The federal election is just months away, and while many issues will influence this year’s poll, there is no doubt the economy will be a hot-button issue that will have a significant impact on who gets our precious vote.
Indeed, history shows economic management is one of the most hotly contested issues in politics.
Also read: Economists shocked as Aussie GDP released
If a government does a poor job managing the economy, it will likely be tossed out of office as voters vent their spleens on the problems that poor economic management creates.
If economic times are good, voters will tend to be happy with the incumbent and be swayed to vote accordingly.
Most opinion polls over the past 25 years show that voters believe the Coalition to be a better economic manager than Labor, and by a wide margin - usually 15 to 25 points. This has helped them win six of the past eight elections.
Prime Minister Scott Morrison and Treasurer Josh Frydenberg are trying to leverage this perception in the electorate, and are already testing a few slogans on key economic themes.
What actually drives the Australian economy?
At some levels, the political debate is misguided because Australia’s economic performance is driven as much - sometimes more - by what happens in China, the US and the global economy than what happens in Canberra.
In simple terms, global economic conditions drag the Australian economy up and down more than policy tweaks from the Australian government.
That said, decisions taken by our government can have a significant influence on the Australian economy over and above those international factors.
Think of policies that deliver an educated, fully employed workforce or allow the business sector to invest, expand and employ. Or conversely, the confidence that can be shattered by reckless fiscal policy or unfairness in the tax system.
How do we measure which side is best?
One way to judge which side of politics is the better economic manager is to look at the rate of growth in the Australian economy during their time in office.
This is simple, transparent and obvious.
I conducted a similar exercise some years ago and will use a similar methodology to update those findings.
Before we get to the conclusion, here is the methodology:
I have assumed the impact of a change of government occurs two quarters after it has been sworn in. This allows for the obvious issue that a government’s impact on the economy does not occur instantly – it takes a short while for policy changes to impact, and for the sake of this exercise, it is assumed the start is the second quarter after the change of office.
For example, the Whitlam Labor government is estimated to be influential on the economy from the June quarter 1973 through to the March quarter 1976, inclusive; the Fraser Coalition government from the June quarter 1976 through to the September quarter 1983; Hawke/Keating Labor government is estimated to be influential on the economy from the December quarter 1983 through to the September quarter 1996; the Howard Coalition government from the December quarter 1996 through to the June quarter 2008; Rudd/Gillard Labor from the September quarter 2008 through to the March quarter 2014; and the Abbott/Turnbull/Morrison Coalition government from the June quarter 2014 to now.
The following table compiles average quarterly growth in real GDP for the duration of each government. It is presented to two decimal points to overcome some issues that emerge with rounding (to one decimal point - 0.56 per cent and 0.64 per cent are both 0.6 per cent - but the difference is significant when compounded over the full term of a government).
Since 1972, there have been three Labor governments and three Liberal/National governments.
Labor has been in power a total of 22 years, the Coalition 29 years, which is a large sample of time to test the proposition.
The results are clear – average quarterly GDP growth is 0.78 per cent under Labor and 0.68 per cent under the Coalition.
And the weakest growth of any government is the current Coalition government, which has been in power since 2013.
At face value, this 0.10 per cent difference does not sound like a huge difference. But recall, this is a quarterly result and annualised over 22 years of Labor governments and 29 years of Coalition rule.
A growth differential of 0.1 per cent per quarter means that annual GDP is 0.5 per cent per annum stronger on average under Labor than the Coalition. And this is over 50 years.
In today’s dollar terms, this equates to around $12 billion per annum in additional output over the years Labor has been in power. Over more than two decades, that is an extra quarter of a trillion dollars in extra output, some of which has accrued to workers via wages and incomes.
Clearly, Labor governments preside over stronger economic conditions.
Why is growth stronger under Labor?
There are several reasons why the economy may be strong under Labor.
Labor pursues policies that reduce inequality more than the Coalition. This means that lower-income earners, who have a higher propensity to spend, receive favourable tax treatment and benefit payments. This boosts householder take-home pay for middle- and low-income earners and therefore boosts spending and economic growth.
The Coalition tends to focus its tax policy on lower tax for high-income earners, who have a lower propensity to spend, which makes the stimulatory impact of those policies less potent.
Other policy settings relating to education and skills, national retirement incomes, and expenditure of universal health care all have economic implications, even if those effects are spread over many years and not confined to the time of office of any particular government.
With a likely May election, all of this is food for thought as campaigning hots up and the economy features in people’s minds as a key issue influencing their vote.
If Labor can get this message out to the electorate, the current polls and betting markets favouring Labor may prove to be correct.
This methodology, quite plainly, takes no account of lasting policy reforms that deliver longer-run benefits to the economy that do not show up in the term of the government implementing them.
Interpretation of how to measure economic management is an open issue, with many approaches worthy of detailed research and analysis. This is just one and I look forward to seeing other contributions on this important topic.