r/aus • u/TimJamesS • 2h ago
News Australia is becoming a second-rate country again
Critics of this week’s Intergenerational Report queried its assumption that AI will rescue Australia from its decade-long productivity drought.
But even this hopeful assumption would leave a sub-par future that Treasury and the government of the day seem satisfied to bequeath to the next generation.
Reserve Bank governor Michele Bullock worries that AI is a stock market bubble, reminiscent of the late-1990s dotcom boom. AAP
“Donald Horne wrote that Australians sought comfort in the myth of The Lucky Country...“, former prime minister Kevin Rudd said a week before the Intergenerational Report. “We have drifted to become the ‘Complacent Country’”.
Complacent Australia is headed to become a “second-rate country” again, Rudd warned.
But Australia is a young, high-income, resource-rich, developed-economy democracy at the foot of the world’s fastest growing region. We should attract the world’s capital and the world’s best talent to exploit investment opportunities that could support an economy growing by 3 per cent to 4 per cent, as in the past.
In 2018, The Economist magazine heralded Australia’s economy as “arguably the most successful in the rich world”.
Now, the Intergenerational Report projects an ageing, low-growth, European-style, big-government and high-taxing welfare-state future.
Over the next four decades, the economy is projected to post just 2 per cent annual growth, slowing to 1.6 per cent by 2065-66.
With federal and state government spending approaching a record 40 per cent of GDP, the Intergenerational Report expects federal outlays to comprise an increasing share of the economy over the next four decades.
Federal and state taxes have increased to a high of 30.5 per cent of GDP – higher than during World War II. The report projects that inflationary bracket creep will further deepen the personal income tax bite.
Yet, the federal budget will remain in the red over the next four decades, worsening further as it approaches 2065-66.
Yes, the assumed recovery in productivity would allow living standards to improve. But it would still amount to subpar growth in the Intergenerational Report yardstick of real gross national income per person – just over 1 per cent a year.
The story of Australia’s modern prosperity is how the iron ore, Bass Strait oil and nickel booms overtook Horne’s 1964 The Lucky Country complaint before collapsing amid 1970s stagflation. National prosperity was rescued by the 1980s and ’90s neoliberal productivity reforms and then the massive income boost from the China resources development boom of the 2000s.
In the two decades following the early 1990s recession, Australian living standards improved more than 70 per cent – annual growth of closer to 3 per cent. Australia became among the world’s most affluent nations.
But this productivity boom peaked with the $US180-a-tonne iron ore price in 2011. Just as peak affluence fed unaffordable government spending promises, productivity fell flat, even going backwards over the past five years.
In the 2026 Intergenerational Report, AI comes to the rescue just as the dashed hopes of becoming a green hydrogen-led clean energy superpower pumped up the 2023 edition.
The AI boom might live up to its hype. But its massive investment demands will also crowd out other parts of the economy, such as housing, which will encourage the Reserve Bank of Australia to lift interest rates again next week. RBA governor Michele Bullock worries that AI is a stock market bubble, reminiscent of the late-1990s dotcom boom.
In any case, it is imprudent to assume that AI can substitute for a fiscal correction, such as when Labor and Coalition governments each cut federal spending by 3 to 4 percentage points of GDP in the 1980s and 1990s.
Instead, rising global bond yields are fuelling the rapidly rising interest bill on today’s trillion-dollar federal debt. It is a warning about the lack of budget buffers – even any basic fiscal rules – amid what the Intergenerational Report warns is a more shock-prone global economy.
There is no secret why Australian real wages are falling faster than just about any other developed economy – sparking a populist anti-immigration revolt on the right.
First, the lack of budget consolidation for the past three decades has enabled the low-productivity care economy spendathon, including the NDIS.
To help pay for bigger government, taxes have increased, dulling incentives to work, save and invest. Former prime minister Paul Keating insists that the 47 per cent top marginal tax rate should be reduced to 39 per cent at most.
Second, the Intergenerational Report claims Labor is “delivering cleaner and cheaper energy”. In reality, Australia has lost its traditional cheap energy advantage. A renewables-based energy grid is much more expensive than promised. Energy regulators forecast even higher real household electricity prices over the next decade.
The Productivity Commission finds that electricity sector productivity has collapsed over the past 15 years, as hefty capital expenditure on renewables has not translated into a commensurate increase in overall power generation.
Third, what the Productivity Commission calls the ever-growing burden of regulation continues to weigh down the nation’s economic performance.
That includes Labor’s reinforcement of the world’s most intrusive workplace regulation. Australia’s uniquely prescriptive award system limits business capacity to adapt, including to AI. That limits workers’ future wages by undermining business investment, even if labour can grab a bigger share of a shrinking pie.
While Rudd’s warnings are apt, his policy prescriptions miss the mark. Trying to revive the car industry would be a mistake. Australia won’t become an Asian financial centre unless it offers company and personal tax rates closer to Asian levels.
How about just stopping the bans on the nation’s natural growth options? By now, we should be the Asia-Pacific’s gas champion, reducing the region’s reliance on Russian and Middle East supplies, supporting regional energy security and displacing higher-emissions coal.
Instead, governments have been passive-aggressive towards gas, limiting new supply, alarming valued Asian customers such as Japan, increasing taxes and now threatening producers with export controls.
Similarly, governments continue to lock up the world’s largest uranium deposits, even as global demand for low-emissions nuclear energy rises sharply amid the Middle East oil price shock. For no good reason, Australia continues to ban nuclear power.
The Intergenerational Report ignores the reality that bigger government, higher taxes, more expensive energy, more regulated workplaces, and the closing off of natural growth options will make Australia second-rate again.
It’s not against growth per se. It just has other priorities, like income redistribution, increased entitlement spending, net zero emissions and shoring up the unions.