Heavy weather coming, but the crew still sunning themselves

Dear ,

Commonwealth budgets used to be a matter of just trimming the sails a little – taxes, beer and cigarettes up – but then along came the 70s and 80s and stagflation, high interest rates, and high unemployment, and they took on an entirely different characteristic.

Treasurers became the Captain Drakes, flaying the opposition, and circumnavigating the world through the financial reefs and safely home. More privateer than bean counter.

Jim Chalmers’ first effort is a trimming of the sails at the same time a financial cyclone, the like of which we haven’t seen since the 70s and 80s, is coming over the horizon, guaranteeing that when the storm does hit, the good ship Australia will be in even worse shape than when the previous crew left it. He needed to pull a lot of the sheets in - complacency and a sturdy ship won't pull us through.

His official position seems to be that he is leaving the heavy work to the 2024 budget, but that is a cover for inadequacy. The problems were evident well-before the last election, and an incoming government should have had well-developed plans to deal with them. They are certainly so significant that leaving the ship exposed like this with every sail set is well-beyond mere negligence.

The challenge for the treasurer is to re-establish strong, non-inflationary per capita growth in the economy. We haven’t had that for quite a while, with the much-hyped 30 years without a recession partly a by-product of immigration-fuelled population growth raising gross, but not per capita, GDP. There were a couple of per capita recessions along the way as a result. This works well for businesses that scale, but not so well for those that don’t, which in part explains the sullenness of electors.

The main issues that need to be addressed are that the country is weighed down by debt (which gets heavier the higher interest rates go); has unsustainable social welfare expenditures; has decreased flexibility in industry and commerce; spends too much money on government vanity projects with negative returns and not enough on value-adding infrastructure; and is gradually crippling its industrial sector by changing from low cost, highly reliable sources of power to high cost, unreliable ones.

The foul weather that is coming is generated by long-COVID in the supply chain, the almost universal increase in every country’s money supply, and Joe Biden’s war on energy. And we also have the polar blast of a new Cold War.

The early 80s gives us the blueprint to deal with these issues, and a few object lessons in what not to do as well.

We need to increase productivity. Which means decreasing government costs, spending, taxes and debt; freeing-up the labour market; increasing competition in the business sector; slashing regulation, particularly under the EPBC Act; emancipating lending; and re-establishing a proper cost of money. We also need to fix the education system so that we can go back to being a meritocracy. A strong economy and democracy tend to look after any Cold War fronts.

Not all of these measures belong in a budget, but a budget has something to play in most of them. And while I say “Jim Chalmer’s first effort”, in reality the Treasurer, while having a central role, is under Admiralty instructions. He needs support from a competent finance minister (First Mate), and the Prime Minister (Admiral) needs to adopt the right strategies.

So what has this set of officers given us? Well, with one notable exception, they’re making the crew fatter and lazier, and the ship is wallowing and taking on water for lack of basic maintenance.

We’re looking at decreases in productivity, with one exception – the decision to encourage pensioners to work more. Another bright spot is the increase in defence spending, as long as they can find ways to reform defence procurement. Defence is not an economic benefit, but it is an existential necessity that was neglected for far too long and is marred by poor strategic thinking and procurement.

Apart from that, government is generally spending more on social services like the NDIS, health, parenting, and education without getting any improvement in the economy or the crew in return.

They claim there will be dividends in terms of increased female participation from their parenting reforms, but if you have to subsidise a woman to leave childrearing to join the workforce then, on just an economic basis, the childrearing is more productive.

The social outcomes under this proposal are also likely to be worse – for example children need less childcare, not more, despite the modern fear that unless tots are exposed to algebra by 2 years of age, they’ll never make it to uni.

Bill Shorten has been tasked with fixing the NDIS, which, while welcome, doesn't have a fixed schedule to be achieved, which means the careening is deferred, possibly for ever, and the ship remains fouled.

Their “Housing Accord” is another productivity destroyer – it will only produce the same number of houses we are producing at the moment but apparently only can do this by a higher level of government involvement.

If they can get their industrial relations legislation through the senate they will return us to the bad old, pre-Hawke and Keating days, of pattern bargaining where one-size-fits-all wages and conditions are imposed on disparate businesses destroying innovation, flexibility, and productivity. We’ll need a fit and alert crew in the storm – this isn’t the way to keep them either.

And while reducing outlays decreases the size of government, which generally enhances productivity, their “saved” money is mostly a redirection from coalition priorities to a Labor one without any cost benefit justification. Which is a better investment – the Hell’s Gate Dam or Dan Andrew’s Rail Loop? (My suspicion is the first, but Jim reckons the second, but then I'm using dollars as my currency, and I think he is using elections).

Finally, and this is the most destructive of productivity, we have their decarbonisation policies which will build networks of powerlines all over the country. These are necessary if you don’t have storage, to take electricity from where the wind is blowing or the sun shining to places where it isn’t.

They will be drastically under-utilised most of the time and will be completely useless at night in a continent-wide doldrums. But the owners of them will still be paid a commercial return based on the cost of building them, not their actual revenue, an astronomical cost which will be added to everyone’s electricity bills.

Couple this with the policy to have 82% renewable in the grid by 2030 and power prices are going to skyrocket, and productivity dive, aided and abetted by subsidies to manufacturers of renewable energy technologies, making the component parts even more expensive than they already are.

Stagflation is the combination of higher prices and lower growth - it is the most unbearable of economic circumstances and eats away at well-being more effectively than anything else short of war. It’s a long time since we’ve had a budget and government that was this stagflation-friendly raising prices and lowering growth all at the same time. We’re lucky the good ship Australia has an iron hull – she might just weather the storm and the crew, but it will be miserable in the meantime.

Regards,
GRAHAM YOUNG
EXECUTIVE DIRECTOR