Australian Economy, Meet Austerity

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Is there really no other way for people to maintain a democratic government than by handing over unlimited power to a group of elected representatives whose decisions must be guided by the exigencies of a bargaining process in which they bribe a sufficient number of voters to support an organised group of themselves numerous enough to outvote the rest?

We don’t know, Mr Hayek, but we very much doubt it.

Australia finds itself in a very precarious economic environment largely because of weak politicians and weak public service institutions. Yesterday’s poor budget news simply confirms what anyone with an ounce of common sense should’ve known was coming for a long time. That is, the Australian economy is in a spot of bother.

So we’re looking at government budget deficits as far as the eye can see? Is that really a surprise?

Let’s point the finger first and start looking at solutions later…

Number one on the blame list is politicians. The Howard government bribed plenty of voters, expanding middle class welfare and pandering to the boomers by making superannuation a very attractive low tax savings vehicle. If not for these bribes the surpluses in the good years would have been larger.

Many argue that cuts to income tax rates were too generous during this time. We don’t buy that argument. Allowing people to retain more of the income that they rightfully earn, and allowing them to spend it in ways that they see fit, is the cornerstone of a properly functioning economy.

If income tax cuts lead to a consumption boom, then it should be the job of monetary policy to control it. Raise interest rates to encourage savings over consumption. But no, the RBA under Ian Macfarlane kept interest rates too low for too long.

The real bribing got underway when Labour came to power in 2007. The 2007/08 surplus was $19.7 billion. That changed to a deficit of $27 billion in 2008/09. More deficits then followed:

2009/10: $54.5 billion
2010/11: $47.5 billion
2011/12: $43.4 billion
2012/13: $18.8 billion

These deficits came at a time when China’s economy was booming. During the first two financial years, Australia’s national income grew at a rapid clip. We should have produced budget surpluses. Instead, the government threw extra stimulus at the economy. That’s why interest rates rose over that period. Monetary policy was the only restraining factor. But rates were coming off historic lows following the GFC, so there was still a significant amount of stimulus flowing through the economy at that point.

The bottom line here is that the management of the Australian economy by politicians was a disgrace. They put themselves before the good of the country. Always looking to take and redistribute what wasn’t theirs in the first place, all to secure another term…another three years in power…another shot at shaping the country according to their ideological viewpoint. Morons.

You could argue that we’re no better. We voted the clowns in. That’s true. But the general population doesn’t take an oath to serve their country, to make decisions in the best interests of the nation. It’s their role to serve their family, or themselves, and no one else. If the government is going to hand out a bribe, you’d be stupid not to take it.

We don’t know what type of oath a politician entering parliament takes. But we’re guessing it’s got something to do with acting in the nations’ interest rather than self-interest. If that’s the case, they’ve all blown it. Liars, frauds, and crooks. And we call them ‘honourable’? Ha! The joke is on us.

Next in line for the blame game is the Treasury department. Their forecasts, which the government relied on to dole out bribes, were woefully inaccurate. It calls into question either their competence or their independence. Probably both. So don’t believe their future deficit forecasts; they are likely to still be overoptimistic. 

Australia faces a sharp drop in investment in the years ahead. Our terms of trade will continue to decline, meaning national income growth will be tepid at best. If China slows more than forecast, and we think there’s a good probability of that happening next year, Australia will suffer its first recession in decades. It will be the recession we didn’t have to have.

Now here we are, facing the very real likelihood of recession, and we’ve got the current government talking about belt-tightening. This is the time when we should be looking at deficits to help the economy through a soft patch. So instead of considering tax cuts that might increase spending, people are talking about tax hikes!

The budget deficit forecast for 2013/14 is now $47.6 billion, which represents a large fiscal stimulus on the prior year. So we’ve had a large fiscal AND monetary stimulus and yet economic growth is still weak. That gives you some idea about just how bad the underlying economy is.

But all is not lost. If we realise that the next few years are going to be tough and austere, and the government finds a skerrick of backbone, important decisions can be made for the long term health of the economy. We’re not too confident of it happening, but there is hope.

Firstly, the government should get rid of a lot of middle class welfare. It’s not the role of the state to subsidise our standard of living. It also needs to restructure the tax system to incentivise productive investment instead of mortgage growth. Get rid of negative gearing and make genuine efforts to clear red tape for developers.

But making tough decisions like this involve reversing the bribes that got politicians into power in the first place. If the pollies sell such policies as genuine attempts to reform a country that has lost its way, and we voters turn around and reject it at the ballot box, then we’ll only have ourselves to blame.

If the government makes some tough choices and tackles reform, Australia has a good chance of getting back on a strong growth footing in a couple of years. Government debt-to-GDP is still very low at just over 20%. The situation is not disastrous.

It’s interesting to see the storm of commentary over the government’s debt blowout compared to the sanguine view towards household debt. Australia’s household debt-to-GDP ratio is nearly 100%. And most of that’s mortgage debt. No problem right?

That’s the consensus view. But we think it will become a problem in the years ahead, especially if we do enter a recession. Carrying such a high debt load while your economy contracts is not an easy task. What will our foreign creditors do? Probably ask for more return to compensate for the risk of lending to Australia. That means a lower currency or higher interest rates (or both).

Australia needs a few years of austerity. We need to realise that we’ve been living beyond our means for a long time. We need to pull our head in, understand that genuine economic growth and prosperity comes from investment and innovation, not speculating on house prices and relying on China to do the heavy lifting.

The next few years will show us what we’re really made of.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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11 Comments on "Australian Economy, Meet Austerity"

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Scott
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Agreed,

As has been said here before, swapping houses between each other is not the basis of a sound economy. (Unless you’re a FIRE parasite)

John
Guest

Great article Greg that’s how I’ll refer to all politicians from now on “Honourable Morons”, but having said that a recession is inevitable and necessary.

ram
Guest
As the NSW ICAC hearings are showing, Australian politicians not infrequently steal BILLIONS each from taxpayers and investors. Until the culturally embedded “West African” levels of corruption are cleaned up, most investors will avoid Australia — for good reasons. It should also be noted the LNP government under John Howard defaulted on its domestic debt. The following Labor government did nothing to pay monies owed, and now it appears the LNP had defaulted on domestic debt again! That is not “generating a surplus” it is deadbeat default. You can be sure they will default on external debts in due course.
Jason
Guest
Totally true Our politicians are liars and corrupt and they cannot manage money. Instead Labor under Rudd spent far too much time licking China’s boots and ensuring Australia remained a vassal state. He was busy running up more frequent flyer points than James T Kirk to be bothered running the nation. Now we have Joe Hockey warning of Budget Doom while Budgie Smuggler Abbott doles out more middle class socialist handouts. Perhaps we should put Parliament House’s canteen lady in charge. A better job at administration would be done. We the Australian population licked China’s ass like subservient terriers and… Read more »
garry
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Whoa….there’s seems to be a presumption here that we have skilled politicians (or rather, country managers) who are running the show ie:(Australia Inc) in a manner where they could do better. The problem is, these folk who play the politics game do it for a career choice (a comfy lifestyle, backed by a good pension) … which certainly doesn’t equate to a skilled country management team. Nope, we have had a long succession of 3rd raters running the place. A tolerant lot we are indeed. Then again, the Lucky Country syndrome has played a part as well. ie: No need… Read more »
Lachlan
Guest

Greg your article here only discusses solutions limited to sustaining the current monetary arrangement….such as allowing a general recession. There are more interesting discussions to be had. If I were king I would look to create conditions where the crippling effects of over-indebtedness could were not socialised in such a way…rather remaining limited to the individuals who did the damage. Our monetary system is only serving a few and even they have deluded themselves.

Roger Triton
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Austerity is a mistake, will solve nothing, will reduce the wealth of the middle class, and this entire story is a scapegoating of Labor by the Coalition so they can win the next 2-3 elections.

Resist Tony Abbott.

Ted Black
Guest
Being free to empty one’s wallet whereever you see fit might be a fundamental freedom but look what we did with the money. Thanks in no small part to a fat bloated protected banking sector and entrenched unresponsive housing development sector we rent seeked ourselves the worlds most unaffordable housing. No wonder we are uncompetitive internationally. We even get rent-seeked by Amazon who charge huge margins in Australia compared to the US. And guess who owns the politicians. The rent seekers their lobbyists and the rent seeking shareholders. The two party model needs to be broken up. It has resulted… Read more »
curl of the burl
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Mate this article is bang on. I’ve been saying this for quite a while. I worked in China for the last few years and it was easy to see the road Australia was heading down from there. Australia’s going to hit recession. It won’t be a sudden drop. We have too much space for government debt for that and our pollies and banks will do their darnedest to keep the bubbly inflated. But when they run out of tricks, it will grind down to it’s inevitable correction point. Depending on how quickly our erected leaders take their balls out of… Read more »
garry
Guest

Yes, the morons we have running the show here have put us on the road to penury. Our mineral wealth squandered, 83% of it now in foreign hands, our food chain rapidly moving down the same path, and our capacity to physically make things pretty much finished. Added to this, we face a future of being tenants in our own land, given the extent of these unbridled sales to foreign entities.

Penny Kosmas
Guest

Austerity measures are a rather simplistic temporary fix in contrast to the services and production allowance heading off our shores , or worse inviting to our shores.

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