Article by John Kehoe, courtesy of The Australian Financial Review.
As Australia grapples with a stagnant private sector, sticky inflation and declining living standards, it is obvious the economic model of the past 15 years is not working.
Labor’s answer is bigger government and government-influenced resource allocation, under Treasurer Jim Chalmers’ values-based capitalism. This will slowly strangle the economy’s dynamism and productivity. But there is a better way.
Australia needs to embrace a dynamic economic growth project that lifts business investment to make workers more productive and increases their real (post-inflation) incomes.
The Hawke-Keating and Howard governments embraced the market economy with a social safety net to deliver long-term increases in living standards.
Today, Australia could learn from the early success of Argentina’s free-market President Javier Milei.
Australia doesn’t need to do a full Milei, but a dose of it would surely help.
Milei has been in power for 12 months. Before politics, he was a libertarian economist for 20 years in academia, financial markets and at a think tank.
He inherited a catastrophic economic situation from the former socialist Peronist government led by president Alberto Fernandez.
Argentina was bailed out by the International Monetary Fund in 2018 and owes $US44 billion ($69 billion).
Hyperinflation peaked at 290 per cent, the economy has been in deep recession and almost half of Argentines have officially been in poverty.
Milei’s shock therapy has imposed sharp government spending cuts, slashed red tape and empowered the private sector.
Today, monthly annualised inflation has been slashed to 32 per cent and is on track to fall significantly further.
Back in black
After a decade of budget deficits, Milei is now running monthly budget surpluses. He has abolished government departments and restrained increases in public sector wages and pensions. His revolution has reduced inflationary subsidies for food, energy and public transport. Australia has increased such subsidies.
Milei has cut central government payments to fiscally irresponsible provincial governments, the equivalent of Australia’s indebted and big-spending states. Total Argentinian government spending has been cut from 44 per cent of GDP to 32 per cent.
Australia’s federal and state spending has increased from a pre-pandemic decade average of about 22.5 per cent to almost 28 per cent of GDP.
Business investment in Australia as a share of GDP has been languishing around 1990s recession levels for the past eight years. To attract business investment in Argentina, Milei cut taxes and liberalised foreign investment and trade rules.
Country risk ratings have improved for Argentina to a five-year low. Energy and mining companies have announced new investment plans.
Milei is aiming to attract more investment in gas, hydrogen, lithium, copper and renewable energy to rival other commodity exporters, including Australia.
In contrast, Australia has wrapped its resources sector in red and green tape.
NSW and Victoria have in effect imposed bans on new gas developments for the past decade, and the federal government has only belatedly endorsed gas as critical back-up component of its renewables-led energy transition.
The Japanese chief executive of the $60 billion-plus Ichthys gas project in Darwin warned last year that it seemed like Australia was quietly quitting gas exports.
Rather than focusing on the basic fundamentals to improve competitiveness, Australia is offering multi-billion dollar taxpayer subsidies for solar panel manufacturing, batteries and green hydrogen.
But in a major blow, Origin Energy in October abandoned its hydrogen venture in the Hunter Valley, and Fortescue – the iron ore miner with hopes of becoming a clean energy giant – backed away from its own targets for green hydrogen production in July. A Future Made in Australia could become a future made in Argentina.
Similar housing challenges
Like Australia, Argentina has faced a housing affordability and availability challenge.
The former socialist government forced tenant agreements to be at least three years, with limits on rent increases. Landlords withheld apartments from the market and left them empty, cashing in on speculative capital gains from the lack of housing supply.
Milei has significantly relaxed regulations on landlords to increase the housing supply, and liberalised the rules to allow landlords and tenants to more freely negotiate.
The supply of apartments in the capital Buenos Aires has already doubled and rents for new leases have dropped by 20 per cent, according to the Argentine Real Estate Chamber.
Financial markets are voicing their approval of Milei’s policies. Distressed government bond yields have fallen, and despite the tough medicine, voters continue to support him.
Milei’s approval rating is almost 50 per cent and Argentines are more optimistic about the economy as inflation rapidly falls. Thankfully, Milei has dropped his bombastic pre-election rhetoric to blow up the central bank and his climate change denialism – he has become more pragmatic in office.
Australia does not face a crisis like Argentina, but we continue to sleepwalk to stagnant living standards unless we adopt a Milei-lite agenda that restrains government and allows the private sector to flourish in a market economy.
