Federal Labor – dealing with its economic mistakes

In 1992 there was a sign in Bill Clinton’s campaign office. It said ‘It’s the economy, stupid.’ Its purpose was to serve as a daily reminder to the candidate that economic issues would be paramount in his presidential campaign.

Last October, there was no doubt the Howard Government could credibly claim that the economy was in good shape. It is therefore hardly surprising that the government was re-elected.

However, the 1.8 per cent swing to the Government, the net loss by Labor of three seats and Labor’s resulting need for a 4.8 per cent swing to win a majority of seats in 2007, are good reasons for Labor despondency.

There are several reasons for optimism though. The first is that the new Leader, Kim Beazley, will be able to change policy and make a fresh start.

Second, at the 2004 elections the ALP needed a swing of 2.3 per cent to win the required seats and may well have done so (or come close) but for policy decisions announced during the campaign.

Third, Labor should not underestimate its chances of getting a 4.8 per cent swing in 2007. Noting Labor’s two-party vote this time was 47.3 per cent, government could therefore be won with 52.1 per cent, less than the Coalition’s 52.7 per cent in October or its 53.6 per cent (on a 5.1 per cent swing) on assuming office in 1996.

It is simply defeatist to suggest that such a swing is unachievable. At the 1998 elections, the swing to Labor (under Beazley) was 4.6 per cent, achieved with policies directed to shoring up Labor’s base vote rather than to attracting the middle ground swinging vote. Labor seemed to assume it could not win that election, a mistake which should not be repeated.

There are several other positive factors.

Howard is unlikely to be favoured by the same good economic figures in 2007 and after almost twelve years in power, it will be unable to blame Labor for any deficiencies.

So what should Labor do?

First, the caucus must unite around the new leader and avoid the recent indiscipline. Why caucus members have felt the need to talk either on or off-the-record about internal matters to every journalist in Canberra, is mystifying.

Second, Beazley must deal with Labor’s alleged economic mistakes of the Hawke/Keating years.

The Labor weaknesses alleged by the Coalition are: high interest rates, a large budget deficit in 1996 and high foreign debt.

As to interest rates, when the decisions to impose high interest rates in the late ’80s and early ’90s are examined, they were taken by Labor after receiving extensive advice from the economic ‘family’ of public servants advising the Treasurer, Paul Keating, and the Government. At the time the most senior of these advisers consisted of the then Secretary of the Treasury, Bernie Fraser (in late 1989 to become the Reserve Bank Governor), his deputies, Chris Higgins (who succeeded Fraser as Secretary in 1989), Ted Evans (later the Secretary under Howard) and David Morgan (now CEO of Westpac). The other ‘family’ members were Bob Johnston, the Governor of the Reserve Bank (appointed by Howard when Treasurer of the Fraser government) his deputy John Phillips, a respected conservative, and the then head of the Bank’s research department Ian McFarlane (the current Governor).

However, if you think my thesis is that the bureaucrats made the decisions not the Government, you’re wrong. Keating and his principal staff adviser, Don Russell, contributed heavily to the debate and PM Hawke was also involved. The Government made the decisions, but only after lengthy consultation with the ‘family’.

What happened was that the 1987 stock market crash was thought likely to have a substantial negative impact on economic activity. In 1988 a debate about the level of interest rates within the family commenced which has been documented. That debate is set out in Dr John Edwards’ superb biography of Keating written from Edwards’ perspective as a journalist and an economist. Edwards was given free access to Keating’s records. We therefore know pretty much what happened.

In 1988 budgetary policy was already tight and Keating’s budget of that year announced a budget surplus of $5.5 billion. Wages policy was also tight in an effort to reduce inflation which at that stage had not been beaten and was still expected to be 6.5 per cent per annum in 1988-89.

At the time, the family felt that interest rates were the most suitable instrument to prevent the economy tipping over into recession. The difficulty was that neither the Treasury nor the Reserve Bank (nor anyone else) was aware that a major investment boom was occurring that year.

The Hawke government was therefore formulating policy in a knowledge vacuum. It did not increase interest rates as quickly in 1988, as a retrospective judgement would suggest was needed. By 1989 when there was a realisation that the economy had been booming, interest rates were further increased.

Rates continued to be increased through 1989 to high levels, in accordance with the best ‘family’ advice. By mid-1989 the economy began to turn down but this was not to be known until 1990. Interest rates should therefore have been reduced from that time but instead were further increased. What effect this had on the recession which took place is a matter for conjecture. It may have had little effect but the suspicion is that the recession may have been softer if the advisers’ economic analysis had been more accurate.

Of course, an incumbent government has to take responsibility for economic (or any other) policy failure and it’s fair to say that monetary policy was misapplied. However, from Edwards’ account of the decisions it is clear that the government was making decisions only after taking careful advice. It is simply unfair to suggest that this was some sort of particular Labor government failure.

If Howard had won the 1987 election, his likely Treasurer would have been Jim Carlton. One asks, under Carlton would the result have been any different? The fair conclusion is that similar decisions would have been made on the same advice. Two further factors support this conclusion. Howard would never have used the Accord process to cut inflation as Hawke did, and may not have cut expenditure so diligently if his recent actions are any guide, leaving him to rely even more on interest rate increases.

Finally, during the Hawke/Keating years, the real (after inflation) level of interest rates was lower on average than during the Fraser/Howard years!

Now, to the alleged large Budget deficit of 1996. When Treasurer Howard left office in 1983, Treasury revealed that the previous Government’s projected budget deficit for 1983-84 was $9.6 billion, equivalent to 4.7 per cent of GDP.

No budget deficit has ever exceeded that figure either before or since. The projected budget deficit left by Keating in 1996 was $9 billion but in real terms it was about half the deficit of 1983. As a percentage of GDP it was only 2 per cent. ‘Beazley’s black hole’ never existed.

The third weakness, the alleged high level of net foreign debt run up under Labor, is also easily disposed of. Since Howard was elected that net debt has doubled. End of story.

The Beazley Opposition should fight hard those views of the supposed weaknesses of the Labor years but should not neglect the great economic reforms of that period.

The crucial decisions of the Hawke years directed to internationalising the Australian economy, by floating the dollar, abolishing foreign exchange controls, cutting tariffs on imports, admitting overseas banks to compete with the domestic banks and deregulating the financial markets, were key decisions which have and are transforming our economy.

Unfortunately, the Opposition lacked economic credibility at the 2004 elections. Of course, ‘It’s the economy stupid’ still applied. The rest was inevitable.