As Australia emerges from a turbulent economic landscape shaped by the pandemic and geopolitical tensions, the nation finds itself at a pivotal crossroads. Economists have recently noted a silver lining: inflation appears to have moderated, offering a glimmer of hope. Yet beneath this seemingly positive development lies a complex web of structural economic challenges that the re-elected Labor government must now confront.
Independent economist Saul Eslake highlights the factors that contributed to the earlier inflation surge, notably the war in Ukraine and the massive fiscal stimulus rolled out during the pandemic, which involved printing substantial amounts of currency. “All of those things are now subsiding,” he asserts, noting that both “underlying” and “headline” inflation are now back within target ranges. This suggests that while inflation may no longer be the immediate threat it once was, the broader economic picture is still troubling.
John Humphreys, chief economist at the Australian Taxpayers’ Alliance, emphasizes that the sources of inflation were not merely external but also driven by domestic policies from the Reserve Bank of Australia and the government. He cautions that despite inflation remaining under control, the cost-of-living crisis persists due to stagnant economic growth and unaffordable housing. “Unless there is a sudden change in policy,” he warns, “economic growth remains stagnant, and housing is unaffordable.” This sentiment underscores a significant paradox: while inflation moderates, the pressures on everyday Australians continue to mount.
A critical issue that economists are increasingly focusing on is stagnant productivity. According to Humphreys, productivity levels have stagnated at the same level as eight years ago, which he attributes to a moribund economy. He argues that superficial policy measures are simply masking deeper issues, with long-term reform sacrificed for short-term political gains. “Australia desperately needs significant tax cuts, less regulation on small business, and cheaper energy prices if we want to kick-start the economy,” he advocates.
This call for reform is echoed by Gigi Foster, a professor of economics at UNSW, who voices concern that the Labor government’s re-election might embolden it to pursue more interventionist policies rather than the necessary structural changes. “The real question,” she posits, “is whether Labor will muddle through with uninspiring policy that only does minor damage, or whether they interpret the election results as a mandate to drive up tax and regulation even further, which will bring us closer to economic ruin.”
Compounding these economic challenges is the ongoing issue of business closures, which Foster links to a trifecta of weak demand, over-regulation, and labor market difficulties. “The government can most immediately address the first two,” she notes, emphasizing that a thriving business environment is crucial for economic rejuvenation. Furthermore, she highlights a troubling trend of workforce disengagement, linking it to broader social issues. “A lot of workers today are stressed, inward-looking, and have varying degrees of social dysfunction,” she observes, suggesting that a holistic approach to community health could have far-reaching economic benefits.
Eslake adds another layer to the discussion by pointing out that the rise in business closures reflects the Australian Taxation Office’s renewed focus on tax enforcement post-COVID. “The uptrend in business closures is largely attributable to the ATO taking action to ensure that businesses meet their tax obligations,” he explains, particularly affecting smaller enterprises that had enjoyed temporary relief during the pandemic.
Housing affordability remains a particularly thorny issue, with both Humphreys and Eslake agreeing that the proposed housing policies from the Labor government—such as the Help to Buy and Build to Rent initiatives—are unlikely to create significant change. “High construction costs, tight supply, and urban sprawl, compounded by political inertia, continue to plague the housing market,” Humphreys states. Eslake offers a stark political perspective, suggesting that the government’s sympathies may not extend far enough to address the needs of first-time buyers, given the larger voting bloc of existing homeowners. “Governments of both political persuasions keep doing things that keep house prices going up,” he asserts.
In summary, while the moderation of inflation provides a temporary reprieve, Australia faces a daunting array of structural economic challenges that require urgent attention. As the Labor government settles into its new term, the question looms large: will it seize this moment to implement meaningful reforms, or will it continue to favor short-term political expediency? The stakes are high, and the future of the Australian economy may well depend on the answers to these pressing questions.
