A very interesting and timely article. While consumer spending figures have inspired some (though not alot) of confidence that the Australian public is tightening its belt, there is still far too large a preoccupation with twenty somethings mortgaging themselves to the hilt for houses they simply cannot afford.

Although Mr Eslake has advocated holding tax cuts off until post 2007, I see no reason why a complete restructuring (eg Brackets of 40%, 30%, 20%, 10%) shouldn't take place now. That way a more efficient and predictable system could be in place for further cuts when the inevitable down turn occurs.

The US has got itself into an absolute mess not only with currency manipulation in China but also in Japan and the Arab states. If Australia is to avoid the fall out once again tax cuts are only the start of reforms needed. The greatest obstacle is trying to explain to the left side of politics that the budget surplus must be protected (aside from tax cuts).

wre,
I am a left thinker, who believes the surplus should be protected to an extent, minus tax cuts.

I believe a surplus should be retained for economic as well as social reasons, and that the constant whinging of the wealthy for tax cuts should cease.

Saul Eastlake is one of this country's most respected economists, and I am sure his prediction will be taken into consideration by any Government, of any colour.

Congratulations Saul, a most interesting and enlightening prediction.

What many 'ordinary' folks like me (until I read up) don't realize, is this.

1/ Manufacturing has become increasingly owned by foreign companies.
(our big 3 vehicle makers are all o'seas)

2/ Since John Buttons 'car policy' to rationalize the industry, and reduce the number of makers was realized, there has been large 'growth' of IT sectors related to this consolidation/rationalization.

3/ Much of the other "growth" of the 'service' sector has been connected to the large job losses and o'seas outsourcing by major corporations like banks and funds. That 'service' sector has been IT.

4/ Now that most large corporations have DONE the shift to outsourcing and IT to manage their newfound lean operating procedures, there is not much more to do, so I expect growth in those sectors to slow considerably.

5/ This leads to the difficult position where (for example) major banks (having closed so many branches) can only save more money by outsourcing MORE costly Australian wage type jobs.

6/ Pressure on their Corporate 'bottom line' and CEO's bonus performance indicators will continue fueling this slash and burn wildfire of economic destruction of the 'average working man'.

7/ Both low AND Hi skilled Australians are being replaced

8/ Political pressure to restrict o'seas outsourcing will have limited impact (though I'm always advocating it) because o'seas manufacturers will wave the 'We will re-locate' stick over the Polys.
9/ High pay will be restricted to the construction and infrastructure industries, which are already the focal point of socialist relevance challenged unions like the ElectricalTradesUnion and CFMEU.

10/ WE STILL CAN COMPETE on a world stage with well managed, government/private teamwork in value added manufacturing which utilizes our natural resources. AT A HUGE but SURVIVABLE COST..but only by looking at automation and global markets...or chinese pay packets.

The solution is NOT a "LABOR or COALITION" one..it is an AUSTRALIAN ONE.

Interest rates will not go up more than 1% over the next 5 years.

The government will decide when to kickstart the property market (early 2009)by incentives.

Wages will increase more than expected.

Consumer spending will tighten before (due to oil, property, rates, jobs) the property market picks up, then spending will go again after equities increase.

The Aussie dollar will move down to 60c then back up to 85c as the US faulters slightly.

We are in the eye of the storm at present, we will be picking up again within 3 years.

Saul, a few things really worry me about this sort of prediction;

1. Peak oil, which is likely to have dramatic consequences for our and other economies by greatly disrupting lines of transport, triggering inflation and causing general destabilisation not only economically, but of society as a whole, which is bound to stop growth dead in its tracks and which will probably manifest itself within the next five years.

2. The notion that we have had continuous economic growth for 15 years while at the same time seeing all sorts of things decline that should be supported by strong economic growth, such as our health and education systems, the gap between the rich and the poor, environmental degradation, etc, etc. One has got to ask; how real is this economic growth? What would it be like if we measured it in a different way that took into account things like the inevitable declining non-renewable resource base, a declining renewable resource base (which should just not be allowed to happen), and an ever-larger population (which we should have stabilised years ago)?

3. The notion that GDP is the all-important parameter, when surely per-capita economic turnover is what really counts. With a rapidly increasing population over the period of continuous economic growth, there has been little or no or very likely negative average per-capita economic growth, and of course it has been very unevenly distributed.

4. The notion that we go into recession the instant we stop growing.

If we measured economic growth meaningfully, we would find a very different story emerging. And if we then looked at per-capita trends over this 15 year growth period, we would see a considerable +/-steady decline.

So for me the significance of your article is lost because the interpretation of growth is fundamentally flawed to start with. This is not a personal criticism – you have previously acknowledged the significance of at least some of the points I have mentioned here. We just need to get those hard-headed reality-detached economists and politicians to do the same.

Thank you to the various posters for their comments. Since there's a 350 word limit I can't respond to every point, just a few observations.

I agree with 'wre' that comprehensive reform of the tax system, embracing lowering of rates paid for by broadening of the tax base, ie eliminating concessions and exemptions) would be highly desirable. However this is not an appropriate time for significant net tax cuts, unless funded by roughly commensurate spending reductions, and I'll leave others to argue over the desirability of those.

I agree with 'realist' that rates will not go up by much, although I will be surprised if the currency moves through as wide a range as he suggests.

'Ludwig' makes some important points. I'm increasingly inclined to accept that 'peak oil' will happen in the next few decades, but that this means that oil prices will stay high and stimulate conservation, the search for alternative energy sources, etc; and that oil supplies will decline gradually rather than abruptly.

I've previously acknowledged, as 'Ludwig' notes, that GDP is an imperfect and incomplete measure of the broader concept of 'welfare' or 'well-being'. However these kinds of discussions, at least among economists, are typically conducted in terms of measures such as GDP - which at least allows people to speak a 'common language', as it were. Likewise the standard definition of 'recession' (at least two quarters of negative GDP growth) is widely accepted (in Western countries) even if it doesn't capture every aspect of deterioration in economic performance.

Per capita GDP growth is less imperfect than GDP unadjusted for population changes as a measure of changes in living standards, and it's true we've had 8 declines in that measure since the last official recession in 1990-91, as against only two falls in GDP itself. Nonetheless, per capita real GDP has risen 41% since the last recession, and research by NATSEM (among others) casts some doubt on the (admittedly widespread) belief that the income distribution has become less equal during this period.