No reason to panic but we must fix the foundations

Let’s walk this back a bit. After the biggest one-day sell-off in blue chip stocks in a year and the tumbling dollar, there were naturally deep breaths in financial markets and among retirees. Future Fund chairman Peter Costello warned the US-China trade war was likely to cause bystanders heartache in the weeks ahead. On Tuesday, after the central bank board’s monthly meeting, Reserve Bank governor Philip Lowe said the uncertainty from the trade and technology spats was hurting investment and meant risks to the global economy remained “tilted to the downside”. Yet Dr Lowe emphasised that the outlook for the world economy was still “reasonable”.

At home, with official interest rates at 1 per cent and yields on 10-year government bonds dipping below 1 per cent, the RBA wound back its forecasts for jobs and growth; GDP is expected to expand by 2.5 per cent this year. Consumer spending is subdued, but the RBA sees the economy kicking along via low interest rates, tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. This last point was driven home in spectacular fashion by an $8 billion record trade surplus in June, thanks to booming iron ore exports and weaker imports. Strong mining profits are behind a dramatic improvement in the federal budget’s bottom line.

Amid the market turmoil, custodian Josh Frydenberg called for cool heads to prevail. “We will continue to take the necessary action domestically, including the tax cuts, to ensure the economy continues to grow,” the Treasurer said yesterday, promising to deliver the surplus he outlined in the April budget. Opposition Treasury spokesman Jim Chalmers claimed the Morrison government’s “inaction on the economy left Australia dangerously exposed”. He said the nation’s biggest challenges — slow growth, stagnant wages, household debt, unemployment and underemployment, and declining living standards — were “homegrown”. That’s quite a charge sheet, and the Coalition has been in power since 2013.

Labor’s critique, however, would have some bite if it offered solutions to those challenges, and a few others, such as improving productivity, reducing taxes and winding back wasteful spending. A reality check to Labor, still reeling from its election defeat, arrived in the verbal electrics of Paul Keating. The former prime minister roasted today’s Labor comrades for failing “to understand the middle-class economy that Bob Hawke and I created for Australia”. Mr Keating said the tax policies Bill Shorten took to the election “were devoted to the bottom end of the workforce and the community” and paid for by cuts in tax breaks to retirees, investors and savers. “If the cuts in tax expenditures had’ve been employed in reducing tax rates, then it would have been a big tax reform and I believe a much more successful outcome,” Mr Keating said, echoing this newspaper’s critique of Labor’s high-taxing, big-spending, income redistribution and class-war agenda ahead of the May poll.

The reforming treasurer of the 1980s understands aspiration. His legacy of lowering taxes, reducing regulation and making workplaces more flexible has been critical to the nation’s prosperity. It’s a pity Mr Shorten did not emulate his party’s economic revolutionaries; understandably, Mr Keating did not express these plain truths before the election. In any case, voters made the right call, opting for the Coalition’s economic policy status quo. In April, we endorsed Mr Frydenberg’s first budget, in particular the fiscal consolidation, flattening of personal income tax scales, spending on infrastructure and tax breaks for investment. But we were, and remain, underwhelmed by the lack of fresh productivity-enhancing reforms.

Since the election, members of the “official family” of economic advisers, such as Dr Lowe and retiring premier Canberra mandarin Martin Parkinson, have argued a more dynamic economy is required if we are to sustain our high living standards. Shifting the dial on productivity growth — which is at a fraction of our long-term average — is vital. Dr Lowe insists, and we agree, structural policies that support firms expanding, investing, innovating and employing people are the key. Investing in trade skills should be a high priority. Ewin Hannan reports today employers are warning Scott Morrison urgent and major changes to the nation’s training system are needed to deliver skilled workers for the unprecedented pipeline of infrastructure projects and mining.

Ahead of tomorrow’s Council of Australian Governments meeting, the Australian Industry Group has written to the Prime Minister calling for a revamp of the vocational education and training system due to inconsistencies in funding, declining funding levels and varying qualification standards. Poor apprenticeship commencement and completion rates add to a complex and confusing picture. A “step change” is needed to lift quality and confidence in the VET system and get more value for taxpayers, argues the AI Group’s Innes Willox. COAG must agree to a national reform road map. A robust training system is one of the best ways to sustain high growth and face global shocks.