There are some striking parallels between political and economic developments in Britain and Australia over the past 25 years, despite their respective locations at opposite ends of the globe.
Both countries undertook substantial economic reforms in the 1980s, in response to decades of economic underperformance, which saw their average standards of living decline relative to those countries with which they had typically compared themselves. In the early 1990s, the prime mnisters who had led those reforms were both overthrown by their respective treasurers, who each went on to lead their parties initially to unexpected election victories, but then to substantial defeats from which neither of their parties has subsequently recovered.
Australia and Britain both experienced severe recessions in the early 1990s, but these were followed by prolonged periods of strong economic growth, accompanied by low and relatively stable inflation and interest rates.
After incurring large budget deficits in the early 1990s, both saw a return to fiscal surpluses by the end of the decade. Despite this both experienced a substantial deterioration in their current account balances: to the point where in recent years Britain and Australia have been running the second and fourth largest current account deficits in the world, in absolute terms, in the past three years.
Reforms continued in both countries during the 1990s, and in each possibly the most important reform was the granting of formal independence to their respective central banks. It ended decades of political interference in the setting of interest rates and has contributed to the lower and more stable inflation and interest rates which both have since enjoyed, in marked contrast to their common experience in the 1970s and 1980s.
The emergence of low and stable interest rates combined with sustained growth in real labour incomes, innovation in both countries’ mortgage markets, and high levels of immigration, resulted in both countries experiencing housing booms of unprecedented magnitude, breadth and duration. These booms came to an end at roughly the same time in both countries - towards the end of 2003 and the early part of 2004 - although house prices have plateaued rather than declined precipitously, as they did at the end of the late 1980s property booms in both countries.
And of course in both countries the prime ministers who led their respective parties to major electoral victories in the second half of the 1990s have attained milestones of incumbency matched by very few of their predecessors. And in both countries one of the on-going political fascinations is the frustrated aspirations of treasurers who could have been leaders of their respective parties in the mid-1990s and who now feel that their time has come.
Yet in some other very important respects the course of events in Britain and Australia has begun to diverge in recent years.
Britain’s economy has slowed significantly since the property market peaked. UK real GDP grew by just 1.8 per cent in 2005, the slowest since 1992; while recorded unemployment rose by an average of 7,000 per month last year, the first year in which unemployment has risen since 1992. In response to this slowdown, the Bank of England cut interest rates last August.
Britain’s fiscal position has also deteriorated significantly, partly as a result of conscious policy decisions but also in response to the slowdown in economic activity.
In contrast, although Australia’s economy also slowed somewhat in the aftermath of the end of our property boom, it was “only” to 2.5 per cent in 2005, and all the indications are that it is picking up again in the first half of 2006. The Reserve Bank of Australia raised interest rates in March last year, and again last week.
And of course Australia’s budget remains in surplus, of the order of about 1 per cent of GDP.
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