Australian Economic Prosperity a Double-Edged Sword

The Australian economy continues to defy economic gravity, with the latest round of economic statistics released last week showing an economy growing above trend over the last 12 months, full-time job creation ticking up in May, and a higher participation rate as people become more confident in finding a job. As Glenn Stevens noted during the week, we must take stock and reflect on the current strength of the Australian economy and “at least view the glass as half full”, especially when comparing our performance with the current mess in Europe (his speech is a must read – view it here).

The underlying strength of the Australian economy, which has allowed it to avoid recession during the Asian financial crisis, the Dot-Com bust and the Great Recession, was built by important economic reforms implemented during the Hawke-Keating government and the early Howard years. The floating of the dollar, lowering tariffs, compulsory superannuation, competition reform and the implementation of the GST have all contributed to a more open, competitive, and prosperous Australian economy and society. These reforms have contributed to 21 years of uninterrupted economic growth and real wage growth, and have created an economy that is currently the envy of the rest of the world.

We should reflect on these numbers and be proud of our achievements. However, we should not be complacent. There are looming economic challenges that require both foresight and policy response from our politicians and policy makers. Many of these challenges have already been identified – the aging population, falling education standards, skill shortages, and inadequate infrastructure for a bigger Australia. To meet these challenges, government investment in health care services, education, skills and training and infrastructure will be required.

Future government will face a quite obvious conundrum – where does the money come from? There has been a $150bill write-down in government revenue since the Global Financial Crisis. That equates to a fall of 4 percentage points of GDP, with Treasury Secretary Martin Parkinson recently stating that “this is not expected to recover to its pre-crisis level for many years to come”.  State government coffers continue to dwindle as inefficient state taxes are not keeping up with growth, worsening vertical fiscal integration and creating political tensions between state and federal governments. Furthermore, the current Gillard government has continued the Howard government tradition of middle-class handouts, in desperate attempt to improve their opinion polling. The Gillard government dumped the corporate tax cut just to pay for the latest handouts, the school bonus payments and boosts to family tax benefits. The ‘entitlement society’ that these handouts create means voters will continue to demand these handouts if they are to re-elect politicians (the ‘what is in it for me’ scenario).

This creates a medium-term fiscal problem – falling revenues are met with much higher government obligations. The sums just don’t add up.

There are many difficult policy remedies that have been flagged by academic and industry economists, policy think tanks and the like. These include reforms on the tax and spending sides of the budget, most notably around the GST and tax-mix reform and better means-tested welfare schemes. Quite perversely, the biggest problem we have is the economy sailed through the last three crises relatively unscathed. The appetite for policy change that is painful in any way does not exist. Some of the great reforms I spoke of earlier came at a time of great economic upheaval in Australia – the disastrous 70’s of stagflation and 80’s of ridiculously high interest rates, painful periods that were burnt into the public’s minds (and burnt a gaping hole in their pockets). This created the seeds for tough economic reform that we continue to reap benefits from. Unfortunately, it seems that similar circumstances will be required for tough economic reforms to enter the Australian political agenda.


Follow me on twitter @dean_pagonis

Further reading:

– A Grattan Institute report that points to the three main areas of reform to boost long-term economic growth in Australia – read it here: 

2 thoughts on “Australian Economic Prosperity a Double-Edged Sword”

  1. Thanks Dean for pointing Glenn’s speech out.

    In particular it’s a little concerning that the media pretty much ignored one of the most important parts of his speech, despite giving a reasonable coverage of the entire thing.

    From memory a week back or so, basically all I heard was that the RBA would not seek to lower the cash rate much more to encourage more “booming conditions”. They forgot to mention that the retail and housing sales figures we’ve been seeing in the recent past were those that were supra-normal and are probably not to be repeated.

    I guess this is a double edged sword too ;). It’s nice to know that the retail sector is probably just adjusting to a more normal pace. On the other hand those involved in retail are probably not so happy about those days being past.

  2. I think the major issue for retailers is that consumers have quicker, easier and more convenient access to price discovery i.e. the price of competitors, whether they are online or at other stores in Australia. In my opinion, this is good for consumers and good the for the economy overall – it’s why we laud more competition in industries.

    I think you are right about the Governor’s speech, there has been little focus on the crux of his speech – that this ‘cautious’ consumer is just conditions going back to long-term trends after unsustainable bouts of spending driven by ever-increasing asset prices in the early 2000’s. The problem for most main-stream media (and there are exceptions) is that it takes too much time and effort to explain these conditions, and they prefer catchy lines like ‘glass half full’ etc. for their tabloids.

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