Keeping the status quo is no longer an option

Both the Australian Government and Opposition appear confused in the debate over significant reform. No wonder the electorate is confused. What has been missing is the broader context. The end of the commodity price boom has dominated the airwaves but this is only part of a much bigger set of issues. Substantial reform will require a clear narrative and a clear exposition of why change is necessary and inevitable.

Most of the electorate and much of the Opposition and minor parties appear happy to stay with the status quo. The government is being dragged into accepting the same. It is hard to win votes on a platform of change and there is no doubt that while there will be substantial gains in the longer run, there will be losers in the short run. The problem is the choice of the status quo is not an option except at enormous cost to future generations of Australians. The world is changing and Australia can either be part of an exciting era of global transformation or Australia can descend into decades of high unemployment and economic, social and environmental dislocation.

Since the early 1990s the world has been transformed by the emergence of large developing countries into the global economy. Through a process of reform, China, India and other emerging countries have added billions of workers and consumers into the global economy. This transformation built momentum during the following two decades and now less than half of global production occurs in the advanced economies. Global economic growth over the past few years has almost completely been driven by growth in the emerging world. Many of the advanced economies are mired in recession and high unemployment.  The global economy is changing quickly.

Australia has been surprisingly resilient during this period of global change. In advanced economies, low skilled workers have needed to compete with very cheap low skilled labor in emerging economies. While on the one hand, highly competitive companies (particularly in manufacturing) in the emerging world have undermined the competiveness of industries in advanced economies, they have also lead to an acceleration of technology. Wealth generation through international trade has accelerated during this period. Global poverty has fallen sharply. However the response in many advanced countries has been to try and preserve the status quo through a wide range of badly designed policies including subsidies to declining industries. Another mistake has been the use of aggregate demand management in response to a structural shock. This policy has driven interest rates to zero, public debt to unsustainable levels and high rate of unemployment in many advanced economies.

Australia was subject to the same global forces undermining existing global industrial structures but the major difference was that Australia produced key inputs that emerging countries, particularly China, needed to sustain high levels of economic growth. The income generated in Australia from the boom in China temporarily disguised the nature of the shock Australia faced and enabled successive Australian governments to avoid making the hard decisions on structural adjustment. The idea that fiscal policy saved Australia from the great recession enveloping the world in 2008 is clearly not supported by the fact that most other countries using fiscal policy did not avoid the structural shock. The income gain from China was clearly the most important contributor to Australia’s performance. Labor appears to cling to the fallacy that adroit fiscal policy explains Australia’s success. Despite uninformed commentary that China stopped growing during the crisis, the truth is that China continued to grow above 10% per year during the crisis years from 2008 to 2010. The continued belief in Labor’s fiscal miracle appears to underlie the reluctance of current Labor leaders to acknowledge the extent of the multiple problems Australia actually faces. Not only is Australia suffering the end of the commodity boom but it still has to deal with the structural shock that the rest of the world has been failing to grapple with for nearly two decades.

The recently published Inter-Generational Report (IGR) doesn’t quite get this broader global context correct. The focus on the demographic and budgetary issues should have been couched in a global context of major intergenerational and international change. The IGR is correct that demographics and the current reliance of outlays in excess of revenue sources is important but that is not Australia’s biggest problem nor is there where Australia’s opportunities are to be found. It is critical to get the fiscal problems addressed but the issues are much larger than the size of the debt.

In the face of disruption of existing social and economic norms and environmental challenges, there is much good news coming from the movement of hundreds of millions of people out of poverty. Australia’s comparative advantage in many areas such as higher education, medical research, environmental management etc means it is well placed to take advantage of the new economic age. Trade agreements recently signed by Australia are important policies to cement Australia’s future prosperity. Australia can’t continue to attempt to keep the economic structures of the previous century when resources (both human and physical) need to be channeled into new industries. Over-burdening new industries through ever rising and uncertain tax burdens to support declining industries is a recipe for European style outcomes. Australia had 15 years of extra income growth to deal with the structural transformation and governments failed to use this windfall. There is a not a crisis in Australia yet but now is the time that reform needs to ramp up. Now is the time for long term thinking to defeat short term politics.

For reform to be successful, it needs to be bipartisan. While the Left in Australia resists acknowledging or apparently understanding that there is a serious problem, minor parties, whose existence rests on maintaining the status quo, will block reform. The Right wing of politics needs to understand that it is important to have a robust safety net particularly when significant structural reform is undertaken. To begin where the current government began its reform agenda suggests a good deal of confusion about the real challenges facing Australia. The focus has to be on implementing sustainable economic, social and environmental policies.  While reform stalls, the costs of inaction will continue to rise. This is the biggest intergenerational issue Australia faces.