Few jobs and not much income in resources
Ross Garnaut and Leslie Martin are members of the Melbourne Economic Forum a joint collobration by The University of Melbourne and Victoria University. This op-ed first appeared in the Australian Financial Review
By Ross Garnaut and Leslie Martin
The China resources boom is ending, along with the huge boost that it gave to incomes, employment and government revenues. Is this a major economic policy challenge for Australia? Or will she be right, mate, with business as usual; so right that Australians continue to enjoy the growth in living standards of the 21st century so far without doing much at all?
It is imperative to answer this question before we debate an appropriate reform agenda. The lack of any clear answers has resulted in much of the incoherence of policy discussion since the 2013 election.
The case for “she’ll be right” says there is no immediate economic or budgetary crisis, and therefore no need for a big, immediate response. Our public debt is low by international standards, our incomes are just about holding up at their extraordinarily high levels, and employment is weakening but not desperately so. Over the past couple of years, labour productivity growth has come out of its early 21st century slump, and now does not look too bad compared with other countries or our own history. Export volumes have grown strongly over the past year on the back of the mining investment boom, almost returning economic growth to its trend rate.
So what’s the problem?
A harder look at the data tells a different story.
Resources investment is still at boom levels but will fall away sharply from late this year. The terms of trade have already declined by one-fifth from their 2011 peaks, and are officially forecast to fall by a similar magnitude by the end of this decade.
So the retreat of the resources boom has a long way to go. Yet many of the economy’s vital signs are already weak.
Employment—whether measured by total number of jobs, aggregate hours worked or full time employment—has been growing more slowly than the working-age population since 2011.
Wages have not kept pace with inflation in the last year, recording their slowest growth in at least 17 years.
New investment in export and import-competing industries shows few signs of life. And all the indications are that there will be no investment revival in these industries until Australian cost levels relative to the rest of the world—the real exchange rate—have fallen a long way from current levels. The substantial exchange rate depreciation since early 2013 helps, but is nowhere near big enough.
There are no signs yet of health in the most important measure of productivity growth—multifactor productivity— which tells us how well we combine capital and labour to produce output, a reflection of managerial skill and technological progress.
The budget deficit for this year remains high. Our current account deficit is reasonably high despite terms of trade being higher than they will be in future. Our private sector is more heavily indebted to external lenders in proportion to the size of the economy than all but a few other economies, and therefore unusually vulnerable to international interest rates rising above their historic lows.
The growth in mineral exports over the past year has caused a fall in prices large enough to cancel out the volume gains, possibly producing what is known as immiserising growth where a country’s citizens can actually be worse off from an export expansion.
Add to that problem the highly capital-intensive nature of mine production and the fact that four-fifths of the after-tax mining profits earned in Australia accrue to foreigners and it’s easy to envisage a mining export expansion phase that creates few jobs and not much income for Australians.
The improved recent economic growth figures are due entirely to a combination of what could be immiserising growth in mineral export volumes, a revival in housing investment and an expansion of domestic spending from a stimulatory budget. Yes, a stimulatory budget—this year’s budget as it leaves the Senate is a good deal more stimulatory that the budget than was brought down by the previous Government before the last election. None of these will be a source of sustainable incomes and jobs growth in the absence of a revival of export and import-competing industries.
All these issues will be weighed at the first meeting of the Melbourne Economic Forum today. Do we have a problem that requires budget adjustment, income restraint and new reform efforts to lift productivity? Or is the Australian “she’ll be right” approach to economic policy in the early 21st century good enough?
Economic modelling for today’s Forum by Victoria University’s Centre of Policy Studies suggests that Australia does indeed have a sizeable problem, with the real prospect of falling living standards to 2020 if nothing is done to avert it.
We all want to increase the chances of extending Australia’s long period of high employment and broadly based prosperity that we have come to enjoy. But if our community has not yet formed the view that we are seriously at risk of losing this prosperity, we cannot yet discuss the best and fairest ways of seeking to preserve it.
Ross Garanaut and Leslie Martin are members of the Melbourne Economic Forum a joint collobration by The University of Melbourne and Victoria University. This op-ed first appeared in the Australian Financial Review