Are over and the hangover is setting in
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.