Wednesday, September 05, 2007

Australia's remarkable economic performance - the need to avoid hubris

Unexpectedly, the GDP figures for the June quarter suggested that Australian economic growth has accelerated again, with June quarter on June quarter growth (seasonally adjusted) of 4.3 per cent. I say unexpectedly because many of us expected weaker figures.

This is a remarkable performance, with sixteen years of sustained growth since the bottom of the last recession in 1991. The nearest twentieth century equivalent was the period after the second world war, although this included some significant downturns. Further, the average percentage growth this time is, I think, higher that it was in that earlier period.

A few numbers to put the whole thing in context.

In 1991-1992, Australia's GDP was around $A417 billion. Commonwealth Government receipts were $A92,966 billion, 0r 22.3 per cent of GDP.

In 2005-2006, GDP reached $A960 billion. It has now passed a trillion dollars. Commonwealth Government receipts were $A221,834 billion, or 23.1 per cent of GDP.

These simple numbers show two things.

First, even adjusting for inflation (I have not done this), Australia's GDP has more than doubled during the period. Our growth has not been as fast as, say, China's, but it has still been very substantial.

Secondly, Commonwealth Government revenues have grown even faster, taking a bigger share of a bigger GDP. Quite simply, the Feds have had money coming out of their ears.

I don't want to comment on the economics in all this. Instead, I thought that I would make a few broader comments.

First, we need to avoid hubris.

Few Australians remember that twenty years ago Australia was seen by many in Asia as the sick man of Asia. Fat, wealthy, slow and in decline. This is, I think, no longer true. But we have been very lucky in many ways.

A very large number of Australians - all those who have entered the workforce since 1991 - have never experienced an economic downturn. I have, and it's not pleasant.

In 1990 the consulting marketplace collapsed, down 30 per cent in one year, the first major decline the sector had ever experienced. We had been on a strong growth path. Over the first three months of 1990 our monthly fees dropped by seventy per cent. We bled and bled.

My point in all this is the need to avoid arrogance, to recognise that we have had a degree of luck, that there will be hard times again.

This leads to my second point, the need to help more people share in the prosperity so that the benefits are more widely spread. During this growth phase, the proportion of Australian wealth held by the top 5 per cent of the population has grown far faster than GDP. The gap between rich and poor has widened, then widened again.

This links to the arrogance point.

Talking to people and listening to politicians and the media I get the strong impression that many Australians have become more censorious, less tolerant, of those not as well off as they. I can do it, why can't they?

A little humility might help here. It is actually relatively easy to make money in boom times if you have assets and/or particular skills. It remains very hard to break out of the poverty trap if you have no assets, few skills or simply experience bad luck. One of my worries is that economic downturn will lead to an explosion in the numbers of the disadvantaged.

I have not written a lot on social policy. However, I have been doing some work in this area so perhaps should share some of my thoughts. As in a number of other policy areas that I have written about, my feeling is that social policy needs new approaches if we are to to make real progress.


Lexcen said...

If we look at the size of our foreign debt, there is no cause for hubris. $330 billion estimated a few years ago.That's not the latest figure of course.

Jim Belshaw said...

I think that's dead right, Lexcen, although the debt is private rtaher than public. Private debt does not have quite the same adverse affects.