Economy needs a better big picture
This was on display again over recent weeks when the government reiterated its intention to maintain a budget surplus while forming a “trimmed down” superannuation and retirement inquiry.
Indeed, the government agenda presents as completely lacking vision or ambition. The targeted small $7bn fiscal surplus seems insignificant for our $2 trillion economy, that has over $2.8 trillion in national superannuation savings.
While the Australian economy is not falling into a recession, it is clear that economic growth is very subdued. The economy is growing at levels below those of the GFC period of 2008 to 2009.
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We have not suffered negative economic growth in any quarter since 2010, but it is the make-up of the growth that discloses the necessity for the government to take positive action at this point.
What’s more, we need also to note the current importance of government demand (public demand), which exceeds the current growth in private consumption. Indeed, private consumption growth is particularly weak given population growth.
Both dwelling investment and mining investment are moving through cyclical downturns that should improve at some point. The benefits of improved trade are noted in the GDP figures and improved profitability of miners will lead to higher levels of capital investment next year.
It is the household sector that is perplexing the RBA and has created its call-out to the government for fiscal support. Australia’s household net worth is near historic all-time highs measured against household income. It has picked up again in 2019 with residential property stabilising and a recovery in equity markets.
The ABS recently estimated net household wealth at about $10.5 trillion. Household income is estimated at about $1.5 trillion per annum (75 per cent of GDP) and household debt about $2.8 trillion, the bulk of which is either mortgage debt or property investment debt.
Household assets are mainly superannuation ($2.8 trillion) and direct non super investments, with housing assets (dwellings) estimated at about $8 trillion.
While GDP and therefore national income is at record highs, the per capita income (that is, GDP divided by population) has fallen over the past two years. We may not be in a recession, but it feels like one, creating the need for the RBA and government to orchestrate and co-ordinate policies that stimulate economic and consumption growth.
One solution is targeted income tax cuts for low and middle-income earners — those earning below the average wage of about $80,000. But tax cuts are not contemplated by the government, which seems focused on the illusion of the benefits of a AAA credit rating. I say this because the US seems undaunted as it heads for a massive 5 per cent fiscal deficit as a percentage of GDP.
Meanwhile, our precious AAA credit rating allows us to borrow at just 0.4 per cent cheaper than junk Greek bonds over a 10-year maturity.
Where is the strategy?
So the question must be asked — do we really have an economic growth strategy, or is the economy being run with a mere hope to see what happens?
Interest rates below the level of inflation are being utilised to drive down the interest burden on a mountain of household debt. However, these same low rates are grossly unfair to savers, who are slugged with tax on interest income that transforms a poor to a very poor return.
In any case, is it clever to create a fiscal surplus through bracket creep, unfair taxes, record commodity volumes, a weak dollar and the benefits of lower costs from rolling government debt?
The latest superannuation review, which stems from last year’s Productivity Commission, calls for a proper retirement incomes study before the compulsory superannuation guarantee is lifted from 9.5 per cent of wages to 12 per cent.
In defining the terms of reference, Josh Frydenberg specifically directed that the review will not consider means-testing of the family home (in the asset test) for the commonwealth pension.
A bolder system
As our wealth data discloses, the family home is a more significant asset than superannuation and non-superannuation investments combined. Therefore, the direction that non-super assets should affect a commonwealth pension entitlement, while a family home does not, is hard to logically justify.
Indeed, the fault line in the pension entitlement directly flows from the original creation of an accounts-based superannuation system rather than a bolder system that included a contributory national pension scheme. Such a contributory pension scheme would allow every aged Australian to receive a pension without a bureaucratic asset test overlay.
In other words, how much simpler would the commonwealth pension be if everyone contributed and everyone benefited?
Is it too late to create such a pension scheme?
I don’t think so given the burgeoning growth in super assets independent of a national investment and economic plan to harness them for economic growth.
The diversion of a portion of the funds into a national scheme would absolutely alleviate the ongoing burden for the government in funding pensions.
However, such a scheme would require a major rethink by a review that is not hamstrung by political direction.
Further, the creation of infrastructure bonds that target essential national projects, funded solely by Australian superannuation funds and underwritten by the commonwealth, would fit nicely inside a long-term economic plan.
Australia’s potential is enormous. However, we are at a key turning point, where we run the real risk of limiting our economic growth potential with docile economic policies and circular reviews.
John Abernethy is the managing director of Clime.
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