Australia's Economic Challenges: Government Support, Inflation, and Productivity

The pandemic changed a lot of things in Australia – and around the world – for better and worse. Two legacies that stand out to me from an economist’s perspective are an increased expectation on how governments should support us during troubled times, as well as an increased focus on domestic economic security, both with consequences for inflation and interest rates.

The shortage of protective equipment, rapid tests and toilet paper during the early pandemic will not be forgotten easily, and the recent jump in fuel prices, and especially images of some pumps running dry, brought back some of those painful memories.

Cost-of-living pressures – not just from the fuel crisis – remain, unsurprisingly, the number one concern of households. Businesses, too, are weary of supply chain disruptions and sticky inflation. Over the past five years, the only time headline inflation has dipped into the Reserve Bank’s target zone (of 2% to 3%) has been when governments have provided temporary support for energy prices, following Russia’s invasion of Ukraine and, more recently, fuel prices.

In May and June this year, in response to the fuel crisis, the Australian Bureau of Statistics brought back a survey of business conditions and sentiment. This survey was introduced early in the Covid pandemic to provide more timely information on how the nation’s businesses were handling the crisis. Now, as then, there are some very useful insights.

Almost three-quarters of businesses reported that higher fuel prices had a negative impact on their business. In May, 47% of businesses absorbed those rising costs and 44% in June. Presumably this is because they considered the price rises to be temporary and/or that consumer demand was not strong enough to allow for increases. However, in May, 12% did pass on higher prices and in June that rose to 15%. Not great news for inflation, but it could have been worse.

Perhaps of greater concern, 9% of businesses reported reducing their workforce in May in direct response to higher fuel prices, and 8% in June. Businesses in accommodation and food services reported a whopping 28% reduction in their workforce (33% in May). And 15% of businesses reported delaying or cancelling investment plans in June. The recent fall in global oil prices is indeed welcome.

Given the tough times we are facing from the collective pressures of higher prices, higher interest rates and slowing demand, it’s little wonder governments are under pressure to provide more support.

But just what is reasonable for us to ask of our governments?

Use of the word “polycrisis” has surged over the last couple of years. Geopolitical uncertainty, rising inflation and falling productivity, the climate crisis, accelerating biodiversity loss and rising inequality flood our headlines and social media. We can feel the collective pressure from these colliding events, and we want someone to fix it for us. But we want them to do so quickly and in a cost- and pain-free way. We are looking for magic bullets that, sadly, don’t exist.

In response to the New South Wales budget, handed down on 23 June, one small business owner welcomed cost-of-living relief handed down by the treasurer in the form of toll caps and registration changes, but lamented it wouldn’t make a huge difference. “It won’t make you a millionaire,” he said. But is there anyone who genuinely thinks that is the role of government? Perhaps. It seems to me those who often want government to spend less and “get out of the way” do so selectively. Heaven forbid we should increase the rate of jobseeker so that people are not living in poverty, especially if it means losing some of the tax perks on a $10m super balance!

The question for government is not only one of cost and trying to rein in deficits that show no sign of ending any time soon. It is also a case of where governments should intervene. Which brings us to the concept of “economic security”.

Economic security, typically, entails producing goods more expensively at home because we want to avoid global supply chain vulnerabilities. Recent world events have given greater urgency to that idea.

But that does not mean governments should – or even can – solve all our problems. New research from leading independent thinktank e61 Institute shows a large productivity gap exists between Australian and US firms operating in Australia, notably in the manufacturing and information sectors. e61 attributed the gap to US firms’ investing more in intellectual property and in being able to employ that IP more successfully. For all of businesses’ claims that red tape or tax rates are making their lives hard, the evidence suggests that much potential improvement in business performance in fact lies within their own hands.

Governments have a clear role to play in shaping our lives for the better, particularly when crises erupt, and in helping those most in need. But we must stop expecting governments to solve every problem. The entrepreneurial spirit in Australia needs to get off life support if we are to advance as a nation.