It's a funny thing about the awful truth: people are much more inclined
to talk about it after elections than before. And it seems as though, of
late, our top economists have done little but tell us our economic
future is a lot more "challenging" than was contemplated during the
election campaign.
The first sobering message is that getting the
budget back to balance won't be as easy as it suited both sides to
pretend in the three-year campaign. Indeed, it could be a struggle that
goes on for at least a decade - depending on how long it takes us to
face up to some tough decisions.
The next soberer is that our
material standard of living is likely to improve at a much slower rate
in the coming decade than it did in the last one. We got that warning in
a speech last week by Dr David Gruen, the top macro-economy manager in
Treasury. And we got it again in a speech this week by Dr Philip Lowe,
deputy governor of the Reserve Bank.
The simple way to see what's
happening to our standard of living is just to take real gross national
income and divide it by the population, to give real income per person.
According
to Treasury's calculations, this grew at an average rate of about 2 per
cent a year during the 1970s, '80s and '90s. Over the 13 years to this
year, it grew by 2.3 per cent a year. But over the coming decade to
2023, Treasury's best guess is the rate of real improvement will slow to
a bit less than 1 per cent a year.
That's more than a halving in
our rate of material advance. What is it that's expected to cause this
marked slowdown? Well, that's a long story. Settle back.
The
greatest single factor causing our standard of living to rise almost
continuously over the years is improvement in the productivity of labour
- that is, increased output of goods and services per hour worked.
Labour productivity improves when workers are given more machines to
work with, when workers' skills improve because of education and
training, when improvements in public infrastructure allow firms to
operate more efficiently and, particularly, because of technological advance: the invention of new and improved products and production processes.
The
next most important contributor to our material standard of living is
"labour utilisation": the proportion of the population that's of the
right age to be in the labour force (often taken as everyone aged 15 to
64), the proportion of people of working age who actually are in the
labour force, the proportion of these who are employed rather than
unemployed, and the average hours worked by people employed (many of
whom will be only part-time).
The standard story from economists
is that the nation's income increases when we produce more goods and
services. But it's not quite that simple. It's not just how much we
produce, it's also what that is worth when we sell it to foreigners so
we can buy what we want from them.
About 10 years ago the world
started paying us a lot more for our minerals and energy - we called it
the resources boom - and this increased the income we derived from the
stuff we were producing. As Lowe puts it, "over time we have been able
to buy more and more flat-screen televisions for each tonne of iron ore
that we have sold overseas".
Economists call this an improvement
in our "terms of trade" - prices we receive for exports relative to the
prices we pay for imports. And the main reason our standard of living
rose by a high 2.3 per cent over the past 13 years is the big
improvement in our terms of trade.
It contributed about 0.8
percentage points of that 2.3 per cent growth, more than making up for a
weaker rate of improvement in the productivity of labour.
But, as
we all know, the fabulous prices we were getting for our coal and iron
ore started falling back a year or two ago, and Treasury expects them to
fall a fair bit further. Indeed, it expects the deterioration in our
terms of trade to subtract about 0.5 percentage points from the annual
growth in real national income per person.
And there's a second
factor we'll have going against us. Until recently, we've been enjoying a
"demographic dividend" as the population of working age grew faster
than the overall population (mainly because of the falling rate of
fertility).
Over the 30 years to 2010, the proportion of the
population aged 15 to 64 rose from a bit more than 64 per cent to a peak
of about 67 per cent. But now, with the continuing retirement of the
baby-boomers, it's projected to fall to about 62 per cent over the
coming 30 years.
So whereas until now the demographic dividend has
contributed to the rate of improvement in our standard of living, over
the coming decade demography will subtract from that rate (we'll have
fewer producers relative to consumers).
Now, there's nothing we
can do to stop world minerals prices falling back and not a lot we can
do to delay the retirement of the baby-boomers. So, ready for the
commercial message from your friendly econocrats?
Lowe says that "over
the next decade or so, if we are to achieve anything like the type of
growth in real per capita income that we have become used to, then a
substantial increase in productivity growth will be required.
"If
this lift in productivity growth does not take place, then we will have
to adjust to some combination of slower growth in real wages, slower
growth in profits, smaller gains in asset prices and slower growth in
government revenues and services."
