The US financial crisis has devastated parts of Europe and wreaked havoc in the US. Normally when the US sneezes we catch a cold but American economic ailments are not as infectious as they once were for Australia. We have been insulated to a large extent by China and India's insatiable demand for our agricultural exports, mineral resources and educational services. This trend will ebb and flow as the world economy lurches from boom to slump in its characteristic way but it is likely to prevail for decades to come.
The Rudd Government's stimulus package, while flawed, has clearly played a vital role in bolstering the Australian economy during the global downturn. Without it, unemployment would have risen sharply and confidence would have plummeted. Fortunately, policymakers in Australia don't have a recession to contend with. US and European policymakers don't have this luxury.
They face the need for fundamental change to the operation of the banking and financial system. The US financial crisis has exposed great weaknesses in its financial regulatory framework, weaknesses that have placed intense pressure on Washington to aggressively take on the excesses of Wall Street. So far, a great deal of effort by the Obama administration has gone into socialising the losses of financial institutions to ensure against calamity. This was necessary in the short term but the key to solving the fundamental problem underlying the crisis is a new regulatory framework governing the operation of the US financial system. Many practices must come to an end, particularly the capacity of financial institutions to package up and sell on high risk US mortgage debt to the world. There must be reform to the credit ratings system that perversely gave AAA ratings to high risk investments. The rampant speculation characterising debt markets and the financial system as a whole cannot be tolerated when we know it has the capacity to plunge powerhouses of the global economy into recession.
Australia is well positioned to emerge from the crisis engulfing the US and Europe as an economically resilient nation. Low unemployment and relatively strong economic growth prevail. Most agree that these are the characteristics of a healthy economy, a foundation for growth and optimism rather than austerity. Australian government policymakers don't face collapsing tax revenues like their US and European counterparts. Neither are they saddled with unsustainably high public debt. Moreover the tax revenue outlook for Australia is set to improve significantly if a deal is struck to pave the way for the introduction of an appropriate Resources Super Profits Tax. State governments will be a major beneficiary of this through an increase in infrastructure expenditure, enabling them to bring new projects online more rapidly.
The relatively optimistic economic outlook for Australia rather than the crisis embroiling the US and Europe should be the backdrop for framing the South Australian budget - a budget that will have a great deal more revenue available to it than was anticipated last year. This reality and the prospect that the next few years will be characterised by growth rather than decline, is yet to be reflected in the language of the State Government. Anticipating a sharp decline in revenue it argued that it had to cut expenditure by $750m over three years. It established the somewhat Orwellian sounding Sustainable Budget Commission to find these cuts and agencies were directed to deliver options for consideration. This process is unfolding as you read. Last month I argued that there was no financial case for cuts to the public service. Additional revenue from the GST and property taxes has delivered a major boost to the budget bottom line providing a foundation for investment rather than disinvestment in the modernisation of our public services.
To ensure that South Australians have the quality services they need over the next decade we have to contain the expected exodus of ageing public servants from the public service. If we don't, major skill and capability shortages will emerge over the next few years.
Consider this. The proportion of public servants over the age of 55 in the South Australian public service has risen from eight percent or around 6,500 in 1998 to over 20 percent or 19,000 today. This represents a monumental workforce planning challenge as it is likely that many of those on the more generous State Pension Scheme (currently around 2,500 people) will opt for the earliest possible retirement date they can negotiate. A major driver of early exit is a growing view in the public service that the current round of cuts is short-sighted and unnecessary and that it will undermine effectiveness and innovation in the public service. Many are asking the question: How can you justify spending $535m on the upgrade of Adelaide Oval at the same time as cutting $750m from South Australian public services?
A smart strategy for the State Government would be to embrace the changed circumstances it faces and articulate a positive vision where investment in both our public service and Adelaide Oval is possible. It would be perverse if public services cuts become the means of funding the upgrade of Adelaide Oval.
This article appears in the July 2010 edition of The Adelaide Review.
To access the original issues piece visit the Adelaide Review website.
