Australia’s political culture feels strangely frozen.
Widespread public dissatisfaction with national politics is intertwined with uncertainty over the future of the economy. But a narrow focus on the performances and perceived flaws of party leaders is obscuring the deeper debate we need to have.
By many measures, the global economy is in the worst shape in living memory. Deflation, stagnation, corporate and even government bankruptcy abound. Europe appears to be coming apart before our eyes. Even China has slowed sharply. Struggling to resuscitate growth, central banks have pushed real interest rates in much of the world to lows not seen for 500 years, since the time of the bubonic plague.
These conditions should force Australia to consider how it will sustain prosperity in the decades ahead. But so far, that process has barely begun.
Australia’s 25 years of economic success rests on a political consensus forged in the 1980s, which became globally influential. The consensus embraced free markets through privatisation and tariff reduction, alongside social insurance reforms – Medicare, compulsory superannuation, HECS and National Disability Insurance – that share risk across the whole population. It succeeded by incorporating the basic values of fairness and government-backed citizen participation into the drive for economic modernisation.
But the “markets plus social insurance” consensus is not a set of timeless truths. The most fruitful and productive versions of those reforms took place in the 1980s and 1990s. Now, Australian governments are caught in a scissor trap between the declining marginal benefits and the increasing economic and political costs of extending them.
This is the reality underlying Australia’s current “reform” debate about tax, infrastructure, health, labour markets and education. Our politicians gyrate between conflicting pressures, seeking answers that might square the circle of growing social need, faltering productivity and increasingly vociferous stakeholders. But the background assumptions about the current debate are imposing artificial constraints on what governments can do – feeding the perception of weak, do-nothing politics.
The current consensus says that only further market liberalisation and tax cuts will lift economic performance and that public financing of large-scale social insurance is the major issue of public sector reform. Mainstream debate focuses almost exclusively on which sectors might be deregulated next to goose up productivity and on how to finance the state.
Yet this obscures the real challenge facing the Australian economy, and the potential solutions to it.
For two decades, twin booms in resources and housing have underpinned the market-and-social-insurance consensus, making its returns appear larger and easier than they really were. Amazingly, Australia has now emerged from the once-in-a-century resources boom more indebted than when it entered. Bank lending increased between 1985 and 2015 from just above 20% of GDP to almost 130%. Much of this debt is sourced overseas.
Finance and real estate increased between 1975 and 2015 from 7% of gross value added to 12%, while mining grew only from 6% to 9%; manufacturing declined from almost 20% to 7%. Finance sector profits increased from less than 1% of GDP in 1985 to more than 5% in 2015. The finance sector now makes up almost half (47.5%) of the ASX200’s entire market value.
An export portfolio overwhelmingly concentrated in unprocessed raw materials and one of the world’s highest foreign private debt ratios, mostly devoted to housing, make Australia an international outlier. These features of our economy greatly expose people and jobs to downward shifts in global prices and demand. Yet within Australia, policy discussion largely ignores private debt, focusing instead on public debt and government spending, which remain low by international standards.
The housing and mining booms have also made broader economic growth more difficult to achieve, because they distort investment and wages and increase costs in other parts of the economy. While recent GDP figures have temporarily calmed anxious commentators, the dire global conditions are unchanged. In Australia, business investment, profits, real wage growth and productivity are all worryingly low. GDP currently relies heavily on increasing public spending and household debt.
To move beyond these unsustainable conditions, the central economic challenge for Australia is to create comparative advantage in a global economy. Working out how to meet this challenge is the task of building a new consensus.
Not all of a nation’s sectors must be globally exposed and export-focused for an economy to thrive. But in the long run, all nations need both scale and diversity of competitive, dynamic sectors which can innovate to take advantage of new opportunities and earn export dollars.
Malcolm Turnbull’s emphasis on innovation recognises this challenge. But his government is mired within the same constraints as its predecessors. While Turnbull has gestured towards new sources of economic dynamism, he has not yet indicated a path to more substantive policy solutions. Labor has made more running in recent months by addressing issues that were previously deemed “off limits”, like negative gearing and prioritising investment in education. But a central policy narrative is still lacking.
While comparative advantage commands growing attention, the current consensus defines it in narrow, static terms, where advantage is determined solely through competitive market transactions. The next consensus must be based on a shift to dynamic capability, in which policy moves from targeting static, one-off efficiency reforms (like privatisations) to dynamic, capability-enhancing investments (like urban development strategies).
With investment in dynamic capability, productivity increases sustainably and cumulatively over time. Prior investments set the stage for subsequent ones.
This requires a vital change of perspective on the role of government. Because so many of the relevant capabilities and benefits lie outside of individual firms, they rely on expensive, shared, long term investments in systems like education and infrastructure. Proactive public policy and public investment are essential in creating sustainable comparative advantage.
In turn, this demands a dramatic change in the current assumptions – that government should wherever possible withdraw from “meddling” in the market, encourage competition and restrict itself to imposing centralised, “market-neutral” rules and cutting taxes.
Building a new consensus does not mean returning to the pre-1980s framework. Tariffs, national ownership and discriminatory labour market rules would lead to economic failure.
Instead, the task is to focus widespread debate and experimentation on how to build new capabilities in places and sectors that matter for the wellbeing of Australians, where firms and institutions can learn to thrive in highly connected and competitive global conditions. Developing the right capabilities among governments is equally urgent.
The new agenda is slowly emerging. State governments are focusing on the health of key industries and looking to integrate urban planning with economic and community development. Universities are seeking partnerships with strategic industries in their regions and experimenting with targeted training and research programs. Cities and industry bodies are focusing on the needs of growth-potential sectors in technology and services.
But without a coherent policy framework, these efforts swim upstream. It is time to move beyond the assumptions of the 1980s, and engage the whole of Australia in building the next consensus.
This is an edited extract from Time for a New Consensus: Fostering Australia’s Comparative Advantages by Jonathan West and Tom Bentley. It is published by Griffith Review and can be downloaded as a free ebook.
Tom Bentley will be in conversation with Lenore Taylor and Stephen Koukoulas at a Guardian Live event at Muse Bookshop, Canberra, on Tuesday 15 March, 6-7pm. Book now.
