Australia’s bogus boom

Chris Leithner

Leithner & Company Ltd

The "recovery" of Australia’s economy from last year’s plunge into recession is much more apparent than real. Before the pandemic, deep-rooted and growing impediments hobbled its growth. Some have existed for decades, others result from the poor policy during and since the GFC. And beginning in March of last year, politicians’ abandonment of even the pretence of principle has inflicted considerable additional damage. These self-inflicted wounds will certainly take years and perhaps even decades to heal.

The short-term risk is that the rebound will be shorter and feebler than the consensus expects; the long-term reality is that the immense costs of governments’ poor management will eventually become evident. What’s long been clear to some will then be obvious to many: for more than a decade, living standards have been stagnating – and for some, they’ve been falling. This is the consequence of governments’ relentless borrowing, spending and meddling. 

Their so-called “stimulus” is actually poison. First, it entices, then it ensnares, ultimately it suffocates. The “emergency stimulus” of the GFC has become a permanent “entitlement” that saps the country’s resilience and consumes its seed corn. As The Australian (11 May) noted, “the economy remains fragile and unable to stand on its own two feet.” A “recovery” based upon hundreds of billions of dollars ginned by the central bank, borrowed by governments and lavished upon themselves, households and businesses: that’s not just a mirage; it’s a delusion. 

The mainstream is jubilant, so investors should be sceptical

This view, to put it mildly, is heterodox; bluntly, it’s heretical. During the past few months, the consensus has spread far and wide: Australia’s downturn was shorter and less severe than initially feared – and the upswing is stronger than originally hoped. The RBA’s Governor, Philip Lowe, fired the starter’s gun in a speech on 16 November: “recent data have been better than expected and the easing of restrictions has lifted spirits … There is a lot of stimulus in the system … So if we do get further good news on the health front, we could have a rapid rebound .”

A fortnight later, The Weekend Australian (“Economic Growth Fastest in 45 Years,” 28-29 November) reported that Australia’s GDP grew “at its fastest quarterly pace in nearly 45 years over the three months to September, according to bank forecasts ... The strength of the recovery ... has caught policymakers and economists off guard, with unprecedented stimulus and success in controlling the spread of outside Victoria turbocharging a rebound in consumption ... ‘the key message is that the economy is weathering the COVID-19 storm better than anticipated, helped by a strong health response and massive fiscal and monetary stimulus.’”

The New Year hardened the mainstream’s conviction – and heightened their self-congratulation. “Why,” asked one researcher, “is the economy looking so strong, so soon after a recession?” Government intervention, he answered. “So what can we predict today with confidence?” He harboured no doubt: “Australian economic outperformance ... I believe the Australian economy can rebound strongly in 2021 well ahead of [Europe’s] and North America’s ... A return to full employment within two years is also vastly underrated by the markets ... While 2021 will undoubtedly face its bumps along the way, the only way is up” (see “Economy’s Ready to Shine in 2021,” The Australian, 25 January).    

Several months later, a columnist in The Weekend Australian (“It’s No Ordinary Boom, So What Could Halt It?” 3-4 April) went even further: what’s occurring isn’t merely a strong recovery, it’s a boom; indeed, it’s an extraordinary boom – and only the collapse of its counterpart in the U.S. can halt it. The Australian (16 April) elaborated: “with total employment rising to more than 13 million in March, the labour market has recouped all of its COVID-related losses ... Frydenberg said the key economic trends were heading in the right direction, with consumer confidence at its highest levels in 11 years and business conditions the best on record.”

On 21 April, another columnist in The Australian hailed “the extraordinary recovery of the domestic economy from the depths of COVID-19 in 2020. The theme of the miracle recovery was further developed in the minutes of the RBA’s April board meeting released which said the economy had returned to pre-pandemic levels by the end of last month. At the risk of analogy overload, Bank of England chief economist Andy Haldane has likened [Britain’s] economy to a ‘coiled spring,’ with the rapid rollout of the British vaccination program leading to ‘enormous amounts of pent-up financial energy waiting to be released.’ Like in Australia, the challenge once the spring is released – and the economy snaps back – is to harness the energy and drive growth to a higher level than it was before the pandemic hit.”

These reports sound great – and the news that many of the people who lost their jobs in February-April 2020 have returned to work is indeed very welcome. The problem is that politicians, economists and journalists are exaggerating the recovery’s sustainability and the economy’s apparent strengths – and understating both its long-term weaknesses and mainstream policies’ costs. They’re omitting to mention, for example, that the current spurt of “growth” probably won’t persist.

Point #1: Australia’s GDP may be rising quickly, but it’s unlikely to last

Most mainstream media reports of Australia’s recovery – and the consensus they parrot – conspicuously lack historical perspective. The Weekend Australian (28-29 November 2020) was a partial exception: “if the economy did grow by 4.1%” in the three months to 30 September, “it would be the fastest quarterly pace since 1976, when real GDP grew by 4.4%, and only the third time growth has exceeded 4% since quarterly records began in 1959 ...” Clearly, Australia’s economy rarely grows 4% during a given quarter; accordingly, it’s unlikely that the current pace of growth will last.

Figure 1: Australia’s GDP, Annualised Rates of Growth, CPI-Adjusted Quarterly Observations, January 1996-December 2020


Figure 1, which uses quarterly data compiled by the ABS to plot annualised percentage rates of GDP’s “real” (that is, net of the Consumer Price Index) rate of growth during the past quarter-century, corroborates this expectation. Two results – the bullish mainstream has ignored both – are most noteworthy. First, over this period growth has trended downwards. Second, the GFC marks an inflection point: before it (quarters to 30 June 2007), growth averaged 4.1% per year; since then (from 1 July 2007) it’s averaged 2.6%. Unless there’s some reason to believe that the Global Viral Crisis (GVC) has re-established the average rate of growth prevailing before the GFC – and I’ve seen no credible argument or evidence to this effect – why should anybody believe that rates of 4% per year – never mind 4% per quarter! – are sustainable? Or even that they’re relevant from a long-term point of view? 

Figure 2 provides additional context. It uses annual observations (compiled by the ABS for the year to June) to plot annual percentage rates of “real” GDP’s growth since 1961. Its decrease in 2020 is the series’ second-worst. Significantly – perhaps that’s why pollies, economists and journos don’t mention it – the strongest increase (1983) immediately followed the sharpest decrease. But not even the most enthusiastic bull has claimed that Australia’s economy will grow 8% (or anything like it) in 2021.

Figure 2: Australia’s GDP, annualised rates of growth, yearly observations net of CPI, 
June 1961-June 2020


For 60 years, real GDP’s annual rate of growth has trended weakly downwards, and the trend of the decades’ average of annual rates of change is significantly negative (Figure 3). Why did growth wane from the 1960s to the 1990s? Why did it rebound to a three-decade high in the 2000s – and lapse to a 50-year low in the 2010s? I’ll provide some explanations below; meanwhile, it suffices to say that the conditions prevailing from the 20 years to ca. 2005 show no sign that they’ll return – and those prevailing during and since the GFC show every indication that they’ll accelerate.

Investors should be under no illusion: whatever has been GDP’s rate of growth during recent months, and whatever it will be over the remainder of 2021, it will likely revert to its long-term trend. Treasury agrees. Indeed, it goes further: in the budget papers released on 11 May, it forecast that growth would wax to 4.25% this year but wane to 2.1% per year – which is below the post-GFC average – across its forward estimates (2022-2025). If so, then stagnation will resume and boom disappear.

Figure 3: Australia’s GDP, annualised rates of growth, CPI-adjusted, mean per decade


Point #2: Components of Australia’s GDP have long been trending in unhealthy directions

My first point is that, by historical standards, GDP’s current rate of growth is exceptional and thus unsustainable. My second one is that this growth isn’t likely to last because it’s not soundly based. A rising tide of prudent private investment, the sharp shrinkage of governments’ debt relative to GDP and a stabilisation of their size and scope: these things underpinned the mostly-robust growth that occurred from the mid-1990s to the GFC. Waning investment and torrents of mostly-wasteful government expenditure (as has prevailed since the GFC and particularly since early-2020), on the other hand, beget the rickety “growth” that soon lapses into stagnation or recession.

The most common way to estimate GDP is to calculate the final uses of goods and services. The underlying principle is that somebody purchases all goods and services produced. If a good has been produced but not sold, this method assumes that the producer has bought it from himself. Measuring total expenditure therefore provides means to quantify an economy’s output over a given period; this method is known as the “expenditure method” of calculating GDP.

By this method, GDP is the sum of private consumption (C), investment (I), government spending (G) and net exports (X – M). Hence GDP = C + I + G + (X − M), where 

  • C (consumption) represents household expenditure. This, in turn, is categorised into durable goods, non-durable goods and services. C excludes the purchase of new housing (that’s investment – see below), and is normally the economy’s largest component.
  • I (investment) includes businesses’ purchases of new plant and equipment, but not exchanges of existing assets. In contrast to its colloquial meaning, in this context “investment” does not refer to the exchange of cash for financial products: buying and selling stocks, bonds, real estate, etc., entails swapping of titles rather than expenditure on products. Buying an existing (as opposed to a new) building, for example, entails investment by the buyer and disinvestment by the seller, netting to zero investment overall.
  • G (government spending) is the sum of government expenditures on final goods and services. It includes civil servants’ salaries, purchases of weapons for the military, etc., but excludes transfer payments to individuals and households such as pensions, unemployment benefits, etc. (which form part of C).
  • X (exports) is the sum of goods and services produced for other nations’ consumption. M (imports) represents gross imports – which are subtracted since imported goods are included in C, I and G.

These four components measure expenditures on “final” goods and services; they thereby exclude “intermediate expenditures.” Businesses use intermediate goods and services to produce final goods and services. As an example, if a car manufacturer buys parts, assembles them into a car and sells it, only the car’s final sale (which includes its assembly, etc.) counts towards GDP. On the other hand, if somebody buys replacement parts and installs them, her purchase of those parts does contribute to GDP.

Figure 4: Components of Australia’s GDP, Annual Figures, 1961-2020


Conceptually and empirically, GDP contains major weaknesses. They’re beyond this article’s scope (but see Point #3 below). Nonetheless, analysis of its components serves a highly useful purpose: it undermines today’s bullish mainstream! Figure 4 expresses the four components of GDP as percentages of total GDP. Although household consumption’s share plumbed an all-time low of 54% in 2020, the data since 1961 show no trend (R2 = 0.01). Nor do net exports (R2 = 0.00): they’ve averaged 0.8% of GDP but in 2020 – perhaps as a result of the iron ore export bonanza? – scaled an all-time high of 3.8%.

Two trends, however, are apparent. First, government’s share of GDP has virtually doubled from an all-time low of 11% in 1961 to an all-time high of 20% in 2020; additionally, its upward trend (R2 = 0.59) is significant. Conversely, investment’s share of GDP has decreased (R2 = 0.47) over time. It exceeded 30% throughout all but one of the years of the 1960s; by 2020, however, it had sunk to an all-time low of 22%. In 1961, investment’s share was roughly three times bigger than governments’; by 2020, they were almost equal – and if current trends persist within a few years G will exceed I.

Over shorter intervals, the progression of the G and I series is revealing. G’s share rose almost without interruption during the quarter-century after 1961. It’s almost universally forgotten – particularly by the ALP! – that Paul Keating cut the rate of growth of federal spending from 21% per year (when the ALP assumed office in March 1983) to 3% per year (in October 1987). Moreover, during the recession of the early-1990s it grew relatively modestly (5-7% per annum) and various states’ premiers (such as Wayne Goss in Queensland) also exercised significant fiscal restraint; as a result, governments’ share of GDP remained unchanged (at 18%) until 2005, and fell to 17% in 2006 and 2007.

Then came the GFC. The Rudd and Gillard governments threw caution to the winds, and the rate of growth of spending again exceeded 20% per year (by mid-2010, however, it decelerated below 10% and in 2010-2011 below 5%). Subsequent (from 2013) Liberal-National governments’ half-hearted attempts to impose some semblance of discipline upon the budget’s forward estimates largely failed in the face of fanatical opposition from Labor and the Greens; moreover, state governments used the GFC as an excuse to launch spending sprees. As a result, by 2019 governments’ share of GDP had risen to 19%. In 2020 it rose to 20%, and if you don’t believe that it will rise further during the next several years then there’s a bridge in Brooklyn I’d like to sell to you!

The course if the “I” series is also highly revealing. It fell, albeit not without interruption, during the three decades after 1961; as a result, by 1992 it had sunk to 22%. For the next dozen years, however, it mostly rose: it reached 28% in 2006 and remained within the range 26%-28% until 2016. Thereafter it sank year by year: it reached 23% in 2019 and 22% in 2020. I suspect that in the next few years it will sink further.

Since the 1960s, GDP’s rate of growth has sagged because governments – federal and state – have grown too large and intrusive, and investment has sunk too far (why invest when governments make it too hard and risky?). The 20 years from the mid-1990s provide an exception to this rule: during these years, governments’ share of GDP stabilised and investment’s share surged; as a result, GDP’s rate of growth rebounded. During the next few years, I suspect, governments’ share of GDP will continue to grow and investment’s will remain depressed. This is another reason why I expect that GDP’s rate of growth will subsequently stagnate.

Point #3: GDP has stagnated partly because Governments’ debts have skyrocketed

Why, with the exception of the 2000s, has GDP’s growth decelerated since the 1960s?

Another part of the answer is that during the past half-century Australian governments, federal and state, have mostly – and increasingly – shirked hard decisions that incur short-term pain but generate long-term gain; instead, they’ve taken easy decisions that increase politicians’ short-term popularity but worsen the country’s long-term problems. Rather than face difficulties squarely, they’ve not just thrown money at them: they’ve attempted to conceal them under a large and growing pile of debt. The problem isn’t just that GDP’s “G” component has risen: governments have lavished households with largesse (“entitlements”) – and thereby artificially inflated its “C” component.

In this respect, too, the GFC was a turning point. Robert Carling (“Plot Steady Course Now to Miss the Debt Iceberg Later,” The Australian, 28 January) belled the cat: “although it is [the mainstream’s panicked reaction to the COVID-19] pandemic that is driving debt to new heights, the explosion started with the GFC more than a decade ago. Total public debt of Australia’s state and federal governments that stood at $150 billion in 2007 had grown to more than $900 billion in 2019.” That’s a compound rate of growth of 16.1% per year – approximately six times the economy’s rate of growth during those years! Then came the GVC. Carling rightly notes that “since March , budget decisions have been made on the run, caution thrown to the wind and short-termism has become the order of the day as governments have adopted a ‘whatever it takes’ attitude to managing the health and economic dimensions of the pandemic.”  

During and since the GFC, in short, governments have accumulated colossal quantities of wasteful, counterproductive and downright damaging debt. The current (March 2021) total is ca. $1.2 trillion – and in the years to come it will surely rise considerably.

Figure 5: Annualised increases of GDP and Government debt, billions of $A (Adjusted for CPI), July 1996-March 2021


Figure 5 plots annualised increases of (1) debt securities issued by Australian governments and (2) GDP. Both series are expressed as billions of $A and adjusted for CPI. The first one quantifies total government debt, i.e., the net (of redemptions) increase of federal and state governments’ borrowing as measured by the face value of the bonds they’ve issued (local governments’ issuance of bonds has been marginal). The RBA has compiled the first series; the ABS the second. The first contains monthly observations; the second is quarterly. Through extrapolation, I’ve converted quarterly into monthly observations. As a hypothetical example, if GDP rises 0.3% during a quarter, then I assume that it rises 0.1% during each of its three months. Figure 6 converts into percentage changes the dollar amounts in Figure 5.

Once again, the GFC forms an inflection point. Before it (January 2009), total government borrowing fell at an average rate of $9.5 billion per year (and close to $50 billion per year in mid-2000). From then until the eve of the GVC’s eruption (January 2020), it rose an average of $62 billion per year (and more than $100 billion per year during the GFC). It’s true that from ca. 2010 to 2019 government debt securities’ rate of issuance decelerated (negative second derivative), but their quantity rose all the same (positive first derivative). Since January 2020, the annualised rate of net increase has exploded: from $79 billion (March) to $120 billion (April) and more than $300 billion since September. Conversely, since the mid-1990s the GDP figures show no trend (R2 = 0.04). Before the GFC, GDP adjusted for CPI rose at an average annual rate of $37.7 billion per year; from then until the GVC, it’s increased at an average annual rate of $31.2 billion per year. Since the GFC, Australian governments have cumulatively issued a colossal amounts of debt (we’ll shortly see how much). But this debt has paid paltry dividends: before the GFC, governments’ debt tended to shrink and GDP to rise; since then, debt has ballooned – but GDP has risen no more quickly.

 Figure 6: Increase of GDP and Governments' debt, percentage changes (Annualised and CPI-Adjusted), July 1996-March 2021


Over the past decade and more, in short, governments have mostly “invested” poorly: as time passes it takes ever more public debt to yield an additional $1 of GDP. It’s true that much government expenditure isn’t – and shouldn’t be regarded as – investment. Equally, however, politicians routinely and insistently justify their actions and proposals as “investments” – the media dutifully ape them – and Figures 4 and 5 imply that on the whole they’ve been bad investments.

We can summarise in a single sentence our conclusion to this point: the recent rebound of Australia’s GDP isn’t merely unsustainable; to a significant extent it’s not even genuine! How can this be? 

An insuperable problem lies at the very heart of the concept and calculation of GDP: a dollar of wasteful and even damaging spending is, as far as the national accounts are concerned, exactly the same as a dollar of prudent and productive spending.

If, for example, the government pays people to dig holes at Place A and Place B, and then orders them to fill holes at B with the dirt from the holes at A, and vice versa, the payments to the workers, owners of machinery, etc., will add to GDP even though they waste resources and thus deplete wealth! This isn’t hyperbole. In Book 3, Chapter 10, Section 6 of The General Theory of Employment, Interest and Money (1936), John Maynard Keynes – the patron saint of today’s disciples of “stimulus” – asserted:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise … to dig the notes up again …there need be no more unemployment and … the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Welcome to the madhouse of Keynesian – that is, “stimulus” – economics! Since March 2020, a colossal amount of counter-productive, wasteful and downright harmful debt-fuelled expenditure has occurred – and will surely continue, albeit perhaps at a decelerating rate, for years to come. It’ll make Australians poorer – not richer.

In this context, it’s easy to understand the mainstream’s fanatical and slavish devotion to Keynesian national income accounting: it creates the impression (as it is now) that the economy is advancing by leaps and bounds when the reality is that wealth is actually stagnating – and perhaps even shrinking!

Table 1: Issuance of debt and change of GDP, three periods, dollar amounts and percentage changes


Table 1 summarises the inverse relationship between Australian governments’ issuance of debt and the economy’s growth of GDP since the mid-1990s.

The greater is the quantity of debt, and the faster its percentage rate of growth, the lower is the rate of growth of GDP. The implication is clear: the explosion of debt during 2020, which will surely continue (albeit, perhaps, at lower percentage rates), will reinforce the long-term trend – that is, the downward drift – of GDP’s rate of growth.

Figure 7 plots Australia’s ratio of total (federal and state) government debt to GDP. When debt increases relative to GDP, the ratio rises; when debt falls in absolute terms or relative to GDP, the ratio decreases. It fell without interruption from 24% in the mid-1990s to 10% on the eve of the GFC (January 2007). It then rose without interruption until the eve of the GVC. Clearly, the GFC’s effect upon Australia’s public finances greatly outlasted the GFC. From the GFC to 2012, the ratio didn’t just increase, it accelerated. From 2014 to the eve of the GVC, it continued to rise but at a decelerating rate. By late-2019, the ratio reached 56% – that’s a 5.5-fold lift from the eve of the GFC. 

Figure 7: Ratio of Australian Governments’ total gross debt to GDP, 1995-2020


Then came the GVC. In 2020, the ratio rose more rapidly than at any other time – including the GFC. The implication is sobering: the GFC’s impact upon Australia’s public finances and economic growth has been long-lasting and hasn’t been addressed (never mind reversed); hence it’s safe to assume that the GVC’s effect will greatly outlast the pandemic. If rising debt over the years has clogged Australia’s economic arteries and thus slowed the rate of growth of its GDP, then the astronomically higher debt arising from the GVC will stifle and stagnate it even further.

Adam Creighton (“Debt to Double in Next Five Years,” The Australian, 28 January) reported that “public debt will [rise from ca. $900 billion in 2019 to $1.9 trillion in 2024] and ‘seriously weaken’ the financial position of , paving the way for further credit downgrades, according to new analysis.” Moreover, “the period of ‘Australian exceptionalism’ – as one of the least publicly indebted nations – is over, according to the report, written by former NSW Treasury official Robert Carling, with the total cost of the pandemic to government at $800 billion. ‘The days of Australia’s unquestionably strong public finances have passed – and we are now in a weakened position to respond to another crisis,’ Mr Carling wrote. ‘We are witnessing a huge change for the worse in the financial position of our governments and there is far too much acceptance and complacency about it.’”

On 28 January, an editorial in The Australian endorsed Carling’s analysis:

While we are significantly better off than comparable nations, Australians should be under no illusions. Our comfortable position has come at a high price. That price has been quantified in an aptly named report entitled The Looming Iceberg: Australia’s Post Pandemic Debt Risk ... The assumption that debt burdens will be manageable in the long term needs to be heavily qualified, the report argues ... reversing it should be a policy priority ...

Point #4: GDP’s Growth Has Also Stagnated Because Productivity’s Has Decelerated

Why did the mean rate of real GDP growth fall without interruption from the 1960s to the 1990s? Why did it rebound to a three-decade high in the 2000s – and lapse to a 50-year low in the 2010s? Figure 8, which elaborates a graphic in “Why Productivity Growth Has Stalled since 2005 – and Isn’t about To Improve Soon,” ABC News, 28 April), supplies another part of the puzzle. Using ABS data, it plots a key measure of productivity – GDP per hour worked – over various lengths of time. During the 5 years to 1980, for example, it rose 14%; during the 10 years to 1985, it increased 25%; and during the 15 years to 1990, it lifted almost 30%.

Figure 8: GDP per hour worked, percentage changes, three durations, 1980-2020


During each of the three intervals (5 years, 10 years and 15 years), not only is the overall trend is downward: the most recent (2020) observations have reached 40-year lows. The rate of growth of GDP per hour worked decelerated during the 1980s, began to accelerate during the 1990s, reached an apex in the years just before the GFC, and has mostly decelerated since then. As a result, the high-water mark of productivity growth occurred in ca. 2000-2005 – and 40-year nadirs were plumbed in 2020. It’s a fundamental problem, but has by near-unanimous consent been consigned to the “too hard” basket.

According to Peter Martin, the author of the aforementioned article, “it’s not only here. In the United States and other developed economies, productivity growth is divided into ‘before 2005’ when it was rapid, and ‘after 2005’ when it collapsed … We might be coming up against hard limits in the amount we can squeeze out of each hour of paid work …”

The problem, it seems to me, isn’t hard limits: it’s soft governments supported by voters who reject tough choices! According to The Australian (“Jobs Growth ‘Key to Push Recovery,’” 16 April), Josh Frydenberg “remains committed” to “reform.” “Flagging his reform priorities ahead of the budget, said the Morrison government was ‘very focussed on what the economy will look like on the other side of the pandemic. Digital transformation, meeting needs, emerging industries, developing the skills sets, matching what the institutions are producing with what the private sector requires, all of that is important,’ he said.”

 Translation: just as the ALP has forcefully and permanently repudiated the historic reforms of the Hawke-Keating years, today’s Liberal-National coalition has disavowed the hard-won achievements of the Howard-Costello era. It won’t trim government spending and bureaucracy, slash regulations, privatise and use the proceeds to repay debt, and slash corporate and middle class welfare. Quite the contrary: Morrison-Frydenberg “reforms” all entail government borrowing, spending, featherbedding and subsidising!

The Australian (“Risks Behind Bank Boom,” 21 April) encapsulated this key point:

Sure, there’s enough stimulus in the system to keep things chugging along , but there’s no evidence of a micro-economic reform program that would enable the economy to sustainably outperform. 

Point #5: Reform has become anathema, so wages’ growth has stalled

To put it mildly, it’s contradictory; to put it frankly, it’s farcical: since well before the GFC, the public has (1) demanded higher rates of pay and (2) increasingly rejected the policies that reliably generate sustainably higher rates of pay!

Figure 9: Total hourly rate of pay (excluding bonuses), 12-month nominal change, September 1998-December 2020