What does Tony's 'stronger economy' look like?

The final week of the election campaign is with us and while the fat lady hasn’t yet sung, the odds overwhelmingly favour the election of Tony Abbott and his Coalition to form government from next week. 

One of Abbott’s pledges during the campaign is to “make the economy stronger”.

At no stage has he articulated what that means, nor has he been asked in the plethora of interviews he has given what the characteristics of that "stronger economy” are.

I reckon most reasonable people would interpret ‘economic strength’ from the perspective of GDP and employment growth, the unemployment rate, rising real wages and ongoing low inflation. These are the items that will show whether an economy is strong or weak.

Looking at what Tony Abbott might be thinking about with a strong economy must be framed from the perspective of the economic climate Abbott is inheriting – the one he wants to strengthen.

The current rate of GDP growth is around 2.5 per cent, with the June quarter data released this Wednesday likely to confirm that sort of growth pace has been sustained into the middle of 2013 (A double data drop may shake and stir, August 27). In the Pre-Election Fiscal and Economic Outlook, Treasury was forecasting GDP growth to accelerate to a 3 per cent growth pace in 2014-15 and 2015-16 (A pre-election budget on the sober side, August 13).

Given Treasury’s excellent track record with its macroeconomic forecasts over the past couple of years, and given the stimulus in place from easy monetary policy, the lower Australian dollar and less restrictive fiscal policy settings, this forecast is non-controversial.

The Reserve Bank agrees with the Treasury GDP growth forecast in its central case forecast profile for GDP growth to lift to around 3 per cent over the next two years.

One key point on which Tony Abbott’s “stronger economy” will be judged at the 2016 election is whether GDP growth has exceeded 3 per cent or not.

Will he do any better than the scenario already factored in?

The Treasury and Reserve Bank forecasts for GDP fit with a scenario for the unemployment rate to tick up in the near term, to around 6.25 per cent, before it falls back to 5 per cent in 2015 and 2016.

Tony Abbott’s economic credentials will also be judged on whether his policy settings deliver a lower unemployment rate that than currently envisaged by Treasury.

The one area where Mr Abbott has put some numbers on his economic objectives is the creation of 1 million new jobs over the next five years. This aspiration means an average increase in employment of 200,000 a year which means by the time of the next election, employment should be 600,000 higher than now (How exactly will Tony Abbott employ one million people?, August 12).

Over the last six years, wages growth has outpaced the rate of inflation by an average of 1.25 per cent per year. This growth in real wages has eased cost of living pressures over that time. A “stronger economy” would lift this rate of increases in real wages and improve living standards at a greater pace than that delivered by Labor.

Tony Abbott can be judged by whether real wages growth has increased at a faster annual pace than 1.25 per cent over his terms of office.

According to Reserve Bank Governor Glenn Stevens, one important way to help sustain economic strength is to lock in a low inflation rate. This helps keep interest rates low, provides a boost to business investment and helps support purchasing power for the household sector.

Over recent years, the inflation rate has averaged around 2.4 per cent. This ongoing low inflation rate has been a factor in the low interest rate climate and has helped support real wages growth. It has also helped fuel an investment boom.

While inflation management is the domain of the Reserve Bank, government policies can have an influence over inflation risks.

The next element with which Tony Abbott’s “strong economy” can be judged is the inflation rate over the next three years.

Overall, Abbott can claim success of a “stronger economy” if he can deliver GDP growth above 3 per cent, an unemployment rate at or below 5 per cent, annual real wages growth above 1.25 per cent and inflation around 2.5 per cent. 

Of course, he has to win the election first. That looks likely. The trick for Abbott will be implementing a policy framework that delivers his "stronger economy" commitment.

It won’t be easy. In fact, Australia has never had an economy that in any full year has simultaneously delivered GDP growth above 3 per cent with the unemployment rate at 5 per cent or less, the inflation rate below 2.5 per cent and average real wages growth above 1.25 per cent per annum.

If Abbott can do all of this, he will have done a terrific job in managing the economy and will go to the 2016 election campaign on the back of a highly successful program of economic management. Good luck to him.

Stephen Koukoulas is managing director of Market Economics and was an economics advisor to the former Prime Minister Julia Gillard.