See Part 1 here
IN PART 1, I argued the best governments in economic management since WW2 were the Curtin/Chifley and the Hawke/Keating governments.
More recently, we have had the Abbott-Hockey team which won an election through the default of Labor and by persuading us that we had a debt and deficit emergency. It was an artifice. In fact, both debt and deficit have worsened under Coalition management. The last Swann budget forecast a deficit of $10 .6b .It is now $ $37b. In each year the budget prospects have got worse.
Our budget deficit is now in the top third of 39 advanced economies. Debt will grow from $450b last year to $497b this year.
From a budget and deficit emergency three years ago, the government has moved to denial that we have ever had a problem. It is abdication of economic responsibility.
Joe Hockey used to tell us that interest rate reductions by the Reserve Bank were the sign of a struggling economy. Yet on the day of Scott Morrison’s budget, the Reserve Bank cut interest rates again. Morrison told us that it was due to lower inflation. But the Reserve Bank refuted this by pointing out that the “prospects for sustainable growth” were of concern. The Bank is clearly worried about the “growth and jobs” that Scott Morrison tells us will occur under his watch. Economic commentators have similar doubts.
Joe Hockey blamed the problem of housing affordability on low income people who weren’t working hard enough and saving enough to buy a home. Malcolm Turnbull gives a variation on that theme by telling parents, presumably wealthy parents, that they should “shell out” more to help their children get into the housing market.
In any event, Joe Hockey’s performance and particularly his 2014 budget meant that Washington couldn’t come fast enough.
Scott Morrison talks about the importance of transitioning our mining based economy to a more broadly based economy. But his budget made no mention of the importance of developing a sustainable economy based on renewable energy. That would make environmental, economic and business sense. But there was no mention of it in Scott Morrison’s “economic plan”.
For years, the Business Council of Australia has been urging repair of the budget. But has now been seduced by a large reduction in company tax. Corporate Australia was the real winner in the budget.
There is no credible evidence that a reduction in company tax or reduced taxes on the wealthy increases jobs and growth. As Michael Keating has pointed out in Pearls and Irritations
‘whereever the tax rate has been changed it has never made a perceptive difference to investment, either here in Australia or anywhere else’.
The “trickle down” theory does not really help “jobs and growth”
Joseph Stiglitz: Trickle-down economics is “absolutely wrong”
And after almost three years of Coalition Government the story on business investment is disturbing. The budget is framed around business investment falling by 11% in 2015/16, falling 5 % in 2016/17 and with no growth in 2017/18. The Treasury figures also show unemployment is expected to remain at 5.5% until at least the middle of 2018.
The budget figures do not show much “growth and jobs” in the years ahead despite what the Treasurer says. Ross Gittins in the Sydney Morning Herald on 7-8 May, 2016 said
‘…there is no evidence to support Morrison’s claim that the budget will do great things for ‘growth and jobs’.
The “supply side” economics of Ronald Regan, cutting taxes for companies and wealthy individuals that Scott Morrison is pursuing, left the U.S. with record deficits and debt and dramatically increased inequality. This inequality is described by the OECD as ’harmful for long term economic growth’. As Nobel winning Joseph Stiglitz put it:
‘the world faces a deficiency of aggregate demand brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom. So that as money moves up, demand moves down’.
The Nobel prize-winning economist Joseph Stiglitz totally rejected the trickle-down theory of economics pic.twitter.com/nKUTYEQPkY— Geoff Pearson (@GCobber99) May 12, 2016
We are learning at last that growing inequality is not only bad for society but it is also damaging for the economy. This is the path that the Turnbull government wants to take us down.
Malcolm Turnbull has told us many times that the Free Trade Agreements with several countries are “massive building blocks” for our economy. However the Productivity Commission has warned us that there is more hype than benefits in these FTAs. “Pebbles” would be a better description than massive building blocks.
For a government that presumably has some regard for markets and free trade, its decision on a $50 billion submarine and naval build in Adelaide is remarkable. Christopher Pyne must really be a national treasure if the government needs to spend so much money to help keep him in public life. This submarine decision by the Turnbull government will surpass by far the protection ways of the Fraser government.
In Pearls and Irritations on 29 April, Jon Stanford and Mike Keating pointed to:
The implications for industry policy constitute a particularly egregious element in the [submarine] procurement decision. … We need to remember that the Abbott government showed the door to the car industry. The end of the ‘age of entitlement’ meant that around $500 m. a year, not high by international standards, was too much to pay to support a high technology(car) industry that, directly and indirectly, employed around 200,000 people.
Now the government is keen to support a (shipbuilding) industry with a cost disability, according to the Rand Corporation, of up to 40%.
Given the likely moderate local value-added in an industry where all sophisticated hardware is important, the effective rate of protection (assistance to value added) will be much higher than this. Indeed a leaked paper from Defence suggested an effective rate of protection of 500% would be required to build the submarines in Adelaide. Even at the height of the Fraser government’s protection excesses … the effective rate reached only 143% for the car industry. …
On the Prime Minister’s figures, 2,800 jobs will be created directly and indirectly, a far cry from the 200,000 jobs that are related to the car industry. Some early estimates suggest we are looking at a cost of around $4 m. for every job created.
It is hardly good economic or business management.
In his interview with Laurie Oakes, Scott Morrison acknowledged that the contract with the French submarine builder had not been signed and the design and specifications were open-ended even though we have apparently agreed on a price. It sounds like a thorough business mess.
The crackdown on high income earners who misuse the superannuation system is welcome but as Saul Eslake and others have warned these same people are likely to now transfer their surplus funds into negative gearing of property, a problem which the government refuses to tackle. In its cautious way the Reserve Bank has warned about the risks of negative gearing.
’Any change which discourages negative gearing may be a good thing from a (financial stability) perspective. The concessional rate of taxation of capital gains might encourage leverage speculation, particularly in combination with negative gearing provisions.’
We are likely to see even more wasteful infrastructure spending, particularly on roads. As Michael Keating has pointed out, we must have proper pricing signals and evaluation for infrastructure investment. A government that professes to understand business, markets and pricing should know this. Unfortunately, it doesn’t and allows so much of road spending to be influenced by powerful motoring organisations and construction companies.
There is no credible plan to bring the budget back into surplus or secure “jobs and growth”. But we will have plenty of slogans in the coming weeks as we had at the last election.
And the budget is quite silent on the two most important issues of our time — climate change and growing inequality. Ideology has been put ahead of good economic management
The case that conservatives are better economic managers does not stand up to serious examination.
You can follow John on Twitter @johnmenadue.
How Reaganomics Destroyed The Middle Class...And Maybe America
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