Bold strategy needed to save us from economic purgatory

The Australian economy shrunk in real terms 0.5% in the third quarter of this year. But you can relax…somewhat. The consensus among commentators — something that meant a lot more this time last year than it does now — is that we are not headed for recession.

Well not yet anyway.

However, these appalling growth figures make it clear the path Australia is currently on definitely ends in an eventual recession. The question is whether we are still willing to endure the moderate pain of economic reform to avoid the larger pain of the inevitable recession.

For some time now, the economic performance of the Australian economy has been mediocre. Business investment has been falling precipitously for a number of years. The Reserve Bank has cut interest rates four times since the start of 2015. Scope remains to cut interest rates further but serious questions are being asked whether this will have any real impact.

Despite foolhardy predictions in budget after budget that the economy will soon return to its ‘rightful’ pattern of strong growth, the budget remains mired in deficit. The only positive that can be taken from this is that it should quash the flawed idea that government should go further into debt to try and prop up demand.

Nor is infrastructure spending a magic wand that will solve our problems. A good infrastructure development plan focused on making it easier to do business — with thorough evaluation and no political interference — may generate positive returns in the long term. However we don’t have such a plan, and even if we did it is little use in the short to medium term.

More haphazard deficit spending is not the solution to lacklustre performance in the private sector. Only the hard work of unwinding a decade or more of anti-business and investment thinking can do this. We need to end our resistance to reform.

The last time Australia had two consecutive quarters of negative real economic growth was more than 25 years ago. Should growth resume in the fourth quarter of this year, Australia will pass the Netherlands for the longest streak of uninterrupted economic growth among major nations for the past 50 years.

Much of this can be attributed to the economic reforms of the 80s and 90s. Hawke, Keating, Howard and Costello turned Australia from an insular, inefficient backwater economy into an open, flexible economic powerhouse.

Australia dodged the Asian Financial Crisis in the late 90s, the end of dot-com bubble and 9/11 which pushed the US into recession in 2001 but caused only a brief dip here, and we held strong while the world economy melted down in 2008.

Luck played no small role in Australia successfully avoiding these calamities. A mining boom starting in the early 2000s added 13% or more to real household per capita income and massive stimulus in China kept that mining boom going through the Global Financial Crisis. We were in a strong position thanks to good management, but a loss of external confidence in Australia’s economy — which would have caused havoc — has not appeared.

We have no right to expect this luck to continue. Indeed we would be fools to rely on it, yet we have effectively assumed that no matter what we did politically — more regulation, repeated rejection of foreign investments, high tax rates, and demonisation of multinational companies—– the money would keep on rolling in and the economy would continue on its merry path.

We have become complacent; encouraging both sides of politics to focus more on how to divide the pie than how to increase it, while electing minor parties to frustrate any unpopular but necessary reform. Economic reform has become piecemeal at best, shambolic at worst.

It is hard to see how minor bilateral ‘trade export deals’ or a toothless ABCC can deliver us from economic purgatory. It is harder still to see how taxing the productive sector of the economy even more will deliver anything at all.

A bold strategy is needed, something that shows the Australian government understands the seriousness of the economic challenges facing us. Cut taxes on business, not by 5% over 10 years, but 15% over five years. Double the Foreign Investment Review Board thresholds and then in three years’ time double them again. Undo the new protectionist procurement guidelines and stop propping up failed businesses. Repeal 10,000 pages of regulation, industry by industry.

If the government does nothing and the opposition promises to do even less, Australia’s lucky streak will inevitably end in a recession. Having just watched the political fallout in countries struggling through a slow recovery like the US and the UK, why would we let that happen here?

Simon Cowan is Research Manager at the Centre for Independent Studies.