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Does Australia have a plan B?

By Chris Lewis - posted Monday, 25 October 2010


In a recent interview on the ABC’s Insiders, Treasurer Wayne Swan again stated that “the strength of the Australian economy stands in very stark contrast to that of other developed economies”, and that “the effectiveness of our stimulus, both fiscal and monetary, is on show for all to see here in Washington two years on”.

But who is Swan kidding? Australia is fortunate to benefit from Asia’s boom, particularly China, which has boosted our mining exports.

Australia also experiences many of the problematic trends evident in many Western nations. With average interest rates in Australia averaging 5.3% between 2000 and 2010, after being 11.4% during 1985-1995, Australia’s household debt to income ratio rose  from about 50 per cent in the early 1990s to be over 150% of GDP by the end of 2009. Australia’s household to income ratio is today similar to the US, New Zealand, UK, Sweden and Spain, although much lower than the Netherlands at well over 200 per cent.

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Without a mining boom, Australia would be just as vulnerable as many other Western economies, albeit with a lower public debt level than most. In the case of the US, while financial services profits grew by 600 per cent from 1980 to 2009, profits for everyone else only doubled. This period was accompanied by wages stagnating with living standards expanding via increasing debt (both private and public).

All Western societies are struggling for the answers against tougher competition from China and other developing nations after decades of promoting freer trade.

With Australia’s increasing reliance upon consumption and debt, what did Labor do in 2009 when experiencing lower private sector activity from the GFC? It adopted more measures to reignite Australia’s housing bubble after prices started to fall in early 2009 by tripling the first home buyers grant to $21,000 for new houses and doubling it to $14,000 for existing homes.

During a time of falling interest rates, house prices soared 20 per cent in the 12 months between March 2009 and March 2010, the fastest ever recorded increase in Australian history. Labor decided it had no alternative, despite the Senate Select Committee on Housing Affordability reporting that “the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s”.

Even more amusing was Swan’s response about the recent high value of the $A when he noted that many Australians travelling in the US were really “enjoying their visits”, and that this reflected “the underlying strength of the Australian economy” and “the confidence of the investment community”.

While a high dollar may help contain inflation and keep pressure off interest rates, Swan eventually admitted that a high dollar would negatively impact on Australian manufacturing and tourism, things are not that great for Australia.

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As Alan Kohler noted in October 2009 (Business Spectator October 27, 2009), a “strong Australian dollar is a disaster for Australian manufacturing”. In the same article, Treasury Secretary Ken Henry expressed concern about the structural changes that will be forced on the Australian economy by a sustained terms-of-trade boom which may mean that the resources sector will command more capital and labour. Henry noted that, “as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative”.

Notwithstanding the problems caused by a high dollar and a growing reliance upon mining, does Labor have an alternative strategy should events deteriorate in economic terms?

With the US Federal Reserve likely to undertake “quantitative easing” (printing money) as a move to deliberately devalue the dollar and make its exports cheaper, momentum is building towards greater trade tensions.

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About the Author

Chris Lewis has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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