Saturday Morning Musings - Australia's economic consensus

In an earlier post, I commented on the way that the peculiar structure of the this Federal election campaign had in some ways created as policy free zone. There I wrote:

The commenters on this blog appear to share the general view that the policy positions of the current Gillard Government no longer count, but the opposition doesn't count either because, with the exception of the NBN, it doesn't have any articulated policies. With such a long period to the Federal election, a policy vacuum has been created. Into that vacuum others are now rushing to enter, including most recently the Business Council of Australia. 

Since I wrote this, we have seen the the Commonwealth budget, the apparent bedding down of the National Disability Insurance Scheme and the attempt by the Commonwealth Government to lock in its Gonski school education funding changes. The budget itself was marked by a degree of convergence from both sides, while both sides support the NDIS, leaving the Gonski changes as a major area of dispute. Mr Abbott has continued his small target approach. The only effective challenges to some of his policy positions including especially the paid parental leave scheme have come from within his own party.   

Outside the party political sphere, policy debate has continued, marked by specific campaigns by the press and by particular special interest groups. An example is the Smartest Investment campaign being run by Universities Australia, the peak body representing Australian universities. Many of these campaigns, including that being run by the universities, are struggling for oxygen in the current environment. However, in all the hurly burly a consensus appears to be emerging in the economic policy area although, as always, there is considerable disagreement on detail.

The most recent national account figures for the  March quarter 2013 showed a continued weakening in the Australian economy. You can see this clearly in the attached graph from the Australian Bureau of Statistics showing quarterly changes in GDP. You can see the upward trend and then a progressive weakening. That weakening trend is associated with the end of the mining investment boom whose affects have been accentuated by the strong Australian dollar.

The first element in the emerging consensus is that Australian Governments at all levels in some ways wasted the opportunities offered by the mining boom.

We overspent and in some ways undertaxed. By undertaxing I am not referring to the discussion around the mining tax, but rather to the various tax reductions that, in the end, proved unsustainable. We also. and this includes the mining industry itself, failed to focus sufficiently on productivity improvement, allowing rising costs to choke investment.

This leads to the second element in the emerging consensus, the need to focus on productivity improvement.  This has short and long term elements.

Looking at the short term, this mining boom was unusual in that it did not flow through to the general price increases and excessive economic activity that marked the end of previous booms. The price effects were especially contained to the mining sector, while the rest of the economy remained relatively flat. It is quite normal for other sectors of the economy to be flat or even decline when one sector expands rapidly, since the growth sector has to attract resources from elsewhere. However, the pattern this time was unusual.   

The overall failure of the broader economy to grow during the boom and now to expand to pick up the slack associated with the end of the boom has been the subject of much discussion. Part of that discussion focused on the exchange rate,

On December 12 1983, the then Hawke Labor Government with Paul Keating as Treasurer floated the Australian currency. This was really the first mining boom under a floating exchange rate, The fall in the value of the Australian dollar in the period immediately prior to the global financial crisis provided an important economic buffer to this country. Its subsequent rise helped choke the boom through, among other things, the pressure it placed on the trade exposed non-mining sectors.

Short term discussions on productivity have therefore focused on the cost explosion in mining, along with the role that slow productivity growth elsewhere in the economy played in impeding growth and adjustment, including  adjustment to the high dollar. This then fed into a longer term discussion on productivity improvement centred both on broader trends such as the aging population, as well as the apparent weaknesses in the broader economy and what that might mean for the longer term future of the country. I think it fair to say that while there is consensus on the need to improve productivity, there is not agreement as to the best way of achieving this.

Discussions on productivity have linked to a second theme, Australia's failure to improve basic infrastructure. There seems to be common agreement that the country has under invested in infrastructure at all levels for decades and that we need to do something about this. A variety of solutions have been put forward. To my mind, however, those discussions have failed to address a very basic question: why has Australia failed to invest in infrastructure? It's not as though the country hasn't had the resources to do so. We just haven't. Until you can answer the why question, you can't then answer the how question.

Debates on productivity and on infrastructure feed into discussion on another consensus area, the need for renewed microeconomic reform. There appears to be consensus that microeconomic reform has stalled, that it needs to be renewed. As with productivity and infrastructure, there is as yet no agreement as to how this might be done. However, there does appear to be emerging agreement on three elements.

The first is the need to reduce Government regulation that is choking economic activity and responsiveness. Again, there is disagreement as to how this might be done. But the consensus is there.

The second is the need to re-balance the tax system, while giving especially state governments access to more revenue. For the first time, there is an emerging consensus that the goods and services tax needs to be increased. Mr Abbott is strongly opposed to this at present on political grounds. Still. watch this space.

The third and related element is the need to restructure Commonwealth-state relations. Australians know that the current Federal system is not working, that the processes have become clogged. The problem here is a simple but almost insoluble. The Commonwealth needs to get out of state space, but no Commonwealth Government will do this.

In all this, Australia has one great advantage. Despite my sometimes criticisms, Australia's top economic technocrats (past and present) are very good. Further, they still have the capacity to provide independent views. They are still prepared to do so within the constraints set by their positions.

When I listen to or read something from the Commonwealth Treasury or the Reserve Bank, I listen or read with respect. I may not agree and will challenge, I know their constraints, but I trust them. If you think about it, that's pretty remarkable! And that's why I think that Australia is in good hands.