THE STATE OF THE AUSTRALIAN ECONOMY

Recently appointed Australian Secretary to the Treasury Dr Martin Parkinson gave an interesting post-budget speech on the Australian economy. Several themes are relevant to economic challenges in New Zealand.

Dr Parkinson opens by noting that Australia came through the global financial crisis well. Leaving aside the effects of stimulatory monetary and fiscal policy, he comments:

The Australian economy dodged a bullet and we did so because of 25 years of hard, and not necessarily popular, economic reform … Australian governments from the mid-1980s onwards recognised the need to transform our economy. They prosecuted the case for microeconomic and structural policy reforms that were crucial in increasing the economy’s capacity to ride out a severe external shock. They put in place robust monetary policy frameworks. And they demonstrated the resolve needed to bring deficit budgets back into surplus, and committed themselves to increasingly well-articulated medium-term frameworks for fiscal policy.

Too many New Zealanders think that Australia’s success is ‘all about mining’. The Economist makes the same point as Dr Parkinson in a leader this week:

[Australia’s] economic success owes much less to recent windfalls than to policies applied over the last 20 years before 2003. Textbook economics and sound management have truly worked wonders.

Note the ‘textbook economics’ – not the dreaded ‘neo-liberal’ policies that Helen Clark used to bang on about.

After discussing at length problems associated with assessing the structural budget deficit in Australia, Dr Parkinson goes on to address wider issues. He states: 

The global economy is undergoing a transformation unprecedented in the last 100 years. Geo-strategic and geo-economic weight is moving, inexorably, from the Western advanced economies towards the emerging market economies. And the pace of this transformation is faster than many anticipated. Key emerging markets from Australia’s perspective are China and India.

 … Indeed, some estimate that China should overtake the US to become the world’s largest economy by 2016 and, in turn, be overtaken by India by mid-century.

These developments will pose major adjustment challenges for Australia (and New Zealand). The paper notes that the Australian dollar, which is currently at record levels, can be expected to move roughly in line with the terms of trade over the longer term. This will put pressure on trade-exposed sectors such as tourism and manufacturing which are not benefiting from high commodity prices. On the other hand:

… it is important to highlight that a higher exchange rate helps to spread the benefits of the terms of trade boom through the community by reducing the price of imported goods and services. Unless the global environment changes, attempting to lower the nominal exchange rate simply results in the required real appreciation being delivered through higher inflation rather than a higher nominal exchange rate. In other words, a higher nominal exchange rate benefits consumers!

 Dr Parkinson points out:

… that the Australian economy is always changing – there are always new jobs and businesses being created as new opportunities are identified. By way of example, in a typical year, around 300,000 businesses are born and a similar number die; around 2 million people start new jobs and leave old ones; and half a million workers change industries.

Finally, the paper draws out the policy implications of the structural adjustment challenges:

A reform agenda that increases the supply of labour, improves the flexibility of the economy and boosts productivity will be vital for our future prosperity in the face of the long-term trends reshaping our economy. The most credible policy responses will be those that allow the economy to adjust, while protecting those most vulnerable.

This will not be easy. As I noted at the outset, the reforms of the past 25 years were difficult and hard won, with populist challenges to their need and their effectiveness.

and Dr Parkinson adds:

Importantly, structural reform is not a one-off – it is a process, not an event. Without continued effort the gains that were made can be eroded over time, particularly given the long lags between reforms and measured productivity improvements.

Contrast the widespread acceptance in Australia of the importance and benefits of its reform programme with Helen Clark’s silly mantra about ‘the failed policies of the past’. But Australia is at risk, at least in the short term, of throwing away some of the gains. As an Australian colleague emailed me last week:

… we are doing our best over the other side of the Ditch to close the gap. I think it is called the ‘winner’s curse’ and the government is doing pretty much everything it can to destroy the prize we have received by virtue of our endowments and the surging economies of China and India.

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5 thoughts on “THE STATE OF THE AUSTRALIAN ECONOMY

  1. More and more I think our constitutional arrangements are to blame for our current state. With Australia’s bicameral, federal, written constitution based system, Muldoon would not have gotten so far out of control, Douglas would not have to have moved so fast, Peters and Clark would not have been able to do so much vote buying, and we too might be enjoying the fruits of a more gradually introduced and more widely accepted policy environment.

  2. And with Australia’s crazily overgoverned polity, Ruth and Roger would never have been able to do what they did – and (fingers crossed) the emergency austerity budget NZ desperately need wouldn’t be able to be introduced between the election and xmas…

  3. I think we need to lighten up on the “Aussie envy” stuff somewhat guys. They have structural problems too and can keep their Federal system of Government.

    It is not a load of laughs living in Sydney where housing is at 9.6 times household earnings and they are in struggle street on their $150,000 a year household incomes. Wait for Leith van Onselen to explain soon on Macrobusiness Au http://www.macrobusiness.com.au how housing inflation leads to general inflation.

    Dr Oliver Marc Hartwich explained it beautifully as well, in comparing Germany (no housing bubble) with Australia.

    And living in Melbourne where housing is 9 times household earnings is not a load of laughs either. And note too, how the housing bubbles collapsing there is starting in the mining states of Queensland amd Western Australia.

    Lets just see how clever Australia is as the housing bubble fizzes and commodity prices go south.

    Now Gerry Brownlee is cracking the whip here in Christchurch and I sure hope this leads to some serious changes in our other cities here in New Zealand as well.

    • All fair points. Plus people have different preferences. And it’s always possible that Australia could shoot itself in the foot. But a fair test of relative overall attractiveness is how people vote with their feet. Overall the traffic is not heading in New Zealand’s direction.

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