EDITORIAL: by Peter WestmoreNews Weekly
Australia's faltering economy: a way out
, August 16, 2008
The Australian economy could be facing its most serious challenge since the Whitlam era in the mid-1970s.The release of data showing falling retail sales, together with a dramatic fall in job advertisements, falling house prices, rising fuel prices and the negative returns of superannuation funds in the last financial year suggest that the Australian economy is facing its most serious challenge since the Whitlam era in the mid-1970s.
The Reserve Bank decision to leave rates on hold at 7.25 per cent will undoubtedly lead to a rise in unemployment. One observer expects it to rise from a little over 4 per cent to 5 per cent over the next 12 months.
If these figures were only a reflection of local factors, we could anticipate that the rise in global economic activity would avert a recession.
Unfortunately for Australia, both the US and Western Europe's economies are stagnating, under the influence of rising interest rates and sharply higher fuel prices.
Merrill Lynch, one of America's most respected investment houses, has warned that the United States could face a foreign financing crisis within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world.Dependent
The US now depends on Asian, Russian and Middle Eastern investors to fund much of its $700 billion current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after its stockmarket bubble burst.
If, for any reason, China, Russia or the oil producers of the Middle East decided to abandon the US dollar, the consequences could be to bring the US economy to its knees.
The international business editor of the London Telegraph
, Ambrose Evans-Pritchard, recently suggested that the Australian economy faces more severe challenges than the US.
After pointing to the problems of Australian banks' exposure to the US sub-prime crisis, causing a fall in confidence in Australian bank shares, he said that the world's financial storm has swept through Australia and New Zealand, amid mounting signs of contagion across the Pacific region.
"It is now clear that the Antipodes are tipping into a serious downturn. Australia's NAB business confidence index fell to its lowest level in seventeen years in June," he said.
Of particular concern was Australia's current account deficit, now over 6 per cent of GDP, despite a massive growth in income from the export of minerals and natural gas.
It is impossible to know how this will be resolved. Australia has a well-educated and skilled workforce, and should be able to weather almost any storm.
But with a government prepared to pay off its own constituencies — for example in introducing an expensive greenhouse gas abatement scheme, in supporting large pay rises for teachers, promising the abolition of the Australian Building and Construction Commissioner and other measures, while doing little or nothing to assist Australian industries compete with cheaper imports — little wonder the Australian economy is faltering.
While international factors triggered the current Australian downturn, the soaring level of national debt has made it inevitable that its impact on Australia will be severe.
For years, respected economists such as Professor Peter Brain and Access Economics' Chris Richardson have pointed out that the level of Australia's foreign debt is dangerous, and must be cut substantially.
The debt-based economy is the consequence of an economic ideology which for the past 25 years has permitted ever-increasing debt, downplayed the importance of saving, and dismissed the importance of Australian primary and secondary industries.
How can this crisis be addressed? A complete solution will take time, but some things can be done immediately. For example, government policy actively discourages saving and encourages debt by taxing saving, and for businesses, making interest on debt a tax deduction.
An urgent priority is to encourage saving by removing the tax on savings.
To address Australia's foreign debt — now over $600 billion, and which is rising due to both the chronic balance of payments deficit and compounding interest — the superannuation funds should be induced to return the $300 billion they have invested overseas.
If invested in Australia, it would provide a way of replacing imported borrowing with domestic borrowing or equity investment.
Both these steps can be taken immediately, and would send a strong message that Australia was putting its house in order.
Ultimately, however, long-term industry policies — like those which exist in countries such as the Irish Republic, Singapore, Japan and Taiwan — are needed to promote the development of Australian industries engaged in import substitution, downstream processing of Australia's minerals, and the development of a viable biofuels industry which would reduce Australia's dependence on imported oil.
Regardless of which party is in government, these issues must be addressed.— Peter Westmore is national president of the National Civic Council.