I have intermittently tracked the economic narrative emanating from our economic leadership in Canberra and Martin Place. Looking for sense in the transition we face from yesteryear’s credit driven model of economic growth to today’s commodities investment driven growth. At times leaders have made some sense, even if they refused to acknowledge what we were transitioning from. But now, it seems to me that our economic narrative and those that weave it are dangerously close to incoherence, even as forces gather that will prove to be a serious test of our economy and our resolve as a nation.
To make my point, let’s look back. The economic narrative of Kevin Rudd’s leadership was relatively clear. The Henry Review he commissioned laid out a very clear blueprint for tax reform to address, among other things, the pressures of the mining boom on other sectors in the economy. It was to achieve this through more heavily taxing the new mining profits and redistributing the proceeds to other sectors through tax breaks. The flaws of the document were of execution not conception. The Henry Review had a clear purpose and reform proposals to deliver on it. There are credible estimates that the resource rent tax could have redistributed as much as $100 billion over a decade. That the document was politically naive is not a criticism one can make of its intellectual sense.
The other great pillar of the Rudd government was fiscal conservatism. This too made sense when coupled with a Henry Review that aimed to shift the tax base in order to sustain broader economic growth.
Meanwhile, in Martin Place, the RBA held a steadfast line that the economy must not be allowed to boom and bust, as it had done in all previous commodities booms owing to inflation. Rather than repeat this history the RBA set a course for “structural adjustment”. That is, it sought to raise interest rates and the currency to such a level that tradable goods sectors outside of mining would be uncompetitive and forced to deflate as mining inflated. The balance, of course, was an engineered two speed economy that in sum was to grow at or above trend. The RBA was also wrestling with deflating the housing bubble that had been at the heart of economic growth for the previous decade. And if politicians could never bring themselves to mention it, the RBA at least did so obliquely.
Both the Government and RBA held strongly to the view, and enshrined it in their forecasts, that the mining “boom” was going to deliver unprecedented national prosperity. So, in total, there was a unified articulation of the challenge and benefits to Australia presented by the mining boom. Of course, it didn’t work out that way at all.
After the failure of the Henry Review, the government of Julia Gillard was left with a watered down version of the mining tax that gifted accelerated depreciation to miners and looks unlikely to collect much at all over the long term. Making matters worse, having never mentioned the housing bubble and its import, the big misses in government revenues resulting from a rise in household saving associated with fears of a credit bubble burst have never even been explained. We’ve had intermittent blandishments from the Treasurer about how households “lack confidence” and an ongoing dedication to a 2012/13 fiscal surplus despite the weakness in private sector spending, but no explanations, no sense.
These two great failures of sense, the collapse of the Henry Review and the failure to explain where our economy is transitioning from, have playing into the illegitimacy that has dogged the Gillard government for a number of reasons. To combat this, what proceeds there are from the resource rent tax have been shifted from business to households. By making this change, Labor has made a dramatic shift in its economic narrative and policy making away from the national interest and towards its own political interests, even as it accuses the mining billionaires of sectional interests. No sense has now become political nonsense.
Meanwhile, the RBA, our other cluster of economic Generals, has also lost its cache. Having made repeated, aggressive growth and inflation forecasts in 2011 to support its case for “structural adjustment”, the big misses in both have hurt its credibility. Yes, the Bank has acted better, ignoring its own forecasts and acting pragmatically on data. But in terms of the economic narrative, the RBA looks as hapless as the Government, overly wedded to a boom that never came. And, having also failed to adequately explain what the economy is transitioning from, it has left all with the impression that it is out of touch. This illegitimacy is now getting worse because there is no developed narrative to explain why the banks are unwilling or unable to pass on the interest rate cuts that are themselves an open acknowledgment that the RBA’s economic narrative of the past few years has made no sense.
And into this incredibly confused national economic narrative, we can now throw two external shocks. The first is Europe, as Greece wrestles with austerity and its future inside in the Eurozone. This has two immediate impacts. The first we’ve all seen in the big selloff in global equities. The second is more hidden but not for long. It is in the rising cost of funds for our banks that ensure that the further interest rate cuts that are coming this year will not be passed on in full.
The second shock is China, which is clearly going through the early phases of a hard landing. That’s not to say that the authorities that guide our great and powerful economic friend can’t turn it around. But the decline in growth is already such that Australia’s terms of trade have been hit, mostly via the prices of the bulk commodities of iron ore and coal. A big fall in national income is already on the way and the trade surpluses of the last few years are ancient history.
So, as we enter this test, one has to ask what effect the mangy state of our fiscal and monetary economic narratives will have. First I’ll observe that the two halves of our economy are ill prepared for it. The services economy that has been served up for sacrifice by the RBA is on its knees and unlikely to suddenly rebound even with cheaper credit. On the other hand, many major mining projects are already committed and will continue. But many more now will not, as we’ve seen in a range of recent company announcements. And if the growth rate in mining investment peaks in the next year then it will start subtracting from growth.
Finally, there is a more subtle effect. I find it difficult to be confident about the nation’s prospects when so little makes sense. My animal spirits are discouraged when the world around me looks confused. I look for coherence when making strategic choices. How do you plan to invest and grow amid a nonsense world?
I’m pretty sure I’m not alone.