Bravo Professor Ross Garnaut, published with permission from author:
Productivity growth has been dismally low in the 21st century. PEFO says in the projection years it will return to an average of the 30 years that covers the stellar 1990s. Inflation has been stuck below the bottom of the Reserve Bank’s range for longer than we care to remember, but it will return in the projection years to the middle of the range. Community frustrations at stagnant real wages will be salved by a return in the projection years to wages growth a full percentage point above inflation – again, all by assumption.
Strong revenue from the return to historical growth trends in output, prices and wages in PEFO support a wafer-thin budget surplus through the forecasts and the projections. That is the foundation for the government’s statements that future tax cuts of unprecedented dimension are “paid for” in the Treasury forecasts. The government makes no allowance for yet another disappointment in Treasury’s assumptions. No cushion for a hard response at home to falling house prices. No cushion for the US travails that will follow Trump’s deficit-fuelled budget expansion at the top of the economic cycle.
It is possible for Australia to return to sustainably rising living standards with sound budgets through the cycle. But we won’t get there by assumption. We need to do now what we didn’t do in 2013.
The old standard way of measuring unemployment focuses on a single measure of unemployment, obscuring large increases in underemployment.
The stagnation of real wages has turned a significant fall in the Australian dollar into a real depreciation.
The real depreciation needs to go further. We will get there if the Reserve Bank has finally accepted that the Australian monetary present, like the present in other developed countries, is different from the past. The difference is that changes in global savings and investment propensities have reduced decisively and permanently real interest rates — set by markets for the long term and by central banks at the short end. In the happy circumstance that the Reserve Bank has caught up with monetary reality, a cut in cash rates will be the first of a series. That will bring another fall in the exchange rate and prospect for real depreciation. The bigger real depreciation can restore strong incentives to invest in our export and import competing industries, and eventually bring large expansion again in the volume of exports.
Real wages have stagnated because the labour market – with supply augmented by this century’s historic increase in short-term work visas – is genuinely weak. The old standard way of measuring unemployment focuses on a single measure of unemployment. This obscures large increases in underemployment. The weakness will only be removed by sustainably strong growth in demand for labour. The real depreciation can make a big contribution.
What happens if the real depreciation that comes with a zero cash rate is not enough? The Reserve Bank has wondered out loud about quantitative easing. That would be a wasteful way of using an increase in assets on the central bank’s balance sheet. It would be much more productive to support a comparable increase in government investment in productivity-raising infrastructure and private investment through accelerated depreciation of capital expenditure.
Bloody hell. Sense at last:
- productivity reform, especially for capital;
- cut immigration (at least temporary preferably all);
- reform RBA mandate to include underemployment;
- crash AUD;
- reform energy for cheaper prices;
- drop helicopter money on productive investment.
It ain’t rocket surgery once you remove the parasites and interests.