Gillard and Swan 'off message' on the economy

Asylum seekers and the carbon tax were only part of the Gillard government's problem. Voters surveyed by the Lowy Institute say it failed in an even bigger and more important area: managing the economy.

Of eight policy areas surveyed in the institute's annual poll, released this week, the starkest contrast in voters' minds was on economic management. The poll found 61 per cent thought the Coalition would do a better job of running the economy. Only 25 per cent thought Labor the better managers.

Isn't this surprising, when Australia was one of only a few Western economies to sail through the global financial crisis with just minor damage? When Euromoney magazine in 2011 named Wayne Swan as the world's Finance Minister of the Year? And when, as Swan constantly reminded us, the Australian economy has grown by 14 per cent since Labor took office, and added almost a million jobs?

There is a stark contrast between the world's view of Australia's economic performance in the past six years and the way most Australians see it. But it's the way Australians see it that matters on election day, and the Lowy poll implies that even many Labor supporters think it has done a worse job than the Coalition would have done.

To economists, its performance was mixed. It did some things well, others badly. It acted decisively at some crucial points - above all, in its initial response to the crisis in October 2008 - but grew disconnected from the real economy as it went on. It showed courage in some areas, especially in putting a price on carbon, but was timid in pushing tax reform and micro-economic reform generally.

The Rudd government's decisive reaction to the global financial crisis in October 2008 was the reason for Swan's Euromoney award. Rudd and Swan took to heart Treasury secretary Ken Henry's succinct advice - "go hard, go early, go households" - and immediately shovelled out more than $8 billion to households in one-off payments to keep them spending.

And so they did: in a remarkable contrast with the rest of the West, household spending - which had been falling through 2008 due to the Reserve Bank's excessive interest rate rises - actually accelerated through the crisis, growing 2.1 per cent over 2009. Just as crucial was the government's decision to guarantee the banks' foreign debt for five years, which prevented vulnerable banks like Suncorp and the Bank of Western Australia collapsing, and put the majors out of danger. The biggest difference between Australia and the rest was that our banks remained strong.

Some economists argue all this was irrelevant to Australia's performance, but they are the usual small-government ideologues. A wide consensus of Australian economists applauded the government's bold first steps. But the applause faded when they were followed by an almost equally large second package in February 2009, and disappeared as the stimulus continued after the crisis had passed, and turned into an entitlement for every school to get a new building, regardless of need.

"The stimulus spending was tens of billions of dollars more than it should have been," says Stephen Anthony, director of consultants Macroeconomics. "It continued on long after it was needed. After the 2010 election we needed a traditional post-election budget to cut the deficit, but that didn't occur.

"The Howard government in its last five years frittered away the windfall of the mining boom. The Gillard government eventually began whittling back entitlements at the edges, and that was admirable. But most of their savings were revenue rises or deferrals of spending. Had they tackled the deficit earlier, they could have got back to surplus by now."

Saul Eslake, chief Australian economist of Bank of America/Merrill Lynch, defends the initial overspending - "there's no way you can get it exactly right, and it's better in that situation to do too much than too little" - but criticises the government for failing to end the stimulus "when it was clear they had promised too much".

But Eslake is also one of many economists who criticises Swan for promising a surplus in 2012-13, "a promise they didn't need to make", which backfired horribly when the economy (and particularly corporate profits) seriously undershot official estimates. Swan made achieving the surplus the test of good economic management then failed the test he had set himself.

"I didn't mind the deficit: it was entirely appropriate at this stage," says Frank Gelber, director of consultants BIS Shrapnel. "But they didn't spend it where it was needed, in building infrastructure that would have benefited the whole economy. They had no recognition of the hardship being suffered by most businesses."

Swan and his officials failed to read the signs. The Reserve Bank kept forecasting a red-hot economy ahead, severely misjudging the impact of the high dollar and consumer caution. And as the economy kept underperforming, Gelber says, Swan and the officials rationalised it by focusing on the averages, which were inflated by a mining investment boom in the outback.

"They had no idea how difficult it was for most businesses in Australia, who were really struggling," Gelber says. "Insolvencies went up dramatically [rising 20 per cent from 2009 to 2012]. But anything Swan said was always spin. Business owners and workers listened to him and thought, 'Well, my business is really struggling, and they're not doing anything for us'.

"They were really good at spending money on reform, redistribution and welfare ... But they weren't good at generating the economic growth to pay for it."

Melbourne University economist Neville Norman points to the government's unwillingness to engage with critics. "They failed to listen to any warnings, and continued to deride any alternative views right up to December 2012, when they abandoned the surplus obsession/target, and with it, any chance of respect as managers," he says. "I have great sympathy for the Rudd/Gillard governments managing our economy in the face of the GFC, but none for their handling of short-term budget management, when they were warned and took no notice, nor for their ham-fisted manner of [introducing] the carbon and mining taxes, or tax reform generally."

In the end, all the government's achievements were overridden by poor implementation - "whatever they tried, they bungled it," says Anthony - and by its failure to sell its message, and get through to the ordinary Australians who would decide its fate.

"Overall, I think Swan made a reasonable fist of his job in terms of economic policy-making," Eslake says, with some caveats, including his failure to "be a spear-carrier for reform". "But a Treasurer has to be able to persuade the public that he's made good economic decisions, and he's been a conspicuous failure at that ... if [Paul] Keating or [Peter] Costello had made the same decisions, they would have persuaded the people that the reason we didn't have a recession in 2008-09 was because of them.

"But Keating and Howard also had prime ministers who were good economic commentators, whereas Rudd and Gillard were hopeless." And that, perhaps, is one key reason why Labor lost the economic debate it should have won.

Ross Gittins is away