The Abbott economy doesn’t look terrible. But it doesn’t look great, either. Unemployment is up, growth is flat, and confidence is down, writes Richard Holden.
OPINION: In his victory speech on election night last September, prime minister Tony Abbott declared Australia was “under new management and … once more open for business”. There were, of course, specific promises such as repealing the carbon and mining taxes, balancing the budget, and building lots of new roads. But the “open for business” line foreshadowed a broad increase in confidence in the economy.
In terms of confidence since then there has been little good news about the economy – and some bad, especially regarding unemployment. The Westpac-Melbourne Institute consumer sentiment index is 10.8% below its post-election peak.
Treasurer Joe Hockey has told us there is an imminent debt crisis, but can’t persuade parliament to pass his budget. The trade minister, Andrew Robb, has said budget blocking puts Australia’s credit rating in jeopardy. The confidence of those receiving family tax and other benefits has been shattered, as has the confidence of those of us who are happy to see our tax dollars spent to make real the promise of opportunity for those less fortunate – a promise that has always been at the core of Australia’s social compact.
I get it: the first step to recovery is recognising that you have a problem. But so far the government seems to have scared global financial markets a fair bit, but not scared the Australian public and their representatives enough to do anything about it. And that’s largely because we don’t have an imminent debt crisis. We have a long-term structural budget problem caused by an ageing population — a problem shared by most OECD countries.
Yet, despite the dramatic rhetoric, nothing has been done to address the structural problems. To say the least, this is not great “expectation management”.
A major election promise was to repeal the carbon tax – legislation that was passed last month. It remains to be seen whether the so-called “direct action” policy on climate change will be implemented, but this is one area where business is certainly happy.
And why not? Under a carbon tax or Emissions Trading Scheme businesses pay if they pollute. Under direct action they get bribed not to pollute. It is, however, clearly bad policy for the economy as a whole — a fact that everyone except for hardcore climate change deniers acknowledge.
Abbott aspires to be known as “the infrastructure prime minister”. But investments of the type Abbott promised take a long time – even to start – so it’s too early to tell whether he will be remembered as he wishes to be in this respect.
If we can glean anything it comes from the yet-to-be-passed federal budget with nearly A$60 billion in infrastructure projects. Abbott has pledged that these and other projects will be subject to “rigorous cost-benefit analysis”.
If so, that’s exactly why some of them might not happen. As an economist I can hardly be against weighing up costs versus benefits. But costs are usually pretty easy to quantify (how much will it cost to build “X”); benefits, not so much. Projecting how much traffic flow there will be on a road is not so hard, though tell that to AMP which is suing its consultants over forecasts of Lane Cove Tunnel traffic flows. Projecting the benefits of genuinely new types of infrastructure is much harder.
What’s the economic benefit of really fast internet access? It’s tough for even the most seasoned consultant to know what to put in the line in the spreadsheet that reads “stuff we never even knew it could be used for”.
So, paradoxically, Abbott’s legacy as “the infrastructure PM” may actually involve not being so wedded to standard cost-benefit analysis, but being prepared to take an educated guess about what a country like Australia will need to face the economic challenges of the coming years.
On the mining tax, unlike many economists, I give the government some credit. Although there are intelligent arguments that those who benefit from digging up Australia’s natural resources should pay a good chunk for it, the mining tax was designed as a “super profits tax”. If that sounds like the last refuge of banana republics that’s because it basically is. “You foreigners are stealing our future”. That is, at best, a cheap caricature of the Australian mining sector.
I’m still yet to hear a coherent definition of what a “super” profit is and how exactly it differs from an “acceptable” profit. Oh, and the mining tax didn’t raise any money, either. It was a bad idea, poorly executed. It’s good to see the back of it.
The Abbott economy at one doesn’t look terrible. But it doesn’t look great, either. Unemployment is up, growth is flat, and confidence is down. For Australia to really be “open for business” at two will require a year ahead with: less scaremongering about non-existent debt crises, fewer ad hoc taxes like the so-called debt levy and the 1.5% tax on the top 3000 companies, and no more draconian cuts to lower-income families struggling to raise kids and get ahead.
This opinion piece was first published in The Conversation.
Richard Holden is Professor of Economics at UNSW's Business School.