Subsidies, safety nets and stagnation: Australia’s new economic model

Donald Trump may have pulled back from civilisationally destroying Iran. But disrupted global oil and gas supplies, and higher energy prices, will likely persist well beyond whenever the war

ends.

Australia’s policy response is shaping up as bigger government, higher taxes, regulated pay

increases, a net zero-inspired loss of our cheap energy advantage and a sovereign-capability

industry protectionism that will make Australia poorer, not richer, and weaker, not stronger.

As it divides a flailing Coalition, One Nation’s pitchfork rebellion is sapping Opposition Liberal

leader Angus Taylor’s opportunity to revive the sort of pro-market and incentives-based policy

agenda that created Australia’s modern prosperity in the first place.

Yet the centre-right’s populist antagonism, Anthony Albanese’s commanding parliamentary

majority and the offers of industry bailouts shows signs of driving business into Labor’s arms,

even after being stitched up on industrial relations. After all, Liberal frontbencher Andrew Hastie

says big business has “lost its social licence”.

Albanese’s oil shock response is doubling down on the COVID lesson that voters reward

governments offering “security” from a dangerous world.

Amid a growing culture of dependency, the Prime Minister promotes an economy that is

“stronger because it is fairer”, promising to ensure that “no one is left behind” from whatever

shock hits next.

As with the Russia-Ukraine oil price shock, that means a halving of petrol excise that will add to

the $1 trillion federal government debt to be shouldered by future voter-taxpayers.

Treasurer Jim Chalmers may even get another temporary budget boost from higher company

tax from iron ore, gas, coal and gold exporters.

But that may further ratchet up the size of government, as in the wake of the pandemic and

Russia’s invasion of Ukraine.

There is no sign of the Labor fiscal consolidation that followed Paul Keating’s “banana republic”

warning 40 years ago next month. That would leave some people behind.

Led by what Health Minister Mark Butler depicts as the “out of control” National Disability

Insurance Scheme, the expansion of the low-productivity care economy has added to the public

debt and dragged down Australia’s overall productivity.

That limits how far wages can rise without pushing up inflation and prompting the Reserve Bank

to lift interest rates. Except that Labor continues to govern as if productivity doesn’t matter: as its

then Workplace Relations Minister Murray Watt insisted just over a year ago.

Last week, Albanese took credit for the Fair Work Commission’s award wage increases up to 42

per cent for 500,000 workers aged 18, 19 or 20 years in fast food, retail and pharmacy

businesses.

Supported by the government, the FWC abolished long-standing junior award rates that

traditionally have recognised the lower experience of younger workers.

As well, Labor is backing an above-inflation pay rise for 3 million award-reliant workers that will

add to the Middle East cost squeeze on labour-intensive services businesses.

The usually-cautious Albanese is responding to the Middle East crisis by proclaiming a new

urgency to “economic reform that drives growth, boosts productivity, helps tackle inflation and

lifts living standards”.

But this seems to stretch the definition of productivity reform to include Labor’s ambition,

concealed at last year’ election, to wind back tax concessions for property investors.

This is promoted as a fix for the intergenerational housing crisis. But the credible research,

including by the Centre for Independent Studies, says that increasing capital gains tax on

property and winding back negative gearing tax concessions would reduce housing prices by a

trivial amount, while edging up rents.

The closing of the Strait of Hormuz has exposed Australia’s reliance on global supply chains for

liquid fuels and will require a reset, including by providing a social licence for tapping

undeveloped local oil reserves.

But, as Albanese correctly notes, achieving anything near sovereign self-sufficiency in petrol,

diesel and aviation fuel would cost tens and tens of billions of dollars. That would be paid for by

consumers and taxpayers amid a cost-of-living squeeze and a decade of projected budget

deficits.

Yes, the world of geo-political conflict does lead to some convergence of security and

economics, such as by reducing reliance on critical minerals supply chains dominated by China.

But global and domestic supply chains held up surprisingly well during the pandemic.

And new Nationals leader Matt Canavan is calling for permanent import tariffs on

politically-selected manufacturing industries.

Rather than taxpayers footing the bill for Labor’s

expensive ad hoc bailouts of steel works, copper smelters and aluminium smelters, consumers

would pay.

Canavan touts it as some sort of new agenda, saying a “microwaved Milton Friedman is not

going to save the day”.

But the Nationals’ agenda harks back to the protection-all-round of Country Party leader “Black

Jack” McEwen in the 1950s and 60s. Then, as now, subsidising or protecting one industry

imposes a burden on the competitive sectors that actually prop up our prosperity, such as

mining, energy and agriculture.