Australia has had a very successful economic decade with declining unemployment, low inflation and fairly strong economic growth. Are Howard and Costello right to argue that it was mostly the Governments doing and in particular that it reflected some hard political decisions such as on tax reform, budget policy and WorkChoices. With less competent or more timid captains at the helm, they claim, the ship of state would flounder.
The best way to assess this proposition is to compare Australias economic performance with other developed countries. At the start one needs to accept that Australias resources boom has given us a spectacular advantage. In a recent speech, Saul Eslake points out that “the terms of trade gains since 1999 have been worth $3316 pa to each Australian on average” and that “parameter variations” (mainly unexpected improvements in terms of trade) added nearly $400 billion to Costello’s revenue. True, bouts of drought and water shortages have pulled back some of this advantage but overall, fortune has dealt us a fairly lucky hand in the last decade relative to other countries.
The economic indicators I have looked at are:
workforce participation ratio (latest);
unemployment rates (latest);
inflation (latest); and
growth in productivity (GDP per hour) over the last five years or so.
On all these indicators, Australia has been an average but not outstanding performer in the last five years despite our considerable good fortune! For example, on workforce participation we have generally not performed as well as Sweden, Denmark, Netherlands, Austria and Norway all countries with more regulated labour markets. And they currently have a more favourable unemployment-inflation trade off too (e.g. Denmark 3.9% unemployment and 1.8% inflation and Sweden 4.8% unemployment with 1.9% inflation, compared with Australia 4.5 and 2.5 respectively). As well they are recording equal or better productivity growth. Nor have we generally outperformed USA, Britain and NZ (e.g. NZ unemployment 3% with 2.5% inflation). The last two countries strengthened their workplace and wage regulation regimes in recent years.
In brief, if our Prime Minister wants to know why voters are unimpressed despite the economic good tides, it could be because they are smart enough to realise it is happening everywhere in the world and that perhaps we have not taken full advantage of our extraordinary good luck with the commodity price boom.
Having said that, I acknowledge that boom times can sometimes create inflationary headaches for governments and that the Governments fiscal and workplace reforms may have helped a little to keep these under control (although wage and price inflation is subdued elsewhere too). I also acknowledge that our economy leaves for dead many other countries like France and Germany. On the other hand I have avoided highlighting our huge external account deficit (6% of GDP) and external debt (equalling about 50% of GDP) where we are among the worst in the developed world. These indicators worry many economists (although I am not one of them).