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National Observer Home > No. 68 -Autumn 2006 > Articles

The Howard/Costello Decade

by John Stone

National Observer
(Council for the National Interest, Melbourne),
No. 68, Autumn 2006,
pages 12–20.

 

In March this year, the Howard Government completed 10 years in office. I have many criticisms of its performance during that time, and there are many areas today where it seems to be in danger of taking its eye off the ball. Nevertheless, if we look back upon the economic record of that period, the conclusion is inescapable to all but the Government’s most bitter critics that Australia’s situation today (say, end-2005) is hugely better than it was 10 years earlier. In arriving at that judgment, I look first at some macro-economic aggregates before turning to more qualitative ones.

 

Macro measures

Over that 10-year period, Australia’s real gross domestic product (GDP) 1 rose by 43.2 per cent, from $607.9 billion in calendar 1995 to $870.2 billion in calendar 2005. Since our resident population over the same period grew by 12.5 per cent, real GDP per head therefore increased by 27.3 per cent.

Arithmetically speaking, the growth of real GDP is a product of the growth in numbers employed and the growth in productivity of those persons — “productivity” itself being, of course, a function not so much of working harder as of working “smarter”, and doing so with more capital equipment per employee.

Total employment in Australia over the decade grew by 1,691,000, or 20.3 per cent, comprising growth of 865,000 (13.8 per cent) in numbers of full-time employees and 826,000 (40.0 per cent) in numbers of part-time employees. The faster rise in the part-time workforce has meant that the average productivity level per worker has grown less fast than it would have done had the full-time/part-time composition of the workforce remained unchanged. But that is only another way of saying that, with the greater flexibility of the labour market resulting from both the 1993 Keating/Brereton workplace relations reforms and the 1996 Howard/Reith/Kernot reforms, more people have been able to find jobs suited to their requirements.

This rise in total employment has not merely been a result of finding jobs for a growing workforce. It has also resulted from reducing the high level of unemployment that the Government inherited from its Labor predecessors. The unemployment ratio, which stood at 8.1 per cent of the workforce (seasonally adjusted) in December 1995, had fallen to 5.1 per cent in December 2005.

Averages, of course, cannot tell the whole story, and the fact that real GDP per head rose by 27.3 per cent over the past 10 years does not mean that every person’s real income rose by that proportion. Nevertheless, when a rise of that magnitude occurs in the average real income tide, it does tend to lift all, or almost all, individual boats.

As it happens, the rise in real GDP per head over the decade understates, in practice, the extent to which average real incomes have risen. This is because there has been, over that decade, a significant improvement in Australia’s international terms of trade (the ratio of the prices at which we sell our exports to the prices we have to pay for our imports). Because gross domestic product measures the volume of goods and services produced domestically, it takes no account of the fact that some of those goods and services are exchanged internationally for other goods and services that we import. So, if the price of those exported products rises relative to the price of products imported in exchange, we can buy more imports with them and are “better off” nationally than the mere GDP growth figures would imply. Over the 10-year period we are looking at, that has been occurring to a degree large enough to make a real difference.

Between end-1995 and end-2005 Australia’s terms of trade improved by 42 per cent. Export prices rose by 38 per cent, while import prices actually fell slightly. At the risk of over-simplification, both sides of that phenomenon may be seen as largely due to the “China effect”. Not only was the rise and rise of the Chinese economy, and the resulting rising demand for our raw materials, responsible for much of the improvement in our export prices, but the surging performance of Chinese manufactured exports was also important in holding down prices of our imports. So far as can reasonably be judged, this “China effect” does not seem likely to decline appreciably over the years immediately ahead; and added to it now is the prospect of an “India effect” that, in my opinion, may prove even more significant in the longer run.

Of course, this terms-of-trade enhancement of our own national productive performance is not primarily something for which the policies of the Howard Government are responsible (which doesn’t mean that it won’t try to claim the credit). Rather, it is mainly that Government’s good fortune to have been in office at the right time. Many years earlier, Mr Howard said (over-optimistically at that time, as things turned out) that he thought “the times would suit him”. Now, in the form of this terms-of-trade effect, they certainly have. Still, his Government’s continued progress towards the more open economy for which the Hawke/Keating Governments had set our course has certainly contributed.

To repeat, this terms-of-trade effect has been sufficient to make a real difference. The real purchasing power of income generated by domestic production (that is, as noted, real GDP adjusted for the terms of trade) is known to the statisticians as the real gross domestic income. In 1995, real gross domestic income was $587.7 billion, rising to $895.5 billion in 2005. Thus, while (as noted earlier) real GDP rose over the decade by 43.2 per cent, real gross domestic income (the more significant measure of national wellbeing) rose by 52.4 per cent. Or, in per capita terms, whereas real GDP per head rose over the decade by 27.3 per cent, real gross domestic income per head rose by 35.4 per cent — some 30 per cent more.

Another way of examining what has been happening to the income component of national wellbeing is to look at the growth of average weekly earnings (adjusted for inflation) over the period. This is not to suggest that people’s money incomes are the only factor in their wellbeing — other factors, some of which I shall come to below, are also important — but as someone has no doubt said, a rise in one’s money income may not be everything, but it sure as hell beats the alternative.

During the period end-1995 to end-2005, average weekly earnings (full-time adult male ordinary time earnings) rose by 54.1 per cent in current dollar terms. If we deflate that figure by the rise in the consumer price index (CPI) over the same period (27.1 per cent), real average weekly earnings therefore rose by 21.2 per cent over the decade. Over the previous decade, and on the same basis, they had hardly risen at all (by only 2.8 per cent). Clearly, on this basis at least, what the former Leader of the federal Opposition, Mr Mark Latham, called “the aspirational classes” have been seeing at least some of their aspirations realised under the Howard Government, and to a significantly greater degree than under its predecessors.

Note that I have used, as my average weekly earnings measure, the figures for ordinary time earnings (that is, excluding overtime and penalty rates) for adult males employed full-time. The corresponding comparisons for the rise in real average total earnings of adult males employed full-time are very similar — 19.5 per cent for the 1995-2005 decade and only 3.0 per cent for the 1985-1995 decade. Alternatively, real average total earnings of all employed persons (male and female, full-time and part-time) grew by 14.5 per cent over the 1995-2005 decade, whereas over the preceding decade they had fallen by 4.4 percent — reflecting, in both cases, the compositional shift towards a growing proportion of lower paid part-time workers.

An alternative to looking at the growth in per capita real incomes, or real average weekly earnings, is to look at the change in people’s real living standards, as reflected in the growth of household consumption. Over the decade of the Howard Government, the volume of household consumption expenditure on goods and services per head of population has risen by 30.6 per cent — that is, a little faster than the rate of growth of real GDP per head, but less than the rate of growth of per capita real gross domestic income. Over the preceding decade, the same indicator rose by only 16.9 per cent. It would be surprising if this marked rise in real living standards had gone unremarked by those enjoying it — particularly when compared with the corresponding experience during the preceding 10 years of the Hawke/Keating Governments. Whether or not Australians today are more “relaxed”, they are undoubtedly more “comfortable” than they were when Mr Howard, in his 1996 federal election television debate with Mr Keating, uttered his famous ambition for them in those regards.

In much the same vein, one of the most long-standing aspirations of most Australians over the years has been to acquire their own homes, or at least begin to do so. The level of interest rates has therefore always been a matter to which they have paid close, and at times painful, attention.

At end-1995, the 90-day bank bill rate was 7.43 per cent. By end-2005, it had fallen to 5.69 per cent. Moreover, not only did the general level of interest rates fall over the period, but also the growing intensity of competition in Australia’s financial sector has meant that lending margins on home loans have shrunk appreciably. Both factors will undoubtedly have contributed to improving many Australians’ sense of wellbeing over the decade.

In contrast to that undoubted improvement, it is a matter of opinion whether the general rise in house (and other dwelling) prices over recent years has made Australians feel “better off”. Those who already own, or are in the process of owning, their own homes may well do so. Those who do not, but who may have entertained the hope of doing so, are more likely to have felt disheartened as they have watched the fulfilment of their hopes recede. The Prime Minister was no doubt right when he said, some years ago, that he had never met anyone who complained to him about the rise in the price of his or her house; but that probably implied that he chiefly meets people who already own their own homes or are in process of doing so.

By the same token, it might be said that only the better-off among us would have felt an improved sense of wellbeing from the fact that the stock market (S&P/ASX200 index) soared by no less than 116 per cent over the decade. Nevertheless, the fact is that today a majority of Australians own shares either directly, or indirectly in the form of their superannuation accounts. The former will certainly have felt richer. As for the latter, while it is probably true that many people in the workforce do not trouble to keep track of the progress of their personal superannuation entitlements, those who do so will also have felt some sense of greater wellbeing as their account balances have risen.

Those of a more pessimistic frame of mind, or those (in the media and elsewhere) who are simply determined to seek out sticks with which to beat John Howard and his government, might suggest that all this good fortune has not been without its price (or several prices). One such “price” to which, from time to time, such observers point is the large deficit which, today, Australia is sustaining on the current account of its international balance of payments. This means, they will say, that year after year Australians have been piling up foreign indebtedness, or selling off our assets to foreigners, so that we may continue to enjoy our newly hedonistic lifestyles. So let us examine such claims.

It is true that in 2005 our current account deficit totalled $55.1 billion (6.0 per cent of GDP), whereas in 1995 it had totalled only $26.0 billion, or 5.2 per cent of GDP. It is also true that, whereas at end-1995, Australia’s net foreign liabilities (government and private, debt and equity) totalled only $270.2 billion, by end-2005 that figure had doubled to $560.2 billion. As a percentage of GDP (the better measure), net foreign liabilities rose over the decade from 53.9 per cent to 61.2 per cent. On the face of it, therefore, the critics might seem to have a point — large or small, depending upon your viewpoint.

Let us, however, dig a little deeper. A nation sustains a deficit in the current account of its balance of payments when its level of domestic investment (in dwellings, office buildings, infrastructure or plant and equipment employed by its industries) exceeds the level of its domestic savings (whether by households, governments or the corporate sector). Over the 1995-2005 period, there have been significant changes in a number of these components.

On the savings side, the most notable change has been the government sector’s move from deficit into surplus. The “Beazley black hole” that the Howard Government inherited in its budget has been eliminated, and replaced with a surplus (an unnecessarily large one, in fact, but that is another story). State government finances, too, are in relatively good shape. As a proportion of GDP, corporate savings (gross operating surplus of corporations) have risen. Household saving, by contrast, has steadily declined, to the point where it is now negative.

On the investment side of the equation, public authority investment has declined slightly over the period, mainly because of the privatisation of a number of former public authorities, whose investment therefore now appears in the private investment figures. By contrast, private gross fixed capital formation (investment in dwellings, non-dwelling construction and plant and equipment) has risen sharply, from 16.6 per cent of GDP in 1995 to 22.9 per cent in 2005. As a result, total fixed investment (private and public) climbed from 20.7 per cent of GDP in 1995 to 26.7 per cent in 2005.

Viewed from this aspect, the rise in Australia’s net foreign liabilities over the decade should evoke little surprise and, really, not much concern. We have been increasing our capital stock much faster than we were doing 10 years ago, and in the process have exceeded our national saving performance — as we have been doing in almost every year since Federation. True, household saving performance did deteriorate considerably over the decade, which is disappointing, and would raise more significant questions were it to continue and be prolonged. But for the time being at least, this situation seems to fit another of the Prime Minister’s aphorisms, as one about which we should be “alert but not alarmed”.

Another such “price” to which many of Mr Howard’s most prejudiced critics often point is what they call “the growth of inequality” in our community. This is one of the oldest, and in my opinion shabbiest, arguments in such critics’ books.

I recall first encountering this argument in about 1969, in a different context, when the Pearson Report on international aid bewailed the growing “gap” between the per capita incomes of the developed countries and those of the then developing countries. As Executive Director for Australia at the time on the Executive Board of the World Bank (which had commissioned Pearson’s report), I argued that it was not this “gap” that was important, but whether or not per capita incomes in the developing countries were themselves rising. In other words, were the people in those countries becoming better off? In fact, most of them were (black Africa being the most conspicuous exception). Today, of course, most of the countries then described as “developing” (again, black Africa excepted) have advanced considerably in real living standards, some of them (South Korea, Singapore, Mexico, etc.) to the point where they are now no longer classified as such.

In the same way, to bewail the rise in real incomes of those at the lower end of the income scale because of a “growing inequality” between their incomes and those at the upper end is sheer nonsense. What is important to those in the former category is whether they are themselves “getting ahead”, not whether the Joneses are getting ahead even faster. Arguments to the contrary are simply the product of the lowest form of politics of envy.

As it happens, the pace of social welfare spending by the Howard Government (much of it poorly directed, but that too is another story) has been so great that the real incomes of those at the lower end of the income scale have actually risen fasterthan those at the upper end. (Of course, since that larger proportional rise applies to a much lower absolute level, the much bewailed “gap” has indeed risen). It therefore really boils down to this. If you are of an envious disposition, you will have felt unhappy at seeing others in the community doing even better (in absolute terms) than yourself. But if you are a normally sensible, non-envious Australian, you will have been giving thanks for the significant real improvement you have experienced in your own personal lot.

 

Qualitative measures

Increasing affluence provides Australians with a greater variety of options as to how they may choose to spend their lives. Governments may have a hand in the former, but their influence upon the latter is much more limited. To take an obvious example, the fact that higher incomes now allow many more people to eat out does not necessarily mean that they eat more healthily. The same is true of their now affordable higher calorific intake, which even casual observation suggests is leading to a growing level of obesity. Similarly, growing personal wealth may not be unrelated, at least in some cases, to a growth in marriage breakdown, with its resulting division of increased partnership assets. However, while it is proper to note such issues, any extensive exploration of them would take us far beyond the scope of this article.

In recent years, the Australian Bureau of Statistics has begun to publish a useful compendium of statistics on all manner of “quality of life” topics. The latest issue, Australian Social Trends 2005, contains a wealth of such material, from which it is possible here to select only a few examples of qualitative change since 1995. 2

Take, to begin with, the matter of public health. This is a topic on which the almost daily media complaints might lead us to think that Australia is failing badly. A few figures may demonstrate how silly such a view would be.

In the eight years 1995-2003, male life expectancy at birth has risen from 75.5 years to 77.8 years. One important reason for this is that the infant mortality rate has fallen by around 15 per cent during that time. Another reason is that male deaths from lung cancer have fallen over the period from 64 (per 100,000 of the age-standardised population) to only 49 — an improvement of almost 25 per cent. (The rate for women, although much lower than for men, has unfortunately not improved over the period). More generally, the (standardised) death rate for the population as a whole has declined from 7.8 per 1,000 to only 6.4 — an 18 per cent improvement.

In particular, the death rates for all the major killers — cancer, heart disease and strokes — have all fallen over the period, dramatically so in the case of heart disease and strokes. The percentage declines are, respectively, 10 per cent, 35 per cent and 28 per cent — major changes in such a short period. Even deaths from suicide, tragic though each of them is, were on the decline. Among the most vulnerable category (males aged 15-24 years), the death rate from suicide has declined from 25 (per 100,000) in 1995 to 18 in 2003. This outcome has been closely related, I suggest, to the marked improvement during that period in unemployment, to which the suicide statistics have long been closely linked. Another much remarked cause of death, namely motor vehicle traffic accidents, has also fallen, from 11 to 8 (per 100,000) over the period.

One option to which a growing level of affluence gives access is better education. It should not therefore surprise us to see that, over the nine years 1995-2004, there was a continuing steady decline in the proportion of school students attending government schools, from 71.0 per cent in 1995 to 67.5 per cent in 2004. Growing affluence, combined with growing dissatisfaction with the product offered by State teachers’ unions and State education departments, is resulting in a steady growth of private schooling notwithstanding the often very considerable financial sacrifice involved for parents.

In many cases, too, it is now no longer as necessary as it once was for young people to leave school early to ease the financial strain upon their parents. Among 15-19 year-olds, 76.2 per cent were in the educational system in 2004, compared with 73.9 per cent in 1995. More strikingly, among 20-24 year-olds the education participation rate rose from 28.0 per cent in 1995 to 37.7 per cent in 2004. During that period the number of apprentices and trainees also rose from 139,000 to 395,000. Of all persons aged 25-64, the proportion having non-school (that is, higher) educational qualifications rose from 46.4 per cent in 1995 to 57.5 per cent in 2004. True, not all the degrees, diplomas, etc involved are of equal merit, but the general level of education does seem to have been rising.

So far, so encouraging. Not all such indicators, however, are so comforting. When one considers data relating to families, the picture is a good deal less cheerful. To take only one statistic in that area, of all families with children under 15, the proportion of lone-mother families among them rose from 16.6 per cent in 1995 to 20.3 per cent in 2004. Over that period, the proportion of children aged under 15 living in one-parent families rose from 16.4 per cent to 20.8 per cent. These and other such figures suggest that all is not well with Australian families. But since not even his most bitter critics would be able to succeed in painting John Howard as anti-family (remember that white picket fence as long ago as 1987?), this worrying situation can hardly be laid at his, or his government’s, door.

 

Conclusion

Readers must draw their own conclusions from surveys of the kind attempted in this article. My personal conclusion is that, criticisms notwithstanding, the first decade of the Howard Government has been a clearly favourable one for most Australians.

 

 

ENDNOTES:

1. Australian Bureau of Statistics estimates of growth in “real” GDP are constructed using its chain volume indexes (of prices, etc) based on the year 2003-04. They measure, in effect, growth in the “volume” of production of goods and services.

2. Because the statistics relating to many of these indicators only become available with significant lags, the periods covered are somewhat less than the full decade since the Howard Government’s election.

 

 

ABOUT THE AUTHOR:

John Stone is a former Secretary of the Australian Treasury and Senator, and is the Honorary Secretary of The Samuel Griffith Society.

 

 

National Observer No. 68 -Autumn 2006