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 ANALYSIS |
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Politics
Who are the better economic managers?
Mike Dobbie, October 15, 2007
Mike Dobbie looks at the challenge of economic management for whoever wins the election
It’s easy to look back on the past 20 years and think that the ALP has been a comparatively poor economic manager. When in November 1990 Paul Keating as Treasurer uttered: "This is the recession Australia had to have" it was a politically disastrous statement. But economically, it had a ring of truth. The structural misalignment that marked the global "greed is good" decade had to be fixed. Even so, the recession was triggered by poor monetary policy by the Reserve Bank in raising official interest rates to 19 per cent as much as it was connected to a global downturn.
The Hawke and Keating governments had taken hard decisions: deregulating the financial system, floating the dollar and implementing wide-ranging industrial relations reforms. The tax system was tightened with the Part IVA provisions that closed the "bottom of the harbour" loopholes. Tariffs were slashed to compel industry to become more competitive. In all, the structural reforms by the ALP transformed the economy and triggered the boom we have enjoyed for the past 15 years.
Over the past decade the Howard government has subsequently benefitted from those reforms, and added to them. Aside from the occasional shock from oil prices, the dot.com collapse, the Asian financial meltdown and the 9/11 attacks it has enjoyed booming global economic conditions. The economic good times are underwritten by the resources boom and ongoing demand for our raw materials – materials that are transformed into goods that are then sold back to us and often bought on credit.
The Howard Government has continued with the Hawke-Keating deregulations, restructuring the taxation system, tightening welfare (while doling out the politically clever First Home Buyers’ grants and the Baby Bonus – future governments will find them almost impossible to abandon even though they address only the symptoms of deeper economic ills).
However, Howard’s team has been slow to react to other issues. The Reserve Bank has raised interest rates nine consecutive times since May 2002 due in part to the boom times being experienced; low unemployment has been matched by a dire skills shortage; infrastructure spending has been painfully low, household debt has continued to soar as Australians opt out of the saving habit; the tax system extracts more from the economy than necessary with a massive $17 billion surplus sitting in government coffers. The WorkChoices industrial relations system reforms have been grossly unfair, stripping workers of long-held rights (conveniently not mentioned in the government’s latest ad campaign) and tilting the balance in favour of employers.
The biggest economic challenge to the side that wins government after the election will be meeting the challenge of the drought and climate change. At present, the Howard Government refuses to acknowledge a connection between global warming and the drought – while suggesting we pray for rain. Only in November 2006 did it begin making formal policy statements on combating climate change and global warming after more than a decade of denial – indeed, this month the PM used the phrase "climate shift", rejecting the use of "climate change". It took until July this year for Howard to make his announcement on You Tube of $627 million in new spending to promote water saving and lower energy use in schools, and a cap-and-trade emissions trading system. He promotes nuclear energy but cannot convince the electorate, especially as the scheme can’t be put in place for more than a decade.
The Government is also campaigning on "experience" among its ranks, assuming that the electorate will forget that there are vast departments of public servants who advise ministers. We should remembers that Peter Costello was a barrister and economics tutor before he became Treasurer. Dr Brendan Nelson was president of the Australian Medical Association before overseeing Australia’s military activities in Iraq and Afghanistan.
And, as Andrew Charlton points out in the October issue of The Monthly magazine, when Howard was Treasurer in 1982 official interest rates hit 21.4 per cent and home loan rates hit 13 per cent. That compares with 7.9 per cent and 12 per cent respectively during Keating’s term as prime minister. Howard also knows it is the Reserve Bank board, not treasurers or governments, which monitors monetary policy and sets the official cash rate target, independent of government so claims about keeping rates low are largely out of his hands as Keating found out with "the recession Australia had to have".
Economic management in Australia is as much influenced by government budgets and Reserve Bank interest rate policies as it is by global conditions. But the biggest influence in coming months and maybe years will be the drought. Its impact on our exports as well as household income and expenses will require smart economic management whether it is John Howard or Kevin Rudd who resides in the Lodge in 2008.
More articles from this week's CompareShares newsletter:
Companies: Exclusive interview with the Pratt dynasty
Stocks: Stock picks for the long haul: Reece Australia and ARB Corporation
Politics: Who are the better economic managers?
Commodities: Wheat prices soar
Technical analysis: Elliott Wave theory spells doom and gloom for the US market
Stock of the week: Imdex Limited
Resident trader: How to profit from volatility
Smart investing: Counting the cost when confidence is lost
Economics: Australian employment data signals rate hike
Stocks: Construction: a two-speed industry
Whatever your views, you can discuss this article - or any of Mike's articles - on our message board Your 2 Cents, in the Analysis section.
Mike Dobbie is business consultant. He is a former managing editor with Fairfax Business Magazines.
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