Who won the historic debate over economic policy that has played out in Western, and especially Anglophone, countries since the 1980s?
Until 2019 the answer was obvious: the right. Economic orthodoxy was that free trade, inflation targeting, a floating exchange rate, enterprise-level bargaining, a preference for private over public provision of services and, most of all, low taxes, small government and fiscal discipline delivered the best economic outcomes.
Many of these were honoured in the breach in Australia — we’re not the free traders we claim to be, and the Liberals have always been the party of high taxes. But they were minor details.
The 2008 financial crisis modified the consensus a little. “Everyone is a Keynesian in a foxhole,” economist Robert Lucas famously said in 2008 about governments rushing to stimulus in the face of crisis. But in Europe and the United States the reversion to stimulus was temporary. Even in Australia, Wayne Swan committed to a return to budget surplus, although he was wise enough to abandon it when the economy couldn’t take it. Australia remained deep in deficit all the way through the 2010s.
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That was the first sign the Coalition — for all its savage attacks on debt and deficits — was backing away from the neoliberal consensus. Tony Abbott and Joe Hockey preached budget austerity, and offered plenty of funding cuts that destroyed their government but maintained a high level of deficit spending — which was just what the economy needed.
And, of course, last year it was Scott Morrison and Josh Frydenberg who launched the biggest Keynesian stimulus in Australian history, racking up deficits that no one had ever dreamed of. Now they’ve doubled down and committed to a long-term deficit strategy in which ongoing spending will be at levels above the Rudd stimulus of 2009.
So who’s won the economic debate now?
In Australia, that victory for the right on economic policy was always tempered by the fact that it was Labor that implemented most of it — including our industrial relations framework. And as part of its embrace of markets, Labor undertook major institutional reforms designed to retain a key role for government. The Hawke government established Medicare. The Keating government established a comprehensive compulsory superannuation system shepherded by employers and unions. The Gillard government established the National Disability Insurance Scheme.
On each, the Coalition has resisted or continues to resist, but the politics of doing away with them are impossible. John Howard abandoned his plan to gut Medicare. The Liberals have repeatedly tried to destroy industry super but failed each time, and the government has backed away from trying to stop compulsory super rises. The battle over the NDIS continues, but over its cost growth, not its existence.
Which leads to the problem Labor now has: what do you do when your opponent concedes your argument and embraces it with gusto? And all that deficit spending is going into areas of Labor strength: health and social care, aged care, mental health, childcare.
As Richard Holden notes in an op-ed in The Australian Financial Review today, Labor’s options for responding to this incursion are limited. It can complain about the hypocrisy of the Coalition, which won’t do much good. It can focus on the quality of the massive spending, and the lack of delivery and impact on the ground — building on its narrative that Morrison is all photo op and no follow-through — but that will take time and is unlikely to provide the solid basis for an election campaign. Or it can swing further to the left in response to the Coalition’s swing to the left.
There is an approach that combines elements of each of these. The Morrison government has arrived at its big spending via accidents: first the pandemic; then an aged care royal commission that demanded a comprehensive policy overhaul; then the gender disaster unleashed on the government by Brittany Higgins. Ad hoc political decisions like being unable to discontinue the low- and middle-income tax offset, and more investment incentives because business has failed to deliver the government’s investment forecasts, also represent major components of the coming deficits.
There’s no comprehensive strategy behind a government spending well over 26% of GDP for a sustained period — beyond a strategy to win the next election. There’s certainly no vision. No one has sat down and thought about what can really be delivered by a government prepared to invest that much debt.
Nor could this government do it. Its prime minister is a salesman, lacking any intellectually coherent ideological framework. The treasurer’s vision is limited to when he can secure Morrison’s job. The rest of the cabinet is weak, lacklustre, incompetent or in some cases all three. The head of the public service is a former Liberal staffer, and in any event Morrison believes it is the public service’s job to implement the government’s political vision, not contribute to it.
That does create room for a Labor alternative — an addition to the big institutional reforms like Medicare, super and the NDIS — as part of a broader vision of how government should protect its citizens in a market economy. It need not go beyond the kind of spending to which the Coalition has committed, but rework it in the service of a more coherent agenda.
What’s the next big reform that can take a place? A full implementation of the aged care royal commission report, establishing an independent aged care funding body supported by separate independent regulatory institutions? An independent climate commission to determine Australia’s climate targets and the way to achieve them? An infrastructure equivalent of the Reserve Bank, charged with identifying major projects without political bias and investing in them?
But more to the point, what does such a reform aim to achieve? What kind of Australia is it intended to lead to?
That’s the gap in the Coalition’s colossal spending. The Coalition is boldly playing to Labor’s strong point. Can Labor exploit the Coalition’s weak point?
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