08-August-2011
Articles
THE feckless Gillard-Swan government has outsourced the difficult management of a two-speed economy to the Reserve Bank and the blunt instrument of interest rates. Managing a two-speed economy is all about managing emerging constraints and bottlenecks, without crippling vulnerable parts of the economy.
Creating space for a mining boom requires government to get out of the way; it requires substantial and immediate productivity improvements across sectors under pressure; and it involves some sensitive use of interest rates.
Interest rates should be just one part of the tool kit, but the job of the Reserve Bank has been made all the more difficult by the government's misguided priorities.
The government should be using its own policy levers to help drive greater efficiencies and productivity in those parts of the economy outside the mining sector that are clearly doing it tough. Instead of doing all it can to help ease bottlenecks and address the significant capacity constraints that are emerging, the government, perversely, is moving in the opposite direction.
The National Broadband Network is a key exhibit, a re-nationalised telecommunications monopoly that will bring all the inefficiencies associated with any government bureaucracy, at a build cost of $50 billion.
It also will increase demand on already scarce labour across the 10 years it will take to roll out, needing an average of 25,000 workers a year. Where will they all come from?
Any productivity gains from the NBN are years away, and rely largely on applications that have yet to be even imagined.
At the worst possible time, problems are also emerging with Labor's re-regulation of the labour market, the latest identified by the Productivity Commission in its retail industry review.
Increased compliance costs, complexity and reduced flexibility are identified as issues hindering productivity. This comes off the back of the worst retail sales figures in 50 years.
Julia Gillard also missed a big opportunity in the latest health package, with the serious reform items falling off. It resulted in more money, and the watered-down reforms on efficient pricing see the costs and compliance costs borne now, with any productivity gains 15 to 20 years away.
The government also has failed to heed warnings to seriously cut wasteful spending and borrowing that have undoubtedly contributed to our higher interest rates and dollar. The panicked response to the global financial crisis in 2008 will cost $87bn, and there is $10bn still to be spent on the likes of more school halls.
Labor has since committed $10bn - more borrowed money - to fund the "Bob Brown Bank", which will pump billions into risky pet renewable energy projects of the Greens. This promise was made after the government lifted the commonwealth's debt ceiling to an unprecedented $250bn.
There will also be a further explosion in regulation through the carbon and mining taxes, and if the government were serious it would be sweeping a big broom through the plethora of federal regulation and reporting requirements businesses are drowning in.
Businesses will spend millions on carbon tax compliance. It won't be one scheme, it will be 500 different ones.
The Coalition has shown its hand with a pledge to calculate the dollar cost of red tape and we will remove $1bn worth each year.
Reviewing the failures of its heavy labour market re-regulation must also be a government priority, made more urgent by global uncertainty and volatility further underlined by yesterday's stock exchange plunges.
The International Monetary Fund has called for urgent tax reform to get more people working, and also surpluses for a rainy day.
Yet the government is instead introducing more taxes and is simply looking to balance its books not by expenditure constraint but through Pollyanna-type assumptions about future mining revenues.
The budget is a house of cards.
The signals are clear: to manage a two-speed economy, Australia needs a government that understands the critical policy role it has to play in kick-starting our flat-lining productivity, in living within its means and in removing interest rates as the sole means of dealing with pent-up capacity constraints.
Andrew Robb is the federal opposition's finance, deregulation and debt reduction spokesman.