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Feb 5, 2013

The Australian economy under Abbott: a (rough) Crikey guide

The Australian economy may not look significantly different under an Abbott government, despite the Coalition's rhetoric. Bernard Keane and Glenn Dyer with the Crikey crystal ball.

How 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.

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.

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53 thoughts on “The Australian economy under Abbott: a (rough) Crikey guide

  1. Barrie O'Shea

    In my 38 years in SMEs, I have had one unfair dismissal case, which was dismissed in half an hour at no cost to me. However, my losses in those 38 years to incompetent or corrupt behaviour by other businessmen would approach $500,000. Not one of those people has lost their house, or been fined or jailed for their actions. In most cases, they have had substantial unpaid tax and superannuation liabilities.

    As you can imagine, the laws that I want changed are not those relating to my workforce. I want to see substantial penalties including jail, for those who, by evading their responsibilities, are able to improve their cash flow and compete unfairly in the marketplace. Despite legislation from both parties, the use of phoenix companies is still rampant.

    So Tony, forget the unions. Stop listening to the Billy Tea Party supporters in your ranks. Give the ATO and ASIC the resources they need to enforce the law. That is the best way to reduce business costs and encourage legitimate businesses to grow and employ people.

  2. Apollo

    The LNP can achieve reduction in CO2 emission by putting the economy into a recession. That’s how the US has been able to reduce its emission.

    The Howard government was better at making work participation higher because they made it a b*tch to be receiving and living on the dole, I heard that the number receiving the dole dropped from 22 or 27% down to 15%.

    I don’t bel i.e.ve dogmatically in a free trade absolute when there is no fair level of play ing field, especially now that most of China’s companies have unlimited backing from the government as they are state own, it’s very hard to compete with them. My suggestion is at least have 1% tariff on products from countries which don’t have carbon tax, and 5% for countries where businesses don’t have the same level of just rewards and protection for the workers and the environment. Might have a levy for Australian companies who outsource to those countries too. It will be interesting the see Bob Katter’s party influence on policy if they have the balance of power.

    I have a good idea to restructure the baby bonus to a planned parental scheme, but I don’t have the time to write it now. TA will be very strong on policy for Australians to “go forth and multiply”.

  3. IC-1101

    Howard made it tough to earn the dole for people that didn’t deserve. If you deserve it — if you’re unable to work, can’t work, mentally disabled — then you should get it. Under a Labor government, the welfare test has always been far too easy. I know students get handouts that basically double as beer money.

  4. Jimmy

    Not sure I agree with some of the assumptions here. Are the MRRT and Carbon taxes reducing growth by that much? Will their removal increase growth by the same amount as growth is reduced by slashing public sector jobs?

    There are also a lot of questions regarding wealth distribution that need answering, the libs are planning to remove means testing for the private health rebate and FTB and slash the School kids bonus, shifting money from low income earners to higher income earners, similarly the Libs plan to stop the $500 super payment for low income earners but keep the variuos tax concessions generally taken up by higher income earners, the ALP has announced anything on this but if they make any changes it will probably be in the opposite direction. Also getting tax payers to pay up to $75k for paid maternity leave is also a poor use of public funds and skewing the benefits towards the top end.

    Also I think the impact on the ability to grow a non renewable energy sector in the Carbon Price V Direct action comparison is well and truly understated.

    On top of it all tighter fiscal policy could well be the worst possible approach if the economy continues to slow.

    I have said it before cutting taxes, increasing spending and increasing a surplus doesn’t work, something has to give.

  5. Jimmy

    “Are the MRRT and Carbon taxes reducing growth by that much? Will their removal increase growth by the same amount as growth is reduced by slashing public sector jobs?” Further to this point, how does the fact that mining company (and others effected by the Carbon Tax) profits are returned to share holders which are not necessarily Australian contrast to the removal of expenditure (ie Public sector wages) that are 100% paid in Australia?

    “eliminating the carbon price (most revenue of which is redirected to free permits to polluters, so the overall impact is limited)” This is looking distinctly short term, what will the impact be as the free permits recede and the direct action doesn’t work?

  6. Joe Magill

    “cut red tape worth $1 billion a year” . I keep hearing this red tape argument but in my 30 year old small manufacturing business I face zero red tape. I complete one ABS return per year which takes a day or two to complete but as a user of the ABS I don’t have any problem with that task at all. If red tape means EIS or land development approvals then I’m not sure that I would liek to see a reduced oversight in this field.

  7. Ruprecht

    Nah, mass public service sackings and cuts to health and education won’t have much impact on the economy.

    Reintroducing WorkChoices and abandoning the NBN won’t provide another drag on the economy.

    We’ll be right.

  8. Hamis Hill

    East Coast LNP state government austerity measures have contracted the economy and certainly and cynically destroyed the federal budget surplus by reducing federal income.
    The other effect of such LNP austerity when projected onto an Abbott administration is a general reduction in money in the economy and so the inducement of interest rate rises.
    So the Bill for the Howard, golden era, mortgage debt orgy will rise to two thousand million dollars a week in interest payments.(Do the numbers; they are important)
    Those who cannot see RECSSION writ large in these figures are simply economic vandals.
    Of course an Abbott administration aping the policies of its state colleagues will be different from a Labor federal government which does not ape those LNP policies.
    To suggest otherwise is simply moronic.

  9. Jimmy

    Joe Magill – ““cut red tape worth $1 billion a year” He may as well say “I’m going to raise Unicorns worth $1b a year” It’s a figure that they will never be able to prove he did or didn’t do because no one can identify “the red tape” let alone accurately cost it.

    The other figure I love Abbott quoting is the number of jobs his govt would create (2m over 10 years I think is the figure is) which given the ALP is up to almost 1m over the past 5 and a bit which included the GFC is very unambitious. In fact the figure is taken straight from the Republican play book where Romeny promised to create X million of jobs in his first term which sounded large but basically was what a monkey would create if he were running the country.

  10. Microseris

    As Ruprect & HH point out, LNP has tunnel vision on fiscal policy. Slash the public service, gut education and health. This increases unemployment with flow on effects across the economy. In Victoria one term Ted has slashed TAFE and VCAL programs and with the savings built a new jail. Got to have somewhere to lock up all the resulting delinquents.

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