The borrowing binge consuming our future

It’s a strength of the Bracks Government that it understood what its predecessor achieved and kept up its legacy. It’s a weakness of the Howard Government that it never understood what its predecessor achieved and let it rot.

The Kennett government’s great achievements were to put state finances on a sustainable basis and make Victoria a good place to do business. Bracks and Brumby have kept up the fiscal stringency to a fault. We can argue over how well they have looked after business, but they certainly have tried.

Hawke and Keating’s great achievements were to get us to accept tough, painful reforms to make Australia a good place to do business and to focus on generating exports and globally competitive manufacturing. Howard began with more reforms, but then switched to spending our money where it could best buy votes.

The Coalition never grasped the second part of the Hawke-Keating-Button legacy, which saw Australia’s share of world exports grow in the late ’80s and ’90s as if it were an Asian tiger. Between 1986 and 1997 export volumes grew by 10 per cent a year, and manufactured exports by 15 per cent a year, swelling almost fivefold. Had that continued, Australia would be running trade surpluses.

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AdvertisementBut the 1996 budget junked most of the policies by which Labor achieved this. Since 1997, export volumes have grown by just 4 per cent a year, manufactured exports by 5 per cent. The World Trade Organisation reports that Australia sold just 0.99 per cent of world exports in 2004, down from 1.18 per cent in 1996.

Why does this matter? Because we are living beyond our means. Since 1980, Australia as a nation has spent $105 for every $100 it has earned. To pay our way, we must increase exports faster than imports – not for one year, but for many.

That should have been this budget’s focus. Amid the war of words over its tax cuts and whether they will make the Reserve Bank lift interest rates (they won’t), its real failure is something else. It is a wasted opportunity to win back lost competitiveness.

The Government tells us only the good numbers: GDP has grown rapidly, unemployment has fallen, real wages and net household assets have risen. It tells us good policy has led to sustained growth in demand, lifting all boats.

But it ignores the dark side, without which all this would have been impossible. Australia began the ’80s with negligible foreign debt. Now it is one of the world’s largest debtor nations, owing a net $422 billion, more than half its output. And that debt is growing by $1 billion a week.

Debt can be good for you. Companies use debt to invest in projects that increase their future income. Good governments do the same: the Bolte government went heavily into debt to build Victoria’s infrastructure. Singapore and South Korea did so to make themselves export dynamos.

Households take on debt to buy or renovate homes, then repay it over time. We choose to limit consumption of other things so we can enjoy better housing. Our debts are born big, but shrink as they get older. If we can afford it, that’s fine.

But there is no similarity between these debts and Australia’s foreign debt. We are not borrowing to invest in income-creating projects but in housing. We are not paying back our debts; rather, each year we borrow more.

This budget did some good things. It removed the $300-million-a-year of “nuisance” tariffs Peter Costello imposed on manufacturers in 1996.

The Future Fund will lift savings and put money aside for future governments to pay debts we are running up now. The Government has yet to grasp the real nettle on welfare reform, but these changes should do more good than ill.

Labor’s amendments can only be token. It just wants us to know it stands for making the tax cuts fairer, investing more to train skilled workers, and changing the Future Fund to an infrastructure fund.

I agree with two of those priorities, but they suggest that Labor, too, still hasn’t got it.

Like Singapore and South Korea in the past, Australia needs to invest in its industry: its farmers, manufacturers and miners, who are competing in global markets against countries with much lower wages and/or far greater government support.

We cannot win global markets by undervaluing our currency, as China does. We cannot rebuild the tariff wall. But our governments can invest heavily in research and development to help industry create unique products that command premium prices.

We can put serious money and bite into the action agendas set up by John Moore as Industry Minister, which now lack money, teeth, or friends that matter. We can do far more to give business incentive to export and to produce here.

We don’t know how and when Australia’s borrowing binge will end. But end it will, and the top priority of any government should be to head off a bust by making our economic growth sustainable.

Both sides are failing that test.