Shouts from the desert

John Howard has claimed that the economy has become too complex for Labor to manage, which invites an analysis into how and why the Liberal Government has performed so well on the economy since 1996. While Howard boosters attribute it to some Midas touch on the part of Howard, the truth is far more mundane.

When we look at the Prime Minister's record, there are four major factors that have helped the economy along, and one of those &emdash; rapid growth in China leading to a resource boom &emdash; has nothing whatsoever to do with Government action.

The three remaining factors are these: maintenance of a budget surplus so as to pay down the national debt; the GST; and the introduction of the 50% Capital Gains Tax discount for long term assets. None of these occured until the second term of the Howard Government.

The first term of the Howard Government was less than stellar. They reduced the budget deficit somewhat, but still had not managed to turn that into a surplus. Much of the economic performance during that period was attributable to built-in momentum from the previous Government, with the start of the tech boom &emdash; driven by the United States &emdash; contributing.

In the second term the Howard Government delivered a triple whammy to assist the economy. The tech boom was in full flight, but the Howard Government brought the budget into surplus, introduced the GST, and encouraged investment by introducing the 50% discount for long term capital gains.

It was no great secret that the burden of past defecits was hurting us - you just had to look at the last Labor budget to see that 30% of our taxes were going into paying off Government debt. That was obviously unsustainable, and virtually everybody knew that the debt needed to be eliminated so that the Government could afford to do things other than paying off debt. There is no special Howard magic in this move.

The GST was also no Howard miracle &emdash; economists had been saying for well over a decade that the wholesale sales tax was a drain on the economy and it should be replaced with a GST. Paul Keating knew of this, which is why he tried to introduce the GST himself, but he was overruled by the unions. The economist support for a GST was unsurprising - the old system had literally thousands of categories, and everything that was being sold had to be slotted into one. Figuring out which category to use was no simple task - many things would even be eligible for more than one so after narrowing the few thousand down you would have to figure out which of the several matches was really the right one. The officials implementing the system often got it wrong, which led to costly appeals and overpayment of tax. After identifying the category for an item the wholesaler's systems and procedures had to be adjusted to deal with the individual tax rate for each item. A lot of the money in the system was being flushed down the toilet on administrative overheads. The GST solved that.

Labor could not introduce a GST even though its leadership knew the GST was necessary, so at the time it took a Liberal Government to do what was plainly needed. It did not have to be a Howard Government &emdash; even a mentally disadvantaged Government led by Alexander Downer could have figured this one out.

Finally there was the 50% discount for long term capital gains. This came out of a recommendation in the Ralph report. Note it was not called the "Howard" report. While the Ralph report was set the task of setting out a road map for tax cuts for business and investment, this was long standing Liberal Party policy and was not attributable to Howard on his own.

Since then Howard has had no more tricks up his sleeves to boost the economy - he has been fortunate that China has been booming, which has underpinned growth in recent years, but as far as economic management is concerned he is a three-trick pony, and none of the tricks is unique to Howard.

This is why, in 2004, I was comfortable with the idea of Costello becoming PM - because "Howard's" successes are really the successes of conservative fiscal policy that would have been achieved at the time with any Liberal Prime Minister.

Given this, there is no reason for Howard to claim the economy is too complex for Rudd to manage. Firstly Rudd is by all reports an impressively intelligent person. Secondly, Rudd has committed to maintaining the budget surplus - this was always Labor's weak point since Labor has previously been more susceptible to the temptation of running deficits. Thirdly, the successes of the Liberal Government are not a result of some amazing economic management prowess, but are the result of sticking to some fairly basic conservative economic principles that Labor has now picked up on.

I do not believe that Labor holds any real economic risk this year, much as Howard would like voters to believe otherwise.