Why has the Australian economy not responded to the unprecedented stimulus it has received? We now know that in the 2013-14 financial year we will see a deficit of around $50 billion. Add to that record-low interest rates, and in almost all post-war years we would see very strong growth, if not a boom, given that level of stimulation.
But it has not happened and the economy remains sluggish. Let me put forward four reasons (there will be many more) – the first three of these reasons show that our country is undergoing fundamental and dramatic change.
Since the war, governments – or, in later years, central bankers – were able to stimulate or hold back the economy by lowering or lifting interest rates. In turn, this would boost or depress the housing industry. We used the housing industry as a virtual economic regulator.
This time around, housing has not responded because although there has been substantial investor buying (including Chinese investment), most of the younger generation has not been able to afford a dwelling. So they are effectively out of the housing market (Low rates have a high price tag for first home buyers, December 10).
Yet the cost of building a basic house has not risen in 20 years, because of remarkable productivity improvements. What has skyrocketed is the cost of land (The price of land is hurting Australia, December 11). The cost of land has been sent through the roof because of zoning, regulation and a complex approvals processes. All of these things have a theoretical value but their combined cost has either priced young people out the market or diverted expenditure away from goods or services to mortgage payments.
When the current younger generation retires, a much larger proportion will not have a dwelling and therefore require much greater help.
Secondly, the mining investment boom drove the dollar to levels that made people working in white-collar areas become nervous that their jobs were not safe from international competition. And that pressure was greatly intensified by global technology.
Thirdly, the industrial relations legislation introduced by the Rudd-Gillard government curbs the hiring of full-time employees by small enterprises – the largest employers.
Fourthly, the mistakes of the Rudd-Gillard government sapped confidence and stopped investment. There are now signs of a pick-up, but it is not uniform around the country
While the dollar has fallen and the government has changed, the other forces are likely to be in place for a long time. Governments will need to think of other ways to stimulate the economy. The best thing they can do is strip Australia of unnecessary regulation and boost small enterprises. That’s what the Coalition plans to do, but it’s a long process, easily derailed and not nearly as effective as the stimulus that went before.