It is unambiguously clear that Australia faces serious economic challenges. The iron ore price has fallen from above $100USD a tonne to below $50USD, resulting in serious impacts to the miners, the industries that act as scaffolding around them, and the revenue that the government draws from all of them in the form of taxation. Business confidence has been somewhere between flat and on a downwards trend since last January (NAB’s index shows a fall from a high of just over ten points to the current low of around zero, not seen since early 2013), and consumer confidence hasn’t fared much better. According to the ABS, business investment is on a downwards trend. None of which is all that surprising, even if the only economic measure you look at is unemployment. Government forecasts for the unemployment rate rose from 6.25% to 6.5% between last year’s budget and MYEFO, and on the most recent forecasts, unemployment isn’t likely to drop below 6% until 2017-2018.
What, then, are we to do about this situation? How are we to face these challenges? Frankly, it’s not clear. Australia passed through the GFC without a recession, in large part thanks to Chinese demand for our minerals, but now demand is slowing as the Chinese come to terms with a credit explosion and higher than optimal vacancy rates. The mining boom is well and truly winding down.
For the past five years, the extent of rhetoric from Joe Hockey and Tony Abbott has been to castigate the Labour party for ruining John Howard and Peter Costello’s divine budget surpluses with wasteful spending. Firstly, this scare-mongering was based on misconstrued metrics. Hockey and Abbott have spent a great deal of airtime scaring the public, with casually large-sounding figures of Australia’s nominal debt, like $600 billion, and spent very little airtime engaging with far more useful metrics like debt as a percentage of GDP. If they had done so, perhaps our entire economic discussion wouldn’t be mired in how to get to surplus the fastest.
Secondly, and more importantly, this obfuscation has meant that instead of spending five years talking about falls in government projections of revenue, or having constructive discussions about how government can assist the economic transition that needs to happen, we have spent five years playing facile blame games over the so called “debt and deficit disaster”. This is doubly problematic because government debt and budgetary deficit are two relatively small problems when compared with the other issues the economy faces.
Moreover, starting a serious, considered public discussion about our economic position would likely reveal that this particular problem can be solved in another way: structural reforms which ‘fix’ revenue shortfalls. One such potential reform lies in superannuation tax rules. According to Treasury estimates, concessional taxation of employer superannuation contributions and superannuation entity earnings account cumulatively for nearly $148 billion of forgone revenue over the next four years. That would go a long way to helping repair the deficit.
One could make the argument that, in opposition, a political party’s only job is to win the election, not necessarily play their hand too early by engaging seriously, or that engaging seriously has been made more difficult by an electorate that increasingly finds complex economic reform unpopular. Either way, the Coalition is in government now: they can’t continue being just the wrecking ball. We have to start having the important debates and actually considering policy options that, for example, address forgone tax revenue in superannuation. Thankfully, the government is starting to realise this. Less thankfully, their attempts to kick-start serious and genuinely necessary political discussion have been a little ridiculous at best.
For example, the Intergenerational Report suggests that under the ALP’s policies pre-election, Australia would reach a 122% net debt to GDP ratio by 2054-55, but under the Coalition’s policy, we would only reach 60% of net debt to GDP. There are two problems with this. The first is the inherent shakiness of any model of any kind that attempts to predict absolutely anything forty years into the future. To illustrate this, one could pick any forty year period in the 20th century. Any single such period not only contains massive cultural shifts (that would affect governmental policy and the economy), but also shifts in the accepted economic paradigm. Between 1950 and 1990, we had both Keynes and Thatcher. This is exemplified by the IGR which itself says that the “report should not be viewed as a forecast”.
However, the second and larger problem is that this is still an attempt to have an economic discussion that will win political points as opposed to helping to correct our economic trajectory. This is still a comparison to the supposed horror of the ALP years (the so-called “previous policy” scenario), as opposed to a meaningful analysis of policy going into the future, which is unsurprising given that the Prime Minister believes that cleaning up the ALP’s “mess” is a key accomplishment of his government’s first year in power.
The RBA currently has interest rates at 2.25%. It’s stuck between a rock and a hard place. It can lower interest rates more, in an attempt to stimulate consumer spending and business investment (especially the latter), but lowering rates even further would exacerbate a housing bubble that the RBA is already concerned about. This makes it clear that interest rates alone will not be a sufficiently large lever to lift the Australian economy out of the slump it is currently in. This presents the government with a choice. Either they can genuinely engage now, or they can essentially do little and wait for the private sector to stop being as skittish as they currently are. Either way, it is time to start actually talking about the economy seriously, not strongarming economics into a little helper to win political points at the expense of the nation.