WITH Tony Abbott issuing a personal and passionate pledge to rekindle “the age of reform” in Australia, the sources of national prosperity and living standards growth remain uncertain given global unpredictability and domestic political rancour.
Leading economists Chris Richardson, director of Deloitte Access Economics, and the University of Melbourne’s Ross Garnaut warned this week that Australia faced a sharp fall in living standards growth ”” a jolt awaiting the Australian people.
“The lesson for Australia is productivity or bust,” Richardson said. He gave a presentation suggesting that “growth in our living standards will halve” and said of the debate on national reform: “You look at the conversation today and it terrifies me.”
Garnaut warned that even Richardson’s predictions might be optimistic. He renewed the call for a better productivity performance and went to the heart of the problem: “I regret to say that changes in the contemporary political culture will be necessary to deliver productivity-enhancing reform.”
Australia’s future was addressed this week at an intense National Economic and Social Outlook Conference, the ninth, jointly run by The Australian and the Melbourne Institute of Applied Economic and Social Research, titled “Pathways to Growth”, featuring leaders from both the Coalition and Labor, policy analysts and academic experts.
The big and contradictory themes were: passionate declarations of reform faith by the Prime Minister and Joe Hockey; repudiations of the budget by Labor, not because of the scale of fiscal cuts but because of values and fairness; and concern from the policy community about fiscal sustainability, global risk and the shadow over future prosperity.
The deception that Australia has no serious budget problem was exposed comprehensively, yet again, by John Daley, head of the Grattan Institute, in a presentation that demands more attention. Daley’s bottom line is that current settings, even after the Hockey budget, “are not sustainable in the long run”.
Daley showed that the budget had both “a revenue and a spending problem”, contrary to much political opinion. He found the biggest single driver of escalating costs was healthcare while welfare outlays were contained. Daley’s analysis shows the main adjustment in the budget is not spending cuts but tax increases, notably “bracket creep” (people pushed into higher tax rates), and this is sure to create an income tax problem. He says more structural policy decisions will be essential and there are only hard political options left.
Richardson summed up the position: “The budget isn’t in crisis but it is in need of much more repair than many realise.” He said it was responsibility of “politicians on both sides of the aisle to lead the repair job”. The best place to start, surely, is an honest admission of Australia’s fiscal reality rather than the current denialism.
Calling last year’s campaign “the Seinfeld election”, Richardson said the politicians “were promising a lot extra when the budget was in deficit”.
Significantly, opposition Treasury spokesman Chris Bowen said he agreed with Daley’s argument about the need for a far greater fiscal consolidation.
Abbott and Hockey half agreed and half dissented from the policy community. They agreed on the need for reform but rejected the pessimism on living standards. Indeed, the Prime Minister and Treasurer are profoundly satisfied with the decision they took to become a government of ambitious reform. You may think they are unnerved by bad polls. They are not.
Their government has a cause and they radiate a sense of purpose. Yet their conversation has yet to strike a persuasive chord with the public. “The age of reform has not ended in Australia,” Abbott told the conference dinner. “It has only been interrupted and is now beginning again. Strongly. Purposefully. And I believe effectively.”
Abbott said he wanted to address the critique of the political system made by the author in The Australian on Wednesday ”” that politics was in malfunction and it was uncertain whether a reforming PM could succeed any more.
“It’s a question many of you may have pondered especially over the past few weeks,” Abbott said. “It can only be answered with a decisive ‘yes’.
Abbott’s argument was that “business as usual is not an option for a country that’s living beyond its means”. He said the government’s reforms were “difficult but necessary”. During questions Abbott praised the reform feats of Bob Hawke and John Howard in office. He asserted: “The budget will pass because no one has put up a credible alternative.”
Yet this confidence on the budget is unconvincing.
Independent senator Nick Xenophon told the final session he felt the government would struggle to get its main budget savings through the Senate and predicted a policy re-think or mini-budget would be necessary.
But Hockey offered an upbeat view. The world was marked by “new disruptive forces” but, he said, “I believe we stand at the dawn of another great age of prosperity, but it is a very different epoch to what anyone would have imagined in 1964” (the birth of The Australian).
Selling the budget philosophy, Hockey said people “don’t want governments to dominate their lives” and that in a more competitive global world the best preparation was “to reduce the role *of government in people’s lives by better targeting spending” and reducing the overall tax burden.
It is obvious that Abbott and Hockey need to refine their priorities. They are battling to pass their budget. They continue to open new policy fronts with reviews on welfare, tax, federalism, industrial relations, competition policy and the finance system.
On the budget Hockey was aggressive over the Coalition’s proposal to index fuel taxes. This move has many policy dividends: for revenue, for the environment and for equity. Yet the Greens oppose it, a stance Hockey called “obscene”. Passionately attached to his asset recycling fund to encourage the states to privatise their assets for new infrastructure investments, the Treasurer said the funds would be appropriated directly to the states if Labor tried to delay the process.
Melbourne Institute head Deborah Cobb-Clark argued the public policy task was how to introduce the needed economic reforms while keeping alive the notion of social contract. She produced research showing that at age 26, people who had grown up in a “welfare” family were “three to four times more likely to be accessing income support” than those from non-welfare families.
The risk was that any policy change that drove such people “back into the arms of their families will intensify any inter-generational disadvantage”.
This threw the spotlight on the government’s proposal to cut dole payments for six months for young unemployed not in education, a proposal that seemed friendless at the conference though defended by Social Services Minister Kevin Andrews.
Cobb-Clark said the answer to the challenge she posed lay in the labour market. There needed to be more initiatives to get young people into work. Apart from a focus on training, this meant “we need a serious conversation on penalty rates”.
The tone for the conference was set by Warwick McKibbin, former Reserve Bank board member, who kicked off the event with a survey of global economic risk warning that “uncertainty is large” and the guarantee that “some things are going to happen that surprise us”.
McKibbin said global economic recovery was weak, the liquidity injections into the world finance system had been “incredible”, Europe’s budgets and jobless numbers were unsustainable, risk was not being priced correctly and that, in this environment, “Australia is going to be seen as a safe haven”.
The consequence would be vast: higher capital inflow into Australia, ongoing upward pressure on the exchange rate and the likely dashing of hopes that Australia’s competitiveness would be restored by a falling exchange rate.
On the same day as McKibbin spoke, Reserve Bank governor Glenn Stevens said the exchange rate remained high by historical standards but he was optimistic about a “significant” fall in the Australia dollar at some point. Stevens and McKibbin have opposing assessments.
Garnaut, who says restoration of economic health requires a major depreciation, told this paper: “Warrick McKibbin’s perspective of a new round of capital inflow will be catastrophic for the trade-based industries. Investment is next to dead in all of the trade-exposed industries. Economic expansion in current circumstances, based only on domestic demand, is unsustainable.”
Garnaut said if the dollar stayed high special measures would be demanded: interest rate cuts to lower the currency plus extra policies to deny any housing price bubble. McKibbin, however, argued that lower interest rates would not lower the dollar: they would merely lift asset prices and foreigners would want to import more capital to hold more of those assets.
Bill Shorten declared himself a “reformer” but put more emphasis on being a “conserver” pledged to “save what is great about our nation”. The Opposition Leader said Labor stood for change with “fairness and caring”. Labor under Shorten often sounds like a resolute defender of the status quo.
Bowen rejected any idea Australia had to choose between growth and fairness. His speech highlighted the great chasm in politics: competing reform agendas between Labor and Coalition, with Labor saying the defining difference is fairness.