Election 2013, and the search for meaning

This election campaign won’t be about what it’s really about because elections are no longer fought over real economics.

Ever since the Coalition nearly lost the GST election in 1998, just two years after winning a 40-seat majority, no party is prepared to promise anything other than the world. These days it’s more about the personalities of the leaders, and which of them you trust.

And in many ways that’s fair enough. The world is changing so rapidly and unpredictably that the most important attribute of economic leadership is flexibility; among the least important is putting a date on the budget surplus.

This is the first election after the peak of Australia’s greatest ever terms of trade boom.

China joined the World Trade Organisation on December 11th 2001, a month after the 2001 election, at which the Tampa affair rescued John Howard from electoral defeat against the hapless Kim Beazley.

For ten years, until 2011, iron and coal prices soared as China rebuilt its national infrastructure on the back of its developing dominance of global trade in manufactures. Australia’s national income also soared and money poured into the national coffers.

That fabulous, disruptive boom ended two years ago and Australia and the world are now in transition to a new economic reality that sees China struggling to reform and modernize its economy and the United States undergoing a rebirth based on cheap energy and, ironically, cheap labour.

That boom was disruptive because China’s accumulation of massive foreign exchange reserves led to a global savings imbalance that contributed to the credit crisis of 2008. It’s huge stimulus programme of 2009 allowed the commodity boom to continue until 2011, but China’s own internal imbalances have now caught up with it and it will be lucky to maintain economic growth above 7 per cent.

What does all this mean for Australia, as it starts the first post-boom election campaign?

It means any promises based on confidence about knowing the future are meaningless. The economic statement issued on Friday was both recognition of how rapidly the world is changing and a stab in the dark about government revenue between now and 2016-17. In truth no one has any idea, and least of all Treasury.

What we do know is that there is a structural budget problem related primarily to the ageing population and the growing cost of health care.

Federal Treasury published the first Intergenerational Report in 2002. The first heading on the first page said: “Planning for the challenges of an ageing population.”

This report, and the two subsequent ones were completely ignored by successive governments. Instead the proceeds of the commodity boom were spent on vote-buying welfare and tax cuts and even since the end of the boom more spending has been racked up with planned extra money to education and disability funding. The Coalition is also proposing fully paid parental leave.

Moreover, Australia’s attractiveness to asylum seekers has turned into a very expensive proposition. Whoever wins the election will be spending billions of dollars paying other countries to house them in order to protect the integrity of our immigration program.

As a result of these things, and the blow out in the cost of health care, the budget is heading for very large structural deficit within five years.

The men and women in federal cabinet over the next three years are the ones who will finally have to confront this challenge, more than 11 years after it was identified. It can be put off no longer.

At the same time, they must make the next set of reforms to improve Australia’s productivity and infrastructure. This means demanding, and paying for, further microeconomic reforms by the states, supporting small business and reducing union influence in the workplace.

What they won’t do, though, is talk about it over the next 33 days.