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A coalition government means more austerity and more inequality

By Andrew Leigh - posted Friday, 6 September 2013

If anyone doubted the relevance of Keynesian economics, the Global Financial Crisis taught the lessons better than any textbook could. As private demand wilted, every developed country put in place fiscal stimulus – designed to save jobs and keep businesses from going bust. On average, a larger stimulus package meant more growth.

Today, Australia faces the opposite challenge. The University of Queensland's John Quiggin has estimated that every $10 billion cut from government spending is likely to reduce employment by 0.5 percent. In a workforce of 12.5 million, that means 62,500 more people without jobs.

This matters because the Coalition is still keeping its cuts better hidden than the City of Atlantis. In past elections, every Opposition policy announcement was accompanied by a sheet of offsetting savings measures – the same approach that the Government has taken to our announcements. But you'll look in vain for a costings table in any recent Coalition policy announcements.


Costings conversations can be eye-glazing at times, but bear with me for a moment.

In May, Tony Abbott announced that he would scrap the mining tax and the carbon price, but keep the assistance to households. This cost $12 billion, and – for once - he identified some cuts in that process, including scrapping the Schoolkids' Bonus and getting rid of 12,000 public servants.

So far so good. But when he announced a $5 billion dollar company tax cut, Mr Abbott claimed it would be paid for by the May savings, apparently forgetting he'd already spent them.

Then came the $22 billion paid parental leave plan – which Joe Hockey initially claimed would be 100 percent paid for by a 1.5 company tax levy. He then scaled this down to 50, 60 or 70 percent, before admitting he didn't bother finding out before going on air. The truth is that the company tax levy pays for less than half the scheme.

And then we have the restoration of the private health insurance rebate to the most affluent, a policy whose price tag is around $8 billion and growing.

As US Republican Senator Everett Dirksen used to say, a few billion here, a few billion there, and soon you're talking serious money. Saul Eslake, who is now chief economist at the Bank of America Merrill Lynch puts the gap at $30 billion. In the past, Joe Hockey and Andrew Robb have estimated it at $70 billion.


At the same time as Mr Abbott is promising big new spending programs to benefit the most affluent, he has promised to shrink government as a share of the economy in every year of his term.

This is no 'relaxed and comfortable' agenda, and the mask slipped slightly this week when Mr Abbott said that he would seek to emulate Margaret Thatcher and Ronald Reagan. Under Thatcher, UK unemployment peaked at 12 percent. Under Reagan, the US jobless figure peaked at 10 percent.

And that's why Quiggin's calculation is so important. If a $10 billion cut in spending raises the unemployment rate by 0.5 percent, just imagine what a $70 billion cut would do.

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An abridged version of this article was originally published in the Daily Telegraph on September 4, 2013.

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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