We could have a stronger economy

Bookmark and Share Economics & Deregulation | Alan Moran
Australian Financial Review 8th January, 2013

Trade Minister Craig Emerson has listed 13 reasons on why he is optimistic about Australia's growth prospects. Among these is an improvement in national savings and increased investment.

As has always been the case, investment is the key to growth in gross domestic product. And savings are the prerequisite for investment.

Of course, investment may not lead to economic growth if it is misdirected, as was the case in Communist countries. Regulations may also dilute the impact of investment by requiring superfluous additional expenditures or, as was the case in Australia with tariff protection, bringing a misallocation in spending.

There are many such qualifications about the potency of investment as the instigator of growth but, nonetheless, it and hence saving is the dominant source of higher living standards.

High savings rates differentiate the rapidly growing developing country economies from those of the economically languishing developed world. Compared to levels of around 20 per cent in developed economies (25 per cent in Australia) the savings share of GDP in China is a colossal 50 per cent - rather more than the 40 plus per cent registered in Japan and Singapore at the height of their growth surges. India also has a high savings rate and might be able to use its savings more efficiently than China as a result of having a lower share of investment directed into state controlled enterprises, which, even though corporatised, are likely to have efficiency deficiencies.

Even though some of the savings of both Indians and Chinese are directed to covering budget deficits in the developed world, the expanded investment these savings permit means there is little doubt that their growth will be maintained for many years.

This propitious basis for continued expansion in the rapidly growing developing country behemoths is further enhanced by their low levels of government spending, which is in the main redistributive rather growth-inducing. The size of government within GDP remains well under 30 per cent in China and India compared with 35-40 per cent in the US, Japan (though rising rapidly) and Australia. Europe is commonly over 45 per cent with France at 56 per cent.

Borrowing levels exacerbate the negative effects of budget deficits and are 8-10 per cent of GDP in the US, Greece, Spain and the UK. India also has a budget deficit in this league. Australia's budget deficit remains more manageable, while China glows with a deficit of only 1 per cent of GDP (and the Germans are even more prudent).

Finally there is debt. The importance of this is sometimes dismissed by those observing that British sovereign debt in 1815 was 250 per cent of GDP, a level approached only by Japan today. But the level of non-sovereign debt 200 years ago was relatively low compared with today. Moreover, contrary to current policies, the British approach two centuries ago was to combat indebtedness by rigorous expenditure trimming.

Today, among the affluent nations, Australia is reasonably well placed. As well as having a budget deficit and debt levels lower than in other countries, growth remains positive a result of us supplying the booming Chinese and Indian economies. Mr Emerson recognises this in his 13 reasons for optimism, but is unable to understand that our regulatory and tax regimes mean we have failed to fully exploit our advantageous situation and that we are precariously placed as a supplier in a world of many rivals.

Moreover, Treasurer Wayne Swan has now had to acknowledge that we are now in budget deficit territory. In addition to the profligate spending the government has already unleashed there is a stockpile of measures being incubated. These include the vast new expenditures lined up on disability pensions and the Gonski education splurge.

Whether or not these expenditure increases are warranted, our capacity to pay for them is being undermined by productivity-sapping carbon taxes and renewable energy standards, and resource rent taxes that hit at exploration, which is the R&D of mining. Added to these are measures that reduce labour market flexibility including laws that are more forgiving of union thuggery and reintroduce mandatory penalty rates.

The capital, largely in the form of new mining investments, that we have built up to supply demand in the successful economies to our north allowed us to ride out the post 2007 economic storms. We should have done better but government policies are now creating conditions that will further undermine the enterprises that have brought the modest success we have enjoyed this past four years.