Australia’s secret Keynesianism

Shaun Wilson, University of Sydney
Nick Turnbull, University of New South Wales

For some time now, Australia along with the United States, has been leading the economic growth tables among OECD countries. Faster growth rates among countries that have placed an ever greater institutional reliance on the private sector have led to now familiar claims about the superior functional performance of markets and the strength of the new, flexible hi-tech economies. Critics of the achievements of these economies, however, point to the shifting burdens of adjustment that faster growth has entailed long working hours, widening earnings inequality and higher consumer debt. Others suggest that the ‘new economy’ has not undergone a sudden upward shift in its productivity due to new technology and flexibility as some like Federal Reserve chief Alan Greenspan have been arguing (Madrick 1999).

Some unique factors appear to be playing a central role in driving Australia’s faster economic growth. Contrary to the apparent ‘death’ of Keynesian fiscal policies (with an elite consensus committed to budget surpluses in place), we now must look beyond the formal balance sheets of state finances to understand how the state is continuing to ‘pump prime’ the Australian economy by relying on household-based deficit spending. Are these policies either desirable or sustainable dimensions of Australia’s economic performance? Here, we look at some of them briefly and then speculate on the emerging relationship between the state and the economy in Australia.

1. Australia’s Rising Household Debt and Debt Financed Consumption

Australian households are no longer net savers, saving less than 2 per cent of their annual income (ABS 2000a, p. 7). At the same time, Australia’s once modest household debt levels have ballooned out in the last ten years, rising to about 90 per cent of household income, closing the gap between Australia and other countries like the UK, Canada and the United States (RBA 1999, pp. 15–16). Debt financed consumption expenditure is important in explaining Australia’s recently improved economic growth performance. While orthodox economic analysis insists that debt is merely a function of household confidence in the low interest rate environment (RBA 1999, p. 11) and point out that it is mainly been channelled into purchasing housing assets, there are other considerations. It is true that the growth in debt is largely associated with borrowing for housing. But with the growing prevalence of credit linked to mortgage packages, the distinction between consumer and housing credit is much less clear than in the past. The steep growth in the average mortgage points not only to rising house prices but also to difficulties in household saving that mask underlying pressure on household budgets.

Contrary to the apparent ‘death’ of Keynesian policies, the state continues to ‘pump-prime’ the economy by relying on household-based deficit spending.

National accounts figures show household consumption remains the solid and consistent contributor to Australia’s economic growth with exports and capital investment much weaker and intermittent contributors (Commonwealth Treasury of Australia 2000: Chart 3). Net exports are only forecast to make a positive contribution to growth in 2000–01 after a recent negative impact (2000: Table 1). The forecast improvement in exports, however, is partly due to the once-off contribution of the 2000 Olympic Games, which are expected to increase service exports by $1.75 billion ($1 billion of which is coming from the sale of international broadcast rights) (2000: Box 3).

Australia’s dependence on rising household expenditure for growth is not coincidental. As we shall see, there are a plethora of public measures, inducements, taxes and incentives to encourage private spending and the growth of household debt in order to sustain Australia’s growth rate.

2. Inducing Private Spending: Health Care, Education and Rent

A glance at recent household expenditure data reveals some interesting trends. Child care, education and rent were among the four fastest growing areas of household spending over 1993–94 and 1998–99 (ABS 2000b). Spending growth on all of these services can be in part linked back to the long-term ‘rollback’ of public provision. Remember the large cuts made to childcare in the 1996–97 Howard Budget and the ongoing preferential treatment of private education by the same government. Although it is true that expenditure on such services might be expected to rise relative to other parts of household expenditure (as part of long-term shifts in household needs and preferences), government policy has reinforced the private provision of such services rather than committing serious public investment to these areas.

Similarly, rising rents can also be linked to declining government (both Labor and Coalition) commitment to replenishing the housing stock with affordable public housing. Between 1987 and 1997, the number of public sector dwellings completed fell by over 50 per cent (ABS 1998, p. 114). The cumulative effect is showing up in greater competition for housing among low income earners who cannot afford to buy homes and who struggle to find adequate private rental accommodation in the big cities.

Rapid growth in household expenditure on health care is also stimulated by recent policies. The Liberal Government’s mechanisms to revive the ailing private health care sector with new taxes, incentive measures, and penalties (costing the public billions) conform to the emerging pattern of market provision of (more costly) social services to maintain economic growth.

3. Casino Capitalism: Place Your Bets

Gambling accounts for an ever-increasing share of household expenditure in Australia. The Productivity Commission estimated average annual household expenditure on gambling in 1997–98 at 3 per cent, up from 1.6 per cent (in today’s prices) in 1972–73 (1999, p. 3.8). This is continuing to rise. The highest proportion was in New South Wales, averaging 3.6 per cent. The net expenditure on gambling in 1997–98 was $10.8 billion, or around $760 by each Australian adult, placing Australians amongst the biggest gamblers in the world. The growth of gambling is thus having a substantial impact on Australia’s growth and employment. At the same time, taxation revenue from gambling has also increased dramatically, rising from about nine per cent of revenue in 1991–92 to about 12 per cent in 1997–98 (1999, p. 2.17).

Child care, education and rent are among the fastest areas of household spending, driven by the ‘rollback’ of public provision.

Research by the Victorian Casino and Gaming Authority argued that increased expenditure on gambling had been funded by a run-down in household savings (Livingstone 1999, p. 36). Livingstone argues that when savings are not available it may be that low income earners redirect their consumption away from other areas, including food, clothing and health (1999, p. 36).

The dramatic increase in gambling activity is a result of government deregulation of the industry. Attempts at regulation in recent years have been a catalogue of missed opportunities, with political leaders sidelining the debate to one about ‘problem gamblers’. Most of the growth in gambling expenditure comes from gaming machines, which accounted for more than 50 per cent of total gambling expenditure outside casinos (1999, p. 3.3). With gambling making such a contribution to growth, employment and tax, the political will to deal with its downside—rising personal bankruptcies and hardship—will remain limited.

4. Cranes on the Horizon: The Importance of Building and Construction

With a disappearing manufacturing sector and little sign of high-tech manufacturing or service industries to fill out the ‘knowledge nation’, the sight of ‘cranes on the horizon’ is a welcome relief. The Treasury’s Economic Roundup frankly admits that this sector is now contributing a ‘historically high’ share of GDP at 6 per cent (Commonwealth Treasury of Australia 2000, p. 13) and thus remains a central element in Australia’s private investment (with many businesses and industries feeding from it). In fact, over the last two years the contribution of dwelling investment has rivalled business investment in its impact on overall economic growth! (Commonwealth Treasury of Australia 2000: Chart 3). Construction and building industries are thus particularly important both Australia’s business and political cycles. Since these industries are very sensitive to economic fluctuations, policies supporting their growth are a political necessity.

The building industry’s contribution to growth reached a record level in the March quarter 2000 of $9,196.4 million (seasonally adjusted) (ABS 2000c, p. 1). This increase of 8 per cent from the previous quarter was due to a record increase in residential building of 12.1 per cent to $5,925.8 million (2000c, p. 1). The number of dwelling units commenced during the March quarter of this year increased to 44,952, 23.5 per cent (seasonally adjusted) above the figure for a year earlier (ABS 2000d: 1).

Despite the increase in building activity, housing affordability is decreasing for low income earners in major cities. In Sydney, median rents are rising and the proportion of those in rental tenure compared to home purchasers is rising (NSW Department of Urban Affairs and Planning 1999, p. 1). While aggregate measures of home purchase affordability remain stable, DUAP notes that ‘in combination with continuing job uncertainty and the likelihood of eventual interest rate rises, these factors continue to discourage or prevent many low and moderate income households from entering home purchase’ (1999, p. 10). Difficulties at the lower end of the market are counter-balanced by an increasing average value of home loans. Research suggests that at the upper end of the housing market higher income earners are making larger purchases, so that the average real loan amount has steadily increased over the decade despite falling interest rates (1999, p. 12).

With a disappearing manufacturing sector and little sign of the ‘knowledge nation’, the sight of ‘cranes on the horizon’ is a welcome relief.

Gearing mechanisms giving tax breaks to property owners investing in new developments have supported the booming housing market. Governments are especially responsive to the ‘aspirational middle class’ which seeks more upscale living and is willing to borrow extensively to enjoy the new urban lifestyle. However, the housing market is forecast to subside dramatically in the near future (BIS Shrapnel 2000). To counteract the anticipated decline in housing construction post GST and Olympics, the Commonwealth Government is providing a $7,000 grant to first home-buyers this year under the joint Commonwealth-State First Home Owners Scheme. The New South Wales Government will add to this through First Home Plus, which also institutes a range of measures to make access to home loans easier and support the construction of new dwellings in particular areas of the State. These policies are designed to keep investment in the building industry strong through the forecast downturn in demand, and reduce the effects on the unemployment level. Most importantly, they act as a ‘pump-primer’ to the economy at a cheap cost to governments with all the risk being borne by the household.

Australia’s Privatised Keynesianism

We are not merely criticising the dishonest portrayal of Australia as a successful market economy after years of hard restructuring. Recent economic growth has little or nothing to do with the benefits of increased market dynamism. In fact, it is the same old indebted economy we have always had, but with an ever greater reliance on household consumption, debt and long working hours to keep it booming. However, this is not simply a result of a deepening culture of consumerism. We have attempted to explain recent economic ‘success’ by understanding government policies that have assisted this success as a reworked variant of traditional Keynesianism—something that is not immediately obvious.

The difference that underlies the policy arrangements we have described here is that the state, rather than undertaking the expense and risk of deficit spending to stimulate growth itself, is using policy mechanisms to encourage households to do this. Through these mechanisms households now undertake more of the state’s function in maintaining growth, financed by their rising consumption and household debt.

Policies on gambling, on construction and on private provision of education, housing and health care, we have argued, amount to a proto-Keynesian and strategically politically management of the economy. All forms of Keynesianism are motivated by political preferences about how to ‘engineer’ growth in the economy as a whole. The fact that the policies we have described have, in the main, have benefited the private sector in no way diminishes the fundamental role of government in stimulating this new economic activity.

Our argument goes some way to countering the orthodox view that it is ‘voluntary calculations’ about low interest rates and a good economic environment that is stimulating the growth of spending and debt. The element of political inducement we have identified here, and its relationship to ensuring expansion, must be more seriously countenanced. An alternative would neither run down the direct role of the public sector in industry development nor place additional burdens on the household. It is ironic in these circumstances that Peter Costello brags about the Government’s responsible economic management and low level of public debt.


ABS (1998) Australian Social Trends, 4102.0, Australian Bureau of Statistics, Canberra

ABS (2000a) National Income, Expenditure and Product, (March Quarter) 5206.0, Australian Bureau of Statistics, Canberra

ABS (2000b) ‘ABS gives snapshot of pre-GST spending patterns’, media release June 28, Australian Bureau of Statistics, Canberra

ABS (2000c) Building Activity, Building Work Done, Australia (March Quarter) 8755.0 Australian Bureau of Statistics, Canberra

ABS (2000d) Building Activity, Dwelling Unit Commencements, Australia (March Quarter) 8750.0 Australian Bureau of Statistics, Canberra

BIS Shrapnel (2000) ‘Sydney CBD: short-term setback a precursor to 1980s style boom’, media release, July 6

Commonwealth Treasury of Australia (2000), Economic Roundup: Autumn, Commonwealth of Australia, Canberra

Livingstone, Charles (1999) ‘Hopelessness and Loss: Victoria’s Gambling Culture’, Arena Magazine, 42, August/September, pp. 34–37

Madrick, J. (1999), ‘How New is the New Economy?’, New York Review of Books, Sept. 23

New South Wales Department of Urban Affairs and Planning (1999) NSW Housing Indicators Report: Data to September 1998, Sydney

Productivity Commission (1999) Australia’s Gambling Industries, Belconnen, Australian Capital Territory

Reserve Bank of Australia (1999), ‘Consumer Credit and Household Finances’, Reserve Bank of Australia Bulletin, June

Shaun Wilson is Associate Lecturer in Political Economy, School of Economics and Political Science, University of Sydney. Nick Turnbull is Researcher in the Quality of Life Project, School of Sociology, University of New South Wales.