan Stanley that lends support to Labor’s push to dump negative gearing.

Calculations by the investment bank show Australia last year used up more than $9 of debt for every $1 of extra gross domestic product, which is around three times more than the debt needed to produce the same amount of growth in the US economy.

​Even more concerning, according to Morgan Stanley, is the comparison to China – where a so-called “debt productivity ratio” of $6 has stoked deep-seated global financial market fears this year about the sustainability of the world’s second-largest economy.

Speaking as the federal election debate increasingly focuses on risks to Australia’s AAA credit rating, Daniel Blake, an economist at Morgan Stanley in Sydney, warned that Australia should urgently find sources of growth that are less debt-intensive, particularly outside the hugely leveraged property market.

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In short, at this election, one political party has no plan but is very busy telling us that it does, while the other has a plan yet is very busy telling us that it doesn’t. Politics is a strange business.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.