Has someone raised the 'speed limit' on Australia's economy?
By Allen Myers
"These are some of the best conditions we've seen in Australia since the 1960s", treasurer Peter Costello declared on May 6. "We are still among the fastest growing economies in the world." Following the release of a report on the economy by the Reserve Bank of Australia, Costello revised the government's forecast for 1998-9 economic growth from 3.25% to 4%. Commentators such as the Financial Review regarded even the higher figure as "conservative".
Costello suggested that these figures were more than just a high point in the usual cycle of boom and slump. He "claimed that Australia could be on the verge of a period of higher longer-term growth rates — 'a very big lift in Australia's economic performance and a lift in living standards' — if it continues economic and fiscal reform", Alan Mitchell reported in the May 7 Financial Review.
On budget night in the following week, Costello declared that there was now the chance to raise the "long-term speed limits" of the economy:
"There has been a step-up in productivity in the Australian economy. In the last two years productivity growth has been about 3%. We can lift long-term speed limits and we can cut the long-term average unemployment rate. There is really an opportunity for Australia to do something it hasn't done for a long time."
The "speed limit" refers to the traditional dilemma of government economic "managers": economic growth at a rate high enough to make an impact on unemployment (generally 2.5-3.0%) tends to produce an unacceptably high rate of inflation. Australia's GDP last year increased by 4.7%, while inflation was well under 2%; if this situation were to continue over the long term, it would indeed be good news.
In fact, however, even Costello is not predicting such an outcome. His growth forecast is for 4% in 1998-9 and 2-3% in 1999-2000. Looking at the elements of the current expansion reveals no reason for great optimism.
The decline of inflation over the last few years is a general phenomenon in the developed countries. In part, it reflects the sharp cutback in social welfare spending. Capitalist governments tend to pay for social welfare through deficit financing, which is inflationary, rather than tax capitalists.
But there are additional, and probably more important, factors behind the current low inflation. There is massive over-capacity in the world economy: most industries are capable of producing far more than can be sold profitably. This situation is deflationary, competition for markets tending to reduce prices.
Australian capitalists have also benefited from lower prices of resources imported from south-east Asia, the result of the massive currency devaluations there after the 1997 crash, and consumer imports from the region are also cheaper. The Reserve Bank estimates that prices of domestically produced goods and services are rising at slightly more than 2% a year, while imported consumer goods prices have fallen more than 2% over the last 12 months.
While international over-capacity will continue to push prices down, it also limits opportunities for protracted growth, particularly through exports. This is important because of the character of the current growth.
Consumer spending
The current boom has been based on a boom in consumer spending. According to the Reserve Bank, private consumption spending rose 4% in 1998. It rose at an annual rate of 5.5% in the second half of the year, and continued a high momentum in early 1999. But household disposable income over 1998 increased by only 2¼%.
The difference between spending and income can be met in only two ways: through a decline in savings and an increase in borrowing. Both have been occurring, and neither can continue indefinitely.
Household saving has almost totally disappeared, falling to 0.8% of disposable income in December, according to Reserve Bank figures. In the early 1980s, the ratio averaged around 12%, and in 1994-6 it was still around 6%.
Borrowing has increased even more rapidly. Household debt grew by more than 13% in the year to March, and personal credit grew at an annual rate of 19% in the six months to March.
Increased borrowing has been encouraged by generally lower interest rates, accompanying lower inflation, and by the spread of "home equity" loans — borrowing on the security of a house, which carries a lower interest rate than an unsecured personal loan.
But Australian interest rates are likely to increase moderately in coming months as a result of international pressures. Higher interest rates discourage further borrowing, and higher repayments on existing debt reduce consumers' disposable income available for purchases of goods and services.
It is impossible to quantify on the basis of the Reserve Bank's statement, but increased consumer debt is undoubtedly also a product of the long decline in real wages that began under the federal Labor government's Prices and Incomes Accord.
Productivity and jobs
Labour productivity in Australia rose by 3¼% in 1998, the Reserve Bank reported. This increase was not due to corporations investing in high-tech equipment. On the contrary: business fixed investment declined by 2.7% over 1998, and investment in equipment and machinery dropped 12.2%.
What this means is that the increased productivity of the recent past is based on workers putting in longer hours and working harder. Despite Costello's desire to project the trend into the future, productivity cannot go on increasing indefinitely through intensifying work. "More likely", the Reserve Bank notes, the 1998 productivity increase "is indicative that further expansion in employment will follow the strong output growth of last year".
That statement reflects the reality concerning labour productivity, but an expansion in jobs will follow only if corporations continue to increase production at something like the 1998 rate. They are not likely to do so if the consumer spending boom flags.
Total employment grew by 2.1% in the year to March — while total output was growing at well over 4%. In the last year, unemployment has declined by only about 0.5%, to 7.5%, seasonally adjusted, in April.
The official jobless rate would be even higher but for a change noted in the Reserve Bank statement: "In previous economic cycles, strong growth in the economy tended to draw people into the labour force; in contrast, the participation rate has declined slightly over the past year".
The growing numbers who don't "participate" in the work force are also known as "discouraged job seekers". That is, they are people who want and need jobs but have given up hope of finding one, even during the present rapid growth; the government puts them in a separate category so that it can understate the real level of unemployment. A year ago, when the official rate was 8.1%, an Australian Bureau of Statistics study put real unemployment at 18.5%.
As good as it gets?
Even the official unemployment rate, 7.5%, is a scandal when it is recalled that the current economic expansion has lasted nearly eight years, considerably longer than the usual "up" side of the business cycle.
This, it should be kept in mind, is the best that capitalism can do in Australia: after eight years of growth, one in five or one in six people who want to work aren't able to do so.
Another year, or even two years, of the sort of growth forecast by Costello will not seriously dent the unemployment rate, although the government may fiddle the figures some more by driving more unemployed off the dole. The next recession, whenever it comes, will begin with a level of unemployment that, a few cycles back, was reached only at the bottom of the slump.
The level of unemployment is only one measure of the failure of the system. Another is the number of children living in poverty. According to a paper presented to a Royal Australasian College of Physicians meeting, 9% of Australian children lived in poverty in 1983; by 1996, the figure was 16%.
On the other hand, some are doing all right, and that no doubt accounts for the smug expression on Costello's face. He and his mates would be well aware of the following observation tucked away unpublicised in the Reserve Bank document: "Corporate profits now stand at 15.4 per cent of GDP, a historical high, and well above the decade average of 14.2 per cent."