Clear economic choices face UK voters and the Australian Government, writes Ryan Batchelor of the Chifley Research Centre.
In less than three months the United Kingdom will vote in a General Election. Polls have the major parties – Conservative and Labour – running neck and neck in terms of vote share and likely seats won. It all points to another hung parliament and a new round of speculation on who will be able to form a government. All of this will make for interesting viewing in the lead up to 7 May and beyond.
The election period is also sharpening focus on the major parties’ competing economic plans. The UK’s experience, and potential paths, may be salutary for Australia.
The Great Recession hit its economy hard, but Britain’s growth is returning, albeit slowly. In fact it has been the slowest economic recovery in 100 years. Today inflation is low, and now falling. For the first time since the current inflation target was introduced, prices growth has fallen below the target range. Low oil prices have helped the price slump, but low business investment, a slow housing market, and low wages growth are all underlying causes.
Britain’s slow growth is no accident. Following their election in 2010 the new Conservative-Liberal Democrat Coalition Government unveiled, in the words of the Chancellor of the Exchequer ‘an emergency Budget’ with sweeping cuts across the UK Government sector. A new conservative government with talk of a budget emergency that required drastic action, does that sound familiar?
The Office for Budget Responsibility estimates that this severe austerity budget took 1 per cent off UK GDP over the next two years, some analysis has the shrinkage at 5 per cent. Simon Wren-Lewis from the University of Oxford writes that ‘the delay in the UK recovery over the first part of the coalition government’s term is at least in part a result of the government’s fiscal decisions.’ What he labels the ‘austerity con’ ‘has done and may continue to do considerable harm’ to the British economy.
So where to from here for the once Great Britain? And will their choice in three months matter for British voters?
Both major parties have broadly agreed to the same longer-term fiscal goals of a balanced budget and lower debt to GDP ratios. As long-term goals these make some sense, although there are key differences. The Tories wants to cut further faster, to get to an ‘absolute’ surplus by 2017-18. Labour will balance the ‘current’ budget – ordinary government services – over time, but still allow borrowing for investment.
Sensible fiscal commitments are key for Labour, as credibility on the economy is a gateway issue for prospective progressive governments.
The real question is the pace of fiscal consolidation over the next UK Parliament (2015-2020), and the severity of the cuts.
The UK’s National Institute for Economic and Social Research has just published analysis of the main UK parties’ fiscal plans. The analysis shows Labour’s plans are likely to see a lower unemployment rate, higher real wages, and faster overall economic growth than the Conservatives’ current plans.
In the UK an end to austerity, and a renewed faith in the role of fiscal policy, can deliver more jobs, higher wages, and higher growth.
The lessons for Australia here are clear. Joe Hockey should be listening as he works on his second, and perhaps last, Budget. Framing their second budget is now the most pressing challenge facing Tony Abbott and his Treasurer, with whom his own political survival is now intertwined.
Australia’s growth rate is already sub-par. The Reserve Bank of Australia has recently downgraded its economic forecasts for calendar year 2015, projecting our growth to be below 3 per cent and thus below trend. Falling commodity prices have drastically hit revenues, unemployment is higher than it was a year ago, and we have just seen our first official interest rate cut since August 2013. These are not good signs.
Just like the UK, Australia’s can’t afford more cuts. Government has a role in supporting demand in the economy when it is otherwise soft. The budget emergency mantra parroted by Joe Hockey and his UK counterpart George Osborne before him to justify severe cuts has been shown to be an economic negative.
The Age’s Peter Martin wrote recently that ‘the time is ripe’ for infrastructure investment. Historically low 10-year bond rates are giving us an unprecedented opportunity to borrow at a cost about equal to the rate of inflation that could build more roads, rail and other productivity-boosting infrastructure at very low rates. Importantly, this type of action could help strengthen our current outlook, supporting jobs and investment that will pay economic dividends well into the future.
In three months UK voters will have their say on clearly different economic paths. Less than a week later Joe Hockey (or someone else) will deliver Australia’s next Federal Budget. Hopefully early May is a turning point for both nation’s economic outlooks, all that’s needed is change.