When a resource-rich country like Australia adjusts to the end of a once-in-a-century mining boom, it can choose either a smooth or a bumpy path.
It will travel the bumpy path if it refuses to acknowledge the contraction in income flowing in from overseas. Then the economy adjusts through a steep increase in unemployment, placing the burden of adjustment heavily on the shoulders of those workers who lose their jobs and young people who cannot find one.
The smooth adjustment path combines an exchange-rate depreciation with wage moderation and fiscal consolidation. Along this path the burden of adjustment is shared more fairly among workers and selected beneficiaries of government spending programs, and unemployment does not rise appreciably.
Australia has a foot on both paths. Soon we must choose between them.
Those who argue that Australia's industrial relations system is totally rigid, having been returned by the previous Labor government to the centralised wage-fixing system that preceded the Hawke era, conveniently ignore the decline in real wages that has occurred over the last two years. ACTU secretary, Dave Oliver, signalled through the joint statement issued at the National Reform Summit, a willingness to discuss further reforms to the industrial relations system to make it relevant to the modern world of disruptive technologies while recognising Australia's future is as a high-skill, high-wage economy.
Aided by wage moderation, the sharp depreciation of the Australian dollar since the mining boom's peak has resulted in a boost to the economy's international competitiveness. But other parts of the necessary adjustment are not going so well. They are private investment and fiscal consolidation. In modelling performed for the National Reform Summit, Dr Janine Dixon of Victoria University's Centre of Policy Studies reported that, under realistic assumptions, measured living standards are unlikely to return to their 2012 levels before the end of the decade. Her modelling demonstrated persuasively that the federal budget is in worse shape than the official budget documents suggest.
On Treasury advice, the government has simply assumed the economy will return to better than trend growth in 2017-18 and beyond, helping achieve a large turnaround in government revenue. Only delusional forecasters would be predicting 3.5 per cent annual GDP growth in two years. It was this same technical assumption of a return to trend growth that bedevilled the previous Labor's government's efforts to achieve its forecast budget surpluses.
Prime Minister Malcolm Turnbull has an opportunity to end this pretence in the mid-year economic and fiscal outlook due out by year's end. By doing so, he can expose the truth about the fiscal position – that Australia is not on a credible path back to surplus. Then, instead of choosing budget measures that attack the poor and the vulnerable, as his predecessor did, Turnbull can start an open, honest conversation with the Australian people on how we, as a community, might go about the task of fiscal repair fairly, through both expenditure savings and revenue measures.
On these pages, this columnist has repeatedly warned the Australian economy is overly reliant on an unsustainable housing boom to replace the mining boom. Now the housing boom is deflating, it's hard to identify major new investments in the pipeline to take its place. Boosted by the real depreciation in the exchange rate, inbound tourism is surging and higher education exports are recovering, but this is happening on a largely unchanged capital base. Agribusiness remains promising but new foreign investment has been modest, not helped by the government's discriminatory policy towards private agricultural investments from China, Japan and Korea. To stretch a metaphor, new investment in tourism, higher education and agribusiness is not filling the hole left by the end of the mining boom.
Typically, investment is the last to recover from an economic shock. The Hawke government encountered this problem after the commodity price collapse of the mid1980s. In response, it introduced an investment allowance to hasten the recovery. Offering incentives to small businesses to make small investments in equipment is all well and good, but large businesses make the big investments. A temporary investment allowance wouldn't immediately aid the task of fiscal consolidation, which needs to be a medium-term project anyway, but it might be warranted to ensure Australia has both feet on the smooth path to economic recovery.
Craig Emerson is chief executive of Craig Emerson Economics and is adjunct professor at Victoria University's College of Business.