Economic management is an ongoing battleground in Australian elections.
In reality, the debate is meaningless because neither side has much control over the key factors. Economically, politicians enjoy what Sir Humphrey Appleby, Minister for the Yes, called responsibility without power, the prerogative of the eunuch through the ages.
First, the Australian economy is dependent on external events, particularly commodity prices and the performance of our trading partners, notably China. Over the past half-century, successive commodity booms and the emergence of Japan, China and India have sustained Australia’s standard of living and protected the country from major recessions.
In 2021, Chinese demand combined with Brazilian supply disruptions drove iron ore prices up, temporarily boosting export earnings from this source alone to around 10% of the Australian economy, or around the double pre-pandemic levels. These additional revenues have more than covered the losses caused by the pandemic from international students, incoming tourists and immigration. Government revenues are very sensitive to the price of iron ore: a rise of US$10 per tonne increases Western Australia’s royalties by around $800 million a year.
Other critical factors largely beyond the government’s control are Covid-19 and geopolitics. The virus is affecting healthcare spending, revenue and industry support. Activity is influenced by mobility disruptions, which impact demand (tourism, foreign students, hospitality and personal services) as well as supply (staff quarantined, labor and skills shortages and supply chain disruption). Sino-US tensions are disrupting relations with Australia’s largest trading counterpart.
Extreme weather events are increasingly affecting agricultural production. Global action to reduce emissions, such as the European Union’s planned tax on carbon-intensive imports, could affect Australia’s fossil fuel exports. Miners are already facing funding difficulties as investors seek to reduce their exposure to the sector.
Second, even in policy areas that are supposed to be under their control, governments have limited ability to shape outcomes. Budget day demagoguery aside, there are many elements that are hard to control, as the continuing inaccuracy of forecasts highlights. When economic activity slows, taxes fall and spending rises, increasing deficits and debt (known as “automatic stabilizers”). Improving performance has the opposite effect.
Fiscal measures rely on uncertain multiplier effects – the increase in economic activity resulting from additional government spending. Targeting stimuli is difficult. Overzealous and/or misdirected government spending to stimulate the economy during the pandemic may have exacerbated inflationary pressures.
Interest rates and monetary conditions are the prerogative of a theoretically independent central bank. Either way, Reserve Bank actions are frequently overruled by those of their larger counterparts, such as the US, EU, Japan and China.
Australian interest rates must follow foreign equivalents to avoid destabilizing capital inflows or outflows. Australia’s size limits the ability to intervene in financial markets to influence the value of the Australian dollar in a world where all countries want a weak currency to improve export competitiveness.
Also, lowering rates and pumping money may not stimulate the economy, as corporate and personal borrowing is based on need and ability to repay. In the absence of demand for their products, the falling cost of debt may not increase investment. Falling interest income can perversely encourage greater savings, including for retirement, reducing consumption, which normally constitutes around 60% of economic activity.
Governments could undertake microeconomic or structural reforms to increase competitiveness and flexibility by improving labor practices, education, cost structures, infrastructure, productivity and social policy. This too presents complications. The couples refuse to cooperate with the dictates of the government to increase the birth rate. Higher immigration faces opposition from many groups.
While everyone agrees on the need for change, there is little agreement on the ‘what’, ‘how’ and ‘who pays’.
Moreover, structural reform requires slow and painstaking efforts, not glib marketing slogans. It has uncertain results and may take decades to produce results, during which time the underlying conditions may change. Australia’s federated model makes it difficult to coordinate policies between different levels of government. The required legislative power is also limited by internal party factional warfare, as well as the frequent lack of a secure majority or control of both houses of parliament.
Third, governments are trapped by unintended consequences. Instead of stimulating activity, falling rates create bubbles in asset (housing) prices, which exacerbate housing inaccessibility and inequality, as well as creating high levels of mortgage debt and inflation. . This leads to surreal policy cocktails: cutting interest rates, subsidizing home purchases, and forcing banks to limit lending (so-called macroprudential policy).
It’s like trying to drive a car with one foot on the accelerator and the brake simultaneously.
It’s understandable that modern superhero politicians prefer more nebulous issues: national security, culture, identity, character, probity, and affinity with cute babies and cuddly animals.
The mystery is why voters believe promises about the economy that even competent governments have limited ability to deliver.
Perhaps like Napoleon’s preference for ‘lucky’ generals, Australians should vote for ‘lucky’ leaders.