Wednesday, May 16, 2007

Dr Ken Henry speaks (this time in public): finding workers and fixing water

Internal Treasury modeling suggests that an extra 90,000 new jobs will be created as a result of the tax cuts in the last two budgets. The head of the Treasury, Dr Ken Henry revealed the figure after a post-budget address to business economists in Sydney yesterday in which he described Australia's success in having achieved something close to full employment as a “staggering”.

He said from now on it would become difficult to expand employment as the proportion of Australians who are of working age shrank.

But he said Treasury modeling using the Melbourne Institute Tax and Transfer Simulator showed that all but one of the tax cuts announced in the last two budgets would increase people's willingness to offer themselves for work, boosting the labour supply. The one that would not was last week's increase in the dependent spouse rebate, which he said would work in the opposite direction.

Together the tax cuts were likely to boost the size of Australia's workforce by around 1 per cent, or 90,000 workers.

Asked whether the budget tax cuts were designed with that aim he conceded that they were not, saying: “as you know... there are other considerations that come into the design of these things”...

In an address to Treasury staff leaked to the press last month Dr Henry warned his officers that in the current political environment there was a greater than usual risk that they would be presented with policy proposals that were “frankly, bad”.

Asked yesterday whether he retained that concern and was still issuing warnings to his staff he replied: “I think you can probably figure out the answer to the second part of the question,” adding that he did not feel comfortable talking publicly about the content of leaked speech.

But Dr Henry did return to one of the most contentious parts of that speech.

In the leaked speech he said he wished the department had been listened to more attentively when the government drew up its government drew up its water policy.

“There is no doubt that policy outcomes would have been far superior had our views been more influential. That is not just my view; I know that it is increasingly widely shared around this town,” he said, adding that he was sure the issue of water would come back to the Treasury at some stage for some quality input, “it will have to”.

At the time his criticism was dismissed by ministers including the Prime Minister and his own minister the Treasurer Peter Costello on the grounds that the Treasury did “not know about water”.

Dr Henry told yesterday's meeting of business economists that just about the the most important reform needed in Australia was the development of a national market in most, if not all, of Australia's business inputs.

“It is probably not too much of an exaggeration to say that the only inputs that are at present characterised by truly national markets are finance, post, telecommunications and maybe aviation.

“I don't mean that I want every input for business to in fact be exchanged in every city and every town and every corner store. What I do want is that if somebody can see a commercial advantage in the exchange of that product, there is no impediment to that happening.”

Adding that if all that sounded abstract and theoretical, the Treasury Secretary said: “to bring it right home, think of water”.

“Water in Australia does not satisfy any of those tests”.

“I don't think that what the microeconomic textbooks have been saying has changed that much over the last 30 years. It is fundamentally a story about allowing markets to operate,” he said.