Bill Shorten can’t avoid a repeat of this week. His economic credibility is under a cloud – but there is a potential salvation if he can make peace with the reality that he is simply more enthusiastic about government spending than his opponents.
The week started well enough for the Labor leader. A national poll on Monday showed him gaining ground on Malcolm Turnbull as preferred prime minister and even though there is doubt about whether Shorten is truly competitive, at least it should have put a spring in his step.
But then treasurer Scott Morrison and finance minister Mathias Cormann hurtled into an attack on Labor’s spending plans, claiming there was a $67 billion black hole in the opposition’s budget plans.
In firing this cannon there was a messy recoil. Maybe it wasn’t $67 billion, they had to admit. Maybe it was more like $30 billion.
Bill Shorten still had $30 billion worth of explaining to do. For Morrison, the job was done. He was remorseless, saying Labor’s accounting mismatch was “like one of those Hollywood films. And the parents come home from a weekend away and the kids turn up and say I only burned down half the house.”
He was able to gloat: “It’s not a question of whether there’s a black hole when it comes to Labor’s unfunded spending, it’s just a question of how big it is”.
Yesterday, as the questions continued about where he would find budget savings, Shorten was forced into admitting he would drop some $10 billion worth of Labor policy, including on the Schoolkids bonus and adjustments to pensions, which have been a line of attack for the opposition.
Here’s the capitulation, via the ABC:
“We think the Government was ill-conceived in making these changes and we still think they’re not the best changes, and that’s why when the Greens and the Liberals voted together on pension changes we registered our disagreement,” Mr Shorten said.
“But now we’ve had the most recent fiscal outlook, there is no doubt that this Government has surprised Australians, including us — they’ve tripled the deficit, they’ve also put at jeopardy, under Malcolm Turnbull’s reign, the AAA credit rating.
“We do not believe, looking at the latest set of books that the Government has just revealed last week, that we’re in a position to restore the changes they’ve made.”
Shorten appeared to be displaying a streak of fiscal restraint, understanding that handouts for families because their kids are going to school might not be sensible in a period when the nation’s budgetary position has been deteriorating.
But this does not line up with the broad statements – and weak answers – he has been providing when asked about his plan for the economy.
Shorten was asked point-blank what it was this week. Here’s his answer, and it’s worth reading in full because it is so completely devoid of anything that resembles a plan.
Labor’s plan for economic growth is jobs, education, Medicare, renewable energy, fair taxation, access for first home buyers into the housing market. Our economic plan is all about fairness. We don’t think that economic growth can be guaranteed or sustained by giving multi-millionaires tax cuts. I don’t think the solution for Australia’s economic growth is giving large foreign multinationals and large banks business tax cuts that this nation can’t afford. I think economic growth comes from fairness; treating women equally in the workplace, making sure we have affordable childcare, make sure our kids get the best education possible, make sure that adults who want to retrain after they have been displaced after losing one job can do so through strong properly funded public TAFE. An economic growth plan which puts people at the centre of our decisions and a viable Medicare system, a well-funded Medicare system is actually excellent for economic growth. Look at the comparative system in the United States. In America they spend 17 per cent of their GDP on a two-tier health system which is notorious for not delivering for people who don’t have a lot of money.
This is a well-worn attack line from Shorten, that we are headed down the path to an American healthcare system despite a distinct lack of evidence to support it. Anyway, he continued:
The truth of is matter is our Medicare system is very efficient. Having Medicare in public hands with one system of payments is actually not just good in term of fairness, but it’s good in terms of economic efficiency. Imagine going down the American path where employers have to pay for the health insurance of their employees. No-one in Australia wants that. They would rather see an economically efficient and fair medical system. What Mr Turnbull doesn’t get is there are two economic growth plans on trial at this election – Mr Turnbull’s trickledown economics, where you look after the top one and two per cent and hope everyone else gets something on the way through, or Labor’s plan to look after working class and middle class families, good education, good health, good jobs, that is, I think, the most sustainable way to generate economic growth in the long-term.
There are two ways to read this. One is that beyond broad motherhood statements about fairness, he really doesn’t have a plan. Even take the first thing he says, that his plan is about “jobs”. What jobs? Where? What are the incentives for industry to create them or will they be supported by government investment?
At the very least the Coalition can mount an argument that by taking less of businesses’ profit dollars away from them in tax, they might encourage companies – including small ones – to reinvest that money in jobs and expansion.
But there is another way of looking at Shorten’s response: Bill Shorten’s plan is to support the economy with government spending, by investing in healthcare and education.
This is basically fiscal stimulus and it is a perfectly valid approach to economic policy as long as you are willing to be straight with the public about what is involved.
It means budget repair will take longer, tax reductions will be harder, but the government in return will play a significant role in propping up the economy by pumping money into it, mainly through hospitals and schools.
A quick recap. Government spending is currently 25.9% of Australia’s economy. The Coalition has a stated goal of reducing government spending to 25.3% and Mathias Cormann has previously said that it should be reduced over time to 24%. The trouble is that, with the current rate of growth in the workforce, a certain level of job creation through economic growth is required to avoid a rise in unemployment. If the government cuts its spending activity in the economy too quickly, that can be a brake on overall economic growth.
RBA board member John Edwards has said the required rate of growth to create the jobs required to meet the growing workforce is around 3%. The economy is currently ambling along at around 2.5%, so we are arguably already close to the wind. And the data is starting to send some warning signals. Trend employment has been strong but is slowing. The economy only added 10,800 jobs last month. And Economist Stephen Roberts summed it up neatly this week, describing the trends in Australia’s labour market as “soft employment growth driven by part-time jobs’ growth; falling hours worked; low and still declining wages growth”.
Here’s a chart from last week, showing the latest data figures which shows clearly that full-time job creation has suddenly taken a turn for the worse.
In this environment, slashing and burning – as was proposed under Abbott and Hockey – is not just poor politics. It is economically dangerous. The OECD was moved to warn the Abbott government of precisely this problem back in 2014, when it said: “Given near-term uncertainties in the rebalancing of the economy away from investment in the natural resource sector, heavy front-loading of fiscal consolidation should be avoided.”
Make no mistake: with the level of debt that Australian households are carrying, a spike in unemployment is the nightmare scenario for the Australian economy. And it is an inescapable reality unemployment would rise without a certain level of economic growth – regardless of the where it comes from.
So it is absolutely defensible to have an economic plan which says spending growth will not be curtailed because it is in the broad national interest.
It’s defensible – maybe even to the ratings agencies – but politically it would be an enormous gamble.
Being an “economic conservative” – believing that budget balance should at least be an aspiration – has become a conventional requirement for anyone seeking to be the prime minister of Australia. Who can forget Kevin Rudd’s proud declarations in 2007, as he so studiously adopted elements of John Howard’s mantle?
We know how that worked out. With the GFC thrust upon him and the need to “go early, go hard, go households”, Rudd responded with a vast increase in government activity – helicopter money, pink batts, school upgrades.
As the budget position has continued to deteriorate since the GFC, budget repair has become the sine qua non of federal politics on the economy. As the economy has been transitioning – weakening, even – and policy reform hampered by the Senate, government has relied instead on the RBA for stimulus by means of rate cuts. But with the cash rate dropping below 1.75%, the central bank is running out of ammo.
Fiscal stimulus means taking some of Glenn Stevens’ job back off him. This at least is something approaching an economic management plan.
The theatrics about black holes this week the Coalition has exposed enormous weaknesses in Shorten’s credibility. “Labor’s plan to look after working class and middle class families, good education, good health, good jobs” is the best indication of where he really stands.
So here’s a suggestion: instead of rambling on with motherhood statements on “fairness”, Shorten should explain that he is prepared to use the power of government spending to support the economy through its transition. At least he wouldn’t need to scramble around trying to fill in black holes.
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