David Uren in an article The Australian today reports the IMF saying, “Investment to GDP ratios in many advanced economies are unlikely to recover to pre-crisis levels in the next five years.”
All those fiscal and money supply injections were supposed to inject new demand into economies and, the narrative goes this will reignite investor confidence, spur new investment and restore economic growth trajectories. And yet the investment share of OECD economies’ GDP remains at under 20 per cent compared to its pre-GFC level of 25 per cent.
Uren notes, “Christine Lagarde has foreshadowed that it will show modest improvement from the 3 per cent global growth rate achieved in 2013, but will emphasise that the recovery is too slow and that this will not change without concerted policy action by governments around the world.”
What on earth could she have in mind? Perhaps she figures that after five years of sprucking the need to reduce “austerity” and increase government spending so that budgets are widened is over. Perhaps she has finally recognised that government spending is almost always geared to consumption not investment that might improve supply. And that, even when it is geared to supply, it is hopelessly extravagant. The epitome of this is the NBN, a $41 billion white elephant which four years after being given the go-ahead and after spending $7 billion has more customer service people than customer connections. (Company doctor Switkowski says it can only be profitable if cost saving options by customers are foreclosed!).
But I digress.
Australia has dodged much of the OECD economic malaise because its primary industries are so highly integrated within the “Emerging Market” economies – read China and India – which have not followed the profligacy of government spending to foster consumer led growth. As a result, whereas the OECD economies have seen a plunge in their investment shares, the Emerging Economies have increased their own from a turn of the century 22 per cent to 31 per cent at present. This has been achieved by governments following the age-old path to prosperity: put in place policies that don’t discourage increased savings and allow these savings to be translated into commercial investments.
Instead Australia, like other OECD countries, has seen a rapid increase in social spending, exacerbated in our own case by wealth-neutralising penalties on investment with carbon taxes and mining taxes.
There has never been an alternative to prosperity other than having governments allow markets to operate with light regulation, curb their own spending, balance the budget and ensure that taxes are geared to spending rather than production. Rudd and Gillard took the opposite approach and in practice found support among the economic bureaucrats in the IMF, and OECD as well as the Australian Treasury. Abbott says he will do things differently and has some major tests ahead. Not the least of these is getting good economic advice.