By Christopher Rath
Will Australia ever feel the bite of economic ruin, Greek style?
Just before the last Federal Budget, an alliance of the nation’s leading industry and business groups gave their sternest warning yet to our political leaders;
Neglecting reform “will set us on a path to economic despair”.
This is not hyperbole as a quick glance at our nation’s economic indicators illustrate that Australia has rising unemployment, low economic growth, low productivity and is wallowing in government debt.
A mining boom coupled with the bold economic reforms of Hawke/Keating & Howard/Costello ensured that Australia enjoyed a quarter of a century of unbroken economic growth. We were the miracle economy, defying the widely held assumption that Australia would go into recession every 10 years or so. Against all the odds we avoided plunging into recession during the 1997 Asian Financial Crisis, the 2000/01 Dotcom bubble burst and the 2008 GFC.
Unfortunately Australia’s dream run is likely to come to an end in the next year or two and we are at risk once again of becoming “the poor white trash of Asia”. Monetary policy can only go so far to address these issues as an historically very low cash rate of 2% means that the Reserve Bank has little wriggle room left in terms of slashing interest rates. Reducing the cash rate is also a blunt instrument, likely to help an already booming property market, and there is often a long and variable lag before the benefits are noticed to the economy.
Microeconomic reforms generally incur an even longer lag with the benefits not felt for years. No doubt part of the reason that we’re facing these economic challenges now is because of the mass exodus of economic reform during the 6 years of Rudd/Gillard/Rudd. They would no doubt claim reforms such as the carbon tax, mining tax, abolishing Work Choices and counter cyclical stimulus payments were useful, but reform implies improvement and these policies have left Australia poorer, uncompetitive and less free.
The Coalition is also somewhat to blame, since the zeal for economic reform was far greater under Howard/Costello than it is today under Abbott/Hockey. They have taken workplace relations reform off the table and budget trims haven’t gone far enough to address our fiscal crisis. There are however some achievements to celebrate such as scrapping the carbon tax and mining tax, privatisation of Medibank Private, $2.45bn of red tape slashed, and most resoundingly, three historic free trade agreements delivered in just over a year. It is also extremely encouraging that Premier Baird was re-elected on a reform agenda.
However the problem remains that Australia has low productivity and eroding international competitiveness. This is where economic reform is needed most, not only because investment can leave Australia with the press of a button, but also because productivity is the main driver of economic growth and better living standards. Yet we are faced with the fact that Australia’s multifactor productivity fell a concerning 1.3% from 2007 to 2013 and for the first time ever Australia is no longer amongst the 20 most globally competitive nations.
To avoid becoming the “poor white trash of Asia”, Australia should:
- Reform our workplace system to at least a comparable level as Howard’s first wave of changes with the Workplace Relations Act 1996.
- Drastic budget cuts to achieve a surplus and start paying off government debt much sooner than the 10-year prediction. The Centre for Independent Studies and Institute of Public Affairs have proposed savings measures that could be easily adopted.
- A serious attempt at tax reform that must involve overall reductions in taxation. Broadening the base of the GST and increasing the rate to 20% could be offset with income tax and company tax reductions.
- Ongoing privatisation and asset recycling as a means of addressing our infrastructure backlog. State governments in particular have a vast array of inefficient utilities, service providers and infrastructure assets that they can put up for lease or sale.
- Build on this renewed era of Australian free trade by seeking new opportunities and also adopting the Commission of Audit’s recommendation to crack down on industry assistance. This will ensure that Australia focuses on areas where it has a comparative advantage, such as finance, agriculture, tourism and of course mining. Manufacturing is no longer part of this mix, making up 9% of the economy but receiving 70% of the industry assistance.
Indeed, it may take an economic crisis for Australia’s political leaders to wake up and get serious about reform. No doubt many would see these five suggestions as ‘controversial’ or ‘radical’ and opposition from Labor and a hostile Senate would almost certainly ensure their failure. The business community should also grow a spine and not leave the task of selling reform solely to the Coalition. Scott Morrison and Joe Hockey were completely correct in labelling many in the business community as “armchair critics”.
Brace yourself; without either a much more assertive Coalition and business community or an economic crisis that leads to bipartisan action, Australia could indeed have many decades of economic despair to come.