Jeremy Thorpe - Economics and Policy Partner - This article first appeared in The Australian Financial Review, 7 June 2017
To borrow a line from Paul Keating, ‘every parrot in the pet shop’ has been squawking about 25 years of economic growth.
The “25 years of economic growth” catchphrase has become an almost mandatory opening to any public policy speech in Australia, and even gets a guernsey in this year’s Budget Paper No. 1. It's also likely to form much of the commentary this week as we talk through the National Accounts due out today.
But the obsessive reference to this growth statistic has embedded a sense of collective complacency in Australia and it masks a number of worrying trends.
Simply focusing on the continuous GDP growth ignores the dilutionary effect of population growth over time. Both sides of Australian politics have embraced the ‘Big Australia’ philosophy, with the combination of strong immigration growth, and Peter Costello’s “have one baby for Mum, one for Dad, and one for the country” resulted in a 40% increase in Australia’s population since September 1991 (the first quarter after the 1991 “recession we had to have”).
In effect, even though our national pie has been growing for 25 years, we are relying on it to feed an even greater number of people.
Looking at GDP growth in per capita terms reveals two points.
First, per capita growth has lagged behind total GDP growth. In nominal terms, over 25 years GDP has grown by 225%, yet GDP per capita grew by only 160%. The focus on headline growth therefore significantly overstates our effective national income as it translates to individuals.
Secondly, rather than looking at per capita growth on an annual basis, it is useful to look specifically at the 103 quarters that make up the 25 years of economic growth. Using this quarterly per capita growth lens, the claim of ‘no recession since 1991’ is challenged.
Through this lens, Australia has had technical recessions (two or more consecutive quarters of negative GDP growth) in both 2000 and 2008. Additionally, the last two quarters of 2016 showed zero GDP growth per resident; as close to another per capita recession as you can get.
Another trouble with pointing to 25 years of continuous annual GDP growth is that GDP is a national figure and it hides regional growth disparities. PwC’s Geospatial Economics Model shows that of 2214 regions in Australia (approximately 10,000 people per region) about one-third in any year had a decline in their regional income. The message: Australia has not even been a ‘two-speed economy’; it is a patchwork quilt full of holes.
Another perspective on this perceived golden age of economic prosperity is to think about our debt position.
Australia's household debt is now the largest in Australia’s history; the ratio of household debt to annualised household disposable income increased from 70.3% in September 1991 to 188.7% at the end of 2016.
Similarly, Australian governments have not come out of the 25 years of continuous economic growth in a position of immovable strength. The International Monetary Fund (IMF) reports that, combined, gross federal and state debt is forecast to peak at just under 43 per cent of GDP this year, twice what it was in 1991.
In any government debt discussion we like to revel in the fact that we are not Greece, Portugal, Ireland or any of the other heavily indebted governments that were caught out by the Global Financial Crisis. Yet despite continual growth and the largest terms of trade boom in Australia’s history, we have doubled our debt and are only the 12th lowest government debt ratio among the 35 nations the IMF considers ‘advanced’. Our capacity for government to absorb the next big economic shock is now questionable.
In a sense, this reflects that the rate of growth is not that to which we are accustomed. Economic growth since the GFC has been consistently and significantly lower than Australia’s long run average, and projections by PwC through to 2050 suggest that lower growth is the new norm. The reality, 25 years of continuous economic growth represents Australia’s squandered generation.
As a nation we have little tangible to show from the the National Competition Policy microeconomic reforms of the 1990s and early 2000s and the unprecedented terms of trade boom driven by China’s urbanisation. We enjoyed the consumption generated by these opportunities but walk away with little to point to of substance. We have not set microeconomic policy to drive future growth, and our fiscal policy has contributed to a structural deficit. Both need urgent reform.
It is time to stop pointing to the 25 years of continuous economic growth as a framing point for our national policy discussions. Sure, we have been growing in aggregate, but in recent years not at the pace where we should be comfortable that Australia’s per person standard of living will continue to improve.
It might not yet be a burning platform, but unless we change this narrative, we cannot even start to have the proper debate about the types of social and economic reforms that we will need to consider to arrest our economic malaise and to build an economic future that will benefit and protect our kids.
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