Reserve Bank governor Philip Lowe last night warned that diminished popular trust in the idea that Australian living standards will continue to improve is fuelling populist politics around the world and making it harder for politicians to implement the policy reforms needed to deal with the issue in the first place. The Australian Financial Review broadly agrees. But Australians still enjoy a prosperity matched by the people of few other nations. And the political task is not to pander to complaints that things aren’t improving enough on their own accord, but to underline the home truth that, to a large extent, we hold our prosperity in our own hands.
As the International Monetary Fund suggests, Australia’s economy has rebalanced pretty well after the nation’s biggest-ever resources boom without a recession or a sharp rise in unemployment. While wages growth has stalled, as Dr Lowe points out, job growth has exceeded expectations. That is a considerable achievement. But it is not going to make us immune from trouble building up in the rest of the world.
The first pre-condition to reviving growth in Australian prosperity is to repair our battered macroeconomic policy levers. The global expansion is slowing. Housing booms around the world are unwinding. Policymakers will face the next recession with their monetary and fiscal ammunition depleted from fighting the GFC. As the IMF urges, Australia needs to run sizeable fiscal surpluses in good times – like now – so as to build a budget buffer to cushion shocks whenever they occur. Instead, both federal and state governments are squandering the unexpected revenue flowing from the cyclical global upswing. The IMF backs the Reserve Bank’s caution in starting to normalise its ultra-low interest rate policy. But this will leave Australia’s central bank with little monetary policy ammunition to cushion the next shock.
Second, Australia must not be afraid of growth – or else end up lamenting its departure. Australia has one of the fastest growing and youngest populations of any developed country, entirely fitting for a frontier economy of just 25 million stuffed with resources and ability to create wealth if there are enough people to develop it. Unemployment is falling even as concerns about immigration bubble up over infrastructure bottlenecks in Sydney and Melbourne. Prime Minister Scott Morrison plans to talk to the states about lowering the 190,000 annual cap on new migrants, perhaps closer to the 160,000 in actual arrivals. Sydney is in the midst of an $80 billion building boom to accommodate more people, and Mr Morrison acknowledges the role of immigration in Australia’s economy. But it still risks ignoring the lesson of former NSW premier Bob Carr’s misguided attempts to slam the gates of Sydney in 2000. That’s required the infrastructure catch-up that is clogging city roads today.
Third, the public debate needs to focus more on driving productivity growth as the underlying source of national prosperity. The Reserve Bank hopes a tighter labour market will bid up wages. But it is not a bad thing that a more flexible economy does not run into bottlenecks that choke off growth whenever the labour market even approaches 5 per cent or so unemployment. To boost productivity, Dr Lowe rightly points to investment in human capital (which we already do a fair bit of), along with sharpening incentives through tax reforms. As the IMF suggests, that requires broad-based tax reform rather than Labor’s tinkering with negative gearing tax concessions in isolation or the Coalition’s mad resort to taxing certain industries or companies, such as banks, on the basis that they’re not popular.
And Dr Lowe touches on another important point. The Hayne royal commission is dealing with clear conduct failures among a range of financial institutions that need to be corrected. But the backlash must not indulge the populist notion that big businesses are bad almost by definition and that banks must be responsible for the failings of their customers. If that takes hold, then banks will simply become afraid to lend simply for fear of being punished for making a loan that goes bad. They will become afraid of growth.
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