Current Issue #488

It's the Economy, Stupid

It's the Economy, Stupid

Those in power, who are able to pull the economic policy levers, are unable or unwilling or simply unaware of what is happening in the economy and what needs to be done to get the economy back on track to stronger job creating growth.

At every opportunity, the Turnbull government is sweeping economics under the rug while it focuses on terror, laws on racial vilification, rhetoric about ‘hard working Australians’, a blip in energy prices and anything else that means the economy is not discussed. The ‘jobs and growth’ mantra is as sincere and meaningful as a US shop assistant saying ‘you’re welcome and have a nice day’ just after they serve you a miserable coffee.

The other economic policy heavyweight, the RBA, is fixated about house prices in Sydney and Melbourne and continues to leave Australia with some of the highest interest rates in the industrialised world and an over-valued exchange rate. It does this while inflation is entrenched below the bottom of its own target range, real wages growth stalls and the spare capacity in the labour market balloons.

To be fair, there is one economic policy issue that has a substantive proposal behind it – the cut to company tax rates. But the plan to reduce company tax rates is more like a Chinese Politburo 10-year plan and it is of such a scale that it will fracture an already vulnerable budget outlook. And, in any event, it looks like hitting the rocks in the senate as it is expensive, ineffective and unpopular. The key elements of the company tax issue will no doubt slowly but surely sink in the not too distant future.

So what should the government be thinking about in terms of the economy and policy?

The budget and government debt are issues that need tendering. Neither are a major concern at the moment, but a little bad luck on commodity prices, an economy crunching housing slump or some global funk from weakness in China or a Donald Trump-inspired trade war will blow the budget out of the water and with it, Australia’s triple-A credit rating. Best to do more than the current plan to chip away at budget bottom line. It would be wise for the government to look at meaningful revenue measures and targeted spending restraint. Revenue neutral but pro-growth changes to income tax scales which would also have the benefit of addressing inequality should be considered.

At the same time, nothing specific is being done to address the simmering problem of labour market weakness. There are 750,000 people unemployed and a further 1.1 million underemployed. This is around 15 per cent of the potential workforce that is not working at all or not working the amount of hours they would prefer. Growth needs to be stronger. Where’s the policy initiative to address this large and growing problem?

Linked to that is the ongoing policy discussion about the optimal level of resources that the government should allocate to education, skills and training. It goes without saying that when the economy is one day strong enough to see employers ramp up their hiring plans, Australians that have reached their full-skill potential should be hired so that unemployment and underemployment are reduced.

Housing, aged-care, workforce participation, the level of social security payments and superannuation are all areas that need attention. By 2027, Australia’s population will be about three-million larger and a good deal older. More than 1.5 million new dwellings will need to be built, preferably in areas that people wish to live in, which means infrastructure spending needs to be higher than currently planned. At the same time, the superannuation system and aging population will present a drag on the budget. How about looking at ways to ensure this fiscal time-bomb is defused early and not left to the next generation of politicians to tackle?

It is also apparent that Australia needs to ensure its economic standing in Asia and the global economy is enhanced. Prime Minister Turnbull, Treasurer Scott Morrison and other senior ministers need to do more than appear at a G’Day Australia trade fair to ensure the economic icing on the cake – exports – remains a critical contributor to the economy. And while the effort to boost exports should be directed across all sectors, Australia is in a wonderful position to benefit from the remarkable growth in spending globally on education, tourism and financial services.

Australia might still get lucky and growth remains reasonable as our major trading partners buying large volumes and paying high prices for the goods and services where Australia has a comparative advantage. There is a risk that this luck might change and if it does, we might look back at the current policy lethargy with regret and disappointment.


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