This article argues that Australia can uphold a decent economic/social policy mix by streamlining public spending and promoting a more dynamic economy.
I make the following points on the expectation that the trend towards freer trade continues as the best means of promoting prosperity. One can note Donald Trump's recent claim that US jobs have shifted to China largely through the actions of US corporations and lawmakers, yet The Economist indicates that only a fifth of the six million US manufacturing jobs lost between 1999 and 2011 was caused by Chinese competition.
First, it is necessary to defend freer trade, despite fears about the rise of authoritarian and mercantile China. As The Economist reports, a study by university economists calculates that median US income earners would lose 29 per cent of their purchasing power if the US was closed to trade, the poorest would lose 62 per cent given they spend proportionately more on traded goods, and innovative US goods would lose access to a growing Chinese market as global competition and low-cost inputs for consumer goods raises the productivity of American designers. The same is true for Australia.
Second, being an advanced liberal democracy that gives greater consideration to social issues in line with its pluralist tradition, Australia will remain attractive to those who generate new wealth. While the global economy provides enormous benefit to low cost nations in terms of costs for manufacturing and services, new wealth does move and/or invest in Western liberal democracies for lifestyle reasons alone. While foreigners are often blamed for rising housing costs, 2014 surveys indicate that Australia ranked third behind the US and Canada as the first choice for wealthy Chinese looking to emigrate with 47 per cent of wealthy Chinese indicating a desire to emigrate.
Australia can effectively balance workplace, wealth and humanitarian considerations to enhance Australia's economy and labour force where and when needed, despite foreign purchases helping raise the price of housing, albeit that most of the price increases occur in a "handful of metropolises that attract people, capital and ideas from all over the world" (including Sydney with a 12 per cent annual rise for the past three years).
In investment terms, while early UNCTAD data for 2015 indicates that Australia dropped out of the top ten countries in terms of foreign investment inflows, partly due to a significant divestment of mining assets, Australia received a further net inflow of $57.5 billion of foreign investment in 2014. Of gross inflows of new direct investment (valued at $140.1 billion in 2014), the largest sources came from the US ($32.0 billion), Singapore ($31.8 billion), the European Union ($28.3 billion), and China/Hong Kong ($14.7 billion) (Dept. of Foreign Affairs and Trade, International Investment Australia 2014, September 2015).
Third, Australia does have a diverse economy with industries that will ensure reasonable prosperity for years to come, notably mining, agriculture, tourism, education. Recent free trade deals have the potential to benefit Australia's services and food producers, although agricultural products only comprised 9.5 per cent of world merchandise exports in 2014 compared to 66 per cent for manufactures (non-food) (WTO, International Trade Statistics 2015). Tourism Australia indicates there were 1,023,600 Chinese tourists arrivals in Australia during 2015 (up 22 per cent from 2014) spending $8.3 billion (up 45 per cent), with total international arrivals increasing to 7.4 million (6.9 million in 2014) and spending $36.6 billion ($31.1 billion in 2014).
Fourth, and this is where the feel good story ends, Australia has to consider age-old competitive imperatives rather than look at soft options like Australia having a low level of debt and overall taxation when compared to other developed countries.
Quite simply, Australia cannot assume that the good times will re-emerge anytime soon to reignite our terms of trade. For example, after the dotcom bubble burst in 2001, the US Federal Reserve eased monetary policy until 2004 with easy credit boosting the housing market, the world economy and commodity prices. This factor helps explain the high demand for Australia's mining products which resulted in mining investment rising from around 2 per cent of GDP in the early 2000s to 8 per cent in 2012. But as world economic growth fell from 5.37 per cent in 2010 to be around 3 per cent from 2012, so the value of our mining exports has fallen as Australia's terms of trade declined from its record peak in 2011.
Since the global financial crisis (2007-08), however, and despite the use of QE and very low interest rates, the governments of most developed countries have relied on debt to maintain public spending levels. In terms of net government financial liabilities, while Australia's surplus declined from 31.5 per cent of GDP in 2007 to 12.9 per cent in 2015, some OECD nations now have a deficit level over 75 per cent of GDP (including the USA, Japan, France, UK, Italy and Spain). Sooner or later, public debt in such countries will need to be addressed.
One should also be careful of relying on China for Australia's future growth. While it was recently reported in March 2016 that China was ready "to roll out other stimulus measures to meet targeted growth of 6.5 per cent between 2016 and 2020", Michael Pettis (Professor of finance at Peking University in Beijing) argues that any commitment to achieve growth through much higher debt levels will inevitably mean that "China's longer-term outlook will be worse than ever" (Vern Gowdie, Daily Reckoning Australia, 9 March 2016).
And with Australia's total public and private debt around $2.5 trillion (mostly private), it can also be argued that public fiscal discipline is of crucial importance because Australian governments are committed to bailing out the banks if they get into trouble thanks to "the borrowing binge of the past few years" which has seen Australia "leveraged" to record high levels (Greg Canavan, Daily Reckoning Australia, 8 April 2016). Hence, there is a need to address recent budget spending given that the Australian government alone has produced an average deficit of 2.8 per cent of GDP between 2008-09 and 2014-15.