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It's not the economy, stupid

-Donal Curtin

Thursday 20th March 2008

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Keeping an eye on the Aussies.
Rudd's in, Howard's out, the new Aussie government's been formed. So it's a good time to have a look at the lessons of the election and the outlook for a Labor-led Australia.

Lesson one: Bill Clinton may have been right at the time when he coined "It's the economy, stupid", but it's clearly lost a good deal of relevance in our neck of the woods. The Aussie economy hadn't had a down patch since the first half of 1991, so by the election the Aussies had over 16 straight years of uninterrupted growth and an unemployment rate down to only 4.3%. That didn't cut it with the voters, though: it's probably still true that a government will get whacked for allowing or causing the bad times, but presiding over the good times is no longer enough to get re-elected.

Whether that will translate into Kiwi voting patterns might be debatable, but lesson two is clearly applicable here at home. As Alan Mitchell, economics editor of the Australian Financial Review, put it: "Large budget surpluses are a political liability ... people want to know why their insatiable demand for government services cannot be met when the government clearly has money to spare". What's more, if you've nonetheless run a surplus that is now giving you political earache, how you run it down also has its pitfalls. Howard's attempt to outspend Rudd came across as economically irresponsible, aggravated by the pork-barrel stench from last-minute slush-fund spending in marginal electorates. Without careful risk management, 'my tax cut's bigger than hers' or 'my spendup's more -lavish than his' may not play as well in 2008 New Zealand as their planners expect.

A general jadedness with the same old same old probably explains most of Howard's ejection, aggravated by specific annoyances (not ratifying Kyoto, not saying 'sorry' to the stolen generation, Iraq). Mostly, economic issues didn't take centre stage. It's possible that rising interest rates played some modest part, but it seems most people didn't pillory the government for it.

There was, however, one important economic contribution to the Howard defeat. It was around Work Choices, the Howard government's equivalent of our former Employment Contracts Act. Post-election, the unions revealed some of the strategising they'd done to fight it, and it was clever stuff. They flagged away going the unions' traditional 'attack on workers' rights' route, since bolshie unions just turn the voters off. Instead, they tapped straight into the resentment of the 'Aussie battler trying to get ahead'. For the battlers, the route to the better house or the new car was via the overtime rates for nights or weekends, and if under Work Choices the overtime and penalty rates were getting the chop or being bought out for not much (as they were), a lot of ordinary folks were getting seriously brassed off. And the unions' campaign played that tune to perfection.

Now think of middle New Zealand, boxed in by the drift into the 39-cent tax bracket, the cost of the mortgage, petrol prices, soaring rates and utilities bills, and feeling that the Working for Families money goes to the other fellow. Is there a large bloc of Kiwis fuming, as the Aussies did, that they can't 'get ahead'? Hmmm? For a Kiwi politician, package that resentment (as Rudd did), or deal to it (as Howard failed to), and you'll win the 2008 election.

What sort of economy is Rudd inheriting? It's in good nick. The latest consensus forecasts have it growing 4.3% this year and 3.7% the next, which is some 1.5% a year faster than we're likely to manage. On the plus side, that makes it a solid market for our exporters. On the downside, the income gap, which is already a good part of the reason why 40,000 Kiwis leave permanently for Oz each year, is going to get a bit wider again.

And it will keep widening beyond that if we don't do something about our rates of investment compared with Australia's. As previous columns have reported, we could close most of the income gap with Australia if our workforce had the same amount of gear to work with as the Aussies do. Now, the Aussie statisticians have this wonderful survey that asks businesses how much they plan to spend on new capital equipment and structures: it's both accurate (especially as they keep asking during the year, so the 'forecast' and the 'actual' start coming together) and highly informative. And they've just released the latest results.

On present showings, the Aussies will be increasing their already impressive capital investment by a further 20%. And yes, of course the mining boom is part of that (the miners will be upping their spend by 38%) but it's the smaller part (about a third of overall capital investment). Aussie investment, outside manufacturing, where it's relatively weak, is, in short, going gangbusters. We don't have the same figures for projected investment in New Zealand, but it's safe to say the Aussie increase is umpteen times the piddling increase we'll put in the window. So the income gap will widen even more as a result. Keep this up, and the 40,000 exodus is going to accelerate. And we'll all be taking more interest in the Aussie elections - because we'll be living there.

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