Earlier this month, the head of the Prime Minister’s Economic Advisory Council, Maurice Newman, delivered a one-eyed speech to the Committee for Economic Development of Australia (CEDA), where he blamed the former Labor Government for the economy’s and Budget’s woes:
After having watched five long years of reckless spending, economic waste, class warfare, particularly aimed at business and, the mindless destruction of Australia’s international competitiveness and, the reintroduction of workplace rigidities, I thought I had a civic duty to stand up…
Indeed, I am shocked that so much economic damage can be inflicted in just six years (of the federal Labor government). While the full effect and extent of it is mainly invisible to most Australians…
Think, six years to create, more than a decade to repair…[T]he harm done is more than dented confidence. It is real and worse, structural.
…today’s deteriorating economic situation was entirely predictable and avoidable. The warning signs were there for all to see, yet Labor decided to ignore them…
Labor’s justification for its unbridled spending was the global financial crisis. A temporary stimulus may well have been justified, but, thanks to China, it should have been short lived. Today’s problems were not made in New York, Athens, Dublin, or, Madrid, but in Canberra.
Today, Newman has returned continuing the Labor blame game and firing back at his critics. From The Australian:
[My earlier speech] proposed policy prescriptions that would return Australia to a sustainable growth path, a path from which we departed after the election of the Rudd-Gillard governments. It was a flashback to the less regulated Howard era, when Australia was internationally competitive, when policy settings allowed us to capitalise on favourable global economic conditions and when gross domestic product per person grew faster, on average, than the OECD, raising Australia’s GDP per person from the bottom third of OECD countries in the early 1990s to the top third in 2007. It was an era that bequeathed the Rudd government no net debt and a surplus of $20 billion.
Contrast this with the legacy inherited six years later by the Abbott government: federal deficits, which according to the Grattan Institute will average $60bn a year in today’s terms, for a decade; and gross debt that is likely to peak at about $440bn. Instead of being internationally competitive, we have slipped, on the kindest measure, from 15th globally in 2009-10 to 21st in 2012-13. Today, that other era seems like paradise lost…
As noted last time, I find it curious that Maurice Newman continues to remain silent on the ballooning of entitlement spending aimed at middle class families, the aged, and wealthy retirees under the Howard Government, which have arguably contributed much more to Australia’s structural budget deficit than any policies implemented under Labor. How could Newman ignore all the baby bonuses handed out, increases in aged pensions, and the generous tax breaks implemented by the Howard Government for superannuation – including tax free superannuation for retirees and cuts to the superannuation contributions surcharge on higher income earners? And how can he ignore the short-sighted decision to end indexation of petrol excise, which now costs the Budget some $5 billion per year?
Similarly, how could Newman gloss over the Coalition’s acts in opposition, whereby they opposed nearly every reform that would have improved the long-term sustainability of the Budget, including opposing the mining tax and changing fringe benefits taxes on leased cars? Or Tony Abbott’s promised paid parental leave scheme, which if implemented will lavish taxpayer largesse on higher income families and blow a huge hole in the Budget?
And how would Newman’s championing of oligopolies and proposal that Australia “rebalance the interests of consumers and businesses” in order to “acquire the necessary critical mass in a small domestic market without running up against trade practices issues” and create “national champions at home” – which is another way of saying that Australia should roll-out the carpet for rentiers – improve the Australian economy’s prospects?
More broadly, in praising the Howard Government’s legacy, Newman conveniently ignores some important facts.
First, the primary factor separating the diverging budgetary fortunes of the Howard era and the Rudd/Gillard era was that Howard governed during a period of favourable macroeconomic conditions, both locally and abroad. Howard presided over the most lucrative part of the resources boom when commodity prices and the terms-of-trade literally exploded, providing the key impetus for the rising disposable incomes (see next chart).
Nominal GDP is the dollar value of what’s produced and earned across the economy and is also the measure that drives taxation revenue. Due in part to the inexorable rise in the terms-of-trade, the Howard Government experienced ever growing nominal GDP growth as commodity prices surged, whereby it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. By comparison, the Rudd/Gillard Governments experienced two episodes where nominal GDP collapsed – both on account of falling commodity prices (see next chart).
Let’s also not forget that the Howard Government made the disastrous decision to halve the rate of capital gains tax (CGT), making property speculation even more fruitful. The decision on CGT also helped kick-off a boom in household debt, whereby debt levels literally exploded over the 11 years that Howard was Prime Minister (see next chart).
This extra demand (spending) by the household sector meant that the Howard Government was able to achieve higher growth and run bigger surpluses, without adversely affecting overall demand in the economy (see next chart).
Once Rudd became Prime Minister in late-2007, however, the ratio of household debt to disposable income flatlined as households dramatically lifted their savings rates. This deficiency of household demand (spending) effectively left a hole in the economy that had to be filled by increased demand (spending) by the Federal Government, which pushed the Budget into deficit.
Put simply, analysis of the Rudd/Gillard Government’s performance is not as black and white as Newman makes out. Had roles been reversed and Labor was in power during the Great Moderation and the once-in-a-century commodity price boom, chances are it would now be claiming fiscal superiority over the Coalition.
The Howard Government’s reign was as much a case of good luck and being in the right place at the right time as good fiscal management.
