In his 18 November address to The Australian Strategic Forum, the Australian Treasurer made some insightful observations about our relationship with China. However, in other writings posted during the last week, he portrayed a disturbing adherence to political expediency rather than a much needed focus on utilising  the economic levers of the country in an appropriate or timely manner.

Whilst Australia’s trade relationship with China  is crucial our country needs to strive to generate other sources for growth. Importantly the economy should not be allowed to drift along because a downturn in China at such a time would cruel our economy and undermine long term plans. Australia needs to urgently develop a economic program and it needs to be adopted across the political and business spectrum.

Concerning China, much in the news over the past few days as former Prime Ministers offer their relationship guidance (“It’s complicated…”), the Treasurer said the following:

“As Henry Kissinger has pointed out, China was the largest economy in the world for 1,800 of the last 2,000 years, only to be surpassed by the West with the advent of the Industrial Revolution.

Australia like so many other nations has played a part and been a great beneficiary of China’s rise with China the number one trading partner for more than fifty countries, as it is for Australia, and in the top three trading partners for more than 130 countries.

Our two-way trading relationship is worth more than $200 billion a year with one third of our exports going to China.

Over one million Chinese tourists annually visit our shores and two hundred thousand Chinese students study in our educational institutions.

It’s a mutually beneficial relationship.

In 2018-19, our iron ore exports, 80 per cent of which go to China, help create enough steel to build the equivalent of ten thousand Sydney Harbour Bridges.

Our exports to China make up 60 per cent of their total iron ore imports and around 45 per cent of their total LNG imports, helping to support their unprecedented urbanisation which has seen more than three hundred million people move from regional to urban areas in the last four decades.”

The Treasurers observations are captured in our first chart covering China – Australia trade over the last 5 years.

There is no dispute that our relationship with China is pivotal for our economic wellbeing, and the Treasurer is right to emphasise the mutuality of the association. However, he fails to acknowledge the excessive risk that this trade relationship has created. What are our plans to balance out our trade with other economies? Do we have a plan?

This week the Treasurer was also present on the op-ed pages of the AFR  in a piece titled, “Australia must prepare for an ageing population”. Here he prosecuted the case securing a budget surplus in FY20. There were to be no “knee jerk” change in Government fiscal policy  – no matter how slow the growth in the economy becomes or how exposed we are to the headwinds in the international economy.

One particular comment of the Treasurer needs to be examined. Not a fact check but rather a logic check.

“At $19 billion per annum, our interest bill is more than double what we invest in childcare and nearly as much as we spend on schools.

Our debt burden represents not just a cost to the budget and therefore every taxpayer, but also an opportunity cost as it constrains the government’s ability to invest in other areas.

If we don’t remain fiscally disciplined today, the next generation will have to pick up the bill tomorrow.”

What the Treasurer failed to state (above) is that Australia’s interest bill will substantially decline as a basket of bonds mature (about $150 billion) over the next 4 years and are rolled at 2% to 3% below what they were issued at. Australia’s actual interest bill has and will continue to decline. This will help the Government achieve a surplus and it could be greater if the RBA instituted a Quantitative Easing (QE) program focussed on government bonds. Further, at current bond interest rates Australia could double its debt, greatly extend its bond maturity profile and yet pay the same amount of interest.

The lack of co-ordination in Australia’s fiscal and monetary policy settings in Australia is unique in a world where QE and fiscal deficits are undertaken methodically across the majority of the developed world. No more so than in the US as it battles against China our largest trading partner.

The Treasurer’s stated focus is twofold. Create the capacity for needed short term responses and have a eye on the longer term demographic issues that will evolve .

“Having a surplus provides the capacity to respond to disasters such as the fires and drought which have tallied more than $1 billion since the election and help address the findings of the interim report of the aged care royal commission.”

And longer term

“Our population is ageing, and this will place new demands on our health, aged care and pension systems.

As more Australians live longer, the number of working age Australians for every person aged over 65 diminishes, whereas in 1974-75 it was 7.4 to one and 40 years later in 2014-15, it was 4.5 to one.

It’s estimated over the next four decades to fall to just 2.7 to 1.”

The second focus is admirable, but it means nothing unless the whole of the Parliament, all sides of the political spectrum, agree to a national policy that governs the aged and healthcare policy of future governments.

The untimely focus on a tiny surplus which fails to respond and therefore stimulate economic activity will do harm to long term economic growth and actually accentuate the cost of an ageing population. Dealing with long term issues also requires a steady focus on economic growth. The compounding of growth, with the benefits of wages and thus taxation growth, will be our nations best defence against the cost of an ageing population. A dollar strategically spent to today will be less costly than catch up dollars spent in the future. This even more significant today because the cost of debt has plummeted, below the rate of inflation and therefore giving us access to extremely cheap foreign debt that should be accessed rather than avoided.

We therefore dispute that a budget surplus is the appropriate policy for the Australian economy at present. Further, the continued lack of co-ordination of fiscal policy with monetary policy and the reticence to focus Australia’s economic policies on what is good for Australia is frustrating.

Source: RBA

The Australian economy is treading water – at best. The most recent employment data were very weak, and wages growth is dead in the water. While residential housing has bottomed, construction activity is anaemic, and business and retail confidence are fragile.

Household consumption growth over the last year is disturbingly weak, as the RBA’s chart below shows:

The RBA has committed to keep rates low, but for retirees, this means insufficient yield on deposits and necessitates drawing down on capital savings.

We urgently need a circuit breaker to instil more confidence in the economy. The Treasurer appears unlikely to deliver that.

Next month’s Mid-year Budget Update

Setting the scene for both next month’s mid-year budget update and next year’s Intergenerational Report (IGR), which forecasts the budget cost of essential services 40 years in advance, the Treasurer  has already indicated there will be no largesse in coming months.

The IGR is released every five years and the next one is due early next year. The last IGR in 2015 warned Age and Service Pension payments would grow from 2.9% of GDP to 3.6% in 2054-55 unless the pensions cuts in the 2014 budget were implemented, which they were not.

Aged care funding was projected to grow from 0.9% of GDP in 2014-15 to 1.7% in 40 years, the equivalent of growing from $620 to $2000 per person.

As the Treasurer hastened to point out,

“Our population is ageing, and this will place new demands on our health, aged care and pension systems.

Since the first Intergenerational Report was released in 2002, we have gone from 13 per cent, or 2.5 million people, being aged 65 and over, to 16 per cent, or 4 million people, today.

Our median age, now 37, has increased by two years since then and life expectancy has gone to 81 for males and 85 for females.

With the sixth highest life expectancy in the world, we are seeing an increase of almost one year every four years.

As more Australians live longer, the number of working-age Australians for every person aged over 65 diminishes…”

Whilst the Treasurer’s attention to Australia’s demographic trend is supported, Australia’s capacity  to deal with it is unique. But the response needs vision and it requires capital investment that accesses todays ridiculously low interest rates

Let’s not get confused by political speak. The government debt burden is relatively small compared with most other developed countries, and with ultra-low interest rates, it does not jeopardise fiscal flexibility.

Further, the government has yet to put its mind to leverage provided by massive domestic reservoir of superannuation savings. It should engage with this large pool of domestic capital and direct at least some of it into long term nation-building infrastructure assets designed to fire-proof the country against the next global slowdown.

Without sensible engagement this capital seems destined to be deployed offshore: note this story from ABC News on 4 November:

“Bemoaning a lack of big infrastructure projects in Australia, the industry superannuation owned IFM Investors fund has looked overseas to seal a $15 billion deal to buy US oil pipeline business Buckeye Partners.

IFM is owned by 27 industry superannuation funds and manages more than $152 billion for about 130 million super fund members.”