A Policy Reset for Jobs and Growth

Posted: Thursday 18 January, 2018

The challenge for the Treasurer in 2018 and beyond is to generate an upward spiral of non mining and new dwelling investment to help reverse the low productivity and falling competitiveness of the post GFC period. This vicious cycle has in part been a toxic byproduct of the stifling pettiness and fractious division that has characterised Australian politics and policy-making since mid-2010.

In the New Year, the Treasurer must again try to push the policy re-set button and embark on a bi-partisan reform conversation focused on raising living standards while leaving no-one behind. He should zero-in on those principles and policies on which there is general agreement, keeping in mind Churchill’s dictum: “A fanatic is one who can't change his mind and won't change the subject.”

The major domestic-grown risk in 2018 is that our housing chickens may come home to roost. Prices in Sydney and Melbourne are now sky high. Residential property yields have fallen to 2.75 per cent, a price-earnings ratio of 36 times. Unless real interest rates stay permanently, these numbers present an insane investment proposition compared to average ASX 200 investment at a price-earnings ratio of around 17 times.

To fund the property boom, household debt has now reached twice average household incomes. It seems that global interest rates are rising. How many households will be bankrupt if global rates rise by 150 basis points over the next 18 months? Presumably this fear lies behind the curtailed wages growth and depressed household consumption, revealed in the latest national accounts.

Soaring property prices have also driven a glut of high-density apartment buildings in Sydney and Melbourne which, in 2018, could risk a massive buildup of non‑performing loans for banks and non‑bank lenders. Unfortunately, Australian banks have a disproportionate exposure to residential housing and related lending. This current boom is easily the greatest in the history of our major capital cities – and history shows that the deepest recessions tend to follow real estate busts.

Most likely new dwelling investment will sink like a stone in 2018 on the east coast of Australia. What will take up the slack?

Thankfully, better news internationally. After years on Struggle Street, many advanced economies are experiencing what appears to be stronger and synchronous growth for the first since before the GFC – the so-called Goldilocks economy.  But appearances are deceiving.  The United States is probably late cycle, the Europeans mid-cycle, while most emerging markets (aka China) are likely still early in their business cycle.  So while a nice story, this coincidence is probably not likely to be preserved. But hopefully stronger global growth will act as a tailwind for the Australian economy, especially through Asian commodity flows. 

There is no denying global growth is picking up in late 2017.  But is this just a temporary spike in public infrastructure spending off the back of former Treasurer Hockey’s asset recycling incentives, or does it represent a broader and sustained pickup in business investment?  This is a crucial question which will determine whether we can shake off low and slow growth rates in 2018 and beyond. Business investment must be the primary driver of growth next year to offset a weaker residential construction spend and ongoing anemic growth in household consumption.  Also, it seems that most of the strong employment growth during 2017 was due to public infrastructure spending or growth in public sector services such as teaching, disability support and healthcare. Surely this is not sustainable.

There are certainly positive steps in 2018 that the Treasurer can take to further drive overall domestic demand via business investment to replace any momentum lost through falling dwelling investment.

First, he can establish a clear Christmas list or infrastructure pipeline of high value projects with large benefit-cost ratios and allow long term institutional investors to play Santa. First cab off the rank, a second electricity interconnector (2IC) between Tasmania and Victoria. This would allow increased exports of dispatchable renewable energy into Victoria during periods of high demand when higher-cost generation would otherwise have been required (increased reliability). It would also allow more imports into Tasmania during low value times to better maintain dam levels for high demand periods, improve the ability (efficiency) of Tasmania’s hydro facilities to be used much like a large battery, and provide stimulus to develop rich wind resources.

Second, the Treasurer could announce a supply chain review into each major Australian export commodity. We need to know the impediments to value adding across all export supply chains. Factors may include infrastructure bottlenecks, foreign ownership of processing assets, or enterprise culture. For example, does an outright sale of Murray Goulburn to Fonterra make any sense?

Third, asset recycling. State and local governments are sitting on an enormous stock of underutilised property and infrastructure assets. Let the Commonwealth take a leaf out of former Treasurer Joe Hockey’s book and offer up large incentives for the speedy sale and reinvestment of proceeds into greenfield public infrastructure and affordable housing assets.

Fourth, and again, the Commonwealth incentivising fundamental state tax reform such as the replacement of stamp duties for land taxes, and introduction of betterment taxes as a hypothecated channel to fund greenfield infrastructure outlays.  This is a no brainer!

Fifth, replace Australia’s inefficient and rent-seeking private technical training system with a hybrid of the United States community college system. The American system keeps teenagers and young adults in their local regions by offering very low cost technical training including in advanced mathematics, coding and all sorts of trades. Fun stuff!  I can speak from personal experience just how tremendous these institutions are. It contrasts with the variable quality, taxpayer subsidised, pay-for-permanent-residency-racket run by many private providers in this country.

The Treasurer could consider undertaking these actions to help frame policy settings to support the current upswing in business investment and promote prosperity for all Australians. 

This article first ran in the Australian Financial Review in January 2018