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ALP digs in deeper on incompetence claim

By Ross Gittins
May 31, 2004


Federal Labor is so debilitated by Peter Costello's success in branding it an incompetent economic manager that it's actually making matters worse, giving him more material to work with.

I should say for the record that few economists would agree with Mr Costello's incessant claims about Labor's bad economic record when it was last in government.

While they remember all the black marks in that record, they also remember the huge extent of the micro-economic reform it undertook.

And they understand - as few punters do - that much of the economy's improved performance during the Howard Government's term is owed to the earlier reforms made by Labor. The fine print in this year's - and every year's - budget papers admits that.

But this isn't about the truth, it's about the public's perceptions. And there's no denying Mr Costello's success in convincing the public that Labor in government was absolutely hopeless.

You can see this in the polls showing the Coalition way ahead of Labor on the question of who's best at managing the economy. And there's little doubt Labor's private polling over the past eight years has convinced it of the depth of its economic credibility problem.

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The funny thing is that most of Mr Costello's success arises from all his carry-on about the Beazley Budget Black-hole he inherited.

He's given the public a wildly exaggerated impression of the size of "Labor's debt" - which the punters are encouraged to confuse with the (still-growing) net foreign debt - and managed to convince people the greatest crime in economic management is running a budget deficit.

The public's perceptions about the parties' respective abilities at economic management are one of the Government's strongest selling points, so Mr Costello has been banging away on the topic for months. He won't stop till election day.

But, you may think, surely that Beazley Black-hole stuff must be wearing thin after all these years?

Well, yes, it is. But that's where Labor - in all its obsessiveness about its problem - has played into Mr Costello's hands.

In his budget reply speech, Simon Crean sought to raise Labor's credibility by making a formal Budget Pledge. Over the next parliament, he promised:

Labor would deliver budget surpluses in each of the next three years and would reduce net debt. It would reduce Commonwealth tax as a percentage of GDP and also reduce Commonwealth spending as a percentage of GDP.

The first problem with this is that, while it's too technical to impress the punters - it's had little publicity in the media - it's too much of a straitjacket to impress the initiated.

How can Labor responsibly promise to run budget surpluses for the next three years? Who knows what's going to happen to the business cycle in that time? Should the economy suffer a serious downturn it would be irresponsible not to run a budget deficit.

Mr Crean did add the observation that "on current forecasts, there is no reason why this should not be possible". But really, he needed to nominate a much more explicit caveat than that.

The Government's "while economic growth prospects remain sound" would have been much more honest. But the promises to reduce taxation and spending relative to GDP are also a worry. That's because such measures aren't only affected by the things governments decide to do.

They're affected also by the economy's movement through the cycle (by the operation of the budget's "automatic stabilisers"). When the economy drops into recession, spending to GDP rises automatically because government spending - particularly spending on dole payments - grows faster than GDP does.

As, of course, it should. Sometimes tax revenue to GDP can rise in a recession, too - though more usually it falls. When you remember that the present expansion phase is now into a record-breaking 13th year, we must surely be close to the peak of the cycle - which is hardly a sensible place for Labor to be drawing lines in the sand.

When you see politicians donning straitjackets in this fashion, it makes you wonder whether they're fools or knaves.

Whether they don't understand the onerousness of what they're promising - or whether they understand perfectly but don't give a stuff. But when it comes to the short-term politics of the matter, Mr Crean could just as well have given his opponent a birthday present.

In Mr Costello's hands, the budget pledge becomes Labor's intention to "collect less tax, spend more money and have more left over at the end of it. So you take in less, you spend more and you have more left over."

That's quite a distortion of Mr Crean's promise, of course - but when did that hold a pollie back? Mr Costello's version is likely to make a far stronger impression on the punters than Mr Crean's. And, despite the distortion, it does make the point that Labor's promises to cut taxes, increase spending and achieve surpluses would be a difficult trilogy to pull off - even with the addition of Labor's nominated cuts in spending.

Labor really would be better off if it stopped being so sensitive about its economic reputation - stopped imagining it can promise its way to fiscal credibility - and, with its desire to offer tax cuts and increased spending, stopped trying to be all things to all men.

Ross Gittins is the Herald's Economics Editor.