Since Australia’s last federal election in 2022, both global and domestic conditions have become increasingly fractured, driven by rising populism, escalating geopolitical tensions, and, closer to home, slowing productivity growth and mounting fiscal pressures.
Australian policymakers must now navigate and seize opportunities in a shifting global order.
A new report from the e61 Institute and UNSW Sydney has identified five key recommendations ahead of the upcoming election, including a need for the next government to prioritise productivity growth and fiscal sustainability.
“As the world moves away from a rules-based system, Australia must leverage its comparative advantages, push back against a closed world, build flexibility in the domestic economy and find opportunities in the move to ‘friendshoring’,” the report reads.
It points out that many nations are now retreating from open trade and climate action, while those that do persist will do so outside of any “multilateral, rules-based structure”.
“There is no return to normal”, the report highlighted, with the ripple effects of recent US policy changes significantly impacting a rules-based order, which relies on credible long-term commitments.
For Australia – which relies on China as its most significant economic partner and the US as its primary geopolitical partner – the escalating trade war puts local policymakers between a rock and a hard place.
“Australia’s relationship with China has been complex for some time – a critical trade partner without strategic alignment. Now Australia’s relationship with the US brings its own complexity – a strategic ally whose economic agenda conflicts with Australia’s interests,” the e61 Institute and UNSW said.
The pair warned that Australia’s exposure goes beyond direct US tariffs on its exports, given that a significant portion of Australia’s goods and services sold to China ultimately serve markets in the United States and Europe.
“If the trade route from China to the United States weakens, Australian exporters are highly exposed. Trade policies that weaken China’s economy, on top of their existing structural weaknesses, will ultimately reduce Australian incomes,” the report said.
Moreover, the research questioned Australia’s ambition to become a green energy superpower, noting that this depends on foreign demand for green products, including energy-intensive value-added goods produced in Australia.
However, it flagged that given global commitments to emissions reduction are now less clear, Australia’s ability to export low-cost renewable power is doubtful.
“Australia must respond to this new dynamic,” the paper added.
“While many nations have responded by protecting and building up their domestic manufacturing capabilities, Australia should take a different approach. Instead, in negotiations, Australia should maximise and demonstrate its strategic advantages with the United States and China.
“Australia needs to also continue to advocate for open trade and market access at home and abroad. Beyond the fiscal costs, protectionist and industrial policies will not build the agility needed in an increasingly unpredictable world. Policymakers should look to build greater economic flexibility to rapidly respond to new opportunities.”
Something’s gotta give
The e61 Institute and UNSW also said the next government will need to focus on “restoring fiscal sustainability”, noting that weak public finances can undermine confidence around future policy and limit the government’s ability to respond to volatility.
This is particularly timely given that, while Australia’s debt-to-gross domestic product ratio is low compared to its OECD peers, the direction of travel is “concerning”.
Namely, current estimates project the federal budget to be in deficit for every year over the next decade, with an eventual return to balance hinged on “ever-increasing taxes”, including through bracket creep, and no new spending priorities or emergencies over that period.
But UNSW and the e61 Institute noted that these projections do not account for the significant fiscal impact of structural changes outlined in the report – including a fall in the price of exports, a trade war, any step-up in defence capability or payments to domestic firms to become more flexible.
Ultimately, the report suggests that a “balanced budget” can help Australia navigate global shocks, but achieving it comes down to four options – faster growth, higher taxes, lower spending or inflating away debt.
“The hopeful approach is boosting productivity, enabling faster growth. But Australia’s track record in recent years is poor. Without that, serious consideration of tax and spending reform is needed,” it said.
The report’s authors noted that boosting productivity growth is, in fact, a key consideration for the next government.
“Australia’s productivity performance is already on a decline: annual growth fell from over 2 per cent in the 1990s to under 1 per cent in the 2010s and has been flat since the start of COVID-19,” they said.
While causes for the slowdown are many, the report asserts: “There is no quick fix.”
“Given other challenges, boosting productivity is as important as ever for Australia’s prosperity,” the report said.
“Policymakers need new insights on how to create an environment conducive to the emergence and growth of high potential firms, how to remove barriers to job switching, and ways to achieve productivity growth in sectors like care, where it has traditionally been hardest.”
Momentum Media’s wealth portfolio is hosting an election briefing on 10 April, bringing together key policymakers and industry leaders to discuss the future of Australia’s financial services sector and broader economic challenges ahead. Tune in to find out more.
