A recent editorial in the Australian Financial Review declared that after devising Australia’s biggest ever stimulus package, the Government now needs to develop a sweeping ‘supply-side reform program’ to drive recovery from the economic downturn caused by the global response to COVID-19 (AFR 2020). The Government has said that it is devising a supply-side policy agenda and the Treasurer, Josh Frydenberg, recently said that he is drawing ‘inspiration’ from the supply-side policies of former British PM Margaret Thatcher (1979-90) and former US President Ronald Reagan (1980-88).
Anyone reading the papers, especially those who weren’t alive in the 1980s, might be wondering what supply-side policies are, what Thatcher and Reagan actually did, and what all this might mean for future government policies?
What are supply-side policies?
This piece of economic jargon can mean different things to people, depending on their views about the appropriate roles of government in the economy.
To some, supply-side means policies to increase productivity, either across the economy or in specific sectors. You won’t hear the person on the street (or as Paul Keating once memorably said, the resident pet-shop galah) referring to supply-side policies, but you might have heard the term ‘microeconomic reform’. In Australia in the 1980s and 1990s, governments implemented a variety of microeconomic reforms including deregulation of financial, labour and agricultural markets, reorganising and privatising government-owned businesses in areas such as telecommunication, ports, airports, energy and financial services, contracting and competitive tendering of government services (such as employment services), tariff reductions and tax reforms (including the introduction of capital gains tax and the GST). More controversially, supply-side policies may also include reducing income tax rates at the top of the tax scales, and reducing welfare benefits in an effort to increase work ‘incentives’. A common belief underpinning these policies was that freely-operating competitive markets could deliver better outcomes than were achieved under direct government ownership and control.
The impact of these measures is an issue of considerable policy controversy in Australia. For some, the supply-side (microeconomic) reforms of the 1980s and 1990s underpinned three decades of continuous economic growth and helped Australia weather several economic ‘shocks’ that hit the economy, such as the 1997 Asian financial crisis and the 2008 Global Financial Crisis (Garnaut 2013). Others argue that these reforms did little to improve productivity and growth, pushed up prices and reduced the quality of public services, and worsened income inequality. Ross Gittins, for example, argues that relying on private enterprise and markets to provide key public services ranging from electricity to childcare and vocational training has been disastrous (Gittins 2020).
The term ‘supply-side policies’ does not have to mean less government involvement in the economy, however. It can be used to describe programs of public investment in economic and social infrastructure aimed at expanding the productive potential of the economy. Examples include spending on economic infrastructure (transport, energy and the NBN), innovation and workforce skills (research and development, education and training), social infrastructure (health and social inclusion), and environmental assets (such as environmental restoration). Spending in these areas has the potential to boost productivity by reducing business costs, increasing workforce participation, improving skills, and expanding business opportunities (for example, by generating new ideas, products and services, or by reducing transportation and communication costs).
What did Thatcher and Reagan do?
Prompted by economic problems in the UK (high inflation and unemployment and industrial unrest), concerns about the economic outlook, and an influential intellectual movement blaming the UK’s economic problems on widespread government involvement in the economy, the Thatcher government implemented an extensive supply-side (microeconomic) reform agenda in the UK. ‘Thatcherism’ involved widespread deregulation, the privatisation of major UK government businesses (airlines, electricity, gas, water, postal services, telecommunications, rail transport and financial services), widespread use of competitive tendering of government services, labour market changes designed to curb the power of unions, reductions in industry assistance, and a substantial reductions in the top income tax rates.
Faced with similar economic challenges to those in the UK, the Reagan administration declared that “government is not the solution to our problem; government is the problem” (Inaugural address, 21 January 1981). ‘Reaganomics’ involved slashing income and capital gains taxes, reducing government regulation and reducing spending on social services. The expectation was that these changes would unleash American ‘animal spirits’, and cause a burst of economic growth that would cut unemployment, while preventing a blow-out in the budget deficit (because the resulting economic expansion would generate greater revenues despite lower tax rates).
The economic scorecards for the UK and US are mixed. They show that after both countries experienced severe recessions early on, they went on to record nearly a decade of strong economic growth and falling inflation. In both countries, however, the party ended in the early 1990s with another severe recession and double-digit unemployment. A key criticism of Thatcherism and Reaganomics is that their policies of deregulation, reducing the welfare state, attacking unions and tax cuts helped to exacerbate other forces affecting income inequality (like globalisation and technological change). For example, a leading scholar on inequality in the US, Joseph Stiglitz, was asked to nominate a turning point in the growth of inequality in the US. He pointed to the Reagan era and cited policies such as financial deregulation, tax cuts and trade liberalisation (Stiglitz 2015, pp: 421-2).
Whatever the current views on these leaders’ legacies, in the 1980s and 1990s Thatcherism and Reaganomics were viewed as models worth emulating. Indeed, biographers of John Howard note that he was ‘emboldened’ by a meeting with Margaret Thatcher in July 1988 and that as prime minister he kept photographs of his meeting with her at home and in his Canberra and Sydney offices (Errington and Van Onselen 2007, pp. 156-7).
Is Australia likely to experience an outbreak of Thatcherism and Reaganomics?
Whether you think economic growth is over-rated or not, the international response to the global pandemic has caused the global and Australian economies to shrink, and unemployment (and underemployment) to rise. The effects of unemployment and under-employment are felt most acutely by those in insecure part-time or casual roles and those entering or re-entering the workforce. The economic downturn also poses a risk to global and regional stability, further increasing risks to peace, trade and investment.
So far, many countries have responded to the economic downturn by injecting massive amounts of borrowed or printed cash into their economies – Keynesian pump-priming. In Australia this cash injection will be equivalent to more than 14% of total output.
Pump-priming is intended to fill part of the gap in demand created by the lockdown and the resulting slump in consumer and business confidence. But a problem facing governments is uncertainty about how long the recovery will take, and where the recovery will be strongest and weakest. Among the ‘known unknowns’ is the question of whether the growth will be in domestic manufacturing as businesses reduce their reliance on global supply chains, and if so which Australian manufacturers will benefit and which ones will suffer. When will international tourism and education resume, and will the same numbers of international tourists and students come to Australia in the future? Will consumers’ eating and shopping habits revert after the lockdown? Will the nature of work be permanently changed and how might this affect our cities? Will commodity prices that have fallen recently bounce back, enabling businesses to dust off the exploration and production plans that were recently shelved?
It is in this highly uncertain context that governments in Australia and elsewhere need to consider the role that supply-side policies can play in helping to achieve a more rapid and sustained period of economic growth than might otherwise occur. The debate is largely about the form and substance, rather than the need for such policies.
As several journalists have pointed out, the Treasurer’s references to Thatcher and Reagan may be intended to appeal to a particular political support base (Gittins 2020). Alternatively, the Treasurer’s reference to Thatcher and Reagan may indicate his desire to develop a certain type of supply-side agenda. Indeed, some elements of this agenda have already been flagged publicly, including labour market and regulatory reform. Working groups have been established to develop specific proposals. The government has also previously promised to introduce further income tax cuts. Beyond this, the government says it is still in the ‘ideas harvesting’ phase and it is not ruling anything in or out.
While the government ponders, others have put forward alternative supply-side policies, including the ACTU, which has suggested supply-side investments in economic and social infrastructure such as skills and early childhood development (ACTU 2020).
Pressed on why he singled out Thatcher and Reagan, the Treasurer later clarified that he was also drawing inspiration from other leaders. He specifically mentioned John Howard and Peter Costello (who introduced the GST, cut income and capital gains taxes and introduced further labour market reforms, which were later repealed). Subsequently, the prime minister stated that supply-side issues would be addressed in the government’s economic recovery plan, which would be a ‘uniquely Australian response’ (Ferguson 2020).
Interestingly, the Treasurer did not mention the microeconomic reforms of the Hawke-Keating Government nor the post-war reconstruction agenda of the Curtin and Chifley governments (Macintyre 2015). The ACTU has proposed the development of a national reconstruction plan, similar to one developed by the Commonwealth during World War II to prevent Australia slipping back into depression after the war (ACTU 2020, p. 5).
In the coming months it will be fascinating to see how the Treasurer and government translate inspiration into policy, and how they draw on historical precedents to frame and explain their supply-side agenda. Given the media controversy generated by the Treasurer’s comments, and the response of the prime minister, it is probably unlikely that we will hear much more about Thatcher and Reagan.
AFR (Australian Financial Review) 2020, The AFR view: Burning platform needs Friedman as well as Keynes, July 24, https://www.afr.com/politics/federal/burning-platform-needs-friedman-as-well-as-keynes-20200724-p55fa5, accessed 4 August 2020.
ACTU (Australian Council of Trade Unions) 2020, Australia’s Economic Reconstruction after COVID-19: A National Jobs Plan, And Five Ways to Get Started. https://www.actu.org.au/media/1449194/national-economic-reconstruction-plan.pdf, accessed 4 August 2020.
Albertson, Kevin and Stepney, Paul 2020, 1979 and all that: a 40-year reassessment of Margaret Thatcher’s legacy on her own terms, Cambridge Journal of Economics, Vol 44, Issue 2, March, pp. 319–342.
Errington, Wayne and van Onselen, Peter 2007, John Winston Howard: The Biography, Melbourne University Press.
Ferguson, Richard 2020, Coronavirus: Scott Morrison distances himself from Thatcher and Reagan as inspirations for reform, The Australian, https://www.theaustralian.com.au/nation/politics/coronavirus-scott-morrison-distances-himself-from-thatcher-and-reagan-as-inspirations-for-reform/news-story/5190d8e80ae1e672e8e630894285385c, accessed 4 August 2020.
Garnaut, Ross 2013, Dog Days: Australia after the boom, Black Inc.
Gittins, Ross 2020 Thatcher and Reagan? He must be Joshing us, The Ae, 29 July. https://www.smh.com.au/politics/federal/thatcher-and-reagan-he-must-be-joshing-us-20200728-p55g4n.html, accessed 4 August.
Irvine, Jessica 2020, Why is the Treasurer taking inspiration from Margaret Thatcher and Ronald Reagan?, The Sydney Morning Herald, 28 July. https://www.smh.com.au/national/why-is-the-treasurer-taking-inspiration-from-margaret-thatcher-and-ronald-reagan-20200727-p55fxy.html, accessed 4 August.
Macintryre, Stuart 2015, Australia’s Boldest Experiment: War and Reconstruction in the 1940s, New South Publishing.
Reagan, Ronald 1981, Inaugural address, 20 January, https://www.reaganfoundation.org/media/128614/inaguration.pdf, accessed 4 Aug