Austerity awaits if Canberra ignores past productivity lessons

This week’s economic update from Jim Chalmers was a strategy from the 1970s, with ever more public spending the way to keep the economy afloat.

It did not work then and is a deadweight now, leaving business and taxpayers treading water at best.

The federal Treasurer suggests that government spending has saved us from recession. But for all Dr Chalmers’ talk of “urgent, unavoidable or automatic increases”, the 5.7 per cent increase in outlays this year contributes to inflation that reduces real growth and increases the debt, funding demand for ever more public spending.

The unavoidable outcome of this is inevitable austerity, and reduced resources for the health and welfare costs of our ageing society.

We need to kick free by expanding our productive economy but, while Dr Chalmers splutters, Business Council of Australia chief executive Bran Black told this newspaper on Friday that improving productivity was the only way to do it.

Australia, he sensibly suggests, needs a transformative agenda to keep up with Donald Trump in his imminent second term. Like Australia, with the Hawke-Keating-Howard era of constant productivity-improving reform, the US has a precedent.

In 1980 Ronald Reagan was elected as a circuit-breaker to kickstart the economy by stopping the state from shackling the job-generating private sector and by restraining bureaucracy. Mr Trump now appears intent on doing the same small government as his celebrated predecessor.

In contrast, our present government is emulating the stagflation and public sector excess of the lost Whitlam-Fraser years rather than the Hawke-Keating-Howard era of constant productivity-improving reform.

As long-serving former treasurer Peter Costello tells Paul Kelly in Inquirer, during his term “Australian exceptionalism became a phrase used in the IMF. We were considered a model for other Western nations.” But not now: “Australia is no longer exceptional in any economic respect. Our budget is back in deficit, forecast to be there for a decade, our debt is heading towards $1 trillion, our productivity is falling, our per capita GDP has declined for seven quarters and structural reform is non-existent.”

We are certainly not where the US intends to be, as Mr Black points out. The president-elect campaigned on cutting the US federal corporate tax rate, now 21 per cent. That already compares well to our headline 30 per cent, which is way worse than the 22 per cent average for the mainly advanced economies in the OECD.

Mr Trump also is keen to cut the US bureaucracy, but there is nil chance of that happening here given ministers rarely see a virtue-signalling way to spend public money they do not like. Climate Change and Energy Minister Chris Bowen has just announced $150m for a taxpayer-supported loan scheme for people earning up to $100,000 a year to buy electric vehicles.

However, there is more to getting government out of the way than reducing deficit-increasing follies and fripperies. As the BCA points out, Australia needs improved productivity to sustain, let alone enhance, our quality of life.

Employment increased by 160,000 people in the September quarter but 90 per cent of them were in the non-market sector of the economy – generally publicly funded jobs in education, healthcare and the public service.

It is no disrespect to the workers with these jobs but to state the obvious that they all rely on the economy-growing, taxpaying private sector.

Where the second Trump administration will look to the productive private sector to expand the economy, Dr Chalmers and his colleagues assume that with enough borrowed money government will always expand its workforce – at least until the cash runs out.