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As the world economy takes off, will SA be left behind?

Analysis

South Australia will need to foster billions of dollars of new investment in its economy if we hope to keep pace with Australia and other advanced economics, writes economic commentator Richard Blandy.

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The International Monetary Fund (IMF) has recently released its economic projections for the world and various national economies in 2017 and 2018. In considering these projections, one should bear in mind that the IMF has been optimistic about economic recovery ever since the global financial crisis nine years ago.

The IMF sees annual world economic growth increasing from 3.1% in 2016 to 3.5% in 2017 and to 3.6% in 2018. This is less than global trend growth before the GFC (about 4% p.a.) but it is still a big improvement.

The United States’ economic growth is expected to increase from 1.6% p.a. to 2.5% p.a., while the Euro Area’s economic growth is expected to decline marginally from 1.7% p.a. in 2016 to 1.6% p.a. in 2018.

China’s economic growth is expected to continue to decline to 6.2% p.a., but the slack is expected to be taken up by India’s economy, whose growth is expected to increase from 6.8% in 2016 to 7.7% in 2018.

What about the Australian economic outlook? The IMF sees our economic growth increasing from 2.5% in 2016 to 3.1% in 2017, before easing slightly to 3% in 2018. In other words, the IMF sees Australian economic growth nearly returning to its past trend of about 3.2% p.a. If true, this would be great news for Australia.

It should be noted that Australia’s economic growth has been stronger than the advanced economies, in general, for many years, so this projection is not surprising.

What about the South Australian economic outlook? Over the past five years, South Australia’s economic growth rate has averaged half the economic growth rate of the Australian economy as a whole. In the year to June 2016, we improved our relative standing to two-thirds of the growth rate of the Australian economy as a whole. On past trends, therefore, we would expect South Australia’s economic growth rate to improve from 1.9% p.a. in the year to June 2016 to about 2.1% p.a. in 2017 and about 2.0% p.a. in 2018.

In other words, while our economic outlook can be expected to improve, thanks to global and Australian economic improvement, it will not be sufficient, on present trends, to stop us slipping further behind the economic performance of Australia as a whole.

No doubt the South Australian Government will point to our economic improvement as vindication of its economic policies. In context, nothing could be further from the truth. We will continue to slip behind the rest of Australia economically, unless we can match the economic growth rate of Australia as a whole. This is a matter of arithmetic.

Hence, the minimum economic growth target for South Australia for 2017 and 2018 should be 3-3.1% p.a. – not 2-2.1% p.a. Anything less will see us slip further behind the rest of the country in economic performance and opportunity.

Economic growth comes from investment, both public and private – but mostly private, since three-quarters of the economy is private.

Australia is growing faster economically than South Australia because national investment (Gross Fixed Capital Formation) is 24.9% of Australia’s Gross Domestic Product, whereas South Australian investment is only 21.7% of South Australia’s Gross State Product (according to the ABS data for year ended June 2016).

National public sector investment is 4.4% of national GDP, whereas South Australian public sector investment is 4% of SA’s GSP. National private sector is 20.5% of national GDP, whereas South Australian private sector investment is only 17.7% of SA’s GSP.

Assuming the productivity of investment is about the same in South Australia as nationally, to grow as fast as the Australian economy, South Australian investment would have to increase in both the public and private sectors – but especially in the private sector – if we were to match the typical Australian pattern and rate of economic growth.

To keep matters simple, public sector investment would have to increase in South Australia by about $500 million, and private sector investment would have to increase by about $3 billion.

Of course, if the public sector investment were to feed into raising the profitability of the private sector, more public sector investment would be beneficial. This public sector investment should be financed by borrowing at current low interest rates for long-term investments.

Increasing the rate of private investment will require a sharp increase in the profitability of private investment, which implies cutting the costs of South Australian businesses. The obvious ways to do this involve cutting taxes paid by businesses, cutting other costs (including wage costs paid by businesses), and deregulating the business environment (where there is an excess of benefits over costs from doing so).

State Treasurer Tom Koutsantonis implicitly admitted this in last year’s state Budget when he introduced a $10,000-per-job State Government subsidy (its Jobs Accelerator Grants scheme) for new, full-time employees, aiming to create an extra 14,000 jobs over two years. The scheme is exceeding its targets.

Treasurer Tom Koutsantonis. Photo: Tony Lewis/InDaily

The State Government now has evidence from its own wage subsidy scheme to make a case before the Fair Work Commission that, until some target rate of unemployment is reached, new, full-time employees should be paid $10,000 less than their Award or Enterprise Agreement wage over their first two years with an employer.

Of course, it makes no long-term economic sense for the South Australian Government to subsidise wages using taxpayers’ money. Eventually this subsidy has to be paid for by taxpayers, reducing their incomes and expenditure on products and services produced by South Australian and other businesses.

Even better would be a pause in wage increases here until the South Australian economic growth rate reached the Australian economic growth rate. This is one effective way that South Australian workers can show solidarity with those who can’t find work.

An important tax-cutting innovation would be for the South Australian Government to offer a Trump-like repayment of 5% of company tax paid by all businesses with registered headquarters (so far as the ATO is concerned) in South Australia. This would be particularly beneficial for small and medium-sized businesses, and may help attract some successful large businesses to shift their HQs to South Australia.

Notice that this is the only effective way for governments to pick winners – only winners should get support.

This could be afforded by cutting South Australian Government spending and employment in areas that fail cost-benefit analysis.

A newly-created South Australian Productivity Commission should focus its attention on undertaking cost-benefit analyses of business regulations to see which ones impose net costs on the South Australian community. These regulatory burdens should immediately be abolished, improving the rate of return on business investment and increasing the rate of growth of the South Australian economy as more investment takes place.

Richard Blandy is an Adjunct Professor of Economics at the University of South Australia, an Emeritus Professor of Economics at Flinders University, and a regular contributor to InDaily.

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