Spending like there's no tomorrow

The lesson that Australia may soon learn is that while times are good, it makes sense to put a little aside for future contingencies

With its resources boom coming to an end, the good times in Australia cannot last. But while economists blame China's economic slowdown and politicians blame one another, it is perhaps time to ask whether Australia might have brought some of the coming hardship on itself.

Until now, Australia has been doing just fine. The ratio of public debt to gross domestic product is about 27 per cent. This compares to an average of about 90 per cent for developed economies. Unemployment - at 5.8 per cent in March this year - remains significantly below that of countries like Britain and the United States.

Indeed, Australia boasts of economic numbers that even powerhouse Germany (6.1 per cent unemployment and a debt-to-GDP ratio of 58 per cent) can barely approach. Since the global economic slowdown began in 2008, Australia's GDP per capita has risen 13 per cent, real wages have climbed 27 per cent and household savings have more than doubled.

Australia has been insulated from the global downturn largely because of China's demand for its resources, notably iron ore and coal. The Australian mining industry brings in billions of dollars of export income, provides work for over 750,000 people and accounts for around 10 per cent of its GDP.

Last month, in what many observers regarded as an important sign that the country's energy-related construction boom may have reached its peak, Woodside Petroleum, Australia's second-biggest oil company, announced it was shelving a US$40 billion (Bt1.1 trillion) gas-export project in Western Australia.

Critics have been arguing for some time that Australia's mining industry is in danger of losing its competitive advantage because it was taxed above the global average. The real culprit, however, appears to be falling global prices.

Australia's resources and energy commodity export earnings are forecast to drop to A$184 billion (Bt5.4 trillion) in fiscal year 2012-2013. This is 4 per cent, or A$9 billion, less than what the country earned from exports in 2011-2012. Many mines may soon become economically not viable, forcing them to close.

Some economists believe that if investments in other parts of the economy, including housing, business and public infrastructure, do not start to pick up soon, the country could find itself in a recession in the next couple of years. Responding to higher unemployment and the consequent economic slowdown, the Reserve Bank of Australia will soon be obliged to cut interest rates, which in turn will weaken the strong Australian dollar.

A significantly weaker currency, accelerated perhaps by eventual monetary tightening by central banks overseas, would be good for some industries, particularly export-oriented manufacturing. But inflation would also rise as imported goods become more expensive, leaving the Reserve Bank in the difficult position of having to juggle the competing interests of exporters and consumers as living standards fall.

By far the most controversial issue so far has been how the country should react to lower revenues. After months of repeatedly promising to bring the budget out of deficit this year, Prime Minister Julia Gillard's government now favours more stimulatory spending. Calls by the conservative opposition to follow the path of austerity have been rejected on the grounds that this strategy has caused even more hardship in Britain and Europe.

But while the politicians squabble over spending priorities, almost everyone is ignoring the fact that Australian governments of all political persuasions failed to take full advantage of the years of prosperity to build up strong reserves.

According to Stephen Anthony, the director of budget policy at consultancy Macroeconomics: "The major issue is what they call middle-class welfare - the payment of welfare benefits to households that essentially are not what you would consider in hardship." This includes tax breaks and policies such as cash grants to first-time home-buyers.

A report by his consultancy blames both sides of the political divide for taking advantage of windfall revenues to implement "wasteful spending and tax concessions". Five Labour budgets under Kevin Rudd and Gillard, it said, had produced a net increase in unnecessary spending of about A$83 billion. An examination of the performance of the Conservative government of John Howard (1996-2007) revealed an even poorer result. In this case, net discretionary spending totalled A$133 billion over five years - a period that also witnessed net tax cuts of around A$117 billion.

With a triple-A credit rating and one of the lowest debt-to-GDP ratios in the developed world, Canberra has the option of spending its way out of the coming economic slowdown. But it would have been better if successive Australian governments had had the foresight to accumulate surpluses during the good times that could now be used to finance counter-cyclical spending.

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