Note two things:
- GDP is sliding inexorably but it’s still respectable over the stretch, but
- GDP per capita is relentlessly collapsing.
This opens a major political economy chasm into which the past four governments have toppled never to return and now a fifth is free-falling. It is simply this:
- that the headline numbers in the economy are reasonable enough, enabling pollies to claim they’re doing a good job;
- but the lived experience of the economy is one of falling living standards and is unlike anything anyone has experienced in thirty years.
Thus unprepared governments are constantly at risk of being out of step with the citizenry. This is a fatal disjunction in Australia especially, which loathes arrogance in its leaders.
The drivers of the disconnect are threefold:
- the collapsing terms of trade post-mining boom rob punters of income and thus greater activity even as greater dirt export volumes support GDP;
- very high immigration adds nothing to per capita growth, in fact it very probably deflates it via yet more income erosion, but it directly supports aggregate demand;
- the push to grow via private credit and the housing bubble does not improve income like it used to given the structural shift to higher household saving but it does produce more houses and thus GDP.
The first driver is unavoidable. The second and third entirely voluntary and cynical.
Governments have run high immigration and housing supportive policies right through the mining bust on the assumption that it would support growth and save them, when the lived experience has been the complete opposite of falling income, crazy house prices and rising congestion. Thus voters who have turned on them with a vengeance.
There is no end in sight to this. Although the terms of trade has rebounded, wages have not, and any rebound will be muted given the profits surge is largely for large mining shareholders in London and Gina Rinehart. The other great beneficiary is the budget but its parlous state means no spending or tax cuts are not on the agenda (unless a desperate government puts them there). Moreover, it won’t last. It never does. Capitalism always kills areas of excess profitability. This is a structural problem in the economy now and only structural solutions will fix it and spread income more widely.
Thus the way out of the trap for any new government is actually pretty straight forward. The major challenge is one of communication and holding the nation to a reform course while rent-seekers try to tear it apart:
- accept that the mining boom is bust;
- accept that household debt has gone as high as it can;
- explain both to the Australian people and dramatically hose down their expectations;
- bring them into a new narrative of national economic reconstruction involving mutual sacrifice;
- the new PM and his government should all take a voluntary pay cut to prove it’s for real;
- pressure should be placed upon all senior executives to do the same;
- falling wages can then be repositioned as a part of improving national competitiveness together;
- policy must shift dramatically from protecting rent-seekers to boosting competition and productivity everywhere;
- cut capital gains tax for property and reform super tax concessions;
- cut immigration to 70k and boost the refugee component;
- interest rates will fall to 0.75% in a hurry;
- instruct APRA to tighten if investors pile in again;
- the dollar will tumble to 55 cents in a hurry;
- force Shell to sell or develop the Arrow gas reserve to prevent further east coast hollowing out.
Basically, compete, together, as a nation via a fully embraced real exchange rate adjustment.
That will finally bring government and the punters onto the same page. Times will be tough, yes, but they’re going to be tough anyway and at least this way the government will no longer be blamed for it. As a bonus it will rob One Nation of its purpose.
This is the agenda that we recommended to Kevin Rudd then Tony Abbott then Malcolm Turnbull. The first two committed suicide instead. The last appeared to have the centrist credentials and communication skills to pull it off. That’s why we supported him. Alas, like this economy, he turned out to be roundly hollow and is also today dead man walking.
Now the only realistic hope for it is Labor. If it does not do it when it gains power then the economy will kill it quick smart too.