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Part VI: Prolonging the Expansion
With ongoing inflation remaining at low levels, Australia has the opportunity to prolong the current economic expansion and push unemployment to around its lowest rate in over a quarter of a century.
Grasping this opportunity will require maintaining the Government's economic policy framework and ongoing reform agenda. Implementation of The New Tax System is an important input to this outcome.
Australia's economic policy framework is motivated by the objective of achieving a sustained increase in our growth rate, which would in turn allow higher incomes, stronger employment growth and lower unemployment. This framework should facilitate - not hinder - the sharing of these economic benefits across society in a sustainable manner. The economic reforms that have been implemented, and are underway, have lifted Australia's potential growth to 3½ to 4 per cent. As such, we have the prospect of sustained strong economic and employment growth (see Chart 4), which will lead to further inroads into unemployment.
Chart 4: Prolonging Growth and Increasing Employment
(a) Includes forecasts for the March and June quarters 2000.
In previous decades, Australian economic performance has been periodically constrained by the emergence of macroeconomic imbalances, such as debilitating inflation and unsustainable current account deficits, following periods of strong economic growth, and despite unemployment remaining high. On occasions, macroeconomic policy settings allowed, or even contributed to, the emergence of excess demand pressures. In other cases, these imbalances may have resulted from the behaviour of participants in the private economy - such as through excessive wage claims.
Structural deficiencies meant that the economy did not have the flexibility and dynamism to prevent those imbalances emerging or to allow the economy to grow at its full potential. The subsequent policy tightening required to address the particular imbalance contributed to a downturn in economic growth and a ratcheting up of structural unemployment. For example, the monetary policy tightening utilised to address the impact of strong domestic demand on the current account deficit in the late 1980s resulted in negative economic growth in 1990-91 and sharply higher unemployment.
The economic policy framework now has clear objectives set in a medium-term context and aimed at lifting the growth potential of the economy. Fiscal and monetary policies are directed at keeping economic growth at a strong but sustainable rate, with a stable environment for saving and investing. Structural reform policies are directed at raising the economy's growth capacity over time and reducing the rate of unemployment that can be achieved without threatening inflation. (See 1999-2000 Budget Paper No. 1, Statement 3 for details.)
While structural reform can provide the potential for the economy to achieve higher sustainable growth rates and for unemployment to fall further, achieving the economy's full potential over coming years will depend on avoiding the short-term imbalances and subsequent policy responses that have ended past expansions. For example, it is crucial that excessive wages growth be avoided. This was a key factor in the development of imbalances during the mid-1970s and early 1980s that led to a tightening of monetary policy, truncating economic expansion and halting the process of reducing unemployment.
Structural reforms are reducing the risk that inappropriate aggregate wage increases will play a leading role in ending the current economic expansion. In particular, reforms to workplace relations have placed greater emphasis on negotiating employment arrangements at the enterprise level, and contributed to improved productivity and relatively stable real unit labour costs.
- These changes have also reduced the likelihood that wage outcomes achieved in former `leading wage' sectors will be transmitted to the rest of the economy.
- The more competitive business environment that exists today has greatly reduced the opportunity for firms to pass on higher labour costs to the consumer.
As discussed in Statement 2, wages growth is expected to remain moderate during 2000-01, despite some pick-up, and the unemployment rate is expected to fall further.
As the unemployment rate declines, labour market pressures may exert a larger influence over wage outcomes than in recent years. However, there have been shortages of skilled labour in some areas, including information technology and telecommunications and selected skilled trades, for some time without aggravating aggregate wages outcomes. While labour pressures may intensify in some sectors and regions, there appears to be little evidence to suggest that there will be a deterioration in the availability of labour over the forecast period that could generate excessive wages growth across the economy.
There is no justification for employees to seek higher wage outcomes in response to the indirect tax changes as the personal income tax cuts provided in the tax package more than offset the price effects of the changed indirect tax arrangements (see discussion in Part IV). There is little evidence to suggest that the introduction of the indirect tax changes will have a significant impact on wage negotiations, although there may well be instances where employees seek to highlight these issues.
While some prominence has been given to enterprise agreements that include clauses related to the introduction of the indirect tax changes - such as the Toyota certified agreement - these clauses do not appear to be widespread. Only around 4 per cent of employees covered by enterprise agreements signed in 1999 appear to have GST-related clauses.
On the basis of the outlook for wages, and the assessment of risks surrounding that outlook, wages growth is not expected to endanger the current economic expansion.
If a policy response were required to address excessive wages growth, it would threaten the continuation of one of the longest and strongest periods of robust economic growth in post-war Australia, as shown in Chart 5. This in turn would undermine the significant fall in the unemployment rate achieved in recent years, and could once again lead to a ratcheting up of unemployment.
Chart 5: Prolonging the Expansion
Chart 6 indicates that unemployment has tended to increase rapidly during economic downturns and decline much more slowly during periods of economic growth. Provided the current macroeconomic policy framework and the ongoing structural reform agenda are sustained, including the implementation of The New Tax System, the continuation of the current economic expansion could be expected to offer a unique opportunity - some years hence - to again achieve and sustain an unemployment rate not seen in Australia for at least a quarter of a century.
Chart 6: The Unemployment Rate
Source: ABS Cat. No. 6202.0 and Treasury.
If the current expansion were prematurely ended by policy being needed to respond to excessive wages growth, this exciting prospect would be put at risk. It is important that participants in the economy understand the significant potential costs of unwarranted wage outcomes.
There is much at stake for Australia over the next few years. The current economic environment, including strong competition and an enhanced productivity performance, provides the potential for a significant improvement in the well being of all Australians through continuing strong and sustainable economic growth and reductions in unemployment. The introduction of The New Tax System is an important element in coming to this conclusion.