Is Coalition Economic Policy A Nauru Solution?

How did a gathering of professional economists rate the policies of the two major parties? And how does the Coalition’s rhetoric about economic management sit against its record? Ian McAuley reports from the Australian Economic Forum

At about the mid-point of the election campaign I was at the Australian Economic Forum – a gathering of professional economists from corporations, government departments and universities.

We heard Nobel Laureate Joseph Stiglitz, former chief economist of the World Bank, heap praise on the Australian Government’s response to the financial crisis. He reminded us that we have come through with very low public debt (about 6 per cent of GDP, compared with 40 to 120 per cent in other countries), low inflation and strong employment.

Stiglitz talked about waste — but not the minor waste associated with our stimulus programs. Rather, he referred to the huge waste of unemployment, which would have occurred had we placed debt reduction ahead of economic stability – the policy which the Coalition says should have been pursued.

Participants at the conference were generally supportive of the Government’s longer-term economic program – building the nation’s productive capacity through investments in broadband, education and better natural resource management. And while there was some criticism of the detail of the Government’s mining tax proposals, there was also a recognition that it makes sense to take some of the bounty of present strong commodity demand to strengthen our economy so that we can thrive when the mining boom is over. And there was a strong call for a carbon price; no-one at the Forum called a carbon price a “big-new-tax”.

By now it is clear that the Coalition has no intention of restructuring the economy.

Its approach to the public balance sheet is to reduce debt, rather than to invest in public assets. It would avoid waste, at least the sort of waste that is revealed in audit reports, by withdrawing from programs. (If you do nothing you cannot be accused of waste!) The Coalition has traditionally preferred subsidies and personal transfers to direct government programs, which means that there is far less accountability for expenditure: if a school building is 10 per cent over budget audit processes expose it, but if a family blows a generous maternity allowance on the poker machines it passes unnoticed. Above all, the Coalition, in its promise to scrap the resource tax, has made it clear that it wants the mineral boom to flourish, regardless of its consequences in terms of economic volatility and distortion of economic incentives.

I would describe the Coalition’s economic policy as the “Nauru solution”. We can recall that island’s spectacular prosperity in the 1970s and 1980s when its economy was based on phosphate mining. Even as their island was literally exported away, Nauruans lived for the present, and those years of plenty are now a distant memory. Nauru is now begging for economic activity: it is even willing to take up opportunities rejected by Timor Leste. It’s a dismal thought that we too may become another poor country in a prosperous region.

Yet, in opinion polling, the Coalition consistently leads Labor in response to questions on the important issue of economic management.

There is no single explanation for this contradiction between professional opinion and public perception. In part, it’s an outcome of the media’s ways of presenting economic issues – issues about economic structure are not easily accommodated in quick grabs. Also, there seems to be a shortage of economic expertise among journalists, who are more intent on quizzing politicians about petty budgetary details rather than on issues of economic policy.

Above all, while it deserves credit for engaging in economic re-structuring, the Government has not been forthcoming on economic policy. Economic re-structuring can be painful in the short term. If we divert some of the proceeds from the mining boom into much-needed public investment, we will have to scale back our current consumption for a few years. A price on carbon will be painful as we make the necessary personal and corporate adjustments. Also, because of the geographical distribution of our mineral resources, there will be regional consequences. These are all hard issues to explain to an electorate which has enjoyed a long spell of rising incomes.

The problem is not without precedent, however. Australia has been through a round of economic adjustment, steered successfully by the Hawke and Keating Governments. The political challenges of reducing tariffs, introducing competition policy and de-regulating financial markets were difficult, but perhaps the difference is that those governments were not hampered by an opposition denying the need for structural reform.