Tuesday, August 14, 2007

"...the bravery, the courage, to call it as it is, no matter the political sensitivity of the advice."

The head of the Treasury - a member of the Reserve Bank board that last week decided to put up interest rates - has defended the right of policy makers to take brave decisions and counselled against acceding to the wishes to people who are hurt along the way.

At the ANU last night Dr Ken Henry delivered the fifth Sir Roland Wilson Foundation lecture in honour of the man who ran the Treasury head from 1951 to 1966.

Noting that Sir Roland was the first economist to be employed in the Commonwealth public service he defended his bravery in bringing on a short recession in 1952 in order to “wring out of the economy” inflation.

He also commended the credit squeeze of the early 1960’s which he said “reflected brave Treasury advice specifically designed to bring inflation back under control”.

Dr Henry said these days those sorts of decisions were made by the Reserve Bank. They entailed “the true essence of Sir Roland’s legacy: the bravery, the courage, to call it as it is, no matter the political sensitivity of the advice”...

He called on policy makers to reject pleas for help from people hurt as a result of economic change.

In an echo of his instruction to Treasury officers in a leaked internal speech in March to resist pressure to approve policy proposals that were “frankly, bad” Dr Henry warned that “protectionism comes in many guises”. It was imperative that pleas to compensate people affected adversely by structural adjustments be resisted.
“We are currently passing through one of the most prosperous periods in Australia’s history,” the Treasury Secretary told his audience.

“Most Australians are benefiting from this prosperity. But there are some notable exceptions. There will always be a temptation, especially in times of rapid structural adjustment, to focus on the acute cases of loss. But there is a stronger case to be focussing, in these times of plenty, on the chronic cases of disadvantage that have tarnished the record of Australian development not for months, or even years, but for centuries. I am, of course, referring, among other things, to chronic indigenous disadvantage.”

“If we are able to muster the courage – if we prove brave enough – to resist the pressure to impede structural change, and instead use this historic opportunity to tackle problems as challenging as indigenous disadvantage, then we will truly have honoured Sir Roland’s legacy” Dr Henry said.

The Treasury Secretary said that in many ways the Australians of today were better off than when Sir Roland ran the Treasury in the 1950s and 1960s. Although on paper our unemployment rate is still above the very rates that prevailed then, taking into account the increased numbers of people now making themselves available for work, Australia’s employment to population ratio was actually better than any time since the early 1960’s.

Then, as with now, Australia had to deal with a terms of trade boom. But the price pressure from the Korean wool boom was spread throughout the economy by centralised wage fixing system. Australia’s present system contained those pressures.

Perhaps significantly, Dr Henry said the move to decentralised wage fixing took place in 1993, under the Keating government with the introduction of enterprise bargaining, rather than in 2006 under the Howard government with WorkChoices.

Before delivering the lecture Dr Henry chaired the first Sir Roland Wilson Debate between students from the Crawford School of Government at the ANU and students from the School of Economics.

The question was whether the big macroeconomic policy questions had been resolved – whether full employment and low inflation were here to stay.