Bipolar nation: how to win the 2007 election

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:

This idea that there’s a once-for-all magical fix - done that. I did the biggest tax reform in Australian history in 2000, but they’re all back on it again! Now, you could do the next biggest now and they’d all be on it again in four years’ time.

It was the voice of a man pleased with his record, happy with his creation. It lent some credence to Paul Keating’s assessment of Costello as “a complacent, business-as-usual treasurer”.

Complacency was a terrible provocation to Donald Horne (author of The Lucky Country). It seemed to him that the minerals boom of the last few years risked reinstating the national complacency: “It’s quite appalling to discover people saying today that Australia is still the lucky country because we have all these minerals,” Horne said in his final interview. “There’s still a bloody lucky country mentality!”

Contrary to general belief, the big take-off in commodities prices is a tailwind assisting Australia only slightly, and only in the last four years. It is certainly having a powerful effect in the areas that directly service the mining industry. House prices in Perth are bounding ahead with rises of 30 per cent a year, for instance. But its overall effect on the national economy is marginal. The up-tick in mining output in 2005 contributed a mere 0.1 of a percentage point to the national economic growth of 2.7 per cent.

But no matter how much, or how little, credit Howard can take for Australia’s long boom, Labor has allowed itself to be put into a position where it can take none at all. This is the most profound mistake of political strategy that the Labor Party has made in its 11 years on the Opposition benches.

Neither Paul Keating nor Bob Hawke has ever received the credit they deserve for saving Australia from its long, slow slide into economic hopelessness. Partly it’s because of the long lag between the pain of the reforms and the gain of the prosperity they generated - it was almost a decade between the advent of the first Hawke-Keating government in 1983 and the dawning of the great boom in 1991.

And partly it’s because the remarkable nation-changing accomplishment of economic turnaround was obscured by everything else that intruded - Keating’s messy political assassination of Hawke to seize the throne, the 1990 “recession we had to have”, and the personal unpopularity of Keating with the electorate.

It was because of this - Keating’s unpopularity - that the party was so reluctant to have anything to do with him. This continued even into the last federal election. Amid the razzle-dazzle of the Labor campaign launch in Brisbane, former leaders were feted, and Mark Latham ostentatiously hugged Gough Whitlam. Paul Keating, though, was treated like a disgraced relative one was obliged to invite but was ashamed to embrace. He was brought in through a side door and edited out of Labor’s broadcast TV footage. It was the nadir of his exile.

This repudiation, Labor realised after the devastating result at the polls, was a mistake. The party lost the last election in large part because voters decided Latham and Labor could not be trusted to run the economy. The party had done so much of the work of rebuilding the economy, yet had no credibility on economic policy.

Keating did not enjoy his exile, but he thinks Labor suffered more than he did. “Fundamentally, the Labor Party never believed in the model,” he said to me in 2005. By “the model”, he meant an open, modern, market-based economy, the economy that John Howard and Peter Costello inherited from Labor, but a concept that Labor itself, post-Hawke and post-Keating, let slip. Keating continued:

The whole Hawke-Keating model for Australia didn’t have to happen. The unlikely thing is it came from a Labor government. Labor governments and Labor parties mostly believed in big budget deficits, they believed in higher tariffs and managed exchange rates and controlled financial markets. The Labor Party never believed in the model that Hawke and I gave the country, but it happened. The country got a very great break from it.

But Labor failed to get the break. Hawke and Keating had been concerned with how to create wealth, but after 1996 Labor returned to its historical preoccupation, not with how to create wealth, but with how to redistribute it. By discarding the economic model, by rejecting the builders and their handiwork, Labor also threw away the voter base it brought with it, according to Keating:

It’s a fundamentally flawed strategy. The Labor Party has given up the middle-class, middle-ground, sole-employer, self-employed, small-business voter that Bob Hawke and I generated for it. That’s why Kim Beazley got a majority of votes in 1998 but not a majority of seats - because he couldn’t get the distribution [of votes in the seats where they were needed to win government] because the Labor Party had already run away from our record …

There’s a decade lost and the brand fades. People don’t tie up the policies with the outcome. A decade of prosperity is a structural benefit for the Liberal Party even though the Liberal Party didn’t create it in the first place. And of course every time the Labor Party tried to win in 1998, 2001 and the last election, 2004, the further it got away from the internationalising model of the Labor government, 1983-96, the less well it did.

After the gut-punch of the 2004 result, Labor realised its error. It decided to rehabilitate Keating. “We have decided to bring him in from the cold,” Kim Beazley told me in August 2006. In doing this, Labor decided to confront the problem of its credibility on economic policy.

Since the 2004 election, it has recognised the economy as the central political battleground. It has acknowledged the country is in a rare period of extended prosperity. And after being airbrushed out of Labor family photos for almost a decade, Uncle Paul is now back in the frame. Kim Beazley - before his departure - and his finance frontbenchers, Wayne Swan and Stephen Smith, three of the men who had earlier sought to hold Keating at arm’s length, began publicly to acknowledge his legacy.

Kevin Rudd has continued to try to recover Labor’s standing. In a speech to the Business Council of Australia in January, he contrasted Howard’s economic performance with Keating’s: “If Australia now had the same terms of trade as we did when Paul Keating was in office, the current account deficit would be 10 per cent of GDP - enough to put us on constant watch from the IMF.” And he dismissed the government’s claim of fiscal responsibility: “Riding the tax windfall from a resources boom to budget surplus, is easy, not tough.”

For the preceding decade, Labor had been particularly spooked by the peak 17 per cent mortgage rate that banks charged during the Keating era. The government used this to crushing effect against the ALP; indeed, it used it so relentlessly that it became reflexive. It was the stock response to any Labor complaint about government economic policy. I call it the government’s Spinal Tap defence.

In the cult movie This Is Spinal Tap, a spoof documentary on the life of a failing heavy metal band, the group’s guitarist takes us on a tour of his collection of prized musical instruments.

After showing off his favourite electric guitar - the one with the flame painted on it - the long-haired, gum-chewing Cockney Nigel Tufnel brings us to his favourite amplifier. “It’s very, very special because if you can see” - drawing attention to the calibrations on the knobs on the face of the amplifier - “the numbers all go to eleven.” A normal volume knob is marked from zero to ten, but Nigel’s favourite goes up to eleven.

The reporter wants to know if this unique calibration makes the amplifier louder.

Nigel (triumphantly): Well, it’s one louder, isn’t it? It’s not ten. You see, most blokes, you know, will be playing at ten. What we do is if we need that extra push over the cliff … you know what we do?

Reporter: Put it up to eleven.

Nigel: Eleven. Exactly. One louder.

Reporter: Why don’t you just make ten louder and make ten be the top number, and make that a little louder?

Nigel (looking blank, chews his gum for a long moment before replying defiantly): These go to eleven.

No matter what Labor said in attacking his record on interest rates, Howard replied that, under Labor, interest rates went to 17 per cent. Even after Howard misled the electorate in the 2004 campaign with his promise to “keep interest rates at record lows” - misleading because the Reserve Bank, not the government, sets interest rates - he kept up the Spinal Tap defence. “Yours went to 17.”

Even after the Reserve Bank raised rates three times, exposing Howard’s election promise as the falsehood it had always been, he kept it up. In Question Time, he called the peak mortgage rate under Labor in 1989 “the notorious 17 per cent”, “the dizzy heights of 17 per cent” and “the bitterly remembered heights of 17 per cent”. Say what you like, Howard said with a dogged imperturbability of which Nigel would be proud, but yours went to 17.

Finally, in parliament in August 2006, Labor’s treasury spokesman, Wayne Swan, reminded Howard that interest rates had hit 21 per cent in 1982 under the then Liberal treasurer, John Howard. Incredibly, it was the first time that the Opposition had used this on Howard. It seemed to disarm him. He lost his Spinal Tap defence.

It had taken Labor a decade to do this, a decade to point out that Howard’s rate peak was four percentage points higher than Keating’s. Why now? Beazley said: “We have been waiting for this for a long time - it’s finally reached the point where interest rates repayments on mortgages are more burdensome than in 1989.” The Reserve Bank had just raised official rates for the third time since Howard’s low-interest election.

How could it be that, with the average mortgage rate today at about 7.8 per cent, repayments are higher than under the notorious 17 per cent? It is because today’s buyers struggle with such huge mortgages that even though interest rates are much lower, the proportion of their income that goes towards servicing them is larger. As Labor crowed, it took an average 7 per cent of household incomes to meet mortgage interest repayments in the Hawke-Keating years, but since the last election the figure has hit 7.9 per cent.

It took Labor a full decade to realise that, in abandoning Keating because of his unpopularity, it had also surrendered its claim to Keating’s historic importance and to the prosperity he had bequeathed Australia.

Wayne Swan said in 2006 that Labor has “deliberately set out to take head-on the accusation that Keating’s record was worse than the Coalition’s”. It is too late. The boom, in the electorate’s mind, belongs to Howard. Asked which party is the better economic manager, Australians, by a margin of almost two to one, name the Howard government.

The Lucky Country decided to make its own luck. The political party that made the decisive break failed to take credit for its own accomplishments. Now it’s too late. John Howard owns the national prosperity as a political asset or, in his own words, a “political weapon”.