CoPS/IMPACT Working Paper Number G-246

Title: Quantifying "Dog Days"

Authors: J.M. Dixon, P.B. Dixon, J.A. Giesecke and M.T. Rimmer


In his recent book "Dog Days", Garnaut (2013) argues that the Australian economy faces significant economic challenges, with a risk that just as the investment phase of the mining boom ends, Australia will be entering an economic environment characterised by declining terms of trade, a rising dependency ratio and rising world interest rates. In this paper, we evaluate the consequences of these challenges for key macroeconomic variables and per-capita measures of economic wellbeing using an economy-wide model. With plausible assumptions on key inputs to our model, we produce a scenario that is broadly consistent with the pessimistic picture for the immediate future of the Australian economy as portrayed in Dog Days. We forecast real per-capita incomes to fall at a rate of 0.3% p.a., so that by 2019/20 they have returned to the level of 2010/11. To maintain an unchanged unemployment rate over the forecast period, the average real wage must fall by 0.89% p.a., returning to its 2007/08 level by 2019/20. Fiscal consolidation sees damped growth in consumption. With real aggregate per-capita consumption falling at -079% p.a., it returns to its 2008/09 level by 2019/20.

These are our forecast outcomes under an orderly adjustment scenario. However as Garnaut notes, there is a risk of mismanagement of the policy adjustments that will be required in the face of Australia's new economic realities. We simulate this through a scenario in which public and private consumption per capita, and real wages, initially remain at their 2013/14 levels, despite a decline in real per capita national income. The macroeconomic adjustments that this scenario entails ultimately generate significant economic volatility, with the unemployment rate rising to 6.6 per cent by 2015/16, before a 2.8% real wage fall in 2016/17 commences the process of returning the unemployment rate to its current level by 2019/20.

Maintenance of our recent experience of rapid growth in per-capita income will require a substantial increase in multifactor productivity growth. In our third simulation, we model the size of the increase in multifactor productivity necessary to offset the forecast declining terms of trade, rising dependency ratio, and other forecast economic challenges. We find that the required rate of productivity growth, at 1.96% p.a., is of a level not seen in Australia since the last program of major structural reform in the 1990s. It seems unlikely that we can count on the tailwinds of any recent programs of micro reform to generate the levels of multifactor productivity growth that will be needed to maintain recent growth rates in real income. In our fourth simulation, we set a more modest goal, uncovering the productivity growth required to maintain, not increase, real per capita incomes. At 0.49% p.a., this rate is higher than the average productivity performance of the last decade, suggesting Australia faces a significant reform challenge in maintaining, let alone growing, real per capita incomes in the post-boom environment.

JEL classification: C68, D58, F43, F16, O40.

Please cite the later published version in:
Dixon, J.M., P.B. Dixon, J.A. Giesecke and M.T. Rimmer (2014) Quantifying 'Dog Days', Economic Papers, Vol 33, No. 3, September 2014, pp. 203-19.

Keywords: CGE modelling, dynamics, mining boom, productivity, economic growth, living standards.

Working Paper Number G-246 can be downloaded in PDF format.

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