Short-termism threatens Australia’s economic potential: CEDA

Australia must move beyond pervasive short-termism and lift its policy ambitions if we are to reach our economic potential as a nation and make the most of our many natural advantages.

That’s the warning arising from CEDA’s new economic dashboard, a comprehensive assessment of the current state and direction of the Australian economy.

The digital dashboard reveals how we are faring as a nation and explores the key risks to future success, bringing together in one tool a broad range of economic and social indicators.

“Our record of almost three decades of economic growth, halted only by the COVID-19 pandemic, is unequalled by any other developed economy,” CEDA senior economist Melissa Wilson said. 

“But we also face significant structural change: ageing populations; climate change; technological shifts; and a rebalancing of the global economy. 

“None of this is new or unknown. Australia has become very good at analysing its problems and opportunities, but less effective at addressing them.” 

Strengths

“Our natural resources have underpinned our economic success. We must remain open to global markets, supply chains, investment and relationships,” Ms Wilson said.

“But we cannot presume previous strengths will continue to support future prosperity. 

“As our world-class health and care services face rising demand, costs are becoming unsustainable. Our workforce is highly educated, yet skills shortages are now pervasive.” 

Strengths include:

• Australia has some of the world’s largest deposits of rare minerals required to produce electric vehicles and renewable energy technologies (Intergenerational Report).
• In 2023, Australia had the 6th highest labour force participation rate for people aged over 15 and the 5th highest for women in the OECD (OECD).
• Australia ranks second in the world behind the US for migrant drawing power, meaning we have a greater capacity to fill skill shortages and increase labour supply (Lowy Institute).

Weaknesses

“Many Australians don’t feel they have shared in the economic prosperity of recent decades,” Ms Wilson said.

“We are no closer to improving outcomes for First Nations Australians, or those experiencing persistent poverty. This is unacceptable in one of the richest countries in the world on a per capita basis.  

“Housing affordability has reached crisis point and rates of chronic disease and mental illness are rising.”

Weaknesses include:

• Australia is over-reliant on a narrowing and inefficient tax base (Intergenerational Report). 
• The-housing-price-to-household-income ratio has doubled since the 1990s and is currently around 5½ (RBA), and tenure security for renters is equal-lowest among 31 developed countries (OECD).
• Australian school students are sliding down international performance rankings (OECD).

Opportunities

“Australia’s strong trade ties with our neighbours position us well given ongoing rapid growth in the Asia-Pacific region,” Ms Wilson said. 

“We are well-placed to punch above our weight in the clean energy transition, but the potential benefits will require significant cooperation to be realised.”

Opportunities include:

• Australia accounts for just over 1% of global emissions, but a shift to exporting zero-emissions goods could help reduce global emissions by around an additional 7% (The Superpower Institute). 
• In 2021-22, 75% of our trade was with Asia-Pacific Economic Cooperation (APEC) members, which includes some of the fastest growing economies in the world (Global Australia).
• Australia is among the least innovative economies in the world and has significant potential to do better. Less than 10% of patents cited by Australian companies are locally developed, compared with more than 40% in Japan and almost 70% in the US and Korea (IMF).

Threats

“Many of our threats have been longstanding challenges and persist mainly due to our failure to adequately respond,” Ms Wilson said. 

“Climate change is causing widespread damage from more frequent and extreme weather, and population ageing is putting growing pressure on stretched service providers and a narrowing tax base. 

“The productivity gap between Australian businesses and global top performers has grown over time and many report barriers to innovation.”  

Threats include:

• The number of Australians aged 65 and above relative to the number of working age Australians – the old-age dependency ratio – is expected to increase from 26.6% to 38.2% by 2063 (Intergenerational Report).
• Australia has more to lose than most economies from a reduction in global trade. Australia’s economic output would fall by about $30 billion (1.2% of GDP) if there was a 10% reduction of all bilateral goods and services trade flows between major economies (OECD).
• The proportion of people who feel a great sense of belonging in Australia has declined from 77% in 2007 to 48% in 2023 (Scanlon).

This dashboard is part of CEDA’s new program pursuing impactful, long-term policy thinking.

“The decisions we make now as a nation shape long-term outcomes for all Australians,” Ms Wilson said.  

“We must shore up our strengths and tackle our weaknesses to make the most of our economic potential.”