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January 01st 2009 print

John Stone

Growth, Jobs, and Prosperity

When the Editor of Quadrant initiated, in March 2008, “a series of articles that will critically appraise the eleven and a half years of the government of John Howard”, he said that “the intention of the series is both to look back on the Howard era and assess its place in history, and to look forward to see what can be learnt for the future from his government’s successes and failures”.

In the first article in that series, “Our Greatest Prime Minister”, it would have been easy to bolster the case for that title by dwelling upon the Howard government’s economic record. I chose not to do so because, with the Editor’s agreement, I had already resolved to write a further article devoted entirely to that topic. This article, deliberately delayed so that the statistical record could become more fully available, now discharges that resolve.

In that first article I said, in a brief interpolation on the economy, that:

“… for years now I have been increasingly critical of certain aspects of the Howard government’s fiscal policies—particularly its persistence in squirrelling away, year by year, huge surpluses in successive budgets rather than cutting taxes. While his Treasurer, Peter Costello, has been the chief culprit, Howard must also bear his share of the blame for having allowed this situation to persist.

“Such sins notwithstanding, however, the fact is that Australia under Howard has enjoyed twelve years of unparalleled prosperity. While in part that has resulted from the emergence of Chinese demand for our commodity exports, it is also fair to say that, on a broader view, the government must receive its due share of the credit.”

In what follows I flesh out those (unchanged) opinions by looking, first, at the macro-economic record of growth in Australia’s real gross domestic product (GDP), and growth in real GDP per head, over the twelve-year period from calendar 1995 (the year before Howard took office) to calendar 2007 (the year he lost it). The significant rise in Australia’s international terms of trade over the period is also noted, leading to an even faster growth in real gross domestic income than in GDP. Growth in employment is then examined, with some implications for productivity performance.

For the average Australian, such macro-economic numbers may mean little. For him or her, what were important during the Howard years were the growth in job opportunities, the growth in average earnings and, associated with that, the rise in real living standards. The “feel good” factor for Australians was a function also of changes in household wealth during the period—in the value of their homes, their superannuation assets, their share portfolios and so on.

Against that background I examine two persistent criticisms of this increased prosperity. The first relates to the significant deficit in our balance of payments current account, and the associated rise in foreign liabilities. The second involves the charge that, while many Australians did prosper under Howard, many did not, so that we suffered a massive growth of inequality. As I hope to show, neither criticism has substance.

As to the future, the Howard government’s economic policy successes and failures do suggest some lessons—of which the Rudd government may now be in need.

Economic Growth

The Australian Bureau of Statistics constructs its estimates of growth in “real” GDP using its chain volume indices of prices based on the year 2005–06. Those estimates measure, in effect, growth in the “volume” of production of goods and services. Over our twelve-year reference period, Australia’s real GDP rose by 54.0 per cent. During the same period our resident population grew by 16.3 per cent, so that real GDP per head increased by 32.4 per cent.

The general rise in well-being inherent in those figures was, clearly, a product of the Howard era. At the same time, however—particularly in its later years—an external phenomenon (the so-called “China effect”) was rendering the rise in well-being even greater. For this, it is often said, Howard can take no credit.

The China Effect

From about 2003 onwards a marked improvement began in Australia’s international terms of trade—the ratio of the prices at which we sell our exports to the prices we pay for our imports. Growth of real GDP measures the growth in the volume of goods and services we produce; but some of those goods and services, rather than being consumed domestically, are exchanged internationally for goods and services produced elsewhere. Thus, if the price of things we export rises, relative to the price of things we import, we can buy more imports with the former, making us better off than the GDP growth figures alone would suggest.

Between the end of 1995 and the end of 2007 our terms of trade improved by almost 57 per cent. This was chiefly a function of export prices, which rose by almost 50 per cent, while import prices actually fell by a few percentage points. Both developments were chiefly due to the growing significance of China (and more recently, to some extent India also) in the world economy. The resulting growth in world industrial production led to sharply rising demand for Australia’s raw materials, with upward pressure on their prices. At the same time—not merely in Australia, but across the world—the rapid growth in cheap Chinese manufacturing exports maintained downward pressure on our import prices, and on inflation more generally.

Over the period, the effect of this major improvement in our terms of trade was considerable. The term given by the statisticians to the real purchasing power of income generated by domestic production (that is, real GDP adjusted for the terms of trade) is “real gross domestic income”, and between calendar 1995 and calendar 2007 that entity rose by 68.4 per cent. Thus, while real GDP rose over the period by 54.0 per cent, real gross domestic income—the more significant measure of national well-being—rose even faster. Whereas real GDP per head rose by 32.4 per cent, real gross domestic income per head rose by 44.7 per cent.

Clearly, this terms of trade effect upon national well-being was, as the critics say, chiefly driven from offshore. So far as I recall, John Howard did not repeat, before the 1996 election, his (then mistaken) claim, many years earlier, “the times would suit me”. In the event, however—particularly during his last five years in office—they did. Still, as Napoleon said of his marshals, the first quality he looked for in them was that they should be lucky.

The more bitter critics notwithstanding, even this “China effect” on Australia was not wholly luck. The Howard government’s continued progress to a more open Australian economy (towards which, in some major respects, the Hawke and Keating governments had already steered) undoubtedly contributed. So did the good personal relationships which—again, pace the earlier prophecies of those more bitter critics—Howard and his Minister for Foreign Affairs, Alexander Downer, had succeeded in establishing with Chinese political leaders.

On these basic macro aggregates, then, take your pick. A rise of almost one-third in real GDP per head over the short space of twelve years is so impressive in its own right as not to require any further egging of that pudding via the terms of trade enhancement of it. To change the culinary metaphor, that was mere icing—albeit very sweet icing—on the cake.

Jobs

Real GDP growth is a product of the growth in numbers employed and the growth in their productivity. Between December 1995 and December 2007 total employment grew by 2,261,000, or 27.1 per cent—a growth of 1,323,000 (21.1 per cent) in full-time employees and 938,000 (45.4 per cent) in part-time employees. In “Liberty, Productivity and Jobs: Workplace Relations under the Howard Government” (Quadrant, July-August 2008) I noted that jobs growth during the Howard government’s first decade had been impressive enough, with 1.69 million additional jobs between December 1995 and December 2005. That, however, was as nothing to the record during the eighteen-month period (April 2006 through September 2007) during which WorkChoices was fully operational. During that short period 499,000 jobs were added, of which 91 per cent were full-time jobs (compared to only 51 per cent during the preceding decade, when the Keating government’s unfair-dismiss-als regime remained in full swing). Thus, while “the structure (including the constitutional structure) of the Work Choices Act was misplaced, and inherently regrettable”, nevertheless “it would … be churlish to deny its remarkable success, during its brief life, in boosting Australia’s labour market performance”.

Importantly, the growth of more than two and a quarter million jobs over the Howard years was not solely a result of employing a growing workforce. It also entailed a massive reduction in the level of unemployment (including long-term unemployment) that Howard inherited, and a remarkable increase in the proportion of the working-age population employed.

In December 1995 some 8.1 per cent of the workforce (seasonally adjusted) was unemployed. By December 2007 that unemployment ratio had almost halved, to 4.3 per cent. But these numbers, good though they are, do not tell the whole story. In some ways, the most impressive testimony to the Howard government’s labour market revolution is to be seen in that most intractable of areas, the persistently long-term unemployed. In the December quarter of 1995 the number of persons who had been unemployed for fifty-two weeks or more averaged 207,000 (trend series). By the December quarter of 2007, despite a 22 per cent increase in the total labour force, that number had fallen by two-thirds, to 69,600. In the even more difficult area of persons unemployed for 104 weeks or more, the figure had fallen over the same period by more than two-thirds, from 115,200 to 36,100. Remarkable also was the rise in the proportion of the working age population (fifteen to sixty-four years) employed, which increased from 58.6 per cent in the December quarter of 1995 to 62.4 per cent in the December quarter of 2007. The increase of almost four full percentage points in that ratio was all the more notable, given that it had remained almost unchanged over the previous thirty years. Clearly, during the Howard years something in the labour market changed—and changed, incontrovertibly, for the better.

As to productivity, the much faster growth over the period in those employed part-time obviously meant that average productivity per worker grew less rapidly than it would have done had the full-time/part-time ratio remained unchanged. As I have noted elsewhere (National Observer, Autumn 2006), “that is only another way of saying that, with the greater flexibility of the labour market resulting from both the 1993 Keating/Brereton workplace relations reforms and the 1996 Howard/Reith/Kernot reforms”—together with, from April 2006, Howard’s WorkChoices legislation—“more people have been able to find jobs suited to their requirements”. In addition, it is obvious that, as a higher proportion of the workforce becomes employed, and as people not previously in the workforce join it, the absolute productivity of the last person to be taken on is almost bound to be lower than that of those employed before him.

It is therefore a commonplace of labour market economics—although not one, it seems, known to (or at any rate acknowledged by) the then Opposition—that, as you draw previously unemployed people back into jobs, and as the employed proportion of the population increases, average productivity will diminish. To take a dramatic (but unfortunately, theoretical) illustration, if we were to find jobs overnight for all those persons of Aboriginal descent who are currently unemployed, Australia’s average labour productivity would undoubtedly fall, because the productivity levels of those people are very low. That would not mean that having them find jobs would be something to be criticised—quite the contrary. In the same way (and leaving aside any other reasons for the productivity outcome over the Howard years), the fact that the fall in unemployment levels, and the rise in the employed proportion of the population, must have affected the level of labour productivity adversely, does not mean that those were undesirable developments—quite the contrary.

Averages, of course, are just averages. A rise of almost one-third in real GDP per head during the period does not mean that every person’s real income rose commensurately. Nevertheless, such a large rise in the real income tide must tend to lift all boats. If any should, nevertheless, remain stranded, that would suggest some adversity specific to those cases.

Prosperity

One of the key markers of prosperity under Howard was, of course, the availability of jobs. Another indicator is given by looking at what those jobs were worth to those doing them—the growth in average weekly earnings (adjusted for inflation) over the period.

The Statistician produces various measures of average weekly earnings. Over the period in question, earnings of adult males working an ordinary working week (that is, without additions from overtime, penalty rates and so on) in full-time jobs rose by 68.2 per cent in current dollars. Deflated by the rise in the consumer price index (CPI) over the period (35.3 per cent), real average weekly earnings, as defined, therefore rose by 24.4 per cent. Note that, over the previous eleven years back to calendar 1984 (as far back as this ABS time series goes), they had barely changed (0.1 per cent).

Lest it may be thought that the Hawke–Keating period might compare less unfavourably by taking a different measure of average weekly earnings than that for full-time adult male ordinary time earnings, consider a couple of alternatives. For instance, real average total earnings of adult males employed full-time (including overtime, penalty rates and so on) provide a very similar picture—a rise of 21.5 per cent for the 1995–2007 period, compared with a rise of only 1.6 per cent for the 1984–1995 period. Alternatively, real average total earnings of all employed persons (male and female, full-time and part-time) grew by 16.9 per cent over 1995–2007, whereas over 1984–1995 they actually fell by 6.1 per cent. The fact that, in both cases, these rates of increase fell below those quoted earlier for full-time adult males, reflects among other things the compositional shift towards a growing proportion of (lower paid) part-time workers.

Another way of assessing prosperity under Howard is to look at the rise in the real living standards of Australians, as reflected in the growth of real personal consumption of goods and services. Over the twelve-year period, the volume of household consumption expenditure on goods and services per head of population rose by 36.1 per cent—slightly faster than the rate of growth of real GDP per head, but less than the rate of growth of per capita real gross domestic income. Over the previous twelve years (1983–1995), the same indicator rose only half as fast, by 18.4 per cent. (The fact that during that period household consumption expenditure rose much faster than average weekly earnings suggests that Australians were then living beyond their own earned means). In his 1996 pre-election television debate with Paul Keating, John Howard expressed the hope that, were he to be elected, Australians would become “relaxed and comfortable”. Whether or not, by the end of 2007, they had become more “relaxed” is a matter for debate, but there can be no doubt that they had become more comfortable.

Some other “feel good” factors contributing to that more comfortable situation are also worth considering. Throughout my lifetime, a prime ambition of most Australians has been to own their own homes, or at least to begin to do so. Housing loan interest rates have therefore always been a topic of major interest, not to mention political sensitivity. The then Opposition’s pre-election attack on the rising level of those rates was merely the latest of such campaigns mounted by Opposition parties (from both sides of politics) over the decades.

At the end of 1995 the ninety-day bank accepted bill rate was 7.43 per cent. After inching higher (to 7.57 per cent) in June 1996, it never again exceeded that initial rate. By the end of 2007 it was 7.29 per cent, having fallen during the intervening years to a low point of 4.25 per cent in December 2001. During most of our twelve-year period, then, bank bill rates—the chief rate influencing the cost of housing loan finance—had fallen from their level when Howard took office. Meanwhile, the sharp improvement in competition in Australia’s financial sector resulted in a substantial reduction in lending margins on home loans. Given both those factors, therefore, the cost of borrowing for Australians to finance their house purchases shrank appreciably over the period as a whole, notwithstanding some increase in its final year or two. The standard variable housing loan rate, which stood at 10.50 per cent at end-1995, and which fell to a low point of 6.05 per cent in early 2002, was still only 8.55 per cent at the end of 2007 (all the election campaign rhetoric notwithstanding).

Apart from their homes, perhaps the next most prevailing passion among Australians is their cars. During calendar 1995 sales of new passenger vehicles and four-wheel-drives numbered 534,100. In 2007 sales had risen to 835,200. The 56.4 per cent increase far exceeded the 16.3 per cent growth in population over that period. Cars had become cheaper and of higher quality, and car ownership had expanded. Notwith-standing the lamentations of the Greens (not to mention all those doctors’ wives driving their BMWs), Australians and their cars were not to be readily parted.

Until early 2008 the Commonwealth Treasury has compiled annual estimates of the household wealth of Australians, comprising the value of their dwellings, the net value of their financial assets, and the capital stock of unincorporated enterprises. Since the figures are in current dollar terms, and there would be considerable argument as to the appropriate deflator, growth in those figures can be no more than broadly indicative. For what they are worth, they show that (if we use the CPI as the deflator) total household wealth more than doubled (120 per cent increase) between June 1996 and June 2007 (the latest figure in the series). The increase over the longer period between June 1983 and June 1996 was 59 per cent.

As those estimates show, a significant component of the growing personal wealth of Australians during the Howard years was the increase in the value of their homes. Writing about that elsewhere (National Observer, Autumn 2006) I expressed a view that still seems valid today, namely:

“it is a matter of opinion whether the general rise in house (and other dwelling) prices over recent years has made Australians feel ‘better off’. Those who already own, or are in the process of owning, their own homes may well do so. Those who do not, but who may have entertained the hope of doing so, are more likely to have felt disheartened as they have watched the fulfilment of their hopes recede. The Prime Minister was no doubt right when he said, some years ago, that he had never met anyone who complained to him about the rise in the price of his or her house; but that probably implied that he chiefly meets people who already own their own homes or are in the process of doing so.”

Today, to an extent much greater than (say) twenty years ago, the great majority of Australians have at least an indirect interest in the stock market, via their superannuation accounts. In addition, more than 40 per cent of Australians own shares directly. During the Howard years the stock market soared. It is a nice irony, in fact, that it reached its peak only three weeks before his—by then widely expected—electoral defeat. I draw no inference from that: it is merely a fact that, since the election of the Rudd government, the stock market has been a case of downhill all the way.

One could go on, but the fact is that during the Howard years Australians generally became steadily better off. Unable to deny that, his critics have resorted to two criticisms of a different kind. So let us examine them.

Growing International Indebtedness

Throughout the Howard period, Australia continued to sustain a deficit in the current account of its balance of payments. In calendar 1995 that deficit amounted to 5.0 per cent of GDP. In calendar 2007 it had risen to 6.2 per cent of GDP.

Since a current account deficit must always be balanced by a capital account surplus, this record necessarily involved a continual increase, over the period, either in Australians’ net indebtedness, or in the (net) acquisition of Australian assets by foreigners (“selling off the farm”, as Sir John McEwen called it). Accordingly, net foreign indebtedness grew from $192 billion (38.3 per cent of GDP) at the end of 1995 to $595 billion (54.8 per cent of GDP) at the end of 2007. Other (net) foreign liabilities changed little over the period; although foreign ownership of Australian assets increased, this was broadly balanced by the growth in ownership of foreign assets by Australians. Nevertheless, on the face of it, the critics seem to have a point—Australians, they would argue, have been enjoying an elevated lifestyle by running up debts to foreigners.

A country experiences a deficit in the current account of its balance of payments if the level of its domestic investment (in dwellings, infrastructure, or corporate construction and plant and equipment investment) exceeds the level of its domestic savings (whether by households, governments or corporations). In effect, Australia’s current account deficit represents the extent to which we are calling upon the savings of foreigners to supplement our own in order to finance the level of investment we undertake. Current account deficits, therefore, can arise in several—often very different—ways, and whether or not we regard them as undesirable will depend very much on the nature of their origin. A country whose citizens, or governments, spend profligately, or whose corporations invest inefficiently and are unprofitable, will tend to run a current deficit for all those undesirable reasons. If, by contrast, a country enjoys a business investment boom in profitable enterprises, so that the demand for savings outruns the domestic supply of them, then we may be justified in regarding that scenario as one to be welcomed.

The Australian experience with respect to these variables during the Howard years was mixed. On the one hand, government deficits, both federal and state, were reined in. On the other hand, household savings (even after allowance for the build-up of superannuation assets by households) were in gradual decline. Perhaps if the Howard government had refrained from taxing us so heavily, and returned to taxpayers those huge budget surpluses which it spent so much political capital inventing excuses for tucking away, household savings would have performed better. That, of course, is speculation; but what is not speculation is that during the period we saw a massive upswing in private investment—both in dwellings, and even more notably, in business fixed investment, which by 2007 was running at record levels. On those grounds it could be said that our current account deficit rose principally because our productive investment rose.

There is of course another, more general reason why we need not be troubled by the current account deficit. During the period in question that deficit was generated by private entities, not governments. As Professor John Pitchford tellingly pointed out about twenty-five years ago, if a private entity (say) borrows abroad, it is because it wishes to put those funds to productive use. If its venture proves profitable, it will be able to service and repay its debts. If it proves unprofitable, it will, in the ultimate, go bankrupt and default on its debts. Undesirable though the latter circumstance may be for the entity concerned, it is not something with which the government, or the polity more generally, need concern itself.

In short, those who inveigh against the Howard government on grounds of balance of payments and foreign indebtedness should think harder.

“Growing Inequality”

A strong, and in many ways admirable, strain of egalitarianism runs through Australia’s core culture. When, therefore, it is alleged that the Howard years, while all very fine for the more fortunate, gave rise to “growing inequality”, such a charge demands attention.

Much work has been devoted to the matter of income distribution in Australia by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, led by Professor Ann Harding. Without in any way seeking to impugn the integrity of Professor Harding, it can fairly be said that her Centre has not been a Howard government cheer squad. It is all the more notable, therefore, that in a July 2008 paper entitled Winners and Losers from Tax-Transfer System and other Changes under the Howard Years, she and her co-author conclude that:

“These trends [in tax-transfer policy and the economy during the Howard era] included unprecedented economic growth, strong earnings growth, some widening in full-time earnings inequality and a modest increase in income inequality … Against the backdrop of a booming labour market, reform initiatives such as the Welfare to Work changes attempted to increase the labour force participation of welfare recipients. Other features of the Howard era included substantial income tax cuts and significant increases in assistance to families with children and older Australians.”

Any such “modest increase in income inequality” is however beside the point. As noted earlier, in absolute terms almost everyone became better off during the Howard years. However important arguments about “growing gaps” in income may be for purposes of the politics of envy, what matters in the end is whether those at the bottom of the income scale did, or did not, improve their lot, and by how much. The evidence (including that from NATSEM) is that, very clearly, they did, and not inconsiderably.

Budgetary Policy Criticisms

My own criticisms of the economic performance of the Howard government, referred to at the outset, are twofold. The major one, which has to do with the Costello “strategy” of over-taxing us, I have dealt with at length elsewhere on several occasions, and it would be otiose to repeat here the matters canvassed at length there. In brief, the government’s budgetary policy over its first six or seven years can be defended—the introduction of the hateful goods and services tax apart—on the grounds that the priorities were, first, to repair the $10 billion “Beazley black hole” in the budget inherited from the outgoing Keating government; and second, to pay off the $96 billion of Commonwealth debt—another legacy of the Keating years.

However, from 2003–04 onwards, with both those tasks accomplished, and growing tax revenues from an increasingly prosperous corporate sector beginning to flood into the Treasury, there emerged a pattern of behaviour which can be described as, at best, seriously erroneous, and at worst, deliberately duplicitous. Every one of the government’s last five budgets greatly understated the revenue estimates. While some cuts in personal income tax levels were made, such cuts were much smaller than would have been possible, and evidenced no coherent tax policy strategy.

The huge surpluses which, as a result, accrued each year were tucked away into one unnecessary (and increasingly risible) “trust fund” or another; and the ultimate result of all this stupidity was to leave in place for the incoming Labor government a veritable Aladdin’s cave of accumulated treasure—which, predictably, it has been happy to set about squandering. Mr Costello’s post hoc protestations notwithstanding—and John Howard also cannot escape responsibility for all this—the government’s fiscal policies left us, quite unnecessarily, with the highest ratio of taxation to GDP in Australia’s peacetime history, and a largely unreformed personal income tax system.

My other criticism, while serious enough in itself, pales by comparison. It concerns the way in which, particularly during its final term in office, the government embarked upon various spending sprees. I referred to this in passing in my March article, noting that a prime example of the genre—the “regional grants” over which the then minister responsible, De-Anne Kelly, presided—was of such scandalous proportions as to sicken even the most loyal Howard supporters, myself included. “Demonstrating perhaps that there is some justice in the world, Mrs Kelly then lost her seat in the election.”

So much for the Howard record. What, then, can be learned for the future from his government’s successes and failures?

Some Lessons

If and when the Coalition parties return to office, there are some lessons to be learned from all this. Meanwhile, too, the Rudd government—or what I suggest may be its likely successor before long, the Gillard government—would also do well to pay attention to those lessons. For example:

  • On budgetary policy, future governments should content themselves with what might be called (after Mrs Thatcher) a “handbag” approach. That is, budgets are there to be balanced—not over some mythical “cycle” or other, but, in other than the most extreme circumstances, annually. Nonsense of the kind that, at the time of writing, the Prime Minister is spouting, about doing “whatever it takes”, is just that—nonsense.
  • If “fiscal stimulus” is to be resorted to, then tax cuts are one thing, but a rising tide of (usually irreversible) current expenditures is quite another. That way, down the track, either taxes must rise from their already excessive levels, or deficits must re-open.
  • More generally, one of the best features of the Howard years was his emphasis on giving people choices. To quote again from my March article, many of the attitudes Howard brought to specific policy matters reflected his view “of the importance of giving people choices—to send their children to schools of their choice, to avail themselves of medical and hospital services of their choice, to sell their labour under conditions of their choosing, and so on. His stated ambition to make Australia ‘the greatest share-owning democracy in the world’—so redolent of Menzies’ ‘greatest home-owning democracy’—was in the same mould” (whatever the pall cast over that ambition by the current international financial upheaval).
  • One choice in particular—the freedom of individual Australians to sell their own labour under conditions of their choosing, and the associated freedom for employers to offer people jobs without interference from either trade union bullies or busybody industrial tribunals, became a fundamental in Howard’s approach to governing. As enumerated above, the resulting growth in the availability of jobs has been there for all to see.

On each of these points, the lessons of the Howard years do not seem to have been learned by his successors.

Conclusion

As one would expect from an almost twelve-year period presided over by a single prime minister, and for a policy area as complex and wide-ranging as the economy, the record of the Howard years is not without blemish. Nevertheless, the strong growth in real incomes, the huge growth in jobs, and the widely disseminated burgeoning of prosperity, however measured, can lead to only one (fair-minded) conclusion. These were good years for Australia. To judge by present portents, it may be some time before we see their like again.