SOBERING news yesterday of GDP growth for the June quarter of 0.2% — half the expectation of economists — and 2% for the year to that point should ring alarm bells in Canberra; whilst any recession in Australia will owe much to external factors (they usually do) local politicians can nonetheless work to avert or limit the damage. To this end, both Liberal and Labor parties, to say nothing of the Senate crossbench, must clean up their act.
At the outset, I should note I am well aware that politicians of all stripes (or at least, where the major parties are concerned) avoid “talking down” the economy like bubonic plague; on the other hand, readers of this column have come to expect nothing other than blunt candour where my views are concerned — and this candour, increasingly, has applied to my assessment of both the main parties — and so today I am simply going to stick to the subject at hand, and call it as I see it.
Before anyone gets too excited, the darkening economic outlook is simultaneously the fault of both major parties (if anyone must be blamed) and has as much to do with uncontrollable external factors as it does with any avoidable missteps at home, and I say that not to defend the Liberal Party, but to make the point that shortsightedness is a unilateral commodity in Australian politics these days, but even that sin often lacks efficacy in the face of global headwinds.
The news that Australian economic output slumped to just 0.2% in the June quarter (and an annualised rate of 2%) should serve as potent notice that for the first time in almost quarter of a century, this country is lurching toward recession; whilst it’s a vain hope in the present gladiatorial environment in Canberra, it’s not possible to pin “blame” for any contraction on one party or the other, and the temptation should be resisted.
But it won’t be, so let’s talk about it a little.
The obvious point to make is that the collapse in commodity prices over the past couple of years has amounted to a double whammy, as billions of dollars in receipts have been stripped from government coffers in addition to the billions in investment money that has dried up in the wider economy; the unemployment rate has proven a prescient indicator of this process, inching upwards as business confidence slowly evaporates, and taking consumer confidence with it.
And of course, every job that disappears also costs the country twice: once in the disappearance of tax payments and consumer spending, and one through the cost of any welfare payments it triggers.
I spend a lot of time in the course of things talking to people from all walks of life — businesspeople, those in the public sector, certain politicians, other media people, ordinary voters — and stripped of the BS that anyone can find if they go looking for quotes from government sources, the economic mood seems as ambivalent now as it has been for many, many years: and even during the Global Financial Crisis there was a sense the mining sector would somehow pull Australia through without a great deal of damage (which it did) that is markedly absent now.
Even so, more than a hundred billion dollars of poorly targeted “stimulus” money thrown around at that time by the Rudd government (and the consequent $350 billion debt pile inherited by the Coalition where none existed beforehand) has left the Commonwealth poorly placed to make any significant attempt to spend the country out of any recession that occurs, and I would make the point that loading up on even more debt now to try to cushion any economic blow will simply make an awful lot more pain later mandatory: and with the irresponsible and thoroughly reprehensible approach of the ALP to budget management and government debt a constant whether it sits in office or opposition, the kind of austerity that would be required down the track to fix the legacy of such largesse would probably never eventuate — and that would be a problem for a whole other set of reasons.
There are, to be sure, some factors at play that will work to ameliorate any recession and arguably truncate it; the Australian dollar — already down 30% from its post-float highs — is as we speak slipping above and below the 70c mark against the US dollar; widely tipped to fall another eight to ten cents against the greenback, the dollar is a potent factor in making Australia more competitive internationally whilst cutting the price of our goods and services on world markets.
Similarly, official Australian interest rates — stuck since May at an all-time low of 2% — are effectively leaving more disposable income in the bank accounts of home buyers, and whilst it remains to be seen whether any consequent discretionary spending results from this, boosting economic activity (and consumer confidence, it must be noted, isn’t what you’d call startling), it at least means that households with mortgages are better able to either save, pay down debt or to spend in the present environment than they have ever been: and whichever way you cut it, those activities too are useful at a time of economic torpor.
And for someone I’ve felt the need to be so critical of, Joe Hockey may have helped to stave off trouble too with a mildly expansionary budget this year, offering instant write-offs of purchases up to $20,000 per item to small business; at a time of economic trouble every bit helps when it comes to firing up activity, although it’s a fair bet the income tax cuts Hockey has unwisely bandied around won’t be forthcoming any time soon: and if they are promised, they should be believed with the utmost of caution.
Yet these things can’t counter the fact that thanks to profligate recurrent government spending — by both sides of politics at various times, and by the states as well as the Commonwealth — and by virtue of the dangerously ballooning structural deficit in federal finances, Australia comes out of a prolonged period of economic growth, underpinned by a lengthy boom in commodity prices, in very poor shape to weather a protracted recession of significant depth.
But that is the situation this country faces, as economic growth in China slows to below 5% annually, and with other so-called “Asian tiger” economies also lagging; Japan — still the world’s fourth-largest economy — continues to languish in stagflation, whilst our other key trading market in the US is growing, but of less consequence to Australia than it used to be now our exposure to Asia (and China especially) has grown as it has.
By contrast, the UK — once upon a time Australia’s most important export market — is booming, with the British economy growing faster now than any other OECD country. Yet there are lessons from the UK that can be applied here in Australia, and it is here that the economics of any downturn intersect with the domestic politics of one: and it is here that Australia’s supposed “miracle economy” is about to be exposed as severely tarnished.
Quite simply, the Cameron government — admittedly in a coalition of inconvenience with the Liberal Democrats — spent its first term in office cutting handouts, slashing politically motivated spending, implementing modest tax rises (mainly on consumption) and delivering matching modest cuts to income tax, and doing at least one thing it was elected for: to fix the British budget, which was left in far worse shape by British Labour than anything Wayne Swan could have hoped in his wildest dreams to have sabotaged, and readying to redress a similarly bloated national debt pile — which obscenely stood, the day Gordon Brown was unceremoniously dumped from 10 Downing Street, at some £1.5 trillion.
The outright re-election of Cameron’s Tory Party in May is evidence, were it even required, that a government administering tough and unpopular reforms, provided it is open with the public and explains what it is doing and why, can easily achieve re-election. But the tough reforms also need to be the right reforms (and Hockey’s 2014 budget was nothing of the sort), although even if they were the ALP would still have led a cynically populist charge to obliterate them in the interests of its insatiable lust for power at literally any cost.
Here in Australia, of course, the common ground we share with Britain is a federal budget plunged into a structural abyss by Labor, with rampant recurrent spending running out of control and a debt pile that continues to spiral: but unlike the UK, we also have a Senate — dominated by Labor, the
Communist Party Greens and a motley assortment of whichever single-issue cross benchers wish to oppose the government at any given time — that has singularly and spectacularly failed to permit the Abbott government making any serious attempt at fixing the damage so ruinously bequeathed by the Rudd-Gillard-Swan Labor government.
Where I am heading here isn’t to rip into the ALP and its resident intellectual cripple, Swan, not that there is anything wrong with doing so, of course; rather, there is a shining example of what happens when the hatches are battened down and genuine repair work is enacted on a budget — and the booming British economy is proof that the pain is worth the gain — and that in any case, both sides of politics actually have a duty to do whatever they can to ensure what I think could be a pretty vicious downturn is dealt with by making the reforms a hostile Senate has to date cynically refused to allow.
One thing that is likely if the bust really hits is that the correction in Australian property markets — which should have happened during the GFC, but which was largely staved off through stimulus spending — will finally arrive, and rather than using public money to try to avert it for fear of the political consequences, whomever is in government when it hits must allow that correction to happen: property markets in this country, heavily skewed to speculation and open to non-residents to distort by making acquisitions that drive up prices, are so overblown that if the bubble bursts, no attempt should be made to stop it.
If people get their fingers burned, that’s commercial reality: there is no right or entitlement to immunity from economic trouble or bad investments; and in any case, if people who lose money on a property bust are so leveraged that a recession takes them under, I would contend it’s their own greed and lack of judgement that stopped them taking huge paper profits (built on the backs of those who can’t afford to enter the market at all) when they should have, and that they have no right to complain.
Still, the swathe of state and federal first home buyers’ schemes — all of which have helped fuel the inflation of the property bubble — should all be abolished; for one thing, it would save a lot of money; for another, the original idea, whilst worthy, has arguably had the opposite effect to the intended help for people to buy housing at all.
Heading into stormy waters, the need to toss Hockey overboard is now past due; unimpressive in office to date and unable to deliver meaningful outcomes as Treasurer when conditions were comparatively benign, there is no reason for Australians to have a shred of confidence in him now the weather has turned: come on down, Malcolm Turnbull or Scott Morrison.
And in case Labor-oriented readers think I’m handing them a free kick, the ALP doesn’t boast a single MP in its ranks with the requisite nous to do the job: Chris Bowen is a red herring and a slogan-regurgitating embodiment of the Keynesian ideas that trashed Australia’s envied international position in the first place; Penny Wong is useless, and as Finance minister presided over a debt blowout that ran into the hundreds of billions of dollars; Swan himself is so incompetent where money matters are concerned he simply shouldn’t be mentioned in the same sentence as the term “economic management;” and as for the rest of them, Labor couldn’t produce a capable Treasurer from an aggregation of the financial nous of the lot.
Today’s piece is intended not so much as to advance a particular argument or position as to raise the curtain on a subject we all knew would present itself sooner or later; after almost a quarter of a century of uninterrupted growth, a recession was always going to be a matter of “when” and not “if.”
Regrettably, I don’t think this will be the last time we talk about recession in Australia — far from it.
But aside from a new Treasurer, those who govern (as well as those who oppose) would do best to abandon the tactics of the schoolkid and the bully, and embrace some responsibility and principle — and that does actually apply to those on the Left more so than the Right, although nobody is blameless.
And the Senate — as much fun as there might be to be had in trying to destroy the Abbott government — would be best served coming to some kind of consensus built not around trying to sabotage and/or emasculate the government’s legislative program, but to enable as much of any eventual response to pass as possible: even if some minor tweaks are needed to render aspects of it less unpalatable to some of the ideological basket cases who sit in the upper House.
I am fast warming to the argument that if reasonable reform of the Senate proves impossible — or if attempts to pursue it are abandoned — then a debate that might instead be worth having centres on whether it should be abolished altogether; not, perhaps, an ideal scenario, but the Senate is being used in ways it was never intended to be, and the abuse of that chamber (right down to the series of “reforms” made by successive Labor governments last century to rig it against conservatives) simply has to stop.
If the looming recession really does hit with full force and great fury, the Senate will have a role to play in any government response; its crossbenchers and the opposition parties have already shown themselves incapable of acting with any decorum or maturity when things are reasonably good, but should they continue to do so in the depths of a recession, then abolishing the Senate just might have to be the first order of business for any government inclined to argue the case at a referendum.