Economists who put their faith in the miraculous economic stewardship of China’s Communist Party, and the expansion in state capitalism that its technocrats measure as ‘growth’, are getting all kinds of wake-up calls this week.
The IMF has downgraded its China growth forecasts, the OECD is revising Australian growth figures downwards, the dollar is swallow diving into a bucket stamped ‘Made in the USA’, and PIMCO has joined China-watcher Ross Garnaut in saying the Reserve Bank will have to slash its record-low interest rates even further.
Why didn’t we see this coming?
Well we did. As John Lee pointed out yesterday, those who have been belling the tiger since the early days of the GFC have been dismissed as a slightly potty “impending doom camp” (Chinese urban legends stumped Labor, May 29).
But as Lee points out, the lazy logic of ‘China’s urbanising, so they have no choice but to buy our iron ore and coal’, is being exposed.
Moreover, the Beijing-dictated financial miracle behind China’s growth story has shown cracks for many years now. As Michael Feller wrote in 2009, when the government owns most of the banks, papering over bad debts is a growth industry in its own right.
As Feller wrote at the time: “Beijing can almost unilaterally intervene in Chinese banks, recapitalise them and ‘erase’ bad debts into special vehicles ... China’s system of politically-directed lending and opaque decision making will need to be reformed if it’s to avoid inflicting unnecessary damage on its own economy and, of course, on trading partners such as Australia. (Holes in the silk curtain, March 10, 2009)”
The steadying of China’s growth story, and the end of the hand-over-fist investment boom Australia went through to cater for it, has profound implications for the major parties in Australia.
One might even ask – despite the commentariat’s new-unanimity that a Tony Abbott government has all but begun ruling the country – which side of politics would best manage this new phase in Australia’s economic history.
Voters are, at present, offered a clear choice.
There’s the Labor party, which is doggedly sticking to its high-spending guns with regard to the NDIS, Gonski education reforms, NBN, carbon pricing and infrastructure spending.
And there’s the Coalition, which plans not to go ahead with much of that agenda, and which wants to cut ‘Labor waste’ from many other areas of expenditure.
The fiscal backdrop to these two opposed projects includes a series of budget deficits for several years hence, net federal debt at about 11 per cent, low government bond yields and a AAA-rating from all three major ratings agencies.
That means in purely financial terms Australia has both choices. We could borrow for a few more years before (hopefully) seeing renewed growth in non-resources sectors, increased federal tax receipts, and a paying down of the debt. Or we could cut public sector spending, hope that boost both business and consumer confidence, and (hopefully) see a surge in new growth and tax receipts to pay down the debt.
Note the word ‘hopefully’ in both scenarios. Voters will soon have to decide which vision to run with, and will put their faith in one of these models. And though the opinion polls say we might as well get on with the latter plan as soon as possible, polls can swing quickly when the news cycle is full of ‘impending doom’.
“Who do you trust to manage the transition from the resources boom to a balanced economy?” That will be what both Labor and the Coalition ask voters to consider at election time.
Picking over Labor’s recent record, it’s clear that the Gillard government spent too much when the worst of the GFC crisis was abating. I have argued that the turning point was the May 2011 budget, though others argue cut-backs should have happened before that.
Those who thought that even round two of the government’s 2009 stimulus spending was going too far will be egging Tony Abbott on to make good on his plan for fiscal austerity – the Coalition plans to cut somewhere in the order of $70 billion from the budget.
In truth, however, that kind of cutting as Australia goes into a downturn is just too dangerous. Abbott knows that. His biggest challenge if his does become prime minister will be quelling the austerity zeal of his party’s economic ‘drys’, and finding politically acceptable excuses for not slashing spending.
We are heading into a time when the oxymoron of ‘conservative profligacy’ is likely to be exactly what Australia needs.