Dec 10, 2014

    Australia risks 'lost decade' unless it changes course

    AS ECONOMISTS debate whether Japan Prime Minister Shinzo Abe can end his country's long funk, I can't help but wonder if another wealthy, seemingly world-beating economy isn't headed for its own lost decade: Australia.

    This mere suggestion will strike many as hyperbolic. The economy Down Under has avoided recession for more than two decades. The government enjoys a fiscal position that inspires envy in Washington and Tokyo. There remain vast resource deposits underground, while new infrastructure is coming online to extract and ship that treasure to China and elsewhere.

    Australia's good fortune, however, looks to be waning. Slowing growth in China, driven in part by the government's efforts to rebalance the economy, has devastated commodity prices.

    Iron ore, Australia's biggest export, now fetches half of the US$140 (S$185) per ton it did last December. Coal prices have tumbled as well.

    These are long-term, not cyclical, trends. And unfortunately, the trajectory plotted by Prime Minister Tony Abbott over the last 14 months has left the country less prepared for that difficult future than when he took office.

    Australian voters have soured on Mr Abbott because of what they see as broken promises. A needlessly austere budget slashed education, health and welfare spending. The government appears to be coddling mining billionaires and backtracking on its environmental pledges.

    My worry has more to do with Mr Abbott's economic priorities. Although he has talked about diversifying the economy away from its dependence on China, his policies have done the opposite.

    Where the previous government moved to tax outsized mining profits to fund investment in education and infrastructure, Mr Abbott has changed incentives so that commodities and mining companies become a bigger share of the economy and have an even bigger voice in politics.

    Scrapping plans for a carbon tax and resisting any serious limits on emissions have made the economy more vulnerable to international shocks and made Australia a punchline at this week's global climate talks in Lima, Peru.

    Instead of undertaking painful and costly restructuring, Mr Abbott has prodded the central bank to loosen monetary policy more and more. Whether all that easy money is pushing Australia towards a subprime-loan crisis has now become a matter of serious debate.

    Over the last year, any time a journalist asked Mr Abbott or Treasurer Joe Hockey about frothy real-estate prices, they were dismissed as nervous nellies. Yet, in an interim report in July, David Murray, the former head of Commonwealth Bank of Australia, called the surge in housing debt since 1997 and banks' exposure to mortgages a significant risk.

    On Sunday, in the final report to emerge from his year-long Financial System Inquiry, Mr Murray urged specific reforms, including cuts in much-loved housing tax breaks.

    There's still time for Mr Abbott to turn things around. But that would require, on the one hand, tightening up the spigot of money that's fuelling housing froth - essentially relying less on the Reserve Bank of Australia to support growth.

    On the other hand, the government needs to urgently rethink its austerity policies. Big investments in human capital - via education and training - as well as infrastructure are the only way to raise productivity and promote job growth in the long run.

    Along with reimposing the carbon tax, the government should capture and redistribute more of the spoils of Australia's resources, replace the high income-tax burden on households with a goods and services tax, and encourage a new wave of entrepreneurship by supporting small companies. Free-trade agreements with China and Japan are welcome.

    But the solution to Australia's challenges remain smart, forward-looking and, yes, costly policy initiatives. Otherwise, its citizens could be in for their own decade of unnecessary pain.