Summit must end national complacency about Australia’s prosperity

As Reserve Bank deputy governor Andrew Hauser noted last year, it can be easy to forget just how prosperous modern Australia became in the first decade or two of the 21st Century. Measures of relative affluence, such as GDP or wealth per head, regularly now place Australia “in the top echelon” globally, as Hauser noted. Australia’s per capita income remains significantly higher than in the UK, Germany, Sweden or Japan, for instance. This has been of enormous benefit to nearly all Australians.

But Australia has experienced comparable periods of relative affluence before in its history — such as in the 1850s to the 1880s, in the early 1950s and the late 1960s to early 1970s.  Such periods have generally given way to lengthy periods of relative under-performance. This has much to do with Australia’s economic structure as a commodity-exporting and capital-importing developed nation.

In this instance, our relative modern prosperity has been built first on the foundation of the economic liberalisation of the 1980s and 1990s, laid by the supply-side deregulation of financial, product and, to an extent, labour markets.

This resort to open and competitive markets gained bipartisan political support around promoting aspiration, opportunity and prosperity.  This pro-market reform era, in turn, allowed Australia to exploit elevated Chinese demand for our resource exports such as iron ore, coal and gas in the 2000s.

Hauser’s “easy to forget” reference is another way of describing the national complacency about Australia’s modern prosperity. Public debate — including from political leaders — shows little appreciation about the nature of the nation’s recent exceptionalism and the source of national prosperity over the past few decades.

More worrying is that this modern prosperity most likely peaked after the Global Financial Crisis in 2011 and 2012 along with the peaking of the iron ore price at $US180 a tonne. It has been slipping away for more than a decade.

Reining in the post-pandemic inflation outbreak while keeping the unemployment rate below 5% has been a genuine policy achievement. But labour productivity remains at 2016 levels. Average household incomes remain below pre-pandemic levels in real terms.

The federal budget is projected to be in deficit for a decade as public debt rises through the trillion dollar mark.

The economy’s terms of trade (or ratio of export prices to import prices) is likely to continue to trend down from the temporary record highs recorded during the pandemic, amounting to a loss of national income.

Business investment in growing future prosperity remains at level not much higher than just after the early 1990s recession, limiting the scope for productivity growth and higher wages.

The RBA’s paring back of its assumption for the economy’s labour productivity growth to just 0.7% annually translates into a lowering of Australia’s economic growth potential — or its supply-side capacity — to just 2%. This represents a sharp fall from the 3% to 4% economic growth posted in the 1990s and into the 2000s. It represents an unambitious and unacceptable low growth economic outlook.

The Economic Reform Roundtable should commit to making Australia an aspirational and enterprise-driven high growth nation bursting with investment opportunities.

More broadly, the intergenerational social contract has been put under strain by the sharp rise of housing prices because of policy-induced restrictions on the supply of housing.

The “thickets of red tape” that are now recognised to have prevented housing supply from responding to housing demand are replicated through much of the economy, including on an excess compliance burden on business.

Notwithstanding substantial increases in taxpayer funding, Australian school student performance — foundationally critical to the nation’s stock of human capital —  has fallen both in absolute terms and in relation to international peers.

Australia’s traditional competitive advantage of low cost energy has been turned into a disadvantage amid a clean energy transition that has proven more costly than projected, in turn undermining hopes of a ‘Future Made in Australia’.

The labour market is being re-regulated in ways not suited to the demands of an open economy, accelerating technological change and a more diverse society.

Amid all this, rising geo-political tensions are dismantling the rules-based global trade and security order — including the WTO system and the US alliance — on which Australia’s modern prosperity rests.

Given these headwinds, the reality confronting the Economic Reform Round Table exercise is that it will take either the highest-quality policy settings across the board or an expected sharp improvement in fortune to prevent a further slippage of Australia’s relative affluence.

The political economy problem is that, at the peak of this prosperity, national discourse has focused on redistributing it, rather than producing more of it. This shows up most clearly in the worsening fiscal position, at both federal and state levels.

The fiscal problem has been caused largely by inflated spending demands baked into Australia’s political system during the period of rising national prosperity.  This then coincided with popular new theories (such as ‘the deficit myth’ and ‘modern monetary theory’) and even central bank innovations (such as quantitative easing) that weakened notions of a traditional budget constraint.

This dynamic was further fueled during the pandemic, when the potentially disastrous downside risks provoked the unprecedented peacetime levels of government spending — and cheap money — that spilled over into the inflation outbreak. Yet even the inflation episode has not quelled political aspiration for more ‘universal’ care economy programs, such as for subsidised childcare, that encourage a growing culture of dependency.

Preserving Australia’s modern prosperity must recognise that public spending needs to be reined back to within the nation’s less bountiful means.  ‘Tax reform’ should not become an exercise in increasing the level of taxation so as to validate the increased share of the economy taken up by mostly low-productivity government spending.

The opposite needs to happen. The ratcheting up of government spending needs to be reversed to facilitate genuine productivity-enhancing tax reform and to make room for more productive private sector growth, including business investment in new productive capacity.

Michael Stutchbury is Executive Director of the Centre for Independent Studies.