Anyone with a horizon beyond his nose that watched yesterday’s treasurer debate cannot have missed what was missing, the void was so enormous. I am describing, of course, the global economy, which got one mention in the entire discourse. China got none. Competitiveness almost none. How can we have a sensible policy debate about Australia’s prospects in the next three years without any reference to this context? We can’t and sense is not the point anyway.

Why is this the case? The motivations for the two political parties differ. For the Coalition it’s pretty straight forward. While the Coalition paints itself as good fiscal managers and Labor as incompetent, the primary factor separating the diverging budgetary fortunes is that John Howard/Peter Costello governed during a period of benign macroeconomic conditions, both locally and abroad, whereas conditions have been largely unfavourable to the Labor government.

While the inexorable rise in commodity prices under Howard/Costello’s reign and the unwind under Labor’s watch has been well documented, perhaps the best illustration of the diverging fortunes of the Coalition and Labor are shown by this chart:

Household debt levels literally exploded during the 11 years the Howard government was in power. This extra demand (spending) by the household sector meant the federal government was able to run bigger surpluses, without adversely affecting overall demand in the economy:

Since the Labor Party came to office in late-2007, however, the ratio of household debt to disposable income has flatlined as households dramatically lifted savings rates. This deficiency of household demand (spending) effectively left a hole in the economy that had to be filled by increased demand (spending) by the federal government, which pushed the budget into deficit.

Had roles been reversed and Labor was in power during the Great Moderation and the once-in-a-century mining boom, the chances are that it would now be claiming fiscal superiority over the Coalition.

That is not to say we may not have had different outcomes. Labor may well have cut up the fiscal pie differently. But the structural forces at work — the Great Moderation and then the rise of China — would have delivered extraordinary windfalls whatever government did. So, for the Libs the motivation to not discuss anything beyond surpluses, interest rates and giveaways is to claim accidents of history as badges of competence.

On the Labor side it’s more difficult to fathom. Labor would have been far better served embracing reality in this election campaign. The post-mining boom narrative, described in detailed global terms, would have made it very difficult for Opposition Leader Tony Abbott to sail through with murky numbers and commitments to surplus.

They’ve made vague gestures at it. But with no ballast. Labor should have fought the election on the ground of the change underway in China; the loss of that great largess; the need to undertake painful reforms to ensure a new generation of Australian investment as mining wanes; the need to address the dollar; the need to engineer a real devaluation; the need to boost productivity to close the competitiveness gap most painlessly, and the need to protect the vulnerable throughout.

Instead, the post-China narrative has lacked all conviction, has been undermined by a Treasurer out-of-step with the PM and both have ended up fighting the election in the limited terms of fiscal policy and giveaways that is salted Liberal ground. So, the second reason we’re caught in a fictional debate is that the current crop of Labor apparatchiks make lousy economists and, more to the point, lousy politicians.

But the unreality runs deeper, well beyond these figures of the moment. It permeates right through our policy apparatus. After 22 years of growth (interrupted briefly by two minor recessions), our elite policymakers are burdened by their legacy of success.

For three decades they have made judgements based upon a single philosophy shared by the legislature and executive: that a flexible private sector economy is the most productive model available. So long as this one condition is met, not much else needs to be done. At first this simple philosophy radically altered the real economy for the better. In the 1990s, we moved from a closed system of tariffs, government ownership and centralised labour to a more productive system driven by private enterprise and competition. Fantastic prosperity followed.

But over time this same philosophy has allowed the real economy to come full circle. Since the millennium the economy has returned to a closed system of overly concentrated and too-big-to-fail oligopolies that is structurally unproductive and endemically uncompetitive.

Now, despite the rhetoric of our exceptional private sector economy, the reality is that actual policy is warped beyond recognition. Our financial regulators and government deploy previously unthinkable tools to protect a banking cartel. Massive resources firms are protected by extraordinary tax dispensations composed by their own accountants. Manufacturing is increasingly protected in an environment of explicit government “co-investment”. The services economy relies upon a national private sector debt that is protected by a pact of mutual silence. A dying national media extracts the last of its depleting rents via a monolithic culture that routinely marginalises critics as “doomsayers” despite their superior forecasting and analysis.

Australian exceptionalism is now the keystone of our political and economic discourse, positioned as it is somewhere between exhaustion and crisis. It’s not really a mystery that we get no debate.

*This article was originally published at Macro Business