Tuesday, November 23, 2010

Hurt by the dollar? Don't expect support. Henry.

Treasury boss Ken Henry has painted the bleakest of futures for firms hurt by the sky-high Australian dollar.

He says it will remain high for years. And the best thing to do for the firms that will suffer is nothing.

In what may be his last appearance before a parliamentary committee Dr Henry told Senators examining the mining tax yesterday Australia should "avoid the temptation to offer support" to business whose future the high dollar will ruin.

Instead decision makers should support the transition of workers away from those business "to other businesses which do have a long term future with the sorts of terms of trade we are confronting".

Underlying his message is a belief that the mining boom will last for years and transform the economy...

"It is likely we will see an Australian economy characterised by unprecedentedly strong rates of growth in some sectors of the economy, particularly in mining, in mining investment, in mining-related construction; and other sectors of the economy growing somewhat slower than their historical rates as labour and also capital move away from the slower-growing sectors to the faster-growing ones," he said.

Assistance to industries "finding the going tough" could mean "even higher interest rates and an even higher exchange rate," endangering other industries struggling but surviving.

Few people appreciated the scale of the shock to the economy from the mining boom and soaring buying power as measured in the terms of trade.

"It started in 2003 and 2004 and maybe because it started then, people don't see it as a shock. But the increase in our terms of trade is of the order we experienced in in the wool boom of 1951. Everybody who was alive then remembers it. This has taken more years to build up but we are now at the terms of trade we had then."

"Everybody in Australia alive in the 1970s recalls 17.5 per cent inflation. We got that from a terms of trade boom one quarter to one third as big as this one."

Unless the proceeds of the mining boom were shared across state borders through taxation there was a risk the Federation would break up.

"That is partly a political judgement, but it is also an economic judgment and I think there is evidence in the Eurozone right now of the difficulties of managing a common currency without a comprehensive system of horizontal fiscal equalisation."

"You wouldn't want to see those sorts of tensions play out in the Australian federation. It's a point about national economic performance in a vast land area that happens to share the same currency."

Dr Henry's term as Treasury Secretary expires in April. If is not known whether he has sought reappointment.

Published in today's SMH and Age

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