Chris Richardson on how we’re unprepared for the next recession
Karen Middleton I want to start by acknowledging that we had a good growth figure this week and everyone has been patting Australia on the back. We haven’t had a recession in 25 years; we’ve had a record number of quarters of positive growth. How would you describe the state of the economy now?
Chris Richardson Look, it is solid but you’ve got to remember two sets of things. That figure – “quarter of a century without a recession” – is indeed a remarkable thing. Only the Dutch have done better – their run came to an end in 2008 – they did 26 years. In a year’s time there’s every chance we’ll mow them down. But the first half of that was off the back of hard work. You saw Australia come together – the feds, the states, the Coalition, the Labor governments – and do a bunch of economic reforms that helped us grow strongly for some time. The second half was essentially just slipstreaming the back of the China boom. We can’t rely on China to power us in the next decade as we did in the last. Why you wouldn’t necessarily love the Australian economy at the moment is that 25 years without a recession is measured in terms of how much we produce – the number of houses we build, tonnes of coal and iron ore, articles we write – and that is a stupid measure. What matters to you, your living standards, has in fact not risen for eight years now. Today, they are where they were just ahead of the global financial crisis.
KM What do you see as the great threats to the Australian economy in the short term? The growth rate of China and its engagement with our economy is one factor. How big a threat is that?
CR Quick caveat up front: all economists are permanently petrified. We see bad things around every corner. I have woken regularly at 3am in a cold sweat over China for quite a while now. We sell a third of our exports to China – that’s a remarkable statistic. We are much more dependent on China than we ever were on the US. China sits atop a little miracle, a little industrial revolution where people are moving from farms to factories and other jobs. They have, I guess, adopted the only successful get-rich-quick scheme known to mankind – the East Asian growth model. Japan did it first and a whole bunch of others followed suit: Korea, Taiwan, Singapore, Hong Kong. It’s taken most of the Western world an incredibly long time to go from poor to rather less poor. East Asia is continuing to do it quite fast. How? Basically when they scraped some money together in the early days they didn’t use it to increase the living standards of today’s generation. They say, “Okay, the kids, the grandchildren – they’ll get it. We’re going to build the factories, the infrastructure and the rest, and we’re going to educate.” And that is a magnificent way to accelerate development. But you reach a point where you’ve built too much. And this last bit of the biggest construction boom the world’s ever seen is built on debt. China has borrowed some growth from the future and they need to now go through a period of not building for a while and doing retail therapy instead. And this is incredibly tricky because it means slowing down, and all sorts of messy politics. If you’re looking for the next Australian recession, it is most likely to start somewhere in China and you’ll see it coming six, nine, 12 months out.
KM So how do we insulate ourselves from something like that?
CR Prayer. [Laughter] To a large extent we can’t – we can’t change China; we can’t change the global economy. We can do defensive work. At some stage, when something goes wrong out there in the world and recession again threatens Australia, you want the treasurer of the day to have a stronger budget, one that the tabloids will let that treasurer use in defence of the Australian economy. And it’s not clear to me that that would happen given today’s fractured budget. It’s not just the treasurer, it’s the Reserve Bank. When the GFC hit, the interest rates set by the Reserve were 7.25 per cent. Today they’re 1.5 per cent. We don’t have the ammo in Australia to fight the next recession.
KM Is there a case for staying in the red for a while and investing in the future?
CR There absolutely is. Because we’ve underinvested in our infrastructure in Australia over time, I would be happy to see more spent on it today. The really low interest rates we have today make borrowing to pay for these things cheaper. So you can and should do budget repair, and you can and should actually spend more on the spending of the future.
KM Presumably, though, you would say that the objective should ultimately be to get back close to the black line, to build in that buffer, should things go badly elsewhere?
CR It’s not just to help fight the next recession, because in part when we talk about budget repair we’re going to talk about fairness. The most unfair thing in today’s budget is actually the benefits that it gives to older Australians. And to that we’re adding deficits that are an implied promise that future generations will pay higher taxes or get less services to make up the difference. We’re the most prosperous generation that has ever lived in Australia, who’ve never had it so good. Our incomes have risen magnificently, our wealth has risen even more, and yet every year we’re not paying our own way, in terms of that recurrent budget. What can you do about it? Let me give you one benchmark, not because it’s perfect but because people don’t understand it. When I say “the economy is okay, but the budget is not”, people don’t get why not. Well, we made mistakes. We assumed that the mining boom, the China boom, was permanent and we treated it that way for budget purposes. And the biggest beneficiary of it was actually the taxman here in Canberra. Not the miners, not Western Australia – it was the tax take. And the boom’s impact on taxes was temporary. But both sides of politics had made permanent promises off the back of it: family benefits, baby bonuses, more recently things like a National Disability Insurance Scheme. But eight tax cuts in a row, we got. That ratio of changes in policy was 4:1: $4 of spending increases for every $1 of tax cut. And I’m not sure much of the increase in spending over the last decade or more has been enormously well directed. Both sides of politics are to blame, Treasury is to blame, you’re to blame – you took the money. So yes, we need to wind back a welfare bill – we need to be more directed with our health spending. Let’s just be clear, this is a personal opinion – I shouldn’t blame the business I work for. But if you do it right, getting more money out of people going to the doctor is a sensible thing to do.
KM Is that a co-payment?
CR That is a co-payment. When I say do it right, that should not be something that hits low-income earners. Canberra is the custodian of Australia’s social compact – that’s what the federal budget is. It raises taxes on businesses and workers and spends it on the young and the old, the sick and the poor. And we have messed up. We took the biggest boom Australia has ever had, assumed it was permanent, made permanent promises, and each time we delay budget repair we make the next recession a bit more likely, and we make it worse than it needs to be, and we’re adding to that unfair burden on future generations.
KM We’ve seen it go around and around: one side proposes those kind of cuts, the other side says no. Do we need bipartisanship on these things, and how optimistic are you that we will see it?
CR Yes, and not optimistic. For 20 years now, both sides of politics have become more populist while in opposition. Both sides have done it and have been increasingly doing it, because it’s brilliantly successful. It makes the government of the day ineffective – in office but not in power – and in frustration we’re more likely to throw them out next time. If you’re going to get better outcomes in Australia, you’re going to have to get better oppositions.
KM One of the policy areas where we do literally invest in the future is superannuation. Do you support some of the measures the government has proposed to limit some of the concessions available now?
CR I’m a broad supporter. The most sensible thing in superannuation would be to tax it kind of like the GST. You accumulate it, it’s not taxed at all, and when you finally get it, that’s when it’s taxed. We last did that in 1983 – it’s now too late to do it. The next best thing would be to actually have all your taxes for super up front, as better contribution taxes. We have a personal income tax scaled so it’s higher for higher-income earners and nothing for low-income earners, and that’s absolutely right. But when people take a dollar out of that and put it into super – super, for most of its history, has been a flat tax. So if you’re on a high income you get this massive benefit. If you’re on a low income you’re worse off when you put money into super. Now the jargon, the technical description of that is “sheer stupidity”. [Laughter] Just have a simple discount that is from your marginal, personal rate of tax. So the prince and the pauper get a bit of an incentive to save for the future. That is what you should do; it’s not what either side proposed. Both sides proposed the same thing. The difference between Labor taxing incomes over $75,000 in retirement, and Libs taxing earnings on $1.6 million in retirement – if you earn about 5 per cent that’s about $75,000… it’s the same policy. Both are good: more incentives for low-income people, better arrangements for women, reducing the big tax break for people on higher incomes – great. Some of the stuff at the back end I actually think is a mistake. But taken together, what both sides took to the election, I’m happy to see it pass.
KM You said we’ve never had it so good. Unemployment is low, growth is good, interest rates are low, we should be in clover, but people are in arrears on their mortgages – we feel like it’s not great. Why?
CR At any given time there will always be people in trouble. So far, though mortgage arrears are rising, they’re rising from a very low level. Why do we feel bad about current circumstances? Partly it’s the human condition, it’s keeping up with the Joneses. There are always people better off and deep down that cheeses us off.
KM We’re just eternal pessimists, maybe.
This is an edited transcript from A Month of Saturdays, hosted by Karen Middleton at the National Portrait Gallery in Canberra. The conversations run every Saturday in September at 3pm.
This article was first published in the print edition of The Saturday Paper on Sep 17, 2016 as "Flying economy ". Subscribe here.