The Austerity Slippery Slope

By Graeme Cotton

Will Australia head down the austerity path?

The world is facing volatile global markets, falling resource prices, issues in China, and serious concerns in parts of Europe. Facing all this, questions remain as to whether Australia can endure another Global Financial Crisis (GFC).

Australia has a revenue problem: falling iron ore prices, lack of productivity, inflexibility in labour markets, an ageing and unskilled workforce, lack of manufacturing, reliance on imports, and both international and Australian companies falling to pay tax.

The Australian Government seemingly has just sold its soul to China with an extensive Free Trade Agreement. This is possibly to offset the loss of revenue due to the spiralling resources market, or our lack of manufacturing due to closures of so many plants. But what will this look like if China continues to spiral into debt?

Would the Australian Government open the purse strings and invest in infrastructure as per the Rudd Government? Could they? Current politicians, including Prime Minister Abbott and Treasurer Hockey, have just finished telling the country that there is a budgetary crisis.

With the current Government failing to assert itself through policy, much of which has failed to be legislated, concerns around our future are legitimate. Politically, the parties are starting to resemble one another as they attempt to stay under the radar and avoid pitching their ideas, due to the impact of current day social media. The country is crying out for leadership – or is it a personality?
At a state level, after many years of droughts and floods, we recently had some serious robust discussions between the Federal Government and all the states around their share of GST, without a true solution. Western Australia has been severely affected by the resources downturn and houses built for the boom period are now seemingly worthless. Victoria has lost many car manufacturing plants and has introduced rate capping to stop the over-expenditure of local governments. South Australia’s large naval construction contracts look in doubt. New South Wales is looking at controlling their costs by introducing shared service centres, selling their power lines to Chinese concerns, or by reviewing the local government arrangements, with amalgamations likely.

With shrinking budgets and a distinct lack of leadership, Australia could be headed unawares towards austerity. As Paul Krugman recently wrote in The Guardian:

Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.

Let’s hope that Australia won’t go down that path.