It shouldn't surprise you that when the secretary to the Treasury, Dr
Martin Parkinson, devoted half his major speech this week to "fiscal
sustainability" - the tax increases and spending cuts needed to get the
budget back on track - the media virtually ignored the other half.
But
the budget isn't the economy. And in that other half Parkinson offered a
revealing SWOT analysis of the economy, outlining its Strengths and
Weaknesses, Opportunities and Threats. So let me tell you what he said
(and leave my critique for later).
For people worried about what
we do for an encore after the resources boom - about where the jobs will
come from - Parko points to three big "waves of opportunity".
The
first wave is the mining investment boom, which is ending but not
leaving us high and dry. "With the capital stock in the mining and
energy sectors now triple what it was a decade ago, additional
productive capacity will drive strong growth in resources exports for
several years to come," he says, although this will involve employing
fewer workers than in the investment phase.
The second opportunity
wave flowing from the vast economic shifts in Asia is rising global
demand for agricultural produce. The Australian Bureau of Agricultural
and Resource Economics and Sciences estimates that China's imports of
fruit will treble by 2050. Imports of beef will grow by a factor of 10
while imports of sheep and goat meat increase by a factor of 19. Dairy
will increase by a mere 165 per cent.
Asia already takes more than
40 per cent of our food exports. Parko warns, however, that our ability
to gain a slice of its rising demand rests on continued productivity
gains in our rural sector, supported by the right policy settings.
"Our
handling of the concerns raised by foreign ownership of Australian
agricultural land (and food manufacturing) in some parts of our
community is one dimension of the agricultural policy challenge, along
with our approach to trade policy, stimulating investment in on- and
off-farm infrastructure and supporting research and development."
The
third wave is the opportunities in the services and high-value
manufacturing sectors brought about by the steadily increasing growth of
the Asian middle class. It's estimated that, by 2030, just under
two-thirds of spending by the world's middle class will come from the
Asia Pacific region, compared with about a quarter today.
"To
capture the benefits of the third wave, we will need to compete on the
global stage for Asian demand for services and high-end manufactures on
the basis of both cost and quality," he says. "We will also need to
compete for foreign direct investment to help put the right
export-related infrastructure in the right places."
But get this
declaration from the economic rationalist-in-chief: "Contrary to how it
is sometimes portrayed in the media, competing on the global stage does
not mean driving down wages or trading off our standard of living. Far
from it."
Parko says improving Australia's competitiveness in
global markets means investing in the skills of our workforce so
Australians have the opportunity to move into sustainably higher paid
jobs, and investing in infrastructure that has a high economic return.
It
means ensuring firms and their employees are freed from unnecessary
regulatory burdens, and establishing the right incentives to encourage
innovation and competition. "In other words, it means raising
Australia's productivity performance," he says.
Which brings us to
Parkinson's three big threats to our further economic success. The
first is productivity improvement. He says that, even after you allow
for temporary factors, there's been a slowdown in "multi-factor"
productivity improvement that's broad-based across industries,
suggesting that deeper, economy-wide factors are at play.
The
second threat arises because, until mid-2011, the effect of this
productivity slowdown on the rise in our living standards was masked by
the rise in the prices we were receiving for mineral exports. But now
the likelihood that these prices will continue falling means a
"significant drag on Australia's national income growth" over the rest
of this decade.
The third threat to continued strong economic
growth comes from the turnaround in the "demographic dividend" delivered
by the baby boomers. For about 40 years until 2010, the proportion of
the population of working age (here defined as 15 to 64) grew a lot
faster than the overall population because of the postwar baby boom,
followed by a dramatic fall in the birth rate in the 1960s and '70s.
This boosted economic growth.
"Over the next few years, this
demographic dividend, which has been fading for some time, will actually
reverse. The proportion of the population aged 65 and over is expected
to increase to nearly 20 per cent in 2030, from 13.5 per cent in 2010."
As
the population ages, the total participation rate - the proportion of
people 15 and over participating in the labour market - will fall,
despite the increase in the participation rate among older Australians.
"This expected decline has already begun and will become more pronounced
by the end of the decade," he says.
Productivity is the key
long-run driver of income growth, but declining export prices and
labour-force participation are expected to subtract from national income
growth in future.
If we assume the productivity of labour grows
at its long-term average, then income per person would grow over the
coming decade by about 0.7 per cent a year, about a third of the rate
to which we've become accustomed, he says. To avoid that, we'd need to
sustain labour productivity growth of about 3 per cent a year, about
double the rate we've achieved so far this century.
If we fail to
make the reforms needed to achieve that rate of productivity
improvement, by 2024 our income per person will have risen only to
$69,000 a year, not $82,000. We'll each be $13,000 a year less affluent
than we could have been.
