Are over and the hang­over is set­ting in

The Weekend Australian - Review - - Books - Paul Cleary

Gar­naut’s as­ser­tion that the boom is over in part is based on the de­cline in av­er­age hours worked per month from an ab­so­lute record of 90.7 in July 2008 — just be­fore the global fi­nan­cial cri­sis — to about 87 hours to­day.

He pre­dicts the terms of trade will drop back to 25 per cent above av­er­age for the 20 years to 2002, while gov­ern­ment rev­enues will be 7 per cent of gross do­mes­tic prod­uct lower than their 2011 peak. The last­ing con­tri­bu­tion from the boom will amount to 3 per cent of GDP, or a mere one-third of the 10 per­cent­age point con­tri­bu­tion at the peak.

This anal­y­sis may be sim­plis­tic be­cause the boom is more than a price ef­fect. The price boom is the first of three phases, which trig­gered record in­vest­ment in re­sources projects. This in­vest­ment will drive a big rise in re­sources pro­duc­tion, which is now un­fold­ing. The ef­fects of this last phase could de­liver higher in­comes to Aus­tralia for some time.

Even though his premise is de­bat­able, Gar­naut’s so­lu­tions are an im­por­tant con­tri­bu­tion to the na­tional con­ver­sa­tion about how Aus­tralia rein­vents it­self now the re­sources sec­tor is dom­i­nant.

Be­com­ing a re­sources-de­pen­dent econ­omy may seem like a bless­ing to many, but Gar­naut’s anal­y­sis of our poor com­pet­i­tive­ness shows early signs of what is known in eco­nomic lit­er­a­ture as the re­source curse.

As for the so­lu­tions, how­ever, Gar­naut pro­poses a risky change in the way the Re­serve Bank man­ages mone­tary pol­icy. He ar­gues the Aus­tralian dol­lar’s over­val­u­a­tion is ‘‘ im­mense and im­mensely dam­ag­ing’’, and has be­come another source of com­pla­cency. He says the dol­lar will re­main ‘‘ un­eco­nom­i­cally high for a long pe­riod’’ and the Re­serve Bank should fo­cus more on the full em­ploy­ment man­date in its act rather than solely tar­get­ing a 2 per cent to 3 per cent in­fla­tion rate.

He urges the RBA to cut in­ter­est rates to de­liver a 20 per cent to 40 per cent real de­pre­ci­a­tion. The bank al­ready has had some suc­cess in low­er­ing the cur­rency with­out aban­don­ing its in­fla­tion fo­cus, but Gar­naut reminds read­ers the bank’s role isn’t lim­ited to con­trol­ling in­fla­tion. ‘‘ There is a gov­er­nance is­sue that has been dis­cussed less than its im­por­tance war­rants,’’ he says.

The con­se­quences of such a de­pre­ci­a­tion could ig­nite very high in­fla­tion and trig­ger an as­set price bub­ble, es­pe­cially in hous­ing. Gar­naut ac­knowl­edges this, say­ing spe­cial mea­sures may be needed to pre­vent it, with­out out­lin­ing th­ese mea­sures, which is frus­trat­ing.

Gar­naut is on firmer ground when he ad­vo­cates sen­si­ble pol­icy re­forms to ad­dress na­tional com­pet­i­tive­ness and pro­duc­tiv­ity.

As one of the pioneers of re­source rent tax­a­tion, he re­turns to Kevin Rudd’s ill-fated su­per-prof­its tax, which would ap­ply to the re­sources sec­tor and all ‘‘ oligopolis­tic else­where in he econ­omy’’.

Tax­a­tion re­form should in­volve equalised rates across all forms of in­come, whether it be work, div­i­dends, cap­i­tal gains or fringe ben­e­fits, while the gov­ern­ment should in­crease the GST and ex­tend its base to ex­empt items.

Gar­naut ad­mits sen­si­ble pol­icy re­form is dead with­out strong lead­er­ship and a re­turn to prin­ci­pled rather than pop­ulist po­lit­i­cal de­bate. As he ex­plains, the start­ing point for re­form is ad­dress­ing weak­nesses in our democ­racy that have con­trib­uted to this fail­ure, namely, the rise of pri­vate in­ter­ests, frag­men­ta­tion in the na­tional con­ver­sa­tion about pol­icy, and in­creased com­fort with con­flict of in­ter­est.


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