The two major issues in this election are climate change and the economy and cost of living pressures. In both cases the two major parties are offering very different strategies.
In these two articles I will focus on the economic choice being offered to voters. In this article, I will compare the two Parties’ fiscal plans, and in a second part to be posted tomorrow I will comment on the likely economic impacts of these respective plans.
The economic challenge
The economy has not been performing well. Indeed, Shadow Finance Minister, Jim Chalmers, understandably contends that the greatest lie in this campaign is that the Coalition are good economic managers. In the last two quarters for which we have data, per capita GDP actually fell and productivity growth has been stagnant for some years now. The key reason has been the slow rate of wage increase and the rise in inequality.
In response, Labor has proposed the most and comprehensive and coherent set of policies ever offered by an Opposition, other than John Hewson for the Liberal Party back in 1993. The thrust of Labor’s policy package is to restore and improve government services and improve the living standards of low and middle-income earners, financed by increasing taxation paid by the top 10 per cent of taxpayers. Labor’s policies do involve redistribution, but this is inevitable if we are to squarely address the problem of low wages and inequality, and thus improve the rate of economic growth.
By contrast, the Coalition is running on its record, and essentially offering more of the same. The only significant policy initiative put forward by the Coalition in this election is its proposal to simplify the income tax structure and reduce the top marginal rates. But these tax changes do not take effect until after two elections, by which time economic circumstances will very likely have changed.
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MICHAEL KEATING. This election offers a very real choice. Part 2
In a previous article (posted yesterday) I compared the Coalition and Labor fiscal plans. The credibility of these plans, as well as their value, depends significantly on whether the underlying economic parameters upon which the plans are based are sound, and equally how those plans will impact on economic activity and growth. These issues are discussed further below in the second part of this series comparing the two Parties fiscal plans.
Both major Parties fiscal plans are based on the economic forecasts prepared by the Treasury and published in the Pre-election Economic and Fiscal Outlook (PEFO) which was released at the beginning of this election campaign. Two questions therefore need to be addressed. The first is how reliable are these Treasury forecasts? The second, is how will the two Parties’ respective fiscal plans impact on the economy? Do their Plans improve the economic outlook, or increase the risks?
The Economic Outlook
Unfortunately, in recent years the authorities – the Treasury and the Reserve Bank – have established a track record of being two optimistic in their projections of economic growth and the increase in household incomes in particular. These forecasting errors of course then raise questions about the reliability of the Coalition and Labor fiscal plans, with the revenue forecasts being especially vulnerable if income growth is less than predicted.
On Friday, just after the release of Labor’s Budget Plan, the Reserve Bank bowed to reality and revised its forecast for the rate of economic growth for next year (2019-20) downwards to 2½ per cent compared to 2¾ in the PEFO. If we assume the same ratio of revenue to GDP as in the PEFO, then this revision to GDP knocks $2.2 billion off the Government’s projected budget surplus of $7.1 billion; emphasising the vulnerability of these projected surpluses to variations in the growth of the economy.
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