The truth about how much politicians can ‘manage’ the economy

Public servants – discharging the wishes of the government of the day under our Westminster system – used to get quite involved in the setting of interest rates, currencies and various other prices in the economy.

After decades of hard-won reforms, however, today these decisions are, by and large, outsourced to either independent agencies or free markets. And that’s a very good thing. Can you imagine the pressure on politicians not to raise interest rates when needed? Indeed.

Governments do, of course, retain responsibility for managing public finances and for taking the tax and spending decisions which do affect individual lives.

But even here, politicians possess very little power over the budget bottom line. Governments can, of course, legislate to increase or decrease tax rates or benefit levels. But ultimately many other factors, such as pandemics, financial crises, commodity prices and the rate of joblessness determine the base of company profits or wages on which tax rates are applied and the need for spending on welfare such as jobless payments. You’ll have noticed by now that budgets frequently defy political promises to be “in surplus” at any particular point in time.

As for budget management during times of crisis, Australia has achieved a more recent bipartisan consensus that it is, indeed, the job of governments to step in and stimulate. Labor did it during the global financial crisis. The Coalition has just done it during the pandemic.

Voters can now be fairly confident that any future government of whichever political stripe will, if confronted with a future economic shock, respond broadly in line with advice from Treasury on the appropriate size and shape of the stimulus program required.

Again, that’s a good thing, folks.

So, on a day-to-day and even year-to-year horizon, it’s not immediately clear that your decision at the ballot box will make much difference to how our economy is “managed”.

That’s not to say, however, that politicians can’t make decisions which affect economy. Over the longer term, they certainly do.

Politicians might not directly create jobs, set prices or entirely control the budget bottom line, but they do play an important role in tinkering with the incentives individuals face as they navigate their daily lives.

The shape and size of our tax system, for example, heavily influences the decisions individuals make about whether and how much to work. So, too, does the level of subsidy applied to childcare – particularly for women.

Public spending on education and skills also help influence the rate of “human capital accumulation” in the economy, which in turn heavily influences how productive we are as a nation.

Tax exemptions on differing forms of investment, such as investment properties, superannuation and direct share ownership, influence how much and where we invest our money.

The eagle-eyed among you will recognise what I’m talking about here is “microeconomic” policies – policies which alter the incentives individuals face. Such policies are separate to the big levers of budget and interest rate policies which comprise “macroeconomic” policy.

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Every galah in the pet store used to squawk about micro economic reforms, as former prime minister Paul Keating once memorably put it.

Today, the silence on the micro-economic reform front is deafening, and potentially stultifying for the future of our economy, whichever party wins power.

Australians deserve welfare-enhancing public goods and services, paid for via a tax system which does the least amount of damage to incentives to work and invest in socially productive assets.

Instead, we often get taxpayer money spent on projects for which the benefits do not exceed the costs and a tax system which too heavily penalises the returns from individual work effort and encourages excessive investment in some asset classes (like shelter).

Neither political party is promising much during this election campaign which will make a meaningful difference to these economic dilemmas. And we’ll all end up poorer for it.

Jacqueline Maley cuts through the noise of the federal election campaign with news, views and expert analysis. Sign up to our Australia Votes 2022 newsletter here.