Australia Blowing $1 Trillion Export Windfall Boosts Budget PainMichael Heath
Even for a country with a history of commodity booms, this one was gargantuan.
Over the decade to 2013, Australia racked up $1 trillion in extra exports from the previous 10 years, thanks largely to China’s once-insatiable demand.
Despite the opportunity of funding infrastructure to meet the needs of millions of new citizens, the nation largely blew the extra cash on month-to-month spending. The added A$300 billion ($232 billion) in government revenue generated from the boom went to things like tax cuts and subsidies.
Aussies taking the Sydney-to-Melbourne trains can think over what might have been as they trundle along for 11 hours -- about the same time that the trip took their grandparents. By contrast, China’s Beijing-to-Shanghai express takes five hours over a longer distance.
What’s worse is that decades-old infrastructure is deteriorating just as government revenues decline and growth from sources beyond mining investment fails to offset the consequence of the end of the boom. Every $10 drop in the price of iron ore cuts federal revenue by an estimated A$2.5 billion.
“We spent the revenues from the boom as they came in from 2003,” said Ross Garnaut, a professor of economics at the University of Melbourne who counseled Prime Minister Bob Hawke during the opening up of the economy in the 1980s. “That left us high and dry when the Chinese new model of economic growth ended our resources boom.”
The record collapse in Australia’s terms of trade is putting a brake on wage growth and leaves the economy expanding below its potential rate of 3 percent. History shows that in the past half century, the nation’s commodity booms have generally ended in recession.
The Reserve Bank of Australia expects mining spending to drop more this year than the 13 percent recorded in 2014. Non-mining investment, which it hoped would pick up the slack, could also fall in the year ahead, the central bank said in minutes of this month’s policy meeting.
The country’s manufacturing sector has been hollowed out and its car industry is set to shutter due to a currency that reached $1.10 in 2011 as Dutch Disease took hold. Future growth and job creation are now dependent on services such as tourism and education, and residential construction fueled by record-low interest rates that are driving up property prices.
“We’re in this slow economic drift,” said Bob Gregory, a professor at Australian National University in Canberra who has studied the economy for almost half a century. “It’s hard to see anything that will turn things around so unemployment will keep rising.” He predicts the jobless rate could climb through 7 percent from the current 6.1 percent.
Yet the Garnaut-Gregory pessimism isn’t shared by all. John Edwards, an RBA board member who advised Prime Minister Paul Keating in the early 1990s, said mining spending only added 3 percent to real gross domestic product over eight years and households saved much of the income gain.
“Australia has not been living in fool’s paradise during the mining boom, it has not been complacent, it has not wasted its endowment,” he said in a 2014 paper titled ‘Beyond the Boom.’
Also, the government’s net debt-to-GDP ratio, although deteriorating, is the lowest among the world’s 10 largest developed economies, according to data compiled by Bloomberg. That gives it capacity to fund infrastructure spending through bond issuance.
Yet households also carry a debt burden of 153.8 percent of income, the highest on record, and the government is struggling to restore the fiscal position as commodity prices slump and the tax system leaks.
Less than three weeks out from the May 12 annual budget, Prime Minister Tony Abbott’s government faces a more than A$40 billion deficit this fiscal year and an electorate unwilling to tolerate tax increases and curbs on welfare spending.
In fiscal 2007, the conservative government in which Abbott was a senior minister had an A$80 billion windfall in its budget bottom line, which was spent on measures such as a cash bonus for having a baby, increased payments to families and benefits for pensioners. The rest was distributed via tax cuts. In response, the central bank was forced to raise the cash rate to 7.25 percent -- 5 percentage points above the current level -- in 2008 to prevent an inflation breakout.
Meanwhile, growing urban centers -- Australia added 2 million long-term migrants from 2003-2013, increasing the population by a tenth -- received almost no new infrastructure. Long stretches of the nation’s highways remain single-lane and the railway system has been little changed since the 1960s.
“Sydney needs a new rail connection under its harbor. Melbourne needs a new rail connection under its central business district,” said Mark Birrell chairman of Infrastructure Australia. “These are very large projects that ideally would’ve been planned well before now -- and the catch-up period is significant.”
After 24 years of growth, the question is whether Australia has had it too good for too long?
In 1986, then-Treasurer Keating warned it was headed toward being a “Banana Republic,” a statement that galvanized the country to reform. That effort prompted The Economist magazine to summarize: “If you look at history, Australia is one of the best managers of adversity the world has seen -- and the worst manager of prosperity.”