Imagine it's November 25 and, if the polls are accurate, we can assume that Kevin Rudd is prime minister-elect . We can surmise what will be foremost in his mind. After more than a decade in opposition, the central focus will be how to win the 2010 election. This will guide every action of the Labor Party under Rudd.
Labor knows that the greatest risk to a second term is an uncontrollable wages explosion. They remember that wage induced inflation destroyed the Whitlam government. Fraser tried to tame the wages beast but it beat him, too. Hawke implemented the Accord as his cornerstone policy plank to contain wages and was largely successful. Keating was caught because the Accord model had run its course and massive interest rates were needed to keep inflation in check.
Rudd's biggest first-term risk is a new wages explosion that would ignite inflation. The Reserve Bank of Australia would seek to pre-empt this by raising interest rates and dampening the economy. Higher interest rates would trigger a crisis in the mortgage-belt electorates. As a 2010 election, loomed an emboldened Liberal Party would stare at the electorate saying, "We told you so!"
Adding to the risk is that the economy is primed for a wages explosion like never before. On the demand side, the figures are breathtaking.
For example, current and planned government and private, non-mining infrastructure spending touches $300 billion. In mining there is about $30 billion in new mines under development with $110 billion in the planning and approvals stages. The figures keep expanding.
The mining industry alone predicts it needs 76,000 additional workers to operate 110 new projects and has no labour estimates for 130 projects. This does not take into account mine construction requirements, which are enormous. The fastest growth will be over the next four years.
In the past five years the workforce in the housing and construction sector rose to more than 1 million. Further growth is locked in. Other sectors tell similar stories.
The labour supply side issue is equally confronting. Unemployment should drop below 4 per cent. Last year about 160,000 new entrants came into the labour market. By 2012 that figure will have dropped to 50,000 and continue to decline. Over the next five years, Australia will be short 300,000 new job entrants when compared with existing numbers. In addition the great wave of baby boomer retirements will crunch over the next five years.
Australia is entering a period of totally uncharted economic challenge. Political vision will determine success or otherwise.
The Howard/Costello team has guided Australia into this situation, which could be described as "economic success on a knife edge". Over the past 12 years, the building of an economic boom without wages or inflation breakout is the stand-out feature. But the challenge of the next five years dwarfs the past 12. There is no room for policy error.
Assuming that PM-elect Rudd has breakfast with his key advisers on November 25, they'll have some fundamentals to contemplate. During 2007 they've made light of Howard and Costello's economic success, alleging the government has lucked out with the mining boom. Labor's done that as a political "put down".
Publicly, they refuse to give any reasons for the extended wages and inflation containment. But if they truly believe their own political spin, they may be sowing the seeds for their potential 2010 election loss.
Howard and Costello have done what Whitlam, Fraser and Keating failed to do, sustaining economic growth without wages or inflation break-outs. They must have discovered some policy keys to success. It would be foolish to pretend that rolling labour reform is not central to the success.
The reforms are an integrated package. They include allowing individual contracts to compete with enterprise arrangements, freeing small business from unfair dismissals, releasing independent contractors from industrial relations, breaking lawless mafia-like behaviour in construction and so on. They have significantly shifted labour law principles away from the "workers' rights" perspective. Their alternate vision focuses on the practical realities of labour arrangements in competitive business settings.
But Labor's tradition is to accept the "rights" perspective as a given. It has traditionally blinded Labor to the negative economic outcomes of labour law that ignores microeconomic fundamentals. Fraser was equally blinded. But if Rudd's team rejects the Howard/Costello "magic" formula, they'll need a stunning alternative if they want political longevity.
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