No Magic Pudding Economy
Posted on Monday, 26 September 2011
Australians have learned the lessons of the global financial crisis. The savings rate has increased five-fold to the highest in more than two decades. The government, by contrast, has embarked on a debt-fuelled spending binge unparalleled in our history.
In his notorious February 2009 essay for The Monthly, Kevin Rudd pronounced the death of 30 years of neo-liberalism. It was up to government, he said, to rectify the ills of a market economy.
This failure to grasp the requirements of wealth creation has characterised the Rudd-Gillard government.
To every problem, the government's response is a new tax, a new regulation or a new bureaucracy. Higher spending, borrowing and taxes have put upward pressure on interest rates and the dollar, squeezed household budgets and depressed consumer and business confidence. The resources boom has only emphasised how deeply subdued conditions are for most of the domestic economy. Although headline economic growth has remained solid, gross domestic product per person has increased by just one half of 1 per cent since late 2007 compared with annual growth of 2 1/4 per cent between 1996 and the end of the Howard government. This is why so many people are convinced that Australia is a rich country at serious risk of becoming poorer.
The government is making our economy less productive by virtually closing down the live cattle trade. It's progressively closing down much of the Tasmanian forestry industry. It's spending $2 billion to close down the brown coal power stations that have been the source of Victoria's cheap-power comparative advantage in manufacturing, and it's spending $11 billion to buy and close Telstra's copper network. In other words, it's spending billions in borrowed money to put people out of work, not into it.
By contrast, the Coalition will cut wasteful spending, abolish counterproductive taxes and build a more productive economy through our six-point productivity plan, which will encourage more people into the workforce, make public institutions more effective, cut red tape, improve competition rules, get greater value from infrastructure spending and reform workplace relations to encourage more pay for better work. Cutting spending means lower borrowing and less pressure on interest rates.
Deloitte Access Economics estimated this year that a $13 billion reduction in commonwealth spending would allow interest rates to be a percentage point lower than otherwise would be needed to contain inflation against the backdrop of the mining boom. Getting more people more productively into the workforce will mean a larger economy, a bigger tax base and more ability for the government to fund services without tax increases or spending cuts elsewhere. The government's budget papers suggest a 1 per cent rise in growth through higher productivity would produce an ongoing improvement in the budget bottom line of about $4.5 billion a year.
If economic growth is high enough through strong productivity growth, it's possible to deliver simultaneously higher spending, lower taxes, a bigger surplus and higher wages without triggering inflation. Far from being "magic pudding" economics, this is what happened during much of the Howard government.
SOURCE: The Australian