Craig’s List: Emerson’s 13 Reasons for Optimism

Craig Emerson lists thirteen reasons on why he is optimistic about Australia’s growth prospects. Among these is an improvement in national savings and increased investment.

As has always been the case, investment is the key to GDP growth.  And savings are the prerequisite for investment.

Of course, investment may not lead to economic growth if it is misdirected as was the case in Communist countries.   Regulations may also dilute the impact of investment by requiring superfluous additional expenditures or, as was the case in Australia with tariff protection, bringing a misallocation in spending.

There are many such qualifications about the potency of investment but, nonetheless, it and hence saving is the dominant source of higher living standards.

High savings rates differentiate the rapidly growing developing country economies from those of the economically languishing developed world.  Compared to levels of around 20 per cent in developed economies (25 per cent inAustralia) the savings share of GDP in China is a colossal 50 per cent – rather more than the 40 plus per cent registered in Japan and Singapore at the height of their growth surges.India also has a high savings rate and might be able to use its savings more efficiently than China as a result of having a lower share of investment directed into state controlled enterprises, which, even though corporatized, are likely to have efficiency deficiencies.

Even though some of the savings of both Indians and Chinese are directed to covering budget deficits in the developed world, the expanded investment these savings permit means there is little doubt that their growth will be maintained for many years.

This propitious basis for continued expansion in the rapidly growing developing country behemoths is further enhanced by their low levels of government spending, which is overwhelmingly redistributive rather growth-inducing. The size of government within GDP remains well under 30 per cent inChinaandIndiacompared with 35-40 per cent in the US, Japan (though rising rapidly) andAustralia.  Europe is commonly over 45 per cent withFranceat 56 per cent.

Borrowing levels exacerbate the negative effects of budget deficits and are 8-10 per cent of GDP in the US, Greece, Spain and the UK. India also has a budget deficit in this league. Australia’s budget deficit remains more manageable, while China glows with a deficit of only one per cent of GDP (and the Germans are even more prudent).

Finally there is debt.   The importance of this is sometimes dismissed by those observing that British sovereign debt in 1815 was 250 per cent of GDP, a level approached only byJapan today.  But the level of non-sovereign debt 200 years ago was relatively low compared with today.  Moreover, contrary to current policies, the British approach two centuries ago was to combat indebtedness by rigorous expenditure trimming.

Today, among the affluent nations, Australia is reasonably well placed.  As well as having a  budget deficit and debt levels lower than in other countries, growth remains positive a result of us being a raw material supplying appendage of the booming Chinese and Indian economies.  Craig Emerson recognizes this in his thirteen reasons for optimism, but is unable to understand that our regulatory and tax regimes mean we have failed to fully exploit our advantageous situation and that we are precariously placed as a preferred supplier in a world of many rivals.

Moreover, Wayne Swan has now had to acknowledge that we are now in budget deficit territory. In addition to the profligate spending the government has already unleashed there is a stockpile of measures being incubated   These include the vast new expenditures lined up on disability pensions and the Gonski education splurge.  Whether or not these expenditure increases are warranted, our capacity to pay for them is being undermined by productivity sapping carbon taxes and renewable energy standards, and resource rent taxes that hit at exploration, which is the R&D of mining.  Added to these are measures that reduce labour market flexibility including laws that are more forgiving of union thuggery and reintroduce mandatory penalty rates.

The capital, largely in the form of new mining investments, that we have built up to supply demand in the successful economies to our north allowed us to ride out the post 2007 economic storms.  We should have done better but government policies are now creating conditions that will further undermine the enterprises that have brought the modest success we have enjoyed this past four years.

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10 Responses to Craig’s List: Emerson’s 13 Reasons for Optimism

  1. Mic of TOLL

    Craig missed one (Reasons for optimism). Labor will soon be booted out. So far our economy has faired well despite Labor not because of them. In productivity terms Australia is 40% more expensive than the US and 60% less productive. What are we going to do to address this – give more power to the Unions?

  2. Up The Workers!

    Quite apart from the 13 reasons for optimism enumerated by Emo, I’m sure our crippling deficit, massive borrowings, job losses, and A.L.P.-closed industries, could all be overcome if Emo releases the video clip of himself singing ‘Skyhooks’ “Horror Movies” outside Parliament House in Canberra.

    Emo is a much better pop singer than he is a Federal Cabinet Minister, A.L.P. intellectual or former Prime Ministerial boyfriend.

  3. Warwick Hughes

    Gidday Alan – you say – “…our capacity to pay for them is being undermined by productivity sapping carbon taxes and renewable energy standards, and resource rent taxes that hit at exploration, which is the R&D of mining.”

    In addition there is an increasing tangle of red & green tape that mineral explorers are forced to comply with. Much of this looks to me pointless other than some ill conceived sop to green pressure. As an example. You plan to drill a few holes in ordinary farming country clapped out by 150 years of ag – before that you can prepare a flora & fauna statement which requires engaging a consultant – all dollars that are diverted from mineral exploration. No benefits for the nation that I can see.

  4. Dave

    “investment is the key to GDP growth is investment” No, really? Thanks Fixed AJM

  5. John Cowperthwaite

    The drive to saving is so markedly different across cultures….
    Is this something that Australians used to do more of?
    The urge to consume now and use credit to it’s maximum always seems to me to be way to enslave yourself to others ambitions.
    An anecdote- some migrants in the US were asked if they could estimate how much they saved each week.This occurred during the time when our national savings rate was in negative territory.
    Confused they asked what the enquirer was after – they know how much they spent – this was their important parameter not not how much they saved.
    We get by on around 20% of our income they relied.Everything else is saved.
    No prizes for guessing which country they came from.

  6. H B Bear

    Did the Legover Man mention the No 1 reason for optimism in 2013 – the Federal election?

  7. Jannie

    British sovreign debt in 1815 was high at 250% of GDP, because Britain had financed Europe’s struggle against Napoleon. But the peace dividend was massive, the industrial revolution and opportunities for domestic and imperial economic growth meant they could service and outgrow their debt for almost 100 uninterupted years.

    Western debt cannot be repaid by growing the farm or business anymore. Growth is a dirty word in ‘Green economics’, but debt is welcomed, even for current consumption. They seem to plan on disappearing the debt with money printing inflation, but as the man said, theres a lot of ruin in a nation.

  8. m0nty

    Nice headline. I like a good pun.

    I have been reading in various places the prediction that it is going to be a bumper year for the Australian economy, including in the Oz itself. Not a whole lot of evidentiary justification is offered for this, which indicates that it’s probably based on informal briefings from independent analysts – i.e. ringing up and/or lunching with someone at UBS. If it was a government leak, you’d see far more detail.

    Not a whole lot of support about the place for Sinclair’s infamous prediction of stagflation.

  9. Mick, whilst there is some short term relief for the economy in the hope that Labor will lose the next Federal election, just as surely as night follows day, the Libs will do jack shit to repair the damage done. Then the Left will get back in in a couple of terms and continue their war against the middle classes.
    Until Australia wakes up to the fact that Labor is the enemy, and start treating them as such, the ratcheting to poverty will not stop.

  10. amcoz

    WS, I fear you maybe right but I hope you’re wrong because if I live long enough to see those assholes return to power I’m sure I’ll do as Socrates did a few mill years ago as I couldn’t bear living through a third nightmare, GW’s being the first.

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