Microeconomic reform key to shift to non-mining future

Much of this discussion and debate is focused exclusively on the outlook for non-mining investment.

Much of this discussion and debate is focused exclusively on the outlook for non-mining investment.

Here the most recent Australian Bureau of Statistics capex ­survey painted a fairly sobering picture of what could happen over the coming year.

However, there is more than one way to assess the mining to non-mining transition. If instead of looking at what businesses think they might do over the ­coming year, we look instead at what they have actually done, then the news is a little better.

In fact, employment data from the ABS shows that there is a clear transition from the mining to non-mining sectors.

While the mining sector has shed 50,000 jobs over the past year, across retail, accommodation & food services, and construction, about 100,000 jobs have been created.

That is exactly where you would expect to see jobs growth given the cuts to interest rates over the past few years and the significant decline in the Australian ­dollar. A further 100,000 jobs have been created in professional, scientific and technical services — essentially white collar private ­sector services jobs.

To be sure, the pace of jobs growth has not quite been enough to stop the unemployment rate from rising over the past year.

And the composition of jobs growth is skewed toward lower paid sectors of the economy.

Nevertheless, the labour market paints a reasonable picture of transition from the mining to non-mining sectors.

And given the interest rate cuts over the past few months, and the sharp decline in the Australian dollar over the past year, it is possible that we might be through the worst on the jobless front.

That does not mean that we can’t, of course, do more to lift growth and incomes across the economy.

After all, living standards have been falling in Australia for three years now.

As always, however, it’s a question of “what”. Namely “what” should we do to further support the economy?

Some argue that it is time for government to do “more”. The “more” that is often prescribed is a federal fiscal stimulus. More spending, in other words.

As a justification, it is argued that the federal government can currently borrow at very low interest rates. As a result, some argue that concern about the persistence of budget deficits in Australia and the increase in debt is misplaced.

Then again, there are a few problems with such an argument: First, the budget starting point heading into a period of population ageing matters enormously.

Deficits and sizeable debt levels in the early years of the next decade will increase the size of any “required adjustment” needed to deal with the ageing of the population. Of course, only economists use phrases like “required adjustment”. In English it is higher taxes, fewer services and a reduced safety net. Given the timeframes involved most of the burden of that adjustment will fall on today’s “Gen Ys” and “Millennials”.

Second, Australia runs persistent current account deficits. That can make the economy vulnerable to swings in offshore investor sentiment. A strong fiscal position is therefore an important counterweight.

A budget surplus also means that the current account deficit ­reflects private sector saving and investment decisions. At the ­moment, however, Australia’s ­current account deficit reflects an excess of government spending over revenue.

Lastly, it is important to remember that the ability to deploy the massive fiscal stimulus seen during the global financial crisis was a result of the very strong ­budget position Australia enjoyed heading into the crisis.

That fiscal stimulus was the difference between the slowdown which did eventuate and a full-blown recession. Australia has not, however, always enjoyed the ­luxury of being able to respond so effectively to economic slowdowns. The magnitude of the stimulus in the middle of the early 1990s recession was scaled down on account of concerns that ­markets would not accept it.

So if a federal fiscal stimulus is not the answer, then what is?

The answer lies in what has worked so well for Australia in the past. Not trying to pick winners or spend our way out of trouble but instead ensuring that the economy is efficient and productive.

That’s a little more difficult than borrowing and spending today; and handing the bill to ­future generations.

It does, however, create a more sustainable foundation for jobs growth, higher wages and an ­enduring post-mining transition.

It also passes opportunity to ­future generations, not a bill.

So yes, it is time for government to do “more” to smooth the mining to non-mining transition.

That “more”, however, is a renewed focus on micro-economic reform and policies that lift productivity.

Adam Boyton is Deutsche Bank’s Australian chief economist.