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Interview: Alan Duncan — What lies on the economic horizon?

By Zilla Efrat

Keep those hatches battened down! 2024 looks set to be as challenging as 2023 was.

According to Professor Alan Duncan, the director of the Perth-based Bankwest Curtin Economics Centre, many of the major economic and social themes that dominated the Australian landscape in 2023 will continue into 2024.

Plus, boards and management can expect a few more challenges.

‘This adds to a heightened degree of uncertainty for households and businesses alike, and one thing we’ve learned from the past is that uncertainty is not a good ingredient when it comes to making economic decisions,’ says Duncan.

‘It is often a basis for constrained choices.’

Duncan believes addressing the cost-of-living crisis is one of the most important priorities for 2024.

‘We still see an awful lot of financial vulnerability among less well-off households predominantly caused by the higher cost of living as well as rising housing costs for those purchasing property or looking to rent,’ he says.

He notes that the housing market has been one of the most persistent challenges that we’ve faced in Australia since the onset of COVID-19. The situation has been exacerbated by a lack of sufficient housing supply in the face of population growth, rising rents and higher interest rates as the Reserve Bank of Australia (RBA) continues in its fight to control inflation.

But when it comes to interest rates, Duncan observes: ‘When you see the forecasts from the RBA and the mid-year economic forecast that the federal government released at the end of last year, I expect little in the way of relief, at least for the first half of 2024.’

Duncan, who is also a John Curtin Distinguished Professor at Curtin University, believes that we may see inflation touching the upper limit of the RBA’s two to three per cent band by the end of this calendar year. But he says there’s still some way to go in delivering sufficient housing stock to take some heat out of the housing market.

Duncan notes that more households have been dipping into their savings to make ends meet as inflation surges.

‘But one of the challenges facing households — and which has been lost in the conversation — is the cumulative impact of price inflation on their financial capacity and financial well-being.

‘Even if prices and wages converge and we get within the RBA’s two to three per cent target band, this will not eliminate the cost-of-living challenges unless we see some compensatory factors or a substantial drop in prices.

‘All that would happen is that the price hikes that we’ve experienced over the past two years would be locked in and families would still be paying far more for essential items as a share of their overall income than they were before. This could further affect their welfare, especially those on lower incomes.

‘Hopefully, we’ll get to a position where we’re seeing some real wage growth. There’s an awful lot further to travel on this journey before we get to a balance again.’

Meanwhile, it appears that Anthony Albanese has rolled back the stage three tax cuts, announced by the Morrison government in mid-2019 with Labor support. The revised tax package will deliver more savings to workers earning under $150,000 compared to the old stage three plan, and less to higher earners.

Duncan previously believed the government would press ahead with the original plan but supports the change.

‘I expected the Albanese government to stick with the old plan because, one, they were an election promise and two, data released at the end of last year showed the share of income taken in tax in Australia was pretty much at an all-time high,’ he says.

‘The personal income tax reforms were designed to reimburse workers for what’s known as bracket creep.’

That’s where inflation pushes income into higher tax brackets, resulting in higher taxes without an increase in real purchasing power.

‘The new changes work better from an equity standpoint and are far more defensible considering the current cost-of-living pressures being faced by so many families.’

However, Duncan would like to see ad hoc changes, such as the stage three tax cuts, replaced by structural changes that are driven by the health of the economy.

‘I’ve long been an advocate for the indexation of tax thresholds because I believe that otherwise, governments can advertise the changing tax thresholds as tax cuts,’ he says.

Duncan says other factors are likely to contribute to rising inflation this year – for example, strong consumer demand, more supply chain disruptions and higher transport costs, given what’s happening in the Middle East and the Russian/Ukrainian war.

The global outlook could also heighten the uncertainty boards face.

‘There are geopolitical challenges that can affect Australia’s trade and economic relationships with the region and more broadly,’ says Duncan.

More than 50 countries are expected to hold national elections in 2024, including the United Kingdom, India, Indonesia, Pakistan, Russia and Mexico.

However, Duncan says: ‘I do think that the outcome of the US election will set the tone for global economic relationships and that’s the one I’m watching most closely.

‘There will be a lot of factors to consider depending on who makes it through the US election. Trade openness is a feature of a thriving global economy, and we need to be watchful of our trade relationships and ensure we have a strong series of trade relationships with as many jurisdictions as we can.

‘Diversification of our trade partnerships is an important defence against the vulnerabilities of bilateral relationships.’

Duncan adds that the transition to net zero will be a dominant factor for boards and management in 2024 and beyond.

‘This is one the megatrends that all organisations need to address in their policy settings,’ he says.

‘Much will depend on the extent to which organisations can plan their own contribution to this global transition with some certainty.

‘There’s some concern that the transition to net zero will create constraints and costs for businesses, but it’s more important that businesses get on the front foot to capitalise on the opportunities it offers.’

Duncan says research by the Bankwest Curtin Economics Centre, a leading research group focused on economic and social policy analysis, identifies that Australia could benefit quite substantially if it addresses the transition in the right way.

‘We could benefit in terms of the products that we sell on the global market as well as through the technology that we build and the innovation that we bring to bear. We can also target the natural resources we have at our disposal and use that in the transition to net zero.

‘In all these respects, Australia is tremendously well positioned. As long as there is confidence among businesses that the opportunity is a positive one, Australia could come out ahead when it comes to navigating the net zero transition.’

Elsewhere, Duncan says one of the hangovers from 2023 that we need to resolve is Australia’s ongoing skill shortages and what role migration and the development of local skills have to play.

He says: ‘Australia has benefited from being a knowledge-based economy with the added benefits of having a very strong natural endowment of resources. We need to have the skills to capitalise on those great opportunities.

‘There’s an imperative to understand, as much as possible, what our future skills needs will be and how people’s jobs and the task content of their roles are likely to change.

‘There are also risks inherent to our move to an increasingly automated world. If we don’t understand it well or don’t correctly pick what the next generation of skills will be to maximise Australia’s economic potential, then we risk falling behind. So again, we need to be on the front foot when it comes to building this the next generation of talent.’

Alan Duncan will be speaking at the WA Governance and Risk Management Forum on 7 May 2024.

 


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