Has Australia’s luck run out?

Economic growth is not looking good

Australians are getting poorer. GDP data has landed and it is not good. Australia is in a per-capital recession. Let’s dig into this.

The problem

Let’s start with GDP itself. This is a measure of economic output. If it falls for two consecutive quarters, then there is a recession. Well, GDP increased 0.2% in the latest quarter. It increased 1.5% y/y, which is below the prior reading of 2.1% y/y. This is the lowest result since 2000. This is a bad result. The target is for GDP to increase around 3% y/y. US GDP increased 3.1% y/y.

It gets worse. GDP fell on a per-capita person. That is, the output per person decreased. It fell 0.3% in the quarter and 1% y/y. This is the third straight quarterly decline. This means that the only reason GDP increased is immigration, with the population increasing around 2.4% over the year.

Disposable per capita income also fell 2.1% y/y (cf on aggregate). While it did increase during the quarter, it is still bell below pre-pandemic levels and is forecast to not reach pre-pandemic levels until 2027. The fall is attributable to inflation, a rapid increase in mortgage payments, and an increase in tax costs due to bracket creep.

Notably, the government’s tax take and spending has not adequately boosted GDP even ignoring the normative problems with a tax and spend budget. Real per capita consumption fell 2.4% y/y. People are spending less. The government is generating more tax revenue. But, because the government wastes so much money, government spending is not productive.

Labor productivity increased, which is good news for the RBA. But, it remains below 2022 levels. People appear to have gotten burned out. The productivity fall is unsurprising. The more hours you take on to deal with cost of living pressures, the less productive you are in those additional hours.

Is there a solution?

certainly indexing tax brackets would be the obvious solution. That would encourage greater productivity. Even Paul Keating – hardly a right winger – said that a tax rate above 39% is confiscatory, stating:

“Once you start getting the top rate over, in my opinion, 39 [per cent], it becomes confiscatory and when they become confiscatory you just lose all that impetus to make a dollar and do clever things.” ~ Paul Keating

But, neither party appears to have a solution. Peter Dutton is less bad as Albanese and Chalmers actively attack ambition through the superannuation tax grab, their tax hikes on higher income earners, and their seeming desire to funnel people out of running their own contracting business into a unionized workforce. Peter Dutton’s approach is to rightly point out that the ALP’s plans are bad, but he needs a more inspiring slogan than ‘we’re not as bad as the other guy’. At present, there appears to be little catalyst for improvement.