Unfortunately it looks like Andrew Leigh has fallen into bad company. He was singing a duet with Craig Emerson in the Parliament this afternoon:
It is a pleasure to rise today to speak on an important issue of economic management. When we talk about the importance of good budget management it is important to remember one simple fact: if the tax-to-GDP ratio today were the same as it had been under the Howard government then the budget would be strongly in surplus.
Dr Emerson: By more than $20 billion.
Dr LEIGH: By more than $20 billion, I am informed by the minister. But if the tax-to-GDP ratio under the Howard government had been what it is today then many of their budgets would have been in deficit. That is a simple fact which those opposite cannot deny.
Of course they can deny that – if the private economy was as strong now as it was during the Howard era the government would be collecting a lot more tax revenue. If the private economy was as weak then as it is now, the Howard government would’ve collected less tax revenue. But there’s the thing – it is not by accident that the private economy is weak now. It is almost entirely due the the mismanagement of the current government.
We have had a few bits of history being disinterred over recent times—we have just discovered where Richard III is buried. And thanks to an IMF report we have discovered a little bit about past budget practices in Australia. An IMF report released in January examined 200 years of government financial records across 55 leading economies. It identified two periods of fiscal profligacy in recent years. When were those periods? Well, if you listened to those opposite, you would be led to think that it was under the current government. But in fact that is not what the IMF found. The IMF found that those two periods of fiscal profligacy were under John Howard’s term in office in 2003 and during his final years in office from 2005 to 2007.
This is a discredited application of an otherwise interesting IMF study.
We discussed the paper here at the Cat on January 11.
So long story short: The IMF study finds in one out of three tests that the later Howard era spending was profligate. In that test the post-Howard era is specifically excluded from the analysis. The IMF itself describes that particular test as:
…somewhat less standard, it has greater flexibility to capture sudden changes in behavior and influential observations in opposite directions in close proximity to each other.
But it does fit in with our expectations – so I suspect it is over-weighted as being important. In fact the result in table 12 is weak – it isn’t confirmed in any of the other tests or in table 13.
A few days later Henry Ergas shredded the ALP interpretation of that paper in the Australian.
Indeed, that test gives many bizarre results. For example, it not only finds Italian governments to be consistent models of fiscal rectitude, but also singles out 2002-05 as years of fiscal prudence in Britain, even though that was when the Labour government’s budget deficit blew out of control.
Precisely because of the difficulties of placing much weight on any such measure, the paper provides a table that combines its tests – and which does not identify any fiscal imprudence in the Howard years.
The interpretation that the IMF study was given in the Fairfax press and ABC is wrong and misleading.
Andrew Leigh should know all that – he is smart and he is good at econometrics. So what is the story?
My take is as follows: The ALP have locked themselves into an attack on the opposition’s track record in office. We saw that over the weekend with Craig Emerson’s efforts and then today with Andrew Leigh. I’m not convinced this is a good strategy. Every time the ALP talk about the economy and the Howard government voters experience cognitive dissonance; they have happy memories of that period, yet the ALP are telling them they are better off now than then. Really? Well look at some of the policy advice they get. Andrew Leigh quotes analysis by Stephen Koukoulas on budget cuts going back to the Fraser (who?) era.
Here is Stephen Koukoulas (former Senior Economic Advisor to Julia Gillard) telling people they have never had it so good:
In the past year, electricity prices have risen 17.7 per cent of which about 10 per cent was due to carbon. This is a big rise. That said, the household expenditure weights used by the Australian Bureau of Statistics show that electricity accounts for just 2.5 per cent of the average household expenditure on the basket of goods and services that make up the CPI.
Electricity is, therefore, a small part of the average household budget.
In terms of some comparisons for where an average household spends its money, purchases of tobacco make up 2.5 per cent of average household consumption, the same as electricity. Spending on meals out and take away foods accounts for 5.5 per cent; alcohol 4.8 per cent; rent 6.9 per cent; petrol 3.5 per cent and holidays and accommodation 4.9 per cent.
So quit yer belly-aching. Just to make sure he doubles down:
Think about it. The average household spends as much on tobacco as electricity and spends more than twice that amount on takeaway food and restaurant meals.
So the ALP (and their advisers) are not serious about the economy. They make dodgy claims, misrepresent IMF studies, and dismiss concerns about the cost of living and especially electricity as the grumblings of malcontents (who probably smoke too much).
(HT: Noodle – who was frantically texting me to watch Andrew’s speech on APAC).