Home truths for Labor


Gough Whitlam ended twenty three years of Liberal government in December 1972, but it took the recession at the end of 1971 and the beginning of 1972 to help Labor across the line. Bob Hawke defeated Malcolm Fraser after eight years in office in 1983, but Labor then was helped by one of the sharpest economic downturns in Australian post World War II experience. For his part Fraser defeated Whitlam in 1975 in the midst of a recession. It is true that as Prime Minister Paul Keating increased Labor’s majority in 1993, after another deep recession, but the voters caught up with him three years later. Every change of federal government for the last half century has been preceded or accompanied by economic failure. Conversely, there has never been a change of government at a time of economic success.

How then does the federal Labor Party shape its strategy now? The Australian economy is not merely prosperous. In many respects the recent economic experience is the best Australians have ever enjoyed. Later this year the economy will highly likely begin the fifteenth year of uninterrupted expansion, a record unmatched since European settlement. In the last fourteen years real household wealth has doubled, a bigger increase than occurred over the previous forty years. Average real income has increased by nearly half. Average real earnings have increased by nearly one third. There are two million more jobs today than there were fourteen years ago, a much bigger increase than in the previous fourteen years. The proportion of working Australians to the whole population is at a twenty seven year high. Unemployment is now hovering just above 5 per cent, a twenty five year low.

Thanks to Peter Nicholson

Thanks to Peter Nicholson from The Australian.

Prime Minister John Howard and Treasurer Peter Costello were dismayed by numbers showing the Australian economy expanded by only 1.5 per cent last year, the lowest rate of growth since the downturn of 2000. They were embarrassed by the record high current account deficit for the fourth quarter of last year, and by the decision of the Reserve Bank of Australia to increase interest rates in March. But it would be foolish indeed for Labor to imagine the long run of prosperity is over. The increase in jobs is at odds with the reported weakness in production, and so too the strength of profits, of the share market and of business confidence. Behind the poor overall numbers was substantial strength in business investment and continuing growth in household consumption. The major weakness was in declining housing construction, a sector long due for a downturn. A great deal depends on stronger export growth, but there is nothing in the numbers for 2004 to preclude solidly increasing output and employment between now and the next federal election. Global growth may well be down this year but the US, China, Japan, most of the rest of East Asia and to a lesser extent Europe will continue to expand, underpinning Australian export growth. If export growth increases and import growth fades, as I expect, the current account deficit at the end of this year will be a little narrower than the end of last year.

It is certainly true that not all Australians have benefited equally by the long upswing. The doubling of wealth has widened inequality. Families that fourteen years ago owned a house and some shares have seen the price of the house more than double and the value of the shares triple. Those who had nothing then have seen the gap between them and their neighbours widen. It is also true that high incomes have increased much faster than low or middle incomes. But the increasing disparity of incomes has been mitigated by what is still a quite progressive income tax system, and by large and increasing family payments delivered as part of the Howard government’s political strategy. There are pockets of poverty, but it hard to argue that any substantial number of Australians are worse off than they were a decade ago. Most are much better off.

One might argue that this exemplary run of success is very largely the gift of the Hawke and Keating governments. Indeed it is. The float of the Australian dollar in 1983, tariff cuts initiated in 1988 and 1991, and then the big shift from centralised wage fixation to enterprise bargaining in 1993, together transformed the Australian economy into a highly competitive and efficient growth engine. They were the great and difficult reforms, compared to which such subsequent improvements in Australian economic framework as the Howard government has carried out have been worthwhile, sometimes hard, but essentially second order. Most of the swing from budget deficits in the mid nineteen nineties to small surpluses today, for example, was accomplished by an increased tax take – the straightforward outcome of continued economic growth. Commonwealth government debt has been reduced, but most of that reduction is accounted for by the sale of half of Telstra – a balance sheet change in which an asset is sold to reduce debt.

In this sense Howard and Costello are repeating the experience of their party’s founder, Robert Menzies. He was helped by an expanding global economy but the real secret of his post war economic success was John Curtin’s dramatic remaking of the Commonwealth during the war. In a little over three years Curtin created a true central bank with control over the financial system, seized for the Commonwealth predominant control over taxation and spending, and then linked both arms of policy to a goal of full employment. Menzies inherited a policy apparatus with which the Commonwealth could, for the first time, smooth the booms and busts which had been characteristic of the Australian economy. It was not the only reason Liberals remained in power until 1972, but it helped.

There is no doubt the big changes of the Hawke and Keating governments set Australia up for its long run of prosperity. But the good deeds of Labor twenty years ago will be no reason to elect Labor tomorrow. By the time of the next federal election the currency float will be very nearly a quarter century behind us.

It seems to me Labor must begin a new approach to economic issues by recognising certain premises. One is that so far as jobs and growth are concerned the economy is pretty good now, and it will highly likely be pretty good in two years time. The expansion is solidly based on strong business investment as well as expanding household consumption, and while exports have been disappointing they will highly likely strengthen. There are all sorts of ways in which the economy could run into serious trouble, but the risks are no higher today than they have been for the last fourteen years. There are plenty of issues on which the government can be challenged and embarrassed, but it would be fatal for Labor to persuade itself that it will coast to power in two years on the back of rising unemployment and high interest rates. It is a possible scenario, but unlikely.

That said, the government is highly vulnerable on economic management, and there is an alternative account of what policy should be aiming to achieve.

The critique should not dwell on Labor’s historical responsibility for the long run of economic success, though it should claim it. Labor should not be afraid to claim credit for tariff cuts, for the deregulation of banking, for the shift from central wage fixing to enterprise bargaining transition, or for the float of the currency “ despite some lingering reservations within the Party. Nor should it be afraid to recognise that in claming credit for the long run of economic prosperity it commits itself to encouraging competitive markets and an open economy.

The central tenet of the critique is that the Howard government and specifically Peter Costello as Treasurer are riding the boom, but doing very little to sustain it. They are failing to use the prosperity generated by the boom, the vast increase in tax revenue, and greater willingness to accept change that arises from continued success and the existence of full employment, to entrench growth and build Australia’s competitive advantages.

Treasury and the Treasurer have prepared the public well for the ageing of the population. It has been useful, but population ageing does not become a serious issue for another two or three decades.

By contrast they have done very poorly in preparing Australia for the issues posed by an extended period of strong growth, and by Australia’s increasing integration into a fast changing global economy.

The neglect is most obviously apparent in physical infrastructure, which now limits export growth and constraints productivity growth in transport and distribution. The federal government does not have an inventory of national needs in physical infrastructure, and hasn’t announced any intention to compile one.

It is apparent in shortages of skilled workers, now increasingly apparent in mining, construction and manufacturing. It is also apparent in education, from pre school to post graduate level. Australia is endowed with mineral resources and arable land, but mining and agriculture together now account for less than one tenth of GDP. Much of the rest of Australian’s income is generated by the production of services. The quality of these services depends on the skills of the providers. It follows that Australia’s competitive advantage depends on the quality of education and training. In most measures of education performance Australia scores around the middle of the OECD group of wealthy economies. Given the long run of prosperity and the swelling revenue of the Commonwealth, there is no reason Australia should not have one of the best eduction systems in the world, and one that is designed to entrench a competitive advantage.

Investment in education and infrastructure can becomes the key elements in a critique of the Howard and Costello approach, and in posing an alternative approach.

In claiming credit for the long run of prosperity Labor necessarily embraces Australia’s openness to gobalisation, the major long term force now driving economic change. But that openness imposes costs on some Australians, which Labor policy can mitigate. The steadily increasing denial of equality of opportunity which is inevitable with increasing wealth, increasing incomes, increasing inequality and increasing privileged access to education and health imposes not only a social cost but a growing economic cost. Labor should declare for equality of opportunity, and the health and education policies which support it. One important protection is a structure of minimum payments by occupation, a structure now contained in the federal award system which the Howard government clearly plans to dismantle. Labor should have no hesitation in defending the present federal system of enterprise bargaining underpinned with minimum award rates. It set the system up in 1993 and 1994, and it has been responsible for the most sustained improvement in labour productivity, employment and real wages growth in decades. There is a big difference between reforms intended to increase flexibility and productivity, and those changes intended merely to dramatically shift the balance of power within industrial relations towards employers and their organisations.

Tax issues occupy the centre stage in the economic debate, but they should not obsess Labor. Under the Howard government the top marginal rate of 47 cents in the dollar will, from July 1, kick in at income above $80 000. More than 80 per cent of taxpayers have incomes below this level. Whatever the Howard government may do, Labor has no compelling reason to dramatically reduce the top marginal rate or offer more than a small change to the top threshold. Not has it any reason to raise the tax free threshold, a change which is extremely expensive, further encourages income splitting, and provides an identical benefit to the very well off and the moderately poor. What money is available for tax cuts should be directed at lower incomes. Though Labor has lost interest in credits rather than cuts to the rates or thresholds of income tax, the Howard government has not. Its generous family payments are effectively credits, which it correctly sees are politically more effective and fairer than further increases in the tax thresholds. The debate over tax is bound to be vigorous, but it is all about distribution, very little about productivity, and Labor has no reason to be intimidated by it.

The bad news for Labor is the difficulty of achieving a change of government during a continuing economic upswing. The good news is that for the first time in nine years Labor is swiftly moving towards a plausible, consistent and appealing policy approach which emphasises its own strengths and searches out the government’s weaknesses. It has yet to put a strong case for education on economic rather than equity grounds. It has yet to develop the debate over training, retraining and skills shortages. But there is no doubt Treasury spokesman Wayne Swan and Infrastructure and Industrial Relations spokesman Stephen Smith are already well down the path of reconstructing Labor’s approach, and that Opposition Leader Kim Beazley is there with them. Labor is already achieving traction in the economic debate. What remains is to tie it all together, and insistently put it across.

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