Australia is facing lean economic times with the government unable to deliver on community expectations for increased spending on key programs including defence, health and climate change, a leading economist warns.
Professor Ross Garnaut, economics adviser to Labor in the 1980s and author of the government climate change review, has co-written a book on the 2008 financial crash, warning that Australia faces a painful adjustment even though it weathered the crisis better than many stgeloped nations.
He said during the boom times leading up to the crash, Australia was spending more than was sustainable.
“We had some belt-tightening to do anyway and we didn’t do that at the time so that’s ahead,” he told ABC television.
“Secondly, we were running a bigger current account deficit than we are likely to be able to run comfortably in the circumstances after the crash. That’s about more belt-tightening.”
Prof Garnaut said the Australian and world economies would have lost some productivity through the failure of the international banking system and reduction in trade opportunities.
“For all of these reasons we have got a bit of belt-tightening to do if we are going to maintain economic stability while getting ourselves back to full employment,” he said.
“I don’t think we can deliver current community expectations about continuation of increases in defence expenditure, health expenditure, big payments in free permits for climate change compensation.”
Prof Garnaut said the government would need to be running tight budgets for quite a long time into the future.
He said the government was right to introduce a big fiscal stimulus program once the global financial crisis hit.
“But once there are signs that the economy is recovering faster than had been anticipated, then it’s appropriate to pull back that stimulus at a faster rate,” he said.
In the book, titled The Great Crash of 2008, Prof Garnaut warns that Australia’s big banks were essentially insolvent at the time of the crash.
He said they were having difficulty rolling over their huge external debts and without the government guarantee on wholesale borrowing, they may not have been able to fund liabilities.
Prof Garnaut said it was a big problem that banks could in future rely on the government to bail them out.
“Now that it has happened once, there will be an expectation that it will happen whenever banks get into trouble and you no longer have appropriate levels of responsibility about private decision making if people think there is going to be a government bailout if they go wrong,” he said.