Do we entrench our advantages or let them slip?

As inflation bubbled back up, the pundits started speculating that the Reserve Bank will increase interest rates again, rather than cut them. Struggling to tackle their budget deficits, federal and state governments have withdrawn electricity bill subsidies that have been suppressing CPI inflation. 

After the reassuring talk of a soft landing for the economy, more people are getting antsy about the cost-of-living squeeze again. Because, you know, prices haven’t fallen back to where they were before the pandemic – they’rejust rising less rapidly than before. Politicians dutifully express sympathy that people are doing it tough. Rising house prices stoke fears that the next generation of Australians might be poorer than their parents. 

Yet, do Australians appreciate just how affluent they are today? Just posing that question risks being accused of being out of touch with the struggles of everyday people.   

But, as the Reserve Bank’s imported English deputy governor Andrew Hauser says, it can be easy to forget just how prosperous modern Australia is. We are in the “top echelon” of global affluence, Hauser says. 

At a macro level, Australia’s per capita GDP is 10 to 15 per cent higher than in Germany and Sweden. It’s 20 to 25 per cent higher than the UK or Canada. 

And, by this same measure of national income per head of population, Australians are 80 to 90 per cent more prosperous than the South Koreans or the Japanese. And four times more affluent than the miserable Russians. 

It begs the question, why? Do Australians work harder than the South Koreans or the Japanese? Are we smarter than the Germans or the Swedes? 

People rightly scoff when I ask those questions. 

But then I say to people. You realise, don’t you, that Australians have been as relatively prosperous as this before, only to let it slip. And that’s what’s happening now. 

We’re not in danger of becoming a banana republic, like Paul Keating warned in 1986. But we are losing our exceptional prosperity and sliding back into the pack of other less prosperous developed economies.    

After World War Two, Australia’s per capita income jumped in the early 1950s when the price of our biggest export, wool, tripled due to soaring American demand. But less than a decade after the Korean War wool boom collapsed, we started to run out of foreign reserves needed to pay for imports and had to be bailed out by the International Monetary Fund. 

Australia unexpectedly boomed again from the mid-1960s when we opened up the Pilbara on the back of demand for our iron ore from newly-industrialising Japan. But that boom blew up in the stagflationary 1970s along with the Whitlam government. By the end of that decade,  Singapore’s founder Lee Kwan Yu warned that Australia risked becoming the poor white trash of Asia. 

Australia’s modern prosperity comes from two fabulous decades of growth from the early 1990s. This started with a productivity bonus from the bipartisan policy decisions to open up the economy to market forces and global competition: by floating the Aussie dollar, deregulating the financial system, lowering the import tariff wall, privatizing government enterprises such as the Commonwealth Bank and Telstra, ending centralized wage fixing, injecting competition into government monopolies such as for electricity, reducing income tax rates by introducing the GST and by giving an independent Reserve Bank the responsibility to tackle inflation. 

Then from the early 2000s came the unexpected boost from China’s booming demand for Australia’s iron ore, by then our biggest export. 

In those two fabulous decades, the purchasing power of Australian households – otherwise known as our standard of living – jumped by two-thirds. Australia became a prosperous nation. We even sailed through the Global Financial Crisis without a recession. 

But this latest prosperity boom peaked around 2011 or 2012 along with the $US180 per tonne iron ore price. 

For the decade-plus since then, Australia’s envied affluence has gradually slipped away. 

It’s happening for two reasons. First because of a lower iron ore price that we can’t do much about. 

But second because of bipartisan policy failures that have undone or reversed the policy choices that helped make us affluent in the first place. Instead of remembering what it takes to grow the pie, the political process has resorted to squabbling over its shrinking slices.    

The result is Australia is becoming more of a low-growth European-style welfare-state economy – when we should be a high-growth frontier economy that attracts the world’s best talent and its saving to our above-average investment opportunities.   

The productivity of the Australian economy – or the amount of goods and services it produces for each unit of labour input – today is hardly above the level of 2016. 

The step down in productivity growth has prompted the Reserve Bank to cut its estimate of how rapidly the Australian economy can grow each year, in real terms, to just 2 per cent, before it runs into so-called capacity constraints. 

These constraints in turn limit how much tax the federal government collects as it confronts a projected decade of budget deficits and a trillion dollar public debt. 

It’s why real wages are languishing at 2011 levels.  And it forces the Reserve Bank to keep interest rates elevated to keep overall spending or demand within the economy’s ability to supply extra goods and services. 

What’s caused this productivity and growth slowdown? Yes, it is a global phenomenon. But, after being feted for its exceptionalism, Australia has become an international economic laggard, according to The Economist magazine. 

First has been the growth in the size of government. The government’s share of the economy has grown by between three and six percentage points since before the pandemic. 

The two fabulous decades of prosperity inflated voter expectations of what governments could deliver – and finance. These expectations got locked into political promises – such as for the NDIS and the Gonski school spending – even as national income growth slowed sharply. 

Once the pandemic hit, middle class voters seemed happy for governments to borrow more to supply them with more non-means tested benefits, such as electricity bill subsidies or universal childcare. 

As the Centre for Independent Studies economist Robert Carling has pointed out, it appears that at least half the voting population now relies on government for at least half of its income. It’s promoting a culture of dependency. 

And most of the so-called care economy is relatively low productivity. Its rapid expansion has dragged down the overall economy’s productivity. 

Second, the tax system continues to rely too much on taxing enterprise and initiative. Projections for closing the federal budget deficit rely on a decade of bracket creep tax hikes on workers. That is, taxation by stealth. 

The 47 per cent top marginal income tax rate encourages enterprising Australians with big ideas to move offshore, say to the US. Paul Keating says Australia top tax rate should be no higher than 39 cents in the dollar. 

The Productivity Commission has documented how Australia’s 30 per cent company tax rate has become uncompetitive by international standards. That makes investing in Australia less attractive which, in turn, undermines our productivity. 

Third, Paul Keating’s big shift from centralized wage fixing in the early 1990s sought to promote productivity-based enterprise bargaining at the shop floor level. But Rudd-Gillard and now Albanese Labor have re-regulated the nation’s work rules in ways that undermine this. 

Reintroducing so-called pattern bargaining delivers uniform work and pay rules across  businesses that are supposed to compete against each other.  And don’t tell me that imposing new rights for working from home makes businesses more productive.    

Fourth, Australia’s cheap energy advantage traditionally has allowed us to sustain a high wage economy. This cheap energy of course was based on plentiful supplies of low-cost coal-fired electricity that attracted energy-hunger smelters in the 1970s and 80s.   

Harnessing cheap wind and solar power was supposed to turn Australia into a clean energy superpower. Instead, energy costs are going up as the share of renewables increases. Australia has lost our cheap energy advantage, exposing our high wage and low productivity growth economy. Governments are being forced to subsidisesmelters to keep them operating. That’s another form of the import protection that we got rid of in the 1980s and 90s because it kept uncompetitive industries going.   

Fifth, what the Productivity Commission calls the ever-growing burden of red tape, regulation and compliance is drowning business in unproductive activity. 

The Centre for Independent Studies has changed the housing debate in Australia. Its now accepted that zoning and planning restrictions, rather than tax breaks for investors, are the main cause of excessive house prices and rents. 

But the regulations that make housing so unaffordable are just an example of the supply-side restrictions across the economy: from opening a coffee shop, to building  renewable energy transmission lines, to opening a new mine. 

Today governments impose all sorts of new burdens on businesses. Such as requiring them to disclose the carbon emissions of their customers in another country, to ensuring that none of their customers seek to launder ill-gotten gains, to engineering gender equality and to maintaining the mental health of their employees. 

This is the modern regulatory state. The Macquarie Group has put its annual compliance burden as high as $1.2 billion. 

Australia is still a prosperous nation. As the Reserve Bank’s Andrew Hauser says, we’re still blessed with extraordinary mineral resources, world-ranking universities, a plum geographical position in the Asia-Pacific, a huge retirement savings pool, relatively low public debt, a strong banking system, proven political and economic institutions, and a track record of openness to foreign capital and labour.    

But it’s up to us whether we want to entrench these exceptional advantages into exceptional prosperity for the next generation of Australians — or are prepared to let them slip back into the pack of low-growth developed nations.