The recession of 2023-24 is the longest per-capita downturn on record, since the Australian Bureau of Statistics started keeping track back in 1973. The latest data released last week shows that Gross Domestic Product (GDP) per person has now shrunk for seven consecutive quarters. The second longest on record lasted for four quarters. The Great Depression may have lasted eight quarters, but we have no reliable data going back that far.
Graph 1: GDP per person
The ABS records three other serious per-capita recessions (1974-75, 1982-83, 1990-91), though each was shorter and sharper than the current recession. In all of those historical cases the recession was followed by a change of government, with Fraser replacing Whitlam in 1975, Hawke replacing Fraser in 1983, and Keating replacing Hawke in 1991. Albanese should be nervous.
Adding new people to the country has meant that total GDP has inched upwards, but that is irrelevant for people’s living standards. Since Labor came to power in mid-2022 the total GDP has increased by 3.4 per cent, but over the same time the population has increased by 5.6 per cent, so that the average person is now 2.2 per cent poorer than they were before the 2022 election.
The deteriorating economy has coincided with rising prices, with underlying inflation staying stubbornly over the 3 per cent target rate since the beginning of 2022. The consequence is that this recession has manifested as a cost-of-living crisis.
Taming inflation is important (and may be achieved next year if the RBA can hold their nerve), but that alone will not improve living standards. Even without inflation we have reason to be worried about our economic future. Prosperity comes from productivity, and the sad truth is that Australia’s productivity levels have stalled for the last eight years.
Graph 2: Productivity (GDP per hour)
The bump at the end of the graph was largely caused by Covid-related changes in labour force participation, so is somewhat misleading. Though even if we ignore that anomaly, current levels of productivity are stuck at the same level we had back in 2016. This is the longest period of productivity stagnation on record.
Australia’s productivity stagnation is worrying, but it shouldn’t be surprising. The last 20 years have seen very little substantive economic reform from either major party, with the exception of the ‘stage 3’ tax cuts. Instead, we have seen a steady growth in government tax and regulation, which has stifled the sort of private investment and innovation that we need to boost productivity.
Australia desperately needs another round of serious tax cuts. The stage 3 tax cuts were a step in the right direction, but they took six years to implement, and they only compensated us for 1-2 years of structural tax increases. With the federal election coming up early next year, the Liberal Party should take this opportunity to show political leadership and announce a bold tax-cutting agenda to help kick-start productivity and get our economy back on track.
Dr John Humphreys is the Chief Economist at the Australian Taxpayers’ Alliance, and has worked previously as a university lecturer, economic consultant, and policy analyst at the Australian Treasury.