For the last two decades, the Australian economy has ridden on a sleek, speedy train powered mainly by Chinese output. However, as Chinese growth slows in an era of relatively weak global demand, the train is beginning to lose steam and the ride is becoming bumpier. Budget cuts, a falling currency, higher deficits and diminishing productivity figures have become familiar terms in the ‘lucky country’ and played a large role in the success of September 2015’s coup d’état, paving way for Prime Minister Malcolm Turnbull. Despite a new Prime Minister and fresh Cabinet, the outlook may not be so optimistic. Policies seem to conflict with objectives; public rifts are beginning to emerge among party factions; and the drums of another global recession are beating louder. Strengthening the Australian economy to the likes of the pre-2008 years will no doubt be a tough long journey requiring sacrifices and unpopular decisions. It will also test the nation’s political resolve in an epoch in which entire Cabinets being replaced overnight has become common sight.
On Christmas Eve afternoon, scrolling through the homepages of various media outlets, it seemed the attention of the Australian Fourth Estate was focused upon the festivities of the season. In Australia, the ‘100 days of office’ review by the media is particularly popular. Such reviews, I found a grand total of zilch. Christmas Eve 2015 marked a hundred days since the current Prime Minister, with his right hand in the air, exclaimed, “So help me God!”.
A bit about the man himself – Prime Minister Malcolm Turnbull. And my goodness is he impressive: having attended a public school on a scholarship, this Rhodes Scholar turned journalist turned legal eagle turned Goldman Sachs partner turned cabinet minister is now leader of the world’s twelfth-largest economy. Besides the wow-factor, these achievements show the ruthlessly clever, individualistic and pro-business character that defines a man now worth well over £100 million. In the words of one of his dons at Oxford, he was “always going to enter life’s rooms without knocking”.
This article shall not be an attempt to perform the said review. Rather, it analyses the economic illnesses facing Australia. It also challenges the seemingly popular belief that a dose of the Turnbull treatment will result in a healthy, smooth prognosis for the Australian economy.
The Path to Office
First, we must understand the context behind the spectacular September coup d’etat that saw Turnbull usurp office from Tony Abbott. Since April 2014, in every major two-party preferred poll, the Abbott-led government fell behind the Opposition Labor Party. One publicity disaster after another, Abbott was viewed at best an unlucky, misunderstood conservative and at worst, an out-of-touch Antipodean remix of Gordon Brown. Worse, public disengagement with the political establishment was at an all time high.
Arguably though, the greatest skirmish facing the government was, and still is, the economy. This is a nation, we must not forget, that has not experienced a recession since the early 90s. For two decades, growth averaged at 3.6%, productivity boomed, public debt was steadily decreasing, interest rates averaged close to 4%, unemployment continuously fell, and the currency appreciated to more than twice its original value. Most politicians in Europe wouldn’t hesitate selling their kidneys for figures so stellar.
But then the Great Recession happened. Chinese demand for Australia’s mining exports and other goods began to slowdown and is continuing to do so. In 2013, the Australian people phoned Dr Abbott to heal the symptoms of economic slowdown. The doctor, who entered office on a Cameron-esque agendum of deficit reduction, acted quickly. However, like many treatments, there were side-effects: the prospects of rising household debt and the reality of lay-offs made large budget cuts particularly unsavoury. To many, the more the doctor acted, the more the economy suffered. It is this combination of publicity, political and economic woes that brewed a storm sufficiently severe to sweep away Abbott’s house of cards.
The Last Hundred Days
As Abbott’s foundations fell, Turnbull’s rose. Finally, on the cold, quiet wintery night of 14 September 2015, a party ballot decided to replace the leader of its pack. The new alpha’s entrance was so grand and welcomed that the markets briefly rallied, the Australian dollar rose to a two-week high, and ‘#libspill’ featured in 580,000 Tweets by the end of the day. The question on many Australians’ minds was ‘could this be our messiah?’. For now, it seems not.
So here we are today: economic growth is at 2.5%, the cash rate has dropped to 2%, unemployment has steadily risen to 5.9%, the currency sits just above US$0.7 and productivity is on the downturn. Chinese growth seems unlikely to reach two-figures in the near future, meaning weaker Australian mineral exports. Mind you though, the mining sector still accounts for 8.5% of the Gross Domestic Product (GDP). So what does Turnbull have in store for the nation?
The Innovation Pitch
Pledging AUD$1.1 billion (£550 million) to research funding, tax breaks and entrepreneurial visas, Turnbull has invested in Australia’s “greatest natural resource” – human capital – to a level unlike his recent predecessors. The goal is to transform Australia’s major cities into the likes of Tel Aviv and Silicon Valley by attracting multinational corporations, start-ups and international talent. While this may sound like a rather generic idea among developed nations, it does have its merits. After all, Australia is home to some of the world’s best universities, a dedicated government research body (which invented polymer banknotes) and advanced infrastructure.
The challenge, however, lies with the government itself. Recently, clamping down on multinational corporate tax avoidance has become popular with the electorate. Only a few weeks ago, Parliament passed new laws allowing the tax office to estimate how much tax multinationals should be paying, as opposed to the amount they are strictly liable under current legislation.
Hence while the government is trying to attract giant offshore corporations and even create companies like Google and Apple, it is also placing them in the crosshairs of harsh tax regulations. It seems the left arm does not know what the right arm is doing: how does one reconcile a pro-business, public commitment to innovation with practically uncertain anti-business tax law? Further, one of the key reasons such companies have low tax profiles is due to successive governments’ pro-business research and capital gains tax credits. Faced with high uncertainty and financial risk, companies can be forgiven for crossing off Australia from their list of potential headquarters or research facility location.
If all this was not bad enough, the OECD has cast doubt on the idea that economic growth can be ‘bought’ by public expenditure on research, arguing that public side research and development may crowd out private initiatives.
Goodbye Sunday Rates
The Australian Productivity Commission recently recommended that in the hospitality and retail sectors, the Sunday double-rate penalty should be reduced to Saturday’s one-and-a-half rate. Turnbull agreed. Unfortunately for him, the unions, the Labor Party, many members of the public and even some of his own party members do not concur.
There is no doubt a case for both sides: employment growth and higher productivity prove formidable arguments for the perceived sacrifice in equity and household income. The resulting effects and the scale of them are still largely unknown. What is known though, is that there is currently considerable public opposition against these measures. Given that former Prime Minister John Howard’s defeat in 2007 was largely owed to an industrial relations disaster, and with an election next year, it seems that Turnbull will not push these reforms through Parliament with much force.
A trademark of the golden pre-GFC (Great Financial Crisis) Howard years were budget surpluses, one that the Liberal-National Coalition has been obsessed with resurrecting after six years of Labor governance. At its unhealthiest, the deficit reached $45 billion and is not expected to recover until 2023-24. To complicate matters, the International Monetary Fund (IMF) recently recommended the Commonwealth Government to slow down its campaign against the budget deficit. The IMF’s assistant director warned that recent efforts to cut public spending are ‘more frontloaded than desirable’ in an era of weak growth and slowing investment. While the IMF’s advice is not the word of God, it did also recommend company and capital gains tax to be cut.
So far, Turnbull has not deviated from the party crusade for a budget surplus, and recently, various think-tanks and even the IMF have proposed lifting the goods and services tax (similar to the UK’s VAT). Once again, given that 2016 is election year, it will be a difficult Rubik’s Cube to solve in relation to pleasing both the party room and voters.
The question of China
The current cordial relations between Australia and China have little to do with any of Turnbull’s efforts or policies, but it is an important issue that cannot be overlooked. The China-Australia Free Trade Agreement has been on the books since 2005 but what is crucial is that its implementation began during Turnbull’s period of office in early December 2015.
Like the plan to axe Sunday penalty rates, this deal has attracted fierce opposition from the Labor Party and the unions. The basis of resistance is that Aussie blue-collar workers will be left jobless should Australian markets prefer Chinese goods, labour and services. After all, these were fears when free trade agreements were signed also with South Korea, Japan, Thailand, Chile, Malaysia, Singapore, New Zealand and the USA. Even if all this scare-mongering from the Labor Party and the unions is unfounded, the Centre for International Economics (CIE) has estimated only 0.4% growth in welfare as a result of this deal, which equates to an annual increase of AUD$130 (£63) in GDP per capita. Moreover, though the Trade Minister recently claimed that the agreement will create 178,000 more jobs by 2035, the CIE puts this figure at a modest 5,434.
What is forgotten, however, is that these deals are more than about raising nominal employment rates or GDP figures. They ensure that countries’ exports remain competitive while fostering closer political ties. For instance, given that New Zealand earlier signed a deal with China that tariffs on beef exports, if Australia did not sign this agreement, then Australian cattle could eventually lose its exposure to the Chinese market.
Australia, should it prosper in the coming century, must be open to trade with China (which also is its largest trading partner). Isolationist and protective policies will only worsen the already slow economic growth. This deal, especially in the long-term, is exactly what Australia needs to become more competitive, innovative and connected to international markets. Trade liberalisation will no doubt strip away many comforts that generations of Australians have become accustomed to and ultimately, Turnbull and his party will be held to account for its ramifications upon workers and the wider economy.
Remember Climate Change?
Another area which sees Turnbull being bound largely by the party room is in the area of climate change. After all, it was this very issue that saw Turnbull lose to Abbott the party leadership by one vote in 2009. Abbott was inveterately against Labor’s carbon tax, any emissions trading schemes and recently even retracted federal funding for wind and solar farms; Turnbull believes in the exact opposite. Like most academics around the world, he sees climate change as a long-term war that Australian agriculture, tourism and infrastructure cannot afford to lose.
Initially after the coup, many on the left lauded the conservatives as finally having a leader determined to combat climate change. However, despite Australia signing the fancy agreement at COP21, Turnbull is yet to act or substantially comment on this vital, contentious matter. He has only dropped his predecessor’s ban on wind and solar funding. And for the emissions trading scheme that was so important to him in 2009? Not a word.
Australia’s Hope or Australia’s Fraud?
It seems more and more likely that the world will see the true Turnbull in 2016. So far, only his public image and words seem more appealing and progressive to voters. His policies on climate change and deficit reduction have deviated little from those of his predecessor. His innovation pitch has put him at odds with the tax office while his approach on China and wages have put him at war with the unions. For the time being, it is unclear whether his every vulnerable venture hitherto is due to his bad luck or poor leadership.
Worse, it seems that the forecast inside the party room is not fairing much better. Like political parties around the world, factional rivalries rule the organisation. After all, the incumbent Liberal-National Coalition represent the interests of the various shades of farmers, urban professionals, Christians, secularists, miners, big business and small business. A balance of powers must be sought for this coalition to operate; Abbott’s deposition was already a storm that rocked the party ship.
So, is Turnbull Australia’s great hope or a fraud? Let time run its course. It is likely that he will win the 2016 election, and a victory on his own platform will allow him greater autonomy in policymaking. A victory in the polls means public support for Turnbull over the Labor Party, over the unions and over rival factions of the party. After which, the world will see the entirety of the leadership, policy and governing abilities of a man who has already stunned the Australian public in 2015.
We have also left out the prospect that he could just be another average Australian Prime Minister, who after a few decades will be overshadowed by giants like John Howard, Gough Whitlam and Sir Robert Menzies. So could he be just another average Joe then? Possible.