ARE WE THERE AGAIN? AUSTRALIA’S OPEN ECONOMY AND THE LONG RETREAT FROM REFORM – ALEX SANCHEZ

As Australians began to face continuing high inflation and concern over the economy in 2026, The Sydney Institute asked two economic “dries” to deliver papers on how to fix ongoing fiscal and monetary problems. On Monday 30 March 2026, Dimitri Burshtein – Financial services executive, economist, strategist, and commentator – joined Alex Sanchez – economist and former advisor to the Albanese Government – to give their evaluations of where policy decisions had gone wrong and strategies that might alleviate diminishing living standards.

ARE WE THERE AGAIN? AUSTRALIA’S OPEN ECONOMY AND THE LONG RETREAT FROM REFORM

ALEX SANCHEZ

Thank you — and thanks to Gerard and Anne for the invitation, and to Dimitri for the idea of getting together on the subject of economic dryness. It’s a subject that, judging by our economic conditions, deserves a good deal more attention than it is currently getting. Thankfully, the Sydney Institute has always had a clear sense of purpose. Unlike much of what passes for public debate today, it consistently asks the questions others prefer to leave unasked.

So, in that spirit, I will be asking one tonight. And it is deceptively simple. In a matter of weeks, the Treasurer will hand down his fifth budget. No doubt the Budget papers will be backdropped by the international conditions.

The Treasurer will emphasise global conditions including suggesting we are facing the most uncertain international environment in ages – ignoring of course that other Treasurers have faced Gulf wars, oil shocks, Asian currency crises, conflicts in Europe and shakedowns in international orders such as the fall of the Berlin Wall and the dismantling of the Soviet Union.

But what I want to focus on is an anniversary literally only days following the May Budget. Because, it was on the 14 May 1986, that Paul Keating, then Treasurer, sat down with John Laws and told the country something that bears repeating. That, structurally, Australia risked becoming a banana republic.

At that time, Keating was responding to a collapse in the terms of trade. Our balance of payments was in deep trouble. It is hard to believe now – especially given the forever buoyancy of our commodity and resource markets. But Keating was sending a message not for the day but one for the ages. Keating was being upfront with Australians like no other Treasurer had been before. Australia had to change he urged. That the model we were operating on was fundamentally broken.

Forty years on — I want to ask, how far away are we from the model Keating assiduously worked to bury? And equally importantly: what would it take to turn it around?

The stocktake

To help us ask the question let’s do a quick audit of how Australia stands. Inflation remains sticky and persistent — above the Reserve Bank’s target band for several consecutive quarters. Productivity is stagnant. GDP per capita — the most honest measure of living standards — has flatlined. Government payments as a share of GDP have settled at levels higher than at any point outside the pandemic. And despite buoyant terms of trade, strong employment and record tax receipts, we are running federal deficits as far as the eye can see.

Into that, we are now having to respond to an international supply-side shock. And what are we seeing in response to these challenges? Proposals for higher taxes dressed up as “intergenerational equity”. Government spending seen as “unavoidable”. And a return to industry policy, wrapped in a fig leaf of “resilience”. We have been here before – old wine in new bottles.

Contrast this with the approach of the most successful Labor government in our history. When Bob Hawke faced John Howard at the 1987 election, Commonwealth payments as a share of GDP stood at just under 27 per cent. By 1990 — a single term later — that figure had fallen to 23 per cent. A four-point reduction in the size of government. In three years. Never to be repeated. Not by subsequent Labor governments with the world’s best Treasurer, Wayne Swan at the helm. Not even by the Coalition of Howard or Costello. Not by anyone.

It is worth appreciating what extracting 4 per cent of GDP means in today’s dollar terms. A turnaround of $117 billion. This step down in government was not a mere oversight or the workings of a feral abacus. It was part of a wider project to right size government, go for growth and return the dividends to Australians as lower taxes. It was a vote for agency and rational economics.

Keatings Tax Statement of September 1985 — which included a cut in the top marginal rate – spelled it out neatly. Listen carefully to how Keating described his objective at the time:

The achievement of sustained high growth rates remains the over-riding economic objective of this Government. We have policies set for growth. It is only through growth that we can generate the higher living standards that the whole community desires.

And this, on the tax cuts themselves:

This slashing of marginal tax rates represents a dramatic and permanent reform to the Australian tax system. It will mean that in the future no Australian will be required to pay more than half his or her income in taxation.

The ambition in these words is striking. Tax was seen as a lever of growth — not an instrument of redistribution or a mechanism to fund whatever the a priori spending of the day demanded.

Let’s be clear – Keating’s tax statement was revenue negative. Unlike today, where the fiscal culture is revenue neutrality – or leveling up tax to match spending – the Labor government made a deliberate choice to take less from the economy and return it back to agency.

The philosophical core of the Hawke-Keating reform project was simple, and it ran from tax through to trade: capital is best deployed privately. The government’s job was to get out of the way and let that process flourish. Which brings me to the next striking difference between Labor of the past and Labor today.

Before Hawke and Keating, Australians lived behind a protectionist wall — effective tariff rates of around 80 per cent. There was no deep set nostalgia for making things – no unrelenting belief that Australians actually wanted to work in factories and buy inferior goods. As Keating himself puts it:

Do you know how poor the quality of Australian cars was? Ordinary working men and women were being asked to pay twice the price for a car of very moderate quality — and that was true of shoes, shirts, underwear, clothing, textiles and footwear.

The opening up the economy – basically subjecting Australian enterprise and resources to the chill of international markets – coincided with the shrinking of government. Under Hawke and Keating, with Peter Walsh a key part of the troika, banks were deregulated and sold off. Airports and utilities privatised. The dollar floated, tariffs removed.

Together with the shrinking of the government’s footprint, the supply side of the economy was opened up too – making for a genuinely competitive economy. It was a formidable project – smaller government, opening up the economy. And it produced the greatest uplift in productivity the country has even seen making way for the introduction of universal superannuation.

Labor – rightly – celebrates these accomplishments. Whether today’s Labor government believes in the framework that governs this thinking, a very different matter. I often ask myself this thought experiment – would today’s generation of Labor politicians approach the same challenges in the same way.

The quiet dismantling

Like a frog in slowly boiling water, the open, competitive economy that Hawke and Keating worked so tirelessly to achieve, is at risk of becoming a thing of the past. This hasn’t happened overnight or by a single dramatic reversal. Nor has it been done by a single ideological flourish. It has happened by stealth – which makes it all the more pernicious.

Take spending and in particular spending on welfare and social assistance. I refer namely to the NDIS. The NDIS was sold to Australian as a unique and affordable reform — compassionate and targeted for those with permanent and significant disability. The NDIS was going to be entirely consistent with the welfare principles of the past, directed at those most in need, carrying mutual obligations, and cost-disciplined.

Sadly, it has become the antithesis of all of that. There are currently 760,000 active NDIS participants. Forty-two per cent are under fourteen. Over half are under eighteen.This suggests the NDIS is in for a long, long tail.

The scheme has no means testing and no citizenship requirement. It is the only insurance scheme in Australia — perhaps in the world — with no user contribution or claim excess whatsoever. Is it little wonder that the scheme is in such dire trouble – with daily accounts of rorts and mismanagement. Because when there is no price signal, it goes without saying there is no rationing mechanism. And when there is no rationing, there is no constraint on over-servicing

The result is a scheme that funds interventions of dubious clinical merit, because there is no gate to prevent it. It is hard to imagine the NDIS in its current form would have survived the Hawke Expenditure Review Committee At three per cent of GDP, growing faster than the economy itself, the NDIS is now the largest uncapped entitlement in Australia’s history.

Let that sink in. Hawke and Keating extracted 4 per cent of GDP in savings over one parliamentary term. And in the space of a generation we have just returned that in uncapped disability welfare.

As bad as the NDIS, it tells us only part of the disability story. According to the Department of Social Services, over 840,000 Australians are currently receiving the Disability Support Pension — the highest figure in fifteen years. Since the national NDIS rollout in 2019, the DSP cohort has grown by 13 per cent, or 100,000 people. The fastest-growing cohort is young – aged between 16 and 20. A life of welfare dependency.

When you combine NDIS outlays with income support for the disabled and for carers, total disability spending exceeds what Australia spends on Medicare, the PBS, or veterans’ support. And according to the OECD, Australia now spends more on disability — both in-kind and in cash — than any other G7 nation. More than the United States. More than Germany. More than Japan. And our collective response? To congratulate ourselves for “saving” the NDIS by slowing its growth from eight per cent annually to five or six. Hawke and Keating introduced income and asset testing to the age pension. It introduced activity testing for working age payments. It introduced HECS for university students.

So, I ask you: how did we reach the point where universalism and a blind eye to welfare dependency replaced a growth objective for Labor?

The return of Peronism

If boosting welfare isn’t enough we have sleep walked into boosterism in industry policy. Only last week, the Prime Minister urged a “new economic model”. The Treasurer, in a previous iteration, shopped something called “values-based capitalism”. And the industry minister, speaks of national resilience. Yesterday, Andrew Hastie basically said the same – a populist unity ticket across the Left and Right of mainstream politics. But regardless of how hard our leaders attempt to justify industry policy, these are just new terms for old arguments.

They are a new form of protectionism with Calwell and Peronist-style economic nationalism, repackaged for a credulous audience. Because long before Harvard gave us the economic complexity index, or backbench MPs lamented the decline of manufacturing, Juan Perón was decrying that Argentina could not remain a nation of herdsmen and farmers.

Back in the 1950s, Peron urged a “Future Made in Argentina”. Just as Calwell would shout that no country could afford to be a quarry or a farm. The reformers of the 1980s understood the damage to living standards from protectionism with absolute visceral clarity. They knew that subsidies assisted the smarties and not the smart. They also knew that governments make terrible investors.

Governments have competing and contradictory objectives. They are captured by political cycles that bear no relationship to investment horizons. And they are immune to the discipline of loss — because taxpayers’ money is always, in inverted commas free.

Today, these lessons have all but been forgotten. I worry most about the culture that has crept in – the one where the line of national resilience is so elastic to cover just about anything. We see the federal government elbowing its way back into manufacturing, energy infrastructure, defence contracting, and overseas industrial ventures — through a labyrinth of off-budget vehicles, sovereign investment funds, and concessional financing arrangements carefully designed not to appear in the headline budget figures.

In the last week we have seen a bailout of Gladstone aluminium at $2 million per job. Before that Whyalla and Bell Bay in Tasmania And we have the Clean Energy Finance Corporation — Australia’s Green Bank — lending to Snowy Hydro Corporation, a state-owned utility, to subsidise the energy costs of Tomago Aluminium, so it can remain in operation for “national resilience”.  A genuine case of money-go-round – or should it be, if it moves tax it, if it keeps moving regulate it, and if it stops moving, subsidise it.

Then of course we have the Future Fund — essentially a state-owned hedge fund — now buying into other State-owned entities. Renationalisation by any other name. And we have the National Reconstruction Fund investing in pie and biscuit makers, despite the fact that the owners are private equity. These are hardly projects of national resilience. They are bail outs of businesses that can’t compete. There is a case for government support – in the narrowest of terms – for defence and national sovereignty reasons. But these cases should be so rare so as be almost non-existent.

In the past, governments exited commercial ventures – whether in banking or otherwise – precisely because there was no market failure to speak of. The allocative distortions these so called investments produced prevented resources from moving to their highest-value use.  In a high inflation rate environment, where aggregate demand outstrips aggregate supply, that matters.

Australia, is an open economy with a floating exchange rate. It does not have a market failure in the supply of capital. There is a failure in the supply of capital to duds — but that is exactly the market working as it should. Instead of finding new ways to subsidise, the Labor government’s task should be rebadging Future Made in Australia to a Future in Australia.

Again, it is the culture that is pernicious. Subsidies and such were once described for what they were: an embarrassing demonstration of corporatism, inefficiency, and waste. Today, they are openly celebrated as policy sophistication — rebranded as “investments”, strengthening “resilience”, even “enhancing productivity”.

I particularly worry about the economic culture we are rapidly developing. The temptation is to suggest that we are now in a world so fundamentally different from the one Hawke and Keating navigated that the old rules no longer apply. A get out of jail free card for frankly, bad policy. And that with clever alliteration or talking points, the country can keep defying economic gravity.

Give me “old” thinking any day. There is always a reason to sidestep reform. In fact, even the use of the term “reform” is now so ubiquitous that bad ideas are given the title. Regardless of the geopolitics of the day, or what is the immediate shock before us, the iron law of prosperity does not suspend itself.

A country cannot permanently spend more than it earns. A country can subsidise it’s way out of inflation or a lack of competitiveness. A country can’t tax its way to higher living standards. Even the Lucky Country must, eventually, pay its way.

After the Global Financial Crisis, the China boom, and a decade of zero-to-negative real interest rates, Australia had an easy run and long reprieve from some hard and fundamental choices. Now that reprieve is fundamentally over. Just like the reprieve that Hawke and Keating jolted us out of.

So, returning to my original question – are way back to the banana republic. Perhaps. But what made the banana republic remark so compelling was not the phrase itself. It was the framework that came with it. Keating’s words landed because there was a coherent and compelling alternative — a framework that backed markets, restricted government, enlarged individual agency, and gave Australians the conditions to compete directly with the world, without the artificial protection of a tariff wall.

The wisdom of the banana republic remark was that it changed the country before it was too late. Both Hawke and Keating could have opted for the Asia Pacific Argentina or Europe – high tax, high spend, money go round, transfers abound economics. They didn’t.

So, I ask again: are we there again? And if we are — the more unsettling question is this: do we still have the political culture, the institutional courage, and the public understanding necessary to do something about it?

That is the question that will define the next decade of Australian economic life?

KEY STATISTICS