Monday, December 04, 2006

Tuesday Column: Rudd's promises

In the end it was Beazley 39, Rudd 49.

Surprisingly, Rudd actually made a few promises in his first day on the job.

I analyse them below in Tuesday's canberra Times column.

As Kevin Rudd himself put it within minutes of assuming the leadership: “Now the new and the real work begins”.

It’ll be more difficult for Labor than ever before.

I’ll explain.

In the past it was possible to win an election by promising to spend money. Both sides of politics did it. In the 2004 election Mark Latham and Julia Gillard promised Medicare Gold. On the other side of politics John Howard and Peter Costello promised a tax rebate on childcare. Each produced figuring showing that even after the extra spending the budget would still be in surplus, and their promises were considered paid for.

Not any more.

Last month the Reserve Bank redefined “paid for”. In its Quarterly Economic Statement it declared that the Australian economy was operating "with very limited spare capacity”.

Stripped of bankers language that means that any extra government spending that encourages us to spend will push up inflation and force the Bank to put up interest rates.

That will be so even if the extra spending leaves a budget surplus intact.

It is a constraint that did not exist in earlier elections. In many of them unemployment was high and business could have done with a boost that wouldn’t have pushed up inflation. Even during the last election Australia’s rate of unemployment was 5.5 per cent.

At 4.6 per cent (and possibly even less when the next figures are released on Thursday) Australia’s current rate of unemployment is so low that it is not possible to argue that anything that adds to spending won’t push up inflation and then interest rates.

Especially given the Reserve Bank’s four increases in interest rates since in a row since the last election.

For an election promise to be salable this time around it’ll have to be seen not to add to public spending.

Which rules out most promised to spend money.

(There are some exceptions, such as the Coalition’s promise to end the tax on superannuation payouts, but most of these sort of ideas have already been taken.)

So what will Labor’s two new leaders promise at the next election if they can’t promise to spend more money?

In part they will promise ideas and values, taking their cue from Mark Latham, the last Labor leader to face an election. Three years ago on taking the Opposition Leader’s job he talked about reading to children.

Kevin Rudd did much the same thing yesterday. He spoke about the family: “the most important thing of my life, the backbone of my life”. And then about federation. There is overlap and uncertainty about which government does what in Australia, and it doesn’t require money to fix up. This is a costless promsie, the kind that Kevin Rudd needs.

Undoing much of WorkChoices won’t cost money either. Nor will action on climate change. If it involves a carbon tax, it might even make the government money.

But several of Kevin Rudd’s policy priorities outlined yesterday will cost money, big-time. And it is hard to know how he will be able to turn them into workable policies in the changed political-economic environment.

His promises to improve access to education and health would be very expensive if made concrete. Yesterday the new leader harked back to the days when he said he was able to take advantage of the free university education made possible by Gough Whitlam. It is an implicit promise that would cost billions to put in place.

I can almost hear Peter Costello’s line of attack. Battlers will be asked to pay higher mortgage rates in order to allow privileged children such as Kevin Rudd to go to university without charge. (And despite his parent’s status as share-farmers Kevin Rudd was privileged. He was bright enough to go to university.)

It will cost money also cost money to save manufacturing, something about which Kevin Rudd was passionate yesterday. He talked of the need for the government to be engaged, to “not sit idly by”.

As he put it: “I am actually a long-term believer in industry policy. That may be heretical, but I come from a long background in the state public service, and I know what it takes to get key industrial projects going. Let me tell you it doesn’t happen just by going and standing over there with your arms folded waiting for some magic to occur. Government has to have its sleeves rolled up and that goes for getting underway major infrastructure and industrial projects across the country.”

Mr Rudd appears to be talking about tax breaks or targetted government spending.

If he is, and we will know soon because he has promised “defined, concrete policy”, it is easy to argue that it’ll push up interest rates.

The Treasury Secretary Ken Henry has laid out the path of attack. In a speech delivered just last month he said: “Almost every day I hear somebody arguing that some activity should be accorded a special taxpayer-funded hand-out, either because it will ‘create’ some impressive number of new jobs or because, if it doesn’t receive taxpayer-funded support, an equally impressive number of jobs will be ‘destroyed’. These arguments must be based on a view that the economy is in a state of chronic under-utilisation of labour and that the central task of government is to provide taxpayer-funded subsidies to those who have sufficient wit to find ways of employing people”.

“That view is at odds with what we observe in the Australian economy of today, where policy settings have achieved a period of sustained success and, as a consequence, labour is in scarce supply. It is because of the intensity of competition for scarce labour that we hear so much about ‘skill shortages’ these days.”

The Treasury chief was sounding a warning to both the Government and the Opposition. The rules will be different in the next election. Sending more money will only push up interest rates. You’ll have to promise something else.