Australia’s 1986 Banana Republic Warning Is Back: Will It Take a Crisis Again? | APS179

On May 14th, 1986, Treasurer Paul Keating warned on radio that if Australia didn’t change, it would become a third-rate economy, a banana republic. That line pushed the Hawke government into major reforms, despite heavy criticism.

Forty years later, politicians and academics are reaching for “banana republic” again. Last time, the warning led to reform. This time, a housing tax reform has just become law, and the Opposition has already promised to scrap it.

What happens if a country keeps putting reform off? Argentina waited until its money was nearly worthless before voters put an economist with a chainsaw into the presidential palace. Will Australia wait that long? If you live or invest here, this directly affects your money.

You might think Australia isn’t Argentina. I thought so too, at first. But this year, rates have risen, jobs are harder to find, and home values have come down. In Canberra, policies come and go, and families pay the price.

I went through the latest RBA, ABS, and Argentine statistics reports and found a pattern shared by Australia’s big reforms.

So how long will Australia keep sliding before it goes in for major surgery? Until then, should you buy, sell what you own, or keep holding cash? I'll finish with 4 things you can do right now.

Section 1: A Warning From 40 Years Ago

To find the root of Australia’s decline, we need to go back more than 40 years. In 1980, Singapore’s Lee Kuan Yew warned that if Australia kept living off its resources, it would become the poorest country in Asia. Australia did reform and move forward, so why was Keating still so worried?

The problem was the current account deficit: Australia was importing more than it exported. In 1986, the deficit reached nearly 6% of GDP, so for every \$100 the country earned, \$6 was borrowed.

Borrowing on that scale pushed reform along. The dollar had already been floated in December 1983, and financial deregulation had begun. In 1986, tariffs came down round after round, and wage bargaining slowly moved to the enterprise level.

The states were no different. In 1992, Victoria was in a debt crisis, with net debt of about \$32.5 billion, the highest of the six states. It had lost its AAA rating in 1990, and Labor lost the October 1992 election after ten years in power. Then Moody’s downgraded Victoria two notches at once, and the new Liberal premier sold assets, cut public service jobs, and closed schools amid fierce criticism. By 1994, both the rating and the economy were recovering.

So none of these big reforms happened on their own in good times.

Section 2: Where Is Australia Stuck?

Where is Australia stuck, and why can’t reform get through? Start with rates. On September 29th, the RBA unanimously lifted the cash rate to 4.60%, its fourth hike this year and the highest since late 2011\. The rate ended last year at 3.60%, a full percentage point lower.

On a \$600,000 variable mortgage, that’s about \$500 more interest a month, or \$6,000 a year, enough to feed a small family for several months. Whether November brings another hike depends on the quarterly inflation figures, due October 28th.

Jobs are harder to find too. Unemployment hit 4.7% in September, the highest since October 2021, as 39,000 fewer people had jobs. If it passes 5%, many people will fall behind on their mortgages, though that could also push the RBA to cut rates.

Housing looks even worse. Prices have fallen for 6 months, with the national median about 5.2% below its March peak and Sydney 8.6% below its peak. In the capitals, 97% of suburbs recorded falls over three months. One property data firm estimates this year’s hikes have cut the average household’s borrowing capacity by \$90,000, putting the home many buyers wanted out of reach.

The economy is still growing, so why are household budgets tighter? Population growth props up the total, while GDP per person is flat or falling. Productivity has barely moved in years, so an hour’s work produces no more than before, and real wages keep falling.

With numbers this bad, you’d expect politicians to have acted long ago, but Canberra has hardly budged. Everyone there has their own agenda.

Section 3: What Is Canberra Fighting Over?

What are the two sides in Canberra fighting over? Labour won a second term in a landslide in May 2025\. This year’s May 12th budget brought in the biggest housing tax reform in decades, sharply cutting negative gearing and the capital gains tax discount. It became law on June 26th and starts on July 1st, 2027\.

You’d expect a reform that big to lift Labour’s support, but it hasn’t. On primary votes in the October 12th Newspoll, Labour was on 29% and One Nation on 28%, basically level, with the Coalition on 20% and the Greens on 14%.

The Coalition has split and reunited twice in a year. On February 13th, 2026, Angus Taylor won the Liberal leadership 34 votes to 17\. The Coalition has promised to scrap the tax reform once in office, so the reform may not outlast one term.

Labour and the Coalition are down to 49% combined, yet one firm’s modelling shows Labour could still win a House majority on 27% of the primary vote. A government that can win without being liked feels little pressure from voters.

The way I see it, whoever reforms boldly first loses votes first. If you are buying a property now, which set of rules do you plan around? I’d run my numbers on the current law and leave some room for it to be overturned.

What investors fear most isn’t good news or bad news. It’s rules that can change overnight. So how bad do things have to get before voters back bold reform? Argentina has already given us an answer.

Section 4: What Did Milei Get Done?

What did Javier Milei actually get done? In December 2023, the month he took office, Argentina’s monthly inflation was about 25.5%. Goods worth 100 pesos at the start of the month cost 125 pesos by the end.

Milei made five big moves. He devalued the peso sharply in one go, taking the hit up front to calm people down. He cut ministries from 18 to 9, cut tens of thousands of public jobs, and slashed power and gas subsidies. The central bank stopped printing money for the government, forcing spending cuts. Milei also cut red tape to boost competition and raised money overseas to put a floor under the country’s finances.

The results showed up fast, and they’ve lasted. This September, the statistics office reported monthly inflation of 1.9%, after a 14-month low of 1.7% in August. Going from 25% a month to around 2% shows the reform was real, and it worked.

The budget turned around too. In 2024, the government ran its first full-year surplus since 2010, about 0.3% of GDP. Poverty fell as well, from 52.9% in the first half of 2024 to about 28.2% in the second half of 2025, the lowest since 2018\.

For property investors, the next part matters most. In December 2023, Milei scrapped rent controls by emergency decree. Long-term rental listings in Buenos Aires later more than doubled, and real rents came down. That’s the opposite of what most people expect when rent controls end. Mortgages came back too, with about US\$3.3 to 3.7 billion issued in 2025, a multi-year high.

Voters backed Milei. In the October 26th, 2025 midterms, his party won 41% of the vote, taking his bloc in the lower house past 90 seats.

Two years on, why did voters stick with a president who campaigned with a chainsaw? Prices settled down, and ordinary people feel that every day. On prices and the budget, the chainsaw really worked.

Those results are real, but they came with a heavy bill.

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Section 5: What Did Milei’s Reforms Cost?

So who’s paying that bill? Look at poverty first. After hitting its lowest level since 2018, poverty rose back to about 32.3% in the first half of this year. That’s around 15.5 million people, and 7.5% of Argentines can’t afford enough food. That’s because incomes rose just over 10%, while essentials rose nearly 20%, leaving households to make up the gap.

Inflation has stopped falling, too. It’s stuck at around 2% a month, with September slightly above August. That sounds small, but compounded, it’s nearly 27% a year. Over the past 12 months, prices rose by even more, 33.4%, according to the statistics office.

The economy has started to shrink. GDP fell about 0.6% in the second quarter, the first drop in two years. Unemployment has gone up to 7.9%, the highest since 2021\. In July, the default rate on household loans hit about 12.9%, the highest in over 20 years, according to the central bank. Nearly 13 of every 100 pesos lent to households weren’t repaid on time. And mortgage demand, which had just come back, has cooled noticeably.

My view is that a chainsaw can get you through an emergency, but the bill has landed mostly on low- and middle-income households. Long term, you still need higher productivity, trade, and innovation.

So what can Australia learn? Loosen planning rules so more homes get built and more rentals come onto the market. Overhaul the tax system, say by swapping stamp duty for land tax. Fix bracket creep, where your pay rises, but the tax brackets don’t move, so you quietly pay a bigger share of your income in tax. A leaner government and faster energy approvals would help too, though none of it sounds like Labour policy. What Australia shouldn’t copy are Milei’s moves that hit basic living standards: the sharp devaluation and the pension cuts. Those go too far.

Even Milei couldn’t fix everything in one cut, so Australia shouldn’t expect to either. Its problems aren’t as serious as Argentina’s, and a chainsaw would damage the parts that still work.

Section 6: Why Won’t Australia Reform?

If the fixes are that clear, why does Australia keep putting them off? It comes down to three words: it won’t collapse. Australia has four things holding it up: a AAA rating and a huge pool of super, plus the big four banks and an independent central bank. APRA, which oversees banks and most super funds, puts total super at about \$4.8 trillion as of the end of June. That’s roughly \$170,000 per Australian.

Those four things are Australia’s insurance. Argentina had none, and once its money was nearly worthless, voters handed Milei the chainsaw. With that insurance, life here is uncomfortable but not fatal, so nobody is forcing politicians to act.

Australia was warned about this back in 1964, when academic Donald Horne published The Lucky Country. The title sounds like praise, but he meant it as criticism: Australia, he wrote, is a lucky country run mainly by second-rate people who share its luck. In other words, the good times came from luck more than skill. More than 60 years on, that still holds true.

Money is tight, so why aren’t voters demanding change? They can’t agree on what it should be. Owners want stable prices and no tax changes, while renters want prices to fall and the tax system overhauled.

I’m not saying Australia can never reform. I am saying that until it’s backed into a corner, the drive for big reform isn’t there. The way I see it, Australia’s insurance stops a crash, but it also stops reform.

So Australia’s biggest risk is that the decline hasn’t hurt enough yet to force change. But not every part of Australia is this well protected. In Victoria, the problems are already out in the open.

Section 7: Victoria Is Changing

How big is Victoria’s debt problem, and what are the parties promising before the election? Voting day is November 28th, with early voting from November 18th. Labour has been in power since December 2014, for nearly 12 years.

Premier Jacinta Allan resigned on July 28th after persistently poor polling and losing most of her MPs’ support, and her deputy, Ben Carroll, took over. On the other side, the Liberals made Jess Wilson leader on November 18th, 2025, and the Coalition now leads the polls.

This year’s May 5th budget showed Victoria’s first surplus in seven years, about \$1 billion. But net debt is forecast to reach \$175.6 billion by next June and about \$199.3 billion by 2029-30. Interest alone costs about \$24.4 million a day, or \$1 million an hour. Still, this isn’t 1992 again: the credit rating and the size of the economy are both different.

For property owners, the issue that matters most is land tax. In 2023, Victoria announced a cut to the tax-free threshold, from \$300,000 of land value to \$50,000, which added about a quarter of a million land taxpayers. Now Labour, the Coalition, and One Nation all promise to roll that cut back. Labour would lift the threshold by \$25,000 a year to reach \$300,000 by 2033\. The Coalition would move twice as fast and get there by 2031-32. One Nation agrees but hasn’t given details. All three are election promises, and none is law yet.

When even a long-serving government promises tax cuts before an election, that’s an early sign voters have had enough and the direction is starting to change.

We can’t decide when real change arrives, but we can decide today how we spend, save, and invest our own money.

Section 8: Four Things to Do First

Here’s my read on what comes next. The next federal election is expected by May 2028, and until then, the policy direction probably won’t change, though small tweaks are possible. As long as Labour stays in power, the negative gearing changes will most likely start on July 1st, 2027, as planned. Rates will probably stay high in the short term.

I don’t expect an Argentina-style collapse here. The more likely path is a slow decline under high rates and political gridlock, until voters truly can’t take any more and real change comes. Until then, plan your investing around a slow decline and rates that stay high for longer.

So here are 4 things you can do now.

First, recalculate your property cash flow assuming rates stay higher for longer. Work it out before the RBA meets on November 3rd, and build a slightly bigger cash-flow buffer into any new investment.

Second, understand the new rules starting July 1st, 2027\. Properties held before 7:30pm on May 12th, 2026, stay under the old rules. For established homes bought after that, losses can only be offset against property income, not wages. New builds aren’t affected, which gives them a structural edge over established homes.

Third, if you own property in Victoria, check after the election whether the land tax threshold rollback has actually become law. Don’t change your plans because of a campaign slogan. Wait until the law goes through.

Fourth, while you’re running the numbers, check whether your whole net worth rides on one asset in one country. My own approach is to keep a big chunk in very safe assets, a small chunk chasing growth, and very little in anything in between.

Ending

Of course, I could be wrong. With a AAA rating and stable banks, Australia could muddle along like this for years. So what would prove me wrong? One signal is a major party winning a federal election on a clearly spelled-out tax and housing reform plan, then legislating it within one term. The other is labour productivity clearly rising two years in a row. Either one would show that Australia can reform without being pushed to breaking point.

Watch the video version of the blog on YouTube.

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