Austerity Test Looms as Abbott Pledges Cuts in Slowing Australia

Austerity Test Looms as Abbott Pledges Cuts in Slowing Australia

Tony Abbott as health minister gave an “iron-clad” guarantee not to reduce government assistance for medical bills before the 2004 election. Soon after the vote, he buckled when the Cabinet dumped his pledge as too costly. Nine years later, as front-runner heading into Australia’s Sept. 7 election, Abbott’s policy resolve soon may be challenged again, this time across the world’s 12th biggest economy. His Liberal-National coalition’s plan to cut taxes and red tape, outlined in a telephone interview yesterday, will run up against 11-year high unemployment and record sovereign debt.“Politically, it’s always good to do the cutting at the beginning of a government,” said Bob Gregory, a professor at Australian National University in Canberra and central bank board member from 1985 to 1995. “But unfortunately the timing of this is really bad because it will be happening as the economy is starting to slip.”

The global austerity debate is playing out locally as two decades of growth are threatened by China’s slowing and the resulting cooling of Australia’s mining-investment boom. Abbott and Prime Minister Kevin Rudd, both 55, have embraced similar policies on issues including education, disability care and immigration, leaving economic management as the defining difference.

Whether Abbott as prime minister proves to be an economic rationalist committed to smaller government or a policy pragmatist prepared to ditch ideology as needed could define the nature of his government, should polls prove accurate.

Economic Divide

The coalition leads Labor 53 percent to 47 percent on a two-party preferred basis, according to a Newspoll published in the Australian newspaper Aug. 26, which factors in preference votes. The swing to the opposition from the 2010 election — if uniform across the nation — would deliver about 12 additional seats, giving it 84 in the 150-member parliament.

While “wary of tags,” Abbott said yesterday he’s a pragmatist who believes values must be tested in the real world.

“I have described myself as a pragmatist, but I’ve talked about pragmatism based on values,” Abbott said in the interview from Melbourne. “I’ve described myself as a conservative incrementalist. The free market has been the best engine for generating wealth that mankind has yet devised. It’s possible to think that we have to be pragmatic and at the same time be a strong supporter of markets.”

The coalition has promised to abolish Labor’s carbon and mining levies and lower the business-tax rate while funding a A$5.5 billion ($4.9 billion) per year maternity-leave program. It plans to reduce the civil service by at least 12,000 positions, lower subsidies for automakers and cancel handouts to parents of school children.

Recession Warning

Rudd says Abbott’s cutbacks could tip Australia into recession. Labor has promised additional assistance for the nation’s floundering car industry, proposed a lower tax zone for northern Australia and a high-speed rail network linking Australia’s most populous cities.

The Treasury said Aug. 13 the budget deficit will widen as growth slows and unemployment rises to 6.25 percent by mid next year, from 5.7 percent in July. Government debt will peak at A$370 billion in April 2016, the Treasury projected.

Australia’s 2013-14 deficit will amount to 1.9 percent of gross domestic product, according to the Treasury. That compares with a U.S. deficit equivalent to 5.4 percent of the economy in 2014, Japan’s shortfall of 7 percent and the euro area’s gap of 2.6 percent of GDP in the period, according to the International Monetary Fund’s fiscal monitor in April.

Surplus Pledge

The coalition has pledged a budget surplus equal to 1 percent of GDP within a decade.

John Hewson, who led the Liberal party from 1990 to 1994 and employed Abbott as a media adviser at the time, said the coalition leader “will be more on the austerity end of the spectrum” and expects he’ll stick to his policy proposals.

Abbott has shown “discipline, not a flighty capacity to bounce some issues and make policy on the run,” Hewson said. “I think it’s that discipline that will probably be his defining characteristic.”

The lack of wealth flowing from the mining boom to Australia’s eastern seaboard and impact of the currency’s sustained strength on service and manufacturing companies there has led to rising job insecurity. Abbott has sought to tap that malaise with pledges he would return to the type of policies advocated during former Prime Minister John Howard’s “Golden Age” of 1996 to 2007.

Mining Boom

In its final six years, Howard’s coalition recorded budget surpluses totaling A$81.6 billion as the nation’s mining boom gathered pace. The Labor government’s six consecutive deficits total A$221.8 billion for the period encompassing the collapse of Lehman Brothers Holdings Inc. and global recession. Australia was alone among major developed economies in avoiding recession as Rudd delivered a A$42 billion stimulus package of cash handouts, building programs and homebuyer incentives.

The government has turned its inherited surplus “into deficits stretching out as far as the eye can see,” Abbott said in Brisbane on Aug. 25, starting the party’s formal election campaign. “We can’t afford another three years like the last six.”

It was in his time in Howard’s Cabinet that Abbott, a practicing Catholic, made his back-down on the threshold at which government assistance for medical bills kicked in.

Political Cohesion

“I had to decide what was more important, the repudiation of my statement before the election or the continued political cohesion of the government,” he said in July 2007, according to the Sydney Morning Herald. “I concluded that, given there was nothing intrinsically wrong with the change in policy except that it made me look like a goose, for me to resign would be a dummy spit rather than a statement of principle.”

The coalition’s parental leave plan, which offers a new parent earning less than A$150,000 as much as A$75,000 over six months, shows Abbott doesn’t follow Howard’s market-liberal stance, said Haydon Manning, a politics professor at Flinders University in Adelaide.

“The question ultimately, is the degree to which he will ruffle the feathers of the economic rationalist members of his cabinet and party room,” Manning said. “He’s come out of the notion of Catholic social justice, which of course is skeptical of full-blown markets and capitalism.”

Abbott stands to take office with the benchmark interest rate at 2.5 percent, the lowest on record. In minutes of this month’s meeting released in Sydney on Aug. 20, the Reserve Bank of Australia said the currency’s direction will be important in setting policy and signaled further rate cuts remain a possibility. The Australian dollar traded at about 89.20 cents in Sydney yesterday.

‘Work Choices’

One of the key differences between the typically pro-business coalition and union-affiliated Labor has historically been industrial relations. At the 2007 election, Labor campaigned against Howard’s “Work Choices” policy that scrapped some worker safeguards. Upon forming government, it legislated the “Fair Work Act,” which gave unions more power.

Executives including BHP Billiton Ltd. (BHP) Chairman Jacques Nasser say the policy has tilted too far in the favor of unions, causing cost blowouts on resources projects.

The coalition plans to re-establish a watchdog for the building industry, the Australian Building and Construction Commission, which could help overcome union resistance at projects like Chevron Corp. (CVX)’s A$52 billion Gorgon project.

Abbott hasn’t released full costings of his promises as he seeks to make himself a small target to keep voters’ attention on the government, a strategy followed by opposition leaders since Hewson’s 1993 campaign on tax reform backfired. Former ministerial colleagues including Peter Costello, the nation’s longest serving treasurer, have questioned Abbott’s resolve on policy areas such as workplace reform.

“The interesting issue is whether Abbott is really a right-wing conservative,” said ANU’s Gregory, who has studied the nation’s economy for almost half a century. “There is a view around that he’s a populist. That when it comes to the crunch, he’ll back off.”

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; Jason Scott in Canberra at jscott14@bloomberg.net