Abbott versus Rudd: a real contest?

There is a view by many that Tony Abbott’s leadership of the Coalition will fully test the Rudd Labor government prior to the next federal election, although opinion polls (and bookmakers) presently suggest that Labor will win easily. One would hope that Abbott makes a difference given the unprecedented rhetoric offered by Labor in 2007: a promise to influence rising petrol or grocery prices, lessen Australia’s reliance upon mineral exports to prevent Australia from being a mere quarry for the world, and even end Japanese whaling.

But only the naïve would rely on one political leader, political party or policy elite given recent policy trends under both Labor and Coalition governments, although Abbott is indeed one of Australia’s most honest politicians capable of encouraging extensive debate (and controversy) about a variety of important issues.

The major problem for Australia (and most Western nations) is that balancing a variety of economic, social and environmental policy needs has become harder.

Sure, difficult policy issues have always been evident. During 1950 Australia needed to build 90,000 houses a year, but only had the domestic capacity to build 60,000, thus leading to the importation of prefabricated houses. Concern was expressed in 1952 that the basic pension had fallen to 28 per cent of the basic wage compared to 36 per cent in 1948. And during 1953 the Australian Workers Union called for a halt to high immigration levels to achieve full employment, while Labor supported the government’s promotion of uranium mining. The early 1950s also witnessed considerable concern about inflation and the balance of payments.

So why do I express more concern about recent policy trends? Well the rules have changed, the policy options for governments appear fewer, and the major political parties are reluctant to tell the truth about either.

While a major policy divide still remains between Labor and the Coalition over the degree of government intervention and labour market regulation (albeit much less today than in the past), policy trends have been largely one-way since the early 1980s. This has been illustrated by lower rates of income taxation for companies and high wage earners, less industry assistance, labour market deregulation, and much greater reliance upon debt (public or private) while the importance of services and consumption has absorbed the lower production of goods (manufacturing).

To now, the decline of manufacturing and promotion of freer trade has not prevented Australia from maintaining one of the world’s higher standard of livings. Even if we allow for the considerable private debt that has been accumulated since 1983, most Australians have enjoyed some benefit through easier access to credit lending and the purchase of cheaper cars and consumers goods.

But no matter how efficient Australia has become in recent decades, the push for greater economic reform continues. We see this with business groups continuously calling for lower tax rates and labour costs in order to compete.

The days when Australia’s political leaders looked to protectionism to uphold the perceived national interest or our standard of living appear long gone. As Abbott has indicated with his past consideration of a lower minimum wage, policy choices are indeed much more limited today as all nations have to compete to a greater extent in terms of taxation and labour costs.

Therefore, you are unlikely to hear Prime Minsiter Kevin Rudd or opposition leader Tony Abbott mirror the political speeches of the 1950s. For example, in 1954, Australia’s Commerce Minister John McEwen argued that tariff reductions were more applicable to highly industrialised countries whereas Australia is “a great exporter of raw materials”. Similarly, in line with wage and taxation policy then being tied to the cost of living, Prime Minister Robert Menzies stated in 1952 that “you cannot have great social responsibility or great social benefit unless you have heavy taxation”. And price control was evident in 1954 when the New South Wales Prices Minister, Mr A Landa, stated that the price of beef and mutton would not be increased and any wholesaler or retailer who charged more would be prosecuted.

But life is getting harder for a growing minority given recent trends, despite the efforts of Labor and the Coalition to maximise economic gain for Australia from its ongoing interaction with the international economy. We see this through greater housing unaffordability, higher food and utility prices, rising public costs for education and health, and an ongoing reliance upon household debt to pay for a variety of goods and services (Australia’s household debt to disposable income ratio reached 159 per cent by March 2008 before some decline, while Australia’s credit debt was estimated at $74,000 per adult by the end of 2009).

I will not pretend to have the answers given the need to balance national and international needs and aspirations through freer and fairer trade which means that all nations should adhere to similar rules. After all, if we are to encourage a world capable of diminishing barriers between nations in terms of both resources and ideas, it is essential that freer trade allows mobility of wealth between those nations seeking to benefit from their interaction with the international economy.

Nevertheless, we should never merely rely on our policy elites alone to decide our future, especially when they fail to acknowledge emerging policy difficulties ahead.

Take China. Contrary to what some suggest with an optimistic belief that Australia’s fortunes lie with Asia (increasingly China), many Western societies are unlikely to pursue business as usual if China does not begin to play by the same rules. Consistent with my own previous concern about China, Paul Krugman recently argued that if China continues on its mercantile way, including fixing its currency and restricting capital inflows, then “the very mild protectionism it (China) is currently complaining about will be the start of something much bigger (“China the one to watch, and worry about”, New York Times, December 31, 2009).

As history demonstrates, political parties can change their policy approach, a prospect perhaps not too far away given the present economic woes confronting major Western economies. As Dan Denning suggests (Daily Reckoning, November 3, 2009), the global financial crisis may become a sovereign debt crisis despite the technicality that a nation can never become insolvent if bonds are issued and others are prepared to pay for them. With the US government needing to roll over $3.4 trillion in debt in the next four years (without even considering additional spending for wars or healthcare), there is a greater chance that investors may prove less willing to hold US dollars given its troubled economy.

In Japan, where governments have used savings (and bonds) to pay for public spending (with public debt now approaching 200 per cent of GDP), pensioners may consume more of their savings to fund their twilight years which may result in higher interest payments (presently 20 per cent of Japan’s budget).

And in Europe, where Spain, Ireland, Greece, Portugal, Italy and Austria have considerable budgetary problems, the question can be asked whether a more stable Germany can bail out such nations or whether Europe’s monetary union is going to fragment to give struggling governments the flexibility to print money and “inflate away political problems” (Denning).

There are other points related to the wishful thinking by Australian policy makers. For instance, during November 2009, the Reserve Bank deputy governor Ric Battellino downplayed Australia’s record household debt by stating a continued high capacity “to sustain a relatively high ratio of housing prices to income”, while predicting that strong population growth (primary through immigration) and Australia’s trade with a growing Asian economy would keep Australia’s economy strong for years to come.

Battellino’s optimism is despite his awareness that first-home buyers (aged less than 35 years) had experienced “a noticeable decline in home ownership in the past 10-15 years”. That “the deposit needed by first-home owners may now be around one and a quarter years’ income, almost twice what it was 15 years ago”. And that the proportion of people who owned their homes outright has fallen from 42 to 33 per cent between 1994-95 and 2007-08 as the average amount owed on homes doubled to $150,000 (Chris Zappone, “High home prices sustainable: RBA”, Sydney Morning Herald, November 25, 2009).

How long are Labor and the Coalition (and the public) going to tolerate such a heavy reliance upon housing policies that clearly benefit the wealthy? Though the Housing Industry Association has predicted a 56,000 home shortage in 2009, which will persist at least until 2012, census data indicates that the number of dwellings exceeded households by 8 per cent in 2006, thus indicating many more second and holiday homes (Zappone).

While median home prices in capital cities have increased in recent times, heaven help those already struggling to meet their living costs should a major economic recession eventuate.With higher inflation and interest rates suggested in the future, and Australia long experiencing higher interest rates than most Western nations, it is worth citing one article which noted that real house prices in Australia only increased by an average of 2 per cent per year from 1975 to 1994 at a time when inflation averaged more than 8 per cent and nominal interest rates averaged 12 per cent (J. Yates, Decomposing Australia’s home ownership trends: 1975-1994, Department of Family and Community Services, 1999).

At the political party level, an Abbott led Coalition can make an important difference even if Australia’s economic plight improves. While Labor is unlikely to lose the next federal election (barring some catastrophe), greater attention should be given to a variety of issues including increasing home unaffordability, rising living costs, the extent of immigration, and even China.

But pressure for policy change is indeed much more likely through greater public anger and extensive debate. For instance, given the contradiction between economic and environmental considerations, will the people of New South Wales allow greater expansion of coal mines or make a greater effort to preserve the environment? After all, a decade after mining activity in the Blue Mountains National Park ended, water flowing from the former mining area into the Grose River was still full of metals in late 2008 with zinc levels well above the toxic limit (“Grose River”, Catalyst, ABC Television, August 14, 2008).

To conclude, I hope Abbott and the Coalition will challenge Labor on a variety of policy issues in 2010. While Rudd will promote himself as saving the Australian economy and Abbott as obstructing the emissions trading scheme, only extensive public debate can promote a better economic, social and environmental policy mix, the ultimate hallmark of a great nation. To this end, Abbott and the Opposition are just as important as the Rudd Labor government.

But it will be members of the general public, hopefully more informed by vigorous debate and greater honesty at the political level, who will also influence or temper the extent of policy reform adopted by policy elites. Just ask the former Howard government which largely lost the 2007 federal election on industrial relations alone, an issue of immense public awareness given the potential adverse impact on wages. Yes, the path towards greater misery for a growing minority may continue as we struggle for policy ideas to balance national and international economic considerations, but the capacity for democratic change remains.