Australia economy shows recessionary behaviors.

[neddy]

Is Australia returning to the Banana Socialist Republic days?

Labor's excessive spending led to birth of Keating's banana republic
BY: JOHN STONE From: The Australian January 01, 2013 12:00AM

OPPOSITION Treasury spokesman Joe Hockey continually says excessive spending, and resulting budget deficits, "are in Labor's DNA". I recalled this during the release, by the National Archives Office, of the 1984 and 1985 cabinet papers (embargoed until today).

An overview by the National Archives historical consultant Jim Stokes was well-informed, but its account of the 1984-85 budget was seriously amiss. In truth, the Hawke government then missed a huge opportunity for a budget that could have transformed its fortunes.

That failure stemmed from the excessive spending proclivities in Labor's DNA.

Let me explain. In his July 1984 cabinet submission, treasurer Paul Keating said that (to quote Stokes) "unless spending was checked, the government would pay dearly in terms of high interest rates and lost credibility"; cabinet "agreed that the projected growth of 6.2 per cent in spending in real terms was incompatible with budget objectives"

What this summation overlooks, however, was the huge projected growth in 1984-85 revenue and the opportunity that was thus presented to cut the deficit dramatically.

I am not being wise after those events. On August 15, 1984, I met Keating and advised him of my intention, "in the near future, to resign my office as Secretary to the Treasury and also from the commonwealth public service". My six-page letter handed to Keating that morning (copied only to my deputies), from which those words are taken, has never been released. But with the 1984 government papers now becoming available, I may quote a few passages.

"I must also say, as I have in two major minutes of recent weeks, that I regard the forthcoming 1984-85 budget as constituting what I called, in the second of those minutes (of August 7, 1984) a 'major failure of policy'. That is not, as I made clear in that minute, any criticism of you personally.

"As I said then, without your own efforts 'I am keenly aware that the result would of course have been very, very much worse'.

"In saying that I have particularly in mind the quite phenomenal 'surge' of revenue in 1984-85, an increase of over 20 per cent on a 'pre-measures' basis. That 'surge' results from a particular conjuncture of events which will certainly not be repeated in 1985-86 or subsequent years. In effect, that 'one-off' conjuncture gave us a 'starting point' deficit of $5.1 billion this year even before the expenditure savings of $0.7bn which ministers have since found it possible to make. On that basis, a deficit of as 'little' as $4.4bn can now be seen as having been achievable. In fact we have a deficit of around $6.7bn (roughly $18bn in today's dollars) .

"One inescapable question arises. As I said in my minute of June 23, 1984, if, in these circumstances, the commonwealth's budget deficit is not to be seriously reined in this year, when is that to be done? And, if at all, how? By future tax increases? Certainly, the further extraordinary rise in outlays of over 6 per cent in real terms coming on top of the real increase of over 8 per cent last year would suggest that this is the only course likely.

"These are harsh and perhaps unduly direct questions. However, nothing in what I see either in this year's ministerial budget processes or in the performance of your colleague ministers more generally gives me any hope that answers will be found to them and many others like them by this government in the months and years ahead."

In 1985 we got the taxes: a capital gains tax, a fringe benefits tax (and, had Keating had his way, a broad-based indirect tax). With a huge budget deficit feeding a money supply growing at more than 15 per cent a year; a yearly inflation rate, fed by that monetary fecklessness, running around 8 per cent; an exchange rate plunging as a consequence; and interest rates therefore running at about 15 per cent, by May 1986 Keating's famous comment about Australia becoming a banana republic was only too accurate. In one important respect, however, there was meanwhile a change for the better. After the December 1984 (early) election, Hawke replaced John Dawkins with Peter Walsh as finance minister. Under his outstandingly capable hands the federal budget recorded (from 1987-88 to 1989-90) the only Labor surpluses in the past 30 years.

What if a different course had been taken in that 1984-85 budget? But then, as the post-Walsh years were to reconfirm, excessive spending was always in Labor's DNA.

John Stone was secretary to the Treasury from 1979 to 1984.

 

[neddy]

Re: Is Australia returning to the Banana Socialist Republic days?

Maybe it is time for my exit strategy .... OZ is a lucky country, lucky that it is so successful even with second rate leaders, managers and workers. So far, the luck is still there, for how long.


13 June 2013, 6.31am EST
Revisiting the banana republic and other familiar destination
Tom Conley
Senior Lecturer, School of Government and International Relations at Griffith University

DISCLOSURE STATEMENT
Tom Conley does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.


With the end of the boom looming, Australia is set to revisit some old economic concerns.
We took the view in the 1970s – it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … … Then you are gone. You are a banana republic.
Revisiting then-Labor Prime Minister Paul Keating’s infamous 1986 warning should remind us how economic conditions change and how they keep changing: how new “realities” are quickly replaced by even newer “realities” masquerading as permanent changes.

Resources have been good for Australia, unlike for some other countries where there really has been a resource curse. However, with the end of the boom it is likely that we will revisit some earlier concerns about Australia’s over-reliance on resources.


Another quote from Bob Hawke, Paul Keating and John Button in 1991, taken from Building a Competitive Australia also seems particularly relevant at the moment.

This tough, increasingly competitive world of five and a half billion people does not owe, and will not give, seventeen million Australians an easy prosperity. The days of our being able to hitch a free ride in a world clamouring, and prepared to pay high prices, for our rural and mineral products, are behind us. From this fact flows everything else.
This sentiment was true for the 1980s and early 1990s, but less so for the 2000s where rising prices for resources and increases in national income provided an easier prosperity than Hawke could have imagined.

In 2000, Keating was still arguing against the resources as saviour view of long-term Australian prosperity:

The global terms of trade will not suddenly flow back in the direction of commodity producers. So even if we wanted to, we can never again rely on export wealth generated by Australian farmers and miners to pay for the preservation of tariff walls to protect our manufacturing and services sectors from competition.
China changed everything. Its voracious appetite for resources pumped up the prices Australia received for its exports – particularly coal and iron ore. Australians promptly forgot the warnings of the past, as resource wealth became the new reality masquerading as a permanent change.

Increased prices then led to a huge investment boom, with gas the major recipient in recent years. The scale has been remarkable, as a recent report from Australia’s Bureau of Resources and Energy Economics (BREE) shows.


Projects at the committed stage, by commodity. Australian Bureau of Resources and Energy Economics
This boom has now peaked and Australia must now find new sources of growth. According to BREE, the “likely scenario” is that

the value of projects currently at the Committed Stage is scheduled to moderate after 2013 as a result of the completion of mega projects currently under construction. In 2014 the stock of committed investment is expected to decrease by $8 billion, and then by a further $63 billion in 2015. From 2017 onwards, the stock of committed investment in the mining sector is projected to revert back to levels comparable to 2007.

Outlook for committed project investment – “likely” scenario. Bureau of Resources and Energy Economics
While some commentators, including the Reserve Bank Governor Glenn Stevens, argue that we are now entering the third – export – stage of the boom, it is likely that just as the boom surprised us on the way up, so will the crash on the way down. Australia will no doubt export more for at least a few years, as recent data shows, but with increased global supply and lower prices, it is likely that we’ll start worrying about our dependence on resources once again.

Recent data clearly shows that commodity prices are on the decline, with iron ore and coal prices substantially lower. According to the RBA:

Over the past year, the index has fallen by 8.6% in SDR terms. Much of this fall has been due to declines in the prices of coking coal, iron ore and thermal coal. The index has fallen by 9.9% in Australian dollar terms over the past year.

Reserve Bank of Australia

Projects at the committed stage, by commodity. Australian Bureau of Resources and Energy Economics

Outlook for committed project investment – “likely” scenario. Bureau of Resources and Energy Economics

Australia is a lucky country, but it is also vulnerable. Australia’s historical vulnerability to declines in international resources demand is about to re-emerge, which will make economic management a difficult task after the September election.

Things have been tough for the Rudd and Gillard governments, but they will be even tougher for an Abbott government constrained by their rhetoric of the dangers of public debt. Labor was helped by the investment revitalisation of the Chinese economy, but should they win the election, the Coalition will come into office at a time of Chinese economic consolidation and rebalancing.

In the late 1980s, when some commentators were eulogising about the end of the industrial revolution and touting the beginning of the information age, Australia appeared to be doomed unless it weaned itself off a reliance on resources. This new reality was superseded by an even newer one – the remarkable rise of the Chinese economy. Not only did Chinese demand increase the price of Australian exports, but it also decreased the price of Australian imports. The terms of trade – the average price level of exports in relation to the average price level of imports – is a ratio (or fraction) and so can be affected by both the numerator and the denominator. Rising costs in China are likely to constrain further reductions in the price of manufactured goods.

The terms of trade improved remarkably from the early 2000s, it then declined as commodity prices fell in the immediate aftermath of the global economic crisis. To the surprise of many, including myself, it then ascended again to new heights as China embarked on one of the biggest investment booms in history, a boom that required many of the things that Australia exports to support it.

There can be no denying that Australia has been lucky to be in a position to take advantage of China’s industrialisation and recent Asian economic exceptionalism in the face of a slow American recovery and continuing European crisis. Similarly, however, any downturn in China and other Asian economies will now negatively affect Australia.