The election of the Abbott government provides a great opportunity to change economic policy settings and steer the economy to a higher growth path.
Although five years have elapsed since the transatlantic banking crisis erupted on Wall Street, Australia's economic performance remains weak by historical standards. One recent indicator is another fall in Australia's overall international competitiveness ranking, as defined in the 2013-14 Global Competitiveness Report published by the World Economic Forum. Australia no longer makes the top twenty most competitive countries in the world having slipped a rank this year to twenty first. In 2010-11 it ranked sixteenth.
Meanwhile, New Zealand has leapfrogged Australia to come in eighteenth in the latest report, up five places since last year's. The other economies that beat Australia were, in descending order, Switzerland, Singapore, Finland, Germany, the United States, Sweden, Hong Kong, the Netherlands, Japan, the United Kingdom, Norway, Taiwan, Qatar, Canada, Denmark, Austria, Belgium, United Arab Emirates and Saudi Arabia.
The overall WEF competitiveness rankings now cover 148 economies and reflect scores for a set of so-called 'pillars' that drive economic growth. These pillars are its institutions, infrastructure, macroeconomic environment, health and education, product market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation. Disaggregated scores for these pillars identify specific areas of economic strength and weakness.
Continuing strengths for Australia are its financial markets and education system while the standout weak points continue to be a highly inflexible labour market and excessive government regulation. Ironically, the labour market has become less flexible when massive structural change in the economy due to the mining boom implies greater flexibility is needed.
During the Rudd-Gillard-Swan era Gross Domestic Product per capita grew on average below one per cent per annum according to Australian Bureau of Statistics data, less than half the almost two and a half per cent per head per annum average rate of the Howard-Costello years. In no single year between 2008 and 2012 did economic growth per head exceed 2 per cent per annum which had hitherto been the norm.
While average annual per capita growth of the economy under the Coalition government was considerably better, including through the Asian crisis in the late 1990s, its 2.5 per cent average annual rate masks a growth slowdown from the early 2000s due to a sharp productivity slowdown.
Under the ALP the distinguishing feature of macroeconomic policy was its short term focus and the activist use of budgetary policy, both to manage aggregate demand and to redistribute income. Although originally meant to be sardonic, the statements "the cheque's in the mail" and "we're from the government and we're here to help" summed up federal fiscal strategy and economic management more generally.
The recessed growth and declining competitiveness of recent years occurred despite a mining boom without historical precedent and a $95 billion budgetary stimulus response to the transatlantic banking crisis that in the end has done more harm than good.
Income redistribution was central to economic policy under the previous government, but exactly how much was needed was never articulated, nor its wider economic consequences, particularly those affecting incentives to work save and invest through the tax system ever identified. Ad hoc income redistribution was a unifying theme of annual budgets on Wayne Swan's watch, although no analysis of the nature and scale of income inequality in Australia, or how it compared with other similar countries was ever canvassed in the budget papers.
The Abbott government has already signalled a strong pro-business stance in contrast to its predecessor. But being pro-business will not necessarily be good economic policy if this means being pro each and every business.
Pro-market economic policies are preferable to pro-business policies, as they can revive private sector activity and entrepreneurship by spurring competitiveness and productivity. At the same time pro-market policies alter incentives and business practices for those businesses in sectors that survive on subsidies, or more euphemistically 'co-investment', as well as those cossetted from competition through trade protection or tax breaks.
In recent years the demand side of the economy has been overemphasised relative to the supply side where, after all, production and employment begins. This reflects a tradition in macroeconomics which proposes that national income is mainly determined on the aggregate demand side of the economy in the short run, yet on the aggregate supply side in the long run. But this distinction is misleading since stronger productivity can lift macroeconomic performance in the short run as well as the long run.
Productivity according to the standard multifactor measure has yet to recover to the high levels achieved in the 1990's following extensive pro-market reforms in that decade and remains the major challenge for the economy.
Addressing the supply side weaknesses that have contributed to lower economic growth, as identified in the WEF competitiveness report, provides a good starting point for meeting that challenge.