Labor trapped in the economic slow lane

The government is in danger of mishandling its central task – setting out a new growth trajectory.

Treasurer Jim Chalmers has a vision but the pivotal question is: does he have the policies to deliver this vision? Picture: NewsWire / John Gass

Australia is in dire need of a new growth agenda to revive its economy and living standards. This is the ultimate message from the week’s dismal national accounts. The new growth model should be the centrepiece of Labor’s 2025 re-election campaign – yet there is no sign of any such ambition.

The mistake of the Albanese government is potentially fatal over time. All its agenda-setting is about “we feel your pain” sympathising with the public’s hardship, boasting about its cost-of-living relief – directed at the symptoms, not the causes – declaring that its spending has averted a recession and blaming the Reserve Bank for high interest rates.

These are variations of the short-term fix. They downplay the imperative to eliminate inflation. They miss the bigger picture. And they raise the danger the government cannot manage the central task of the times – getting Australia on to a new growth trajectory for the 21st century.

Independent economist Saul Eslake tells Inquirer: “I’ve not been critical of Albanese and Chalmers for not doing any reform because, in effect, they promised at the 2022 election they wouldn’t.

“But what I am critical of is there has been no attempt in the lead-up to the next election – which history tells you they are likely to win – to articulate the case for an ambitious reform agenda. I’m surprised by that. Some people thought they would try but they haven’t. And if they don’t, by the time the 2028 election comes around they’ll have to persuade people why they’re not a tired government that has been there too long.”

What does the Albanese government believe? Is it just bigger, more interventionist, a Future Made in Australia government deficient about the centrality of private sector capital? What sort of 2025 mandate will it seek? Will Labor and the Coalition conspire in another bipartisan retreat from the reforms that Australia needs? Expectations are low.

Calling for serious reforms, Deloitte Access Economics partner Stephen Smith tells Inquirer: “As another federal election looms I don’t have any confidence or expectation that the government or Opposition will take any significant policy reform to a vote.”

How far does the economy need to sink before a circuit-breaker kicks in? This week’s story is grim – the economy grew 0.2 per cent in the June quarter, just 1 per cent for the year, the weakest annual growth outside the pandemic since the early 1990s recession. Only government spending and migration levels prevented a negative result. Productivity growth is weak, down 0.8 per cent over the quarter. This is the sixth successive quarter of negative GDP per capita growth.

Labor has fumbled the inflation story. The outburst from ALP president and former treasurer Wayne Swan slamming the RBA for “hammering households” with interest rates just makes it worse. This helps neither the bank nor the government. It reinforces the impression Labor disagrees with the bank’s strategy, but creating this wedge won’t buy the party electoral immunity. It will only raise doubts about whether Labor has the spine for resolute economic management.

The government should have campaigned on the evils of inflation and focused on the economic revival agenda. Promoting the different outlooks of RBA governor Michele Bullock and Jim Chalmers has done nothing to help Labor, contrary to much of the ALP smart money.

In her Thursday speech this week, Bullock announced the bank wouldn’t be intimidated. Don’t fall for the idea the bank will cut rates because of weak growth. Bullock says the bank’s “highest priority” is to bring inflation down, that it is “premature” to think of interest rate cuts, that the board is “vigilant” to upside inflation risks and that if inflation doesn’t fall the “best medicine” may be “more restrictions” into the economy.

Note the main theme of her speech: don’t believe that the medicine of high interest rates is worse than the disease of high inflation. Inflation is “bad for everyone” and if it gets entrenched the cost of removal comes only with a “larger rise in unemployment and higher risk of recession”.

Tensions between Jim Chalmers and Michele Bullock over interest rates and inflation continued on Thursday.

While the economy faces a demand-supply imbalance, the core problem is supply side and productivity weakness. That means the economy cannot sustain more activity short of risking higher inflation. Here is the conundrum: the bank can wind back demand but building up the supply side of the economy is the real key to a prosperous future, and that demands government leadership.

University of NSW economics professor an Academy of the Social Sciences in Australia president Richard Holden tells Inquirer: “What we need is a growth agenda. That must have at its core making Australia a great place in which to invest. But Australia is busy turning its back on what helped us last 30 years without a recession and become one of the most prosperous nations on earth.

“Beginning in 1983, and up until a couple of years ago, we made our labour market more flexible. Now we’re doing the opposite. We opened our economy to the world. Now we’re doing the opposite. We reduced our reliance on income taxes. We’re now doing the opposite. It’s as sad as it is troubling.

“A growth agenda involves reversing the long-run decline in school educational outcomes as reflected in our absolute and relative drop in PISA scores, so we have the human capital to match the financial capital we seek to attract. It involves making it more attractive to employ people by having a flexible labour market. It involves embracing new productivity-enhancing technologies like artificial intelligence rather than seeking to over-regulate them. It involves getting more of our tax take from the GST and less from income tax to increase labour supply and dynamics.

“Of course, the world has changed in the last 40 years. We should update our economic approach but not uproot it. We must not turn our backs on what made us such a success story, as this government has been busy doing for the last 2½ years.”

Judo Bank chief economic adviser Warren Hogan has a different take – he says Labor does have an economic agenda that is being systematically implemented – but it’s the wrong agenda for the times and is unlikely to change at next year’s federal election. Hogan tells Inquirer: “I think Labor has been putting forward an economic agenda that involves bigger government, more regulation, weaker productivity and more regulation of the labour market. The disconnect, the idea that is missing, is that we are now one of the world’s wealthiest countries because we decided 40 years ago to run a reform-orientated, market-based economy.

The outburst by former treasurer Wayne Swan helped neither the bank nor the government. Picture: Dan Peled / NCA NewsWire

“My concern is that Labor’s agenda is the opposite of Hawke and Keating. They don’t get this point, they don’t get the power of the market economy.

“The two parts that worry me most in terms of economic performance are, first, the further regulation of the labour market, the tightening up of the IR system through new laws on top of the emboldening of the unions – that raises the cost of labour and it’s a key issue in our productivity problem.

“The second issue is the size of government, state and federal, and this is a departure from what I call the modest government we’ve had over the last 40 years.

“What we’re now seeing is a structural shift, far bigger government in terms of bureaucracy and an expanded welfare state.”

Meanwhile, weak productivity is a cost for business that erodes the cost base of the economy. Sadly, productivity has become a word game, endlessly recycled but devoid of meaning or detailed agenda.

Drawing on the national accounts, Hogan points out that government spending (local, state, federal) as a proportion of GDP has recently taken a historic leap upwards. “It started in 2018 under the previous Coalition government but has been supercharged in the last two years under this ALP government,” Hogan says (see graph).

The magnitude of the increase is unprecedented since the late 1960s-early ’70s when the size of government took a sharp, permanent upturn.

The numbers show total spending as a proportion of GDP stayed around the 18-19 per cent zone for many years but recently has escalated into the 21-23 per cent zone, an increase likely to become permanent based on the electorate’s demand for expanded government services.

Hogan says: “The economy has fundamentally changed in the last 10 years. With the retirement of the baby boomers, labour shortages are the new norm, unemployment is less of a problem, we will be constantly operating the economy near its capacity. As government grows and hires more labour, you see the crowding out of the private sector. Businesses are less likely to expand and invest. The strength of employment this year is outstanding, but most of these are public sector or quasi public sector jobs.”

Deloitte’s Smith tells Inquirer: “Even before the national accounts release it was clear the policy levers in Australia needed to shift from containing inflation to promoting growth. This requirement is dire because the private sector had become effectively dormant in Australia.

“Economic growth has been propped up by population growth and the public sector, neither of which represents a sustainable platform for economic activity or prosperity. We need a situation where the private sector is driving economic growth. Looking across the economy, there are no clear drivers of growth for the medium or long-term.

“The only sustainable long-term growth driver is productivity. Australia’s productivity is flagging for several reasons but a decades-long lack of economic reform has discouraged competition and dynamism in the private sector.

“The largest reform opportunity remains the tax system. Australia relies far too heavily on income tax, both from individuals and companies. Reducing and flattening the personal income tax schedules, lowering the rate of company tax to 25 per cent for large companies, increasing the rate of tax on national resource extraction, lifting the rate of the GST and broadening the base, halving the discount on the capital gains tax, and incentivising the states and territories to abolish stamp duty should all be on the table.

“None of these ideas is new. But the reason they haven’t been implemented to date is not because they are old or because they are without merit. The reason is a distinct lack of political courage from both major parties over the past two decades.”

Chalmers would repudiate the above criticisms. Before the 2022 election and since then as Treasurer, he has been fashioning a Labor reform agenda. In his recent John Curtin lecture he framed this as creating “a new fourth economy for Australia” – identifying the three previous economies as agriculture, industrialisation and the Hawke-Keating deregulated open economy.

The Chalmers strategy is to recruit the disruptive forces in today’s world and convert them into economic strengths.

“Our task is to harness these forces of energy, technology, demography, industry and geography to our advantage,” he says. For Chalmers, the “central opportunity” for Australia lies “in the revolutionary transition now under way in global climate, energy and capital markets”.

He says by 2050 it is estimated that 90 per cent of electricity globally could be generated by renewables and calls this the “biggest transformation” since the industrial revolution. For Chalmers, renewables are not just about cutting emissions but delivering a higher productivity, higher-growth Australian economy.

He sees the rise of artificial intelligence as integral to the strategy, highlighting that by 2030 AI could contribute up to $4.4 trillion to the global economy – more than the current output of Britain. At the same time Chalmers emphasises the opportunities arising from investments in an expanded care economy represented by aged care, the National Disability Insurance Scheme and the demands arising from an ageing population.

Chalmers has a vision. The pivotal question is: does he have the policies to deliver this vision? So far, that is not apparent. Australia’s transition to 82 per cent renewables by 2030 faces serious trouble with investment shortfalls, demands for more financial incentives, entrenched political conflict, Labor’s scepticism about gas as a transition fuel and the need to maintain coal-fired plants to ensure power system reliability.

The Albanese government is pinning its hopes on the much-hyped technology, forecasting it to inject up to $600bn a year into the national economy by the end of the decade.

Productivity Commission chairwoman Danielle Wood has raised serious doubts about two elements in Labor’s economic strategy – its Future Made in Australia agenda and the productivity impact of an expanding care sector.

Wood has reinforced the argument from a litany of experts that subsidies for low-emissions manufacturing pose hefty risks, saying they “would take jobs and capital investments from elsewhere in the economy where they could generate higher value”.

“For industries that are not able to ‘stand on their own feet’ in competing globally, more money will be needed for every year we choose to ‘rent’ the industry.” In short, the Future Made in Australia model risks becoming a winner-picking project in denial of the market economy.

Wood has made the obvious point about the expanding care sector. Because it is labour-intensive and has poor productivity, the more the care sector expands, the more “that will drive down productivity overall”.

These points have been affirmed by Eslake, who says: “If you ask Labor about its agenda, it will point to a Future Made in Australia. Now, I don’t have a problem with the proposition that the transition to net zero won’t happen without government involvement.

“But this idea that Australia ought to spend billions of taxpayer dollars subsidising the manufacture of solar panels, the lithium industry and so-called critical minerals just because other countries are doing it is crackers. This is what the IMF and others call industrial policy. There’s plenty of analysis showing how difficult it is to get this right and how prone it is to covert political influence and bad results.

“The government would say this is its growth strategy and I would say is akin to drawing up a circular firing squad. Australia is never going to be a significant manufacturing nation partly because the experience of the world tells us you need to get scale since manufacturing has high fixed costs and you need to produce at scale. You can only do this by having a big domestic market – think China, the US, the EU and Brazil – or exporting to big markets that are nearby.

Eslake says there is a “fetish” about manufacturing jobs, suggesting they are more important than jobs in mining or agriculture. The risk, however, is directing resources via subsidies into manufacturing where productivity in many cases is weak.

He says: “I think it’s plausible that Australia could become a significant producer of renewable energy but I am exceptionally dubious about the prospect of producing that renewable energy to become a manufacturing superpower.”

Labor seems trapped between the politics and economics. With its declining trend in the polls and fear of minority government, the risk is that Labor will just offer a “more of same” economic agenda at next year’s election. A second term like the first.

That would mean bigger, more interventionist government, a costlier IR model, more red and green tape, no substantial tax reform, full throttle on the renewables transition and subsidising wages in the care economy. That may be enough to get re-elected; it won’t deliver a new growth model for Australia.