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Abbott versus Rudd: a real contest?

By Chris Lewis - posted Friday, 15 January 2010


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.

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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).

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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.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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