Australia is at risk of waking up from the mining boom with nothing to show but a debt hangover and an economic headache. While the economic reforms of the 1980s and the ’90s prepared Australia to meet past crises, reform has stalled and cracks are starting to show.
The mining boom has generated significant revenue (particularly in Western Australia) that has been used to fund government interventions in the economies of under-performing states (especially South Australia and Tasmania). Western Australia generates $3 billion more in GST revenue than it receives, while South Australia and Tasmania are net beneficiaries to the tune of $1.65 billion.
In 2014/15, Western Australia expects to receive approximately $1 in GST revenue for every $3 its residents pay. On the other hand, up to three quarters of the Tasmanian population receive the bulk of their income from the government, according to estimates by a University of Tasmania professor.
These transfer payments prevent much needed economic reform; unemployment is 8.9% (seasonally adjusted) in Tasmania and 6.0% in South Australia, while Western Australia is at 4.6%.
The mining boom and the record terms of trade have shielded parts of the country from the reality that Australia is one of the highest cost countries in the world. Private debt in Australia is unsustainably high and the budget is in poor shape, with debt and deficits predicted for years to come. We are not well placed for future fiscal stresses.
There are signs that the capital investment phase of the mining boom is over and economic growth across advanced countries is expected to remain low for the foreseeable future (the IMF predicts average growth of only 1.2% this year). While there are encouraging signs from the United States, Europe remains mired in crisis and China is unlikely to continue growing at double digits forever.
It’s tough to convince a country with uninterrupted economic growth for more than 20 years that it needs economic reform to ensure prosperity for future generations. Yet that is the very message Australians need to hear because we must reduce the size of government – and now.
Irresponsible government spending is distorting markets and propping up uncompetitive companies and industries, preventing workers from transitioning to competitive industries.
The effectiveness of this government intervention is rarely measured, but we can see the cost. Both taxes and government debts are increasing, yet there are calls for more of both.
For example, government interference in the housing market through stamp duty, the First Home Owners Grant, and restrictive and cumbersome planning practices is a key reason why the ABS house price index for Perth increased by nearly 180% between March 2002 and March 2013. And before you blame the mining boom, prices in Hobart also increased by 190% between 2002 and 2011.
It’s not just house prices that are out of control, as anyone who has paid electricity bills in the last five years would know.
Growth in government spending has consistently outstripped economic growth over the last 40 years. Despite these increases, we have not addressed the sustainability of key government services. Health expenses have doubled in the last decade in nominal terms and are likely to double again in the next decade in real terms, while programs like DisabilityCare will require tens of billions of dollars a year to sustain.
Advocates of big government allege that Australia has low tax rates and can simply increase taxes to fund grandiose new spending programs. While Australia might have low taxes compared to some in the OECD, Australia isn’t competing with just the OECD; in the Asian century, Australia must be globally competitive.
While announcing the closure of Ford Australia, CEO Bob Graziano said it cost them four times to build a car in Australia than it did elsewhere in Asia. We can’t compete in Asia on wages but we must stop strangling business with more red tape.
Restrictive regulation (especially environmental regulation) and duplication of oversight at the state and federal levels have a serious impact on business growth.
We’ve already seen high costs and red tape kill major projects such as Woodside’s James Price Point LNG plant and the Olympic Dam project in South Australia. Business cannot afford greater impost, yet some within the current government are claiming that passing 590 new laws in the most recent parliament is a praiseworthy achievement.
Australia will face real economic challenges in the near future. We must prepare for those challenges by cutting wasteful government spending programs and focusing on making Australia an attractive place to do business.
Simon Cowan is program director of the Centre for Independent Studies TARGET30 campaign. He is speaking at the University of WA Business School tonight on responsible government after the boom.