The Australian economy under Abbott

How would the Australian economy fare under a re-elected Labor government or a newly elected Abbott government?

The answer is complicated: the opposition is refusing to spell out in detail its economic and fiscal policies, and in any event governments respond to changing circumstances in a way often at odds with their stated policies and election commitments.

And we don’t know the make-up of the Senate from July 1, 2014 so it’s hard to know what capacity either side would have to get its legislative agenda through.

But we have enough sense of Labor and Coalition policies — assuming they broadly adhere to them and get to implement them – to get some idea of the different paths the economy might take under each.

Today, the Coalition. While there’s limited detail and some confusion about the Coalition’s fiscal policy, Joe Hockey, Tony Abbott and Andrew Robb have laid out some important pointers:

• A tighter fiscal policy than Labor

• Significant cuts in the public service beyond those already achieved by the government, including removal of duplication of functions at state and Commonwealth level

• Lower personal taxes and abolition of the carbon price and mining tax

• Measures to lift workforce participation

• Cutting regulatory costs for business by $1 billion a year

• Labour market reforms but not a return to WorkChoices

• Tax breaks to drive greater private sector investment in infrastructure.

Some other policies are also relevant: more red tape for foreign investment, anti-dumping and, potentially, wheat marketing and less red tape for uranium sales to India, as well as a more generous paid parental leave scheme than Labor’s offering.

The logical upshot of the Coalition’s approach is significant spending cuts: not merely does the Coalition intend to run a tighter fiscal policy than Labor, but run one while offering tax cuts — eliminating the carbon price (most revenue of which is redirected to free permits to polluters, so the overall impact is limited), eliminating the mining tax (the impact of which is heavily dependent on the coal and iron ore price) and reducing personal income taxes.

However, the net effect on the Commonwealth’s contribution to demand will, because of those tax cuts, only reduce by the extent to which the Coalition’s fiscal policy is tighter: if for example Labor projects a $2 billion surplus in 2013-14 in the May budget and the Coalition aims instead for a $5 billion deficit in 2013-14, the net impact on demand is, at $3 billion, fairly trivial. The issue will be what services and programs are cut to meet the Coalition’s policy requirements.

In the longer term, the Coalition is committed to an absolute reduction in the size of government, via public service cuts, a National Commission of Audit and Robb’s proposal to eliminate duplication between state and federal governments.

The Coalition has talked tough on reducing government before and signally failed to follow through — the Howard government in fact became the biggest taxing government in Australian history.

But in the event the Coalition follows through, any longer-term permanent cuts in spending would presumably be accompanied by tax cuts, negating the impact on demand.

The real issue in that event would be whether tax cuts are simply handed back to voters, Howard style, or they are used to eliminate inefficient taxes or encourage investment.

In short, the Coalition’s commitment to tighter fiscal policy is unlikely to materially affect overall growth, although if broader economic conditions are soft, blindly following a tighter fiscal policy will exacerbate that softness and may precipitate a downturn.

The Reserve Bank will have some additional room to cut interest rates, but the stimulatory impact of monetary policy is likely to decline, given the RBA already has rates at extraordinary lows.

On monetary policy and finance more generally, Joe Hockey has promised a major inquiry into the financial system, and also seemed to suggest he will be more effective at convincing the big banks to pass on all interest rate cuts. If that were the case, the RBA would actually be able to cut rates less, knowing the full cut will be delivered through to consumers.

“All up, the economy under the Coalition is on current evidence unlikely, at least over the course of its first term, to look significantly different to how it looks now …”

A tighter fiscal policy might also place upward pressure on the dollar, by reinforcing Australia’s safe haven status, especially if the RBA has little room left to further cut rates — but again, the material effect is likely to be limited.

Economic growth might also benefit from any rise in consumer confidence that comes from the return to majority government, potentially flowing through to retail sales, although retail’s “problems” are primarily structural rather than due to a lack of consumer vim and vigour.

Story continues on page 2. Please click below.