THE PAST FOUR DECADES: REFLECTIONS ON THE AUSTRALIAN ECONOMY – MICHAEL STUTCHBURY

On 22 July 2014, Michael Stutchbury announced he would be stepping down as editor-in-chief of The Australian Financial Review after 13 years at the helm. He began at the AFR in 1982, rising to economics editor, covering the Hawke-Keating economic reform program of the 1980s. Between 2001 and 2006, he was editor of The Australian. In 2011, Stutchbury returned to the AFR to become editor-in-chief. He will continue as editor-at-large with the AFR until 2025. Over the decades, Michael Stutchbury has witnessed up close the many challenges in Australia’s economy. On Wednesday 11 September 2024, Michael Stutchbury gave his take on where the Australian economy stands and where it has come from over four decades.

THE PAST FOUR DECADES: REFLECTIONS ON THE AUSTRALIAN ECONOMY

MICHAEL STUTCHBURY

I’m here to tell a ripping yarn about the past four decades of the Australian economy. It’s the story of how Australia turned from being a mediocre country into one of the world’s most prosperous nations.  But it’s also the story of how this is now under threat.

Four decades goes back to the early 1980s, when the Financial Review’s editor Paddy McGuinness hired me to become the paper’s industrial relations writer based in Melbourne. I’d just spent a year or so in Canberra as a junior economic analyst in Malcolm Fraser’s Department of the Prime Minister and Cabinet. And before that I’d grown up in Adelaide, in the 1970s doing a journalist cadetship on the local paper, The Advertiser, and finishing an honours degree in economics at the University of Adelaide.

To bookend the then and now of these past four decades, I’ll refer to observations of two foreigners – Singapore’s founding prime minister Lee Kwan Yew and the former Bank of England official Andrew Hauser, who this year has become the Reserve Bank of Australia’s deputy governor.

Sometime in the late 1970s – or perhaps in 1980 – along with others I’ve vainly sought to pin down exactly when and where – Lee Kwan Yew famously warned that Australia risked becoming the white trash of Asia. The white trash phrase was picked up by others, including CRA chief executive Rod Carnegie who set up McKinsey in Australia in the early 1960s and who passed away last month.

It became a description of Australian decline that was echoed by claims over the next decade. Australia was likened to a frog being boiled alive in a vat of foreign debt. and Paul Keating warned that Australia risked becoming a banana republic.

By the late 1970s, Australia had become a mediocre country. the excitement of the 1960s mining booms, including in nickel and the beginnings of the Pilbara iron ore export boom, gave way to the global stagflation of the early 1970s and the mayhem of the Whitlam Government.

The Fraser Government pursued a fight-inflation-first strategy. But it failed to tackle the basic problem of an over-protected and over-regulated economy. Import protection preserved 80 per cent of the local car market to the local manufacturing outposts of foreign auto makers. In the air, regulation deliberately suppressed competition through the infamous domestic two airline policy. Governments ran, and sometimes even monopolised, airlines, banks, power stations and phone companies.

As a young treasurer, John Howard pushed for reform, including to the tax system, through a consumption tax that would finance cuts to Australia’s punishingly high income tax. While he was stymied by Fraser on that, Howard did manage to get up one big thing: a review of the financial system by hooker corporation chief executive Keith Campbell, that laid down the intellectual foundations for the financial deregulation of the 1980s.

The Fraser Government reversed course when the second OPEC oil shock sparked a boom in steaming coal development, based in Queensland.  The Financial Review ran a page one splash headline: Australia continues to export a lot of coal. But the late 1970s resources boom was blown up by trade union strikes demanding much higher pay for significantly less work.

In Washington, US fed chair Paul Volcker, jacked up us interest rates to break the OPEC cartel and to crunch inflation. By 1982, Paddy McGuinness predicted across the top of page one that Australia was headed for recession, hit by the collapse of global energy prices, a US recession and an inflated domestic cost base. Unlike in other economies, such as the US, Australia did not reap the recession dividend of lower inflation, even as its jobless rate again hit double digits.

It was a mess. from the ACTU, Bob Hawke grabbed the Labor leadership, beat Fraser at the March 1983 election, and held an economic summit based around consensus, at which Rod Carnegie led the big business delegation and I covered as a junior Financial Review reporter.

The only thing left was an incomes policy, the wages accord with the ACTU that was supposed to deliver a cut in real wages, restore company profits, boost business investment and wind back inflation as the economy recovered.  It was a pivotal moment in the story of prosperous modern Australia.

The foundations of today’s prosperity began first with the shock of that early 1980s recession which rammed home the point that Australia needed to change course. But also important was the work, often in the background, by an assortment of people who built the case for a more deregulated and open economy.

There was Alf Rattigan, the mild-mannered head of the Tariff Board, the predecessor of today’s Productivity Commission, who took on the protectionists. There were editors and writers at the Financial Review, from Max Newton in the 1960s through to Paddy McGuinness. Paddy and Gerard Henderson were both fierce critics of the Industrial Relations Club while an intellectual rabble rouser called Aussie Holmes shook things up at the Reserve Bank as the Campbell Inquiry was urging a more market-based approach to the financial system.

Liberal backbencher Bert Kelly mocked protection in his Modest Member column in the Financial Review. The National Farmers Federation under David Trebeck and Andrew Robb overturned the protection all round of the Country Party under Black Jack McEwan. There were the Liberal dries, including John Hyde and the Institute of Public Affairs and, in Sydney, the Centre for Independent Studies. There was the background inspiration from the Reagan and Thatcher revolutions in the US and the UK as Hayek and Friedman took the intellectual mantle from John Maynard Keynes.

The explosive device in all this was the 39-year old treasurer from the NSW Labor right, Paul Keating. Keating had left school at fourteen. But he had been schooled in economics by Max Walsh in the Financial Review’s pokey office in the Old Parliament House.

Keating smashed Labor shibboleths. He ridiculed the Labor left unions, such as the Metal Workers, for putting 100,000 Australians out of work in the recession. Old Labor wanted to nationalise Australia’s banks. Keating Labor let in foreign banks – Citibank, JP Morgan, Deutsche Bank and others – to compete with them.

On Friday 9 December 1983, basically nine months after winning office, Keating and Hawke floated the Australian dollar. That put one of the economy’s most important prices in the hands of the market rather than of bureaucrats and politicians. The Financial Review called it a brave new world.

The cut in real wages made the economy competitive again on international markets and underwrote a jobs boom. Keating vowed to set the sails for growth and hold on tight. But it hit the rocks in mid-1986 with a slump in Australia’s commodity export prices that caused a balance of payments blowout and a run on the Australian dollar.

Keating phoned into the John Laws 2UE talk back radio show and, off the cuff, declared that, without a big adjustment, Australia risked ending up a third rate economy, a banana republic.

What did he mean by this? He meant discounting wage indexation for the inflationary effect of the lower dollar. He meant the belt-tightening of a big budget consolidation, driven with Finance Minister Peter Walsh to get Australia living within its means. And he meant a supply-side revolution, including the dismantling of the import protection wall, cutting the 60 per cent top marginal personal tax rate by broadening the tax base, privatisation of government businesses such as the Commonwealth Bank, Qantas and the Commonwealth Serum Laboratory. And by the early 1990s, with the ACTU’s Bill Kelty, Keating also meant the end of centralised wage fixing and the start of enterprise bargaining to funnel all the other reforms to drive productivity growth at the shop floor level. This was the microeconomic reform agenda that some knew as dry economics, or supply-side economics, or economic rationalism, or even pejoratively today as neo-liberalism.

Of course, something else was running alongside all this policy wonk stuff. Unleashed by financial deregulation, the 1980s was the decade of debt-fuelled so-called entrepreneurs, or corporate raiders, such as Alan Bond, Robert Holmes a Court, John Elliott, John Spalvins, and former Financial Review journalist Christopher Skase. Holmes à Court almost succeeded in taking over Australia’s biggest company BHP. The corporate raiders shook up the sleepy and often state-based industrial structures that had been cosseted by all the regulation.

It was a global phenomenon. In the US, Michael Milken, whom I caught up with in Sydney a couple of months ago, famously developed high yield bonds, or junk bonds. It was the decade of greed is good. and it blew up with the October 1987 crash, the biggest share market crash since 1929.  At the Financial Review, Paddy McGuinness predicted a deep recession, even a depression, and a massive housing bust. Instead, the opposite happened, as central banks all eased monetary policy, the global economy bounced back and Australia experienced a debt-fuelled speculative asset price boom, including for housing and commercial property.

The Reserve Bank responded by lifting its cash rate from 11 per cent to 18 per cent, putting today’s 4.35 per cent cash rate that supposedly is smashing the economy in some perspective. It burst the asset price bubble. The economy fell into what Keating called the recession we had to have. Westpac almost went broke. The State Bank of Victoria was rescued by the Commonwealth Bank, turning it into the truly national bank we see today.

Rather than a wages blowout recession, this was a financial bubble recession that again pushed up the jobless rate to double digits. But, unlike a decade before, it came with an unexpected bonus. It snapped the inflation stick. For the first time since the stagflation of the early 1970s Australia joined the ranks of the low inflation world. The Reserve Bank opportunistically took advantage of this to introduce its 2-3 per cent inflation target, taking the cue of other central banks such as in the New Zealand, Canada and the Bank of England.

After John Howard won the 1996 election, new Treasurer Peter Costello formalised the Reserve Bank’s operational independence to deliver its 2-3 per cent inflation target – the thing they’re arguing over now.  Costello’s 1996 budget delivered another sizeable fiscal consolidation to get the budget books in order. Together, the RBA’s low inflation target, the fiscal consolidation and the floating dollar provided the stable foundations that in turn supported the microeconomic policy reforms and delivered the low inflation productivity boost of the 1990s.

Australia stopped being a mediocre country. In the decade of equity, rather than debt, the consensus of Australian policy echoed the American democrat modernisation of Bill Clinton – it’s the economy stupid – and Tony Blair’s modernisation of UK labour. Then came something that no-one really predicted.

Recall that the banana republic fear of 1986 was that commodity-exporting Australia was trapped by a long run decline in our terms of trade, the ratio of export prices to import prices, the idea was that commodity prices were on a downward trend compared to the prices of manufactured goods. We would have to dig more and more out of the ground to pay for the same amount of manufactured imports. That would amount to a recurring national pay cut. Perhaps Australia should subsidise a computer chip making industry, as chip maker Intel urged the Howard Government to do.

By the late 1990s, RBA Governor Ian Macfarlane had started thinking that the reverse might be the case amid the stirring of big emerging market economies such as India and China. Perhaps the prices of manufactured items – such as computer chips – would fall relative to the prices of commodities, including minerals extracted from the earth’s crust.

China joined the world trade organisation in late 2001. On the one hand, China flooded the world with cheaper factory goods that Australia bought. On the other hand, it sharply increased the demand for commodities such as iron ore and coal that Australia sold. Australia became the preferred supplier of the raw materials into the blast furnaces of the biggest industrial revolution the world had seen.

Unlike the late 1970s coal boom, the floating dollar meant that the China boom did not blow up the economy. Instead, as the Australian dollar rose to $US 1.1, the subscale and high-cost Australian car industry was finally squeezed out. Being able to import cheaper cars allowed the economy to focus on where it could actually make things for a profit. Among other things, it made the fortunes of iron ore barons Andrew Forrest and Gina Rinehart. Australia became the world’s biggest exporter of liquefied natural gas.

From the early 1990s recession through the $US180 a tonne peak of the iron ore price in 2011 and then to the pandemic, Australia enjoyed three decades of unbroken economic growth. We got through the East Asian financial crisis of 1997 and 1998, the tech wreck bursting of the dot com bubble in 2000 and 2001 and then the global financial crisis in 2008 without a recession. Australia’s per capita disposable household income grew in real terms by two thirds.  Australia became a serious, prosperous G20 country.

Just over a couple of months ago, the RBA’s new deputy Andrew Hauser delivered a revealing message: Australians have forgotten, if they ever appreciated it, just how prosperous they are. Like being in the top echelon of global affluence. On the latest numbers, Australian per capita GDP is 15 per cent higher than in Sweden, 23 per cent higher than Germany and Israel, 91 per cent higher than Japan and nearly five times that in Russia. It’s 32 per cent higher than in the UK. And, as Hauser says, living here, it feels that way too.

But the latest official intergenerational report projects that Australia’s annual economic growth will average just 2.2 per cent over the next 40 years, down from 3.1 per cent over the past 40 years. That should be unacceptable for a frontier, resource rich, migrant-receiving economy at the foot of Asia.

Australia’s modern prosperity really peaked just after the GFC at the top of the China resources boom. There has been no substantial and lasting productivity reform since John Howard’s GST reform nearly a quarter of a century ago.

In some areas, such as in industrial relations and taxation, it’s going backwards.  The unions and the Rudd-Gillard government knee-capped Keating’s enterprise bargaining. Haunted by work choices, the subsequent Coalition governments showed no interest reframing the adversarial basis of Australian industrial relations. In taxation, the lack of any reform aspiration or principles, means that tax changes are unprincipled and ad hoc as the tax system piles more of the burden onto incentive and enterprise.

The latest national accounts show that GDP per hour worked – labour productivity – has not grown since 2016. And we can’t rely on something falling out of the sky – such as the China boom of the 2000s – to again come to the aid of the lucky country.

The China boom has well and truly peaked. China’s population now is falling. Australia can’t expect much more growth from our iron ore exports. And the assertiveness of Xi Jin Ping means Australia needs to reinvest some of its China boom into national security, such as AUKUS.

Australia got rich as a fossil fuel intensive economy, including coal and LNG but now this has to decarbonise. We have big opportunities in sun, wind, minerals from lithium to copper, and perhaps green iron. But it’s much harder than some have made out, especially given that Australia’s cost base has blown out in ways that will make many projects internationally uncompetitive.

The globalisation that followed the fall of the Berlin Wall and supported Australia’s modern prosperity has been replaced by deglobalisation driven by the return geo-political rivalry, sharpened by Vladimir Putin, and national sovereignty-based supply chains. China’s export-based growth model flooded American and European markets, undermined their industrial bases, and helped produce the populist backlash of Brexit and Trump.

Rather than fiscal discipline of the late 1980s, Labor budgets and the first Howard-Costello budget, Joe Hockey’s 2014 budget hit a political wall. Rather than labour v capital, politics is now fashioned around personal identity and cultural tribalism. Rather than generating wealth, politics has become about redistributing wealth in the name of inclusion and leaving no one behind.

The highest inflation rate since the 1990s recession has been caused by the massive budget and monetary stimulus response to the pandemic spilling over the economy’s disrupted supply capacity. The left-right populism of the Greens and the Nationals tries to blame it on supermarket price gouging.  Treasurer Jim Chalmers snipes at a Reserve Bank that has been overloaded with the responsibility of bringing inflated aggregate demand back within the economy’s supply capacity.

Amid all this, government spending has ratcheted up by two per cent of GDP, adding to demand without boosting supply. The increased structural outlays are concentrated in low productivity spending monuments such as the NDIS and the Gonski school funding of progressively worse student results. Politics is set to get even madder next year, most likely, under a minority Labor government that, like the Coalition, has no credible growth agenda.

In the long cycle of things, we are back to a place similar in some ways to the 1970s. The task will be to preserve as much of the foundations of prosperity built up over the past 40 years on which to assemble a new coalition for growth.

Encouragingly, most Australians aren’t really interested in tribal identity politics and culture wars. Most Australians want well-paying jobs to help raise their families, safe communities, good schools and a strong economy. the task will be to rebuild a coalition of the aspirational centre – like with the Hawke-Keating and Howard-Costello governments – to deliver that over the next four decades.