Just like in the US , the next Australian election will be decided by the cost of living. Both the US and Australian economies have performed quite well, in difficult circumstances. However, the lesson from the US election is that both Governments need to tell their story better.
It seems likely that the core issues in the approaching Australian election will be very similar to those underpinning Trump’s victory in the US.
We are told that Trump won because a majority of US electors thought Trump was dead right when he told them to ask whether they were better off today than they were four years ago. Migration was another central issue in the US. And it is easy to see how Dutton, who likes to portray himself as a tough guy like Trump, will run a similar campaign here – short on detail and large on assertions.
The recent US economic record
In responding to the charge that people are worse off, a good place to start is with the facts. Unfortunately, it is fair to say that the Biden-Harris Administration failed to emphasise how well the American economy was doing during their time.
In fact, during the four years of the previous Trump Administration the US economy grew at an average annual rate of 1¼ per cent. This is markedly slower than an average growth rate of 2¼ per cent over the four years of the Biden Administration.
Also in per capita terms, the US has been the fastest growing economy of the Big 7 OECD economies over the last two years (2023 and 2024), and this certainly wasn’t the case during the first Trump Administration.
It is true that inflation took off during the early years of the Biden Administration, with US consumer prices increasing by as much as 8.0 per cent in 2022. However, this jump in prices was a worldwide phenomenon, largely reflecting the impact of the war in the Ukraine on energy prices, and supply difficulties at the height of the Covid pandemic.
What was impressive about the Biden Administration is that they managed to get inflation back down quite quickly with an increase in consumer prices of only 2.8 per cent over the last four quarters. Furthermore, this was done without much of an increase in unemployment, and at the end of 2024 the US unemployment rate is still only 4.0 per cent compared with 4.8 per cent in 2020, Trump’s last year in office.
By any standards, bringing inflation down so quickly while growing the economy faster than under Trump, is quite an achievement, but one that the US electorate failed to recognise. And whose fault was that?
Australia’s recent economic record
Under the Albanese Government economic growth in Australia has not been strong. In particular, labour productivity has fallen a little, but that was equally true under the previous Morrison Coalition Government.
As living standards depend fundamentally on productivity, this is the main explanation for the pressures on the cost of living, but equally this is not a new phenomenon. The cost of living was under pressure before Labor was elected.
Furthermore, the Labor Government has over time introduced a raft of targeted assistance measures to assist households where they are finding it most difficult to cope. These measures include:
- Delivering a tax cut for everyone, not just the less than 10 per cent on the highest incomes proposed by the Coalition
- Increasing rent assistance which helps those who cannot afford to buy a home
- Making medicines cheaper and boosting bulk billing
- Providing energy bill relief
- Improving competition and cracking down on dodgy pricing and unfair charges in supermarkets
- Boosting wages for low paid workers by increasing the minimum wage along with large wage increases in aged care and childcare
- Delivering new rights and better bargaining rights for workers
- Improving access to childcare to help lift female workforce participation.
However, the amount of extra assistance the Government can provide to struggling households is, of course, limited by a budget constraint. Improving the cost of living requires that inflation is brought down, and we cannot afford to risk higher inflation by excessive public spending financed by too large a budget deficit.
It is to Labor’s credit that two of its three budgets have had a surplus, and the deficit in the most recent budget is expected to still be only a modest 1.0 per cent of GDP.
Furthermore, inflation is falling. Over the twelve months to the September 2024 quarter, the CPI rose 2.8 per cent, down from a peak of 7.8 per cent for the twelve months ending in December 2022. Also, while much of that peak inflation was caused by international pressures, some of it represented a delayed response to the previous Coalition Government’s policies (or lack of policies).
In addition, Labor should take some credit for how inflation has been brought down without much of an increase in unemployment. This is unlikely if an attempt had been made to bring about a faster reduction in the inflation rate.
That leaves interest rates which have had by far the biggest impact on the cost of living for the one third of households that have a mortgage on their homes. But interest rates are expected to start falling before the next election.
Some of us think, that given the lags before monetary policy fully takes effect, interest rates should start to come down following the next Reserve Bank Board meeting in December. But more likely it will be early next year.
In any event, it is important to note that interest rates started rising just before the Albanese Government was elected, and that was almost certainly too late. In other words, Australia’s inflation problem was picking up steam under the previous Morrison Government.
Implications for the Australian election
In sum, both the Biden Administration and the Albanese Government have quite a good story to tell about their respective economic management. But clearly Kamala Harris failed to tell it (as did Biden while he was the Democratic candidate).
Harris instead focused on how she was offering a different set of values to Trump, and that must have pleased her supporters. But Harris did not go on the attack and point out the dangers of Trump’s economic policies, despite expert opinion and modelling demonstrating how these policies would damage America and the world economy.
Unfortunately, there are similar questions about how effective Albanese will be in selling Labor’s achievements.
Albanese will need to attack much more. It is not enough to talk about what Labor has done, although that is important. Labor also needs to focus on the Opposition – how poorly they have governed before losing office, and their lack of policies now.
The Coalition like to portray themselves as always better economic managers than Labor, but without offering a shred of evidence. To the limited extent that the Coalition is specific, they criticise the amount of public expenditure under Labor, and say that it will be lower under a future Coalition Government.
But Dutton and his spokesmen never say how and where public expenditure will be cut, nor do they discuss the consequences for the public services that we rely upon as an important part of our living standards.
The fact is that in Labor’s latest Budget public expenditure is estimated to amount to 26.4 per cent of GDP in the current financial year (2024-25). This is significantly less than the Coalition budgets for 2019-20 and 2020-21, and about the same as the Coalition budget for 2021-22.
Of course, these last three Coalition budgets were affected by their necessary response to the Covid pandemic, and they did help limit its damage to the economy. However, even if we make the comparison with the pre-Covid years, public expenditure under the Coalition governments from 2013-14 to 2018-19 averaged 25.0 per cent of GDP, compared to 25.4 per cent over the three Labor years from 2022-23 to 2024-25.
This difference of less than half a percent of GDP is almost insignificant and is more than accounted for by the steps that Labor has started to take to restore the serious underfunding of so many public services by the Coalition, although that task is by no means complete.
Conclusion
In sum, Labor has quite a good story to tell about its management of the economy compared to under the previous Coalition governments. Also, Labor has taken a lot of useful steps to assist households who are most in need. But the scope for more such assistance is limited by the budget and the need to bring inflation down.
Labor now needs to get more on the front foot in promoting its economic record. But Labor should also condemn how the Coalition is relying on rhetoric and the lack of any specific policies, which would demonstrate how the Coalition would tackle the present cost of living challenge differently and more effectively.
As the recent US election showed, unless Labor builds a large part of its campaign around economic management and the cost of living, it is unlikely to win a majority.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
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