Two things happened yesterday to confirm the policy deficiencies of the John Howard-Peter Costello duumvirate which ran Australian economic policy for 11 years. And how we are going to pay for them in years to come.

The current account deficit for the December quarter was the worst ever, even more terrible than the days of Paul Keating’s infamous Banana Republic comments in 1986; our net foreign debt has a terrible record as well. And in a speech yesterday, Federal Treasury Secretary Ken Henry poured cold water over many of the policy prescriptions of Howard and Costello.

We are seeing a third policy prescription come back and bite us now: rising interest rates and big cuts in the May budget because of Howard/Costello’s policy of limiting budget surpluses to 1% of gross domestic product and giving the rest away in tax cuts and middle class welfare when it should have been spent on upgrading skills, education and infrastructure through a co-operative approach, not politically-based antagonism.

It’s why our trade performance is so appalling as we continue to build deficits even as national income and our terms of trade are at 50-year highs and still rising; it’s why labour is in such short supply, especially skilled people capable of filling the rising level of vacancies in the resources and associated sectors; it’s why interest rates will be high for the next two to three years.

Henry is the Treasury official who gave us the GST, Howard’s single major reform in Australia, which then helped finance his quaint ideas of economic and social policy. But the current account deficit and international debt remain the worst legacies of the Howard Costello years. Nothing was done to alleviate them, despite those claims that by lowering Federal Government debt, the pressure would be taken off the private sector and off interest rates.

Calculations by economists put the current account deficit at 7% of GDP, about what it was back in 1959 when John Howard’s hero, Robert Menzies ruled the roost. And remember it was 6% in 1986 when Mr Keating said “Banana Republic”. But back in 1959 and 1986, our terms of trade were worsening and the dollar as falling.

21 years on, our terms of trade are rising, prices for our major commodity exports are at record or near record levels and the dollar is rising. But we can’t ship enough coal, iron ore, copper and other commodities because of capacity constraints, the rising cost of doing business and a shortage of labour, all things the Howard/Costello duo could have eased with lots of targeted co-operative spending.

At some stage in the not-too-distant future the rest of the world will realise that we are a high debt nation and sell off the dollar, possibly forcing us to keep interest rates higher than normal to help attract foreign capital to pay for our poor trade and savings performance.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey