As various opinion pieces have pointed out this week, the Liberals are playing high-stakes politics with their budget strategy.
They are going against the conventional wisdom that spending cuts are necessary to avoid future interest rate increases, and instead saying that there is a danger the economy could slow too much. Intellectually, I think this is a defensible position. The budget is a very clunky mechanism for macroeconomic fine-tuning, with its measures unlikely to have any significant effects for months and hard to change if they prove to be misjudgments.
Politically, however, the argument is too complex and risks further undermining the historic issue strengths of the Liberals.
The recently released results from the 2007 Australian Election Survey (a mail-out survey, which closed in March 2008) shows that while more respondents prefer the Liberals than Labor on interest rates, the margin has narrowed significantly since 2004. The 29 percentage point lead the Liberals had after the 2004 election had shrunk to 6 percentage points after the 2007 election. By not being seen to be strong on the interest rate question this is put further at risk.
The Liberals are also complicating their low tax issue perception with their comments on spending. In the AES, they are still ahead, but only by 2 percentage points, the worst result since 1993. At a high level of abstraction, Turnbull’s position is perfectly sensible:
irrespective of the level of inflation or the state of the business cycle, government spending programs should be frequently examined to see that they will not be wasteful and that they will achieve their objectives.
But Nelson’s ‘every mother loves her baby’ defence of a non-means tested baby bonus, plus the confusion over spending cuts for cyclical reasons, are blurring this point. Turnbull’s no doubt right that few rich people get the baby bonus, and that therefore means testing will at best save trivial sums, but welfare for the wealthy is a symbolic trap set by Labor into which they have fallen.
And by being seen to question the conventional wisdom on the budget and inflation they risk further falls in their standing on handling the economy seen in Newspoll earlier in the year (pdf).
There is a chance that Nelson and Turnbull will be proven right; that as before the last recession Labor will hit the brakes too hard, cause unemployment to increase significantly, and show that the electorate’s confidence in their economic management skills was misplaced. Nelson and Turnbull will be able to say ‘I told you so’, that they had the answers in early 2008, and will have the answers again after the 2010 election.
But the Liberals are also gambling with the party’s few remaining issue polling leads. Apart from defence, Labor is ahead on all issues except economic issues. And if there is a recession, Labor will be in deep political trouble anyway, regardless of what the Liberal leadership says now. Whatever the intellectual merit of the Coalition’s arguments, a simpler message more in line with the conventional wisdom is likely to be better political strategy.
Andrew Norton 
I am glad you pointed out that Turnbull has been arguing for reduction in government waste irrespective of the business cycle. It seems to me that this is a very sensible position.
Unfortunately, the same can’t be said for his “see no evil” position on inflation. When I was watching him on TV the other day the alarming thought crossed my mind that he actually appeared to believe what he was saying on this issue.
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Howard ceded all credibility in his final years with his tax and pork barrel election strategies. Inflation’s well and truly tied to the Coalition.
What’s worse for Nelson, Costello and Turnball, if you think that 4.5% CPI sounds like a huge figure, remember that this well and truly understates inflation on the basic staples people are forced to buy every week: rents/mortgages, fuel and groceries are up well above that. The CPI figure is handily reduced by the inclusion of discretionary categories: cars, electronic goods and the like.
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Not so, Pete, while a fair bit is the result of rising demand for commodities (an international problem) inflation at the moment is also tied to seasonal conditions (ie poor fruit and vege supply – things we don’t as a rule import), and a temporary (as in a couple of years) spike in grain prices that will persist until producers are in a position to respond. It would only take a decent Aussie wheat crop to blunt international grain prices (not looking good ATM) because even though we are not a big producer, we are one of hte biggest traders. A big Autumn break would put a damper on inflation in the products you refer to.
Swan and co have seized on a temporary inflation problem to try and gain economic credibility when it falls of its own accord in six months or so. Of course it could backfire if the drought continues.
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I’m personally think they’re crazy. In addition, every government talks about getting rid of waste and duplication, but it never happens (and no-one can tell us how, in terms of the specifics, except Jeff Kennett), so its hardly a thrilling issue.
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Conrad – That’s a bit pessimistic; there were a couple of Keating budgets that cut in real terms and one Costello budget. But the only historical predictor of cuts is a massive deficit, which obviously we don’t have.
Like most commentators, I will be surprised if there is a real reduction in spending. But in last year’s Budget papers I could not find any cuts at all except to spending on commerce degrees, so it will not be hard for Swan to do better than that.
On the other hand, it means that all the easy cuts will be made this time, and the pattern of rising spending will return more strongly next year.
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I have been warning myself for months that draconian cuts in government spending would worsen the slow-down and accelerate the inevitable rise in unemployment (now generally forecast to rise to 5%). So Turnbull and Nelson have a core point.
But they handled it very badly – economically and politically.
Economically, by calling inflation a charade that would soon resolve itself and failing to call for action to deal with it, they ended up like the Emperor without his clothes. The more sensible economic approach of Turnbull would have been to say “inflation is a serious concern but government spending cuts are the wrong instrument for the brand of (imported) inflation we are experiencing: a more structural approach is needed”.
Politically it was equally inept because all the hard line business economists like Richardson will say on Tuesday night that Swan was a wimp and that as a result, interest rates will rise further. And what will Swan say? “Well at least I went part of the way down that road – unlike Malcolm Turnbull”. Swan will appear to be right in the middle.
Even Turnbull’s argument that means testing yields low net returns makes sense in principle but I understand that new technology simplifies the administration, leaving a significant net revenue gain. We shall see.
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Fred – The means testing will presumably be done as part of assessment for FTA A, rather than going to the expense of setting up another means testing process, though of course many families will be taking a temporary dip in income due to the mother taking time out of the workforce.
As Turnbull suggested on Insiders this morning, it will be interesting to see if there is a clamour for maternity leave to be means-tested. The same arguments seem to apply – why should the wife of a millionaire get paid for having kids?
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That will be an interesting debate. Here is the opening salvo.
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Until we know exactly what the means-testing is, it’s hard to say whether it’s a good idea or not. FWIW, I’m all for scrapping the Baby Bonus, but a means-test that says that all households earning, say, less than $100K are entitled to $5000 per baby, but all others get nothing would pretty obviously be a bad idea. OTOH, one that means, say, that the bottom 20% get 5000, the next get 4000, the next get 3000, the next get 2000 and the top 20% get only 1000 per baby mightn’t be such a bad idea, as it would cut the cost of it substantially, and could be used as a way to slowly phase it out altogether.
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“(imported) inflation”
It’s only partially imported. The fact that the training system has fallen to bits at many levels (apprenticeships, university, upper high school), is partially responsible. It beats me why some of the companies complaining the most (i.e., the mining companies especially) don’t get together in groups of their own and train too many people rather than wait for the government to pay for some of it. It would be a drop in the ocean for many of them (especially if they cooperated), and would save them piles in the long term in terms of wages and efficiency.
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Conrad – The mining industry is involved in education.. The economics of human capital, however, generally suggest that companies will be reluctant to make significant investment in non firm-specific skills, since mobile labour means there is a risk they won’t get a return on their investment or indeed would end up subsidising a competitor.
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Andrew, to what degree do you think that could be overcome by giving significant tax breaks to companies that train its workers in skills likely to be useful out-of-house?
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NPOV – ABS stats suggest that about a quarter of postgrads and about 7% of undergrads have employer financial support (which would be tax deductible), though presumably this would be almost entirely at third-party education providers. Often employers will oblige employees to stay with them for a certain number of years, or have to pay back the money spent on them.
Unless the employer has some comparative advantage in education or training I don’t see that they should be encouraged to enter this market themselves. There will be benefits from specialisation and economies of scale if 3rd party providers do the job instead.
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Andrew,
1) Companies might be reluctant to do that, but the problem now is that some people possibly moving to another company is better than having no people to start with or having huge wage bills.
2) I don’t see why decent management strategies can’t be used to get around this. Many places have incentives to stay after training (e.g., withholding bonuses etc. until goals have been met etc.).
3) At least for industries like mining (some of the biggest complainers), I don’t really see how subsidizing your competitors a small amount makes much difference, excluding the cost involved in training (which must be diddleys for companies like BHP), unless their extra production somehow depresses prices, which for things like coal, seems rather unlikely or perhaps causes higher prices in associated service industries (again, a problem that should be easy to get around).
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Conrad – If the solution is so obvious, easy and inexpensive then NPOV’s tax breaks are unlikely to make a difference. While I think higher ed policy is deficient in putting constraints on supply, I would not argue that every skills shortage is the result of policy failure. Sometimes demand for labour will shift faster than supply possibly could (given multi-year apprenticeships and degrees even for entry-level jobs, let alone the many jobs for which experience is necessary).
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Andrew, how far ahead do most large corporations (e.g. mining companies) project their expected labour requirements? And does this information find its way to universities and TAFEs when determining allocations?
I would have thought that, for instance, 5 years ago BHP would have a reasonable idea of what sort of labour reuirements they’d have by now – and surely 5 years is long enough to train up the average BHP employee?
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(BTW, is it just me, or is everybody seeing GMT date/time stamps?)
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NPOV – The current boom in commodities demand seems to have taken everyone by surprise in its scale. Apparently tonight’s budget will have yet another upgrade in revenues from this source. According to ABS mining statistics, quarterly capital expenditure starts rising massively in mid-2005. Presumably planning for that must have started some time before. But it has more than doubled in less than 3 years, which unsurprisingly has put massive strains on the available labour force for both construction and operation of new facilities.
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Hmm…China has been growing its industrial base at a very rapid rate since the late 1990’s, so it’s a little hard to see what’s so surprising about the surge in demand for commodities in the last few years – was it generally expected that China would have enough commodities of its own?
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On the other hand Australia is not the only player in the international mining market. I’m no expert on the mining industry, but presumably companies don’t start building multi-hundred million dollar facilities unless they are very confident of customers at a good price.
In the ABS series, between 2002 and mid-2005 they were spending about $2.5 billion a quarter on capital expenditure – still a lot of money. It then rapidly increased, to $5.8 billion in the September 2007 quarter.
I don’t have any brief for the management quality of the mining industry, but I do resist the idea that things as complex as international commodity markets or even local labour markets are easily predictable.
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Well sure, and BHP and its ilk are surely at least partly successful because they’ve done a good job at anticipating difficult-to-predict markets, and presumably would be better at than governments.
Are labour shortages and infrastructure bottlenecks a big problem in other significant commodity exporting nations? Or is something peculiar to Australia?
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If we are going to discuss inflation, shouldn’t the Reserve Bank get a mention at some stage? After all, action earlier by them would have reduced inflationary pressures.
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