Slowly, Australians are awakening from their deep 28 years slumber. For nearly three decades, they have slept secure in the delusion that the boom in commodities was a God-given gift that would keep on giving and provide the means to ride out any financial storm and most political follies.
They may have stirred at election time or when a prime minister changed, but even the ‘progressive’ chatter around them did little to disturb their reverie, thanks to constant reassurance that uninterrupted economic growth was a given. Other than signal occasional annoyance, they nodded silently as the Turnbull government borrowed its way down the socialist road.
Indeed, since 2014, when the Abbott government’s attempts to rein in debt were rudely interrupted, Australia’s gross and net borrowings have more than doubled. That is faster than almost any other country.
Now, suddenly, many of those Australians are waking to the unfamiliar reality of financial stress. Like Rip Van Winkle, they are realising this is a different country to the one they remember. The egalitarian land they once championed has become a place where envy, identity and sanctimonious bureaucracies intrude into their daily lives. Their belief that Australians are generous, fair-minded people is being challenged by their children who are taught they are the descendants of oppressive colonialists and racists. They question how this can be when they observe minorities enjoying so many financial and other privileges denied to them.
What the political rhetoric never mentions is that economic trends are not acts of God.
How an economy adjusts to changes in the business cycle depends on the efficiency of its infrastructure and the flexibility of its labour and capital markets. Australia’s outstanding performance has papered over the economic consequences of poor policy decisions, which have combined to make Australia a less attractive place to do business.
For example, the hugely expensive National Broadband Network monopoly has relegated Australia to 62nd place in global internet speed rankings.
The obsession with renewable energy, has seen one of the world’s cheapest energy producers become the tenth most expensive. Add to these the world’s highest minimum wage and it is clear prosperity has fostered political complacency.
The 20,000 workers who have lost their manufacturing jobs in the last five years know this. So do those who have seen living costs rise, wages stagnate and house prices fall. This when household debt is at record levels.
It is a dangerous cocktail not lost on the authorities. Since the 2019 election, the government has introduced a $158 billion tax reform package, to be phased in over five years, the Reserve Bank has cut official cash rates to a new record low of one per cent and the Australia Prudential Regulatory Authority has increased customer borrowing capacity by up to 14 per cent. Another rate cut in October is expected. This may inject some confidence into a soft domestic economy, but any reprieve could prove temporary.
With interest rates in the world’s largest economies barely positive or deeply negative, economic activity has been flashing weakness for months. Indeed, there is so much spare and idle capacity around today, it calls into question whether authorities any longer have the ability to materially impact economic activity. Since the 2008 Great Recession, governments and central banks have more than doubled global debt from A$166 trillion to A$360 trillion, outstripping growth in income by a factor of five. An economy addicted to debt is like being addicted to drugs. It takes bigger and bigger hits to deliver the same high. Ominously, the junkie dies in the end.
Yet today, nationalising risk is a preoccupation of politicians and unelected central bankers. It explains why asset markets and financial institutions continue to be supported by easy credit. And why the wealth gap in most Western democracies is widening. Risk has become a meaningless concept. To keep the music playing, borrowings are encouraged at every level of society, until balance sheets are stretched to breaking point.
So where to from now?
Crises seemingly emerge from nowhere. It’s because they are the outworking of long-term drivers and the complex workings of a now distorted system. With the US economy enjoying its longest expansion ever, there is a delusion that recessions have finally been conquered. But as J. K. Galbraith reminds us, ‘Nothing is so admirable in politics as a short memory’.
To be fair to Prime Minister Scott Morrison, and most of his ministerial colleagues, in 1991 when Australia experienced its last recession, they were barely in the workforce. Rather than face ferocious opposition from vested interests inside and outside of government, its better to cling to the hope that Australia will escape another global financial crisis. In this way they can stick to soft social issues and avoid hard-headed, economic reform.
But, whatever the current mood in the party room, global macro reality points to an elevated state of economic and geo-political uncertainty. All the risks appear to the downside. Not to recognise this is folly.
This is not 2008 when Australia had no net debt. Today, gross debt exceeds $700 billion and budget surpluses remain ever elusive. Available ammunition has been significantly depleted.
The cheap politics of the Turnbull years, and forever pandering to minorities, can’t continue. Immigration and competition for jobs will increasingly be in the spotlight. Tough decisions will be needed on energy. Pretending that renewables are cheaper and more reliable than coal is no longer credible, assuming it ever was. Coal-fired power will have to be fast-tracked and the playing field with renewable energy levelled. Reducing red tape and making the economy more flexible and internationally competitive must become an overriding policy priority.
After nearly 30 years of slumber, such a rude awakening won’t be easy. But better to prepare voters for recession than to wait for the music to stop.