I want to start by asking you to reflect on this scenario:
- The world and Australia have emerged from an emergency and inflation is rampant.
- Workers are in short supply, while unions are aggressive, adding to upward pressure on inflation.
- Coal fired power stations are struggling to stay open and power shortages have become endemic.
- Population growth, including immigration, is running hot and housing shortages are being felt across the country.
- The government is making serious market interventions and threatening more, blaming business for many of these failings.
- The Liberal Opposition is proposing more freedoms, less government, lower inflation, more housing and a more reliable supply of electricity.
This scenario is not 2023 – it is 1949.
The recently formed Liberal Party is led by Robert Menzies.
Menzies is preparing for an election and believes the values of his new party can provide the toolkit for the times.
His emphasis is on freedom and choice for individuals and enterprise, personal responsibility, private home ownership while fighting creeping communism and socialism.
Menzies’ pitch resonated with Australians ready to move on from the era of big government during and following the Second World War.
His win began 23-years of stable government, unprecedented growth and widespread prosperity.
Those years saw productivity gains driving real wage increases never seen before and not seen since.
Aspirational Australians were able to get ahead.
History may not repeat but so much of this story is still relevant today.
AUSTRALIA HAS HAD HIGH INFLATION, SLOW GROWTH PERIODS BEFORE
Indeed, the more you examine recent Australian history, the more the political and economic impact of high inflation and big government become clear.
There have been three major prolonged periods of climbing and stubborn inflation since World War 2:
- The post-war reconstruction when inflation rose from 2.5% in 1947 to 9.3% in 1950.
- 1972-1975 where inflation rose from 4.7% to 17.7%.
- Inflation then rose to a peak of 9.6% in December 1986 followed by another spike in December 1995.
Each of these events led to eras of smaller government, greater freedoms, with a stronger focus on enterprise and productivity reform.
- 1949 – Menzies came into power promising to support the “ambitious enterprise of the individual.” This followed repeated interventions from the Chifley Government to entrench wartime economic powers: including a referendum to give pricing powers to the Commonwealth and culminated in the final rejection of the plan to nationalise the banks in 1949.
- 1975 – Whitlam’s massive expansion of the state, leading to sharp increases in inflation paved the way for Fraser to promise a retreat from Labor’s excesses.
- 1996 – Howard came into office after a fresh spike of inflation and the long tail of the 90s recession finally broke Australians’ confidence in Labor.
- 2013 – And while a significant inflationary surge didn’t precede the 2013 election, Tony Abbott came to power following a massive growth in government during the GFC, increases in unemployment, uncontrolled borders, rising energy prices and big government interventions including Labor’s mining and carbon taxes.
In all these elections the issues were consistent:
- Australians wanted less government and better government, not more.
- Labor’s agendas had delivered some combination of rampant inflation and a sluggish economy.
- And the Liberals offered an agenda freeing Australia from these constraints.
What is notable is voters only gave governments a small window to get on course when economic troubles hit.
Australians are fair minded and that is a good thing.
But when governments fail to address real threats to Australia’s economic security, voters will act.
Through history we’ve learnt inflation changes governments.
The experience of Chifley, Whitlam, Keating and the Rudd/Gillard governments should be a warning shot to Labor governments.
But Liberals should remember that voters ultimately did not forgive Fraser for the second oil shock and subsequent increase in unemployment in the 80s.
This is why governments need to treat inflation as its first, second, and third priority.
CURRENT ECONOMIC CONTEXT
In that context the period between 1996 and 2020 is increasingly looking like a long summer.
Today, inflation is stubbornly persistent, with core inflation higher than almost every advanced country in the world.
The economy is shuddering to a halt with negative growth per person last quarter.
Labour productivity is in an unprecedented freefall. Having grown by 11.4% in our time in government almost half of that has been lost in a single year of Labor.
And meanwhile the government is proposing rapid population growth – 1.5 million immigrants in 5 years – without a plan for housing, services and infrastructure.
Westpac-ACCI research shows 42% of businesses are seeing their margins eroded despite increasing prices.
NAB reports that 1 in 3 consumers report very high levels of consumer stress.
And ANZ is reporting the longest slump in consumer confidence since the 1990s recession.
This despite an unemployment rate at 3.6% and company profits growing at 7.1% over the year.
Whether it is on prices or output, families and businesses are united by one thing: they feel like they are working more for less.
And the risk is hard working Australians trying to get ahead feel they have become the working poor.
The challenge of inflation is not new but for a generation of Australians it is unfamiliar.
For the last two decades low interest rates along with strong credit have meant money – for government at least – has appeared to be free.
For governments, advocacy groups, and voters the solution to most problems became as routine as it was predictable: let government fix it; let government borrow to pay for it.
Sensible people can debate whether that was an appropriate course of action in a low inflation environment.
But with sky rocketing interest rates, stubborn inflation, and collapsing productivity, this big government approach is a road to ruin.
LABOR FAILING THE TWIN CHALLENGES OF INFLATION & PRODUCTIVITY BRINGING GROWTH TO A HALT
The twin challenges of persistent inflation and sluggish productivity require a strategic and whole-of-government response.
The cost is alarmingly human and clarifies why this needs to be treated with the same resolve as other crises, albeit with a different toolkit:
- Small business owners like Veronica, whose only choice to keep her doors open is to raise prices or sack staff.
- Young mothers like Nicole, who has taken on more hours, spending less time with her young children to pay her mortgage.
- Pensioners like Josephine, who worries about paying her energy bill through the winter despite investing in solar.
Solving this can’t be left to the Reserve Bank.
This Reserve Bank focuses the pain on interest sensitive hardworking Australians with a loan, while putting the aspiration of home ownership even further away for young Australians.
But while the RBA is doing what it must, in Canberra we see indifference, or worse, incompetence.
Dr Steven Kennedy as the Secretary of Treasury is the government’s top economic adviser.
During Senate Estimates, Dr Kennedy confirmed that after more than a year in office the Prime Minister has not requested a single personal briefing from him on inflation or any other economic issues.
And despite inheriting a budget which was in balance from November 2021 through to the election, a labour market and commodities sector so strong a drover's dog could have delivered a surplus this year, we have a Labor Government that can’t say no to spending more money.
Just two months ago the Treasurer delivered a budget that spent $2 for every $1 that it saved.
Labor spent $185 billion more in its two Budgets than the former Coalition Government spent in March.
That’s over $7,000 for every Australian.
Labor has spent an extra $3.8 billion in just one month since the Budget.
Is it any wonder that interest rates went up within weeks despite the Budget highlighting the expectation of no further increases.
The Budget gave with one hand while taking away with another.
Taxes are increasing as the LMITO ends, self-managed super funds and franking credits are now under attack, gas, fuel and livestock are being hit with additional tax as inflation drives bracket creep.
Meanwhile, the government removed an explicit goal to reduce inflation from its own fiscal strategy.
When asked about this during Senate Estimates, the Finance Minister could not even explain why.
We see a similar complacency on productivity.
The Productivity Commission has confirmed the Treasurer has not directly met with the Commissioner to be briefed on its recent 5-year productivity review.
Neither has the Prime Minister. In fact, the Prime Minister’s own department has not even sought briefing from the Productivity Commission on its review.
The Business Council of Australia has warned Labor’s industrial relations agenda “threatens” any progress on productivity.
Independent research showed that abolishing the ABCC would add $47 billion in costs to the economy.
The e61 Institute found Labor’s multi-employer bargaining laws risk stifling firm growth and reducing competition.
BHP has warned Labor’s same job, same pay legislation is a productivity killer.
And Treasury’s much vaunted Employment White Paper won’t even consider the productivity and jobs impact of these policies.
Meanwhile, the CEO of gas producer Inpex has warned the government’s approach to the gas industry increases sovereign risk.
The Department of Industry has granted just a single initiative Major Project Status in the 12 months Labor has been in government compared with 23 across the Coalition’s last term in government.
And the regulatory burden is only getting higher with:
- an EPA that will duplicate more state bureaucracy and remove Ministerial accountability for decisions;
- a safeguard mechanism that will lower the guillotine on emissions intensive industries;
- a financial disclosure framework that wants to force listed and unlisted companies to report other companies, other customers, other countries emissions.
And small businesses can’t be sure the accelerated depreciation on investments they purchased a year ago will be honoured by the tax office.
SO WHAT INSTEAD? PRINCIPLES TO GET THE ECONOMY BACK ON TRACK
So what is the alternative?
For too long productivity has been a dirty word for politicians.
Real action on productivity is essential so the next generation can enjoy a better quality of life than the one before it.
Alongside fiscal restraint, a strong focus on productivity has two big dividends.
First, we know prosperity is impossible without productivity. This is the great lesson of the last century. Sustainable higher real wages are only possible with higher productivity.
Second, productivity puts downward pressure on inflation. Producing more with less drives down prices.
What won’t work is throwing more money at the problem.
Productivity, by definition, requires that if you spend money, you need to spend it well.
But it also requires a government prepared to make it a priority.
BACK TO BASICS ECONOMICS: FIGHTING INFLATION & DRIVING PRODUCTIVITY GROWTH
A back-to-basics economic agenda will put fighting inflation and driving productivity growth at its centre.
Inflation, overregulation and low productivity are aspiration killers.
As I travel the country and listen to businesses – from primary producers, pharmacies, and aged care providers to investment houses, financial advisers, big and small banks – the constant theme is that the regulatory burden is reaching critical mass and if it doesn’t kill jobs first, it will kill businesses.
This is why is essential we adopt at least five policy settings that drive productivity:
First, supporting small business and entrepreneurship, backed by an innovative and safe financial system;
Small businesses deliver one third of GDP, make up 98% of all businesses and employ around 50% of the private sector workforce.
They don’t have government affairs spokespeople and they don’t have armies of advisers to help dissect regulation.
They take risks to build a better life for themselves and their families, to support their communities and to employ Australians.
They need a champion in government.
And they need access to fast payments, reliable credit and ways to raise capital.
This means ensuring our financial system is fit for purpose with consumer outcomes at the heart of any changes.
Second, delivering an incentive-based tax system, cutting the compliance burden to drive innovation and support workplace participation;
The Coalition’s stage 3 tax cuts, our reduction in the small business company tax rate, the small business tax offset for sole traders and trusts and the R&D tax incentive reforms are good starting points.
But we have seen further measures from the Coalition’s last Budget wound back under this government including: patent boxes, the tech investment boost, and extended accelerated depreciation.
We need to take further steps to create an innovative economy and support individual aspiration.
And we need to seriously explore all options for our tax system to support young people into homes, unlock housing supply, and support families navigating work and raising children.
For instance: using tax advantaged superannuation contributions to buy a first home is good policy for young Australians.
Our tax system should be simpler and fairer and most importantly, taxes should be lower, not higher as we saw in the last Budget.
Third, focus on supporting more work, not more welfare;
Currently Australia faces one job vacancy for every 1.2 unemployed people.
This is unprecedented in recent times.
To boost labour market participation, we need to recognise that employment is a two-way relationship that works best when there is flexibility between employers and employees.
We also need to support businesses trying to find workers by recognising the dignity of work and the importance of getting unemployed people experience in the workforce.
This means recognising the best form of welfare is a job.
Reducing effective marginal tax rates for jobseekers and pensioners is a good example, as Peter Dutton has outlined in his two Budget Reply speeches.
Fourth, reining in fiscal policy, embracing technology in government services and driving productivity in government decision making;
Essential to battling inflation is reining in the growth in government spending and driving public sector productivity.
That’s why we’ve opposed $45 billion of additional spending initiatives in the Parliament.
Productivity requires smarter spending, not more spending.
Whether it is regulatory approvals, grant processes, or procurement – government processes and decisions need to be streamlined to support productivity.
Much of the private sector has been relentless in improving productivity over the past decades, while improving the customer experience.
In health, aged care and social services – better use of technology can deliver a generational opportunity to drive similar gains through the public sector.
Reforms and initiatives like the Consumer Data Right, Digital ID and privacy protections can put the customer at the centre of government.
All of this is essential to get the Budget on a sustainable footing without raising taxes.
Fifth, getting the basics right where government does have a role to play: reliable energy, critical infrastructure, and an education system that puts outcomes first.
These should be self-evident.
As coal plants retire, power prices continue to rise in the absence of replacement. Labor’s broken promise on power prices was inevitable while it ignored realities.
That’s why a sharp focus on gas supply and opening the debate for nuclear in the longer term needs to be a priority, alongside a technology neutral capacity market.
Infrastructure funding that materially increases new house builds, so desperately needed with sharp population increases and home ownership slipping away from young Australians.
And despite years of increased funding, our education is delivering poorer outcomes for our kids.
Experience over last decade shows the volume of spending isn’t what drives outcomes but the quality of policy thinking does.
All of this requires a government to treat productivity as a priority.
TOOLKIT FOR THE TIMES
Australia emerged from the pandemic in a world-leading position but we are now falling behind.
A year of economic decline under Labor reflects a government prioritising its own aspirations over those of everyday Australians.
Whether it’s Labor’s Canberra Voice or its union led IR agenda, these are the wrong priorities for our current challenges.
Worse, they are divisive at a time when all Australians are hurting.
Inflation economics is different from our experiences in recent decades.
It doesn't matter what your income is, everyone feels the pain and the gradual loss of hope.
It’s different in a way that Labor doesn't comprehend. It's different because you must go to the source of the problem rather than focusing on the symptoms.
Our values provide the toolkit for the times through a focus on:
- Encouraging enterprise – not big government.
- Fiscal discipline taking pressure off prices and taxes.
- Productivity reforms freeing up households and businesses to make their lives easier.
- Backing hardworking, aspirational Australians to get ahead.
Robert Menzies understood this in 1949.
Malcolm Fraser understood it in 1975.
John Howard understood this in 1996 just as Tony Abbott did in 2013.
Peter Dutton understands it now.
This is the Liberal Party’s DNA.
These values are the pathway back to a low-inflation, high-growth, aspirational economy.
And under Peter Dutton’s leadership, I’m confident it is the pathway back to government.
Not because that is a goal unto itself but because it is essential to supporting Australians to live the lives they want to lead.