Jim Chalmers rips up Paul Keating’s economic playbook

“No credible economist or economic institution, including my old department Treasury, believes this, but naive politicians have fallen for it again under the guise of net-zero industry policy.”

Chalmers insists the business centrepiece of Tuesday’s budget, a Future Made in Australia, is not a “repudiation” of the past economic models.

Instead, he says, it recognises that the world has changed and the past “is not necessarily the right economic orthodoxy for the big turning points”.

“I genuinely believe in some of those people who I greatly admire from the 80s and 90s ... the vast achievements of those incredible performing governments under Bob and Paul,” Chalmers says in response to The Australian Financial Review asking about mainstream economists criticising the government’s ditching of conventional economics.

“But we have to recognise that the world moves on, and we need to move with it. Because if we get stuck in the past, this country will be poorer. It will be more vulnerable.”

The world is changing, as it always is, but the old rules of economics still apply.

Keating the exception for Labor

Labor’s shift to the left on economics has been a quarter of a century in the making.

Keating was the exception for Labor, not the rule. Economic rationalists are rarely sighted in modern Labor. Economic “rationalist” is now a term of derision inside the party. But what’s the alternative? Economically “irrational”?

Chalmers’ old bosses, Kim Beazley and Wayne Swan, buried Keating’s approach to economics after his election loss to John Howard in 1996.

Albanese, Chalmers and Industry Minister Ed Husic will sit around the cabinet table choosing what green energy, manufacturing and technology projects are worthy of government backing – under the guise of the energy transition, supply chain resilience, national security and sovereignty.

Chalmers insists the budget will put a premium on “responsibility and restraint”.

The evidence is conflicting.

Breathtakingly, Labor has slated $1 billion (that’s $1,000,000,000) for domestic solar panel manufacturing.

The current head of the Productivity Commission, Danielle Wood, and four previous heads of the commission all agree Australia has no hope of being competitive making solar panels. Labor’s spending will risk taxpayer money and drain labour and capital away from more productive uses.

It’s a recipe for weaker productivity, higher inflation and lower real incomes.

Albanese dismissed one of his critics, Gary Banks, as a “flat earther”.

Yet even progressive economist John Quiggin, and Hawke’s former economic adviser, Rod Sims, have voiced concerns about the risks of a Future Made In Australia.

Chalmers, to his credit, has been more respectful than Albanese and has deliberately avoided personal fights with his critics.

Perhaps he has learned a valuable lesson from voters rejecting Labor’s “top end of town” rhetoric in the 2019 election, which he and leader Bill Shorten embraced with gusto.

The federal government has committed up to $470 million on a single quantum computing company, PsiQuantum, without a transparent process about exactly what the government has signed on to.

Queensland state Labor has matched it with a further $470 million, for a total public sector injection of $940 million in debt, grants and potential equity if milestones are met.

The Albanese government’s actions demonstrate Labor’s lack of regard for orthodox economics and mainstream economists.

Modern Labor has become more interventionist and redistributionist.

In past decades, strong treasurers and an economically rational Treasury would have blocked the Future Made in Australia agenda, price caps on gas, and re-regulation of the labour market that takes the rigidities of the workplace system back to the pre-Keating era.

Today, there is little evidence of much internal resistance to Labor’s economic adventurism.

There are no economists on Labor’s expenditure review committee and virtually none have serious business experience.

Albanese has an economics degree, but was a member of the University of Sydney’s anti-orthodox political economy faction.

Wasted economic talent

Four of Labor’s most qualified economic figures are languishing on the backbench, or on the fringes of the frontbench.

Andrew Charlton, a former adviser to Kevin Rudd, has an economics PhD from the University of Oxford, was a manager at Wesfarmers, and founded economic consultancy AlphaBeta, which he sold to Accenture.

Daniel Mulino has an economics PhD from the US Ivy League institution, Yale University. Previously a Victorian state MP, Mulino was a junior state treasury minister before switching to federal politics. Mulino has a written a serious book, Safety Net: The Future of Welfare in Australia, that argues that applying an insurance mindset to the social welfare safety net would deliver participants better outcomes and more value for taxpayers.

Canberra-based Labor MP Alicia Payne has an economics degree and worked for a decade at federal Treasury and the National Centre for Social and Economic Modelling.

Another Labor MP from Canberra, Andrew Leigh, is an economist with a PhD from the prestigious Harvard University. Leigh is Assistant Minister for Competition, Charities and Treasury. He is below Chalmers and Assistant Treasurer Stephen Jones in the Treasury pecking order.

Chalmers has political and practical experience in economic policy. He worked as a media and political adviser to treasurer Swan for five years until 2013, working closely with the Treasury led by the respected Ken Henry. One long-time Canberra observer says: “I don’t care that Jim doesn’t have an economics degree, but he doesn’t show much respect for the discipline.”

Essay revealed Chalmers thinking

Chalmers began articulating his views in a 6000-word essay for The Monthly, entitled Capitalism after the Crises, in January last year.

He unveiled a grand vision to revamp the nation’s long-standing market-based economic model, attacking “neoliberalism” and urging business to co-invest with government to deliver “values-based capitalism”.

Embracing left-wing Italian economist Mariana Mazzucato, Chalmers said markets were a positive and powerful tool, but had been poorly designed.

He criticised the “negative form of supply-side economics” prescribed by traditional economic institutions, including the International Monetary Fund and World Bank.

The philosophical assessment came just weeks after the Albanese government’s intervention in the gas market to cap wholesale prices and the extension of multi-employer bargaining in workplaces.

The government would “build a better capitalism” more aligned with Australian values and building more resilience against economic and geopolitical shocks, he wrote.

Chalmers is seeking business, investor and superannuation fund support to work more closely with the government on areas beyond clean energy and housing, to include the “social purpose” areas of aged care, education and disability.

“We will employ this co-investment model in more areas of the economy,” Chalmers noted.

“The private sector is key and central to sustainable growth, and there’s a genuine appetite among so many forward-looking businesspeople and investors for something more aligned with their values, and our national goals.”

It’s a very different approach to Keating, who freed up capital markets by floating the dollar, removing foreign exchange controls, liberalising the banking sector and privatising government enterprises.

Keating’s answer was to deregulate to let the market provide the money to projects and for government get out of the way.

Keating knew politicians and bureaucrats allocating money to pet projects would misallocate resources and risk taxpayer funds.

He privatised and established the National Electricity Market to get government out of power markets.

Modern Labor is doing the opposite.

The Albanese government has embraced government banks, including the $15 billion National Reconstruction Fund and $20 billion Rewiring the Nation vehicle to upgrade transmission infrastructure for renewables.

A nation of rent seekers

The blame for shifting away from a market-driven economic model should be widely shared.

The Liberals, Greens and big business are partly to blame.

The Rudd-Gillard Labor government attempted to deal with the challenge of climate change and the energy transition in an economically rational way.

A price on carbon emissions, attempted by Rudd and finalised by Gillard after a messy leadership change, would have largely left emissions reduction and energy transition decisions to the private sector.

Instead of green industrial policy that entrenches government picking winners, a carbon price allows businesses in the market try to fund the lowest cost way to reduce emissions.

Crucially, the revenue raised was to be used to compensate households by reducing income taxes and boosting government transfer payments. It could have financed other lower taxes via broader tax reform.

But Tony Abbott and big business, including miners, tore down the carbon tax, and the Greens blocked Rudd’s earlier carbon pollution reduction scheme.

Instead, Australia will become a nation of rent seekers trawling parliament and lobbying ministers for special favours, blowing billions of dollars on green-energy boondoggles.

The Snowy Hydro 2.0 pumped hydro project initiated by the Turnbull Coalition government has already jumped in cost from an initial $2 billion to $12 billion.

It could be just the tip of the iceberg.

To reach net zero emissions by 2050 and shut off all coal-fired power, Australia will need to build the equivalent of 50 Snowy Hydro schemes, according to the Energy Security Board. Or seven times the capacity of the National Electricity Market that has been built over the past 24 years.

There will be many more cost blowouts and project failures to follow, exposing taxpayers to unprecedented risks.

And whatever the long-term case is or isn’t for nuclear power, without a carbon price the Coalition will also need to bet billions of dollars of taxpayer money on the baseload energy source.

As former Treasury secretary Ken Henry said last week, if Australia still had a simple carbon price and a mining super profits tax, there would no need to go down the slippery slope of a costly green industrial policy and to prop up uncompetitive manufacturing.

Chalmers worked for Swan and still wears the scars of the mining tax and carbon tax fights, which ultimately contributed to the infighting and downfall of the Rudd-Gillard government.

Fifteen years later, he’s backing a more interventionist approach to strive for net zero to try to make Australia a wind and solar superpower, while offering incentives to private capital to exploit Australia’s critical minerals such as lithium, cobalt and nickel that are crucial for building electric vehicles and wind turbines.

“We have been dealt the most incredible cards as a country,” Chalmers says. “And if we don’t play those cards, that would be an egregious breach of our generational responsibilities.”

It’s a very different era to the time of Keating and the then finance minister Peter Walsh.

Taxation revenue this year will go close or exceed the former Coalition government’s 23.9 per cent of tax-to-GDP cap.

Spending will be elevated at around 26 per cent of GDP over the next few years, with few signs the government has taken serious steps to rein in the National Disability Insurance Scheme, which threatens to flow out from an-already inflated $42 billion to $125 billion per year over a decade.

Keating and Walsh cut bloated government spending from 27.6 per cent of GDP in 1984-85 to 22.9 per cent of GDP in 1989-90.

In today’s dollars, the almost-5 percentage points of GDP cut in spending is the equivalent of more than $100 billion a year of spending cuts, phased in over five years.

Chalmers ridicules “scorched earth” spending cuts that the Labor base won’t stomach and would be political cannon fodder for the Greens eyeing inner-city Labor seats.

His public break with Keating-nomics perhaps shouldn’t be a surprise.

Chalmers studied his PhD in politics on Paul Keating, Brawler statesman: Paul Keating and prime ministerial leadership in Australia.

Tellingly, the thesis focused much more on Keating’s wielding of political power as prime minister between 1991 and 1996, and less on his eight-year economic policy performance as treasurer.