The Kouk Writes: the issues with Mr Hockey’s methodology

August 6, 2013

On ABC radio’s AM program this morning, Shadow Treasurer Joe Hockey made mention of the fact that average interest rates over the term of the Howard government were lower than the average over the term of the current Labor government. Mr Hockey noted that the average level for the standard variable mortgage rate was 7.26 per cent under the Howard government and is, so far, 7.29 per cent under Labor.

These numbers are correct, and just to outline Mr Hockey’s methodology, they cover the period for the Howard government from March 1996 to November 2007 inclusive. For the current government, Mr Hockey uses the time period December 2007 to July 2013. It might be worth noting that if the RBA cuts interest rates today and the standard mortgage rate is trimmed to 5.95 per cent, the average under Labor drops to 7.27 per cent. Next month the average drops to 7.26 per cent, even without a further rate cut from the RBA. I note that the new government will not be sworn in until after the September RBA Board meeting.

There are a number of issues I could take with Mr Hockey’s methodology, but for now I will take it as one way of analysing the relative level of interest rates since 1996.

Let’s use Mr Hockey’s methodology and apply it to the unemployment rate. This shows that the average level for the unemployment rate under the Labor government has been 5.1 per cent. Under the Howard government, the unemployment rate averaged 6.4 per cent. With the July labour force data released this Thursday, even if the unemployment rate rises to 5.8 per cent in the month as the market consensus expects, the average under Labor is still 5.1 per cent.

That 1.3 percentage points difference on the unemployment rate translates to around 150,000 jobs in the current labour market.

Let’s use Mr Hockey’s methodology for the tax to GDP ratio. Under the Howard government, the average tax to GDP ratio was 23.4 per cent of GDP (data from 1996-97 to 2007-08, inclusive). Under Labor, the average tax to GDP ratio has been 20.9 per cent (data from 2008-09 to 2012-13, inclusive).

In other words, the tax take under Labor is 2.5 per cent of GDP lower, which in 2013 dollar terms is around $40 billion a year. If the Labor government collected tax at the same level of the Howard government, we would already be swimming in budget surpluses.

Maybe on the unemployment rate and the Coalition government’s addiction to tax, Mr Hockey has something with regards to the methodology.