It's the economy, stupid!

Economic Policy: Fiscal “Comfort” versus Long Term Future

Making the Australian economy work.

As expected, the debate between the Prime Minister and the Leader of the Opposition on Sunday night concentrated on the economy. I would have thought the televised discussion would help me, an Australian voter, to better comprehend the alternative economic polices of both major political forces. However, I remain confused.

The conventional thinking is that the ultimate goal of government’s economic policy is to promote the long-term prosperous future of the nation. At the macroeconomic level, the concerns are employment, stability, and growth. In the ideal world, the rest can be left to the market forces. Then, since our word is not ideal, and markets often fail to respond to macro-financial signals, microeconomic polices come to play aimed at specific industries, markets, businesses, and households.

Therefore, as a voter I would like to find out which government will be better in securing long term future for this country through their macro- and microeconomic policies. However, the debate between the major contenders predominantly evolves around the budget deficit, debt, and interest rates with no apparent relation to the long-term future. Therefore, it is difficult to see, who is really a better economic manager, or if there is a genuine intention of economic management beyond the budget.

Yes, the budget is increasingly in the red, now - over $30 billion. And yes, the government debt may soon reach the staggering amount of over $300 billion.

If we believe that this is the main problem the Australian economy is currently facing and make our voting decision accordingly, then the very recent Australian economic history might help. While one side of the politics is seemingly less financially responsible, commits spending beyond means, and accumulates debts, the other one tends to fix the debt problem and accumulate reserves. Yes, it is true that Howard-Costello government happened at the peak of the mining boom. It is true that the following Labor governments over-spent five consequent budgets at the time of the global financial crisis and the end of the intensive investment cycle in the mining sector. However, it is also true that economic stimulus of the Rudd Government did not contribute to Australia’s future economy, and instead was squandered on the dodgy insulation program and overpriced school halls.

Now, both the Labor and the Coalition make achieving budget surplus within their first/next three year term a part of their political pitch. However, neither of them seems to understand that the budget deficit is not always a bad thing, and the absolute amount of debt can even increase, provided its increase is slower than the GDP growth, and that borrowing ultimately serves economic growth, especially in the sectors where the country might enjoy comparative advantage in the future.

The promised by the Coalition 1.5% decrease in the company tax, even though in the short run cutting the revenue side of the budget and, therefore, adding to the deficit, potentially can induce economic growth. However, not any kind of growth can contribute to the future (after the mining boom) prosperity of this country.

I have written in my earlier article on The Conversation that it is not the first time in Australia’s economic history that a prevalent sector reaches its peak and gives way to a rapidly developing new one. This time, however, while the mining and education sectors have apparently hit their peaks and manufacturing continues its decline, there seems to be no replacement underway.

The question is if the change in the macro-financial mix: decease in company tax together with low interest rates and depreciating Australian dollar, is able to give the market enough incentive for expansion not only of the existing/traditional sectors, but also to boost finding and funding such a replacement. If not, then, whether we – market economists – like it, or not, new and innovative microeconomic policies are needed.

The Coalition promises help developing export-targeting agriculture in the North of the country.While, this idea and policy sound reasonable, is it the only available potentially competitive initiative?

Resources will remain one of the main competitive advantages of this country in the foreseeable future. However, instead of waiting for the next mining boom, this country needs strategies contributing to manufacturing “on the sides of mines”. Particularly, we need a discussion, revised policy on and assistance to nuclear energy. This may serve multiple causes: creating jobs in export-targeting fuel element manufacturing, generating cheep energy for processing/enriching competitively other minerals, and reducing carbon dioxide emission.

Any other ideas beyond the three years term of government? I would like to hear them from the competing politicians.