JOHN MENADUE The myth that the Liberals are better economic managers?

 Scott Morrison in today’s announcement of the election date said once again that ‘Labor cannot manage money’

In an earlier post I argued that the economy is a means to an end. It is not an end in itself. The economy must ensure and hopefully advance the health of our planet and our society. Unfortunately the Government sees the economy as paramount. It believes that this will play to it’s strength. But the facts do not show that the Liberals are better economic managers.

Liberal Party performance is hindered by its out dated view of markets and the role of government.

In an article in The Guardian on 19 March 2018,  Stephen Koukoulas, a research economist, after examining economic data, concluded ‘On both measures, the level of economic growth and growth relative to the US, Labor is a better performer than the Coalition. One of the weakest economic managers since the early 1970s is the current Abbott/Turnbull administration where GDP growth has averaged a mere 0.60% per quarter which is just 0.04 percentage points above the US performance.’

Only two Australian treasurers have been awarded the coveted Euromoney ‘Finance Minister of the Year’ award. Paul Keating won it in 1984 in recognition of the government’s role in structural reform. Wayne Swan won the award in 2011 in recognition of the government’s successful response to the Global Financial Crisis. It is unlikely that recent treasurers, Joe Hockey or Scott Morrison, would make the shortlist for this award!

But what about Peter Costello who because of his performance as treasurer in the Howard government is now treated by the media as a financial guru.

Peter Costello was a very lucky treasurer. He inherited a booming world economy and a mining boom. As Paul Keating once put it, Peter Costello was ‘Hit in the arse by a rainbow’.

With record revenues in boom times, Peter Costello introduced measures which have left a very serious and damaging legacy. Continuing chronic budget deficits are very much due to Peter Costello. The Howard and Costello government wasted the buoyant revenues of the mining boom.

The parliamentary budget office put this problem in the following terms.

Over two-thirds of the five percentage points of GDP decline in structural receipts over the period 2002/3 to 2011/12, was due to the cumulative effects of the successive personal income tax cuts granted between 2003/4 and 2008/9. A further quarter was the result of a decline in excise and customs duties as a proportion of GDP. Significant factors driving this trend included the abolition of petroleum fuels excise indexation in the 2001/2 Budget and the decline in the consumption of cigarettes and tobacco over the period.

The IMF came to much the same conclusion. It identified two periods of Australian ‘fiscal profligacy’ , both during the Howard turn in office – in 2003 at the start of the mining boom and during his final years in office between 2005 and 2007. (SMH Jan 11, 2013).

In short, our continuing structural budget deficit is due in substantial part to the Howard/Costello government’s laxity with government spending in it’s last years in office. We blew the benefits of the mining boom when we should have been doing more to improve the underlying budget position.

The Howard/Costello years locked in negative gearing concessions and generous treatment of capital gains which have been at great cost to the government in lost revenue and priced many young Australians out of the housing market.

There were also tax-free superannuation benefits, family trust concessions, franking credit rebates and a whole series of decisions on spending and tax that have caused continuing budget difficulties and the skewing of the tax system and the economy in favour of older generations. There really has been generational theft.

These tax concessions introduced by Howard/Costello cost the budget over $50 billion a year. We are paying a very heavy price for the budget damage that Peter Costello inflicted over a decade ago.

The Howard/Costello governments did pay down the debt it inherited by $96b but $70b came from asset sales and particularly from the sale of Telstra for which we are paying a heavy price today in the NBN mess

The other major cause of the structural deficit is that the Rudd government spent heavily to counter the global financial crisis. It was more successful than almost any other government in the world in avoiding a major recession and unemployment, but when the recovery took hold, the Rudd and Gillard governments did not focus on the structural deficit problem particularly as identified by the Henry tax review. Some improvements were made to reduce middle-class welfare like the subsidy to private health insurance and the over-generous concessions that Peter Costello had given to superannuants. But the improvements were nowhere near enough.

Since Tony Abbott became Prime Minister, the Coalition has been predicting that it would get rid of Labor’s debt. It hasn’t. When Tony Abbott came to office in 2013, Australia’s net government debt was $174 billion. It has now doubled to over $340 billion.

The Treasurer’s forecast of a budget surplus of $7.1 billion in 2019-20 would represent a dramatic turnaround in the budget position and reduced debt. His budget forecasts are based however on estimates of economic growth, wages, revenue and expenditure that are highly optimistic, even heroic.

The Government and Treasury have been far too optimistic about wage and economic growth for several years. Productivity is now growing more slowly than in the past. Household debt is now at a record level, 190% of disposal incomes. None of that suggests good economic management.

The current budget states that the government has achieved $62 billion of ‘structural savings’ since it came to office. This also is highly problematic. The Grattan Institute states that

Achieving such a reduction in spending would require significant cuts in spending growth across almost every major spending area, during a period when we know that an ageing population will increase spending pressures, particularly in health and welfare. There have not been enough significant savings measures in the past three years to explain the turnaround. … It appears to be more driven by assumption than by reality.

So much of the Treasurer’s figures lack credibility. They are designed for an election campaign and gloss over budget reality.

Bill Shorten has said that in the election campaign, he will show that Labor will produce ‘stronger surpluses and paying down national debt faster’. We will see, but the evidence so far suggests that he may do better in budget management than Scott Morrison..

Outside the budget context, the Coalition government has shown poor economic management in critical areas.

  • It allowed the greed and abuse by our banks to continue year after year. It refused to intervene, partly because it didn’t want to offend its political friends and partly because of an ideological view that government intervention and regulation should be ‘light’.
  • Over $20 billion will have to be written off the NBN for it to have a viable and modern future. The Coalition’s performance in the NBN debacle must rank as the most wasteful infrastructure project in our history.
  • Barnaby Joyce’s inland rail will need a substantial capital write-down because its operations are unlikely to be economic.
  • The opening and closure of Christmas Island at a cost of $185 million does not suggest a government that is good at business management. It was all political posturing at the expense of the taxpayer.
  • There has been widespread waste and lack of due process in the provision of security and support services for asylum seekers marooned in Manus and Nauru.
  • The Coalition has committed $50 billion plus, for the twelve French submarines to be built in Adelaide. We could have bought modern submarines off the shelf that would be much cheaper and would be delivered much earlier. For a 300% effective rate of protection for the French submarines, we will have an increase of less than 2,000 employees. The motor vehicle industry, which the government forced to shut down had a rate of protection of less than 8% and employed 200,000 people. What a price we are paying for Christopher Pyne. One thing that is certain is that this submarine project will leave major budgetary headaches for Australia in the years ahead. None of this sounds like good business management.
  • The Coalition continues to make it virtually impossible to import second-hand cars on any worthwhile scale. The restrictions on imports of second hand vehicles were imposed to protect our motor vehicle industry. But the motor manufacturing industry has now been closed. Consumers are denied choice because the government has decided to side with the vested interests in the motor distribution sector.

To top off this poor record in economic and business management we have an economy headed in the wrong direction. After thirty years of continuous economic growth we have a planet in increasing peril, our rivers that have become unhealthy and we are unable to afford the level of public services that we once had.

Trust is being eroded because we have placed economic interests ahead of the wellbeing of our planet and society.

One must then ask the question that despite the rhetoric, why does the Liberal Party has such a poor record in economic and business management.

The reason I suggest is that the Liberal Party has ideological blinkers about the role of government in the economy and particularly the need for appropriate regulation. Following the ideology of Reagan and Thatcher, the Coalition places far too much confidence in markets and lacks an appreciation of the appropriate role for government in our mixed economy. The Coalition is handicapped and hidebound by an out-dated ideology about markets and private enterprise. The tide has turned in the world that now sees the failures of the market system. The Coalition has failed to catch up. That is why we are seeing the failure of the Liberal Party in economic and business management. Its ideology has passed its use-by date.

print

This entry was posted in Economy, Politics. Bookmark the permalink.

8 Responses to JOHN MENADUE The myth that the Liberals are better economic managers?

  1. Alan Luchetti says:

    Yes, the Libs are inferior economic managers because of rising underemployment and private debt and privatisation of natural monopolies and financial sector share of GDP and inequality. Also because of property bubble presently popping and Hayne findings and lowered wages share of GDP.

    But can we please explode the myth that a currency issuer’s “debt” is any kind of rational indicator of economic competence. Unless the economy is overheating or the current account is heavily in surplus, all that adherence to this myth achieves are the real indicators of incompetence noted in the preceding paragraph.

    Howard and Costello ran surpluses for a decade within which private debt / GDP went from 128% to 190%. That is the most relevant indicator of their competence. People have to stop thinking about money as if it were a durable circulating commodity. We’ve had a fiat currency for 30 years. Time that sank in.

  2. Michael Rogers says:

    The Chinese Communist Party could lay a claim to ‘managing the economy’.

    Australian Federal governments can manage the federal budget.

  3. Kien Choong says:

    Peter Costello should have set up a Sovereign Wealth Fund (like Norway), as the resource windfall rightfully belong to both current and future generations. Arguably that was his biggest failure.

    (I also agree the Coalition’s reputation as better economic managers is undeserved.)

    • Jordan Grant says:

      The Norwegian government sovereign wealth fund is meaningless. Like Australia, Norway issues it’s own currency, so it’s pretty pointless saving something that you can create at will.

      The Norwegians would have been way smarter if they’d denominated their sovereign wealth fund in foreign currencies and gold, as it can’t easily procure those things….

      • Michael Rogers says:

        Venezuela issues its own currency. Try buying something with it outside of Venezuela (or in Venezuela for that matter).

        Meanwhile here is what the Norwegian Sovereign Wealth Fund has invested in: https://www.nbim.no/

        • Alan Luchetti says:

          Inflation risk is (partly) about how much is spent, not whether a currency issuing govt needs to save what it can always issue.

          It’s decades since the AUD was a durable circulating commodity that needed to be saved in order to be spent.

          Why should any right thinking economist support the federal government needlessly competing against the private sector in the funds management industry?

          It’s worth remembering how Australia got its Future Fund. The financial sector lectured the fed govt about fiscal rectitude in order to increase its turnover (dollars sucked out of the economy by surpluses need to be replaced by private sector borrowing) Costello bought their lecture and a decade of surpluses threatened to “eliminate the debt” (put an end to bond issuance). The financial sector said wait, we must have a bonds market. So Costello issued bonds and diverted the dollars so sequestered into a Future Fund. The need to “save for a rainy day” was a cover story.

  4. Stephanie Dowrick says:

    Thank you John, for this blog as well as this article. I feel both deeply grateful your words are here AND outraged that we do not (or seldom do) find this thoughtful commentary in the mainstream media. I fear the next weeks will be stridently toxic as this Govt seeks to retain power – despite no evidence they would use their power to protect any but narrow interests.
    May I therefore appeal to readers of P & I to be more than appreciative of the articles that offer evidence, facts, vision?
    However you can, please actively disseminate the thoughtful analyses that you find here. Use email, social media, your own personal conversations. The buttons above (starting with the little Twitter “bird” on the left) make it so easy. Voices of integrity must be heard.
    I suspect many of us reading this blog or writing for it are older – so where you can, please invite your younger friends, colleagues, family, to join in. The future is literally theirs. Passivity suits the status quo – but the status quo is certainly not suiting or serving us.

  5. David Thackrah says:

    I have to say you have confirmed my overview since the week PM Howard sent a cheque for $600 per child to every mother. I utterly disagreed with this fiscal stupidity by the Federal Government. Now in 2019 my case rests.

Comments are closed.