Australia after the boom: Abbott's challenge

Between the 1990–91 recession and late 2013, Australia enjoyed the longest unbroken period of economic expansion of any developed country ever. During this time, average incomes, measured in international currency, rose from the lower middle ranks of the developed countries to, at their peak, 25 per cent higher than those of the United States and 50 per cent higher than those of the European Union – a status unknown since the great boom from the gold rushes of the 1850s to 1891 that incubated modern Australia.

The expansion of the 1990s was built on solid foundations: rapid increases in productivity. Yet the expansion of the decade that followed was built on sand that was bound eventually to shift: at first a housing and consumption boom funded by bank borrowing from international debt markets; and then an unprecedented lift in the ‘terms of trade’ (prices for exports relative to imports), leading to an increase in resources investment to an unprecedented share of the economy.

The housing and consumption boom ended by the mid-2000s. That would normally have disrupted the prosperity: the global financial crisis would have descended upon us at a time of weakness were it not for the timely arrival of the China resources boom.

This boom was caused by a historically unique period of economic growth in China: the strongest, longest episode of ‘catch-up’ growth that the world has ever seen, using energy and metals more intensively than other countries had done, which set the world’s most populous country on the way to becoming the world’s largest economy. It was a remarkable episode in history.

Through the second decade of this extraordinary expansion, Australian businesses and households became accustomed to easy increases in incomes, ever-lower taxation and rewards that bore no close relation to effort or achievement. They demanded more and more of these good things. Governments met those demands not through increased productivity, but with the bounties of the housing, consumption and resources booms. Incomes, spending and costs rose to heights that could be supported only temporarily.

The China resources boom has had three phases. The first, high terms of trade, started in 2003 and reached a peak in 2011. The second, investment, started before the Great Crash and paused through it, then gained strong momentum from early 2010 and reached a peak in 2013 before declining. The third, increases in export volumes, started strongly in 2012 and is likely to continue until about 2017. Since increased government revenues were mostly being spent as they arrived from 2003 (the surplus of about 1.5 per cent of Gross Domestic Product (GDP) was a small proportion of the increase in income), the first phase had much the largest impact on the national economy and the investment phase the second-largest, while the third phase will have the least impact.

Adding the effects of the three phases together, the China boom reached its peak in late 2011, but was already contributing a high proportion of its eventual maximum impact by the time of the Great Crash of 2008. The impact of the resources boom on Australian economic activity declined from 2011 and is likely to fall rapidly from 2013.

Through the long boom our real expenditure and real incomes grew prodigiously. Australia’s real exchange rate against all other countries – an inverse measure of our competitiveness – rose to unprecedented levels. This caused the stagnation and then decline of what had been vigorous exports of services and high-value manufactures. The problem arose because we spent the benefits of the resources boom as they came in, as if it was going to be with us forever. That’s a lesson for the future: next timewe should save most of the increase in incomes generated by any resources boom that might come our way. But it’s too late after the peak of the boom to do that now. The result is that we are internationally competitive in too few activities to maintain full employment without running into external payments problems, unless we greatly improve our competitiveness.

The dog is barking. The fall in prices for resources from their 2011 peak is bringing down federal and state government revenues. Investment in resources has reached its peak and is about to go into decline. The volume of resources exports is increasing rapidly, but they do not have enough domestic impact to maintain full employment. Nothing else is growing strongly to replace the contribution of the resources sector. On current trends, we are headed for lower average incomes and employment.

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Prime Minister Julia Gillard and Treasurer Wayne Swan did a fair job of economic policy after the China boom reached its peak and started its long downward slide in 2011, but they were judged by the electorate to have failed. That’s what Dog Days do. People had come to expect rising employment, incomes and services, along with falling taxes, but the economy could no longer support these.

Governments look bad in the Dog Days. The former government’s position looked worse because its revenue forecasts were consistently too high. The largest of the six-monthly upgrades to the budget deficit came out three days before the calling of the 2013 election. The government had accepted official advice, as a good government should, and paid a high price in credibility.

Dog Days end when people abandon expectations of rising living standards and accept that some of the private gains of the Salad Days must be surrendered for the common good. This only happens in a timely way if leaders explain that times have changed and outline a programme of shared restraint. Otherwise the alignment of expectations with reality is a long slog, usually involving recession, massive business failures and high unemployment.

We seemed to be making a start on lowering expectations in the May 2013 budget, when some measures created losers and the Opposition did not come out against them. That ground was lost in August, when a modest measure to remove an income tax loophole was attacked by the private interests affected by it and rejected by the Opposition, and then became prominent in the election campaign. The Opposition also gave prominence to an extraordinary piece of middle-class welfare, its paid parental-leave scheme. These developments cancelled the budget message that the good times might have stopped rolling.

During the election campaign, the former government made slight reference to the challenge of transition from the China resources boom but said nothing about what needed to be done in response. The Opposition said that it would stop the boom from ending and would solve the budget problem because improved confidence on its election would lead to stronger economic growth.

We are in the Dog Days for some time yet – for years, if we have no effective leadership. Excellent economic policy will look ordinary, and ordinary policy abominable. Good policy has to begin with a huge readjustment of community expectations. But a changed political culture presents political leaders with an awful choice: between easy short-term political gains from telling the electorate what it wants to hear, and the risk inherent in explaining and seeking to advance the public interest.

One large change in political culture has been the rise of professionalism in the careers of leaders and the approach of parties to winning elections. Another is the decline in mass membership parties with strong roots in the community and consistent ideological themes that are widely recognised. These are closely related developments: the decline of the latter has left a vacuum that has been filled by the former, and the advance of professionalism has reduced the appeal to citizens of participation in political parties. The problems and the need for reform are more acute in Labor than in the Coalition.

Parties have become increasingly sophisticated in identifying the marginal and the uncommitted voter, and more focused in election campaigns on appealing to them. The focus is increasingly on the specific and local and mundane and narrow and immediate rather than the grand themes of politics. Policies are distilled to slogans. The focus on the uncommitted encourages caution. This has made election campaigns themselves uninteresting to most citizens who are generally interested in policy and politics.

The truth of the democratic electorate, identified by Cicero more than 2000 years ago, is that voters are more likely to support someone who tells them what they want to hear. Professional polling and politics has confirmed this truth and identified more precisely what it is that voters say they desire. In the short term, at least, leaders are rewarded electorally by repeating back to uncommitted voters the things they have said that they want to hear.

All of these tendencies have been present since the late 1970s, and they expanded in the 1980s when the systematic use of polling with focus groups became important in structuring the positions of political parties and guiding election campaigns. They have become more influential over time, as parties have grown both more expert in the use of the data and more reliant on it.

I have my doubts about the policy effects and also the long-term political value of focus groups and highly professional polling. The messages from focus groups told the Labor Party to abandon the ETS, and then to abandon the prime minister whose electoral fortunes diminished when he accepted this advice. I doubt this was even sound short-term politics.

But these are lonely doubts. For the moment, the focus group and opinion poll loom large in Australian policymaking. For the moment, reform in the public interest cannot prosper unless its proponents change what people want to hear. Leaders of the major political parties, and especially the prime minister, are in the best position to change what people want to hear.

The focus groups and the polling never endorsed the sweeping policy changes of the Reform Era. They are unlikely ever to endorse the policies required for adjustment to the end of the China resources boom. At first sight, this change in Australian political culture seems to be decisively against a new Reform Era.

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Tony Abbott as Opposition leader gave the honouring of election promises an unprecedented priority in his criticism of Prime Minister Gillard over the ‘carbon tax’. In truth, there is a complex relationship between leaders’ standing and the extent to which they honour election commitments.

Both the Whitlam and Hawke governments had to deal with huge changes in circumstances from those that had seemed to face them immediately before they took office. Whitlam was elected on an elaborate programme to expand public services of various kinds. As the global post-war boom came to an abrupt end and Australia’s terms of trade fell sharply from late 1973, Whitlam continued to deliver on his promises. This counted for little in the electorate. The government was judged harshly for its failure to meet expectations on full employment.

Hawke took into government the lesson of the Whitlam experience: a determination to meet election commitments after circumstances have changed is economically damaging and politically unwise. Following advice from the Treasury that the budget deficit would be far larger than had been revealed to the public, Hawke immediately set out to cut spending and strengthen revenue in order to make way for a considerably trimmed-down version of Labor’s election promises. The voters demonstrated over several elections that they valued the larger and broader commitments to rising employment and economic growth more highly than the truncations of expenditure.

There are counter-examples. The Fraser Coalition government promised a large income tax cut in the 1977 election campaign and put it aside after the election. This was an important factor in corroding the government’s standing.

In 1993, the Opposition leader, John Hewson, promised to introduce a goods and services tax, part of which would be used to fund a cut in income tax. The Keating Labor government responded by promising to match the income tax cut without the goods and services tax. But neither the treasurer, John Dawkins, nor the government recovered from the partial withdrawal of these promised cuts after Labor was re-elected.

Prime Minister Gillard’s statement before the 2010 election that there would be no ‘carbon tax’ under a government that she led was lethally damaging in the hands of an effective Opposition leader.

Prime Minister John Howard’s distinction between ‘core’ and ‘non-core’ promises – made in explaining budget cuts after the 1996 election – was much derided at the time, but a way out of the dilemma that arises when election commitments don’t add up to a reasonable response to realities as they reveal themselves in office.

The Abbott Coalition government has been elected with an unusually severe problem of reconciling election commitments with the realities of its time in government. The promise to retain compensation for the ETS, but to repeal the scheme that provides the revenue for this, has repeated the 1993 Keating tactic on matching an opponent’s promises on tax cuts.

The expedient of distinguishing between ‘core’ and ‘non-core’ elements is not so readily available to Prime Minister Abbott, who, like Whitlam before him, has made a great deal of his commitment to keep all promises to the electorate. The highest-profile promises, and there- fore the hardest to put aside as ‘non-core’, happen to be those that – at best – will make Australia’s adjustment more difficult. These include the repeal of the mining tax and ETS, the preservation of the income tax loophole related to the private use of company motor vehicles, and the world’s most generous parental-leave scheme. Strong commitments were also made during the election campaign to avoid cuts to any of the major commonwealth programmes: pensions, defence, health and education. At least the commitment to increase defence spending greatly had no timetable attached to it. Most difficult of all for the government will be the high profile given to assurances that economic growth will be greater under a Coalition government and that this will ease pressure on the budget. As Whitlam discovered, the electorate ends up valuing general promises of prosperity more highly than the minutiae of taxation and expenditure.

The Abbott government’s postponement until its tenth year of expectations of a surplus has delayed the day of reckoning for its budget contradictions. However, it also removes what had been an important source of budget discipline under the Labor government. All of this means that an effective Opposition leader who emphasises the negative will have plenty to exploit as the gap widens between expectations and emerging realities.

Abbott is the third prime minister of Australia since the Salad Days gave way to Dog Days in 2011. Without strong and early policy action, starting with a transformation of expectations about what the economy can and cannot deliver, the accumulation of economic problems is likely to overwhelm his prime ministership. His task is harder in the political culture of the early twenty-first century.

If he chooses to take strong and early action, he will be able to draw upon an electoral dynastic founder’s huge political advantages of incumbency. An effective leader offering strong policy responses that are broadly seen to be equitable is rewarded by the electorate.

Beyond the general advantages of incumbency, the current prime minister has support for the time being from major private interests and from News Corp. The private interests are encouraged that they have a prime minister who agrees with them. Abbott’s personal links with News Corp personnel provide him with a reliable praetorian guard, ready to disembowel critics, right or wrong. The support of private interests will be tested, however, as a reform programme designed to deal with Australia’s problems must disappoint them. News Corp support will be tested by the limited appeal to media consumers of a positive and complex campaign encouraging restraint in the public interest, and by the competing commercial attractions of simple and negative messages.

The largest of all alterations in political culture through the Great Complacency is the uninhibited entry of corporate wealth directly into the political process, to achieve changes in policy. This has been accompanied by changes in the approach of the business lobbies. Abbott has ridden this tiger into office. His success as prime minister depends on his capacity to put it back in the public-interest cage.

 

This is an edited extract of Ross Garnaut's Dog Days: Australia After the Boom, Redback, $19.99 available now

 

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