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Episode Transcript:
Hello and welcome to The Stutchbury Sessions, maybe also known as the Stutch sessions. I’m Michael Stutchbury, Executive Director of the Centre for Independent Studies and formerly Editor in Chief of the Australian Financial Review.
Today I want to take you on a journey through Australia’s modern prosperity, how we built it, why it peaked, how it’s slipping away, and what we must do to restore it. Let’s begin with a simple question: Do you remember how rich Australia became a decade or so ago?
Not so long ago, we sat comfortably in the global top tier of affluence. Our per capita income was higher than the United Kingdom’s, higher than Germany’s, Sweden’s, even Japan’s. It still is. We dodged the global financial crisis. We’d enjoyed more than two decades without a recession. But, as Reserve Bank deputy governor Andrew Hauser observed last year, it’s easy to forget just how exceptional Australia’s modern prosperity is.
Do we ever ask ourselves, “How come?” Are we smarter than the Japanese? Do we work harder or more efficiently than the Germans?
The source of our prosperity was built on the supply side reforms of the 1980s and 1990s: the floating dollar, financial deregulation, import tariff cuts, privatization and labor market flexibility. They were supply side reforms because they allowed markets to work better, to supply more goods and services. You might even call them neo-liberal, but they are also bipartisan, championed, first by the Hawke-Keating Labor government, and then cemented by the Howard-Costello coalition. And then the lucky country got really fortunate in the 2000s with the rise of China, Australia became the main supplier (There’s that word again) into the blast furnaces of the biggest industrial revolution the world has seen. iI was led by iron ore, coal and gas.
The key point here is that the supply side reforms of the 1980s and 90s made the economy much more flexible. This meant it was then able to digest Australia’s biggest ever resource development boom without blowing up the economy, as it happened in previous such booms. Unlike other countries, we even avoided recession during the GFC in 2008 and 2009 yet, as I warned in our recent submission to treasurer at Jim Chalmers economic reform roundtable, this prosperity peaked in 2011 and 2012 alongside an iron ore price of $180 USD a ton.
Since then, our prosperity has been slipping away, and it’s been doing so now for more than a decade. We’re still affluent, but we are well on our way to losing the truly exceptional modern prosperity we have enjoyed. History should have taught us to be wary. Australia has stood at similar heights before, only to fall back to the pack from the 1850s gold rushes to the marvelous Melbourne land booms of the 1880s. We were a working man’s paradise, but that ended in the devastating depression of the 1890s. We became passing rich again during the wool boom of the early 1950s only to collapse into the stagflation of the 1970s.
Each time, our prosperity was temporary, helped by some lucky country good fortune, but then eroded by complacency, poor policy and external shocks.
Today, the symptoms of decline are unmistakable. Labor productivity is stuck at 2016 levels. Real household incomes remain below pre-pandemic peaks. The federal budget is projected to be in deficit for a decade, with public debt pushing past the trillion dollar mark. Business investment is barely above the level seen after the early 90s recession, energy prices, once a source of competitive advantage, have soared, undermining our future made in Australia ambitions.
Meanwhile, the Reserve Bank has quietly pared back its estimate of potential economic growth to a meager 2% a year down from the three to 4% growth that Australia enjoyed in the 1990s. This isn’t merely a cyclical downturn, it’s a structural slippage in our economic potential.
Why has this happened?
In part because our political system has turned inward. At the very moment when our prosperity peaked, the national conversation turned from creating wealth to redistributing it. The political contest became less about aspiration and more about entitlements. New theories, from modern monetary theory to the so-called deficit myth suggested that budget constraints were some old fashioned thing. The pandemic then unleashed unprecedented peacetime spending. It seemed understandable at the time, but it has left us with entrenched deficits, bigger government and higher inflation. Even now, as inflation lingers, there is an insatiable appetite for new universal care economy programs, subsidized childcare, dental schemes, energy handouts and more.
The fiscal ratchet is clicking upward. The federal government spending has risen from 23% of GDP in the early 2000s to 27% today, much of this is low productivity spending, which crowds out private investment and erodes productivity growth.
So what is to be done?
In our submission to the economic reform roundtable, CIS argued that Australia must recommit to becoming an aspirational enterprise, driven by a high growth nation full of investment opportunities, this requires four pillars.
First, restore fiscal discipline.
So called tax reform, must not become an excuse to validate bigger government and higher taxes. Instead, the blowout in government spending must be reined in indexing personal income tax brackets to end bracket creep would be a start, but we also need credible fiscal rules akin to those that delivered budget surpluses in the late 1980s and then again in the late 1990s and early 2000s
Number two, unleash housing supply.
Australia’s housing shortage is not an act of God. It is the result of restrictive zoning, planning delays and developer taxes. We must slash red tape, liberalize land use and incentivise construction. Young Australians deserve a fair go at home ownership.
Third, re-energize business dynamism.
From industrial relations to environmental approvals, regulatory thickets are strangling business investment and enterprise. We need a root and branch review of compliance burdens, a return to enterprise bargaining and a renewed emphasis on productivity enhancing infrastructure.
Finally, restore our energy advantage.
Australia once enjoyed some of the world’s cheapest electricity today, we are in danger of becoming amongst the most expensive. The Clean Energy Transition has been poorly managed with subsidies, mandates and network bottlenecks driving up costs. We must restore reliability, embrace technology neutral solutions and revive our industrial competitiveness.
But let me add something that goes beyond economics. Prosperity is not merely the product of good policy. It rests on cultural habits and institutional integrity, a respect for markets, a spirit of enterprise, a belief in reward for effort when these cultural foundations erode. Prosperity becomes fragile when institutions lose authority, whether through political polarization, regulatory overreach or declining educational standards, the social contract frays. Our schools once the envy of the world now see falling literacy and numeracy despite record taxpayer funding.
Our universities once bastions of free inquiry, now chase ideological fads and international rankings. So we must reform education, not just to lift schools, but to rekindle a culture of aspiration.
We stand at a big moment in history. The rules-based global order that underpinned our modern prosperity, the World Trade Organization, the US Alliance, free and open markets, is being dismantled before our eyes. Geopolitical tensions from Ukraine to the South China Sea threaten the trading system upon which we depend. At home, productivity is stalled, debt is rising, energy is expensive and housing is scarce.
Yet, I remain optimistic, because Australia has reinvented itself before. In the 1970s as stagflation learned a small chorus of voices, including the then fledgling Centre for Independent Studies, championed classical liberal reforms, those ideas once considered as fringe became mainstream, delivering the prosperity we now risk squandering today.
Our mission is unchanged, to construct and promote an economic agenda based around freedom and choice to restore and sustain Australian prosperity. But we can’t do it alone. We need political courage, business leadership, and above all, an engaged Australia that refuses to settle for mediocrity.
Thank you for listening. And if this conversation has sparked something for you, a memory of what we once achieved or a hope for what we might become again, please share it and visit cis.org.au to read our latest research and join the debate
Until next time, this is Michael Stutchbury reminding you that our prosperity is slipping away, but it’s not yet lost. We still have a choice. Let us make the right one.