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The following article was written yesterday (Friday). A number of the points made appear in The Weekend Australian today (Saturday), including an editorial which again refers to Gillardís past relationship with the corrupt union official.

Des Moore

Omens of an early poll

Article in Quadrant Online

by Des Moore

September 15, 2012

On September 3, Quadrant Online published my note suggesting the possibility of an early election with Swan leading Labor. Developments since then seem to have supported my thesis.

Of particular note is Swan’s attack on Abbott centred on the latter’s alleged bad behaviour in the distant past and his alleged aggressivity. While acting as prime minister during Gillard’s bereavement absence, Swan used Question Time to accuse Abbott of (inter alia) "going the biff" and "aggressive negativity", also describing him as “a thug". While the Speaker required these to be withdrawn, the message that Abbott is an unsuitable PM has gone out and was quickly picked up by Fairfax journalists. The timing of the attack has pertinence to an early election, not to one in November 2013.

Also pertinent is the cessation of media reports on the past behaviour of Gillard in association with a leading trade unionist. This has occurred despite revealing public addresses by former policeman and radio announcer Mike Smith suggesting much more will be revealed. The silence in The Australian, which had been playing a leading role, followed a report that three senior executives of News Ltd had dined at the Lodge.

Swan has also been more than active in promoting the strength of the economy and the future outlook. When questioned on September 6 by the ABC about the 3.7% increase in real GDP in the June quarter (compared with the same quarter last year), he claimed it was a “very, very solid result”. When asked about the implications of the fall in commodity prices, he skated over concerns by referring to the 5.75% decline in the terms of trade already estimated in the 2012-13 budget. He added that “we’ve got a solid investment pipeline... and low unemployment”.

Swan’s picture seems principally designed for the immediate future.

First, mainly because the prices of our exports relative to those of our imports fell in the June quarter for the third quarter in a row, the growth in GDP was much less than for real disposable incomes, which increased by only 2.6%. Indeed, in what is probably the best guide to economic well-being, the real increase in per head terms was much lower than over the previous year -- only 1.2% compared with nearly 3%. In short, benefits of the mining “boom” are now being spread more thinly across the community and this is reflected in the on-going low level of consumer confidence.

Second, the terms of trade fell by 7% over the year to the June quarter and the Reserve Bank index of commodity prices in August was 18.5% down year on year. Judging by the ongoing serious economic problems now being experienced overseas, particularly in China and recessed Europe, and reported assessments that the supply of key commodities has now started to outstrip demand growth, further price falls are likely, with adverse implications for the budget and household incomes.

However, while Swan did acknowledge that even current price levels would “have an impact on the budget”, he has re-affirmed the (small) budget surplus commitment for 2012-13 and the budgeting of surpluses for the subsequent three years, as well committing to not increase the overall burden of taxation beyond what Labor inherited. It is difficult to believe that, with the increased announcements of large new expenditure commitments by Gillard and the likely slower-than-estimated growth in revenue, such surpluses will be achievable. Indeed, reports suggest further restrictive measures are needed simply to achieve the move to the estimated 2012-13 budget surplus from a $40-odd billion deficit last year (3% of GDP). An early election would arguably prevent having to announce the further measures to achieve the 2012-13 surplus and justify predicted surpluses beyond.

With Swan in command it would also avoid having as a major election issue the further questions Gillard will face about her earlier relationship with a corrupt union official. In short, an election now may be better than one in November, 2013.

It would also not have to cope with the now certain reductions in the “solid” investment pipeline. The ABS survey of expected future capital expenditure still suggests a strong increase in the current year consistent with the budget forecast for a 12% real increase in business investment. But with overseas markets continuing to wobble, plans for investment projects are already being significantly shelved or delayed. Surveys of the costs of investing here and overseas also indicate the attractiveness of Australia has slipped considerably.

Third, while Swan makes much of Australia’s lower unemployment rate relative to that in most other countries, he fails to explain the slowing of growth in employment. After increasing by 3.3% over the year to June 2010, employment grew by only 1.2% over the year to June 2011 and over the last year by only 0.5%. How is it that only an additional 60,000 jobs were created over that year while GDP grew at 3.7% and the population of working age increased by 237,000?

Particularly puzzling is that about 190,000 of the working age population increase did not even join the labour force so that the proportion not in the labour force increased from 35 to 35.6%. In other words, Australia may now be moving down the American path, which has seen increasing numbers appear to give up looking for a job.

Yet the ABS September, 2011, survey showed that about 850,000 of those not in the labour force actually wanted to work. With about 600,000 unemployed, this means there were then over 1.4 million potential additions to the employed. Bear in mind also that, of those employed, about 830,000 (or 7.0% of the labour force) say they are under-employed. All up, about 2.2 million want to work or work harder.

In short, the labour market is far from operating efficiently and does not look like improving. One obvious reason is the enormous increase in regulation under the Fair Work Australia (FWA) legislation (it came into full effect in 2010), which has made employers increasingly cautious about adding to their workforces, particularly with lesser skilled. This caution will have been reinforced by the increase of more than 14% over the two years to June, 2012, in compensation to employees (this national accounts data includes mainly wages but also redundancy payments) while corporate profits increased by less than 2%. The increasing complaints by business about higher costs and dissatisfaction with FWA, combined with increasing union militancy, pose a serious problem that the union-run government seems incapable of handling.

Whether or not there is an early election with Labor led by Swan, careful analysis suggests the government is under playing the many problems it faces in a cooling economy that is not absorbing its working-age population.

Des Moore is Director, Institute for Private Enterprise, formerly Deputy Secretary, Treasury

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