Victoria confronts its failed experiment
Socialism is a political and economic theory of social organisation that advocates for the means of production, distribution, and exchange to be owned or regulated by the community. Socialists believe the government is the community apparatus that should control all aspects of the economy.
Importantly, socialism is distinct from democratic or market socialism, which you’ll find in countries such as Norway, Denmark, Finland, Sweden, and sometimes Estonia and Iceland. These countries have economic and political models, which bear the hallmarks of socialism and capitalism. They are neither fully socialist nor fully capitalist.
Socialism commands goods and services. It appropriates the earnings of producers and consumers, invariably distorting markets and producing shortages.
According to a recent article by economist Saul Eslake, Victoria, historically one of Australia’s most prosperous states, has experienced a significant economic and fiscal decline since the turn of the century. That decline coincides with a rise of socialist idealists in government, and in particular, the government of Dan Andrews.
According to Eslake, Victoria was once a leader in productivity and income but now lags most states, including South Australia and Tasmania, in economic performance. Key indicators such as per capita gross product and household disposable income have fallen well below the national average.
Labour productivity in Victoria has grown at an annual rate of only 0.8 per cent, the slowest of any state or territory, driven by sluggish growth in 13 of 19 economic sectors and an increasing share of employment in low-productivity industries.
Meanwhile, Eslake reports Victorian per capita household disposable income, once above the national average, is now among the lowest in Australia, trailing behind Tasmania and South Australia.
And when falling productivity and incomes coincide with ambitious but poorly planned (read: vote-buying) infrastructure spending and the acquisition of voter-appeasing sporting events (give them a coliseum and gladiators!), mounting debt results.
Over the past decade, coinciding with the Andrews government, Victoria’s general government sector has run cash deficits totalling $97 billion, equivalent to 1.9 per cent of the gross state product (GSP). This is double the national average for other states.
And when these projects are managed by a public sector that costs more and works less than any other state (Victorians with full-time jobs work fewer hours per week (37.4 per cent) than the national average (37.6 per cent, NSW 37.7 per cent), government spending must consistently exceed revenue.
After a long period of power and profligate spending, Premier Andrews confronted that very thing Margaret Thatcher’s warning alluded to – he was running out of other people’s money.
Consequently, Victoria’s tax revenue has risen by 56 per cent in the past three years, significantly higher than the national average of 33 per cent, and further increases are expected and will be needed.
Victoria already holds the lowest credit rating among Australia’s states, with rising interest payments threatening further downgrades. Should they transpire, they would elevate borrowing costs and dampen economic confidence further.
Sadly, thanks to the socialist experiments of the past, Victoria now lacks assets to sell, leaving spending cuts and tax hikes as the only viable paths to fiscal recovery.
Victoria’s economic decline and fiscal challenges are rooted in weak productivity growth, an over-reliance on low-productivity industries, and prolonged overspending.
Victoria’s economic decline is the result of another failed experiment in socialism.
While Eslake suggests addressing these issues will require a shift toward fostering high-productivity industries, implementing stringent fiscal discipline, and reevaluating public sector costs to restore economic and financial stability, a more fundamental change needs to occur. And to begin that process, the socialists (as distinct from the market and democratic socialists) need history lessons.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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