Australia: Finding the Economic Challenge

By Alastair Furnival

Melbourne business district, night. What will Australia's economic future hold? Source: Rob Michalski's flickr photostream, used under a creative commons license.

With the Australian election now announced for September 14, Prime Minister Julia Gillard will be hoping the bad news is done in the first week: an ex-government member of parliament placed on 149 charges of misusing trade union funds; a forced ministerial reshuffle; and troublesome former prime minister Rudd returning to breakfast television.

For Labor, the 2013 lead up will resemble the experience of the Liberal Party in 2007. Australia has weathered the global economic storm with its AAA credit rating intact, a creditable growth rate hovering around 2%, inflation low by recent standards – forecast at 2.4% for this year – and unemployment staying fairly close to the optimal 5% target.

As in 2007, we have a government which in any comparable nation would be re-elected for its economic prowess, but which few but the professional gainsayers regard as anything other than doomed.

Some of this is explicable. Despite a population of 22 million on a land mass equivalent to the continental United States, Australians are perennially worried about immigration and refugees — issues on which Labor has converged with the opposition, but is still seen as comparatively soft.

The lingering question of the Prime Minister’s character is epitomized by Julia Gillard’s introduction of a carbon tax, despite having explicitly ruled out such a move during the 2010 election.

And there remains a sense that the government has a leftist agenda simmering below its nominally centrist credentials. Erstwhile Attorney General Roxon jettisoning the burden of proof for respondents to discrimination claims is the first response to this problem.

But if it’s still the economy, stupid, then is there a true argument for change?

The coalition will say it’s about fiscal management.  One of the proudest boasts of the Howard government is that it repaid $96 billion in debt accumulated by the Hawke and Keating governments, while instituting the sovereign wealth Future Fund.

Over the past 6 years, public debt has shot from zero to $260 billion with the government finally abandoning its first surplus promise in December 2012.

But one man’s fiscal recklessness is another’s economic foresight.  Many Australians believe stability is due to pump-priming through initiatives like Building the Education Revolution school infrastructure program.

So, looking beyond the election, where is the economic challenge which could define a new government?

One area may be manufacturing.

For the first time, we have seen a Federal opposition willing to question car industry subsidies. While Melbourne isn’t Detroit, Australians retain a historical attachment to the symbolic importance of a domestic car industry.

The $1.179 billion spent on public assistance in 2010-11 may be less iconic: particularly when GM and Ford continue to process taxation into the type of steel artworks last part of the mainstream Australian dream circa 1976.

Manufacturing is the area where Australia will most benefit from improved policy. We have tremendous raw material advantages, particularly in steel and agriculture, but much of industry remains unimaginatively mired in the lower-tech secondary industries.

This is visible in the January OECD-WTO data which bench-marked the value-added component of export revenues here.

From this data, Australia has expected comparative economic advantage in resources and agriculture exports, but languishes behind ASEAN, with less than 10% of exports by value attributable to imported inputs. We represent the antithesis of an integrated global value chain.

Some of this is distance, but much is productivity: labor prices; transport, dock and shipping regulations. Even if these costs are addressed, there remains a question of ambition: what policy settings might encourage Australian capital toward domestic value-add – instead of onshore mines and farms supplying offshore factories? Hopefully the answer isn’t limited to reintroducing coated steel tariffs.

If there is a genuine economic contest, then manufacturing may be an unexpected battleground for 2013 – with the Gillard government foreshadowing a major industry statement in the next month. Given its desperate need to regain the political initiative, it’s time for the government to try something radical.

Mr. Alastair Furnival is an economist and political consultant, and Chairman of Australian Public Affairs.

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