I Am Not Sure This Is Going To Be A Wonderful Christmas….

This popped up last week:

Australia’s economic problems have been brewing for years

We are in the most prolonged downturn since the 1991 recession. It’s time for a treasurer to do something about it.

John Kehoe Economics editor

Dec 6, 2024 – 2.56pm

The stagnant private sector economy and deterioration in living standards exposed in the national accounts this week have been years in the making.

Labour productivity has failed to improve since 2016; business investment is languishing close to 1990s recession levels; there has been no serious economic reform; undisciplined government spending is in vogue after too much stimulus during the pandemic; and the Reserve Bank of Australia has been forced to push up interest rates to grind household and business activity to a halt and bring inflation under control.

As a result of all of this, economic growth slowed to just 0.8 per cent through the year to September, and in per-person terms the economy has been shrinking for almost two years after adjusting for population growth. It is the most prolonged downturn since the 1991 recession. A better measure of living standards – disposable income per person – is 10.5 per cent below its peak.

The soft-hearted want to take the easy path and blame the RBA. The hard-headed know this problem has been brewing in Canberra over multiple governments under Liberal and Labor prime ministers and treasurers.

For years, serious economists have warned Australian economic policy was on the wrong track. Now it is coming home to roost.

Economist Alex Sanchez, a former adviser to Prime Minister Anthony Albanese and self-described “Labor dry” of the Hawke-Keating reformist mould, says the platform has been burning for more than a decade.

“The sad thing as a country is that we’ve known about it, but done nothing to arrest it,” he says. “It just seems to have gotten all too hard, which is not characteristic of our country’s nature.”

“And I hold myself to account as well,” he adds, having stepped down from the government in July.

But in Canberra, it has been all buck-passing and blame-shifting. Labor is trying to deal with the symptoms of inflation and declining living standards. But cost-of-living handouts do not treat the underlying cause of the problem.

The political class increasingly sees every problem as a distributional issue rather than the poor fundamentals.

Making matters worse, profligate spending by federal and state governments is now in direct conflict with the RBA’s efforts to tame inflation. Governments have their foot on the accelerator as the RBA keeps its foot firmly on the brake.

Approaching an election, an increasingly desperate Albanese government is on a collision course with the RBA as Labor prepares to roll out more cost-of-living relief and a big-spending childcare package. The prime minister’s election slogan to Australians is “we have your back”.

Treasurer Jim Chalmers has dropped the pretence that fiscal and monetary policy are working in the same direction. He now says the record government spending is propping up the economy to save it from technical recession.

While the government wants to avoid the economy going backwards, the extra dollars it is spending will inevitably prolong the inflation pain and elevated interest rates.

Labor did not cause the outbreak of the biggest inflation shock since the 1980s. Extraordinary pandemic stimulus from the Morrison Coalition government (backed by Labor) and the RBA; government-mandated lockdowns; closed borders; global supply chain disruptions; and a war in Ukraine that temporarily lifted global energy prices were the chief culprits.

Yet, the criticism from some economists is that after 2½ years in government, Labor should have done better managing the inflation outbreak and the economy more broadly.

The good news is the unemployment rate is a low 4.1 per cent. A jobs surge in government-dominated care sectors and the bureaucracy has held up the labour market. Chalmers has also delivered two budget surpluses due to a revenue boom from income tax and soaring commodity export prices.

The lucky treasurer

Economist Chris Richardson says Chalmers has been the luckiest treasurer in history, but there has been no real restraint on spending. Chalmers’ budgets have added $60 billion extra in net discretionary spending. The budgets have contained $104 billion in new spending decisions, but raised only $44 billion in extra revenue to pay for it.

That’s a generous calculation because it includes billions in theoretical revenue from a new superannuation tax on retirement savings balances above $3 million that is unlikely to pass parliament.

Total federal and state government spending in the September quarter was at a record 29 per cent of nominal GDP. Extraordinarily, it is the same level it reached during the peak of the pandemic lockdowns in mid-2020 when massive stimulus payments including JobKeeper were flowing.

Higher spending on the $49 billion National Disability Insurance Scheme, aged care, defence, state government public servants and infrastructure projects has pushed the nation’s finances into a long-term structural deficit.

The Organisation for Economic Co-operation and Development warned again this week that expansionary budgets will need to be reined in over the coming years to address fiscal pressures.

“Robust government spending growth has kept GDP growth positive as tight monetary conditions restrained private consumption and investment,” the OECD noted.

Westpac economist and former Treasury official Pat Bustamante says the “once-in-a-lifetime” expansion in the public sector is propping up the labour market, but skewing productivity.

“The longer this dynamic continues, the larger the risk we remain stuck in the slow lane when the public-sector sugar hit runs out,” he says.

The fundamental problem was laid out in a McKinsey report presented to company chairmen and chief executives this week. For much of this century, Australia has coasted on the easy gains from the mining boom and high immigration. Labour productivity growth has been virtually zero since 2016 and has slumped to 30th out of 35 rich countries. McKinsey’s “national emergency” warning is no exaggeration.

Productivity – how efficiently labour produces goods and services – is the key determinant of living standards and contributed more than 80 per cent of income growth for the three decades before the pandemic, the Productivity Commission estimates.

Governments are pumping in more money to the non-market economy (such as the NDIS, aged care and public service), which is expanding at almost triple the pace of the private sector. While higher demand for social services seems inevitable as the country becomes richer and older, bigger government is indisputably weighing down productivity.

Productivity is falling in the non-market economy and has had zero growth for 20 years. This is Chalmers’ “care economy”.

Productivity Commission chairwoman Danielle Wood said in July it “always has been and always will be difficult” to improve productivity in labour-intensive industries. “So what that means is as those sectors expand as a share of the economy, as they inevitably will, that will drive down productivity overall, and you have got to work harder elsewhere,” she said.

In other words, governments and business need to drive larger-than-usual productivity gains in the private sector to offset the expanding non-market economy. But it’s not happening. While private sector productivity is now growing at just below pre-pandemic averages, overall productivity is shrinking.

The key to getting private sector productivity firing is business investment, and it has been stuck around 1990s recession levels as a share of the economy for the past eight years under both Coalition and Labor governments.

Less investment in new tools and equipment and a shallowing of the capital stock makes workers less productive. Business cannot afford to sustainably pay higher real wages unless worker output is rising. Or if employers are forced to lift nominal wages without a productivity offset, the cost pressures will inevitably be passed on to consumers through higher prices, contributing to inflation.

Election cannon fodder

Today, real incomes and living standards have gone backwards due to a combination of higher inflation, elevated interest rates and income tax payments. It is election cannon fodder for Peter Dutton’s opposition.

Shadow treasurer Angus Taylor sharpened his attack this week when he said Australians were paying the price for Labor’s “big government, big Australia” policies. Taylor is economically literate to diagnose the problems. But the Coalition is yet to roll out meaningful policies to fix the challenges. Next week, it will unveil a big taxpayer gamble on nuclear energy.

Teal independent MP Allegra Spender is almost the only MP making a meaningful contribution to the tax reform debate, after publishing a green paper which she will use as a guide for demands in the event of a hung parliament after the election.

Australia’s over-dependency on growth-inhibiting taxes on personal income and non-mining corporate profits has been repeatedly called out by the International Monetary Fund, OECD and former Treasury secretary Ken Henry’s tax review.

Overhauling tax, workplace relations, fixing the energy system mess, competition and less stifling red tape should form the basis of a modern reform agenda.

It’s not beyond us for Australia to once again enter the hall of fame of being great economic reformers.

— Chris Bradley, McKinsey senior partner

Business is exasperated about the Albanese government and is giving up hope on Labor. The platitudes from the government have worn thin, particularly after a series of workplace law changes that empower unions and reduce flexibility.

The tensions were laid bare this week after Chalmers admitted that eventually – perhaps after election spending – the private sector must drive the economy.

In response, the bosses of BHP and Wesfarmers demanded a reduction in red tape and a more friendly environment for investment.

“I kind of wish he’d said this a year ago because this is exactly the message that’s been coming from ourselves, but also from broader business,” BHP Australia president Geraldine Slattery said.

The number of restrictive clauses in federal law (including “shall”, “must”, “may not”, “required” and “prohibited”) has surged by 50 per cent since 2007, according to McKinsey.

Labor’s policies involve bigger government reallocating resources around the economy.

Chalmers’ values-based capitalism is captured by subsidies for manufacturing and green energy such as solar panels, batteries and critical minerals, a $470 million taxpayer bet on PsiQuantum, the care economy and trying to shoehorn superannuation funds and the Future Fund to invest in the government’s priorities of the energy transition, housing supply and infrastructure.

It’s a very different economic approach to the Bob Hawke-Paul Keating Labor governments in the 1980s and 90s. Their focus was on expanding the market economy via productivity growth to pay for social security net programs such as Medicare and compulsory superannuation.

Liberals John Howard and Peter Costello followed up by introducing the GST and cutting other taxes, workplace relations flexibility and delivering 10 budget surpluses.

Then the mining boom arrived in the mid-2000s to deliver tax revenue windfalls, and that made Australia complacent.

The reform task has been made harder by the 24/7 media cycle, social media, powerful lobby groups, the proliferation of political advisers with no outside experience becoming MPs, a less ambitious and more politicised bureaucracy, a more divided electorate and rising budget pressures.

McKinsey senior partner Chris Bradley says governments and business should build a shared understanding of the productivity challenge and create a sense of urgency.

“The incredible economy that we built did not happen by fluke. It happened through amazing leadership from both sides of politics.

“The ingredients were a shared diagnosis of the problem, an absolute focus on urgency and a package deal of things that are collectively better.

“It’s not beyond us for Australia to once again enter the hall of fame of being great economic reformers.”

Here is the link:

https://www.afr.com/policy/economy/australia-s-economic-problems-have-been-brewing-for-years-20241205-p5kw02

All this makes a pretty depressing read, made a lot worse by the stupidity of the Opposition suggesting a quick little dose of nuclear would make the medicine go down, and solve all our problems.

With solar, wind, tidal and fossil sources available in abundance, and nothing that even vaguely resembles a nuclear industry at present it seems to me we need to go slow and carefully to develop  the nuclear skills we need and plan for serious phased adoption the decade after next. We have the luxury of time to get it right and to learn from all the mistakes of others of the last 20 years! In the meantime we have heaps of conventional energy sources!

We have time to do things properly and safely and this is what we should do I reckon!

What do you think?

David.