Another election is on in Australia, and the topic du jour – the political topic du century it seems – is that, horror of horrors, the government’s budget next year will be in deficit to the tune of $30 billion! It’s a scandal! Our debt is ballooning! And it’s all Labor’s fault! Why, all you have to do is look at the responsible Howard period – falling debt – and compare it to the irresponsible Labor period – rising debt – and you know who to vote for, don’t you?
Figure 1: From the responsible Howard to the irresponsible Rudd?
Or maybe not. Here is exactly the same data, but now plotted with Australia’s private debt level. In case you can’t see it, government debt is the little squiggly red line at the bottom of Figure 2.
Figure 2: Howard rode a private debt bubble and Rudd didn't
Politics is so easy when you can play the game without context. Without context, it’s a no-brainer: the Liberals are better at managing Australia’s finances than Labor. With context, it’s a sideshow: you might as well vote for a meerkat or a leopard to run the country: luck – and quick tricks rather than wisdom – have been far more important than economic wisdom in crafting the apparent economic legacies of our leaders.
Howard was lucky to take over from Keating at a time when private borrowing had recovered from the 1990s recession and was growing gangbusters; Rudd was unfortunate to take over from Howard at almost the instant that the private debt party came to an end (see Figure 3).
Figure 3: Who you gonna call? Neither of them...
Drill down further still and the question of which party is better at managing the economy starts to sound like asking which witchdoctor would be better at managing the first manned flight to Mars. Howard was lucky to take over from Keating when the recovery in business borrowing had peaked. He then kept the credit gravy train running by conjuring a revival in household borrowing in 2001 by first re-introducing and then doubling the First Home Vendors Grant.
Then luck intervened as the business sector moved into full Ponzi mode (remember the leveraged buyout craze, with its last hurrah being the aborted buyout of Qantas?), more than making up for a decline in household debt growth from 2004 on (see Figure 4).
Luck is the last word you’d use to describe Rudd’s timing – unless prefaced by the word “bad”. Household borrowing had been heading south for four years by the time he took office; virtually on the day he did, business borrowing tanked as well.
Figure 4: Business debt decline begins precisely when Rudd takes office
You might almost imagine that the business sector went on a borrowing strike because of Rudd’s election – until you notice that business borrowing peaked in the US slightly before either Rudd or Obama were elected. Both allegedly left-of-centre politicians had the misfortune to assume the reins of power just as the biggest private debt bubble in history began to burst (see Figure 5).
Figure 5: And it's coincidence rather than causation
Rudd did conjure up one witchdoctor’s spell that made our economic performance appear less dire than America’s. Throwing the trusty First Home Vendors’ Boost talisman into the fire, the decline in household debt growth was arrested and Australia avoided outright deleveraging (see Figure 6).
Figure 6: Household borrowing kept Australia bubbling along during the GFC
So what does this tell us about whether Rudd or Abbott would be a better economic manager? That the question is irrelevant.