Government | Regulation

"Tony Abbott will be the next Prime Minister"

The Prime Minister does deserve enormous credit for all of this [reform], but...if she loses the next election that credit will slip away as well because Tony Abbott will unwind it.


With Labor leadership tension the topic on everyone's lips, CEDA had two of Australia's renowned political journalists to discuss Australia's current political arena and challenges.

Sky News, Political Editor, David Speers and Winthrop Professor of Journalism, University of Western Australia and Contributing Editor, The Australian, Peter van Onselen spoke of the Labor leadership tensions.

"The one thing I am pretty confident of is that the Prime Minister is stuffed," and "Tony Abbott will be the Prime Minister no matter what happens," said Professor van Onselen.

"My sense is that she is finished, whether at the hand of the electorate- if she holds on against Kevin Rudd, or whether it is at the hands of Kevin Rudd...or a third candidate," he said.

"The Prime Minister does deserve enormous credit for all of this [reform], but...if she loses the next election that credit will slip away as well because Tony Abbott will unwind it."

Professor van Onselen questioned whether Kevin Rudd could support a comeback, even if he made it to the top office.

"However, if Gillard were to win another election, that would be the worst outcome for Kevin Rudd because it consigns him to the dustbin of history."

Professor van Onselen said that the PM "needs him [Rudd] numerically to be able to maintain her minority status, yet he needs her to fail for his legacy to be achieved and justified."

"He doesn't want to have to take Julia Gillard out the way that she took him out, because doing so turns him, partially, into the villain," he said.

On the liberal side of politics, Mr Speers said Abbott would continue to use the carbon tax as a political tool at any opportunity like the Qantas and Alcoa job cuts, even if it's not the cause.

But Professor van Onselen was concerned about: "What do we get, if I'm right and Tony Abbott wins the next election?"

"I think we get a potentially average, to say the least, conservative regime running the country," he said.

"The Liberals could become a 'do nothing' government if they were to win," and Labour, with internal conflicts, would be a weak opposition."

With the continued leadership speculation, Mr Speers said it would be hard for the government to focus on reform.

"They need to break out of this ongoing spiral on the Labor leadership and that, at the moment, is their biggest challenge," he said.

Deloitte Access Economics Partner, Professor Ian Harper and HSBC Australia Limited, Chief Economist, Paul Bloxham provided an overview of the international and domestic economic outlook.

Professor Harper said that the global economy is growing but below trend. The world is focussed on the three engines of growth: Europe, Asia and the US.

Although "it isn't all bleak within Europe" the Eurozone is forecast to have a mild recession in 2012, Professor Harper said.

He outlined economic possibilities for the Eurozone including a long and deep recession to rebalance economies and implement reform.

According to IMF forecasts, all regions including advanced economies, emerging and developing countries, and the Australian economy are expected to dip from 2011 levels in 2012 and pick up again in 2013.

On the Eurozone he said: "It is difficult to see how the Eurozone crisis can be resolved quickly."

"What we're observing are the symptoms of a more fundamental structural problem."

For Germany, the Eurozone crisis presents a dilemma. They cannot simply "let the weak ones go" because it would cost not only their economy but their political stability, he said.

"So when people say that the Germans should finance the rest of Europe out of this problem, they have a point. It isn't just that the German's are the richest, it is that the German's are actually benefiting from the system with the way it is operating," Professor Harper said.

"The Germans are amassing a substantial current account surplus, German unemployment is falling. The German economy is doing very well."

Deloite Access Economics are predicting growth to be stronger for Australia in the second half of the year with growth of 3-3.5 per cent for the calendar year 2012, he said.

"At DAE we don't see unemployment rising above 5.2, 5.3 per cent in the foreseeable future.

"So we don't see any weakening of jobs growth, we do see reductions in hours, which of course, will also help to keep unemployment from rising.

"Given our [Australia's] reliance as a current account deficit country on foreign capital inflow, it made life quite difficult for our banks."

He said these avenues have been restricted or cut off, leading to a big retreat in the domestic markets, leaving big banks to "hoover up" available deposits.

"One thing we have not really seen grip us yet, is the crisis in the markets for credit that will be faced by small and medium enterprises [SME's]."

Professor Harper suggests SMEs who need money should be building relationships with their banks now as "transactional banking is dead, relational banking is back with vengeance."

HSBC Bank Australia Limited, Chief Economist, Paul Bloxham predicts Australia's luck will continue in 2012.

Currently, there are $232b worth of mining projects (already in advanced stages), which is 15 per cent of what the Australian economy produces in a year. The mining boom is something we have never seen before in scale.

However, he said at the other end of the spectrum the strong Australian dollar has not only had a negative effect on manufacturing, but also tourism and retail in Australia. We had a decreased number of visitors in December. In addition Australian's are heading overseas with their money and not buying locally.

By the end of the year, Mr Bloxham predicted we will start to see the exchange rate effect wear off as businesses inevitably adjust to the exchange rate changes.

On productivity, he said we haven't noticed the productivity decline because we've had a continued rise in commodity prices, which has been boosting our incomes.

"However we cannot continue to grow our economy in the medium term if we don't have growth in productivity," he said.

"We think commodity prices peaked late last year, and so it will become more noticeable this year that we haven't got that productivity growth supporting growth."

Keynote speaker and Bank of Melbourne, Chief Executive, Scott Tanner said: "What remains in Europe is the risk of a sharp contraction, with the likelihood of a replay of Japan's lost decade and the potential risks to the global economy from that."

He said a key lesson from the global financial crisis is that debt matters, and it matters in both the banking and public sector.

"A resolution of the crisis will require the makings of a strong and stable banking system in all economies," he said.

Our challenge in Australia is how to deliver strong and sustainable growth, a strong and stable banking system with cooperation between governments, banks, and businesses and maintaining low inflation, he said.

On Victoria, Mr Tanner said it was a critical time for Victoria with a reduction of the share of GST to the tune of over $500m per annum. In addition, Victoria would also see a reduction in their take of payroll, stamp duty, and other taxes.

Interestingly, Mr Tanner also said that despite national unemployment remaining low, Victoria's unemployment rate is higher than the rest of the nation.

Chairman, Productivity Commission, Gary Banks AO said that per capita income has not suffered from the productivity slowdown. However, productivity is the mainstay of rising living standards and there is a sense of crisis and urgency to address Australia's declining productivity.

In order to improve productivity, Mr Banks said that innovation is better than government assistance, but it's design is crucial.

"The best Government assistance is to reduce regulatory burden and constraints" to allow companies to compete he said.

Mr Banks said he is united with EPO contributor Saul Eslake and others in seeing an imperative for reform going forward to enhance productivity in the future, given the strong policy reform drivers behind the rise of productivity in the 90s.

The drop off in productivity has been outweighed by a terms of trade boom he said.

"This has been described as masking the productivity drop-off, and that's true, but in a profound sense the terms of trade boom have partly caused it. There have been structural and indeed compositional shifts responding," he said.

"The boom, while it's not a bubble, looks like it is going to be here for a while to come. But we're unlikely to see an ongoing increase in the terms of trade that we have experienced in recent times, even if it stays high."

We can expect to see some recovery in measured productivity as things stabilize and output catches up however, we should not be complacent because we still have the challenges of ageing, sustainability and globalisation he said.

A key to the big reform in the past was having both incentives to be more productive as well as flexibility and capability to be able to respond to these incentives he said.



Extract of Saul Eslake's contribution to CEDA's 2012 EPO publication as published in the Financial Review, 17 February 2012.

Media release

EPO publication summary