Friday, July 26, 2013

Economic reality is too hard to sell

The next federal election, which now may not be until the end of September, will be the country's first ''post-prosperity'' election.

It will be the first election since the end of the boom.  Saying we're entering a post-prosperity era is not to claim that Australia won't remain prosperous.  By regional and world standards Australia is a very rich country, and it's likely we'll stay that way for some time yet.  But what is different in a post-prosperity environment is that Australians can no longer assume their living standards will continue to improve.

In 1900 Australia had the second-highest standard of living in the world (behind New Zealand).  By the 1970s Australia had the tenth highest standard of living.  In the 1970s, of course, the country was still rich and still prosperous — but compared to other countries it was not as rich as it once had been.  The pattern of Australia's economic rise then relative decline is at risk of repeating in the coming decades.

Two decades of prosperity has made politicians complacent.  It's said that ''generals always fight the last war''.  The parallel is that politicians always legislate for the boom that's already ended.  In a boom politicians believe they can legislate and regulate without cost, or at least at a cost that's affordable;  the carbon tax is the best example.

The problem is booms end.  Costs that businesses and consumers might have been able to absorb in a boom become unsustainable once rising incomes are no longer guaranteed.

Boasting about legislation

An example of just how out of touch MPs are was revealed when Rob Oakeshott, the retiring independent MP, boasted that one of his main achievements in the last Parliament was helping pass more than 500 pieces of legislation.  Only someone who didn't have to run a business would define success in such a way.  Some of the legislation Oakeshott helped pass is the reason why it costs twice as much to build a Ford car in Australia as it does in Europe, and four times as much as it does to build a Ford in Asia.

These figures, revealed by Ford boss Bob Graziano as he announced the company would stop building cars in Australia in 2016, received about a day and a half of media attention.  If ever simple statistics sum up the challenges Australia faces, it's these from Ford.

Yet both Labor and the Coalition seem to take it for granted that Australia will remain a high-cost, high-regulation economy.

In June, on the day Kevin Rudd was sworn in as Prime Minister (for the second time) he talked about the global economy and how ''there are a lot of bad things happening out there''.  That was certainly a welcome recognition of reality.

What was unreal was when the PM then talked about the opportunities in ''processed foods and agriculture, in the services sector and also in manufacturing''.

The reality is that as PM the first time around Rudd reregulated the labour market and dramatically increased the costs in all those industries he mentioned.

Coalition seems just as sanguine

At times, the Coalition seems just as sanguine about costs and productivity as the Labor Party.  Tony Abbott has promised the Fair Work Act will be reviewed by the Productivity Commission and he would seek a mandate for any major changes at a future election.

That means major labour market reform under a Coalition government could be three or four years away — at best.  Such is the chilling legacy of John Howard's Work Choices.

The big-spending policies around which Rudd wants to fight the election, such as the national broadband network, more money for schools and more money for disability services, are a throwback to 10 years ago when policies like these were affordable.

It takes a brave politician to point out that the biggest threat to Australia's future prosperity is not the lack of a high-speed internet connection to every home.

The last politician who used an election campaign to level with the Australian public about the country's economic condition was John Hewson, seven federal elections and 20 years ago.

John Howard tried to do the same in 1987.  Needless to say, both men lost.

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