Australia is set to enter its 25th year without recession next week. For the economy, one of the longest periods of growth on record in the developed-world has actually stored up trouble.
The country is increasingly relying on past momentum, as the costs of political inertia mount and a generation untouched by economic shock breeds complacency. Having shunned major policy change since the turn of the century, Australia’s economy may need to weaken further before the nation will accept reforms from any government.
“No one under the age of 43 has any experience of a recession as an adult,” said Saul Eslake, former chief Australia economist at Bank of America Merrill Lynch. “That’s bred a degree of complacency among managers of firms, among employees, and among voters and politicians.”
The economies in more than a third of Australia are contracting, according to a PricewaterhouseCoopers LLP analysis. Even as firms plan to cut investment by the most on record, Prime Minister Tony Abbott is putting off contentious tax and labor overhauls that could make the economy more efficient and companies more productive.
Yet the urgency for change is intensifying: Treasury says Australia should brace for the weakest income gains in half a century in the coming 10 years, unless it can achieve record productivity growth.
“If we keep going the way we’re going, we could have people in 30 years’ time looking back for the first time in Australian history at a third of a century without growth in living standards,” Ross Garnaut, a University of Melbourne economics professor who counseled Prime Minister Bob Hawke in the 1980s, told a conference June 22. “We need a change in political culture. We need a lot of reform.”
The portents aren’t good.
Abbott has ditched the spending cuts that made his first budget so unpopular, delivering what he had promised would be a “dull” second budget last month. After surviving a leadership challenge in February, Abbott said fiscal problems he dubbed an emergency prior to his election were now manageable.
He’s also sent contentious policies to review committees that are unlikely to report before elections due late in 2016, including changes in tax, labor relations, pension savings and coordination with the states.
“You’d be brave to forecast the government will take a serious reform agenda to the next election, and the opposition will want a small-target strategy to help it appear electable,” said Haydon Manning, a politics professor at Flinders University in Adelaide. “Unfortunately it seems we won’t have real reform until a recession forces voters to listen to politicians who have the courage to take on long-term problems.”
IMF Urges Action
The International Monetary Fund on Wednesday called for an “ambitious” reform agenda to boost productivity, warning Australia’s potential growth rate could slip to 2.5 percent without action. The nation averaged a 3.3 percent expansion over the past 30 years.
Australian firms, too, had little pressure to increase efficiency in an economy undergoing simultaneous commodity, property and share price booms since 2000. The country sailed through the 2008 global financial crisis.
Success a Liability
To boost productivity, the government can force firms to increase efficiency through intensified competition and removal of subsidies, Eslake says. It can also make it easier for businesses to implement changes through areas like labor-market reform, invest in education to equip the workforce and build infrastructure.
For now, the government is relying on a benchmark interest rate at a record-low 2 percent to support growth.
“The fact that we did get out of the GFC without being scathed probably was a liability in the sense of there being no impetus to reform,” said David Burchell, a professor of humanities at the University of Western Sydney. “In comparison with previous decades, there’s also a lack of government leadership on promoting change.”
In fairness to Abbott, the peak of reform in Australia in the 1980s was facilitated by the then opposition leader John Howard backing the Hawke government’s economic agenda in a rare show of bipartisanship. Since 1996, opposition parties supporting government-backed economic reform has been the exception rather than the rule.
Moreover, Abbott’s government has secured free-trade agreements with China, Japan and South Korea, three of Australia’s top four trading partners, since its election.
Still, the last significant policy move that stuck was the introduction of a 10 percent goods and services tax in 2000, pushed through by Howard in the teeth of Labor opposition. It replaced sales taxes and some state levies to make doing business easier, broadened the government’s revenue base and allowed for personal income tax cuts.
Political inertia had a limited impact on an economy underpinned by a mining investment boom amid a surge in demand from industrializing China.
“The record of taking on vested interests in the past 15 years is somewhere between disappointing and abysmal,” said Eslake, who sees a 20 percent chance of recession in 2016 or 2017. “The outlook is not a very optimistic one.”