After the US subprime lending disease that ushered in the Global Financial Crisis (GFC) during 2008, federal governments around the world took a leaf out of Keynesian economics and primed the pump of public spending and regulation. They provided guarantees and recapitalisation to former premier world financial institutions like the Royal Bank of Scotland, which were teetering at the brink. All sound practice, warranted at the time including within Australia. But Keynes also said such governmental activity needed to be wound back expeditiously so that private sector activity could regenerate itself. Instead, many key political masters in power deliberately chose to represent the GFC as a systemic failure of markets and free decision making, rather than as a failure of prudential supervision of US banks by the Federal Reserve in allowing subprime lending to go on for the best part of ten years. So public spending and various new regulatory juggernauts have hurtled on unchecked, ever since. Political leaders have not only ignored Keynes, but also an unusual bedfellow for him in the form of Milton Friedman, who warned governments should not fund permanent consumption from temporary incomes (e.g. long term education programs from short term tax revenues derived from a transitory mining boom).
In many significant world economies, Keynesian interventions came at a time when government expansion had already occurred for a significant period, so that public sector spending and borrowing as a share of GDP were taken up to stratospheric levels. France now devotes 57% of GDP to the public sector, but within a giant regulatory and relatively inflexible system. Most economics students learn that public sector activity at around 25-30% of overall GDP is sustainable, and will underpin positive and balanced private activity and growth. The United Kingdom public sector is also edging up to the mid-forty percent levels, and the US is well above thirty percent.
We now have a situation in major democratic nations where reliance on the public sector and its increasing grip on resources is becoming the new world malaise . Claims for continuing but uneconomic government assistance (e.g. for the car industry, and middle class welfare schemes) compound this problem of high pressure in funding the public purse.
Research undertaken by my Institute in the last five years has shown that businesses see increasing workplace regulation, most particularly the Fair Work laws, as a cause of both lower productivity and future employment growth prospects. In a study undertaken by the Economist Intelligence Unit during 2012, commissioned by my Institute, Australia’s multi factor productivity ranked 50th in relative terms out of 51 countries surveyed – just ahead of Botswana. Some Australian commentators scoffed at the results where emerging African economies produced a better relative performance than Australia. And yet these same people now scratch their heads and wonder why large resource projects in Australia like Browse LNG are being mothballed, and our top resources giants have exploration and research teams off doing feasibility studies in Africa and Latin America.
Another statistic is of major concern – the share of total adults deriving their employment and wellbeing from the transfer of taxation income from privately employed individuals or businesses. The ABS estimates 20% of the total adult workforce is employed in the Australian public sector and the Centre for Independent Studies has estimated 17% of Australian adults are on welfare. This means about two in five working age Australians are employed through incomes transferred from the other three in five employed in the private sector. Combine this with the imminent retirement of many privately employed baby boomers, and the economic crush of funding public sector growth will soon become unbearable. This ratio could well keep moving towards 50/50, where each taxpayer supports one welfare recipient or public servant.
There is no real sense that either mainstream political party yet has the courage to produce a convincing vision to take Australia forward, and a set of reforms to rebalance how public and private sector resources and decision making should work together to achieve that. Author and public commentator Paul Kelly makes the very salient point that from 1983 to 2007 Australia had a golden quarter century of political leadership from Hawke to Keating to Howard where inspiring vision and positive rational actions were expounded and taken to rebuild Australia’s future. At the moment we are running on empty. It seems whenever one of our political leaders has an inspiring thought, they are told “Yes Minister, that’s a courageous decision” (meaning ‘doomed to fail, and you with it’). It’s time for a new form of courage in our political leadership, and thinking that will take command of a new National Vision, and reverse the malaise that is quietly killing off growth, productivity and incentive in this country. Without this, our recent golden era is likely to be transformed into a lead filled legacy.
Peter Wilson AM is chairman of the Australian Human Resources Institute.