Yesterday, Secretary of the Treasury Martin Parkinson spoke for CEDA and the result was a nice illustration of the poisoned political economy that he must deal with. Let’s take a look.
My first key message is that Australia is well-placed to cope with further global turmoil.
This is due both to the underlying strength of the economy and to the significant resilience and flexibility we have across all arms of economic policy.
The Australian economy is growing solidly and our expectation is for it to grow close to trend over the next year.
Importantly, this growth has not been accompanied by signs of emerging economic imbalances.
We have close to full employment and aggregate wages and prices are in check. Indeed some imbalances that built up in the previous decade are receding, albeit slowly – for example, household balance sheets are strengthening on the back of higher private savings.
God praise Glenn Stevens! The RBA chief seems to have successfully broadened the acceptable scope of safe official comment to include an open acknowledgement that Australia had, and is still wrestling with, a credit bubble (“imbalance” in polite conversation). This has been gestured at before, by David Gruen, but only in a peripheral sense. It is, of course, a decade too late, which is the point of this post. Another imbalance is growing in its place and no doubt when it ultimately corrects, as they all do sooner or later, we’ll be seeing a similar mea culpa from one of Parko’s successors.
What is this new imbalance of which I speak? The outlines of it are apparent in Parko’s confidence:
While structural change is painful for some parts of the economy, this is happening in the context of overall economic strength.
In contrast, the international economic outlook is marked by some areas of great weakness, and a high degree of uncertainty. In particular, there are deep-seated and deeply troubling problems in the Eurozone and there is little sign that they will be resolved in the near future.
The Eurozone’s malaise reflects entrenched structural problems in a common currency area, compounded by deep weaknesses in the financial system, and in fiscal positions, and a lack of political will or accord to deal with them. This view underpinned the relatively pessimistic projection of European growth included in the Budget papers.
…What I would emphasise, though, and as recently discussed at Senate Estimates, Australia is well-placed to cope with whatever emanates from Europe. Of course we would not be immune to negative impacts via financial, trade and confidence channels, but we have significant flexibility and capacity at our disposal to cope with a range of different global scenarios.
…Australia is also well-placed to respond to demand and confidence shocks emanating from Europe. As everyone here knows, our main trade links are with the emerging Asian economies, not with Europe. (In the last two decades, the share of Australia’s merchandise exports going to emerging Asia increased from 13 per cent to 42 per cent.
…In the event that a demand or confidence shock emanating from Europe affects us via our Asian markets, macroeconomic policy is well-placed to respond and we would expect the exchange rate to adjust in ways that help buffer the impacts.
Yes, we are in a position to ride out any immediate storm. And what a relief here too that Parko embraces a falling exchange rate. He is right, it would indeed fall. Australia is not a safe haven for capital and that nobody in government really thinks we are is another relief.
But this again gestures at the imbalance that Parko dare not address. The exchange rate would be falling from very high levels and will work only so long commodity prices don’t just keep falling along with it. That’s the new imbalance: an over-reliance on three export commodities.
Ironically, when Parko goes on to outline his view of the challenges facing the economy, he actually addresses this imbalance but his remedies only make it worse:
Current economic circumstances bring this into sharp relief – we’ve seen the peak of the terms of trade. Improving national income and living standards in future, therefore, will rest with productivity improvement and innovation, not with continued rises in the prices for our minerals and energy exports or falls in the price of imports due to a rising Australian dollar.
• The key domestic policy directions are to continue microeconomic reforms to improve the productivity of our economy. This includes governments at all levels working together to reduce inefficiency and remove constraints on innovation – for example by: progressing the Seamless National Economy; appropriate infrastructure investment planning, funding and use, including better price signals; and ensuring effective education and skills systems which focus primarily on improved outcomes rather than simply on funding.
• Governments must help manage sectoral transformations so industries adjust to sustainable futures. This is important both in its own right, but also in the signal it gives business – at the end of the day it is decisions by businesses that are the ultimate determinant of Australia’s productivity performance.
• And we must continue to develop our tax system at Commonwealth and State levels to improve efficiency and assist in resource movement across the economy. A second area of focus must be on maintaining and further developing an open, embracing orientation to our Asian neighbours in all areas of social and economic life.
• This goes to our ‘soft skills’ as a society – our social attitudes, our curiosity and tolerance. But it also goes to our policy settings – for example, how we would build our skill and knowledge base, and the incentives we provide for mobile factors of production such as skilled labour and capital. A third area of focus is that we must have a sensible discussion on what we expect governments to provide, and the tax system needed to support these expectations.
• Ageing and rising societal expectations are likely to put enormous pressure on budgets over coming decades. At the same time the taxation base is weaker than we had imagined in the mid-noughties.
• The specific choices will be determined politically and I do not presume that there is any ‘right’ answer. Yet much of the debate over government provision assumes we can have it all, with people simultaneously believing we can maintain or even reduce taxation levels while keeping the current range of social policy interventions with limited targeting and -provision – and indeed adding to this with a long list of worthy, but expensive, new proposals.
• The key point is that choices need to be explicitly debated. The examples of the US and Europe, where decisions have repeatedly been put off in good times, are not models to emulate.
I agree with all of this in principle. But the fact is, if you don’t prevent the ongoing hollowing out of the industrial base outside commodities, as Parko’s predecessor proposed to do via a resource rent tax, then when the terms of trade corrects for good, as it most assuredly will, the imbalance will correct too, all the more violently. That it is politically impossible to do so, increasingly so by the day as mining moves to control the media, is Parko’s poisoned chalice.
6eae2530-b923-11e1-bb02-2b45fb913cdc_120618 CEDA speech FINAL
