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Thursday, May 11, 2006

The Australian Model

Peter Hartcher, international editor of The Sydney Morning Herald, says the Nordic model isn't the only example of successfully combining "the vigour of American capitalism with the humanity of European welfare," Australia has emerged with a new economic model worthy of emulation:

Sun, surf and birth of new economic model, by Peter Hartcher, Financial Times:Unheralded and almost unnoticed, the world has seen the emergence of a new economic model.

It is a developed country that enjoyed faster economic growth than the US over the past decade. Yet it also offers universal healthcare and other social welfare benefits that the US does not. Unemployment is similar to America’s, but without the glaring income disparities that characterise US growth. It is a country that seems to have achieved a sweet spot, combining the vigour of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither. And it manages this while keeping a consistent budget surplus. That country, rolling into its 16th year of uninterrupted growth, is Australia. ...

Australia, which started life as a dump for Britain’s criminal effluent, was such an unlikely candidate to be any sort of economic role model that it should give hope to others. Australia’s economic development in the twentieth century seemed to be arrested at the quarry-and-farm phase. And when the founder of modern Singapore, Lee Kuan Yew, forecast in the 1980s that Australians were destined to become “the poor white trash of Asia”, he seemed to know what he was talking about. In 1970, Australian per-capita incomes were the fourth highest in the world. In the 20 years that followed, its ranking fell inexorably. By 1991, Australia was placed 19th. Other countries surged. Australia stagnated.

That changed with the 1983 election of a Labor government. ... followed by a conservative government ... who pressed ahead with another wave of economic modernisation. The net result has been 22 years of near-continuous reform. In the national budget announced on Tuesday, Peter Costello, the treasurer,... cut taxes for the fourth consecutive year and began a sweeping reform of superannuation to improve savings, while adding funding for national infrastructure and scientific research.

Australia’s per capita income is now ranked eighth in the world. In the last decade unemployment has halved. Net household wealth has doubled. ... Most economists see no early end to the expansion...

Australia is a model in another sense, too. Its socio-economic arrangements offer an alternative to the two familiar options of the American versus the European. Mr Howard says the key is balance: “There is much in American society that I admire but I have long held the view that the absence of an effective safety net in that country means that too many needy citizens fall by the wayside. That is not the path that Australia will tread. Nor do we want the burdens of nanny-state paternalism that now weigh down many economies in Europe.”

The US may be a rich country but its bounty is very unevenly shared. One result is that for the broad mass of its citizens, America has the sort of health indicators of a much poorer country. Australia has chosen a more egalitarian policy set. Life expectancy is the fifth highest in the world. Child poverty is half the American rate. No one in Australia dies because of lack of health insurance.

But neither does Australia suffer the customary handicap that goes with a humane welfare system – a crushing burden of government spending. ... The federal government has run a surplus in nine of the past 10 years. Last month it paid off all outstanding federal debt – the federal government is debt-free for the first time since the 1970s.

However, Australia is far from perfect and its reform drive has faltered in recent years. It has failed to manage properly the problems of its success. After such a long boom there is a shortage of skilled workers and the country suffers from underinvestment in new infrastructure. Further, it has a chronic current account deficit of a yawning 6 per cent of GDP. Economic reform is a continuous process. Yet it has become a case study ... illustrating that vigorous capitalism can coexist with a humane welfare system.

Update: Here's a different view from the editorial page of the WSJ. As usual, it's all about tax cuts:

Australia's Timid Budget, Editorial, WSJ: All you need to know about Australia's new budget is that the Labour Party thought it was pretty good. If only that were true. Instead, Canberra on Wednesday skirted politically unpopular, long-term structural reforms necessary to bolster future economic growth in favor of short-term giveaways. If Treasurer Peter Costello can't push through real tax reform in good times, we wonder, when can he?

To Mr. Costello's credit, his 11th budget -- a record -- sure was comprehensive. It touched income tax rates, health care, defense, infrastructure spending and pension savings, to name a few. Mr. Costello made changes in all of these areas. The trouble is, he did so too timidly.

Take the average Australian's income tax. Aussies are saddled with some of the highest individual income tax rates in the world. ... Mr. Costello addressed this burden, but just barely. He cut both top rates by 2 percentage points, bringing them to a neat 45% and 40%, and raised the income thresholds a bit -- but without indexing them to inflation. There wasn't much to do with the lower tax brackets -- the bottom quartile pays only about 3% of Australia's taxes, anyway. (That didn't stop Australia's liberals pronouncing it a "budget for the rich.") ... But not a word was said about significant income tax cuts or simplification to the code itself... Good grief.

Turning to business, the tax picture gets gloomier. ... the government's revenue take from Australian businesses has shot up in recent years, thanks mostly to the commodity price boom, from which Australian raw materials producers benefit greatly. Between the 2004-05 and the 2005-06 tax years, company tax paid is expected to increase by 23%. Yet Mr. Costello's budget ... contained only a change to depreciation measures for business, which -- while it will help -- again, doesn't do much to encourage entrepreneurship in the long run.

The one bright spot was Mr. Costello's reform to Australia's compulsory pension-savings system, known as superannuation. The Lucky Country is the only one, so far as we know, that taxes pension savings on the way into an individual's account, while it's accruing interest, and again when it's withdrawn. ... Mr. Costello announced that he'd stop taxing pension withdrawals. That is, on balance, a good thing. But if Mr. Costello could, politically, afford to cut only one of the three taxes, we'd argue that it's better to tax people on exit rather than entry. After all, the idea is to get Australians to save more, not extract more, from their pension plans.

Mr. Costello has been, on the whole, a decent treasurer. He's generally conservative, and his instincts are for lower taxes across a wider base. We suspect his recent timidity has to do with fears that cutting taxes too much could overstimulate the economy and induce further interest rate hikes. ... But even if it were true, that calculation has to be set against the surge in tax revenue that a tax cut would produce. ...

    Posted by on Thursday, May 11, 2006 at 12:06 AM in Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (25)

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