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The saying goes “ask five economists a question and you’ll get five different answers – six if one went to Harvard”. At Wednesday night’s Fabian Society forum, three interesting economists managed to produce a lot more than three answers to the question: “what are the key economic challenges facing a Rudd Labour government”. The general conclusion was: it’s going to be tough. The recurring theme was the upward trend in inflation, and the consequent need for fiscal restraint, tempered with concerns about the impact of a sharp downturn in the US economy, and the level of indebtedness in the Australian economy.

ANZ’s Chief Economist Saul Eslake identified inflation as the key short-term challenge, which is likely to see interest rates rise further, and require fiscal restraint by the Rudd government. He argued (as in a previous interesting speech) that settings of fiscal policy have in the past been too loose, and that revenue windfalls associated with the resource boom should have been spent more on enhancing the productive capacity of the economy rather than on cuts in income tax. (This presentation was also the most broad ranging of the three, also touching on longer term economic challenges including global warming and the ageing population.)

A similar line was taken by HSBC’s Chief Economist John Edwards, who noted that the Rudd Government has been elected in much less favourable economic circumstances than previous governments. The Hawke government took office at the trough of the 1980s recession, with economic conditions gradually improving though its first term. The Howard government’s first term was characterised by the emergence of the Australian economy from a mid-cycle lull. Edwards argued that the Rudd government, in contrast, faces significant short-term economic challenges: an overheating domestic economy, which will require contractionary monetary and fiscal policy, despite the possibility of a significant downturn in the US economy.

In contrast, Associate Professor Steve Keen of the University of Western Sydney focussed on the high and rising levels of household debt in the Australian economy, suggesting that – as in the US economy – a serious and protracted debt-induced recession may be on the horizon. In that context, he argued that higher inflation may in fact aid households, by reducing the real value of their debt. This was subject to some subtle criticism from Saul Eslake, who noted in discussion following the presentations that rising debt is also a consequence of the development of financial systems, and that it was not clear cut to argue that the level of debt per se is a problem, but rather the capacity of households to service that debt.