Economic management is a perennial battleground in Australian elections.
In reality, the debate is meaningless as no side has much control over key factors. On the economy, politicians enjoy what Yes Minister’s Sir Humphrey Appleby termed responsibility without power, the prerogative of the eunuch throughout the ages.
Firstly, Australia’s economy is dependent on external events, particularly commodity prices and the performance of our trading partners, especially China. Over the last half a century, successive commodity booms and the emergence of Japan, China and India have underpinned Australian living standards and shielded the nation from major downturns.
In 2021, Chinese demand combined with interruptions in Brazilian supply led to higher iron-ore prices temporarily increasing export revenues from this source alone to around 10% of the Australian economy, roughly double pre-pandemic levels. These additional revenues more than covered the pandemic-driven losses from international students, inbound tourists and immigration. Government revenue is highly sensitive to the iron ore price: a US$10 per tonne rise increases Western Australia’s royalties by around $800m per year.
Other critical factors largely outside government control are Covid-19 and geopolitics. The virus affects expenditure on health and income and industry support. Activity is influenced by mobility disruptions, which impact demand (tourism, foreign students, hospitality and personal services) as well as supply (quarantined staff, worker and skills shortages and supply chain breakdowns). Sino-US tensions bedevil relations with Australia’s largest trade counterparty.
Extreme weather events increasingly affect agricultural production. Global action to reduce emissions, such as the European Union’s planned levy on carbon-intensive imports, may affect Australian fossil fuel exports. Miners already face financing difficulties as investors seek to reduce exposure to the sector.
Secondly, even in areas of policy supposedly within their control, governments have limited ability to shape outcomes. Budget-day grandstanding aside, many elements are difficult to control, as the persistent inaccuracy of forecasts highlight. When economic activity slows, taxes fall and spending rises, increasing deficits and debt (known as the “automatic stabilisers”). Improving performance has the opposite effect.
Budget measures rely on uncertain multiplier effects – the increase in economic activity resulting from additional government spending. Targeting stimulus is challenging. Overzealous and/or misdirected government spending to boost the economy during the pandemic may have exacerbated inflationary pressures.
Interest rate and monetary conditions are the preserve of a theoretically independent central bank. In any case, the Reserve Bank’s actions are frequently negated by those of larger counterparts, such as the US, the EU, Japan and China.
Australian interest rates must track overseas equivalents to avoid destabilising capital inflows or outflows. Australia’s size limits the ability to intervene in financial markets to influence the value of the Australian dollar in a world where all countries want a weak currency to improve export competitiveness.
Besides, lower rates and pumping money may not boost the economy as business and individual borrowing is based on needs and repayment ability. In the absence of demand for their products, lower cost of debt may not increase investment. Lower interest income may perversely encourage greater saving, including for retirement, reducing consumption, which normally constitutes around 60% of economic activity.
Governments could undertake microeconomic or structural reform to increase competitiveness and flexibility by improving workforce practices, education, cost structures, infrastructure, productivity and social policy. This too presents complications. Couples refuse to cooperate with government diktats to increase the birth rate. Higher immigration faces opposition from many groups.
While everybody agrees on the need for change, there is little agreement on the “what”, the “how” and the “who pays”.
Besides, structural reform requires slow and painstaking effort not glib marketing slogans. It has uncertain outcomes and may take decades to yield results, during which time the underlying conditions may shift. Australia’s federated model makes it difficult to coordinate policies between different levels of government. Required legislative power is also restricted by internal party factional wars, as well as the frequent absence of a secure majority or control of both houses of parliament.
Thirdly, governments are trapped by unintended consequences. Instead of boosting activity, lower rates create asset (housing) price bubbles, which exacerbate housing unaffordability and inequality, as well as creating high levels of mortgage debt and inflation. This leads to surreal policy cocktails: cutting interest rates, subsidising home purchases and jaw-boning banks to limit lending (known as macro-prudential policy).
It resembles trying to drive a car with a foot simultaneously on the accelerator and the brake.
It is understandable that modern superhero politicians prefer more nebulous issues: national security, culture, identity, character, probity and affinity with cute babies and cuddly animals.
The mystery is why voters believe promises on the economy that even competent governments have limited ability to deliver on.
Perhaps like Napoleon’s preference for “lucky” generals, Australians should vote for “lucky” leaders.
• Satyajit Das is a financier and author of A Banquet of Consequences – Reloaded (March 2021) and Fortune’s Fool: Australia’s Choices (coming in March 2022)
