Photo: There has been no mini-budget and no policy changes to alter the path of government spending under the Coalition. (AAP: Alan Porritt)
Tony Abbott has wisely left Australia's fiscal settings exactly as they were under Labor, putting the lie to his hysterical pre-election economic rhetoric, writes Stephen Koukoulas.
Almost two months after a thumping election victory, there is not one hint of any economic policy change from the Abbott Government that will deal with the budget bottom line. Yet until the day before the election, this was painted by the Coalition as an "emergency" or "crisis".
The reason is obvious. The budget is in triple-A shape and in the complete opposite of an emergency.
If there were a budget emergency, Treasurer Joe Hockey and the Government would have acted with the same speed on spending and revenue measures as they have shown over abolishing the carbon price and implementing their boats policy.
Which goes back to the main point.
The six years of Labor Party government through to September 2013 were characterised by pragmatic, prudent and ultimately successful management of the economy. While some of the politics was astray, Australia's economy is in tip-top shape as a result of this record of first class economic management.
The economic runs on the board delivered by Labor include six extra years of unbroken economic and employment growth, a halving of the inflation rate, further solid increases in per capita GDP, and ongoing prosperity. If Tony Abbott can maintain the same record as Labor in his term in government, even without the negative shocks from the global economy, he will have done well.
This strong economic performance between 2007 and 2013 was despite the world economy crashing to its weakest point since the Great Depression of the 1930s, when financial market ructions threatened to completely undermine the functioning of global trade and the world economy.
It was truly extraordinary that Australia, in these circumstances, managed to dodge a recession and at the same time hold the unemployment rate below 6 per cent for whole period where unemployment rate hit double digits in most other advanced economies.
The reasons for this remarkable economic performance are simple: policy pragmatism and foresight. The fiscal stimulus measures, which saw the budget balance move by 6 per cent of GDP, was vital to supporting economic growth.
Builders were employed and retailers stayed afloat as the government pumped temporary, timely and targeted spending into the economy. Aiding the growth-enhancing policies was the easing in monetary policy, which saw the RBA cut the official cash rate by 425 basis points in a few months. This saved mortgage holders and business alike many tens of billions of dollars in interest costs - money that was at least partly directed to spending and investment. The Australian dollar fell by over 30 per cent and traded at 60 US cents, which helped to support many exporters.
Complementing this policy brilliance was some good luck. In the period from 2008 to 2010, the Chinese authorities stimulated their economy which not only saw Chinese GDP growth bounce back to above 10 per cent, but also reversed the commodity price slump and boosted demand for Australia's exports.
After the depths of the crisis had passed, the prudent policy settings from the Labor government continued.
In its budget settings, the Labor government implemented the largest tightening in fiscal policy ever recorded. The budget tightened by 3 per cent of GDP in a couple of years and 2012-13 saw the largest cut in real government spending ever.
This fiscal policy tightening was aimed at replenishing the budget, and there would have been a budget surplus were it not for the post-stimulus slowing in the Chinese economy, and the decline in the terms of trade that hit tax revenue hard over the past couple of years.
It has not been widely reported that over the past two years, the Australian economy confronted a 20-year low for Chinese economic growth. This bad luck (for Australia) obviously dragged the terms of trade lower and the Labor government had to deal with this unfortunate turn of events. In late 2012, it made the prudent decision to let the budget automatic stabilisers to work which of course meant less revenue and a budget deficit, but it kept the economy growing at around a 2.5 per cent pace and as we saw last week, the unemployment rate in September was just 5.6 per cent.
From a perspective of maintaining economic growth, this again highlighted the prudent and pragmatic nature of policy makers interested in sustaining economic growth and job creation.
It is interesting to note that the fiscal tightening allowed the RBA to ease monetary policy over the past two years, with interest rates for mortgages and the business sector falling to the lowest level in around 50 years.
The Labor Government knew that if it delivered tight fiscal settings, it would give room to the RBA to ease monetary policy which in turn would help trim the Australian dollar strength.
The RBA rose to the challenge and the recent fall in the dollar from levels constantly around 105 US cents to levels under 95 US cents has given exporters and firms competing with importers a clear shot in the arm.
At a macroeconomic level, it is difficult to find what the Labor government could have done differently or better. Less fiscal stimulus during the GFC may have seen the economy dive into recession. More stimulus was not needed given the economic outcomes delivered. It was about as right as these things can be in an economy that is now around $1.6 trillion a year.
To be sure, some of the rhetoric from the Labor ministers around the budget was misplaced, such as promises to return to surplus in 2012-13 come hell or high water, but the actual runs of the board and the bottom line policy settings were almost always right.
The fact that Mr Abbott and his team have seen fit to hold fiscal settings exactly as they were under Labor - with no mini-budget and no policy changes to alter the path of government spending or to change the momentum on economic growth - speaks loudly about the economy that Labor managed over their term of office, and draws into question the hysterical electioneering claims of economic incompetency and budget emergency.
Stephen Koukoulas is a Research Fellow at Per Capita, a progressive think tank. View his full profile here.
Why isn't Abbott acting on the 'budget emergency'? - The Drum (Australian Broadcasting Corporation)
