Recent economic management in Australia has been abysmal, and a reckoning awaits

Everyone knows that the Australian economy has been allowed to overheat.  Unemployment has just hit a record low of 3.5 per centand many employers are having difficulty recruiting staff.  Annual inflation (as measured by the CPI) increased to 6.1 per centin the June quarter, and is expected to go much higher.

With the economy now suffering excess demand, one has to ask why the Commonwealth and nearly all the States have recently brought down budgets with roaring deficits.  At the same time our Reserve Bank, after lowering interest rates to rock bottom levels and stimulating an asset price boom, has recently hit the panic button and initiated a property downturn.  Effectively, official monetary and fiscal policies now have markedly inconsistent settings.

The bottom line is that government spending (at the behest of "moderate" or "progressive" administrations) is out-of-control in this country, and there is little to show for the profligate deficit spending of the last 15 years.  Excessive deficits are contributing to interest rates going up faster than they would otherwise need to.  There is also no clear end in sight to the spending spree, which might only end when Australia's creditworthiness starts being questioned or voters rebel.

In Australia, there has been a major increase in the size of government over the last 20 years.  Up until recent years, government expenditure ranged from around 24 per cent to 26 per cent of GDP.  In 2019–20 expenditure grew to 29.2 per cent in GDP and was expected to hit a peak of 34.4 per cent in 2020-21.  While government spending will fall over the next few years, nobody expects a return to the long term average anytime soon, if at all.

The cause of recent bad economic policy can be traced back to Australia's response, firstly to the financial crisis of 2008, and then to its totally excessive reaction to Covid.  With exports to China booming, the then Rudd government did not need to increase spending, as it did.  The response to Covid later copied that of many other Western countries, and involved extensive lockdowns, big cuts to interest rates, and massive fiscal stimulus.

No amount of deficit spending or interest rate cuts was even going to make much difference to sectors affected by Covid lockdowns (eg hospitality), with much of the government money being windfalls that ended up in household savings or corporate profits.  Before Covid, every post-Howard budget, except for the first Abbott/Hockey budget (itself largely blocked by the Senate), had also involved substantial (though more modest) deficits.

Recent years have seen huge spending on COVID, money wasted on poorly chosen defence acquisitions, big spending on infrastructure (much going well over budget), soaring spending on childcare, and out-of-control spending on the (unfunded) NDIS, to name but a few.  Poor spending programmes are always difficult to reverse, and, during the COVID induced spending binge, all sorts of additional outlays were slipped into Government budgets, largely unnoticed.

The Coalition’s JobKeeper scheme wasted at least $40bn, according to analysts. It sent cash to businesses that didn’t need it and “saved” jobs at huge cost.  Billions of dollars also have been spent or promised by both sides of politics to "save" the Barrier Reef to little obvious need or benefit.  Such spending is futile, if claims that the reef is doomed due to global warming, are to be believed.

The situation with debt and deficitsis grim.  Commonwealth debt is spiralling towards $1 trillion.  NSW debt stood at $50 billion in 2019, is heading to $140 billion this year and towards $200 billion by 2025.  The NSW deficit has blown out to $11.3 billion, compared with the $3.6 billion deficit forecast in the 2021-22 half-yearly review.

The NSW government has promised a $27 billion spending spree over the next five years, with continuing big infrastructure spending, and significant reforms to "unlock women’s economic potential" via boosts to childcare and early education.  The planned opening of a section of the City and Southwest line between Sydenham and Bankstown is already expected to be up to 12 months late, and the cost of the metro rail line that extends on to the Sydney CBD and Chatswood has blown out by $6 billion to $18.5 billion.

Figures for Victoria are equally bad.  The Victorian budget forecast a $21 billion deficit in 2021-22, $7.9 billion in 2022-23 and lower deficits in following years, with debt increasing from under $50 billion in 2019 to $210 billion by 2025.  Both Victoria and Queensland have seen rapid growth in the size of their public sector workforce.

The Northern Territory is in the worst shape and had made noises about seeking a bailout from the Commonwealth.  The NT's budget for 2022-23 estimatesa $1.1 billion deficit with net debt of $8.7 billion.  The other states and territories, while not quite as bad, are all (bar WA) in deficit.  The WA Budget is in surplus (in part due to getting a bigger share of GST revenue) but with falling iron ore prices this situation won't last.

States’ and territories’ combined total debt will reach 159 per cent of operating revenuesby 2024, up from 83 per cent in 2019, S&P has forecast.  In dollar terms, debt will more than double in that time from $270bn to $588bn.  “We anticipate Victoria’s debt levels will rise the most, with debt more than tripling from 2019,” the report stated. “Most other states will more than double their debt during the same period.”

Affecting both Commonwealth and State policies, what is happening in our national electricity market is an exercise in mass delusion.  All the major political parties and most of the media are pretending that the move to so-called "renewable energy" will give us lower electricity prices and reliable supplies, when they know that the opposite is happening.  Subsidies hide the real cost of electricity, and Snowy 2 (supposed to cost $2 billion) is developing into a $10 billion white elephant.  The nub of the problem is, while that wind and solar can provide low variable cost electricity for some of the time, electricity cannot yet be economically stored on an industrial scale.  An energy supply and cost crisis is inevitable, when enough coal-fired electricity is shut down.

On a world scale, what is dangerous is that the response to Covid has synchronised all the major world economies.  They all went into Covid downturns and subsequent recoveries in sync.  Most are now heading into downturn together, which will deepen any coming recession.  This time even China, which kept the Australian economy moving during the global financial crisis around 2008, is facing its own economic problems, while rising interest rates will hit the budgets of big debtor nations.

The last time all the major economies went into boom and subsequent bust together was in the early 1970's, when the recession of 1973-74 turned out to be a major one.  In that case US Vietnam war deficits caused a boom later busted by the Oil Crisis of 1973.  The parallels with the present day are notable, except that this time Western governments are carrying a lot more debt.

The head of Treasury, Dr Stephen Kennedy, says inflation and real wages growth can be expected to lead to higher average personal tax rates over time, from the current 23 per cent to almost 27 per cent in 2033.  He predicts that average personal tax rates will increase towards record levels, increasing the fiscal burden on wage and salary earners, and has urged the Albanese government to immediately begin repairing the budget to contain debt and build firepower to confront the coming downturn.

It is obvious that the Australian economy has harder times ahead.  Iron ore and many commodity prices have already started to fall back towards historic levels, and both BHP and Rio Tinto are warning investorsabout the uncertain outlook for commodities.  The run of good seasons and high prices for farmers won't last forever either.

Government royalties (except ironically for coal) are on the way down, and the slowing housing market means that the stamp duty bonanza for state governments is over.  Eventually increasing government outlays and rising interest on public debt (not to mention the effects of Net Zero) will place still more pressure on government budgets.

Somewhere along the line governments will have to tighten spending and raise taxes but despite calls from Treasury officials little in the way of serious budget repair is in sight at federal or state level.  With "progressives" and the Teals recently doing well at the polls, the public is getting what they voted for but will have to pay the eventual cost.

The Morrison Government deserved to be voted out of office on grounds of economic policy alone.  The problem is that Albanese's fiscal policy promises to be even more squandering.