One of Tony Abbott's first acts on becoming Prime Minister was to sack
the secretary to the Treasury, Dr Martin Parkinson. Parkinson's crime
was to believe - as did the government he had been serving - that we
need to take effective action against climate change.
Abbott also
sacked Parkinson's obvious successor at Treasury, Blair Comley, for the
same crime. It was a disgraceful, vindictive way to treat loyal and
proficient public servants.
But Parko's departure from Treasury
was delayed, first so he could help the new government prepare its first
budget and then because his experience was sorely needed to help Abbott
and Joe Hockey prepare to chair the G20 meeting this month.
But
the time for his departure has finally arrived and this week he gave one
of the last of many speeches during his distinguished career. It was a
tour of the short-term and longer-term challenges and opportunities that
lie ahead. He professed to be very optimistic about our prospects, but I
found his remarks pretty daunting.
Starting with the rest of the
world, Parkinson observed that, even this far on, the big, developed
economies' recovery from the global financial crisis was slow and
uneven. Forecasts for global growth next year had been downgraded again,
to 3.75 per cent, following a pattern that had become familiar over the
past few years, he said.
"We now have a situation where 200
million people around the world are looking for work. As the
International Monetary Fund's Christine Lagarde noted, if the unemployed
formed their own country, it would be the fifth-largest in the world."
The
financial crisis led to rapid accumulation of public debt, and
governments in many countries had neither the political support nor
market tolerance to use deficit spending to stimulate their economies,
he said.
In normal times, countries might use monetary policy to
offset fiscal tightening, supporting demand by cutting interest rates
and boosting economic activity by having their exchange rates fall. But
many countries already had their interest rates at zero.
So their
efforts to cut spending and raise taxes while their economies are still
so weak - known as a policy of austerity - ran the risk of weakening
demand further and making the budget deficit bigger.
Many
countries had resorted to "quantitative easing" - metaphorically,
printing money - to offset the budgetary tightening. Trouble was, we are
yet to see the massive increase in funding this has generated translate
into growth-inducing investment, he said. It was leading to too much
financial risk-taking (buying high-priced shares and bonds) but not much
economic risk-taking (increasing production capacity).
This was
why our move to get each of the G20 members to agree to take measures
that would cause their growth over the next five years to end up 2 per
cent higher than otherwise, particularly by increased investment in
infrastructure, made so much sense.
In the short-term construction
phase, it adds to aggregate demand. If it's done well, it adds to the
economy's supply capacity and boosts productivity for the long term. And
if you price access to the infrastructure properly, it might even help
the budget in the medium term.
Turning to our economy, the
short-term outlook was dominated by our transition from resources
investment-led growth and risks associated with continued weakness in
the global economy and the potential for renewed financial instability,
he said.
But our transition to broader sources of growth was
occurring more slowly than we might have expected. In particular, the
dollar hadn't fallen as much as expected, considering how far commodity
prices had fallen, so the boost to the non-mining economy hadn't been as
great as hoped.
The limited fall in the dollar was explained by
the big countries' quantitative easing, which was pushing their
currencies down relative to ours.
Our consumers were also cautious
in their spending and businesses seemed unwilling to invest until they
saw consumer spending picking up. It was looking likely the economy
would have grown below trend for seven of the eight years to 2015-16.
The
long-delayed return to healthy growth created a risk that cyclical
(temporary) unemployment turns into structural (lasting) unemployment.
However, working the other way was our moderate growth in wages, which
was a sign that the labour market was adjusting flexibly, even though it
was also likely to be limiting consumer spending.
Turning to our
longer-term challenges and opportunities, our big opportunity arose from
the shift in the centre of global economic growth to Asia. By 2050,
four of the five largest economies in the world would be in our region:
China, India, Japan and Indonesia.
In this decade, the number of
Asian middle-class consumers would equal the number in Europe and North
America. These people would increase their demand for a wide range of
goods and services that we could help supply.
But if we were to
grasp these opportunities, we would need to work for them, and work
hard, Parkinson said. There were no grounds for complacency.
We
must use the opportunity provided by all the present reviews - of the
tax system, the workplace relations system, the financial markets,
competition policy and the functioning of our federation - to make
decisions that improve our productivity growth and position ourselves to
reap the most from our prospects.
Our other big problem was
achieving a more sustainable fiscal position - getting the budget back
to surplus. Australia had a "structural" budget problem - that is, one
that wouldn't disappear once the economy had returned to normal growth -
requiring a sustained and measured response, involving people giving up
benefits.
It was important we start the process of repairing the
budget now, he said. We had recorded 23 years of consecutive growth and
the budget projections were based on an assumption that this would
continue for another decade.
Such an outcome - 33 years of uninterrupted growth - would be without precedent. Get it? We're unlikely to be that lucky.
