A popular myth is that Australia survived the 2007-08 global financial crisis because our major banks didn’t collapse and a technical recession was never called, but closer inspection reveals we didn’t survive the GFC. Indeed, the prospects for many workers and businesses have never been worse.
Nonetheless, we should be optimistic about our future. Here are five steps the government should follow to turn the economy around and restore prosperity.
Step one is to stop living in denial. The economy is in bad shape. Private sector real wages went backwards by 0.3 per cent over the past year. Business investment is expected to reach a record low 9 per cent of GDP in just three years. And the unemployment rate is closer to 15 per cent when those marginally attached to the labour force are counted, as Adam Creighton showed on this page on May 22.
Meanwhile, annual income growth has been 65 per cent slower since the GFC than in the years between the Keating recession and the GFC. And to top it off, government debt will reach $725 billion by 2027-28. All this after 26 years of unbroken economic growth.
Step two is to understand we can do something about it. The Grattan Institute recently found that two-thirds of the decline in non-mining business investment is due to “benign long-term structural changes in the economy”. In other words, sit back and watch decline unfold. But decline is a choice.
Bad policy has caused economic decay. Good policy delivers recovery.
Step three is to acknowledge that we do not have a deficiency in aggregate demand. We have a collapse in the capacity of the economy to generate wealth. This is why productivity growth and investment are low. When there are fewer things of value being produced, there is less income being generated.
Calls for more government intervention to support aggregate demand are wrongheaded. We have had a decade of deficits, monetary easement and public infrastructure spending. Yet, instead of productivity and growth, all we managed was more debt.
Step four is to stop listening to the usual suspects.
We were told by the Treasury, the Reserve Bank of Australia and numerous private sector economists not to worry about the end of the mining investment boom. Non-mining investment would pick up once the exchange rate depreciates and interest rates and wages drop.
Well, the exchange rate is down 25 per cent since 2011, interest rates have been at record lows since 2013, and many Australians haven’t had a pay rise in years. Yet non-mining business investment is missing. The usual suspects have long been forecasting that business investment and growth would come back. But how?
Which brings us to the last step: eliminate bad policies. There are many to choose from, from high corporate and personal income tax rates to an overbearing regulatory state. One area often talked about but seldom acted upon in earnest is red tape.
Most people think of it as a few pesky forms that must be filled in, or a couple of hours on the phone to the local council.
However, what most people don’t know is that it can take up to 5000 licences, approvals, and permits to set up a new mine, as was the case with the Tad’s Corner Project in central Queensland’s Galilee Basin.
Meanwhile, starting a new restaurant in NSW requires filling out 48 different forms and obtaining 72 licences.
Red tape could well be the biggest impediment to growth in Australia.
Recent IPA research found that red tape costs Australia $176bn a year in lost economic output. This makes red tape Australia’s biggest industry. The good news is that there is a lot of low-hanging fruit.
Here is where the government should start. Implement a one-in, two-out policy, meaning that for every new rule or restriction implemented, two must be repealed.
Of course it is a crude approach, but it is easy to implement and worked wonders in the Canadian province of British Columbia. Abolish the energy efficiency equipment program that mandates minimum energy efficiency levels for commercial and residential equipment and appliances, and which adds to the cost of products without making a difference to the environment.
Eliminate section 487 of the federal environmental law, which allows green groups to sabotage development without incurring the costs of their actions.
Remove domestic regulation of product safety standards and instead permit market entry of all products cleared by overseas regulators of good standing.
Domestic regulations add to compliance costs without improving safety outcomes.
There is no shortage of red tape. The government should start cutting. It will make a bigger difference than most people think.