The Great Australian Reckoning is upon us

Well, Prime Minister Tony Abbott couldn't have wished to live in more interesting times. A combination of global and local factors are imposing the Great Australian Reckoning on his first term of government, but it is still not clear who the winners and losers will be. That said, the whole country will see standard-of-living declines to some extent.

Overnight, the Federal Reserve announced another $10 billion will be removed from its monthly bond-buying program – that is, it will only artificially increase money supply by $65 billion a month.

Stock markets continued to bounce around before and after the decision, and in some emerging markets there are clear signs of capital being repatriated to more developed economies. However, we cannot yet see the clear long-term impact on the ASX and the Australian dollar.

The more bearish-minded expect the dollar to fall far below 80 cents, and for many stretched valuations on the ASX to dramatically correct.

That view is not irrational (though probably not likely). For more than a decade, our political economy has been riding two horses – resources and the housing finance industry – that have kept money swirling around, GDP growing, unemployment and inflation low, and even won former Treasurer Wayne Swan Euromoney’s ‘Finance Minister of the Year’ award.

But even Swan, while trying to enjoy that accolade in 2011 (as a hostile media rained on his parade) would have known that a reckoning was due. While mining and property spruiking sucked up so much of our attention, and capital, major planks of Australia’s future success were neglected (more on that in a moment).

The Great Australian Reckoning was always going to arrive – the end of a once-in-a-lifetime terms-of-trade boom is happening right now, as international competition and shaky demand from China lower the prices of our commodities exports. That is amplified by a sharp decline in the capital inflows that were funding the construction of resources projects.

And, simultaneously, other sectors of the economy realise that we’ve been paying ourselves too much during the good times. In the list of winners and losers, the union movement is currently being singled out for a painful reckoning (The crumbling pillars of union power, January 30), though it has to be said that they were not the only ones making hay during an extended period of sunshine.

The tale of excess goes back to the Howard years, when tax revenues grew rapidly during the ‘mining boom mark I’ and Peter Costello played Santa with tax cuts and family tax benefits. He even posted families one-off bonus cheques at one point.

As Howard and Costello paid off the federal debt left by Keating, private debt spiralled upwards. Consumers got drunk on the easy credit of the mid- to late-2000s housing boom – a non-productive ‘boom’ in which we took other people’s savings, parked it in our houses, and then drew it down to artificially boost ‘incomes’ to live high on the hog.

And when the GFC slammed the door on that party, the Rudd and Gillard governments took up the slack, borrowing to keep small businesses going through thousands of lucrative government contracts.

This columnist supported the stimulus programs – both of them – and I do not resile from that position. Those closest to the GFC news and data (and Business Spectator staff literally did not sleep much during that crisis) knew that the Rudd-led responses, including the tragically dangerous pink batts scheme and ‘school halls’ job creation program, were decisions taken at a white-hot moment in the global political economy. Large mistakes were made, but mostly we saw larger mistakes made overseas.

That has left Australia with $300 billion in gross debt, and because Labor’s spending programs are hard-wired into the budget, that will grow closer to $500 billion before Treasurer Joe Hockey’s cost-cutting begins to have any effect (and we won’t know how effective that will be until the May budget).

In 2014, the reckoning for all of these excesses is upon us. The Abbott government is walking a tightrope on so many issues. If it succeeds in restructuring the economy over the 2013 to 2019 period, it will be put alongside the Hawke-Keating government as having pulled off major historic reform.

But look at the challenges:

• it must slow and then turn around the nation’s infrastructure deficit to unlock much-needed productivity gains.
• it is biting the bullet on one area of advanced manufacturing – the auto industry – but must open the way for other areas (such as auto component exports) to take up the lost jobs.
• it must encourage the recapitalisation of the agribusiness sector (don’t mention GrainCorp) and stimulate (okay, let’s mention SPC) a new generation of high value-added food exports to feed the emerging Asian middle classes.
• and it must radically reform the tertiary education sector – a potentially huge export business that, sadly, has been demeaned and stripped of much of its prestige/value by packing too many domestic students into unis and, in the mid- to late-2000s, ripping off foreign students to fund the extra places. And yes, that was done under both the Coalition and Labor governments.

There are many more challenges, but even the short list above looks difficult given the fiscal constraints this government must face up to. And, let’s not forget, there is likely to be a full-blown war with unions in the process.

One is tempted to buy a one-way ticket to a nation with fewer problems to tackle in the years ahead... Spain looks nice!

Seriously though, Australia can negotiate these challenges, particularly if journalists focus less on the acrimonious tribalism that has defined politics in this country for the past few governments and devote more space to how these diabolical policy problems can be solved.