Saturday, February 23, 2008

Saturday Forum: “Labor Can’t Manage Money” three months on

“Labor can’t manage money” we were told in the election advertisements.

“They’ll stuff the economy” was the grim forecast.

Three months on Labor are looking okay as economic managers, although problems await, and it looks as if the Coalition couldn’t manage money.

Its not just this week’s revelation that the Coalition ordered 100,000 WorkChoices Mousemats and then locked away in storage for $930 a month, although that’s emblematic.

There is also this week’s Audit Office report about the Coalition’s ghost rail projects. According to the Office just before the end of July in 2004, 2005 and 2006 the Coalition government authorised special grants to the Australian Rail Track Corporation “so as to reduce the budget surplus”.

The Rail Track Corporation hadn’t asked for the money and wasn’t able to properly use it. It invested it while it drew up plans in a series of transactions that the Office believes will cost $141 million in lost interest earnings...

The Coalition also cut the efficiency dividend it demanded of the public service, again in an apparent attempt to stem the growth of the surplus.

Days before the November election was called, at the time when it was running those “Labor can’t manage money” ads, the Coalition shoveled $5.5 million of government grants to 28 of its own electorates as part of its Regional Partnership Program. The figures presented to parliament this week suggest that it was a particularly productive week for the Ministers approving those grants.

The revelations coming out both in parliament and at this week’s Senate estimates hearings paint a picture closer to that of a government showered in riches spraying money around without regard for the consequences than that of a responsible economic manager.

The Coalition’s new Treasury spokesman Malcolm Turnbull has seemed anything but responsible.

His performance on The Insiders on the eve of parliament’s return two weeks ago was excruciating.

In the face of absolutely clear evidence that inflation was accelerating and moving well beyond the Reserve Bank’s 2 – 3 per cent target band during the Coalition’s last months in office he denied it.

“The great credit of the Coalition government is that throughout the entirety of its period in office, including the December quarter for last year, inflation was maintained within the Reserve Bank’s 2 to 3 per cent target band,” he said.

As for the December quarter result that he insisted was only 3 per cent, the Reserve Bank pointedly noted in its Quarterly Statement a week later that it was only a fiddle to do with the way in which the childcare rebate was paid that kept it there. The true rate was much higher.

When told by The Insider’s Host Barry Cassidy that the underlying rate of inflation was 3.6 per cent the Shadow Treasurer replied that it wasn’t.

“That is a complete untruth. I challenge you, invite all of your viewers to go to the Reserve Bank website. You will see there that the headline consumer price index was 3 per cent. In fact, it was 2.96 per cent. The other measurers of inflation, so-called underlying inflations, none of them were 3.6 per cent, not one.”

The Treasury’s senior domestic economist David Gruen was only too happy to take up the challenge and inform the Coalition of where the much-quoted 3.6 per cent figure had came from when he appeared before the Senate’s economics committee on Wednesday.

Here’s how he put it: “The Reserve Bank is focused on two measures of underlying inflation. They both rely on lining up all of the prices in the consumer price index from the smallest increase to the largest, and then either chopping off the two tails - 15 per cent from either side – and averaging what is left (that is known as the trimmed mean) or simply picking the rate of increase of the price that is growing right in the middle of the distribution, that is called the weighted median.”

“The weighted median is running at 3.8 per cent, and the trimmed mean at 3.4. The Reserve Bank takes the average of those two, which is where you get the number 3.6 per cent. You will find the 3.6 figure discussed in the latest statement on monetary policy that was released a week ago.”

What must have been humiliating for Malcolm Turnbull is that this information was widely known. He was either pretending to be ignorant or he really didn’t know very much about how the inflation rate was calculated.

Things got worse when he accused Wayne Swan and Kevin Rudd of making dangerous remarks about inflation “so reckless that in effect by talking up inflation they produce a self-fulfilling prophecy”.

A week later the Reserve Bank itself came out with forecasts and language about inflation that made the Prime Minister and Treasurer seem timid.

But in other areas the Shadow Treasurer has been on the right track.

In Question Time he has honed in on the genuine economic problems that are facing the Tresurer in ways that have unnerved him.

Monday’s question about Australia’s non-accelerating inflation rate of unemployment (NAIRU) wasn’t simply designed as the “pop quiz” that Wayne Swan said it was when he was unable to answer it.

It went to the heart of the process that the government and the Reserve Bank are taking part in.

After noting that Australia’s present rate of unemployment was 4.1 per cent he asked: “given the Reserve Bank’s stated intention to tighten monetary policy in order to lower inflationary pressures, what does the Treasurer regard as Australia’s current non-accelerating inflation rate of unemployment expressed as a percentage?”

“If the Treasurer regards that rate to be higher than 4.1 per cent, how many Australian jobs does he believe should be sacrificed to achieve it?”

There is a rate of unemployment below which inflation will accelerate. Above it inflation should be stable.

The Treasury believes that that rate is around 4.7 per cent. By pushing up interest rates until inflation stabilises the Reserve Bank will implicitly be also pushing up interest rates until enough people get thrown out of work to push the unemployment rate above 4.7 per cent.

Malcolm Turnbull’s question invited Wayne Swan to make that implicit truth explicit.

Rather than do so the Treasurer waffled.

The correct answer was around 66,500 jobs. If the Treasury’s estimate of NAIRU is correct, roughly that many jobs will need to be sacrificed in order to get inflation back under control.

His question the next day went to the heart of another dilemma facing Mr Swan and the Reserve Bank.

The unemployment rates in Queensland and Western Australia are low. But they are higher elsewhere: “Given that the export-driven mining industry in Western Australia and Queensland is not likely to be materially affected by domestic interest rate rises, how will you ensure that your fight against inflation will not have a very uneven impact with a heavy cost in jobs outside of Queensland and Western Australia?”

Again the Treasurer’s answer was unintelligible.

Malcolm Turnbull asked a similar question to the Finance Minister, Lindsay Tanner: “What is the government’s plan to ensure that its inflation-fighting proposed budget cuts will not further reduce growth and jobs in those sectors of the economy outside mining?”

His answer was similarly unhelpful.

Mr Turnbull told the Speaker of the House that there seemed to be “a contagion on the government benches of inability to address the questions asked”.

The questions are difficult to address. Managing the Australian economy is truly difficult at the moment, in part because the tools available to the government – tax, spending, and interest rates – are blunt and hard to apply.

Right now Mr Swan and Mr Tanner have two ready answers: “That’s the job of the Reserve Bank”, and “You’ll find out in the budget”.

But Australians will blame the government when the Bank starts pushing up unemployment, as it will have to in order to get inflation back under control. And they will blame it when the cuts in spending growth resulting from Labor’s increased efficiency dividend and the outcome of the razor gang directly push them out of work.

And the Budget is shaping up as an almost impossible balancing act.

Mr Rudd and Swan have promised a big surplus of around $18 billion and have created an expectation that it will be bigger still.

They can’t get it by banking on an increased tax take. They have promised not to allow the tax take to increase “as a proportion of GDP against the standard already set by the Howard Government.”

Yet if mining taxes boom or if GDP itself falters that proportion could increase automatically.

The government might have to cut tax rates further while cutting spending while boosting the surplus while keeping an eye on unemployment.

Rudd, Swan and Tanner have inherited difficult challenges.

It won’t be possible to assess their ability to handle them until after the May budget.