Melbourne Institute Pathways to Growth: Facing the Headwinds Chris Richardson

3 July 2014

An economy in transition – 1

40

50

60

70

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90

100

110

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024

Terms of trade - index: 2011-12 = 100

An economy in transition – 2

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5

10

15

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1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024

Terms of trade - index: 2011-12 = 100, on LH axis

Quarterly engineering construction spending (in today's dollars, on RH axis)

$ billion

Nominal growth a useful indicator

-2%

0%

2%

4%

6%

8%

10%

12%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Nominal GDP growth

Living standards for Australia Pty Ltd: Productivity or bust

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1980s 1990s 2000s to 2013 Decade to 2023

Terms of trade Participation Productivity & other Productivity & other

Deloitte’s 25 reasons for optimism on growth

The ‘rivers of gold’ rolled in – and out

-50,000

0

50,000

100,000

150,000

200,000

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350,000

Budget 2000-01 Budget 2004-05 Budget 2008-09 Budget 2012-13

Effect of the economy on the Budget

$m

We spent for fun, then for defence against the GFC

-50,000

0

50,000

100,000

150,000

200,000

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Budget 2000-01 Budget 2004-05 Budget 2008-09 Budget 2012-13

Policy costs on taxes

Policy costs on expenses

Effect of the economy on the Budget

$m

We cut old taxes – and then raised new ones

-50,000

0

50,000

100,000

150,000

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400,000

Budget 2000-01 Budget 2004-05 Budget 2008-09 Budget 2012-13

Policy costs on expenses

Policy costs on taxes

Effect of the economy on the Budget

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Australia was the fastest growing rich Western nation in the past decade, and we forecast it to retain the title in the next decade. Yet major challenges and opportunities lie ahead: • Demographics boosted our living standards in the 1970s and 80s,

followed by productivity in the 90s and a surge in the terms of trade last decade: But that bunch now look more problematic, with both ageing and commodity prices likely to be headwinds.

• Asia’s boom is changing shape: That will open up growth options in gas, agribusiness, tourism and education, as well as rolled gold opportunities in those businesses linked to health and ageing.

• The Budget isn’t in crisis, but it is in need of much more repair than many realise: A temporary boom was spent on permanent promises. Politicians on both sides of the aisle need to lead the repair job – and those outside parliament need to lend a hand.

The summary …

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