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Seven reasons to smile about Australia's future

Jessica Irvine

If you have survived this far into 2016 without fundamentally questioning some of your core beliefs, and generally worrying about the direction in which the world is heading, you're definitely doing it wrong.

It has been, to put it mildly, an exceptional year.

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US Federal Reserve hikes interest rates

Federal Reserve Chief Janet Yellen announces the Fed has raised interest rates for only the second time in a decade, in response to a solid US economy and expectations of higher inflation.

From an economic viewpoint, there's been the first step in the unravelling of the European Union with Brexit and building fears about a China debt crisis. At home, we've lived through the slowest wage growth on record, seen glimpses of both deflation and recession and watched as record low interest rates feed a potential property price bubble.

Even the most faithful proponents of capitalism as the primary vehicle for wealth creation and rising living standards must question if economic growth has delivered for all, if jobs growth is delivering secure employment, if rapid population growth has been matched by adequate infrastructure and if wealth and life opportunities have been concentrated in the hands of a few.

And what hope does 2017 offer? Only 345 days of a Donald Trump presidency.

Trump's recipe of anti-globalisation, anti-migration and anti-trade policies runs counter to the foundations of the success of the Australian economy.

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But it is these very qualities that will stand us in good stead in the years to come, according to a paper by former Reserve Bank board member, now Lowy Institute fellow, John Edwards, titled How to be exceptional: Australia in the slowing global economy.

It's at times like these that we need a clear-headed vision of who we are as a nation and what sets us apart. Despite a tendency for self-flagellating as we may be, Australia is a successful, open economy in its 26th year of continuous expansion. Policies of trade liberalisation, anti-protectionism, selective migration have been key ingredients in that success. And – if we protect them – will continue to be, says Edwards.

"These respects in which we're exceptional, are precisely the ways that support our ability to keep globalising our economy. The respects in which we're distinctly Australian are also the respects in which we become capable of becoming international."

Reading Edward's thought-provoking and deeply reassuring paper throws up the following reasons for optimism.

First, despite the crazy elections, the real US economy is picking itself up off the floor. After a long recession, spare capacity is being used up, leading the US Federal Reserve to take the first step towards normalising ultra low interest rates last week. The US is one step back from the precipice.

Second, while growth in the world's second economic giant, China, has slowed, this is a needed, and desirable, step towards a more normal rate of growth. China has accumulated much debt, but it also has large foreign reserves and, unless the Chinese Communist Party is feeling particularly self-destructive, it will use them to stabilise any unwinding debt crisis.

Third, Australia's economic growth cycle is the longest on record, but it's not the best we've seen. Over the past 25 years, the economy has grown 123 per cent. Measured as GDP per capita, living standards have risen 61 per cent. But we've done better. In the 25 years following the end of World War II, the economy grew 230 per cent. Living standards rose 157 per cent. In an odd way, it is reassuring to know we can – and have – done better.

Fourth, we are not Americans. US citizens have seen no real increase in the median income for the past two decades. But in Australia, despite two decades of relentless economic restructuring, even the bottom fifth of households have seen a real increase of 60 per cent in their disposable income over the past. The rise in inequality in Australia has been more muted than elsewhere. A progressive tax system and targeted welfare system have shared the gains of prosperity across the income spectrum, even if the top 1 per cent has done particularly well.

Fifth, Australia's major political parties are still pro-immigration. It's true the resurrection of Pauline Hanson is an indicator of anti-migrant sentiment, but Australia's major political parties remain committed to selective immigration. "That's a very big difference. The Labor Party and the Liberal Party are not anti-immigration parties and they have variously presided over governments which have had vastly bigger migration programs than the United States and United Kingdom, compared to population. It's one of the enigmas of Australia."

Sixth, we are a young nation that is resisting the ageing process better than others. This is in no small part due to young, skilled immigrants. Australia's working age population is expected to grow 25 per cent by 2050, almost three times faster than the US. China's workforce, by contrast, will shrink by a third, along with declines in much of Europe and Japan. In the future, when ageing populations start a bidding war to attract skilled, young migrants, Australia is well placed.

Seventh, our government debt is low. The combined net debt position of all Australian governments – state and federal – is still only about 20 per cent of GDP, compared with 80 per cent in the United States. This gives us more fiscal space to move should we encounter another global shock.

Does this all sound a bit Pollyanna to you? While there is good grounds for optimism, Edwards insists success is not guaranteed.

"It might be concluded from this analysis that Australia has most of what it needs for a prosperous future, and that much of what it must do to secure that future it is already doing. I think that would be entirely the wrong conclusion to draw. It is true Australia has considerable strengths even in a slowing global economy. But many of Australia's strengths are fragile, under strain, and contested."

Edwards has a substantial to-do list for policy makers: spend more on childcare, increase the age pension entitlement age, close the federal deficit, spend more on education, maintain a skills-based migration program of the same size as recent years and ensure that rising wealth inequality does not translate into even bigger increases in inequality of income and life opportunities.

Have a good rest everyone, there is much work to do in 2017.

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