The Australian economy under Abbott

By Bernard Keane and Glenn Dyer
Tuesday, 05 February 2013

1abbott-thumbHow would the Australian economy fare under a re-elected Labor government or a newly elected Abbott government?


The answer is complicated: the opposition is refusing to spell out in detail its economic and fiscal policies, and in any event governments respond to changing circumstances in a way often at odds with their stated policies and election commitments.


And we don’t know the make-up of the Senate from July 1, 2014 so it’s hard to know what capacity either side would have to get its legislative agenda through.


But we have enough sense of Labor and Coalition policies — assuming they broadly adhere to them and get to implement them – to get some idea of the different paths the economy might take under each.


Today, the Coalition. While there’s limited detail and some confusion about the Coalition’s fiscal policy, Joe Hockey, Tony Abbott and Andrew Robb have laid out some important pointers:

  • A tighter fiscal policy than Labor
  • Significant cuts in the public service beyond those already achieved by the government, including removal of duplication of functions at state and Commonwealth level
  • Lower personal taxes and abolition of the carbon price and mining tax
  • Measures to lift workforce participation
  • Cutting regulatory costs for business by $1 billion a year
  • Labour market reforms but not a return to WorkChoices
  • Tax breaks to drive greater private sector investment in infrastructure.

Some other policies are also relevant: more red tape for foreign investment, anti-dumping and, potentially, wheat marketing and less red tape for uranium sales to India, as well as a more generous paid parental leave scheme than Labor’s offering.




The logical upshot of the Coalition’s approach is significant spending cuts: not merely does the Coalition intend to run a tighter fiscal policy than Labor, but run one while offering tax cuts — eliminating the carbon price (most revenue of which is redirected to free permits to polluters, so the overall impact is limited), eliminating the mining tax (the impact of which is heavily dependent on the coal and iron ore price) and reducing personal income taxes.


However, the net effect on the Commonwealth’s contribution to demand will, because of those tax cuts, only reduce by the extent to which the Coalition’s fiscal policy is tighter: if for example Labor projects a $2 billion surplus in 2013-14 in the May budget and the Coalition aims instead for a $5 billion deficit in 2013-14, the net impact on demand is, at $3 billion, fairly trivial. The issue will be what services and programs are cut to meet the Coalition’s policy requirements.


In the longer term, the Coalition is committed to an absolute reduction in the size of government, via public service cuts, a National Commission of Audit and Robb’s proposal to eliminate duplication between state and federal governments.


The Coalition has talked tough on reducing government before and signally failed to follow through — the Howard government in fact became the biggest taxing government in Australian history.


But in the event the Coalition follows through, any longer-term permanent cuts in spending would presumably be accompanied by tax cuts, negating the impact on demand.


The real issue in that event would be whether tax cuts are simply handed back to voters, Howard style, or they are used to eliminate inefficient taxes or encourage investment.


In short, the Coalition’s commitment to tighter fiscal policy is unlikely to materially affect overall growth, although if broader economic conditions are soft, blindly following a tighter fiscal policy will exacerbate that softness and may precipitate a downturn.


The Reserve Bank will have some additional room to cut interest rates, but the stimulatory impact of monetary policy is likely to decline, given the RBA already has rates at extraordinary lows.


On monetary policy and finance more generally, Joe Hockey has promised a major inquiry into the financial system, and also seemed to suggest he will be more effective at convincing the big banks to pass on all interest rate cuts. If that were the case, the RBA would actually be able to cut rates less, knowing the full cut will be delivered through to consumers.

All up, the economy under the Coalition is on current evidence unlikely, at least over the course of its first term, to look significantly different to how it looks now …”

A tighter fiscal policy might also place upward pressure on the dollar, by reinforcing Australia’s safe haven status, especially if the RBA has little room left to further cut rates — but again, the material effect is likely to be limited.


Economic growth might also benefit from any rise in consumer confidence that comes from the return to majority government, potentially flowing through to retail sales, although retail’s “problems” are primarily structural rather than due to a lack of consumer vim and vigour.


Story continues on page 2. Please click below.

But nothing in the Coalition’s current policy set appears aimed at addressing the persistent stagnation of residential construction, which the RBA is hoping will pick up the slack through this year as the mining investment boom peaks and comes off the boil.


The Coalition policy to cut red tape worth $1 billion a year, while worthy, is unlikely to have any significant economic impact; as the majority of red tape costs are in the time and resources required for compliance (particularly for small business), such savings are likely to be absorbed directly by business, and in any event are too small to produce a noticeable difference to economic growth.


And any additional investment generated by reductions in red tape may be offset by increases in reporting requirements for foreign investors proposed by the National Party, re-regulation of wheat sales at the behest of an uncompetitive section of wheat industry and the imposition of even more “anti-dumping” laws, an issue on which the Coalition appears determined to outflank Labor to the Left.


The Coalition is, however, likely to have mixed fortunes on productivity, which it identifies as a priority. Multifactor productivity is likely improve naturally as the vast spate of mining projects currently under construction mature.


It may also benefit from greater investment in infrastructure, which is the goal of Robb’s (inaptly-named) infrastructure bonds proposal, although that will be balanced by the abandonment of the NBN in favour of Malcolm Turnbull’s bizarre, copper-based FTTN proposal.


Workplace relations reforms intended to give employers more power to drive productivity reforms will, perversely, likely lead to reversals of the labour productivity gains currently occurring under Labor.


The decline in labour productivity under WorkChoices has been well-established and indeed was predicted by Treasury prior to the introduction of those reforms; any move back toward WorkChoices-like workplace relations laws are likely to once again send labour productivity into reverse.


On the upside, there is likely to be fewer days lost to industrial disputes. Against that, the restoration of the Australian Building and Construction Commission will see a rise in the number of construction workers being killed and injured on the job.


The Howard government presided over a significant increase in workforce participation (one area where Labor has performed poorly).


A more generous paid parental leave scheme may help marginally, as will IR deregulation (a key reason for the decline in labour productivity under WorkChoices was the entry into the workforce of poorly skilled workers made more employable by the ease with which they could be sacked).


It should also be noted that a big rise in participation will send the unemployment rate up, with more people looking for work.


And whatever gains have been made in the decarbonisation of the Australian economy by the time the removal of the carbon price is achieved are likely to be reversed under the Coalition; its “direct action” policy is grossly underfunded and, in the absence of a fairly significant funding increase — of some billions — is likely to ensure Australia fails to achieve its emissions reduction target by 2020.


All up, the economy under the Coalition is on current evidence unlikely, at least over the course of its first term, to look significantly different to how it looks now, assuming similar conditions.


A global slowdown or difficulties in China would mean slower growth and demand more fiscal flexibility from the Coalition that its hairy chested rhetoric now suggests. But that picture may change substantially once we start seeing some real detail about what Joe Hockey would do as Treasurer.


This story first appeared on Crikey.


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