The Economist Magazine on 9 September 2000 carried a survey of Australia under the Heading:

Miracle Cure: How Australia won Economic Success

“TRY as you may, you won’t find anyone to say anything uncomplimentary about the Australian economy.  Politicians of all stripes, officials, businessmen, bankers, academics – every one of them will tell you the economy is in tip-top form.  And not just Australians, either.  The OECD’s annual economic survey of Australia, published earlier this year, was equally full of praise: “…Exceeded most expectations”, “…Based on a judicious mix of sound macroeconomic and structural policies”.  A recent analysis of the Australian economy by Charles Bean, the Bank of England’s new chief economist, joined the chorus: “…A mixture of good institutional design and wise decision-making.”  And when Paul Krugman, a well-known American economist, visited Australia a couple of years ago, he dubbed it “a miracle economy” for emerging from the Asian economic crisis virtually unscathed.”

Paul Krugman, a Nobel Laureate, is the Economist who coined the expression: “Productivity isn’t everything, but in the long run, it’s almost everything” which is the title for our panel discussion later today. His description of Australia as “a miracle economy” was made in 1998 during the Asian Financial crisis.

In the 1980s and 1990s, the “Asian Tigers” Hong Kong, Taiwan, Singapore, South Korea and other countries in South-East Asia, attracted massive international investor interest on the back of high and sustained economic growth, high savings rates, export-led development, and quite a dose of Government direction and intervention.

There were many who predicted that Australia, with outmoded free-market “ideology” held by people like me, would be left in the wake of the stellar performance of these economies. Observing the rise of the Asian economies in the 1980s the region’s senior Statesman Lee Kuan Yew warned Australia risked becoming “the poor white trash of Asia”.

But in 1997, as financial contagion swept through south east Asia, Australia (with a significant devaluation) sailed through with very little disruption. Regional Governments fell and their economies were rocked forcing them to apply for emergency bailouts from the IMF and World Bank. Australia joined these Multilateral Agencies as a Sovereign lender of last resort. Australia proved the strong man in Asia. This truly looked like a miracle even to me!

Because it was such a respected regional and international economic leader at the time, Australia became a prime mover in the establishment of the G-20 group of Finance Ministers and Central Bankers in 1998

However, the Economist was gilding the lily significantly to say in 2000 that politicians of all stripes would tell you the economy was in tip top form. Some people mistakenly think we had a wonderful era of bipartisanship at the time. Not so. In fact in September 2000, we were in the first quarter of the introduction of GST. Labor leader Kim Beazley claimed it would induce recession and surf him back into office. Once there he promised he would “Rollback” the GST.

When the GST legislation passed through the House of Representatives, Kevin Rudd, a future Labor Prime Minister told the House (30 June 1999):

“When the history of this Parliament, this nation and this century is written, 30 June 1999, will be recorded as a day of fundamental injustice – an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians.  It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up.”

In 2006 Rudd “zigged” describing Australia under the Coalition as ‘Brutopia”, “unrestrained market capitalism that sweeps all before it”. On the eve of the 2007 election he “zagged”, “I am” he declared “an economic conservative” and he pledged to stop “reckless [Government] spending”. A little over a year later he “zigged” again and took reckless government spending to new and unimagined levels. He justified this with a call to arms in The Monthly Newspaper in February 2009 “…the challenge is to save capitalism from itself”, he said “…the current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus”.

There was no bipartisanship for economic reform in the late 1990s and early 2000s. Maybe there was a little more in the late 1980s. By 2009, Labor scorned market-oriented policy. We were at a time in human history Rudd said which was “a turning point between one epoch and the next” (The Monthly cited above)

The Coalition had a go at restoring things after its election in 2013, but the failure of the 2014 Budget ended any hope of restoring the fiscal position. By 2020, in response to Covid the Coalition went for a full-throated spending mission of its own. One can understand excess at a time of challenge. But on neither occasion-after the challenge of 2009 or the Covid challenge of 2020-did Government get around to unwinding the excess. No serious concerted attempt was made to get us back to where we were pre-crisis. We ratcheted up debt in 2009, and we ratcheted it up again with Covid. And we did this all through a prolonged boom in the Terms of Trade.

I will put up my hand for economic liberalism. I supported it when I was in Government. I support it today. It has lifted hundreds of millions out of poverty in our generation. But economic liberalism is certainly not the consensus in Washington today. I’m not sure it ever was. And it is certainly not the consensus in Australia today.

Australia survived the introduction of GST, (some significant timing issues lead to one negative quarter), and the economy never looked back. By 2004 after seven cash surplus Budgets, the Commonwealth Government was debt free in net terms. No other comparable western country got anywhere near that, not the US, the UK, the Europeans, the Japanese.

The Financial Times Editorial had this to say on 1 August 2006: –

Financial Times FT.com

Lucky Australia

“What can you say about an economy that is a textbook case of good policies, well executed?  That is the challenge facing the authors of the latest survey of Australia by the Organisation for Economic Co-operation and Development, which struggles to find any serious blemishes in the country’s recent performance.  Though the OECD identifies some causes for concern, its report card is mostly straight “A”s.

The list of achievements is impressive.  After years of sustained growth, Australia enjoys higher living standards than all the Group of Seven economies except the US.  Unemployment is at a 30-year low; inflation, though on the rise, is still under control; the federal budget is solidly in surplus and net government debt has been eliminated.  While the current account deficit has swollen, it is due entirely to the private, not public, sector.

………………..

The biggest potential threats to Australia’s winning streak are political rather than economic.  One is the perennial difficulty of achieving the federal-state co-operation essential to improving infrastructure and social services.  Another is that the government’s authority might be damaged by continuing frictions between John Howard, the prime minister, and Peter Costello, the long-serving treasurer, who deserves much of the credit for the economy’s performance. 

For the moment, though, Australia continues to live up to its much over-used sobriquet, the lucky country.  But as the OECD observes, a big reason for its good fortune is that it has been adept at making its own luck.”

Copyright The Financial Times Limited 2006

For nearly 12 years I sat on the Ministerial body that oversees the International Monetary Fund (IMF) first known as the Interim Committee until 1999 when it became known as the IMFC (International Monetary and Financial Committee). It met twice a year usually in Washington. Australia was sought out for advice at these IMF Meetings because we had a lot of reform experience which others thought they could learn from.

We had done the hard yards. We had opened our market to international trade and reduced tariff barriers. We had reformed our tax system. We were opening up labour markets by promoting flexibility with individual contracts. Our competition policy had wound down orderly marketing schemes. We had privatised significant Government businesses like the Commonwealth Bank and Telstra. We had soundly regulated and opened up financial markets. But most of all we were running surplus cash Budgets, and we had no net debt. In fact, we had net negative debt (cash on hand) which we locked up in a Future Fund. This made us exceptional. We had experience to share. The results were in. On the discussion of economic policy, we were often asked to lead with ‘the Australian experience”.

In those days the G-7 was attempting to nudge Russia towards economic liberalism. So, the G-7 was, for a while, the G-8. In June 2006 I was asked-the first time ever for an Australian-to present to the G-8 Finance Ministers who were meeting in St Petersburg. The Europeans wanted to hear about public finance management under our Charter of Budget Honesty and debt reduction. The Russians were looking for some advice on how to broaden their indirect tax base. We were all hoping to encourage Russia to evolve towards a free-market economy. This event sticks in my mind because it is a long way to go from Australia to St Petersburg for a weekend. I had a lot of time to think about my presentation.  It was, I thought, persuasive. But obviously, not persuasive enough! Russia has not embraced the market economy.

Nevertheless, I am glad I went. At least I saw St. Petersburg.  In the fallout from the Ukraine war, I am now banned from entering Russia.

Australian economic policy in those days had a coherent and consistent direction. It was to promote open flexible markets- trading markets, product markets, labour markets, financial markets because this would promote productivity and lift living standards. We could do this within a clearly articulated Budget policy that would keep the tax burden low and allow us to repay debt. This would strengthen the Nation’s Balance Sheet to meet future challenges.

And it did. It allowed us to weather the financial crisis of 2008. The Asian crisis of 1998 was a Sovereign financial crisis. The crisis of 2008 was a banking led financial crisis. In that period not one of our Banks failed. In fact, not one suffered an annual loss. Not one suffered a quarterly loss. They came through that period the most profitable and well capitalised banks in the world. They were well regulated, well capitalised and profitable in a productive growing economy.

Our current Treasurer Dr Chalmers has had his own go at repudiating what he calls neo-liberalism. In 2023 he published his credo also in The Monthly calling for a system of ‘values based capitalism”. It’s not entirely clear what this means in the real world. One thing it clearly involves is higher taxes and higher Government spending. It certainly means lower productivity growth and higher Government debt.

This is not a new model. It is a very old one. Many other countries have been doing it a lot longer than us. They were doing it all through the 1990s and 2000s when we decisively turned away from it. As he doesn’t like open markets it would be interesting to know which of the developed countries Dr. Chalmers admires as a template for the kind of Australia he wants. We could measure its results.

How would we now share the “Australian experience” in the councils of the international economy? Would Ministers talk about their success in lifting the tax burden and increasing spending? Do they aspire to be world leaders on such policy? One thing the Europeans know all about is how to tax and spend. They have been at it for decades. We used to throw off at Eurosclerosis. Now we have caught it. There is nothing healthy or original about that.

How would we now share our experience with productivity? Our productivity growth has spiralled downwards particularly in this era of ‘values based capitalism”. Our growth used to exceed the countries of the G-7 and OECD but now trails. Our once non-existent net debt has grown well over ½ Trillion dollars. All our markets- financial, product, labour-are significantly more regulated.

Of course, the push-back against markets and economic liberalism is now not only on the Labor and socialist side of the debate. The Trump Administration is re-imposing tariffs as a negotiating tactic on all sorts of trade and non-trade issues. The Administration has ramped up Government direction of business with companies like Intel, Tik-Tok, in the pharmaceutical and many other industries. Mr Farage in the UK seems to be attracted to these kinds of policies. In Australia, Andrew Hastie MP is calling for the return of car-assembly plants.

The U.S. might be big enough to declare a unilateral trade war and continue as the engine of world growth. I don’t think the UK will do well without the innovation and dynamism that free markets bring. I know Australia won’t.

In Australia, we came through an enormous era of prosperity based on sequenced and sustained reforms. At different times people on both sides of politics made contributions. There appears to be little appetite for reform along these lines today. As our appetite has diminished so too our robustness has diminished.

There is nothing about our economic performance today that is exceptional.

A massive boost in the Terms of Trade has so far moderated the decline in our living standards. And our incredibly strong Balance Sheet cushioned the savage rundown of our fiscal position. We have taken on more than ½ trillion of Commonwealth net debt and remember that is after we net off the Future Fund which is now the only significant Commonwealth Financial asset. It too is a legacy of the reforms of the early 2000s.

We are running off and running down the legacy of all the hard work done a quarter of a century ago.

Crises are always threatening in different ways and on a regular basis. As a middle of the pack country that lacks economic ambition, we will be much more exposed to future external events than we used to be.