Australia is going through a process of economic diversification. The country is an important global supplier not only of iron ore, coal, bauxite and various precious metals, but also of liquid gas. As such it is feeling the pinch of the end of the super cycle and the steep fall in prices in these markets. It also needs to change the focus of its production structure in order to put an end to its dependency on raw materials exports and to be able to maintain high economic growth in the future. Since 2013 investment and employment in Australia’s raw materials sector have been declining. The conservative Prime Minister, Malcolm Turnbull, aims to accelerate the restructuring process by political means.
As regards corporate restructuring, Turnbull is focusing especially on smaller companies. Worthy of note here are his plans to promote tourism and tourism-related services as revenues from tourists from China and other Asian countries are expected to grow very strongly in the future. This is flanked by plans to expand the country’s transport infrastructure – also with the participation of private investors. This includes, for example, new highways and a second airport for Sydney. But the financial sector is also to grow faster. Start-ups are to be supported in order to accelerate the innovation process in the fintech segment. Australian financial products are to play a more important role in exports. Finally, Turnbull has also identified the education sector as a source of new growth. Institutions of higher education are to become more attractive for (paying) students from abroad. The restructuring process also includes an innovation offensive: very generally, the government plans to promote technical innovations and the entrepreneurial spirit, foster closer cooperation between universities and business and make technical school subjects more attractive.
As plausible as all these plans may be, they are nevertheless not uncontroversial – because they cost a lot of money. Above all, the volume of tax cuts for companies planned in order to attract private investment has come up against resistance from the Labor opposition. The first stage of the corporate tax cuts has now passed parliament, but at only one percentage point it looks too small to really stimulate investment in a sustainable manner. Whether further tax cuts will follow is highly uncertain as the government only has a narrow parliamentary majority. In order to finance his restructuring offensive Turnbull has cut pensions and child allowances and has scrapped individual tax benefits for families. These cuts have also unleashed criticism. The innovation offensive does not go far enough anyway as the government is not prepared to invest enough money. The various free trade agreements that have been negotiated recently, especially with China, would appear to be of more concrete benefit here. This mainly helps Australia’s agricultural exports and is likely to reduce Australia’s large current account deficit. On the other hand, foreign investors are to be allowed to participate to a greater extent in projects in Australia.
Despite the restructuring towards a broader-based economy, ultimately the fear remains that Australia will not really be able to shake off China’s strong influence on its economy because of the stark realignment of its tourism sector to Chinese visitors. But its diminished dependency on exports of raw materials will have a positive impact on Australia’s medium-term growth path.