No. 189

ECONOMIC GROWTH – WHY IT’S ESSENTIAL

Stone the crows! Suddenly it’s the 1970s with talk of the limits to growth.

Readers who experienced that unhappy decade (hair and flairs, disco and doomsday – shudder) will remember the Club of Rome’s warning it was all over for capitalism because we would run out of food and energy in the twenty-first century.[i] Some three decades later, finding the lights still on, opponents of growth added to the argument, suggesting that expanding economies made their beneficiaries ill, that we suffered from “affluenza” – “an epidemic of stress, overwork, waste and indebtedness caused by dogged pursuit of the Australian dream … an unsustainable addiction to economic growth.” [ii]

Which is where we still are, despite post GFC Europe showing the misery that accompanies an end of economic growth. On Wednesday and Thursday economists, environmentalists and ethicists will meet at the University of New South Wales to again discuss limits to growth.[iii] One of them is Sydney Morning Herald economics editor Ross Gittins who wonders whether we should worry about productivity improvements to expand the economy at all.

Economists have no evidence to support their fond belief that the burst of productivity improvement in the second half of the 1990s was caused by micro-economic reform. But even if you share their faith, it’s a dismal record if you undertake sweeping reform of almost every facet of the economy then, 10 to 15 years later, you get no more than five years of above-average improvement. What’s more, all the big reform has already been done. With the global ecosystem already malfunctioning under the weight of so much economic activity, it’s time the age of hyper-materialism came to an end and we switched attention from quantity to quality.[iv]

At which the Crows less caw than clutch at branches lest they fall from the trees in merriment.

No matter how hard it is to extract more growth from the economy, extract it we must. Mark Coultan explains why:

NSW faces enormous liabilities to pay the superannuation of the post-war generation of public servants on old schemes, where the pension was largely independent of contributions or investment returns. Under one accounting standard, the unfunded liability is $16.9 billion. Under a new accounting standard, which assumes the fund will earn only the government bond rate into the future, the liability is assessed as $42.2bn. The government has a policy of eliminating unfunded superannuation liabilities by 2030.[v]

And the state of Illinois demonstrates what occurs when government piles up future welfare debts it cannot meet. Illinois has long failed to fund profligate public sector pensions and is now in a position where it faces a $160bn shortfall. Last week, the state legislature cut benefits, but for all the union complaints the scheme will still not be self-sustaining until 2044.[vi]  Unless, that is, public service unions, angry at plans to increase the public service retiring age and to pay annual 3 per cent cost of living increments only on the first $30000 of a pension, do not knock the plan off in the courts.[vii]

And this is before Washington faces national health and welfare costs. “Absent reform of federal retirement and health programs – including Social Security, Medicare, and Medicaid – federal budgetary flexibility will become increasingly constrained,” the US Government’s Accountability Office asserts. Less asserts than understates. Its most optimistic model has government debt reaching 200 per cent of GDP by 2050. [viii]

We aren’t as badly off. For a start, outsourcing defence to the US means Canberra can pick up more of the health and welfare costs of our ageing population. But they are still growing faster than the means to meet them.

According to Parliamentary Budget Office chief Phil Bowen, while GDP growth was 3 per cent per annum across the last decade, health spending increased by 4.7 per cent a year. Welfare spending (35 per cent of spending) was up 3.7 per cent per annum.[ix]

The Productivity Commission estimates that health, aged care and the pension costs will place “additional pressures” of 6 per cent of GDP on governments by 2060.[x] John Piggott, director of the Australian Research Council Centre of Excellence in Population Ageing Research agrees. More people with higher expectations of care will mean taxes, as a proportion of GDP, will have to rise. “For my money, some increase in consumption taxes seems inevitable,” he writes [xi].

So that’s alright then – except for the top 30 per cent of earners paying all the income tax who will get slugged some more.[xii]

But it’s not alright – because a bigger take of a stagnant tax base does not generate a growing revenue stream. Treasury suggests we will not return to the tax-to-GDP peak of over 24 per cent in 2004 -05. When tax collections do maximise in 2016-17 they will reach a full per cent less than 04-05:

The peak in the tax-to-GDP ratio was underpinned by temporary, higher incomes from the high terms of trade and share market prices,” the econo-crats estimate. And don’t think bracket creep will fix things – this estimate includes the erosion of Howard-Rudd tax cuts as wages rise up the tax scale.[xiii]

The only way of generating the tax income we need is to pursue the thing environmental moralists abhor – growth. Which is what we are not seeing much of. The Productivity Commission projects labour productivity growth at 1.5 per cent per annum, well below the 1.8 per cent of 1988-89 to 2003-04. Real disposable income per capita is expected to grow at 1.1 per cent per annum compared with the average 2.7 per cent annual growth over the last 20 years.[xiv]

It is all very well to bang on about how we would all be happier consuming less conspicuously, working less frenetically and valuing the environment over the economy. Such assumptions will not last long when government cannot fund the health care and living standards retired Australians expect by right.

Growth isn’t good – it is essential.

Stephen4@hotkey.net.au

For a case made, a speech written. Call me, 0417469093

 

ENDNOTES


[i] Club of Rome @ http://goo.gl/r3CLn recovered on December 8

[ii] Clive Hamilton, “Affluenza,” @ http://goo.gl/dWZg8Y recovered on December 8

[iii] University of New South Wales, School of Mathematics and Statistics, “Limits to growth beyond the point of inflexion,” @ http://mpel2g.net/ recovered on December 8

[iv] Ross Gittins, “Growth to get sluggish but few care,” Sydney Morning Herald, December 2

[v] Mark Coultan, “State super schemes nearing pay-day crisis,” The Australian December 3

[vi] Associated Press, “Illinois legislature passes fix for $100 billion pension crisis, New York Times, December 3

[vii] Kurt Erickson, “Unions, universities, others analysing pension change fallout,” (Mattoon, Ill) Journal Gazette and Times Courier, December 4

[viii] US Government, Accountability Office, “Long term Federal fiscal outlook,” Spring 2013, @ http://goo.gl/RuCEKq recovered on December 8

[ix] David Uren, “Budget faces years of deficits without cuts,” The Australian, December 2

[x] Productivity Commission, An Ageing Australia: preparing for the future, 2 November 2013 @ http://goo.gl/cMxY3i recovered on December 8

[xi] John Piggott, “We are at population tipping point,” Australian Financial Review, December 6

[xii] Australian Bureau of Statistics, “Government benefits, taxes and household income,” June 29 2012 @ http://goo.gl/I8kXdj recovered on December 8, Adam Creighton, “Rich are paying their fair share and then some,” The Australian, February

[xiii] John Clark and Adam Hollis, “Tax to GDP: past and prospective developments,” (in) The Treasury, Economic Roundup (2) 2013 @ http://goo.gl/4OKGmY recovered on December 8

[xiv] Productivity Commission, ibid

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