Australia’s economy

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The Australian economy has been one of the OECD’s best performing economies, though it now faces some major challenges.

Australian income per head is among the highest in the OECD area, even after taking the cost of living into account. In recent years, living standards have been boosted by booming commodity prices and export volumes that have strengthened the Australian dollar’s buying power overseas and have prompted massive investment in new resource processing capacity, as witnessed by major deals with Japanese energy companies to build liquid natural gas processing plants. Unemployment is also relatively low.

Australia scores admirably in broader well-being indicators too, such as community life, civic engagement and health.

But the commodity boom has peaked. Prices in the key exports sectors of coal and iron ore have been heading down, weakening the terms of trade and the value of the Australian dollar. Furthermore, business investment is falling as the resource-sector investments approach completion. Australia will therefore have to adjust towards other economic activities, such as tourism and other services aimed at the Asia-Pacific region, spurred by a more competitive exchange rate.

Australia’s booming house prices in some urban areas raise concerns of a possible correction, as has happened in some other OECD economies. High house prices are a mixed blessing for the Australian economy. On the one hand they have been prompting new housing construction, a welcome offset to the shrinking resource sector, and making households more confident about spending. On the other hand, high prices raise questions of affordability and a risk of macroeconomic impacts if prices fall rapidly. Understandably, the central bank and the financial regulators are keeping a close eye on developments.

In sum, there is a risk that the adjustment towards non-resource sectors may not be smooth. Within the range of possible outcomes the most difficult scenarios are likely to be triggered by an external development. For instance, precipitous falls in commodity prices might prompt a very sharp exchange-rate depreciation, with investors consequently selling off Australian assets. This challenging situation might then be made worse if non-resource sectors do not move fast enough to take advantage of the favourable conditions created by the lower exchange rate.


Being prepared for such eventualities means having substantial fiscal fire power to withstand a downturn and to bolster recovery if needs be. Therefore, while Australia’s fiscal deficit and public debt compare favourably internationally, the government’s objective of a budget surplus by the early 2020s is welcome.

This policy will also help Australian policy makers address longer-term issues. Population ageing is one. Although it is not as rapid in Australia as in some other OECD countries, ensuring adequate retirement income and paying for ever expanding health care will be challenging.

Click to enlarge

Raising average living standards over the long run in Australia will require broad-based shifts up the productivity ladder, with policy helping through steady and determined efforts to bring about improved macroeconomic and structural conditions for business, better workforce skills, and further improvement to public-service efficiency.


However, raising average living standards is not sufficient to ensure inclusive growth. On inequality and relative poverty, Australia is middle ranking. In particular, despite several decades of policy attention, there are still wide socio-economic gaps between Australia’s indigenous peoples and the rest of the population. Indigenous Australians, about 3% of the population, have a life expectancy about 10 years lower than for the population as a whole, and have an employment rate more than 25 percentage points lower.

Australia faces several environmental challenges. Climate-change is of particular significance in Australia because of threats to plant and animal life, and risks to agricultural production. The authorities are addressing this and are finalising a replacement greenhouse-gas reduction mechanism for the repealed carbon tax. Furthermore, much of the population lives in urban or extensive suburban areas planned around car-based transport, resulting in traffic congestion, local air pollution and energy use. Australia also faces challenges in assuring water supply and mitigating risks from drought.

Australia is on the whole well equipped to deal with these problems. The institutional frameworks and processes for good policy making are well established, and pragmatic economic thinking usually drives policy reforms.

In many areas, Australia is at the leading edge of policy. On the jobs front, for instance, it was among the first to use incentive-based contracts with private-sector employment agencies to help the unemployed get back into work. But there are areas where Australia should improve. Take infrastructure, for instance. Shortfalls in transport infrastructure are prominent and, more broadly, ensuring efficient use of existing investments is a challenge. There is also room to improve education outcomes; for example, Australia’s score in OECD PISA test, which compares the performance of 15-year-old pupils internationally, is above the OECD average, but falls short of top-ranking countries.

The forthcoming OECD Economic Survey of Australia, assesses progress on these fronts. It summarises developments in monetary and fiscal policy and in structural reforms in several areas. In addition, the report takes an in-depth look at Australia’s tax and transfer system; for instance, it explores avenues for a more growth friendly tax mix. Roles and responsibilities in the federal system also come under the spotlight. In particular, spending in Australian states far exceeds revenues collected from their own tax bases, the difference being made up by large transfers from central government (some with conditions attached). This imbalance helps drive national agendas, but implies less autonomy for the states.

Australia’s economy has shone brightly in recent years. It was one of the very few OECD countries that escaped a recession in the global financial crisis of 2008-09 and has exploited its geographical position and mobilised resources to build trade and investment relations in Asia. With the right economic policies, Australians can look forward to an even brighter future in the years ahead.


References

OECD (2014, forthcoming), OECD Economic Surveys: Australia 2014, OECD Publishing, Paris
http://dx.doi.org/10.1787/eco_surveys-aus-2014-en.

Visit also www.oecd.org/australia.

For more information on the OECD’s Programme for International Student Assessment (PISA), visit
www.oecd.org/pisa.


© OECD Observer No 300, Q3 2014

See also:

G20 Brisbane 2014

Australia: Brisbane 2014 special




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