Monday, September 6, 2010

Our economic challenge will be feast not famine

Perhaps we're seeing the emergence of a new law of elections: the real issues facing the economy in the next term won't bear any resemblance to those discussed during the campaign.

In the 2007 campaign, the Liberal slogan was Go for Growth and Labor wanted the growth to involve more investment in training and infrastructure. In reality, the Reserve Bank was hauling on the interest-rate brakes because of rising inflation pressure, and we ended up spending most of the term fending off the worst global recession in 60 years.

In this campaign, the Libs defined our biggest economic problem as combating Labor's horrendous budget deficits and struggling to overcome Labor's mountainous public debt. They assumed their net cuts in spending (which Treasury and Finance later found to be largely illusory) were the only thing that could return the budget to surplus.

Lacking convictions and the courage of them, Labor - which had done a remarkably good job of shepherding the economy through the global financial crisis - fell in with this bookkeeper's vision of economic management.

But two weeks after the election, the June quarter national accounts have swept away all the nonsense of the campaign. The resources boom is back, the economy is roaring along, the government's filling coffers will soon get the budget back into surplus without the pollies doing any more than resolving not to spend all of it, and the economy's big problem will be growing at full employment without overheating.

Before we explore those challenges that await us, why is economic debate during election campaigns so off-beam?

It's partly because the modern practice of aiming election campaigns almost exclusively at swinging voters in marginal electorates - people known to be uninterested in politics, without ideology, economically illiterate and of a self-centred, what's-in-it-for-me? disposition - means nothing unpleasant or even faintly serious can be raised.

Consider the recent British elections. Anyone taking the slightest notice would have known that whichever side won the election would immediately plunge into sweeping spending cuts and tax increases to hack into a budget deficit that really was a worry. But all sides studiously avoided engaging with the issue.

The other reason election campaigns are so unreal is that even economists can be quite ill-informed about the state of the economy and direction in which it's headed.

Throughout this campaign most economists thought consumer spending and home-building were quite weak, with the worries about the US and European economies, and maybe even the disincentive effects of the new mining tax, putting a question mark over the medium-term prospects for our economy.

Most of those doubts and misconceptions have been swept away by last week's figures, including the survey of firms' capital expenditure plans, which exposed how much the mining companies were lying about the resource super profits tax's supposed threat to their future activities.

I've come to the view that few people - even economists - have a good feel for how the economy's travelling at any moment. It's never very clear what's happening until we see the national accounts. Then, of course, any fool can tell you what the score is.

I suppose it's possible a double dip in the US and lingering weakness in Europe could be sufficient to knock China, India and the rest of emerging Asia off its stroke and thus bring our resources boom to a sudden halt, but I doubt it's likely.

It is likely coal and iron ore prices are near their peak and will fall back as world supply catches up with world demand. But prices could fall a fair way and still settle well above their long-term level. Part of what we lose on price we'll make up on increased volume. And the miners and natural gas companies have maybe a decade's worth of construction projects in the pipeline.

We're back to growing at the trend rate and are already close to full employment. As in all Australian commodity price booms, our big problem will be how we manage the inflation pressure as the extra export income is spent.

Can we keep travelling at full-employment level without overdoing it and having to induce a recession? Rest assured, the Reserve Bank will raise interest rates to whatever level is needed to keep inflation in check, but can we do better than that?

Could we keep tightening budgetary policy to take some of the pressure off monetary policy and interest rates? The bookkeeper's approach to economic management doesn't augur well. The flipside of the nonsense we heard in the campaign is that once the budget's back in surplus, whoever's in government will imagine they're able to spend more freely (just as John Howard did during the first stage of the boom).

To help with the macro management part of the problem, but also to ensure we have something to show for the boom, we need to save a higher proportion of the extra national income. Perhaps we need a sovereign wealth fund to justify ever-higher budget surpluses.

The idea of increasing compulsory superannuation contributions to raise national saving is attractive, but a Coalition government wouldn't go ahead with it and Labor's present scheduled phase-up is too delayed to be of much use.

We need to revisit - more intelligently - the question of population growth, but ask whether meeting the mining industry's need for more labour actually requires open slather on skilled immigration (with all the increased spending on public infrastructure that would necessitate).

Now the election's (almost) out of the way, there's so much we need to debate about economic policy.