Labor's 'govern and be damned' strategy

In many ways, the Gillard government is doing exactly as some of the nation’s most astute political observers have advised – governing today, knowing full well it will be out on its ear tomorrow.

The controversial changes to schools funding have upset many – private schools and the state governments with smaller numbers of schools in need of top-ups being the main aggrieved groups. But whatever one thinks about the Gonski-inspired reform, it is a Labor reform – a classic social-democratic policy, which is why Tony Abbott secretly loves it (at least if you believe David Marr, who hasn’t missed a chance recently to tell Australia that Abbott’s heart belongs to old Democratic Labor Party politics).

Likewise, the National Disability Insurance Scheme. It is compassionate and respects important rights of Australians who, though fewer in number at the ballot box, deserve just as much protection and support as any other citizen. Democracy often struggles with such reforms, and the Gillard government has pushed this one forward nonetheless.

You could add carbon pricing and the NBN, but the ‘govern despite the opinion polls’ mantra doesn’t apply there – they were well underway before the Abbott ‘carbon tax promise’ campaign ground Labor’s primary vote into dust.  

A cynic might say that the purpose of this strategy is to load Labor up with material for the attacks it will make on virtually all Abbott policies after the election, should the Coalition win power. The reform objectives are noble, in the best tradition of Labor and, well, completely unaffordable in the current fiscal environment.

As Jessica Irvine has pointed out several times, even if, by a miracle, Labor was returned to office, it would be dealing with a structural problem in the tax base (Wayne’s budget blues and beyond, April 16). Peter Costello had the luxury of nominal GDP running far ahead of real GDP growth, producing a tax bonanza that, along with mining boom revenues and privatisation receipts, allowed him to fill the nation’s champagne glasses many times over. Whether Labor or Coalition, the next government is likely to have to limp along with real GDP growth higher than nominal growth.

So Labor’s ‘govern despite the polls’ strategy leaves a potential Abbott government under two piles of poo. The first is dumped in the form of unaffordable policies that he will have to can; the second slides off the back of a truck previously used to ferry construction materials to the mines – the GDP hit expected from the end of the mining construction boom will be large indeed.

And then there’s the dollar. Assistant governor of the Reserve Bank Guy Debelle reminded a Melbourne Institute gathering in Canberra yesterday of some of the unusual capital flows into Australia in recent years, and their effect on the Aussie dollar.

In his presentation he said: “... the capital inflow to the resource sector to fund investment along with the increased purchases of government debt, have been putting upward pressure on the currency. But at the same time, the reduction in offshore borrowing by the banking system has been putting downward pressure on it. The net effect of all these flows however, is that the Australian dollar is higher than one would expect, given fundamentals such as the terms of trade and interest differentials.”

Slowing capital inflows for mining construction will cool the dollar. So too will a slowing of capital inflows if an Abbott government is formed and lives up to its promise of cutting borrowing – Labor has been issuing consistently high levels of commonwealth government securities since mid-2009. At first this was ‘stimulus’ money, but in recent times it has been used to plug the structural revenue holes detailed above.

There is also the risk of a smallish carry-trade reversal. Grattan Institute economist Saul Eslake told me recently that central-bank and pension-fund holdings of CGSs were pretty safe. They are, he says, long-term investors who use currency swaps to protect their holdings rather than having to ‘rush for the exits’ if the dollar begins to fall.

However, says Eslake, there is a third and unquantified holder of government debt – retail investors, who may do a runner if the value of their holdings is eroded by a falling dollar.  

While an Australian dollar tumble doesn’t affect government revenues directly, it will in the short term hammer GST receipts (our made-in-China consumption party will slow) and hit corporate tax receipts from companies with significant levels of imported inputs.

Longer term, all is not lost for an Abbott government – the plan is to cut red tape, abolish the mining and carbon taxes, and stimulate the SME sector to begin investing, employing and creating new wealth for the nation (and for the federal coffers). The only 'stimulus' SMEs will get is the warm glow of 'confidence' that a Coalition government is back in power, but that might just be enough to do it.

Overall, the Coalition's plan for the nation is quite a punt – and a strategy that would be pursued with Labor’s remaining MPs (all half-dozen or so of them) loudly reminding Australians of the beautiful, equitable Australia they were just about to create before that wicked Mr Abbott moved into the Lodge. 

Expect to see Abbott's ears packed with cotton wool if he does get to step into parliament as Prime Minister.