20 - Are The Liberal Party Really Better Economic Managers?

A 2019 Lowy Institute poll (opens new window) asked participants about the importance of democracy and found that only 65% of Australians (and 55% of those aged 18-29) believe that "democracy is preferable to any other kind of government". This low result predictably led to some pearl-clutching and fist-shaking from liberals, but should we really be so surprised? Many citizens feel that their vote doesn't matter and it turns out there is actually research to back this up. A 2014 article, Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens (opens new window), published by Cambridge University showed that "majorities of the American public actually have little influence over the policies our government adopts." While the Australian system is not identical to the US one, we do see a similar disenfranchisement at play here. On the issue of climate change for example, a recent poll (opens new window) found that 84% of Australians want climate action, but instead our lawmakers have provided a decade of neglect and in 2014 the repeal (yes really) of a price on carbon. There are presumably many factors that have led to this state of affairs, but perhaps one innocuous explanation could simply be that modern society (and by extension public policy) is so complex now that on any given issue it's increasingly difficult to come to informed positions, even for domain experts. Perhaps I'm being unfair, but I can't image the Ancient Greek voters in their prototypical democracy contending with matters as impenetrable as dividend imputation credits or carbon capture and storage.

Image by Nathan Saad.

What does any of this have to do with economic management? Well one of the upshots of this voter apathy is an increased focus on the dark arts of public relations by political parties. Branding is everything and one of the most enduring and pervasive narratives in Australian politics has been that the Liberal party is better at managing the economy than Labor, but is there actually any evidence to back this up?

# Measuring Economic Management

Answering this question is not simple. For starters, the Australian economy is a dynamic system full of unpredictable agents (people) interacting and behaving in complicated ways. No single metric can truly capture economic performance and in reality governments need to balance a number of concerns including unemployment, inflation, growth and the budget. Another difficulty is that it's hard to attribute economic outcomes to specific parties. For example if we were to see a sharp drop in unemployment, a simple reading might be to give credit to the party of the day (something they would surely advocate) but perhaps the policies of previous governments were also a factor. Unpicking this causal web is impossible and so for the purposes of this article I will split the analysis into short-term and long-term management of the economy.

I am also going to coldly ignore any questions of morality in this analysis. While governments may at times decide to implement a loss-making policy because it is the "right thing to do", I am only going to focus on economic outcomes. As an aside, the financial implications of these "right thing to do" policies are often far better than you might assume (especially if you get your news from a Murdoch source). By way of example, some governments around the world (including the Netherlands and Utah) have sought to end homelessness by providing unconditional housing as a human right. Many of these programs have actually resulted in a windfall for governments as the relatively low costs of housing are balanced out, and in some cases exceeded, by the substantial savings in social services, hospitalisations, policing and jail time.

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# Short-Term

To measure short-term economic management I will use Gross Domestic Product Per Capita (GDPPC) as a metric. GDPPC is simply the value of all goods and services produced by a country in a given year divided by the population and is a reasonably good proxy for economic growth. Now GDP is not an uncontroversial metric. For one thing it tells you nothing about the inequality in an economy and additionally there is some contention about what should and shouldn't be included in the calculation. In fact the inventor of this metric Simon Kuznets actually argued that the military, advertising and financial industries should be ignored but we include them nonetheless. With that said, GDP is still a pretty good measure of how an economy is doing and crucially it is the predominant metric that politicians use to grade themselves. I have chosen to use GDP Per Capita rather than the more commonly reported GDP since I believe it better captures the economic impact on constituents. To put it crudely, there isn't much point "growing the pie" by 5% if the pie needs to be divided by 10% more people.

# Growth in GDP Per Capita

In the chart below we can see the annual percentage change in GDPPC (compared to the previous period) through the following governments:

Labor: Gough Whitlam (1973 - 1975)
Liberal: Malcolm Fraser (1975 - 1983)
Labor: Bob Hawke / Paul Keating (1983 - 1996)
Liberal: John Howard (1996 - 2007)
Labor: Kevin Rudd / Julia Gillard (2007 - 2013)
Liberal: Tony Abbott / Malcolm Turnbull / Scott Morrison (2013 - Present)

If viewing on a phone this plot may look better in landscape mode

The change in GDPPC is quite noisy and we can see large swings from year to year. Overall we find that the average growth in GDPPC in years where the Liberal party is in government is 5.40% compared to 5.05% for Labor. In years where there is a change in government, I have assigned the GDPPC value for that year to the party that is leaving office (which I think is reasonable since there will always be a delay between an election result and the implementation of economic policies). For example the Liberal Party won government back from Labor on the 18th of September 2013, but I have attributed the GDPPC result for that year to the Labor party. In the next chart we can see the average growth in GDPPC by government. Interestingly, the Whitlam Labor government has the best record with 10% growth which is more than double the much praised Howard government. It is also noteworthy that the current Liberal government has the worst record of all, performing even more poorly than the GFC-affected economy of the Rudd-Gillard years. Please note that the GDPPC result for the current government does not include 2020 and therefore doesn't reflect the COVID-19 economic crisis.

If viewing on a phone this plot may look better in landscape mode

On these numbers I would argue that it is a toss up between the two parties in terms of economic management. The Liberal party has a slightly higher average GDPPC score but given the volatility in the data this difference in negligible.

The problem with this initial analysis is that it doesn't take into account the substantial global factors that affect our economy. For example, the government of the day can't really be held responsible for economic downturns due to foreign wars and likewise can't entirely take credit for increased demand for our exports due to infrastructure booms in other countries. In the next section we will try to normalise for these global trends.

# Normalised Growth in GDP Per Capita

It is often said that when the US sneezes, Australia catches a cold and so in this section I will use US GDP Per Capita to account for global impacts on our economy. Rather than using the raw Australian GDPPC we will instead look at the difference between the change in Australian GDPPC and the change in US GDPPC. Intuitively we can think of this as a measure of how our economy is doing relative to the rest of the world and therefore it should provide a better picture of local economic management.

If viewing on a phone this plot may look better in landscape mode

On average, GDPPC has grown beyond the US rate by 0.33% under Labor governments while the figure for the Liberal party is -0.24%. That is, the Labor party has outperformed the US in terms of economic management while we have gone backwards under the Liberal party. In the plot below we can see that the two best performing periods of relative growth since 1973 have been under the Labor governments of Rudd-Gillard and Whitlam respectively.

If viewing on a phone this plot may look better in landscape mode

This analysis clearly shows that the Labor party has a superior record in terms of normalised GDPPC and, as outlined above, this metric provides a more accurate picture of the impact of local government policies since it corrects for global trends. There isn't room to include all of my analysis here but I'll just say that these results were pretty robust. I tried making the following changes and saw minimal impact on results:

Swapping GDPPC for GDP
Adjusting the delay between a government taking office and attributing economic results
Normalising GDPPC by the OECD average instead of the US value

# Long-Term

Assessing long-term economic performance is much more difficult. As mentioned previously, it is practically impossible to untangle decades of policy and definitively link specific governmental decisions to economic outcomes. With that said, when I think of forward-thinking programs that are widely praised by Australians, most of them have been implemented by Labor governments.

# Medicare

The Whitlam Labor government was the first to provide public healthcare to all Australians under a scheme called "Medibank" in 1975. The subsequent Fraser Liberal government then went about drastically cutting and eventually abolishing the program before (in 1984) Bob Hawke's Labor reinstated the original model under the name "Medicare". The economics of Medicare are too complex to explore in this article but consistent polling has shown that the system is very popular even with Coalition voters. Medicare was also well ahead of its time, especially when you consider that the US still doesn't have universal health care almost 50 years after Whitlam first introduced the scheme.

# Higher Education Contribution Scheme (HECS)

Whitlam famously abolished university fees in the 1970s but it was the Hawke Labor government who set up the HECS system. These programs have dramatically increased the availability of tertiary education to all Australians. Again it is hard to estimate the exact impact of this investment in human capital, but higher education is widely regarded as a key driver of economic growth.

# Superannuation Guarantee

The Melbourne Mercer Global Pension Index (MMGPI) scores 37 countries in terms of the adequacy, sustainability and integrity of their retirement income systems. In 2019, Australia ranked 3rd behind the Netherlands and Denmark, and is consistently in the top 3. The Keating Labor government introduced compulsory employer contributions in 1992 in a move to protect the country from a projected retirement income crisis due to an ageing population.

# National Broadband Network (NBN)

Another example of the Liberal party's inability to think beyond a three year election cycle is the NBN. While I would caution against praising Labor too much for their initial NBN plan of "Fibre to the Premises" (since they weren't in government long enough to roll it out), the Coalition scoffed at the "gold-plated" Labor plan and instead implemented a copper and HFC mix. We currently have the fourth slowest and the least affordable internet in the OECD and only this month, the Coalition have announced a $4.5 billion investment to finally provide the infrastructure Labor promised back in 2009. Again, it's hard to quantify the cost of slow internet but the productivity loss in this country will no doubt have been substantial. You can't expect to have Silicon Valley style growth when our country's internet is slower than Kenya's.

Obviously I can't explore every long-term project this country has implemented in this article and it's fair to say that neither party's record is perfect. For one thing, both Liberal and Labor governments have let us down with regards to climate policy. Credit should also be given to the Howard Liberal government for legislating the GST which is reasonably well-regarded to this day. With that said, and keeping in mind the complexity of policy impacts, I believe on long-term management of the economy Labor have a far stronger record.

# Conclusion

It turns out there isn't a lot of evidence to support the Liberal party's claim that they are better economic managers than Labor. While Labor have implemented most of the big ticket economic policies since the 1970s, they have done so while maintaining stronger short-term economic growth than their Coalition counterparts. Of course there are many different ways to measure economic success and declaring one party the "winner" is reductive, but one area where the Coalition are clearly superior is in political branding. Despite their unimpressive record, according to polling by The Australia Institute last year, (opens new window) 44% of Australians believe that the Coalition are the better economic managers, compared to 30% for Labor. The current Abbott-Turnbull-Morrison Liberal government arguably has the worst economic record since the 1970s with the lowest GDPPC growth of this period, a much-derided roll out of the NBN, no progress (arguably negative) on climate policy and an obsession with austerity measures based in antiquated economic thought, yet they have won the last three elections and are on track to win a fourth, all while campaigning with slogans about how Labor can't be trusted with the economy...

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