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The economic record of the Howard government

July 12th, 2003

I’m writing a chapter for a book on the Howard government, in which I’m assessing its economic policies. Here’s my draft conclusion (comments much appreciated).

The experience of seven years of nearly uninterrupted expansion under Howard, following three or four years of tentative economic recovery under Keating has given the government a reputation for good economic management. This reputation has been reinforced by the maintenance of low interest rates.

It is hard to see, however, that the government has contributed much to these outcomes. As in standard nowadays, the Reserve Bank is primarily responsible for the maintenance of macroeconomic stability. The Reserve Bank has judged monetary policy well since the mid-1990s, and, as a result, Australia has gradually recovered the ground lost in the 1989-92 recession.

But whereas the then Treasurer, Paul Keating, must share significant responsibility, along with the Reserve Bank, for the disastrous misjudgements that gave us ‘the recession we had to have’, the current government can claim little credit for the correct judgements of the Reserve Bank. It cannot even claim credit for not interferign. The policy of central bank independence has turned out well in Australia in the last, but it failed badly in New Zealand, where bad monetary policy contributed to a string of recessions in the 1990s.

In its first term in office, the government claimed credit for the decline in interest rates on the basis that the tight fiscal policies associated with the 1996 Budget cuts. The merits of the ‘crowding out’ hypothesis underlying this claim are debatable, particularly in a world of unrestricted capital movements.

More importantly, the government has abandoned any claims to fiscal rectitude since 2001 when it dissipated what remained of the budget surplus, Since then, the government has more or less officially adopted a zero budget balance (on whichever of the various accounting systems seems most appealing in any given year) as its target. This policy ensures that an economic downturn will produce large budget deficits and a substantial reduction in public sector net worth. If the government took its own rhetoric about fiscal prudence seriously it would be running surpluses to prepare for such an event.

Similarly at the microeconomic level, it is hard to see any basis for claims of superiority in economic management. The government has neither produced an alternative to the microeconomic reform agenda of its predecessors nor made any significant contribution of its own beyond the completion of unfinished business and some desultory swipes at the trade unions.

In retrospect, it seems likely that the long expansion of the 1990s will be viewed as a missed opportunity. Such a period of economic stability does not come along very often and is unlikely to persist indefinitely. Yet Australia has surprisingly little to show for this long period of prosperity, except for massive additions to an already impressive stock of housing, now valued at equally impressive prices. Unemployment has fallen a little but is still above the low points reached in previous expansions. No new initiative has been made to deal with the problems of financing retirement for an aging population; there has not even been much progress in tidying up the tangled web of policies inherited from the Keating government. The most important single investment in the future is education: if anything, we have gone backwards in this respect, particularly in relation particularly in relation to post-secondary education, the main area of Commonwealth responsibility.

In 1964, Donald Horne described Australia as ‘a lucky country, run by second-rate people who share its luck’. This epigram could be applied, with equal or greater justice, to the Howard government and its term in office, particularly as regards economic policy. Sooner or later, however, this kind of luck will run out.

Update Lots of useful comments already! I’m grateful for substantive, stylistic and typographical corrections and suggestions. As well, the comments thread has some good discussion of things like measures of unemployment. I’m very encouraged by this and will probably post more.

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  1. July 12th, 2003 at 12:13 | #1

    Some suggestions Johno:

    This reputation has been reinforced by the maintenance of interest rates that were low by the standards of recent decades (but still high by comparison with major trading partners).

    Unemployment has fallen a little but is still above the low points reached in previous expansions, while inequalities have grown.

    The most important single investment in the future is education: if anything, we have gone backwards in this respect, particularly in relation to post-secondary education, the main area of Commonwealth responsibility. Disinvestment in social infrastructure has been reinforced by an entirely gratuitous populist campaign to reduce levels of public debt, which was driven to extraordinarily low levels in Australian historical terms and by comparison with other comparable nations.

  2. July 12th, 2003 at 18:03 | #2

    John,
    My guess before I started to read, that you would not be complimenting the Howard Govt, was borne out.
    I don’t know if this valid criticism or not, but on the surface it looks like economics aint too objective. Would Paddy McGuiness come to the same conclusions I wonder? There is a typo: “interferign”?
    Alan

  3. John
    July 12th, 2003 at 18:17 | #3

    Alan, you’ll notice I was more critical of Keating than of the current government.

    And I suspect Paddy would have a fairly similar assessment to mine, though he would have a very different view about what should be done.

    In fact, a quick Google reveals that he is more critical than me, saying “While the Howard Government has done many useful things it has presided over a real deterioration in economic policy-making”.

  4. cs
    July 12th, 2003 at 19:03 | #4

    I can’t see how, as Alan seems to imply, the test of ‘objectivity’ can be an account with politically neutral implications. On the contrary, as the disinterested scholar should let the political cards lie where they fall, this suggests Alan is failing the ‘objectivity’ test by seemingly supposing a neutral political meaning could be a relevant indicator.

  5. s robertson
    July 12th, 2003 at 19:04 | #5

    re interest rates: seems to me that following deregulation of the banks, some bloody bad investments were made and several banks almost went to the wall – perhaps ? saved by massive hikes in home mortgage rates (as is apparently happening in Mexico now). it may be mere coincidence that following the collapse of HIH, it is now insurance rates that are causing real hardship across all social groupings. in all of the above, more stringent ‘regulation’ of the behaviours of financial institutions (essentially private sector) would seem to be a necessary component in ‘economic policy’ .

    re employment stats: i recall reading somewhere that if one is “employed” for as little as 1 hour a week, then one if counted as ‘employed’ for statistical purposes. not sure the general public is aware that current reports on the unemployment rate don’t have the same significance as they would have had ? a decade ago? Wonder what the rate would look like if only those employed at least 20 hours a week were included- 20 hours at the minumum wage being the amount more or less equivalent to the dole (survival level).

  6. Homer Paxton
    July 12th, 2003 at 21:59 | #6

    The two great moments that transformed the Oz Economy were:
    1) the cutting of tariffs. This put the wood on companies and unions to buckle up. I well remember the complacency of unionists in the late 70′s in the Metal industry. No-one cared a toss about people being made unemployed for the high wage claims then because of last in first out rule. It has greatly changed now.
    2) The recession we had to have dramaticxally reduced inflation and Bernie Fraser kept it down. This led to intense competition in the domestic economy that has contininued which with 1) has led to the Economy from strength to strength.

    most other reforms have there basis in these two.

  7. July 12th, 2003 at 22:29 | #7

    typos (since books dont get edited these days)

    “as IS standard nowadays”

    “The policy of central bank independence has turned out well in Australia in the last,” (last what?)

    “particularly in relation particularly in relation” (duplicate phrase)

  8. July 12th, 2003 at 22:43 | #8

    also, commas and periods should always go inside the quotes (otherwise they look like they just dangle there)

    (central queensland university recommends a different practise, but more authoritive sources confirm my suspicions:

    http://infocom.cqu.edu.au/Courses/2002/T2/JOUR11005/Study_Schedule/content/module_06a.htm

    vs

    http://www.cmu.edu/styleguide/punctuation.html

    ahh carnegie mellon, my old rivals)

  9. craig
    July 13th, 2003 at 01:02 | #9

    You’re right about the 1 hour a week statistical measure.

    A more relevant measure would be labour hours.

  10. July 13th, 2003 at 02:43 | #10

    It’s a good thing this medium is virtual, else I would physically remonstrate (i.e. kick the shit out of) people that nitpick about typos.

    As for your passage, John, it’s your field not mine, but if you are going to say “they should have done better” then you really should say how.

    Just to be fair, and non partisan and all that, I’m surprised you didn’t sledge the government about unfunded super liabilities that Stephen Mayne’s been banging on about. That would seem to be a legitimate criticism to me.

  11. July 13th, 2003 at 06:36 | #11

    Couple of points to add to my previous
    –reporting typos in a request for comments is not such a bad idea I think, as authors do tend to miss them.

    –yeah I should have checked to see what Paddy has said. It probably is impossible to come up with a politically neutral economic assessment of a govt. On the other hand what would have surprised me would have been a glowing endorsement.

    I think the question should be: is there such a beast as leftist economics? as in feminist science?
    Alan

  12. July 13th, 2003 at 15:27 | #12

    “also, commas and periods should always go inside the quotes (otherwise they look like they just dangle there)… (central queensland university recommends a different practise, but more authoritive sources confirm my suspicions…”

    Utter nonsense, unless you just happen to be deliberately using the US dialect (other dialects don’t have “periods” in punctuation anyway).

    This whole area of different dialect usage has been well described in many discussions at http://www.wikipedia.org. Use whatever you want, only be consistent and don’t be intimidated by claims about “more authoritive” – that is merely the detritus of an earlier attempt to take over the language, no more a justification than that itself was.

  13. Homer Paxton
    July 13th, 2003 at 17:08 | #13

    three more observations,

    One of their worst decsion was to discontinue the AWIRS survey ( I hope my memory is correct) just like the kneecapping of the bureau of labour market research by Willis this measure meant sensible labour market policies were made in the dark.

    The Liberal Governmant is not ideological driven but pragmatic like the Labor Government. how else do you explain their Whitlamite spending spree.

    Fiscal policy is overrated. Except for their first year they have done nothing. I suspect there has been a structural deficit for some time which means they are lucky they are the first Government for some time not to encounter a recession.

  14. July 13th, 2003 at 18:59 | #14

    i usually dont use punctuation at all…but since it will probably be cut and pasted to the book, i thought id point it out.

    i also never use capitals, but apparently they are a good idea in a book…

    anyhoo, i accept dr evils physical challenge…

    where and when?

    …c8to

  15. July 13th, 2003 at 21:40 | #15

    JQ just posted something containing the term “math question”, so he is using the US dialect. He is also leaving everything after that new post reverting to italics, so consistency doesn’t seem to bother him much either.

  16. John
    July 13th, 2003 at 22:37 | #16

    Fair go, PML, it’s Sunday night. I’ve fixed both slips now.

  17. James Farrell
    July 13th, 2003 at 23:04 | #17

    I’m glad John is questioning the Government’s claim that its budgets were a cause of low interest rates. But I think ‘debatable’ is much too polite. He needs to really go for the throat here, since Howard and Costello have been making this completely unsupportable claim for years without being challenged.

    And it’s hard to blame the media when the most credible seeming experts peddle the same idea. I remember my jaw dropping when one night a few years ago Chris Richardson told Kerry O’Brien, with nary a blush, something like: it’s a rule of thumb that each extra billion off the fiscal balance will raise the cash rate by x basis points. I forget what x was, but that’s not the point.

    So when can a discretionary reduction in public saving cause the interest rate to rise? In a small open economy there is no reason why it should, as John has pointed out: foreign saving takes up the slack. In a closed economy operating below full employment, the extra spending stimulates activity and private domestic saving increases. If, due to the consequent higher level of activity, there is a shortage of liquidity, the central bank can easily accommodate this.

    This leaves the case of a closed economy already at full employment. Clearly if the government increases its consumption then the private sector must either save more or invest less. In the absence of any other mechanism, this adjustment may need to be brought about through a rise in the interest rate. How does this work given that the interest is set by the central bank? The budgetary change creates chronic excess demand, which causes inflation, which prompts the bank, according to its rule, to raise the interest rate.

    Presumably the latter process is what’s going on in Richardson’s simulation model. But given that we are not in a closed economy and that no one knows where we are in relation to full employment, it’s outrageous even to assert with confidence that the fiscal balance affects the interest rate, let alone claim to be able to quantify the relationship.

  18. Observa
    July 14th, 2003 at 11:03 | #18

    My business experience gives me a very strong gut feeling that the implementation of a VAT tax in place of the WST has produced outstanding benefits for the production side of the economy.(A clue to this might be to investigate vehicle sales after the govt relaxed the GST interim measures on cars)

    Major benefits to industry IMO have been 1. The reduction in costs to exporters 2. The one eleventh general cost benefit to producers over consumers 3. The computerisation and general accounting improvements forced on SMEs in order to comply with minimum quarterly BAS statements. These benefits must be ascribed to the current govt., which add to the impact of the Hawke/Keating govt reforms. Business today is meaner, leaner and more informed than a decade ago. Also with a higher GST accounting requirement, new entrants to the market-place have to hit the ground running.

  19. July 14th, 2003 at 12:12 | #19

    Observa – have a look at my publications page http://users.netlink.com.au/~peterl/publicns.html for an article looking into what a GST would deliver.

    It was then and still is now my view that enforced computerising is not a benefit by and large. My view was that it was a compliance cost delivering no actual improvement to smaller businesses, that weren’t in need of that sort of management information in the first place (that’s partly based on my late father’s description of inventory control when running a small shop in early retirement). It ends up biassing the market in favour of larger businesses and adding to barriers to entry etc.

    Of course, there are indeed businesses that would eventually need those systems, or which can use the information if they have it despite its not being worth the cost (making the best of a bad job), but that’s a long way from justifying that much investment then and there.

    As for the other disadvantages I saw – well, have a look at the article.

  20. derrida derider
    July 15th, 2003 at 22:08 | #20

    I’m no friend at all of the current government, but I think its macroeconomic management has clearly been a bright spot in an ocean of incompetence.

    It is not so much what it has done as what it hasn’t done – it hasn’t stuffed up. In a small commodities-based economy this is a real achievement because such economies have quite small margins for error.

    It has learned the virtues of benign neglect of the currency. It has not tried to muscle the RBA. It has avoided the error (to which the Labour governments were prone) of overreacting to short term market movements, preferring to keep its eye on the medium term.

    As it happens its only departure from steady long-range policy – the horror budget of 1996 (which I vehemently opposed at the time) – was vindicated in the Asian financial crisis. Had we still had moderately loose fiscal policy in 1998 we would have likely have been another victim of the irrational ‘contagion’ of that time, and have suffered a capital flight which would have far outweighed the gains to our commmodity exporters.

    And I must say it’s amusing to watch neo-Keynesians imply that fiscal policy is impotent. Ask yourself – if the Howard government had done a Bush, wouldn’t you now be talking of ‘mortgaging the prospects of our children’ a la Krugman and Brad deLong?

  21. John
    July 15th, 2003 at 22:13 | #21

    DD, I agree with a number of points you make, but the crucial point about the 1996 Budget was “as it happened”. Things turned out well but totally by chance.

  22. gordon
    July 21st, 2003 at 12:02 | #22

    Strongly support comment by cs regarding inequality, and suggest some real attention to this. I believe the Centre for Social & Economic Modelling has now discontinued its annual reports quantifying the growth of inequality in Oz, but they were real eye-openers, particularly the regular finding that, in the absence of compensating transfer payments of varying sorts, economic inequality is increasing in leaps and bounds and (from memory) has now left Oz somewhere among the top few most unequal societies in the developed world. Prof. Gregory’s work you will know. This is a realllllly important issue, from which much else flows.

  23. Observa
    July 24th, 2003 at 01:05 | #23

    PML, Thanks for the link and I accept your general points about a VAT tax there. As far as the intro to a GST in Aust, there were some teething problems and consequently some added compliance costs. As far as large organisations went, I am sure they noticed little or no extra compliance costs. Well embedded computerised accounting and often handling of WST on a monthly basis, would have seen little problem with a GST. Indeed for many of them handling a single rate GST, would have been a God-send over the variable rate WST. Little change to cash flows either, except that now every capital input purchased (in particular transport vehicles) came with an immediate tax input credit.
    SMEs would have fared worse for the first full fin year, with quarterly minimum reporting for most, after many were used to dropping of the she-box full of receipts annually to their accountant before. Three full financial years on and the teething problemms have vanished. For very small enterprises, you can choose to pay Q GST based on past turnover and leave an accurate reconciliation until years end as before. Now I might suggest here, that if compliance costs are as onerous as you think they are, it would be easy to check the proportion of businesses using the percentage of turnover method for BAS returns, rather than their own calculated figure. My guess is not that many, because many would have taken the opportunity to computerise and
    ‘Account as you go’, something they meant to do, but had been putting off. When the accountants told many of their ‘shoe-box’ clients, computerise or I won’t be able to service you any longer, they got with it or retired. Yes it lifted the bar for new entrants(and got rid of a bit of flotsam and jetsam)as well as making things harder for the tax cheats(remember all those extra ABN registrations) Now you may say we need the free flow of new entrants. Too true, but one thing we don’t need are a bunch of amateurs, who don’t understand the need for viable businesses (ie earning ‘normal profit’)creating short term havoc in the market-place while they work it out. Large numbers of these don’t get the press of an HIH, but I can assure you they have a similar impact.
    The only long term negative of a GST for myself and many others, was the devaluing by one eleventh of all of our existing capital stock. Other than that I reckon this GST has been a shot in the arm for Aust business. Nevertheless I view it as overall, bland incrementalism as far as my ideal tax system, but I’ll take a GST over a WST any day.

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