Quotes of the Day

If life were fair, John "Boom-Boom" Howard and Peter "Put-It-on-Credit" Costello would one day get a monument honoring their services to consumerism, wealth accumulation and fat profits. Perhaps a statue at every shopping mall or a team portrait in real-estate agencies would do the trick. Or maybe the banks could issue platinum credit cards celebrating the Liberal Prime Minister and Treasurer's contribution to the Swipe-It culture. They've had some luck, no doubt, but Howard and Costello have taken taxing and spending to audacious new levels, pushed away the poor's support struts, and launched their chosen people into hyper-debt. Right now, as they would behave toward a croupier during a winning streak, Australians feel like they want to buy these two politicians a drink - or at least to stay at their table while they deal the winning cards.

"Who do you trust to keep the Australian economy strong and to protect family living standards?" Howard asked at the start of the election campaign. The answer has not been in doubt for a long time, given that the Labor alternatives have been miserable. According to a Newspoll published last week, 58% of those questioned said Howard was more capable of handling the Australian economy (Latham was preferred by 27%). Since the conservative government was elected in March 1996, the economy has grown by one-third. Unemployment has fallen from 8.5% to 5.7%. Mortgage rates have dropped from 10.5% to 6.5%. Inflation has been sleeping in a hammock, slung at a rate of 2-3%, for a decade. That's the good news.

But household indebtedness is at a record level. Consumers are paying a higher proportion of their income to service their borrowings (and thus are more vulnerable, as is the economy, to a fall in asset prices or a rise in interest rates). Under Howard and Costello, foreign debt has doubled to $A393 billion (equivalent to 50% of national output). No wonder voters think the cost of money is the marker for economic safe hands - they're geared to the back teeth, and interest rates will only have to rise by a few points to burn the most vulnerable. As soon as the economy cools, most households will renegotiate their consumer and home mortgage debts; those really pressed will experience a bit of belt tightening, or be forced to spend a few more years in the workforce, or even cut into their children's inheritance. The greedy, the stupid, and the plain poor will curse their misfortune - and they'll get no sympathy from those on the other side of the street.

Howard and his ministers have grown accustomed to taunting Labor about the high interest rates that choked the economy to a standstill at the start of the 1990s. That interest rates have stayed low, as they have internationally, is as much a matter of luck as prudent policy. But it's also the payoff for market reforms over two decades that have raised productivity in almost every part of the Australian economy. Beating down inflation and expectations of future price rises for goods, services and labor has been the country's most impressive economic achievement. In any case, an independent Reserve Bank is responsible for interest-rate policy and moderating the swings in economic activity. After seven Budget surpluses, during a time of buoyant revenues, Costello could have retired more debt and spent more on public investment that will sustain future growth - in infrastructure and human capital. Indeed, these surpluses have been slight exercises in prudence in an era of prosperity. Asset sales, such as the partial float of Telstra, have helped create the illusion of fiscal frugality. Other than two hard years of spending cuts to rein in Labor's excesses, Canberra has barely been squeezed. Compared with the hard, lean predators who dominated the Expenditure Review Committee in the Hawke-Keating years (1983-96), the incumbents are pussycats. On Sept. 10, the Commonwealth Treasury and Finance Department, under the charter of Budget honesty, released an up-to-date fiscal and economic outlook to assist the parties in making their election pitches and giving voters a true sense of current economic settings. Tax revenues are healthy, due to employment growth and company profits. The major parties may be tempted to send some of the cash surplus (expected to be $A25 billion over the four years to 2007-08) back to taxpayers to win key blocs of voters.

The legacy of the profligate Whitlam era (1972-75) and the wild ride of the Hawke-Keating years is that Latham will be forced to eat up much of this campaign pleading the case that Labor can be trusted with managing the money. Howard and Costello can continue spending taxpayer funds - outbidding Labor on health spending or tax cuts - and not carry the stain of profligacy. Appearing as a pale imitation of his former self, Latham signed a low-interest-rate guarantee a few days into the campaign. The stunt reeked of the forlorn Crean years and brought gleeful ridicule from the government. Who will have the discipline to make the central bank's job easier? The finance professionals believe that there's not much between the two sides. Futures traders are not expecting a significant rise in rates any time soon, regardless of who wins the election.

But Labor will be especially hard pressed in making a case to the comfortable majority of urbanites that things are crook, that the government has to go, and that only Labor will look after them. Perhaps Latham's toughest job will be getting the most comfortable Australians to believe that his "ladder of opportunity" won't be erected at their expense. Although it's probably too late for people to get their heads around it, Latham's family and tax policy, released on Sept. 7, has many worthwhile features - and several that are hard to fathom. There's a mix of tax bribes to middle-income families as well as tax and welfare reforms designed to provide greater incentives to work. "Rewarding Hard Work," as the package is called, is a reasonable embodiment of Latham's "get off your behind" philosophy regarding the low-paid and unemployed. It's in line with the ideas that have been kicking around in think tanks and universities (and in Latham's mind) for years, and if implemented, it's likely to change the welfare culture. Whoever wins the election, Latham has outlined the next phase in social policy. The question not being asked during this campaign is: Which party is best placed to improve the country's economic prospects over the long term? Issues such as interest rates and tax cuts - basically housekeeping and creative accounting - are easy for politicians. In a materially rich, "live now, pay later" culture, Australia's voters are not thinking too far ahead or demanding solutions to developing problems like the aging population, rising health-care costs, workforce skills, immigration, retirement savings and the like. Occasionally, prominent voices are heard. Treasury secretary Ken Henry has argued that meeting the fiscal needs of an aging population requires sustained productivty growth and increased workforce participation - basically, a high-growth road to close a forecast gap between revenue and spending in 2040. Reserve Bank chief Ian Macfarlane has warned that unless governments improve the quality of higher education and maintain a flexible economy, future generations could be burdened with higher taxes to meet the health and welfare costs of retiring baby boomers.

How does the Howard-Costello partnership measure up on these points? Is it looking beyond the three-year election cycle? Although some may grumble about the 10% goods and services tax introduced in 2000, it was a necessary adjustment and modernization of the tax system that required bureaucratic toil and a willingness to take political risks, but not great courage or imagination. Reforming wage bargaining and introducing user-pays for education and health across the board have been done gradually. A fairly benign, mainly symbolic, deal such as the Free Trade Agreement with the U.S. is a metaphor for the Howard-Costello way: a second-order reform is sold with five-star trimmings as a "once in a generation" windfall. Costello talks up an agenda for solving the intergenerational crisis that lies ahead, but it is the bureaucrats who are showing leadership and doing the heavy thinking; the Treasurer needs to find his mojo if the government wins a fourth term.

Howard and Latham speak often about the future and ten-year plans. But their obsession is with the present. In truth, there is a great deal left to do. Too often, the government has chosen the low, quiet road to reform; the Opposition has trimmed its radical urges in hopes of creeping back into power. The tax system remains a mess; it's neither fair nor simple nor good for the economy. Investment in the future is miserly. Students should be getting better teaching and facilities for their $A100,000 university degrees. The spread of broadband - which will be a dynamic tool in the new economy - is woefully slow. But it's not that kind of election. Perhaps next time the economic ideas contest will be more inspiring. It certainly will be more urgent.

• Tom Dusevic
• Smart economics is about future prosperity, not just the level of interest rates