Latest news with #Paul Keating
The Guardian
4 days ago
- Business
- The Guardian
As the economy slows and productivity flatlines, is Australia having another banana republic moment?
When Paul Keating stepped into a noisy kitchen in a Melbourne function centre for an interview with John Laws, he didn't mince his words. It was 14 May 1986 when the then Labor treasurer told Laws that without some serious changes, a collapse in export prices meant our trade-dependent country was living beyond its means and fast on its way to becoming 'a banana republic'. 'If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for,' Keating told Laws. Sign up: AU Breaking News email It was that sense of urgency – the threat of a 'banana republic' – that helped blow away the cobwebs of complacency and drive the massive reforms of the 1980s and 1990s. Australia in the decades since has prospered. Yet once again we are having similar conversations. The economy doesn't seem to be functioning as it should, and may only be capable of growing at a fraction of the rate it used to. The budget is in structural deficit. The population is ageing, and our demand for government services grows and grows, even as our capacity to fund that extra spending goes the other way. Younger Australians are increasingly resentful about their lot, homes are too expensive and the world outside our shores looks more dangerous than it has in decades. Used to being a standout on the global stage, we are being relegated to the back of the pack. Living standards across the rich world climbed by an average of 22% over the past decade. In comparison, our living standards are up just 1.5%, according to analysis by Chris Richardson, an independent economist. Analysts place a lot of the blame for this on a slowdown on one thing: productivity growth. They point to the fact that our economy is no more productive now than it was in 2016. Over the longer term, productivity growth is the ingredient that delivers higher real wages, generates better-quality goods and helps pay for government services. Technological change can explain a lot of productivity growth over the decades. The promise of artificial intelligence is that it ignites an explosion of new growth as AI embeds itself deeper into the economy and our lives. With so much apparently at stake, Chalmers in a recent interview was asked if flatlining national productivity was a 'crisis'. 'No,' the treasurer said, 'but it's a big challenge'. Australia and Australians have a lot of 'big challenges', and some are regularly referred to as 'crises'. Yet not all are worthy of a three-day economic reform roundtable with 900 submissions and 40 ministerial mini-roundtables leading up to it. At the National Press Club on 18 June, Chalmers declared that the government has 'a responsibility to rebuild confidence in liberal democratic politics and economic institutions – by lifting living standards for working people in particular'. Days out from the start of the roundtable, Chalmers has been at pains to play down the very reform fervour that he fanned. Anthony Albanese appears to have little appetite for spending political capital in pushing through tough economic reforms. The PM has made it clear that there will be – read his lips – no new taxes this term. The treasurer has obediently narrowed the scope of the potential 'deliverables' to regulatory reform to get more homes built, with a side promise of some progress on longstanding policy ideas, like a road user charge. Sign up to Breaking News Australia Get the most important news as it breaks after newsletter promotion The lack of a 'crisis' in productivity may make it hard to understand why we have spent nearly six weeks leading up to this talkfest in Canberra. But it does help explain the apparent lack of urgency to solve the issue. So what do economists reckon: do we have a productivity crisis? The answer, Richardson quips, 'depends whether you like rising living standards or not'. Are we a commodity price collapse away from becoming a 21st-century version of Keating's 'banana republic'? Saul Eslake, another independent economist, says no – the economy now is totally transformed. Rather than crisis, Eslake volunteers the word 'malaise'. 'I don't think it would help the debate to call it a productivity crisis,' he adds – that could lead to rushed and short-term measures that might just goose the economy for a year or two. 'There are no magic bullets, no short-term solutions. Nothing that can be done, even with the greatest amount of political will, to lift productivity growth in 12 months' time,' Eslake says. John Hawkins, an economics professor at the University of Canberra, says productivity is not a crisis because it's 'not something that is making people worse off'. Instead: 'It's a lost opportunity to make us better off'. 'We got used to the idea that incomes go up over time. Over the long run most of that increase has come from productivity,' Hawkins says. 'More recently we got away with low productivity growth because commodities were strong, but we need to do something if we want real income growth going forward.' Shadows of the 1980s, then, from which we can expect echoes of that era's reforms.
ABC News
10-08-2025
- Business
- ABC News
While Trump plays with tariffs, Chalmers must find a way to do what Keating did in the 1980s
In the early 1980s, Australia had as big a trade deficit as the United States has now — around 3 to 4 per cent of GDP. But the two solutions to the same problem could not be more different. In the 1980s, then treasurer Paul Keating tore down Australia's imposing tariff wall, but in 2025, US President Donald Trump is doing the opposite — raising tariffs back to levels last seen in 1930. In 1986, I was editor of the Australian Financial Review. On Wednesday, May 14, I got into work at about 10am to find that the Australian dollar was crashing. By the end of the day, it had fallen 3 US cents, one of the biggest one-day falls in history, kicking off a three-month devaluation totalling 21 per cent to less than 60 US cents. It started when Keating was interviewed by John Laws on 2GB that morning and said the collapse in our terms of trade meant that Australia was in danger of becoming a banana republic. (We later learned that he had been standing in the noisy kitchen of a function centre near Melbourne, having just given a breakfast speech, and that what he said was not premeditated.) With economics editor Michael Stutchbury, I sprang into action and marshalled the troops. We got a recording of the interview, transcribed it, and prepared a big front page for the following day. Here's the nub of what Keating told Laws: "It's the price of our commodities — they are as bad in real terms since the Depression … it means an internal adjustment. And if we don't make it this time, we never will make it. If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for. We will end up being a third-rate economy … a banana republic." Trump's language on April 2 this year was also theatrical and urgent, but he was not foreshadowing an internal adjustment, far from it. "For decades, our country has been looted, pillaged, and plundered by nations near and far, both friend and foe alike," he said. In the executive order he signed that day, Trump declared a "national emergency" that was America's "large and persistent annual US goods trade deficits". That declaration gave him the ability to usurp Congress's constitutional power to impose tariffs. Four months of bruising, chaotic negotiations later, America's average tariff rate has increased from 2.5 per cent to 19 per cent, the same level as that which catastrophically worsened the Great Depression and, as it happens, was the average of most Australian tariffs in 1986. Keating started cutting them in an economic statement to parliament in May 1988. Anything above 15 per cent was cut to 15 per cent, which included the 79 per cent tariff on motor vehicles and 146 per cent on textiles, clothing and footwear, and anything between 10 and 15 per cent was cut to 5 per cent. I asked Keating last week why he decided to do that, and also why he waited two years. His answer to the first question was simple enough: "We had tried the closed way for 70 years and it failed us. We had to open up the economy and become competitive. Also, tariffs are just a tax on working people." Keating told Kerry O'Brien in the interviews for the book Keating, after O'Brien recalled that Bob Hawke had called the interview with Laws a disaster: "That's a post-event re-evaluation. It turned out not to be a disaster but a turning point in the Australian reconstruction to deal with (the) big secular decline in the terms of trade that had begun in the 1960s." As for why he waited two years to start cutting tariffs, Keating told me: "We had to cut government spending first. Australia's government sector was the biggest in the OECD, and the first step had to be getting that down. "We cut government spending from 29.4 per cent of GDP in 1986 to 22.4 per cent in 1989, down seven percentage points, and back to what it was before Whitlam." I asked him whether he had any regrets — after all, the tariff cuts that began in 1988 ended up destroying Australian manufacturing. He replied: "Yes, but Australia's living standards rose. Wages increased and so did profits." Now, Australia's living standards are declining despite higher terms of trade because of weak productivity growth. America's problem in 2025 is similar but different. Productivity is fine, and the trade deficit is the same, but it wasn't caused by a collapse in the terms of trade like Australia in the 80s — America's have fallen just 3.5 per cent in two years. It was caused by the strong US dollar, which was the result of it being the world's reserve currency, and which exacerbated the decline in its comparative advantage, especially versus China. It's obvious that tariffs will not rebuild America's comparative advantage, quite the opposite, but that's not really why Trump is doing it. Trump's using tariffs for two purposes: first to raise revenue while cutting taxes on the rich, because, as Keating says, they are a tax on working people, and second as a non-military assertion of geopolitical power. The reason Trump likes taxing via tariffs is that he can say, and does say, that other countries are paying them. The revenue is now up to $US30 billion a month, and America's working people are starting to realise that they're the ones paying that, which should eventually rebound on the president. But for the moment, he can say, as he did on Saturday, "hundreds of Billions of Dollars are pouring into our Country's coffers" — as if it's coming from somewhere else. The use of tariffs to assert power and/or punish other countries and companies, rather than protect domestic industries, is shown by Brazil's 50 per cent tariff, imposed because former president Jair Bolsonaro is being prosecuted for trying to overturn the election, an activity Trump is in favour of, and India's 50 per cent tariff as punishment for importing Russian oil against sanctions. Also, the CEO of one of the world's biggest companies, Tim Cook of Apple, showed up at the Oval Office last week, lavishing praise and carrying a gift for Trump of a piece of iPhone glass set in a big lump of 24-carat gold, to get Apple's tariff of 100 per cent removed. It worked. He also promised to invest another $US100 billion in US manufacturing, mainly by having the iPhone glass made by Corning at its plant in Kentucky. But that plant is fully automated — the glass is untouched by humans. That's why there's no longer much point in using tariffs these days to try to rebuild a manufacturing industry: the jobs go to robots, not humans. Or rather, the point is not jobs, but profits. That's why the stock market is back at record highs, having fully recovered from the initial tariff meltdown on April 2: tech companies are going to make a ton of money, or at least investors think they will. Economist Nouriel Roubini wrote last week: "The US happens to be at the centre of some of the most important technological innovations in human history. These will deliver a large positive aggregate supply shock that will increase growth and reduce inflation over time. This effect should be an order of magnitude larger than the damage [of tariffs]." So, the US economy is engaged in two historic revolutions at once: dramatically raising import taxes and remaking the global trading system, and at the same time leading a technology revolution — artificial intelligence — that McKinsey & Co says is part of a seismic shift reshaping the world's economy that will have 3,000 times the impact of Britain's Industrial Revolution in the 18th and 19th centuries. And while all this is going on, Australia's current treasurer, Jim Chalmers, will next week conduct a reform roundtable, where 25 or so chosen people will be tasked with finding more tax revenue without the government being voted out, and finding a way to repeat what Keating did in the 1980s and 90s and lift productivity. Good luck with that. Alan Kohler is a finance presenter and columnist on ABC News, and he also writes for Intelligent Investor.
