When Paul Keating entered a bustling kitchen in a Melbourne function center for an interview with John Laws on May 14, 1986, he delivered a stark warning. The then Labor treasurer cautioned that without significant changes, Australia was on the brink of becoming a “banana republic” due to a collapse in export prices. “If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for,” Keating declared.
This urgent call to action spurred the sweeping economic reforms of the 1980s and 1990s, setting Australia on a path to prosperity. However, the nation now finds itself in a similar conversation as economic growth slows and productivity flatlines. The current economic landscape suggests Australia may only be capable of growing at a fraction of its previous rate.
Economic Challenges in the Modern Era
Australia’s economy is grappling with a structural deficit, an ageing population, and increasing demand for government services. Younger Australians face frustrations over expensive housing, while the global environment appears more perilous than it has in decades. Once a standout on the global stage, Australia risks falling behind.
According to independent economist Chris Richardson, living standards across the rich world have climbed by an average of 22% over the past decade. In stark contrast, Australia’s living standards have risen by just 1.5%. Analysts attribute much of this stagnation to a slowdown in productivity growth, with the economy no more productive now than it was in 2016.
“Productivity growth is the ingredient that delivers higher real wages, generates better-quality goods, and helps pay for government services,” Richardson notes.
The Role of Technological Change
Historically, technological advancements have driven productivity growth. The promise of artificial intelligence (AI) is to ignite a new wave of economic expansion as it becomes more integrated into the economy and daily life. Despite these prospects, Treasurer Jim Chalmers recently downplayed the notion of a productivity “crisis,” labeling it instead as a “big challenge.”
Australia faces numerous “big challenges,” often dubbed “crises,” yet not all warrant extensive economic reform efforts. At the National Press Club on June 18, Chalmers emphasized the government’s responsibility to rebuild confidence in liberal democratic politics and economic institutions by improving living standards for working people.
Government Response and Reform Prospects
As the government prepares for a major economic roundtable, Chalmers has tempered expectations for reform. Prime Minister Anthony Albanese has shown little appetite for spending political capital on tough economic reforms, ruling out new taxes this term. Consequently, the treasurer has narrowed the scope of potential reforms to regulatory changes aimed at increasing housing supply and exploring longstanding policy ideas like a road user charge.
The absence of a clear “crisis” in productivity may explain the lack of urgency in addressing these issues. Yet, the question remains: do economists perceive a productivity crisis?
“The answer depends on whether you like rising living standards or not,” quips Richardson.
Expert Opinions on Economic Malaise
Independent economist Saul Eslake argues that Australia is not on the brink of a 21st-century “banana republic” scenario, describing the current situation as a “malaise” rather than a crisis. He cautions against labeling it a productivity crisis, as this could lead to hasty, short-term measures that might only temporarily boost the economy.
“There are no magic bullets, no short-term solutions. Nothing that can be done, even with the greatest amount of political will, to lift productivity growth in 12 months’ time,” Eslake states.
John Hawkins, an economics professor at the University of Canberra, concurs that productivity is not a crisis but a “lost opportunity” to improve living standards. “More recently, we got away with low productivity growth because commodities were strong, but we need to do something if we want real income growth going forward,” Hawkins asserts.
Looking Forward: Echoes of the Past
As Australia navigates these economic challenges, the shadows of the 1980s loom large, offering potential lessons from past reforms. The nation stands at a crossroads, and the decisions made today will shape its economic future. While there are no easy solutions, the focus must remain on fostering sustainable growth and improving living standards for all Australians.
