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Sent: 17-07-2012 12:37:02
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Canadian Settings Contrast with Australia'sA How To Book Of Self Managed Super FundsYes can be the hardest word - part 1SMSFs and Related Party TransactionsEmail Marketing For Planners
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Canadian Settings Contrast with Australia's

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Canadian policy settings raise the possibility that Australia is at risk of becoming too infatuated with the idea of being a miracle economy.

For many years, Australia's policymakers have been at pains to highlight how much better performing the Australian economy has been than the economies of other countries. The idea of Australia being a "miracle economy" has become embedded in the Australian political rhetoric.

Recently, on the ABC television programme The Insiders, opposition leader Tony Abbott was taken to task for not being more positive about the Australian economy. When supposedly sceptical political journalists leap aboard the miracle economy bandwagon, there is a risk of overload.

Since the time Peter Costello was Treasurer, Australian politicians have become increasingly smug about the country's economic positioning. Statistically, it has been better than average and surprisingly good against the benchmark it set for itself in the 1980s.

However, the reason politicians talk with reverence about the Hawke-Keating years when referring to the sources of the improved performance is that little reform has occurred since then to support the country's growth potential.

Even then, the Hawke-Keating reforms were motivated by, and simply compensated for, poor prior performance. Between 1960 and 2002, there was no net difference between the expansion of the Canadian economy, for example, and the expansion of the Australian economy.

The momentum generated in the Hawke-Keating years was maintained by a cyclical upturn in commodity prices and investment spending after 2002 which appears to have benefited Australia marginally more than Canada. However, as a north Atlantic economy, Canada's growth was hit far more severely by the credit crisis in 2008. Since 2009, Australia's pace of economic growth has not outshone that of Canada.

As the "miracle economy" rhetoric has gained ground, Australian politics has been preoccupied with sharing the benefits of growth and correspondingly less engaged in understanding where those benefits arose and how they can be built upon.

A similar outcome is evident in the USA where the rhetoric is about protecting "the middle class". Every presidential speech refers to this symbolic group and how critical it is in permitting the USA to remain "the world's strongest economy". In Australia, the corresponding rhetoric refers to "working families" benefiting from "the miracle economy".

Habitual use of rhetoric such as this risks the possibility that everyone slackens off in their efforts to build wealth while they think about what their share of the existing pool of wealth should be.

The pressure for business to be more productive consequently diminishes. Governments are less energised in their pursuit of productivity enhancing reforms. Households become more demanding in their quest for a larger share of the economic cake. The end result is that overall performance begins to flag.

Another symptom of this politics of smugness is a central bank demanding that everyone see the economic glass as half full rather than half empty. The fullness of the glass is not simply a handy simile by which to encourage a more optimistic view of life. There are some very meaningful consequences for the way policy is set.

Interest rates in Australia are far higher than in Canada where many of the economic exposures are similar.

Canada's financial system resembles Australia's in structure and ability to withstand financial shocks. Both countries' currencies are more or less level with the US dollar. The trends in inflation rates in the two countries have been similar although, on average, the Australian rate has run at about one percentage point higher. Canadian government debt as a percentage of GDP is closer to 80% than Australia's 20-30% but that should imply higher interest rates there not lower rates. Both countries are participating in an energy renaissance.

Yet, Australia's 3.5% cash rate compares with a 1.25% policy rate in Canada. Since 2008, Canada's policy interest rate has been running below inflation while Australia's has been above inflation by 2-3 percentage points.

There appears to be a clear difference in the settings and, consequently, expectations about the future. Canadian authorities appear to be erring much more on the side of stimulus. Analysts of the Australian settings will say that the central bank here is holding something in reserve just in case things get worse.

In either case, it is hard to accept that both sets of policy are right. Importantly, the risks are not symmetric. If Canadian authorities are wrong, they can prevent growth and inflation getting out of hand by aggressively raising rates. History says that the reverse - trying to generate growth by cutting rates after having kept them too high for too long - is a more difficult task.

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