This month two reports were released in Canberra.
The first was an important analysis of economic data, the 2014 national accounts issued by the Australian Bureau of Statistics.
What Australia’s national accounts show is an economy in deep trouble. As David Harvey reminds us, to function satisfactorily it is necessary for capitalist economies to achieve a minimum 3% compound growth forever.
Economic growth in Australia last year was 2.5%, its average for the past six years. This is the longest period of stagnation since the depression years of the 1930s. In the last quarter of 2014, when growth is normally expected to increase due to rising consumer spending in the Christmas period, the economy grew at just 0.5%.
As a result, the official unemployment rate seems certain to rise beyond the present 6.5%. Reserve Bank board member John Edwards said: “There is no doubt that this rate of 2.5% is below the rate that is necessary to prevent a rise in unemployment, we’ve got to get it to 3%.”
Total wage income, which rises automatically with increases in the working population, grew by only 2.2% in 2014. Average wage increases were just 1% last year after falling 0.5% in the final quarter.
The end of the squandered mining boom, and the fall in mining company profits that accompanied it, led to a 4.4% decrease in overall company profits.
The ratio of exports to imports — Australia’s terms of trade — fell almost 11% last year, which is 25% lower than their peak in September 2011. With China revising its 2015 growth rate down to 7%, its lowest growth since 1990, the terms of trade are set to weaken further this year, putting greater pressure on employment prospects.
To stimulate the stagnating economy, the Reserve Bank cut interest rates to 2.25% last month. On past trends of its use of the expression that the rate was “appropriate for the time being” the Reserve Bank is almost guaranteed to cut rates further. An analysis of the terminology shows that in the 67 post-meeting reports since 2008-9 the expression “for the time being” has been used on eight occasions and each time a further rate cut has occurred within two months.
Yet in a speech in Sydney on March 5, the deputy governor of the Reserve Bank, Philip Lowe, said interest rate cuts are not working to stimulate the economy in the way they did before the onset of the global financial crisis in 2008.
The European Central Bank (ECB) has the same problem. The ECB is now charging a historic low interest rate of 0.05% on its regular bank loans, and its deposit rate is -0.2%, which means that the banks have to pay money to keep excess cash at the central banks.
With these extraordinary measures failing to stimulate the economy, from March 9, the ECB began a program of quantitative easing — effectively printing money to stimulate the economy. From March 9 to September next year the ECB will spend US$1.4 trillion buying government bonds. This follows the decision in the US to end its US$4.5 trillion quantitative easing program last October.
The effect of these programs around the world has been to create asset bubbles in the housing and share markets without rejuvenating the economies of the US, the Eurozone or Japan. With business investment falling by more than 9% last year, perhaps what the deputy governor of the Reserve Bank has in mind for the Australian economy is Keynesian deficit spending?
The other report that followed from the national accounts was the fourth Intergenerational Report (IGR), released by Treasurer Joe Hockey.
These reports come from legislation enacted by the John Howard government with the Charter of Budget Honesty Act in 1998. They are supposed to provide an assessment of the implications of demographic changes for economic growth, as well as assessing the financial implications of continuing current policies and trends over the coming four decades.
The first of these reports was released in 2002 but the 2012 report was brought forward to 2010 by then-Treasurer Wayne Swan. From this point, if not before, the reports are best seen as party political propaganda.
The latest report supports this view. The present labour underutilisation rate — the total of unemployment and underemployment — is about 16%. Yet the IGR assumes a steady 5% unemployment rate for the next 40 years.
The report is also in breach of the act, which provides for an assessment of the long-term sustainability of “current government policies”. The current government policy on age pensions, which is before the Senate, changes the index of the pension from average male weekly earnings to the CPI from 2017. This would reduce the age pension from 28% of average male weekly earnings to 16% over the next four decades.
The level of age pension has not been below 20% of average earnings since 1965. But the IGR would have us believe that the change in the index would return to average male weekly earnings in 2028.
This can be guaranteed to have about the same accuracy as picking the 2028 Melbourne Cup winner tomorrow.
Extrapolating into the future the economic growth realised in previous decades can tell us something. When the authors of Limits to Growth did this in 1972 they predicted ecological and economic collapse in the 21st century if overuse of resources continued unchecked.
Although the analysis was much criticised at the time, a further study by the CSIRO in 2008, which compared what had actually occurred since 1978 against the predictions made in 1972, found that the two in fact lined up and would continue to do so without a marked reduction in consumption.
Any report on the likely state of things in 40 years’ time that isn’t seen through the prism of climate change isn’t worth the paper it’s printed on.