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Euthanasia for the miracle economy

By Alex Erskine - posted Saturday, 15 June 2002

What is 2 + 2? An MBA will say 22. An engineer will say a number between 3.975 and 4.025. And an economist will close the door and ask quietly "What do you want it to be?" This has never been more clearly shown than with the Intergenerational Report.

Shock horror, a budget deficit of 5 per cent of GDP in 40 years. The ageing of Australia means we must take our hemlock now, to avoid a painful death in decades to come. Really?

Actually no, it is only schizophrenia.


Treasury is quite happy to argue that economic growth will be good in the near-term and that inflation will be low (yes, sensibly lower than the RBA's current fears). But such bravery turns to complete cowardice when given the opportunity to make projections in the long term.

The economy "going gangbusters" for all the good reasons like technical progress, more flexible markets and good economic policy suddenly goes to sleep. Even in the current decade, GDP growth is projected to slow to 3.1 per cent on average. The further into the future the worse it gets. What a hoot!

Treasury rightly says "Over the longer term, productivity growth is the key driver of real GDP growth. With projected lower growth in the labour force and falling participation rates, annual employment growth could be significantly lower over coming decades". It then assumes that "productivity will grow at around its 30-year average of 1.75 per cent per year, real GDP growth is projected to decline to an average of 3.1 per cent per year in the current decade, and to around 2 per cent per year by the 2020s and beyond". There are intelligent reasons for using a much higher rate of productivity growth ... we are still only at the beginning of the IT leap forward.

Treasury does provide "both high and low productivity growth scenarios starting in 2006-07. The high-productivity scenario uses a productivity growth rate similar to the 1990s (that is, 2.0 per cent per year) while the low growth scenario uses a productivity growth rate similar to that experienced in the 1980s (that is, 1.2 per cent per year)". How about a less asymmetrical set of projections – like 2.3-1.2 per cent, if 1.75 per cent must be the centre? Talk about chicken licken!

And where is the "miracle economy" swagger that has seen Australia "stare down the world recession"? "Over the longer term [meaning the end of the current decade]... Australia's projected average real growth rate is slightly lower than recent projections for the United States, reflecting higher fertility rates in the United States."

The Treasury projections are a start on longer-term scenario analysis, but they are not the end. Several things can be done to lift longer-term productivity and labour force growth, so boosting per capita economic growth. Lower income taxes, more immigration, more levelling of the playing field, less government, smarter/more efficiently-delivered education and – radically – a higher retirement age in line with increasing life expectancy are obvious solutions.

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About the Author

Alex Erskine is Managing Director of Erskinomics Consulting Pty Ltd and a Visiting Fellow at the Macquarie University Applied Finance Centre.

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