Have Labor and more importantly Treasurer Wayne Swan lost the plot?

The title is probably a little harsh, but my mate Wayne Swan is not really inspiring any confidence in me and to be honest I’m not sure the other mob are any better. Mind you the idea of Malcolm Turnbull as Treasurer (should the Coalition get power) is somewhat appealing as at least he knows how to run a business.

The issue for the Labor Party is that is has: One, used the wrong tools to massage the economy; Two, lied to the Australian public about introducing a Carbon Tax, Three, gone to extreme lengths to control the House of Representatives and lost the trust of the Australian Public as a result.

However with the release of the 2012-13 Budget, I thought I would address point one above as my knowledge extends to this domain and others can deal with the political impacts. Economics is based on the distribution of Supply and Demand and without going into excessive detail on economic theory, there are different schools of thought that exist. (Similar to religion if one was to draw a parallel, i.e. every religion believes there is a higher authority/entity but the difference lies in the detail.)

In a nutshell, Wayne Swan comes across as a Keynesian Economist, although like all politicians is influenced by the electorate. Wikipedia basically describes Keynesian Economists as:

“Advocates of Keynesian economics argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, particularly monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.

Keynesian economics advocates a mixed economy — predominantly private sector, but with a significant role of government and public sector.”

Keynesian economic theory leans towards running budget deficits when the economy is in recession or a downturn and running budget surpluses in times of prosperity. There is another factor of interest on Government Debt which I have not addressed here, but is important in the current economic climate.

Factors providing growth to the economy are Consumption, Government Spending, Investment and Exports (through providing income) and Factors limiting growth are Taxes, Savings and Imports. Generally the multiplier effect of a $1 spent on consumption is not as effective as $1 spent on investment or Government Spending (if the spending is on infrastructure).

This is where I believe that the current government misread the electorate/Australian economy. When the original $900 was given to taxpayers under Kevin Rudd’s government (Swan was Treasurer) the expectation was that the Australian public would spend all of it and kickstart the economy through consumption. However most people either saved this money or paid off credit card debt both of which have negative impacts on economic growth according to Keynesian theory.

This money would have been better spent on infrastructure projects that were needed for the economy and may have resulted in job creation, or kept some companies in business etc, etc.

Similarly taxing the mining companies a greater amount causes problems, as then they charge more for their product which reduces profit margins for supplier industries, who in turn charge more for their products to cover costs, etc. A carbon tax has the same result, although I think the idea of a carbon tax is valid, we need to look at timing of implementation so that the economy does not suffer as a whole.

Changes to the health insurance rebate system may result in more people on the public health system. This may cause waiting lists to grow, which in turn causes problems. The better way would be for the government to encourage people to move into the Private Health system so as to place less strain on the health system.

Lastly, giving money to parents to spend on education needs for their children is targeted incorrectly as the money should be spent on improving education delivery. This will have a much longer impact on education standards and more importantly the nation’s children are better educated.

This last measure appears to be more of a political exercise rather than an economic one. This practice is not new to Australian politics and both major parties have played this game. The more courageous move to make would be to do what is correct for the economy and the nation which may earn the respect of the people !!

So Wayne Swan has really misread (and mislead) the public with the way the 2012-13 Budget is constructed and failed the leadership test when it comes to decision making. But the other side are also yet to prove that they are a better alternative!!