Adjusting (or not) to a new sort of economic fray

In a couple of weeks Australia and New Zealand will publish their government budgets. Each has some learning for the other.

It is now ingrained in the New Zealand psyche that Australia is far richer and so a far better place to make a living. In the 12 months to March 51,273 emigrated there.

Wages and salaries are far higher for the same work. Australia has vast quantities of stuff it can dig up and ship to China and other voracious “emerging” economies. The stuff we export mostly comes off grass, not from holes in the ground — vanilla to Australia’s absinthe.

But an edge has crept into Australians’ usually cocky chatter — and not just about cricket.

That edge is partly due to the skew between Western Australia — the “Saudi Arabia of minerals” — and the rest. A chart in The Australian newspaper last week showed Western Australia’s general economic growth far ahead of Queensland’s, even farther above that of New South Wales, Victoria and South Australia and miles above Tasmania’s.

The mining boom plus soaring prices drove up the exchange rate, which exposed the eastern states’ relatively low productivity growth.

Australia has not squirrelled away a swag of the proceeds nor redistributed enough across the country. It has lived up to the absinthe limit. What if China and Co slow and/or find cheaper sources? Both are distinctly in prospect, even, some say, under way.

Also in The Australian last week veteran commentator Paul Kelly drew on analysis by an eminence grise of Australian economics, Ross Garnaut, to suggest an upcoming “pivot” into recession.

Kelly quoted Garnaut: “If we continue with the current economic policy settings and current mentality, then a recession is very likely and the economy will kick along the bottom for a long while.” To deal with that would need “broad-based restraint, shared sacrifice across the board and an emphasis on reforms to deliver productivity”.

Add in Treasurer Wayne Swan’s wail last week returning from the do-little G20 summit that Australia’s 0.4 per cent inflation in the March quarter (same as here) was evidence of “deflation”. Really? Australian inflation in the year to March was 2.5 per cent versus our 0.9 per cent and in both cases domestic inflation was much higher than the overall figure. No one in authority here is talking “deflation”. Rather, the talk is of low interest rates.

Swan was excusing a deficit budget on May 14 instead of the surplus he boasted last year. That is despite a desperate hunt in recent months for things to cut and some number-shuffling. The surplus is postponed to 2014-15. And the forward track on present settings is towards a deficit of 4 per cent of GDP by 2023, the Grattan Institute has calculated.

The forward track Bill English will deliver on May 16 in his vanilla budget is toward a significant surplus from 2016 on. He starts with net debt around 24 per cent of GDP. Australia’s federal-plus-states’ net debt is around 22 per cent of GDP. Australia didn’t have an earthquake costing its government 7 per cent of GDP.

English’s forward fiscal track is one reason why Australian business leaders chorus that they would like New Zealand’s government (even over their Liberal-National alternative). Another reason is the reduction here of wage protections, of which there was another dose on Friday. The government here costs less. Workers here cost less.

Go back to Garnaut’s emphasis on “sacrifice”. That big word was much in vogue in speeches on Anzac Day and on war’s glories and horrors. It is too big a word for English’s fiscal tourniquet, painful though the squeeze is for many. But there is something nevertheless in the Anzac analogy.

The generals a century ago found themselves fighting a new sort of war which the old battle manuals did not fit. They launched stalemated frontal assaults, killing 16 million. Troops were sacrificed to old thinking.

The central banks and governments of Europe, the United States, Britain and Japan battling for “recovery” in the stalemated post-GFC global economy are like those generals. The central banks print money furiously. Governments swing between “austerity” and “stimulus” while behind the front economists fight an inconclusive theoretical war on which is right.

As in 1914, today’s economic fray is different. Textbook tactics aren’t working in a revamped theatre of operations. There is “recovery” in big firms’ profits and so in the sharemarket but not in jobs and wages.

The big new idea for the ground war in 1914-18 was the tank but generals were slow to value and use it. That came in the 1939-45 war. We have yet to see the big new idea which can rewrite the economic policy battle manual.

So English and Swan are stuck with the old manual. Still, English might usefully apply the Australian lesson to the dairy boom and Swan might usefully study English’s tourniquet. Meantime, New Zealand’s budget may be bland but vanilla’s a better taste than Australia’s coming dose of bitters.