Can Howard take credit for Australia’s boom? He cannot take credit for the Hawke-Keating reforms, but he is responsible for decisions since 1996.
The early reform record of the Howard-Costello government is the subject of near-universal praise among the economics profession. One early decision was to ensure the Reserve Bank was independent of government in deciding whether to raise or drop interest rates. This helped the Reserve Bank under Ian Macfarlane to produce the best monetary management in the world.
Another was the commitment to keep the national Budget in balance or in surplus. A third decision was to improve budget transparency, with Treasury required to release publicly a midyear review of progress in achieving budget outcomes and a snapshot of the latest economic activity.
Other significant changes were the reform of the tax system, introducing the GST, and, more recently, creating a single national industrial relations system based on individual contracts.
In last year’s Budget, Costello announced dramatic reform of superannuation to improve savings, which will not only help retirees but should also add to national savings. And the conspicuous reform of Howard’s fourth term is the introduction of WorkChoices. This is a deregulation of the workplace that is designed to increase flexibility for employers. In the event of a recession, it will probably allow employers to cut the cost of their workforces by reducing wages and conditions.
As Howard and Costello’s term in office has lengthened, it is clear that the government’s reform drive has faltered. It has failed to manage properly the problems of success.
Productivity growth has slowed. After such a long boom there is a shortage of skilled workers and the country suffers from under-investment in new infrastructure. With the economy approaching full capacity, the former Reserve Bank governor Ian Macfarlane announced in 2005 that the rate of potential economic growth had slowed: “We should get used to GDP growth with a two or a three in front of the decimal point, rather than a three or a four as we had become accustomed to throughout most of the expansion.”
Further, Australia has a chronic current account deficit of a yawning 6 per cent of GDP.
On these grounds, a growing chorus of economists now argues that the Howard government is missing a once-in-a-generation opportunity to make more, necessary reforms. The ANZ Bank’s chief economist, Saul Eslake, complimented Costello on his early reforms, but judged “the fact that the government has not undertaken real reform of the tax system would have to rank as one of the greatest missed opportunities in the last 50 years”. Eslake made this point:
The commodities boom has created windfall gains for the Commonwealth revenue, if you include the Budget to be announced next week [May 2006], of upwards of $100 billion spread over the last four budgets. But the government hasn’t saved any of these … gains. I struggle to think of anything they’ve done in recent years to strengthen the resilience of the economy for when the commodities boom ends, to increase productivity, or to enable fundamental reform.
A Macquarie Bank economist, Rory Robertson, quipped that “the economy has done more for the government than the government has done for the economy”.
What does the Treasurer say to this criticism? Asked to respond in an interview in his office last year, Costello leaned back in his chair, flung his arms towards the ceiling, and boomed:
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