It seems likely that Kevin Rudd will win the coming Federal election. What will happen if he does? This depends very much on what will happen to the economy over the next few years. It seems almost certain that the specific commodity boom will continue, fostered by continuing high growth in the Asian economies and that the economy-wide investment boom will also remain strong at least for some time.
But there is no question that confidence in macroeconomic management will fall. Poll after poll shows much higher levels of community confidence in the ability of the Coalition to manage the economy. This is not just a matter of perceptions - there is little economic expertise or experience in the Labor team.
Moreover, the success of Coalition policies in driving unemployment to a 34 year low and operating the economy at full pace in itself poses problems for Labor. Currently, despite moderate cost-push inflationary pressures, the underlying rate of increase in the CPI at 3.1% is at the upper range of the RBA’s range of tolerance.
There are 8 trade unionists on Labor’s front bench and the trade union movement has spent $20 million funding the deceitful campaign against the Coalition’s industrial relations reforms. There will necessarily be a need for payback given a Rudd victory whatever Rudd says about ‘governing for all Australians’. Wage demands were likely to increase anyway but will now increase faster as will general cost-push pressures in the economy. That Labor markets will be more regulated with union control of workplaces and pattern bargaining under a Rudd Government will mean that the chances of a wages ‘breakout’ increase.
The prospect of higher tax collections acting as a macroeconomic stabiliser has been reduced by Rudd’s proposal to match the Coalition tax cuts. My guess is that in this tax offer might in fact not be realised but, if it is, there will again be further pressure on interest rates and inflation.
So what are the prospects? My guess is that the economic fundamentals facing the Australian economy will tend to remain sound but that electing a Rudd government will lead to higher wages growth, higher inflation and hence higher interest rates. These factors in conjunction with lower economic confidence suggest higher unemployment and hence lower economic growth.
There are high levels of private sector debt and these will create straightforward solvency issues for business and households were markedly higher interest rates to emerge. Whether this will go as far as triggering a recession I do not know but the unparalleled 17 year period of continuing economic expansion definitely seems under threat.
The Labor Party may win the coming election on the basis of its misrepresentations about WorkChoices and its scurrilous abuse of John Howard but the successful economic management it has delivered has created an explosively growing economy that presents problems for Labor.
The large tax cuts offered by Howard and Costello might be deliverable without harmful macroeconomics implications, by a talented team of fiscal conservatives, but to a union-dominated Labor Party which feels a strong need to implement an expanded social program in heath and education it spells trouble.
I’ll be interested to observe the stock market in the remaining weeks up to the election. The market has closed in the red in 7 of the last 10 trading sessions. Valuations will appear high if firms anticipate markedly higher wage and capital costs. A plunge over the coming weeks may be the first of a series of warnings we will receive about our likely economic life under Labor.