Ignore the pain, talk up the gain

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The Age: Victoria’s economy: Ignore the pain, talk up the gain. November 17, 2014. Tim Colebatch Tim Colebatch is The Age’s former economic editor.

Since 2010, Victoria has added more than 400,000 people, or 2000 people a week.

When the economy is in trouble, the government is in trouble. Voters grow worried, anxious, and grumpy. Bills become difficult to pay; jobs become precarious. The state government doesn’t really run the state economy, but it claims to – so if voters feel insecure, they will kick it anyway.

Victoria’s economy is not doing well. It is growing but in low gear. Since the Coalition took power in 2010, key measures such as state final demand (total spending in the economy) show Victoria’s economic activity has grown less than its population.

The number of full-time jobs peaked in April 2011, and despite rapid population growth, has declined since. Part-time jobs have swollen but Bureau of Statistics surveys show they are mostly going to people who want a full-time job but can’t find one.

When the Coalition took office, Victoria’s unemployment rate was 5 per cent, one of the lowest in Australia. It is now 6.8 per cent, the worst of any state except Tasmania.

Manufacturing has been the main victim. The Bureau of Statistics reports that in the year to August, on average, Victoria had 23,000 fewer manufacturing jobs than in 2010. And more big job losses loom as the car industry folds.

Those in jobs are hurting, too. In 2013-14, on the bureau’s measures, wage growth in Victoria slumped to about 2.5 per cent, yet prices in Melbourne rose 3.2 per cent. The average wage is buying less.

Even with no carbon tax, electricity costs 34 per cent more than when the Coalition took office. Gas costs 31 per cent more. Victorians have coped by cutting back on other spending. Since the end of 2010, the bureau estimates, real growth in retail sales, and total spending by households, business and government have failed to match population growth. Living standards have edged down.

It’s not a catastrophic plunge into the abyss, except in car manufacturing. But we’ve had a long period in which consumers, business and governments have put off spending, leading to weak demand and few new jobs. Its main victims are the young, like Warrnambool teenager Arie Eddy, who applied for 780 jobs in 18 months, but was offered just one job interview, until The Age told his story in August.

The Napthine government could truthfully tell us Victoria’s malaise is not its fault. The mining boom pushed up the dollar to levels that made much Australian production uncompetitive. And those who really run the economy – the Reserve Bank, and federal government – have sat on their hands, rather than intervene to protect our competitiveness.

So producers have moved jobs overseas. Ford, Alcoa, Toyota, Holden and Qantas maintenance have closed their plants, or will soon do so. Thousands of lower-profile jobs have gone in many industries.

The Napthine government prefers to ignore the pain, and talk up any gain.

Treasurer Michael O’Brien points out that Treasury forecasts growth of 2.5 per cent this financial year, and 2.75 per cent from then on.

Premier Denis Napthine declares proudly that the state has added 90,000 jobs since the Coalition took office. That’s true, but only 12,000 are full-time jobs – and Victoria has added 320,000 adults in that time.

The government would happily talk about financial management, in which Victoria leads the nation. The budget for 2013-14 ended up with a surplus of almost $2 billion. Victoria is the only state government with unblemished AAA credit ratings from both Moody’s and Standard & Poor’s.

The recent Fairfax Ipsos poll found voters ambivalent about who to trust. They rate Labor as the better party to deliver job growth, by 48 per cent to 38 per cent. But they put Coalition far ahead as managers of the state’s finances, by 56 per cent to 29 per cent.

The Coalition plans to hammer this home in campaign ads, repeating the Kennett government’s tactic of attacking past Labor governments to depict Labor as “the guilty party”. Labor, in turn, attacks the government as lacking a vision for Victoria, and allowing jobs to collapse.

But the strength of the budget and the weakness of the economy are mirror images. The government has a solid budget surplus because it refused to relax its fiscal grip to create jobs. It does not run the Victorian economy but it is the biggest player in it, and it has chosen austerity.

The Coalition’s first three budgets increased spending by just 3.5 per cent a year. After inflation and population growth, that’s virtually no growth in real spending per head. Its latest budget update projects even more restraint if it is re-elected; spending would rise, on average, just 2.3 per cent a year.

It cut 4200 jobs but hasn’t slashed the public sector as the Kennett government did. It repeatedly set but failed to meet targets to deliver record infrastructure investment, which has shrunk from $6.6 billion to $5.5 billion since the peak of Labor’s stimulus. To escape further embarrassment, O’Brien has changed the definition to include investment by private sector partners on projects like the East West Link.

Victorians have got what they asked for. Before 2010, the Coalition promised to rein in spending and bring down the state’s debt. That was one reason they were elected. No one can complain that they have broken that promise.

The latest budget update predicts that net debt will peak next June at $22 billion, just 6 per cent of the state’s gross state product (GSP). The lease of the Port of Melbourne would cut the debt to $18 billion, after which it would grow by about $1 billion a year, and remain steady at 4.5 per cent of GSP.

The rewards of this fiscal virtue are a AAA credit rating, and low interest bills. The Treasury estimates that its average interest rate is 40 basis points lower than it would pay with a AA rating.

But austerity also has its costs. Most AAA-rated economies don’t need to borrow; they have low population growth, and few infrastructure needs. Victoria is very different.

The state entered 2000 with 4.7 million people. This time next year, on current trends, it will have more than 6 million.

Melbourne has added more than 1 million people in 15 years. It had 3.4 million people when the century began; within months, it will pass 4.5 million. No city in Australia has ever added so many people, so quickly.

Since 2000, the city’s population has grown by almost a third, but its infrastructure has not kept pace. Voters can see it on the roads, where cars move like snails in peak hour traffic; in the crowded trains, trams and buses; in the emergency wards of hospitals, even in some schoolyards.

Labor in government was slow to respond but in 2007, John Brumby decided he would borrow to build. His government produced a transport plan, and ramped up infrastructure spending from $2 billion a year to $5 billion; financing it by increased debt. But the voters saw the debt rising before they saw the infrastructure the government was building with it. Labor lost office.

The Coalition has struggled with the same problem. It has tried everything except borrowing: handing projects over to the private sector (East West Link), promising projects it hopes to build in 10 years’ time (the airport rail link), scaling back plans to cut costs (Melbourne Metro). But it is still not building on a scale to match the city’s growth, and public-private partnerships add to the state’s future liabilities just as debt does.

Meanwhile, the state’s population is soaring. Since 2010, Victoria has added more than 400,000 people, 2000 people a week. In 2012-13, 92 per cent of them made their home in Melbourne: on the urban fringe, from Wyndham Vale to Doreen and Cranbourne; in new apartment blocks mushrooming up in the city centre; or in a quiet “infill” revolution which is slowly filling the inner and middle suburbs with more people.

The differences between Labor and the Coalition are unclear. Both regard the AAA rating as a Holy Grail to be protected, so both accept similar budget disciplines. While the Coalition accuses Labor of fiscal recklessness in office, and Labor accuses the Coalition of fiscal meanness, so far, neither shows any desire to risk life outside the safety zone of fiscal rectitude left by the Kennett government.

Labor’s “Back to Work” policy promises 100,000 new jobs, which sounds a lot from spending just $1 billion over four years. It includes $500 million for “strategic investments”; a $200 million to expand firms outside Melbourne; $200 million to invest in six growth sectors such as medical technology, food and fibre, and international education; and $100 million in wage subsidies to re-employ retrenched workers and the long-term unemployed.

These are good ideas, but not that different from what the Coalition is doing, as when it invested $22 million to keep SPC-Ardmona alive. Government programs work only when they target money well – and both sides keep failing the tests of good governance.

Tim Colebatch is a former economics editor of The Age, and author of a recent biography of former premier Sir Rupert (Dick) Hamer.

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