Gillard's beautiful, unaffordable vision

Competing on IP, management and technology instead of labour costs is an attractive idea, but the question is whether Labor's dream could ever be realised before it's too late.

He not busy being born is busy dying

– Bob Dylan

In 1979 – the year my family migrated to Australia – the nation was on the cusp of what Paul Kelly famously identified as 'the Australian settlement'. Kelly's powerful thesis, though controversial among historians, was that a new set of rules came to the fore around that time to replace an older set that had shaped the country for the eight decades since federation.

Out went the White Australia policy. Out went protectionism. Wage arbitration was well past its use-by date and even our love of Queen and country was transferred to Kylie and Jason.

The story of Labor's reforms in the 1980s and early 1990s is the story of the birth of modern Australia. The deregulation of the finance industry, the floating of the dollar, the cutting of tariffs and the establishment of enterprise bargaining allowed Australia to take its place in a globalising, free-market economy.

The Howard years continued in a similar vein. Hawke and Keating had stolen much of the thunder, but further reforms were needed – the GST and first wave of IR reforms (not the later, infamous WorkChoices), and substantial personal income tax cuts. Okay, both Labor and a prospective Coalition government will come to rue that last one, but it seemed like a good idea at the time.

And now, all these years into the Australian settlement, we're in a seven-month election campaign which has all the appearances of being another turning point.

In a stirring speech to the AWU conference last night, Prime Minister Gillard made it quite clear that Labor thinks the settings are about right, and Opposition Leader Tony Abbott's vision for our future is all wrong.

Despite Australia being uncompetitive in so many sectors of the economy, Gillard told the union audience that Australia's future lay in "being strong, being smarter" and "getting work pumping through the workshops, the factories and the offices now."

Crucially, Gillard argued that Labor's key differentiator from the Coalition was that "we cannot embrace an agenda of cost cutting and wage reduction as our future".

Labor's pitch to voters will be that there's no need to slash the budget and allow industries such as food processing and steel production to fall apart under the resources-boom-induced high dollar.

All we need do is seize the moment, give innovation a shot in the arm via the new Plan for Australian Jobs policy, boost education and training, and start doing things more efficiently via the high-speed data channels of the NBN.

It is a coherent, attractive vision, but the real question is whether such a plan could take effect before the last factory and office have boarded up the windows and the workers have pushed their barrows north to dig iron ore for China.

Certainly our fiscal resources cannot sustain the pattern of subsidies and interventions Labor is planning without racking up a much larger federal debt. Government bonds still enjoy a AAA rating, with net debt hovering around 10 per cent of GDP. But can we afford to shuffle further out along this limb to 15 or 20 per cent of GDP? And where exactly do we stop?

The Greens will today call for a full Senate Inquiry into the bungling of the mining tax formula that allowed attractive investment depreciation terms to scotch any prospect of raising revenue from miners when the federal budget needed it most. Yes, Treasure Swan is right to argue that in the long term revenues will flow from any future booms. But we needed that money now, and the super-profit phase the MRRT was supposed to skim the cream off is already over. Spreading the wealth of the mining boom has been a failure.

Meanwhile, the Abbott vision, while not as extreme as Labor will attempt to paint it, carries a heavy subtext of the two things Gillard identified – cost cutting and wage reduction.

The Abbott team will be extremely careful between now and September 14 to minimise any talk of IR 'flexibility' leading to lower wage outcomes, or the fact that public service cost cutting does, in fact, involving throwing Mum, Dad, cousin Jim and Aunt Ethel out of work. That just sounds bad.

And yet any business-minded person who spends time in China, or any south east Asian economy, comes home with a visceral understanding of the fact that there are literally billions of people ready to make what we can make, with costs cut to the bone and wages just above subsidence level.

Labor's vision – in which we don't try to compete on labour costs, but rather in better management, IP and smarter use of capital and technology – is far preferable to watching real wages fall in the decades ahead. But then how will we afford to do this?

Based on all the policy indicators so far released or discussed by the Coalition, a Abbott government wouldn't get a chapter in a forthcoming Kelly book for establishing a 'new Australian settlement'. However, if Abbott is elected, his government is likely to be the beginning of a quite unpleasant process – learning to live within our means.

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