MICHAEL KEATING Labor and the economy: Future policy choices?

May 27, 2019


Labor went into the recent election with a comprehensive economic plan. Many commentators have blamed Labor’s election loss on this plan, and its support for modest redistribution, thus raising the question of where does Labor go from here?…Labor needs to sell the message that redistribution is essential to sustain economic growth.

In my view no-one can be certain why Labor lost; least of all before more detailed statistical analyses are available. Labor should therefore take time to consider and discuss both content and presentation before determining its future economic strategy.

In this brief article I will therefore only try to outline some of the key questions and issues that seem germane to that future discussion.

The first and fundamental choice is whether Labor should aim to present a small target at the next election, by focussing on principles and values, or should it continue to present an alternative economic plan. Of course, Labor’s next election strategy could be built on something in between these two extremes.

  • On the one hand, many pundits claim that Opposition parties cannot win with a large comprehensive plan, and they need to make the Government’s record the centre of criticism and not themselves.
  • On the other hand, Labor is a party of change and there are good reasons to oppose continuation of the status quo.

The answer to this first question will also depend upon judgements about whether Labor lost the recent election because of its detailed program or because of its failure to present it better

  • Certainly, Labor did not respond adequately to the many false claims about the impact of its proposed taxation changes. On the other hand, the statistical data presently available throw some doubt on the significance of the tax changes as an election issue.
  • The biggest swings against Labor were in electorates with high proportions of voters without post-secondary education and/or with low incomes: people who would have benefited from Labor’s tax changes.

Perhaps Australians are resistant to overt redistribution through government intervention, even where that redistribution is intended to reverse previous increases in inequality that were market driven. Alternatively, it could be that Labor’s presentation failed to distil a compelling narrative and/or the narrative got lost in all the detail. Another consideration is whether Labor can afford to sit back and wait for an economic downturn – possibly accompanied by a return to Budget deficits – in the expectation that government will then fall to Labor without it taking any risks.

  • In my view, the most likely scenario is that the economy will continue to stagnate, but personally I am sceptical that Australia will experience a full recession with a significant rise in unemployment. If I am right, I don’t therefore see any more prospect of the government falling because of a poor economic record at the next election than there was at the last.
  • Instead, Labor will need to present a compelling alternative for change.

A Fair Agenda for Economic Growth

On balance, I would expect that in the light of the above considerations, Labor will decide to remain true to its traditions and continue to prosecute an agenda for economic change. However, I think success will require Labor to challenge the present economic orthodoxy that voters must choose between redistribution and economic growth and jobs – in other words, Labor must dispute the economic dogma that redistribution is bad for the economy.

Unfortunately, in the recent election, Labor was too often perceived as focussing on distribution of wealth, and not its creation, with the implicit assumption that Labor’s support for wage growth would come at a cost to economic growth.

Instead the reality is that economic growth is being held back by inadequate growth in aggregate demand, and demand growth is inadequate because incomes are stagnating, especially the wages of low-income households. It is these low-income households, which have a lower propensity to save, who provide most of the support for consumption growth. Furthermore, without that consumption growth investment will also continue to stagnate, which then retards the take-up of new technologies, and is the reason why productivity growth has also been very low.

In short, Labor needs to sell the message that redistribution is essential to sustain economic growth.

Labor needs to argue that this weakness in aggregate demand is why we have experienced economic stagnation over the last five years of low wage growth. The first message must be that the only way to return to a more buoyant economy is to restore wage growth and reduce inequality.

The second message is that the reason for the low wage growth and the rise in inequality has been the impact of technological change which has hollowed out middle-level jobs and has also tended to be skill-biased. Accordingly, the future growth of the economy and jobs will require more investment in education and training – including life-time learning – so that workers can more readily adopt and adapt to technological change.

There is no reason to choose between redistribution and economic growth. Instead, we need more investment in skills so that we can achieve a more equal distribution of incomes while also improving the take-up of technology that drives future productivity increases and economic growth.

In this way Labor can achieve Albanese’s objective of combining a fairer distribution with the creation of wealth.

But this economic strategy will require the government to spend more. The present Budget assumes a completely ridiculous degree of restraint in government spending which is projected to not even keep pace with population growth over the next four years and then slow further after that.

In addition, the Budget projections assume a return to past rates of economic growth as soon as possible. Experience tells us that these projections are unrealistic, and especially unrealistic assuming a continuation of the present government’s policies.

Over time more investment in human capital will lead to a more equal distribution of income and increased economic growth, but for the next few years we cannot hope that economic growth will provide the revenue that will be needed to finance a strategy for economic development.

Instead, any government that wants to promote economic development will have to raise more revenue and increase taxation. The unavoidable choice will necessarily be between closing present tax loopholes, increasing income tax revenue through bracket creep, or increasing the GST. Clearly the least painful and least economically damaging would be to close tax loopholes.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.

Share and Enjoy !

Scroll Up

Receive articles straight to your Inbox

How often?

Thank you for subscribing!