WHY AUSTRALIA HAS DONE SO WELL

WHAT STILL NEEDS TO BE DONE

Notes for Address to Adam Smith Society Lunch, London 18 July 2002

By Des Moore

 

The Economist recently portrayed Australia’s economic performance as "Down Wonder". This reflects the GDP increase averaging over 2.8% pa per head, after inflation, in the 8 years ending in June 2001 —almost a 25% increase in living standards and about double growth rates in 1970s and 80s. Most importantly, much of this improvement was due to the faster growth in productivity — 1.8% pa cf 0.6 % pa — rather than the business cycle recovery and, unlike the US and contrary to the winner pickers’ attempts to persuade the Gov to invest in ITC, it did not reflect investments in ITC production. During the 1990s Australia actually caught up a little to America, although we still have a productivity "gap" of about 20%, about 5% less than the UK’s.

Significantly, there were minimal adverse effects from the Asian crisis (even though 60% of our exports go there) and the US slow down. Slowing growth last financial year mainly reflects pause after pre- GST spending burst to beat price rises.

Nov 2001 election focused less on economic issues per se, more on immigration/defence even though those were largely bipartisan.

How did this wonder result happen?

Basically it reflected the more "liberal" policies pursued by governments of both political complexions. This produced much greater exposure to competition, both internal and external, in a context where macro policies became less "Keynesian", and more stable.

What still needs to be done

1. Even with reduced regulation of employer-employee relations, the actual and potential intervention by third parties in employment arrangements is a significant deterrent to employment — Aus has a unique institution (AIRC) that has proceeded on the assumption that there is an imbalance of bargaining power between employers and employees. This has led to subjective judicial interventionism becoming a major problem (in other areas too).

2. The improvement in budgetary policies has not been accompanied by any reduction in the size of government — indeed since the Howard Government came to office in 1996, the taxation ratio to GDP has risen slightly. This partly reflects concessions/compensation made to ensure the GST was politically acceptable in face of Labor opposition. But also the more general problem of extensions of eligibility for social security and health benefits — the buying votes by both political sides has been rampant. Now 22% of working age population receive social security/health benefits cf 15% at end 1980s.

3. The Treasury’s Intergenerational Report, tabled as a Budget paper, suggests that continuation of existing social security/health policies would require an increase in taxation equal to 5% of GDP by 2042. This provides potential rationale for starting smaller government now.

4. Environmental regulation is excessive and is inhibiting investment in forestry, mining and farming.

5. Although monetary policy is now rightly focused on maintaining low inflation, adjustments in interest rates are too focused on achieving changes in activity in the short term. Wealth effects (and "bubbles" do not seem capable of being adequately taken into account.