Rudd has spooked Abbott into bad policy

The latest cuts to public spending announced by Joe Hockey yesterday reveal the extent to which the Rudd resurrection has forced the Coalition away from economic sense.

With opinion polls too close for comfort, the Abbott team has been forced towards populist policies that will hamper growth at a very dangerous time in Australia’s economic history.

In that sense, Rudd’s charisma and salesmanship skills are the real wrecking ball swinging through the economy – not the carbon tax, the mining tax or ‘debt and deficit’ problems which on a global scale are simply not an immediate problem.

Labor has had six years managing the economy, but Rudd only managed the cash-splashing crisis years of 2007-2010. Julia Gillard’s cabinet was the one looking at longer-term solutions to the end of the investment phase of the mining boom.

Gillard’s decision to woo the small business sector was smart politics, and smart economic thinking. Small, nimble operators are exactly what Australia needs to reinvigorate non-resources sectors and provide jobs to take up the mining jobs that are now falling off sharply.

Earlier this month the Real Estate Institute of Western Australia noted that premium rents in Perth and rental prices in mining centres such Karratha and Port Hedland had tumbled by 30 to 40 per cent as the number of resources industry workers seeking accommodation had dropped.

Those workers, and the chain of retail and service industry jobs they supported, must be made up quickly. The Reserve Bank’s attempts to stimulate the economy with rate cuts have effectively failed – dropping the cash rate from 2.5 per cent to 2 or 1.5 per cent won’t work if consumers are not borrowing to spend, but simply continuing to deleverage.

That means the supply side of the economy needs help, and traditionally it’s the Liberal Party that puts forward plans to do that. Tax cuts for businesses big and small would be the logical way to increase investment and jobs growth. And that is what the rhetoric of the Abbott team is focused on.

However, behind the rhetoric, the Coalition has been forced by the tighter polls to continue giving sweeteners to the consumer, not to business.

Hockey announced yesterday that he would scrap billions of dollars of assistance to small businesses.

Unsurprisingly, the Coalition won’t proceed with carbon tax compensation, because Abbott hopes to be able to abolish Labor’s emissions trading scheme completely – either by winning effective control of the Senate with the help of DLP senator John Madigan and other independents, or by a risky double-dissolution election later in 2014.

But much more surprisingly, the Coalition is tearing up around $4.2 billion of Labor’s SME assistance measures across forward estimates:

– $2.9 billion in instant asset write-offs on investment items costing up to $6500

– $900 million in the ‘loss carry back’ scheme

– $400 million in accelerated depreciation for cars.

That’s not the only supply-side pain in the Coalition’s plans. The 1.5 per cent tax cut for companies big and small doesn’t begin until 2015, but the 1.5 per cent levy on big business to fund Abbott’s paid parental leave scheme begins in 2014.

That’s a one-year tax hike, followed by years of ‘no change’ for big business and a modest tax cut for small business (How did Rudd miss Abbott's giant tax grab?, August 22).

Economists are complaining that at the very moment Australia needs a productivity boost via industrial relations flexibility, tax reform, tax cuts and other measures to boost job creation, the Coalition is heading the other way. 

Like Labor, the Coalition won't touch industrial relations or say anything (for now) about raising the GST. Getting rid of the carbon and mining taxes sounds impressive, but only because Abbott has been so successful in exaggerating their impact on the economy.

For the Liberal party faithful, the injustice (if there’s ever any justice in politics) of this situation is that it is being forced by the popularity of Rudd – the man who fluffed the introduction of the mining tax and spent too wildly in the two years of panic following the Lehman Brothers collapse of late 2008.

Rudd caused much of the mess the Coalition wants to clean up. But punters love him enough to leave Abbott’s hands tied.

The dreadful politics of the past three years are now being turned, inevitably, into dreadful policy. One can only hope that the economic results, which will be painful, are enough to knock some sense into the political classes.

Australia needs productivity improvements and a business confidence boost to spur private sector investment and job creation.

What we’re getting instead, forced because of Rudd’s highly convincing (but actually insubstantial) salemanship, is more goodies to cheer up the consumer.

Hockey and Abbott want to leave the carbon tax compensation for consumers untouched (increases in pensions and other benefits, plus tax cuts), as a ‘stimulus’ to get the economy moving again.

That’s a joke. The real stimulus opportunity lies within the Coalition's traditional constituency, the entrepreneurial SME sector. But Rudd has them too spooked to stick to their principles.