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Showing posts with label Liberal Party. Show all posts
Showing posts with label Liberal Party. Show all posts
Sunday, August 26, 2018
Thursday, July 04, 2013
It's wrong to hire Treasury people?
 |
| 1970s Treasury, National Archives. Creative Commons |
Shadow Treasurer Joe Hockey has accused Kevin Rudd of politicising the Treasury, describing the Prime Minister’s recruitment of a senior official as “a joke” and “wrong on so many fronts”.
On Wednesday, Mr Rudd announced that Treasury deputy secretary Jim Murphy, would be his new chief of staff.
Mr Murphy is head of the Treasury’s markets group and is well regarded in business circles.
Mr Hockey, also claimed the head of the Treasury, Martin Parkinson, had called him to complain about Labor appointing “so many” public servants as political staffers.
It is understood this conversation happened some time ago.
“At one stage the Secretary of the Treasury rang me up and expressed… disappointment that he was in a position where he had so many Treasury public servants in political offices,” Mr Hockey said on Thursday morning.
“He was doing the right thing in letting me know”.
A spokesman for Mr Hockey confirmed the shadow treasurer was referring to Dr Parkinson, but he would not reveal when the call was made or any further details of the phone conversation.
Fairfax Media has contacted Dr Parkinson’s office for comment.
Mr Hockey told journalists that “it politicises the Treasury” when politicians such as Mr Rudd and former treasurer Wayne Swan, recruit Treasury public servants into their political offices.
“This is a joke,” Mr Hockey said...
“Jim Murphy is meant to run the markets division of the Treasury… He has been plucked out to go and run Kevin Rudd’s political office as the most senior official in that office. It’s just wrong.”
Mr Hockey’s complaints ignore a long history of movements between the Treasury and politicians’ offices on both sides of politics.
Arthur Sinodinos moved from Treasury to the office of Coalition leader John Howard in 1987, returning to the Treasury in 1989 when Mr Howard lost the post. He rejoined Mr Howard’s office when Mr Howard was reappointed opposition leader in 1995, staying with him as prime minister and becoming his chief of staff. Mr Sinodinos is now a Coalition Senator.
Treasury assistant secretary Peter Boxhall and colleague Peter Hendy joined Coalition leader Andrew Peacock’s office when he replaced Howard in 1987. Mr Boxhall later worked in the office of Coalition leader John Hewson and Treasurer Peter Costello before being appointed head of the Department of Finance. Senior Treasury official Phil Gaetjens was seconded to Mr Costello’s office to replace Mr Boxall. He returned to Treasury when the Howard government lost office in 2007 and is now head of the NSW Treasury.
Treasury assistant secretary Don Russell joined the office of Labor Treasurer Paul Keating in 1985, later becoming his chief of staff as Treasurer and Prime Minister and being appointed Ambassador to Washington and head of the Department of Innovation.
Ken Henry was seconded from Treasury to Mr Keating’s office in 1986. He returned in 1991 and worked closely with the Howard government on the implementation of the goods and services tax before being appointed head of the Treasury by Peter Costello in 2001.
Dr Parkinson himself worked in the offices of Labor Treasurers John Kerin and John Dawkins from 1991 before returning to the Treasury and being asked by John Howard to run the prime minister's emissions trading task group in 2006.
With Jonathan Swan, in The National Times
Related Posts
. Hockey. The man who would be Treasurer... what can I say?
. The Coalition's cheat sheet. What to say, topic by topic
Monday, February 25, 2013
Tony Abbott you need to balance your books. Your time starts now
Guest columist Shane Wright, from the West Australian:
If the polls are to be believed, Tony Abbott will be running the country by mid-September.
For those ALP supporters hoping for some sort of miracle – be it delivered by Julia Gillard or Kevin Rudd – the current poll leads enjoyed by Mr Abbott this far out from election day give him an 85 per cent chance of winning.
Given that the economy and managing the Budget will be key features in the coming weeks and months, it’s time to have a careful look at what Mr Abbott, shadow treasurer Joe Hockey and shadow finance spokesman Andrew Robb are offering voters.
The Opposition has been deliberately cagey about its big ticket policies and their costs.
Its current plan is to release these costed policies in the 33 day period between the issuing of the parliamentary writs and polling day on September 14.
But Mr Abbott has been clear that many of the policies that went to the 2010 election will get another run around the electoral paddock.
At the last election, as Mr Abbott repeatedly mentions, the coalition offered savings of $49 billion. But the fact he also offered $38 billion in spends, for a net improvement to Budget of $11 billion over four years, is barely whispered.
Some of those savings have gone, swept away by time.
For instance, at the small end of the spectrum the Opposition planned to save $4 million by not proceeding with Australia’s bid for a place on the UN Security Council...
Abandoning a plan for a 50 per cent tax discount on interest income was going to save the Opposition almost $1 billion. Unfortunately, the Government has already ditched that.
But the march of time means there are also potential new savings from programs put in place by the Government that could be axed by an incoming Abbott Government.
Mr Abbott’s plan to get rid of the Schoolkids Bonus, which started last year, will deliver a $2.1 billion boost to the Budget bottom line.
The single biggest save announced in 2010, and to which the Opposition remains committed, is a freeze on public sector jobs.
Whatever you think about public servants they’re easy fodder for politicians of any stripe.
It’s unclear, however, how this will play out as some parts of the public service will be excused from staff cuts.
The major issue remains around the carbon price (and if you read the coalition’s "Our Plan" document you could be forgiven for thinking that is the only thing holding back Australia).
It’s easy to say the carbon tax will be gone within months, but so too will around $8 billion a year in revenue.
That revenue is going towards a variety of measures, the most costly of which is the increase in pension payments and the big lift in the tax-free threshold.
Mr Abbott has confirmed the pension increases will have to be wound back as will the tax-free threshold change.
Somehow, he is also offering tax cuts to all (but a reversal in the tax cut delivered by the tax-free threshold change) on top of the abandonment of the carbon tax.
He might have to mention to the States that their GST revenue will be down slightly because the carbon price pushed up prices.
The tax-free threshold change could have an impact on employment for low income earners (who are in the best position to increase hours and boost their overall income).
The mining tax, damp squib in terms of revenue it has so far turned out to be, will also go.
In terms of revenue right at this moment that is not of huge consequence to the Opposition (although a falling dollar would certainly beef up future revenue flows).
The Opposition has been upfront in dumping all policies linked to the MRRT including the $500 co-payment for superannuation to people who earn less than $37,000.
Except it hasn’t abandoned every policy tied to the mining tax.
It remains committed to keeping the increase in the superannuation guarantee to 12 per cent that will cost close to $1 billion a year by the end of the forward estimates.
(Yes, the super guarantee costs the government because it gets less tax as superannuation is taxed at a much lower rate than ordinary incomes.)
Though the Opposition won’t concede this point, its job has been made easier by some of the cuts delivered by the Government since 2008.
The changes to the Baby Bonus and Family Tax Benefit, the increase in the age pension age, the abolition of the dependent spouse tax offset, cracking down on wealthy parents who move income to their children, the changes to FBT on work cars … the structural base of the Budget has been improved no matter what coalition MPs argue (or have opposed it the Parliament).
This is where Mr Hockey and Mr Robb will have to make fiscal ground by cutting programs put in place by the Government, such as Medicare Locals, or implement their own structural saves.
At the same time they will have to add in their own policies that will cost money.
The Opposition is already committed to winding back one Government saving measure, the means testing of the private health insurance rebate, which will be a long term drain on the Budget.
Peter Costello’s biggest financial windfall, outside the mining boom, came from selling Telstra.
But Mr Hockey doesn’t have a business of such a size to flog off.
The Opposition is committed to selling Medibank Private (a policy it has held for more than five years) which, in better times, had a theoretical price tag of at least $4 billion.
There is the option to sell Australia Post which last year delivered a reasonable profit on the back of soaring parcel deliveries caused by the increase in online shopping.
If the post office was sold off with a banking licence then Mr Hockey could not only reap a financial windfall but also boost competition in the financial sector.
(Axing the NBN does not have a major impact on the Budget because of the way it is funded. However, selling it could produce a much needed financial fillip.)
There may be substantial unaccounted savings, however.
The Opposition’s border protection policy, if it works, would free-up billions in dollars that could be moved into other parts of the Budget.
However, no one knows for certain that the policy will work.
Defence is potentially a Budget destroying sector for both the Opposition and the Government.
Two mega projects must soon get the green light – and hit the Budget bottom line.
The Joint Strike Fighter and the submarine replacement program will together cost the Commonwealth tens of billions of dollars.
Mr Abbott is promising a three percent real annual increase in Defence spending "subject to improvement in the Budget".
Notwithstanding that no one can define what "improvement in the Budget" means, decisions to start paying for the JSFs and the submarines may have to be made earlier rather than later.
And as the JSFs have already proven, big Defence procurements are notorious for going way over budget.
We haven’t even added the thought-bubble of dam building across northern Australian. That’s dam building without any infrastructure to support it.
All of this is before we hit the economy proper.
There have been ongoing warnings from Treasury that tax receipts won’t flow like they did before the GFC.
Then add in the high Australian dollar (which is doing far, far more damage than any carbon tax), the global currency wars, any move in government bonds and a host of other factors.
All this awaits Mr Abbott, Mr Hockey and Mr Robb.
Related Posts
. Costings. Swan chucks Hockey a time bomb
. It's gone. No Coalition commitment to deliver a surplus within 12 months
. Lib costings debacle. Amateur hour all round
Read more >>
If the polls are to be believed, Tony Abbott will be running the country by mid-September.For those ALP supporters hoping for some sort of miracle – be it delivered by Julia Gillard or Kevin Rudd – the current poll leads enjoyed by Mr Abbott this far out from election day give him an 85 per cent chance of winning.
Given that the economy and managing the Budget will be key features in the coming weeks and months, it’s time to have a careful look at what Mr Abbott, shadow treasurer Joe Hockey and shadow finance spokesman Andrew Robb are offering voters.
The Opposition has been deliberately cagey about its big ticket policies and their costs.
Its current plan is to release these costed policies in the 33 day period between the issuing of the parliamentary writs and polling day on September 14.
But Mr Abbott has been clear that many of the policies that went to the 2010 election will get another run around the electoral paddock.
At the last election, as Mr Abbott repeatedly mentions, the coalition offered savings of $49 billion. But the fact he also offered $38 billion in spends, for a net improvement to Budget of $11 billion over four years, is barely whispered.
Some of those savings have gone, swept away by time.
For instance, at the small end of the spectrum the Opposition planned to save $4 million by not proceeding with Australia’s bid for a place on the UN Security Council...
Abandoning a plan for a 50 per cent tax discount on interest income was going to save the Opposition almost $1 billion. Unfortunately, the Government has already ditched that.
But the march of time means there are also potential new savings from programs put in place by the Government that could be axed by an incoming Abbott Government.
Mr Abbott’s plan to get rid of the Schoolkids Bonus, which started last year, will deliver a $2.1 billion boost to the Budget bottom line.
The single biggest save announced in 2010, and to which the Opposition remains committed, is a freeze on public sector jobs.
Whatever you think about public servants they’re easy fodder for politicians of any stripe.
It’s unclear, however, how this will play out as some parts of the public service will be excused from staff cuts.
The major issue remains around the carbon price (and if you read the coalition’s "Our Plan" document you could be forgiven for thinking that is the only thing holding back Australia).
It’s easy to say the carbon tax will be gone within months, but so too will around $8 billion a year in revenue.
That revenue is going towards a variety of measures, the most costly of which is the increase in pension payments and the big lift in the tax-free threshold.
Mr Abbott has confirmed the pension increases will have to be wound back as will the tax-free threshold change.
Somehow, he is also offering tax cuts to all (but a reversal in the tax cut delivered by the tax-free threshold change) on top of the abandonment of the carbon tax.
He might have to mention to the States that their GST revenue will be down slightly because the carbon price pushed up prices.
The tax-free threshold change could have an impact on employment for low income earners (who are in the best position to increase hours and boost their overall income).
The mining tax, damp squib in terms of revenue it has so far turned out to be, will also go.
In terms of revenue right at this moment that is not of huge consequence to the Opposition (although a falling dollar would certainly beef up future revenue flows).
The Opposition has been upfront in dumping all policies linked to the MRRT including the $500 co-payment for superannuation to people who earn less than $37,000.
Except it hasn’t abandoned every policy tied to the mining tax.
It remains committed to keeping the increase in the superannuation guarantee to 12 per cent that will cost close to $1 billion a year by the end of the forward estimates.
(Yes, the super guarantee costs the government because it gets less tax as superannuation is taxed at a much lower rate than ordinary incomes.)
Though the Opposition won’t concede this point, its job has been made easier by some of the cuts delivered by the Government since 2008.
The changes to the Baby Bonus and Family Tax Benefit, the increase in the age pension age, the abolition of the dependent spouse tax offset, cracking down on wealthy parents who move income to their children, the changes to FBT on work cars … the structural base of the Budget has been improved no matter what coalition MPs argue (or have opposed it the Parliament).
This is where Mr Hockey and Mr Robb will have to make fiscal ground by cutting programs put in place by the Government, such as Medicare Locals, or implement their own structural saves.
At the same time they will have to add in their own policies that will cost money.
The Opposition is already committed to winding back one Government saving measure, the means testing of the private health insurance rebate, which will be a long term drain on the Budget.
Peter Costello’s biggest financial windfall, outside the mining boom, came from selling Telstra.
But Mr Hockey doesn’t have a business of such a size to flog off.
The Opposition is committed to selling Medibank Private (a policy it has held for more than five years) which, in better times, had a theoretical price tag of at least $4 billion.
There is the option to sell Australia Post which last year delivered a reasonable profit on the back of soaring parcel deliveries caused by the increase in online shopping.
If the post office was sold off with a banking licence then Mr Hockey could not only reap a financial windfall but also boost competition in the financial sector.
(Axing the NBN does not have a major impact on the Budget because of the way it is funded. However, selling it could produce a much needed financial fillip.)
There may be substantial unaccounted savings, however.
The Opposition’s border protection policy, if it works, would free-up billions in dollars that could be moved into other parts of the Budget.
However, no one knows for certain that the policy will work.
Defence is potentially a Budget destroying sector for both the Opposition and the Government.
Two mega projects must soon get the green light – and hit the Budget bottom line.
The Joint Strike Fighter and the submarine replacement program will together cost the Commonwealth tens of billions of dollars.
Mr Abbott is promising a three percent real annual increase in Defence spending "subject to improvement in the Budget".
Notwithstanding that no one can define what "improvement in the Budget" means, decisions to start paying for the JSFs and the submarines may have to be made earlier rather than later.
And as the JSFs have already proven, big Defence procurements are notorious for going way over budget.
We haven’t even added the thought-bubble of dam building across northern Australian. That’s dam building without any infrastructure to support it.
All of this is before we hit the economy proper.
There have been ongoing warnings from Treasury that tax receipts won’t flow like they did before the GFC.
Then add in the high Australian dollar (which is doing far, far more damage than any carbon tax), the global currency wars, any move in government bonds and a host of other factors.
All this awaits Mr Abbott, Mr Hockey and Mr Robb.
Related Posts
. Costings. Swan chucks Hockey a time bomb
. It's gone. No Coalition commitment to deliver a surplus within 12 months
. Lib costings debacle. Amateur hour all round
Friday, April 20, 2012
'Too much money was sloshing around' - Turnbull on Howard's economic mistakes
The guy is honest, gutzy, serious. Unlike his frontbench contemporaries
Coalition Communications spokesman Malcolm Turnbull has crashed into the economic debate, saying the Howard government made bad economic decisions in its final years, ones for which he accepts collective responsibility.
“The simple fact is, and we’ve seen it again and again in this city, when governments have money sloshing around they want either to spend it on benefits, invest it in infrastructure or give it back in tax cuts,” he told a Canberra forum organised by the Melbourne Institute.
“There’s nothing wrong with any of those objectives if the spending or the tax cutting for example is sustainable, well targeted, and represents value for money. But regrettably that isn’t always the case.”
Mr Turnbull believes the Coalition should have banked much more of the income from the mining boom, perhaps by putting it in a wealth fund managed by the Future Fund. But he said the idea had become less attractive after “the so-called Keating debt had been paid off.”
“I say this as somebody who has been part of a government and made collective decisions about spending. This is a behavioural economics perspective. From a political point of view my strong belief is that a new sovereign wealth fund would be very much in the spirit of the times, and would become a matter of real national pride.”
Asked which of the Howard government’s decisions were bad he said: “This isn’t the time or the place, nor would I be able to comprehensively chronicle them all, but I think most of us feel that, Peter Costello clearly does.”
“The reality was inevitably the surpluses came in - in those last three years much bigger than forecast - so the government was presented with a lot more money at the eleventh hour, as it were.”
Mr Turnbull’s observations challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses...
He also took issue with those on both sides of politics who want the Reserve Bank to cut interest rate in order to restrain the Australian dollar. They include Coalition finance spokesman Andrew Robb and Australian Workers Union leader Paul Howes.
“To complain about the current level of the dollar is to implicitly oppose the current size of the resources sector,” he said.
“In a sense by developing an iron ore or a coal industry in the first place while while having a floating currency and free capital flows Australia signed on for the current ride.”
As an instance of what could happen when a government tried to restrain the exchange rate he singled out the McMahon Coalition government of 1971 and 1972.
“Arguably among the most costly policy miscalculations in our history was the Country Party’s repeated veto of the stronger dollar in 1971 and 1972, which stoked the runaway inflation which ultimately averaged 9 per cent annually for the next two decades - it took a long time to get over that.”
The Country Party was the National Party’s predecessor. Mr Turnbull’s analysis differs from that of other Coalition politicians who blame the two decades of high inflation that grew out of the 1970s on the succeeding Whitlam Labor government.
Former Reserve Bank board member Bob Gregory backed Mr Turnbull’s support for a sovereign wealth fund but said in his view interest rates were too high because the Bank had overestimated the strength of the economy. It would soon correct its mistake and cut rates.
In today's Canberra Times, Sydney Morning Herald and Age
Malcolm Turnbull writes:
Peter Martin’s article in the Sydney Morning Herald today rather misrepresents a very sober and fairly academic discussion about the exchange rate, fiscal discipline, the mining boom and sovereign wealth funds at the Melbourne Institute Conference in Canberra yesterday.
Speaking on the same platform as Professors Max Corden and Bob Gregory it wasn’t the occasion for a rip roaring partisan political harangue but rather a more thoughtful and considered analysis of some important political issues. It was certainly received that way.
My only comments on the Howard Government’s spending was to say that with the benefit of hindsight we could have saved more in our last years in office – that is hardly a novel observation, and as The Australian’s David Uren reports, I noted that it was significant that our side of politics, having governed Australia well and responsibly for nearly twelve years, is nonetheless prepared to reflect on how we might have done a good job even better.
What Peter Martin failed to report was that I pointed out that politics is a relative business and that compared to the reckless spending of the Rudd and Gillard Governments the Howard Government’s record was in terms of fiscal matters “stellar” – as indeed the record shows. John Howard not only paid off all of Labor’s debt, left us with a substantial cash at the bank but also established our first sovereign wealth fund, the Future Fund with the proceeds of asset sales and surpluses.
I might add there was no reporting of the strong criticism I made of the Rudd Government’s mishandling of the mining tax issue, both in terms of process and design.
Peter Martin asked me to nominate particular spending decisions I didn’t agree with and having declined to talk about one decision or another or otherwise go into particulars this is what I said:
“..most of us feel we could have saved more, certainly in the last term in particular. The reality was that surpluses came in invariably in the last three years much bigger than had been forecast. The Government was presented with a lot more money at the eleventh hour. Quite a lot was saved. Politics, just like interest rates, is relative. One thing that is commendable is that our side is having an honest reflection on whether – notwithstanding we did a very good job paying off debt, establishing the Future Fund and other funds and adding to national savings and (in this regard) compared to our successors did a stellar job, it is I think a good thing to be reflecting on whether that job could have been done better. I guess what I am saying is that if we had a – if there had been an ongoing sort of program of thrift and saving [referring to the sovereign wealth fund proposal] that would have been a good alternative, more money would have been saved.”
Now, quite how you can turn an answer like that into a headline which says “Coalition economics not on the money: Turnbull” let alone argue that my observations “challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses.”
Quite the contrary is the case, the repeated budget surpluses were the result of sound economic management – they are the proof positive.
My point is that when surpluses are high Governments are under pressure either to spend them or give them back in tax cuts. As I said in my speech as long as the decisions to spend or cut taxes are sustainable, there should be no hesitation in doing so. But if those decisions taken at the top of the cycle create long term obligations or entitlements or create long term diminutions in the tax base which have the consequence of creating a structural deficit then they are not wise.
Now I do not believe the Howard Government did that, quite the contrary. But the Labor Governments that succeeded us have done just that, by overspending they have created the extraordinary situation where they have been borrowing record amounts and running deficits in the midst of the biggest terms of trade boom in our nation’s history.
So my argument for a new sovereign wealth fund, for creating a stronger culture of thrift and saving is that it will provide another option for governments faced with strong revenues – one of saving for the long term. And that is entirely consistent of course with the philosophy and the the practice of the Liberal Party in Government.
A high exchange rate - should we be concerned and what should be done?
Malcolm Turnbull
Melbourne Institute – Public Economics Forum
Canberra, 19 April 2012
Well thankyou very much. Let me start by saying that I’m very honoured to be in such illustrious company for this discussion.
Max Corden, my fellow speaker, is of course one of our nation’s most distinguished economists and his work on industry protection, trade and exchange rates has not only contributed to economics as a discipline, but has also influenced some of our important public policy debates, especially over the true costs of tariffs. He was one of the loose grouping of public servants, academic economists, corporate economists, financial journalists, backbench MPs and others who took on Australia’s long-established commitment to industry protection in the 1960s, and by doing so began the long process of dismantling the increasingly antiquated post-Federation economic institutions.
In 1982 Max proposed the three-sector model that has been revived a number of times, including in the last article that is being distributed today, that most usefully explains what is usually termed ‘Dutch Disease’ or the ‘Gregory effect’. I think it would have been better if it had been called the Gregory Effect , if I could say that. Because one of the problems with the whole Dutch Disease term is that a phenomenon that for most people is actually a profoundly good thing, is presented as a morbid condition – a counterpoint to the virility that you were talking about Gary. I noticed your hair is perfectly combed, by the way. This is of course the phenomenon where higher income and a stronger exchange rate caused by rapidly growing exports from one traded sector (classically, the resource sector) have a negative impact on other traded sectors.[1] And of course, the argument now is – and Max might touch on this – that the Dutch never suffered from the Dutch disease in the first place. That’s the Treasury’s received view – Martin Parkinson is nodding there.
Bob Gregory of course is here today as well and he’s another of our distinguished economists in the room. He produced the first research about this in 1976, which is why it sometimes known as the ‘Gregory Effect’. He is perhaps known best for his work on the labour market and a former member of the Reserve Bank board. [2]
Now they have published recent papers dealing on this and I will come back to these papers in a little while, particularly Max’s. But I just want to say something about the Gregory paper, which he wrote with Peter Sheehan. It looks at the recent divergence between GDP per capita and income-based measures of living standards as an increasing proportion of our growth in material well being having come from gains in the terms of trade (which are not captured in the former calculation or the former metric). He calculates that gap at $7500 per capita in 2011 dollars, which is a large chunk of what has been accrued over the past decade. It is worth pondering, perhaps we can discuss, how enduring that gain will be. [3]
Given there are so many great economists here I think I should going to focus my talk principally on the political economy of the matter. There is of course a great politician here, Dr Andrew Leigh, one of the Members from the People’s Republic of Canberra. And it’s good to see him, but I’m sorry you have to leave him before the discussion. It will be a pity.
Let me just outline a few propositions that should serve as constraints in the discussion. And I will say frankly in advance, if you accept them all, there isn’t much space left for a genuine attempt to ‘do’ something about the exchange rate.
The first point is that the wave of emerging market demand for commodities is much bigger than we are.
Everyone agrees that it is the sheer size of this resources boom that distinguishes it from previous commodity windfalls such as the late 19th century minerals boom, the Korean War wool price spike, or the buoyant energy and agricultural prices of the early 1970s.
And we have to bear in mind that the commodity boom that we’re talking about here in Australia is in large measure made up of the demand for the components of making steel. That is to say, iron ore and metallurgical coal. I will come back to thermal coal later. That demand is being driven by the rate of urbanization in Asia and in particular, of course, China. Now the steel intensity of economies peak when urbanization peaks and then over time starts to decline. So this is not going to go on forever. Steel intensity is not coextensive with economic prosperity. America uses much less steel now than it did 50 or 60 years ago. And the same will be true of China. A lot of people don’t reflect on this, but it is very important to bear in mind, particularly when people are trying to persuade you that this is a boom that will never end. I know there are a few people in this room who suspect that, or come close to arguing, that this is the case. So I would just make that point about urbanization, that this is a long term trend. It won’t go on forever, but it is a long term trend. This is not a spike.
The only episode that is comparable in terms of its economic impact was Victoria’s gold rush of the 1850s, which trebled the European population of Australia, made Melbourne into one of the great cities of the British Empire, and helped deliver the highest per capital incomes in the world for the next four decades.
Just in summarizing some of the metrics, and I know everyone here’s very familiar with them. The RBA index of commodity prices tripled between 2003 and 2009. In terms of investment committed or flagged for new resources sector projects, the January investment pipeline reported by Deloitte Access was $912 billion, with work going on at projects involving $415 billion. And in terms of duration, the episode has already outlasted all earlier booms save for the 1850s gold rushes. [4]
The bottom line here is, large though our resource industries and endowments are, in the end Australia is a tiny part of the market compared to an increase in demand in China or India. Even without investment in expanding our resources capacity, our exchange rate would still be significantly elevated compared to the period before 2003 given demand has been so strong. To complain about the current level of the dollar is to implicitly oppose not just current expansion of the resources sector, but its ex ante level of production.
In a sense by developing an iron ore or coal industry in the first place while having a floating currency and free capital flows, Australians signed on for the current ride.
The second proposition I want to make is about the dollar. This is the first – and Ric Battellino made this point in a very good speech last year – this is the first big boom, the first boom we’ve had, during which the exchange rate has been floating, and in which, and I’m quoting from his speech, “a significant rise in the nominal exchange rate has been an important part of the economic adjustment. This has added an important degree of flexibility to the economy by allowing the real exchange rate to rise through a means other than inflation.” [5] This is not our forst big boom, but it is our first big boom with a floating exchange rate.
Now my next proposition is that in my view, Australians are not going to reverse the past two decade of depoliticizing the exchange rate and interest rates. We’re not going to go back to governments, Paul Howes notwithstanding, setting the exchange rates or interest rates.
The contrast could not be more stark between the 2000s and earlier booms, as Treasury’s David Gruen described in his recent paper on the boom, when the exchange rate was still manipulated by politicians willing to do anything to avoid enraging farmers and manufacturers (which they would if the exchange rate had revalued). The result back then of income shocks was invariably inflation and industrial disputation as the higher wages in the fast growing sector, in the resources sector, flowed on to what max would call the lagging sectors and of course, created or contributed to very damaging inflation. One of these choices was arguably among the most costly policy miscalculations in our history - the Country Party’s repeated veto of a stronger dollar in 1971-72 which stoked the runaway inflation that ultimately averaged 9 per cent annually for the next two decades. [6] It took a long time to get over that.
Persistently high inflation combined with political meddling on official interest rates and the value of the currency in turn contributed to the macro-economic instability, recessions and low growth of the 1970s and 1980s.
Compare this with the record since our institutional arrangements were changed - first with the float of the dollar in 1983, and then later with the formalization of Reserve Bank autonomy and independence, and specification of an inflation target.
Since the float Australia has experienced only one recession (if we use the rule of thumb of two consecutive quarters of contraction) and that, in 1990-91, was the result of a conscious policy decision by the soon-to-be-independent RBA to finally break the back of inflationary expectations. The 1990-91 recession was a disaster in terms of human costs, but it did achieve its objective although at very high cost.
Against this backdrop, Paul Howes recently suggested the Reserve Bank’s mandate be altered to focus it on two objectives (price stability would be joined by the real exchange rate).
Given the struggles across much of manufacturing, where most of his members work, and Paul’s very enviable youth, it’s not hard to see why he might arrive at this suggestion. After all, it is quite a while, thankfully, since we have seen serious inflation at work in Australia or engaged in public discussion of its insidious effects.
The first thing wrong with Paul’s idea is that the RBA would be left with one instrument to aim at two targets - which implies one of them would have to be partly or entirely sacrificed at some point.
But an even more important criticism is that Howes implicitly downgrades the value of keeping inflation low, perhaps not realizing that if it edges higher, the costs tend to fall on the most vulnerable.
It is telling – very telling in my judgement and a marker of monetary policy success - that to find a quote best to explain this danger we had to go back to 1990, when Ross Gittins expressed the issue very well in an article. And I quote Ross Gittins:
“Inflation would be less of a problem if everyone had an equal ability to protect himself from its ravages. The ability to protect yourself from inflation, however, varies greatly through the community. Generally speaking, it's the better-off who have greatest freedom to protect the real value of their income and their wealth. The more you have, the more you can afford to get the advice and do the tricks that keep you ahead ... inflation hurts our society: it makes it less fair, with the less powerful and the less astute being the ones who lose out.” [7]
And surely the Australian Workers’ Union and its supporters would not want to do that.
Now Max Corden’s recent paper on policy options for a three-speed economy logically and convincingly makes a general argument that in an open economy amid a resources boom, any sector-specific policy we can devise is nothing more than a redistributive measure, either from consumers to producers, or from one group of producers to another. There will be negligible impact on the exchange rate.
He makes the point so compellingly that I think we can dismiss even considering such policies (unfortunately that is not so easy in the real world, where they remain popular). [8]
I might simply note for emphasis that invariably the loudest claims for assistance are from industries and firms whose comparative advantage is least apparent and whose history of Government assistance has been the longest, regardless of the exchange rate.
Add all of this up and the very limited scope to ‘do something’ about the high dollar becomes plain.
Max’s paper does propose one other approach - which is a strongly contractionary fiscal policy (Government spends less) offset by accommodative monetary policy (Reserve Bank cuts rates) with the aim being to leave demand at the same level but lower the effective exchange rate.
Of course such a strategy is very challenging to implement at the present time, where the aftermath of the GFC is layered on top of the resources boom, making it particularly difficult to know what ‘neutral’ settings for monetary and fiscal policy might be in Australia, much less what the current trade-off between them is.
Max notes that this could be a useful role for a sovereign wealth fund, a reform I have advocated. My understanding of his position is that he is agnostic as to whether a sovereign wealth fund invested in foreign currency denominated assets (and by that I mean uncorrelated foreign currency assets - so it would make no sense for us to invest a sovereign wealth fund in the RMB) would actually result in effective exchange rate sterilisation. And I think he’s right to be agnostic about that. I note that the Governor of Norges Bank said in 2010 that it is was still unclear, I think he said the jury is still out, whether Norway's SWF which at $550 billion or thereabouts has been effective in keeping the krone value even lower than it otherwise would be. And bear in mind their sovereign wealth fund, at %550 billion, is around 125% of Norway’s GDP. So a comparable Australian sovereign wealth fund would be a gigantic fund and obviously not something that could be achieved other than after a very long time.
So the exchange rate sterilization argument, in the context of investing in uncorrelated foreign assets I don’t think is a very powerful one. It might have some effect but it’s probably not going to be very material. The better arguments for a sovereign wealth fund relate to financial prudence and remembering that all booms come to an end and ensuring that when that does happen we will have something to show for it.
As to the exchange rate, I agree with Max that in an Australian context an Australian SWF – we already have one of course, the Future Fund. I’m talking about a new one or a second account if you like. This fund would assist in the fiscal consolidation exercise we both endorse and to pick up on something Martin Parkinson said the other day would result in savings being higher than they otherwise would be.
This behavioural aspect of SWFs is rarely discussed. The simple fact is, and we have seen it again and again in this city, that when Governments have money sloshing around they want either to spend it on benefits, invest in infrastructure or give it back in tax cuts. Sticking it in the bank is generally not very attractive, particularly when there is debt to be paid off and we saw this in the last years of the Howard Government when the Keating debt, so-called, had been paid off.
There is nothing wrong with any of those objectives if the spending or the investing or tax cutting for that matter is sustainable, well targeted and represents value for money.
Regrettably that isn’t always the case. Some of you have obviously fainted, shocked, at that proposition. And my argument is that it would be a salutory encouragement to greater thrift if an additional option was built into our thinking about public finances which was to save for our children and grandchildren's futures. And I say this as someone who’s been part of a Government and made collective decisions about spending. I am giving a behavioural economics perspective. You would struggle to quantify this or justify it in a quantitative way.
From a political point of view, my strong belief is that a commitment to a new SWF would be very much in the spirit of the times and would become a matter of real national pride. But it has to be said there isn't a lot of support for such a reform outside of the Business Council of Australia and many of its leading members, leading economists both academic and corporate, David Murray, Arthur Sinodinos, Peter Costello, the IMF and implicitly the Reserve Bank itself. And of course the Greens. But apart from that motley crew, there doesn’t appear to be much support for it.
There are many issues to discuss in relation to a new SWF, which of course may simply be another account managed by the Future Fund. These include the governance, the investment mandate of the fund and its nature. Should it be long term saving fund like the Norwegian fund, something we can live off when the oil runs out, probably not applicable to our resource endowment. Or should it be a stabilization fund like Chile's, which can be drawn down on when the commodity cycle turns down and government revenues decline?
My argument for a SWF as you can see is not driven solely or even largely by a concern about the exchange rate, and we have to always ask ourselves that while we may lament the high exchange rate as we empathise with producers, we should remember that the most important concern of politicians will inevitably be the welfare of consumers.
Of course the consumer benefits of a higher exchange rate are cold comfort if you dont have a job, but if you can combine a rising exchange rate, the sectoral adjustment that causes and yet maintain high levels of employment it is hard to see that the high exchange rate is an unalloyed bad thing as many would have us believe.
Compare the situation in China where you have a number, and Yiping Huang writes a lot about this, a Chinese economist. Or Michael Pettis, at Peking University has written a lot about this so probably a lot of you are familiar with it. But if you think about the Chinese economy, because consumers don’t have the same leverage there that they do in a democracy like ours, there are massive subsidies to producers and to State owned corporations at the expense of consumers. Negative real deposit rates, the transfer of between five and seven per cent of GDP from households to the banks to State owned corporations. That funding not being available to private corporations with a few exceptions that are national champions, like Huawei and others. And at the same time of course the exchange rate benefits exporters at the expense of consumers. So do we really want to do that? Is that the approach we really want to achieve? We have got to think about that, think about the consequences, when we complain about the exchange rate.
Now just consider, when we are told the exchange rate is unreasonably high, it is worth thinking back to the turn of the century when Australians were still being penalized because our economy was not exposed enough to the ‘new economy’ boom, so called.
Because of this and low commodity prices in the year 2000, GDP per capita at market exchange rates was $US35,300 in the US and a mere $US20,800 here.
What a difference the past dozen years and a change in investor perceptions has made.
By 2008 per capita incomes in Australia and the US expressed in market terms were the same, for the first time since 1895 and by 2012, the IMF forecasts GDP per capita of $US49,100 in the US and a startling $US69,000 in Australia. So the reality is that the high exchange rate is a feature in a turn around in economic conditions that has made all Australians wealthier but of course has had serious issues of adjustment. But it is something we should be proud of, that we have been able to achieve that process of adjustment while still maintaining relatively high, historically high levels of employment. And that is something we should be very proud about.
Now I am just going to make one final point because we can talk a lot more in the discussion. But my simple point is this: There is always an attraction to what I used to call many years ago, the ‘Backslash Copy’ school of economic forecasting. Those of you who can remember using Lotus 123, so it’s only the older people in the room who know what I’m talking about. The disruption caused by technology, discover and innovation is not limited to the world of social media.
Just think for a moment of the revolution in natural gas. That is a vast topic for another occasion. It was only a few years ago that the United States was lamenting that it was running out of energy and that it was going to become a massive gas importer. Gas is now cheaper relative to oil, by relative values on a BTU basis, than it has ever been. And of course America will become a major gas exporter. And that is going to have a very material impact on the price of gas in Asia. The price differential in the United States and gas in Asia – because the markets are not presently connected – is gigantic. Now trade will resolve that.
What has made that possible? Horizontal drilling and fracking. Technology has made that possible. The gas has always been there, it has been there for millions of years, no doubt. China is a gigantic coal province, it has more coal reserves than any country in the world. It has, inevitably, equally vast resources of gas – unconventional gas, shale gas, coal seam gas.
Now there are people in Beijing that I have spoken with who believe China will become self sufficient in gas eight years or more from now. And more than that, it could become an exporter of gas. Now we are dealing with high levels of uncertainty here, so I wouldn’t make any financial investments on what I am saying to you, or anything I have said to you. But imagine if China becomes self sufficient in gas. I think that is very realistic. But imagine if China becomes an exporter in gas. America will become an exporter in gas. What does that mean for the value of our gas reserves and the value of our gas exports? What will happen if technologies to make steel without metallurgical coal become available? And there is a lot of work being done, but I think they’re a long way off, but who knows.
We should not assume that rapid disruption is limited to the world of the internet. The world of resources is subject to it just as much. And sometimes those shifts, while perhaps they take a little longer to take effect can be even more momentous. So prudence and thrift are good qualities to bear in mind in these uncertain, but nonetheless very prosperous, times. Thankyou very much.
[1] W. M. Corden & J. P. Neary (1982) ‘Booming Sector & De-Industrialisation in a Small Open Economy,’ Economic Journal 92, pp. 825-848. This and subsequent research modeled an economy experiencing rapid growth in income from one type of export in terms of three stylized sectors: a booming sector (such as resources or energy), a lagging traded sector (such as manufacturing or agriculture), and a non-tradable sector (such as services or government).
[2] R. Gregory (1976) ‘Some Implications of the Growth of the Mineral Sector’, Aust. Journal Agric. Econ. 20, pp. 71-91.
A third important contribution to the early economic literature about resources booms was also published by an Australian economist, Richard Snape (1936-2002) who later became deputy chairman of the Productivity Commission. See R. H. Snape (1977) ‘Effects of Mineral Development on the Economy", Aust. Journal Agric. Econ. 21, pp. 147-156.
[3] R. Gregory and P. Sheehan (2011), "The Resources Boom and Macroeconomic Policy in Australia", available online at: http://www.cfses.com/documents/AER_No_1.pdf, p.11
[4] Wayne Swan & Lindsay Tanner (2010) Budget Paper No. 1, 2010-11, pp.4-4 to 4-5.
[5] Ric Battelino, Deputy Governor, RBA (2010) ‘Mining Booms & the Australian Economy,’ speech to Sydney Institute, 23 Feb 2010, published in RBA Bulletin, Mar Qtr 2010, p.67
[6] Country Party then Whitlam: David Gruen, Australian Treasury (2011) ‘The Macroeconomic and Structural Implications of a Once-in-a-Lifetime Boom in the Terms of Trade,’ speech to ABE, 24 November 2011, pp.6-7.
[7] Ross Gittins, Sydney Morning Herald (1990) ‘Why High Inflation Makes Us Losers,’ 2 May 1990.
[8] W. M. Corden (2012) ‘The Dutch Disease in Australia - Policy Options for a Three Speed Economy, Melbourne Institute of Applied Economic & Social Research, Working Paper No. 5/12, Feb 2012
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Coalition Communications spokesman Malcolm Turnbull has crashed into the economic debate, saying the Howard government made bad economic decisions in its final years, ones for which he accepts collective responsibility.“The simple fact is, and we’ve seen it again and again in this city, when governments have money sloshing around they want either to spend it on benefits, invest it in infrastructure or give it back in tax cuts,” he told a Canberra forum organised by the Melbourne Institute.
“There’s nothing wrong with any of those objectives if the spending or the tax cutting for example is sustainable, well targeted, and represents value for money. But regrettably that isn’t always the case.”
Mr Turnbull believes the Coalition should have banked much more of the income from the mining boom, perhaps by putting it in a wealth fund managed by the Future Fund. But he said the idea had become less attractive after “the so-called Keating debt had been paid off.”
“I say this as somebody who has been part of a government and made collective decisions about spending. This is a behavioural economics perspective. From a political point of view my strong belief is that a new sovereign wealth fund would be very much in the spirit of the times, and would become a matter of real national pride.”
Asked which of the Howard government’s decisions were bad he said: “This isn’t the time or the place, nor would I be able to comprehensively chronicle them all, but I think most of us feel that, Peter Costello clearly does.”
“The reality was inevitably the surpluses came in - in those last three years much bigger than forecast - so the government was presented with a lot more money at the eleventh hour, as it were.”
Mr Turnbull’s observations challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses...
He also took issue with those on both sides of politics who want the Reserve Bank to cut interest rate in order to restrain the Australian dollar. They include Coalition finance spokesman Andrew Robb and Australian Workers Union leader Paul Howes.
“To complain about the current level of the dollar is to implicitly oppose the current size of the resources sector,” he said.
“In a sense by developing an iron ore or a coal industry in the first place while while having a floating currency and free capital flows Australia signed on for the current ride.”
As an instance of what could happen when a government tried to restrain the exchange rate he singled out the McMahon Coalition government of 1971 and 1972.
“Arguably among the most costly policy miscalculations in our history was the Country Party’s repeated veto of the stronger dollar in 1971 and 1972, which stoked the runaway inflation which ultimately averaged 9 per cent annually for the next two decades - it took a long time to get over that.”
The Country Party was the National Party’s predecessor. Mr Turnbull’s analysis differs from that of other Coalition politicians who blame the two decades of high inflation that grew out of the 1970s on the succeeding Whitlam Labor government.
Former Reserve Bank board member Bob Gregory backed Mr Turnbull’s support for a sovereign wealth fund but said in his view interest rates were too high because the Bank had overestimated the strength of the economy. It would soon correct its mistake and cut rates.
In today's Canberra Times, Sydney Morning Herald and Age
Malcolm Turnbull writes:
Peter Martin’s article in the Sydney Morning Herald today rather misrepresents a very sober and fairly academic discussion about the exchange rate, fiscal discipline, the mining boom and sovereign wealth funds at the Melbourne Institute Conference in Canberra yesterday.
Speaking on the same platform as Professors Max Corden and Bob Gregory it wasn’t the occasion for a rip roaring partisan political harangue but rather a more thoughtful and considered analysis of some important political issues. It was certainly received that way.
My only comments on the Howard Government’s spending was to say that with the benefit of hindsight we could have saved more in our last years in office – that is hardly a novel observation, and as The Australian’s David Uren reports, I noted that it was significant that our side of politics, having governed Australia well and responsibly for nearly twelve years, is nonetheless prepared to reflect on how we might have done a good job even better.
What Peter Martin failed to report was that I pointed out that politics is a relative business and that compared to the reckless spending of the Rudd and Gillard Governments the Howard Government’s record was in terms of fiscal matters “stellar” – as indeed the record shows. John Howard not only paid off all of Labor’s debt, left us with a substantial cash at the bank but also established our first sovereign wealth fund, the Future Fund with the proceeds of asset sales and surpluses.
I might add there was no reporting of the strong criticism I made of the Rudd Government’s mishandling of the mining tax issue, both in terms of process and design.
Peter Martin asked me to nominate particular spending decisions I didn’t agree with and having declined to talk about one decision or another or otherwise go into particulars this is what I said:
“..most of us feel we could have saved more, certainly in the last term in particular. The reality was that surpluses came in invariably in the last three years much bigger than had been forecast. The Government was presented with a lot more money at the eleventh hour. Quite a lot was saved. Politics, just like interest rates, is relative. One thing that is commendable is that our side is having an honest reflection on whether – notwithstanding we did a very good job paying off debt, establishing the Future Fund and other funds and adding to national savings and (in this regard) compared to our successors did a stellar job, it is I think a good thing to be reflecting on whether that job could have been done better. I guess what I am saying is that if we had a – if there had been an ongoing sort of program of thrift and saving [referring to the sovereign wealth fund proposal] that would have been a good alternative, more money would have been saved.”
Now, quite how you can turn an answer like that into a headline which says “Coalition economics not on the money: Turnbull” let alone argue that my observations “challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses.”
Quite the contrary is the case, the repeated budget surpluses were the result of sound economic management – they are the proof positive.
My point is that when surpluses are high Governments are under pressure either to spend them or give them back in tax cuts. As I said in my speech as long as the decisions to spend or cut taxes are sustainable, there should be no hesitation in doing so. But if those decisions taken at the top of the cycle create long term obligations or entitlements or create long term diminutions in the tax base which have the consequence of creating a structural deficit then they are not wise.
Now I do not believe the Howard Government did that, quite the contrary. But the Labor Governments that succeeded us have done just that, by overspending they have created the extraordinary situation where they have been borrowing record amounts and running deficits in the midst of the biggest terms of trade boom in our nation’s history.
So my argument for a new sovereign wealth fund, for creating a stronger culture of thrift and saving is that it will provide another option for governments faced with strong revenues – one of saving for the long term. And that is entirely consistent of course with the philosophy and the the practice of the Liberal Party in Government.
A high exchange rate - should we be concerned and what should be done?
Malcolm Turnbull
Melbourne Institute – Public Economics Forum
Canberra, 19 April 2012
Well thankyou very much. Let me start by saying that I’m very honoured to be in such illustrious company for this discussion.
Max Corden, my fellow speaker, is of course one of our nation’s most distinguished economists and his work on industry protection, trade and exchange rates has not only contributed to economics as a discipline, but has also influenced some of our important public policy debates, especially over the true costs of tariffs. He was one of the loose grouping of public servants, academic economists, corporate economists, financial journalists, backbench MPs and others who took on Australia’s long-established commitment to industry protection in the 1960s, and by doing so began the long process of dismantling the increasingly antiquated post-Federation economic institutions.
In 1982 Max proposed the three-sector model that has been revived a number of times, including in the last article that is being distributed today, that most usefully explains what is usually termed ‘Dutch Disease’ or the ‘Gregory effect’. I think it would have been better if it had been called the Gregory Effect , if I could say that. Because one of the problems with the whole Dutch Disease term is that a phenomenon that for most people is actually a profoundly good thing, is presented as a morbid condition – a counterpoint to the virility that you were talking about Gary. I noticed your hair is perfectly combed, by the way. This is of course the phenomenon where higher income and a stronger exchange rate caused by rapidly growing exports from one traded sector (classically, the resource sector) have a negative impact on other traded sectors.[1] And of course, the argument now is – and Max might touch on this – that the Dutch never suffered from the Dutch disease in the first place. That’s the Treasury’s received view – Martin Parkinson is nodding there.
Bob Gregory of course is here today as well and he’s another of our distinguished economists in the room. He produced the first research about this in 1976, which is why it sometimes known as the ‘Gregory Effect’. He is perhaps known best for his work on the labour market and a former member of the Reserve Bank board. [2]
Now they have published recent papers dealing on this and I will come back to these papers in a little while, particularly Max’s. But I just want to say something about the Gregory paper, which he wrote with Peter Sheehan. It looks at the recent divergence between GDP per capita and income-based measures of living standards as an increasing proportion of our growth in material well being having come from gains in the terms of trade (which are not captured in the former calculation or the former metric). He calculates that gap at $7500 per capita in 2011 dollars, which is a large chunk of what has been accrued over the past decade. It is worth pondering, perhaps we can discuss, how enduring that gain will be. [3]
Given there are so many great economists here I think I should going to focus my talk principally on the political economy of the matter. There is of course a great politician here, Dr Andrew Leigh, one of the Members from the People’s Republic of Canberra. And it’s good to see him, but I’m sorry you have to leave him before the discussion. It will be a pity.
Let me just outline a few propositions that should serve as constraints in the discussion. And I will say frankly in advance, if you accept them all, there isn’t much space left for a genuine attempt to ‘do’ something about the exchange rate.
The first point is that the wave of emerging market demand for commodities is much bigger than we are.
Everyone agrees that it is the sheer size of this resources boom that distinguishes it from previous commodity windfalls such as the late 19th century minerals boom, the Korean War wool price spike, or the buoyant energy and agricultural prices of the early 1970s.
And we have to bear in mind that the commodity boom that we’re talking about here in Australia is in large measure made up of the demand for the components of making steel. That is to say, iron ore and metallurgical coal. I will come back to thermal coal later. That demand is being driven by the rate of urbanization in Asia and in particular, of course, China. Now the steel intensity of economies peak when urbanization peaks and then over time starts to decline. So this is not going to go on forever. Steel intensity is not coextensive with economic prosperity. America uses much less steel now than it did 50 or 60 years ago. And the same will be true of China. A lot of people don’t reflect on this, but it is very important to bear in mind, particularly when people are trying to persuade you that this is a boom that will never end. I know there are a few people in this room who suspect that, or come close to arguing, that this is the case. So I would just make that point about urbanization, that this is a long term trend. It won’t go on forever, but it is a long term trend. This is not a spike.
The only episode that is comparable in terms of its economic impact was Victoria’s gold rush of the 1850s, which trebled the European population of Australia, made Melbourne into one of the great cities of the British Empire, and helped deliver the highest per capital incomes in the world for the next four decades.
Just in summarizing some of the metrics, and I know everyone here’s very familiar with them. The RBA index of commodity prices tripled between 2003 and 2009. In terms of investment committed or flagged for new resources sector projects, the January investment pipeline reported by Deloitte Access was $912 billion, with work going on at projects involving $415 billion. And in terms of duration, the episode has already outlasted all earlier booms save for the 1850s gold rushes. [4]
The bottom line here is, large though our resource industries and endowments are, in the end Australia is a tiny part of the market compared to an increase in demand in China or India. Even without investment in expanding our resources capacity, our exchange rate would still be significantly elevated compared to the period before 2003 given demand has been so strong. To complain about the current level of the dollar is to implicitly oppose not just current expansion of the resources sector, but its ex ante level of production.
In a sense by developing an iron ore or coal industry in the first place while having a floating currency and free capital flows, Australians signed on for the current ride.
The second proposition I want to make is about the dollar. This is the first – and Ric Battellino made this point in a very good speech last year – this is the first big boom, the first boom we’ve had, during which the exchange rate has been floating, and in which, and I’m quoting from his speech, “a significant rise in the nominal exchange rate has been an important part of the economic adjustment. This has added an important degree of flexibility to the economy by allowing the real exchange rate to rise through a means other than inflation.” [5] This is not our forst big boom, but it is our first big boom with a floating exchange rate.
Now my next proposition is that in my view, Australians are not going to reverse the past two decade of depoliticizing the exchange rate and interest rates. We’re not going to go back to governments, Paul Howes notwithstanding, setting the exchange rates or interest rates.
The contrast could not be more stark between the 2000s and earlier booms, as Treasury’s David Gruen described in his recent paper on the boom, when the exchange rate was still manipulated by politicians willing to do anything to avoid enraging farmers and manufacturers (which they would if the exchange rate had revalued). The result back then of income shocks was invariably inflation and industrial disputation as the higher wages in the fast growing sector, in the resources sector, flowed on to what max would call the lagging sectors and of course, created or contributed to very damaging inflation. One of these choices was arguably among the most costly policy miscalculations in our history - the Country Party’s repeated veto of a stronger dollar in 1971-72 which stoked the runaway inflation that ultimately averaged 9 per cent annually for the next two decades. [6] It took a long time to get over that.
Persistently high inflation combined with political meddling on official interest rates and the value of the currency in turn contributed to the macro-economic instability, recessions and low growth of the 1970s and 1980s.
Compare this with the record since our institutional arrangements were changed - first with the float of the dollar in 1983, and then later with the formalization of Reserve Bank autonomy and independence, and specification of an inflation target.
Since the float Australia has experienced only one recession (if we use the rule of thumb of two consecutive quarters of contraction) and that, in 1990-91, was the result of a conscious policy decision by the soon-to-be-independent RBA to finally break the back of inflationary expectations. The 1990-91 recession was a disaster in terms of human costs, but it did achieve its objective although at very high cost.
Against this backdrop, Paul Howes recently suggested the Reserve Bank’s mandate be altered to focus it on two objectives (price stability would be joined by the real exchange rate).
Given the struggles across much of manufacturing, where most of his members work, and Paul’s very enviable youth, it’s not hard to see why he might arrive at this suggestion. After all, it is quite a while, thankfully, since we have seen serious inflation at work in Australia or engaged in public discussion of its insidious effects.
The first thing wrong with Paul’s idea is that the RBA would be left with one instrument to aim at two targets - which implies one of them would have to be partly or entirely sacrificed at some point.
But an even more important criticism is that Howes implicitly downgrades the value of keeping inflation low, perhaps not realizing that if it edges higher, the costs tend to fall on the most vulnerable.
It is telling – very telling in my judgement and a marker of monetary policy success - that to find a quote best to explain this danger we had to go back to 1990, when Ross Gittins expressed the issue very well in an article. And I quote Ross Gittins:
“Inflation would be less of a problem if everyone had an equal ability to protect himself from its ravages. The ability to protect yourself from inflation, however, varies greatly through the community. Generally speaking, it's the better-off who have greatest freedom to protect the real value of their income and their wealth. The more you have, the more you can afford to get the advice and do the tricks that keep you ahead ... inflation hurts our society: it makes it less fair, with the less powerful and the less astute being the ones who lose out.” [7]
And surely the Australian Workers’ Union and its supporters would not want to do that.
Now Max Corden’s recent paper on policy options for a three-speed economy logically and convincingly makes a general argument that in an open economy amid a resources boom, any sector-specific policy we can devise is nothing more than a redistributive measure, either from consumers to producers, or from one group of producers to another. There will be negligible impact on the exchange rate.
He makes the point so compellingly that I think we can dismiss even considering such policies (unfortunately that is not so easy in the real world, where they remain popular). [8]
I might simply note for emphasis that invariably the loudest claims for assistance are from industries and firms whose comparative advantage is least apparent and whose history of Government assistance has been the longest, regardless of the exchange rate.
Add all of this up and the very limited scope to ‘do something’ about the high dollar becomes plain.
Max’s paper does propose one other approach - which is a strongly contractionary fiscal policy (Government spends less) offset by accommodative monetary policy (Reserve Bank cuts rates) with the aim being to leave demand at the same level but lower the effective exchange rate.
Of course such a strategy is very challenging to implement at the present time, where the aftermath of the GFC is layered on top of the resources boom, making it particularly difficult to know what ‘neutral’ settings for monetary and fiscal policy might be in Australia, much less what the current trade-off between them is.
Max notes that this could be a useful role for a sovereign wealth fund, a reform I have advocated. My understanding of his position is that he is agnostic as to whether a sovereign wealth fund invested in foreign currency denominated assets (and by that I mean uncorrelated foreign currency assets - so it would make no sense for us to invest a sovereign wealth fund in the RMB) would actually result in effective exchange rate sterilisation. And I think he’s right to be agnostic about that. I note that the Governor of Norges Bank said in 2010 that it is was still unclear, I think he said the jury is still out, whether Norway's SWF which at $550 billion or thereabouts has been effective in keeping the krone value even lower than it otherwise would be. And bear in mind their sovereign wealth fund, at %550 billion, is around 125% of Norway’s GDP. So a comparable Australian sovereign wealth fund would be a gigantic fund and obviously not something that could be achieved other than after a very long time.
So the exchange rate sterilization argument, in the context of investing in uncorrelated foreign assets I don’t think is a very powerful one. It might have some effect but it’s probably not going to be very material. The better arguments for a sovereign wealth fund relate to financial prudence and remembering that all booms come to an end and ensuring that when that does happen we will have something to show for it.
As to the exchange rate, I agree with Max that in an Australian context an Australian SWF – we already have one of course, the Future Fund. I’m talking about a new one or a second account if you like. This fund would assist in the fiscal consolidation exercise we both endorse and to pick up on something Martin Parkinson said the other day would result in savings being higher than they otherwise would be.
This behavioural aspect of SWFs is rarely discussed. The simple fact is, and we have seen it again and again in this city, that when Governments have money sloshing around they want either to spend it on benefits, invest in infrastructure or give it back in tax cuts. Sticking it in the bank is generally not very attractive, particularly when there is debt to be paid off and we saw this in the last years of the Howard Government when the Keating debt, so-called, had been paid off.
There is nothing wrong with any of those objectives if the spending or the investing or tax cutting for that matter is sustainable, well targeted and represents value for money.
Regrettably that isn’t always the case. Some of you have obviously fainted, shocked, at that proposition. And my argument is that it would be a salutory encouragement to greater thrift if an additional option was built into our thinking about public finances which was to save for our children and grandchildren's futures. And I say this as someone who’s been part of a Government and made collective decisions about spending. I am giving a behavioural economics perspective. You would struggle to quantify this or justify it in a quantitative way.
From a political point of view, my strong belief is that a commitment to a new SWF would be very much in the spirit of the times and would become a matter of real national pride. But it has to be said there isn't a lot of support for such a reform outside of the Business Council of Australia and many of its leading members, leading economists both academic and corporate, David Murray, Arthur Sinodinos, Peter Costello, the IMF and implicitly the Reserve Bank itself. And of course the Greens. But apart from that motley crew, there doesn’t appear to be much support for it.
There are many issues to discuss in relation to a new SWF, which of course may simply be another account managed by the Future Fund. These include the governance, the investment mandate of the fund and its nature. Should it be long term saving fund like the Norwegian fund, something we can live off when the oil runs out, probably not applicable to our resource endowment. Or should it be a stabilization fund like Chile's, which can be drawn down on when the commodity cycle turns down and government revenues decline?
My argument for a SWF as you can see is not driven solely or even largely by a concern about the exchange rate, and we have to always ask ourselves that while we may lament the high exchange rate as we empathise with producers, we should remember that the most important concern of politicians will inevitably be the welfare of consumers.
Of course the consumer benefits of a higher exchange rate are cold comfort if you dont have a job, but if you can combine a rising exchange rate, the sectoral adjustment that causes and yet maintain high levels of employment it is hard to see that the high exchange rate is an unalloyed bad thing as many would have us believe.
Compare the situation in China where you have a number, and Yiping Huang writes a lot about this, a Chinese economist. Or Michael Pettis, at Peking University has written a lot about this so probably a lot of you are familiar with it. But if you think about the Chinese economy, because consumers don’t have the same leverage there that they do in a democracy like ours, there are massive subsidies to producers and to State owned corporations at the expense of consumers. Negative real deposit rates, the transfer of between five and seven per cent of GDP from households to the banks to State owned corporations. That funding not being available to private corporations with a few exceptions that are national champions, like Huawei and others. And at the same time of course the exchange rate benefits exporters at the expense of consumers. So do we really want to do that? Is that the approach we really want to achieve? We have got to think about that, think about the consequences, when we complain about the exchange rate.
Now just consider, when we are told the exchange rate is unreasonably high, it is worth thinking back to the turn of the century when Australians were still being penalized because our economy was not exposed enough to the ‘new economy’ boom, so called.
Because of this and low commodity prices in the year 2000, GDP per capita at market exchange rates was $US35,300 in the US and a mere $US20,800 here.
What a difference the past dozen years and a change in investor perceptions has made.
By 2008 per capita incomes in Australia and the US expressed in market terms were the same, for the first time since 1895 and by 2012, the IMF forecasts GDP per capita of $US49,100 in the US and a startling $US69,000 in Australia. So the reality is that the high exchange rate is a feature in a turn around in economic conditions that has made all Australians wealthier but of course has had serious issues of adjustment. But it is something we should be proud of, that we have been able to achieve that process of adjustment while still maintaining relatively high, historically high levels of employment. And that is something we should be very proud about.
Now I am just going to make one final point because we can talk a lot more in the discussion. But my simple point is this: There is always an attraction to what I used to call many years ago, the ‘Backslash Copy’ school of economic forecasting. Those of you who can remember using Lotus 123, so it’s only the older people in the room who know what I’m talking about. The disruption caused by technology, discover and innovation is not limited to the world of social media.
Just think for a moment of the revolution in natural gas. That is a vast topic for another occasion. It was only a few years ago that the United States was lamenting that it was running out of energy and that it was going to become a massive gas importer. Gas is now cheaper relative to oil, by relative values on a BTU basis, than it has ever been. And of course America will become a major gas exporter. And that is going to have a very material impact on the price of gas in Asia. The price differential in the United States and gas in Asia – because the markets are not presently connected – is gigantic. Now trade will resolve that.
What has made that possible? Horizontal drilling and fracking. Technology has made that possible. The gas has always been there, it has been there for millions of years, no doubt. China is a gigantic coal province, it has more coal reserves than any country in the world. It has, inevitably, equally vast resources of gas – unconventional gas, shale gas, coal seam gas.
Now there are people in Beijing that I have spoken with who believe China will become self sufficient in gas eight years or more from now. And more than that, it could become an exporter of gas. Now we are dealing with high levels of uncertainty here, so I wouldn’t make any financial investments on what I am saying to you, or anything I have said to you. But imagine if China becomes self sufficient in gas. I think that is very realistic. But imagine if China becomes an exporter in gas. America will become an exporter in gas. What does that mean for the value of our gas reserves and the value of our gas exports? What will happen if technologies to make steel without metallurgical coal become available? And there is a lot of work being done, but I think they’re a long way off, but who knows.
We should not assume that rapid disruption is limited to the world of the internet. The world of resources is subject to it just as much. And sometimes those shifts, while perhaps they take a little longer to take effect can be even more momentous. So prudence and thrift are good qualities to bear in mind in these uncertain, but nonetheless very prosperous, times. Thankyou very much.
[1] W. M. Corden & J. P. Neary (1982) ‘Booming Sector & De-Industrialisation in a Small Open Economy,’ Economic Journal 92, pp. 825-848. This and subsequent research modeled an economy experiencing rapid growth in income from one type of export in terms of three stylized sectors: a booming sector (such as resources or energy), a lagging traded sector (such as manufacturing or agriculture), and a non-tradable sector (such as services or government).
[2] R. Gregory (1976) ‘Some Implications of the Growth of the Mineral Sector’, Aust. Journal Agric. Econ. 20, pp. 71-91.
A third important contribution to the early economic literature about resources booms was also published by an Australian economist, Richard Snape (1936-2002) who later became deputy chairman of the Productivity Commission. See R. H. Snape (1977) ‘Effects of Mineral Development on the Economy", Aust. Journal Agric. Econ. 21, pp. 147-156.
[3] R. Gregory and P. Sheehan (2011), "The Resources Boom and Macroeconomic Policy in Australia", available online at: http://www.cfses.com/documents/AER_No_1.pdf, p.11
[4] Wayne Swan & Lindsay Tanner (2010) Budget Paper No. 1, 2010-11, pp.4-4 to 4-5.
[5] Ric Battelino, Deputy Governor, RBA (2010) ‘Mining Booms & the Australian Economy,’ speech to Sydney Institute, 23 Feb 2010, published in RBA Bulletin, Mar Qtr 2010, p.67
[6] Country Party then Whitlam: David Gruen, Australian Treasury (2011) ‘The Macroeconomic and Structural Implications of a Once-in-a-Lifetime Boom in the Terms of Trade,’ speech to ABE, 24 November 2011, pp.6-7.
[7] Ross Gittins, Sydney Morning Herald (1990) ‘Why High Inflation Makes Us Losers,’ 2 May 1990.
[8] W. M. Corden (2012) ‘The Dutch Disease in Australia - Policy Options for a Three Speed Economy, Melbourne Institute of Applied Economic & Social Research, Working Paper No. 5/12, Feb 2012
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Friday, September 30, 2011
Ken Henry ought to listen to Malcolm Turnbull
On Wednesday at the London School of Economics, Malcolm Turnbull delivers a public lecture:
Same bed different dreams
Asia's rise - threat or opportunity? The view from Australia
LSE Asia Research Centre public lecture
Date: Wednesday 5 October 2011
Time: 6.30-8pm
Venue: Hong Kong Theatre, Clement House
Speaker: Malcolm Turnbull
The world economy is being transformed by the rise of Asia and increasing integration. Accompanying competition and adjustment pressures are a source of anxiety in many of the advanced economies, as are declining weight and influence relative to the emerging economies. But the opportunities and potential upside are larger still, and not just for commodity exporters such as Australia.
Malcolm Turnbull is the MP for Wenworth in the Australian parliament and serves as Shadow Minister for Communications and Broadband.
He entered parliament in 2004 serving as Parliamentary Secretary to the Prime Minister from 2006 until he was appointed to Cabinet as the Minister for Environment and Water Resources; a position he held until the Federal Election in November 2007. After the election Malcolm was appointed as Shadow Treasurer and following a leadership ballot in September 2008, he was elected by his colleagues to lead the Liberal Party as Leader of the Opposition, a position held until December 2009.
Malcolm graduated from Sydney University with a BA LLB. He won a Rhodes Scholarship and completed a further law degree at Oxford. During and after his studies at Sydney University, Malcolm worked as a journalist with the Bulletin, 2SM, TCN 9 and the London Sunday Times.
After a successful career in journalism Malcolm began practicing law in 1980. He quickly established a reputation as an effective advocate, most notably when he successfully defended former MI5 agent Peter Wright against the British government, in the "Spycatcher" trial.
Malcolm left law for business in 1987 where he has since been responsible for the establishment and success of many Australian businesses. In particular he has been a determined supporter of Australian technology. He co-founded OzEmail in 1994. His software companies have won many awards for exporting Australian technology.
In 1997 Malcolm was elected to attend the Australian Constitutional Convention. He led the republican case in that Convention and in the subsequent referendum.
Suggested hashtag for this event for Twitter users: #lseturnbull
Just as well it's Turnbull. Hockey might have misjudged the opportunity.
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Tuesday, September 27, 2011
Hockey. The man who would be Treasurer... what can I say?
Hockey needs more than Google for his economic research
Eric Ellis
Joe Hockey presents as a pleasant enough chap, in a matey, Billy Bunter type of way. But he needs help. The man who seems poised to hold Australia's economic future in his hands needs to try harder. At the least, he needs to read more extensively, more deeply and of a better quality of title. As does his researcher.
An excellent place to start would be within the annals of his own political hero and patron, John Howard.
In denigrating Euromoney magazine's awarding of its prestigious Finance Minister of the Year gong to Treasurer Wayne Swan, Hockey took particular relish at sticking it up the 2001 recipient, the then finance minister of Pakistan.
''In 2001 there was a Pakistani finance minister,'' Hockey incredulously informed Parliament. ''That is quite an extraordinary one, that one.''
One can't speak to what Hockey had in mind when he let fly that particular spray. His office refused to reveal what he found ''extraordinary'' about that gong to Pakistan. Maybe in Joe and his boss Tony's dog-whistling world, Pakistanis can't be capable of anything more than boarding a people-smuggler's rickety Australia-bound boat. Or perhaps strapping some explosives to their chest, or fixing a cricket match.
More likely, his research was no more scientific than googling Euromoney's Wikipedia pages, seeing the word Pakistan and thinking that will resonate in middle Australia as a synonym for basket case. And aren't they Muslims too? An electoral bonus in the heartland swing seats!
True, Pakistan isn't China (awarded in 2008) or Canada (last year, and a Tory too, inconveniently for Hockey). But had Joe browsed deeper he would have discovered the 2001 gong went to a man called Shaukat Aziz.
He would have discovered that Aziz was an expatriate career banker, at one point tipped to head Citibank in New York, when he was asked by Pakistan's president Pervez Musharraf to come home and fix the economy.
Aziz ushered in the most far-reaching program of economic reform in Pakistan since its 1947 independence, progress more profound than even the celebrated 1984 Keating reforms were for Australia.
Aziz later became prime minister, presiding over several boom years when Pakistan was second only to China in its buoyancy.
Under Aziz, Pakistan's economy doubled while the stockmarket and its foreign exchange reserves grew fivefold. Aziz stepped down in 2007, the first Pakistani PM to see out a full parliamentary term, some achievement in that difficult country. Now retired, he is a director of a big Singapore-based international hotel chain and the US private equity giant Blackstone.
Based on the economic evidence presented thus far, the Liberal member for North Sydney is a pygmy next to Aziz, and that's saying something. But all Joe really needed was to consult his political patron, John Howard, who knows Aziz well.
This was the gushing Howard, meeting Aziz in Islamabad on November 22, 2005. ''I'm impressed, if I may put it that way, Mr Prime Minister, with the great emphasis placed by your government, particularly under your leadership and with your business background, of the significance of economic growth and foreign investment,'' Howard said. ''Pakistan is winning herself a well-deserved reputation for being a country that beckons foreign investment and creates a transparent environment for foreign investment.''
As for the Nigerian recipient Hockey slagged, that's the Harvard-educated economist Ngozi Okonjo-Iweala, who became finance minister in the second reformist term of Olusegun Obasanjo. On her watch Nigeria's economy roared...
Continued at the National Times
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Tuesday, September 13, 2011
The Coalition's cheat sheet. What to say about carbon tax
Leonore Taylor has the background.
34 pages. Here's what they have to say:
Coalition Carbon Tax Talking Points
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Read more >>
34 pages. Here's what they have to say:
Coalition Carbon Tax Talking Points
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Friday, July 22, 2011
Malcolm's speech: "If Margaret Thatcher took climate change seriously..."
He begins talking about the Great Barrier Reef
The Great Barrier Reef is brutally confronted, it is indeed in the front line of the climate change battle, by two aspects of global warming. Most of the warming which is the consequence of human carbon dioxide emissions increasing the greenhouse effect has been absorbed in the ocean. That’s no surprise. As ocean temperatures rise, coral bleaching, which is another way of saying coral dying, events have increased. Indeed since 1979 there have been eight mass bleaching events on the Reef with no known bleaching events prior to that date.
Furthermore as more carbon dioxide is absorbed into the ocean it increase the acidity of the ocean – the last time the ocean’s acidity was this high was 25 million years ago. This is reducing the capacity of hard shelled sea creatures to form their calciferous shells – whether they are krill in the Antarctic or coral in the tropics.
Much of the work that was done by Virginia and her team, many of whom are here tonight, and which continues at GBRMPA was to reduce agricultural run-off into the Reef, reduce unsustainable fishing on the Reef, and was all designed to increase its resilience to deal with these larger, long term existential threats. Just as a healthy person can better battle a disease, so can a healthier Reef better respond to, and at least in part adapt to, the consequences of climate change.
Now, you will be relieved to know I am not going to spoil the evening with another political speech about the carbon tax or Julia Gillard’s broken promise not to introduce it.
Rather, I wanted to say something to you about the importance of science.
But first, let me say straight up that the question of whether or to what extent human activity is causing global warming is not a matter of ideology let alone or of belief. The matter is simply one of risk management...
It is, moreover, not a question of left versus right indeed it was Margaret Thatcher who more than 20 years ago called for immediate action to reduce greenhouse gas emissions. Her words, on our response to climate change were as wise and as relevant today as they were in 1990. Mrs Thatcher said then:
“Many of the actions that we need to take would be sensible in any event. It is sensible to increase energy efficiency and to use energy prudently. It is sensible to develop alternative and renewable energy sources. It is sensible to replant the forests which we consume. I note that the latest vogue is to call them ‘no regrets’ policies – certainly we should have none in putting them into effect.”
And let us not forget it was Margaret Thatcher who in 1990 committed Great Britain to reducing emissions by 2005 to a level no greater than 1990 and who as that commitment to combating climate change committed £100 million to sustainable tropical forestry. So so much for those who suggest that people in the Liberal Party or on the centre-right of politics more generally who support effective action on global warming are some how or another from the left.
If Margaret Thatcher took climate change seriously and believed we should take action to reduce global greenhouse emissions, then taking action and supporting and accepting the science can hardly be the mark of insipient Bolshevism.
Nonetheless, there is no doubt that many people are grounding their opposition to the Gillard Government’s carbon tax on the basis that climate change is not real and that the scientific consensus which supports it is not soundly based.
It is important to remember however that the rejection of the consensus scientific position on global warming, rejection of the CSIRO’s position on global warming, is not Liberal Party policy.
Quite the contrary. The Liberal Party’s policy is to accept the scientific consensus that the globe is warming and that human greenhouse gas emissions are substantially the cause of it. It is also the Liberal Party’s policy to take action to cut Australia’s greenhouse gas emissions such that by 2020 they will be at a level equal to 95% of their level in 2000. This is the same unconditional target adopted by the Rudd Government and the Gillard Government and pledged at Copenhagen.
That 5 per cent cut is not expected to single-handedly stop global warming but is a measured and prudent contribution to what needs to be a global effort to reduce greenhouse gas emissions so as to prevent, it is hoped, temperature rises beyond 2 degrees Celsius in the course of this century.
Having said that, it is undoubtedly correct that there has been a very effective campaign against the science of climate change by those opposed to taking action to cut emissions – many because it is not in their own financial interests – and that this has played into the carbon tax debate.
Normally, in our consideration of scientific issues we rely on expert advice. Agencies like the CSIRO or the Australian Academy of Science are listened to with respect.
Yet on this issue there appears to be a licence to reject our best scientists, both here and abroad, and rely instead on much less reliable views. Some of those less reliable views are from scientists – although most are not.
In an age where the Internet gives everyone the opportunity to be a broadcaster, you can find an opinion to support any proposition. If it doesn’t suit your interests to reduce the use of fossil fuels, there are plenty of blogs and articles online to support your self interest.
Some of this material online can be very embarrassing to rely on. A good friend of mine recently contended that the CSIRO were utterly wrong on climate change and he sent me a paper from what he understood was “a leading scientist in a leading journal”. As it turned out the paper was in journal published by the Lyndon LaRouche Movement and was written by a man who had recently served time in gaol for securities fraud. The only peer review to which his work had been subjected was, in fact, a criminal jury.
I might note for those unfamiliar with it, that the local wing of the LaRouche movement is the Citizens’ Electoral Council (CEC) an extreme, rightwing, racist organisation that I’m proud to say that the Liberal Party emphatically and invariably puts absolutely last in any how-to-vote form that we distribute.
These are the charming people who recently disrupted a scientific conference in Melbourne by threatening Professor Hans Schellnhuber, a leading European climate scientist in the midst of his lecture by waving a noose in front of his face and saying “Welcome to Australia”. Just think about that. What a wonderful welcome to Australia from these people.
Now my friend had spent much of his career drawing on expert advice in business, economics and science. He goes to the best consulting firms for his advice, the best law firm, the best accounting firm. And yet on a subject as important as climate change he has been taken in that was anything but the best. And needless to say he was a little bit embarrassed by it.
But this is not an isolated case. And I have to say this is like ignoring the advice of your doctor to give up smoking and lose 10 kilos on the basis that somebody down the pub told you their uncle Ernie ate three pies a day and smoked a packet of cigarettes and lived to 95. Now that is how stupid it is and we have to get real about supporting and responsibly accepting the science. And if we want to challenge the science, do so on the basis of peer reviewed work of which I have to say, there isn’t a lot on the contrary side of the argument.
And this is actually — this war on science and on scientists which is being conducted is much worse than the case of person who ignores his doctor’s advice and follows the advice of his friend down the pub, drawing on the life experience of the fortunate Uncle Ernie.
Because the consequences of getting our response to climate change wrong will not likely be felt too severely by us, or at least not most of us, but will be felt painfully and cruelly by the generations ahead of us. And the people in the world who will suffer the most cruelly will be the poorest and the people who have contributed the least to the problem. There is an enormous injustice here. When people try and suggest to you that climate change is not a moral issue, they are wrong. It is an intensely moral issue raising grave moral issues.
Those of us who do not believe the CSIRO is part of an international Green conspiracy to undermine Western civilisation or do not believe that leading scientists like Will Steffen are subversives should not be afraid to speak out, and loudly, on behalf of our scientists and our science. We must not allow ourselves to be deluded on this issue.
If you are a Liberal, as I and many others here in this room are, most of us are perhaps. If you are a Liberal, do not imagine that taking that position puts you at odds with Liberal policy – it does not. It does not. And remember too that if we form a Government in Canberra and then seek to meet that 5 per cent target through purchases of carbon offsets from farmers and payments to polluting industry to cut their emissions, the opponents of the science of climate change will be criticising that expenditure too as “pointless” and “wasteful” with as much vehemence as they are currently denouncing Julia Gillard’s carbon tax.
As Liberals, we have to stake our environmental case and our position on the right way to deal with climate change on the basis that we are supporting the science. That is our policy and we should not allow ourselves to allow people to imagine that it is not. In my view, we cannot afford to allow the science to become a partisan issue as it is in the United States where it appears that it is apparently no longer politically acceptable for any would-be Republican Presidential candidate to say that he or she believes that global warming is occurring and is caused by human activities. Now the change in the Republican Party is extraordinary. In the Presidential Election in 2008, John McCain, the Republican candidate, ran on a policy in terms of climate change that was only marginally different to that of Barack Obama. I mean, the differences were one of detail. And there has been an extraordinary swing, not against cap-and-trade versus direct action; not against one mitigation policy against another; but there has been a swing against the science and that is profoundly dangerous. Because we run the risk that we diminish the science, that we discredit the science and that of course is the ultimate justification for doing nothing about it.
Now not so long ago I was with a friend, a very long serving and distinguished Environment Minister from our region and we discussed the progress of the climate change issue globally. And he said that he thought that human selfishness and greed was so great that there would no effective action to reduce greenhouse gas emissions and that by the end of the century our planet would be uninhabitable for billions for people. And as he said that, I felt a chill going down my spine. I feared that he was right but my natural optimism reasserted itself and I thought to myself, ‘we are better than that’. We are better than that but you could not fault him in terms of his objectivity or realism.
Now let me just say this to you: The idea that our country, this great country of ours, can sail through a 3, 4 or 5 or more degrees rise in temperature this century with our prosperity and freedom, let alone the Great Barrier Reef, intact is very naïve. So this is a big issue. So in the storm of this debate about carbon tax and direct action and what the right approach to climate change should be, do not fall into the trap of abandoning the science. Do not fall into the trap of thinking that what Lord Monckton says or what some website says is superior to what our leading scientists or leading universities would say.
And I just ask all of you, many of you here, have had important dealings with the medical profession. Would you allow yourself, your own body to be operated on by some medical theory that you picked up on the website or would you seek to get the most highly respected specialist in the field to operate on you. We all know what the answer is. That’s what we do with our own bodies. What we’re talking about now is the future and the health of the planet.
Now I think an effective response to climate change does not depend on one mitigation policy or another being adopted. Different countries will have different views on what is the most cost-effective way to reduce and indeed so will different political parties and different political leaders. But we must not allow opposition to a particular policy to undermine or diminish our commitment to take climate change seriously and to work effectively both here and globally to ward off the avoidable consequences of global warming.
We also need to be very clear-eyed about what an effective global response to climate change requires. There are many calculations on the scale of emissions reductions required. But it is quite clear that to achieve the necessary cuts by mid century all or almost all of our stationary energy – and when I say our, I mean the world’s – will need to be generated from zero or near zero emission sources.
This could be renewables like hydro, biomass, wind, solar or tidal power. It could be geothermal power, it could indeed be nuclear power. But it will not be burning coal unless the emissions from that coal are captured in some form or other.
Australia generates most of its electricity from burning coal – much of it very emissions intensive brown coal in Victoria or South Australia. That is why our carbon dioxide emissions are among the highest in the world on a per capita basis – a reason why the Chinese (whose emissions are about one-fifth of ours) and the Indians (whose are less than one-tenth of ours) find our regular references to their emissions – and why should we do anything until the Chinese or Indians do something – why they find those references incredibly galling. Those of us, and David’s a member of this club with me, who have represented Australia at international conferences on this, know how incredibly embarrassing statements like that are when you actually confront the representatives of those countries.
We are also the world’s largest coal exporter – we have 19% and 58% of the global trade in thermal and metallurgical coal respectively. In 2009, thermal coal exports were worth $18 billion, and metallurgical coal exports worth $40 billion.
Some people would say, I trust that most would not, that as we have a vested interest in coal being burned we should oppose action on climate change and rather like the tobacco companies who sought to discredit the connection between smoking and lung cancer muddy the waters on climate science in order to prolong the export billions from coal mining.
Others might say that we should not be troubled by the long term prospects for coal because we have abundant resources of the alternatives – gas, the least emissions intensive fossil fuel, uranium, geothermal power and, of course, plenty of sunshine.
A more responsible approach would be to encourage the development of those alternatives at the same time as we promote and develop technologies to capture CO2 emissions from coal burning – whether that is by pumping it into the ground or by turning it into other useful products.
Indeed many would say that no country has a greater vested interest in clean coal than Australia.
And yet I regret to say to you that neither the Labor government led by Julia Gillard – who is a woman fond of a hard hat, I must say – nor the coal industry itself have shown much enthusiasm for investing in Research and Development or trials for Carbon Capture and Storage. In fact funding has been cut again as part of the recent carbon tax package.
A handful of large firms dominate production of thermal coal and coking coal. BHP, Peabody, Rio Tinto, Anglo-American, Xstrata, Wesfarmers. The operating earnings generated from thermal coal production alone are not easy to estimate, but they may approach $10 billion in good years. There is plenty at stake at both the level of producers and export earners, not to mention the taxes they pay along the way for there to be a critical mass of parties with the motivation and resources to move on carbon capture and storage.
Now one of the most dispiriting parts of Professor Garnaut’s updates was his analysis in volume seven on carbon capture and storage. Essentially he said work had come to a halt in 2008 and no technical progress or commercial pilots of significance were apparent. The estimate of coal capture and storage adding 40-plus per cent to the cost of coal-fired electricity was about the freshest fact on the page.
One need only look at the vast expansion of new investment in coal-fired generation underway in China, India and elsewhere to understand the importance of this issue. Carbon Capture and Storage isn’t just about saving Australia coal exports or generation capacity. It is about addressing the reality which the MIT study on the future of coal baldly stated as long ago in 2007: “We believe that coal use will increase under any foreseeable scenario because it is cheap and abundant.” Now if it increases and emissions increase and the science is right, the Reef is finished. And that is a very small part of it. So this is a very serious issue and it is remarkable that with all the rhetoric about the need for action from the Gillard Government, the single most important area of research and development, the one that is arguably the most important in terms of the world’s future and most certainly most important from the point of view from our own economy, is being neglected.
So the commercial feasibility and large-scale deployment for Carbon Capture and Storage is the only way – in the absence of some great technological shift, and you won’t find me discounting that, I’m a great believer in the disruptive power of technology – the world has any chance whatsoever of achieving the cuts needed to get to the 60 per cent or 80 per cent 2050 targets that leaders have committed to.
The thermal coal industry and the Gillard government both know this. So how should Australians interpret their disinterest in this technology? As an acknowledgement that Carbon Capture and Storage doesn’t work and is too expensive and hence thermal coal is finished? Or a sign they don’t ever expect to be answerable for those 2050 targets? I fear that is probably the answer.
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It'll never happen.
Shane Wright of the West Australian examines its Direct Action Plan:
Australia has had 21 years of direct action to tackle climate change. And, in all but one case, it has been failure after failure.
In 1989 Bob Hawke pledged to plant 1 billion trees over the coming decade as part of an effort to improve the environment.
It’s a good starting point for the history of direct action.
What could be wrong with planting trees?
They make us feel good, they consume a lot of carbon dioxide, they stabilise the soil and they also reduce the air temperature around them.
But, more importantly, did all those trees make a substantial difference in cutting our greenhouse emissions?
Ultimately, you can talk about feeling green and doing our bit but unless the policy is working it is just empty rhetoric that comes at a cost borne by the taxpayers of the country.
Since Mr Hawke wandered around the country urging us to plant trees there have been a host of government efforts to improve the environment and cut greenhouse emissions.
Here’s the bottom line.
Since 1990 Australia’s greenhouse emissions have climbed (by about 6 percent) and are on their way to being about 30 percent higher by 2020.
According to the Grattan Institute, an independent think tank based out of Melbourne which has looked at this issue, the Federal and State governments have tried more than 300 emission reduction policies and programs since 1997.
There’s plenty of evidence available of what works and what doesn’t, of what gets some bang for its buck and what should be dumped because it’s hurting taxpayers and doing nothing for the environment.
One of the key elements of Tony Abbott’s "direct action" is a tendering process for farmers to sequester carbon in the soil...
More than half of the cut in emissions he promises under a coalition government come from this process at a fraction of the cost of a carbon tax (although how it would be monitored and policed is left out).
This is the track record of tendering processes to achieve environmental outcomes in this country.
"Analysis of a range of grant-tendering programs – involving $7 billion in budget funding – shows that they cannot reduce emissions at the necessary scale or speed," the institute’s economists and analysts found.
"On average, for every million dollars the government commits to such schemes, only $30,000 of operational projects result within five years and only $180,000 within 10 years.
"Based on experience, government would need to announce an abatement purchasing fund of $100 billion to meet the 2020 emissions reduction target."
Governments have channelled $5 billion of our money into rebate programs.
They were found to have produced "relatively little" and, to achieve the bipartisan goal for 2020 emissions, would require spending another $300 billion over the coming decade.
Grattan also reviewed energy efficiency standards.
We’ve got energy efficiency stickers on our fridges, dishwashers and big screen TVs, our homes are rated on energy efficiency. Surely it must be working?
Not really.
"Because they are limited in scope and slow to take effect, they cannot play more than a support role in meeting the 2020 targets," the institute found.
One of the Abbott direct action plans is to put "one million additional solar energy roofs on homes" by the end of this decade.
To do this the Government would offer an extra $1000 rebate for either solar panels or solar hot water systems, with a cap of 100,000 rebates a year.
Straight off there’s that rebate issue that worried Grattan, while the thought of 273 roofs getting covered in panels or homes getting solar hot water systems a day, every day, for a decade should worry anyone who watched the home insulation program.
The coalition’s policy document cites a California program of a similar nature as the genesis of this policy.
Which is good, because the Productivity Commission this year had a look at the California program and found the cost of abatement was between $305 and $651 per tonne of carbon dioxide equivalent.
So there’s the choice between letting the public find a solution at $23 a tonne and a government initiative that will cost between 13 and 28 times more.
Sounds a bargain.
Indeed, it looks like the only real success story on the direct action front has been in land clearing.
On that front, an effective ban on native land clearing – which heavily affected Queensland – is the only thing that has stopped Australia’s greenhouse emissions going through the roof.
Emissions from deforestation have fallen from 132 million tonnes back in 1990 to 49 million tonnes expected to average through 2008 to 2012.
But that ban has not been priceless.
Talk to any farmer who has had this fundamental right to do what they like with their land and you’d get a clear picture of the costs involved.
Governments of all persuasions took away a property right from a group of Australians and did not pay them for it.
To put it bluntly, the farmers and regional communities of this country were ripped off.
The Productivity Commission looked at the various bans on native vegetation clearing back in 2004 and delivered a scathing assessment.
"At their most basic, these effects have involved a reduction in the area of land available for agricultural production. But often they also have imposed significant restrictions on the normal operations of agricultural enterprises, preventing many landholders from implementing innovation in technology and farming methods and increases in scale necessary to achieve the productivity improvements required to remain viable," it reported.
"In the longer term, the entry of new younger farmers is likely to be discouraged because of the significant restrictions on any development of new or existing properties which involves clearing native vegetation."
In fact, both the PC and Grattan have recently found that about the best performed, and cheapest, program in this country to have emerged to cut emissions has been the NSW and ACT Greenhouse Gas Reduction Scheme.
Not surprisingly, it’s a market-based system which penalises power companies for not cutting emissions.
It puts a price on emitting carbon – something almost every "direct action" program goes out of its way to avoid.
Two decades on from Bob Hawke and his trees, governments of all persuasions have gone out of their way to find a magic bureaucratic bullet to cut Australia’s greenhouse emissions.
The one shot that delivered, banning the clearing of native vegetation, has come at a cost that most of us choose to ignore.
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Sunday, July 10, 2011
C-Day. It's best done as a carbon tax - Abbott
He said it. Presumably he meant it.
Sky News sit-down interview, July 2009:
"I also think that if you want to put a price on carbon, why not just do it with a simple tax? Why not ask motorists to pay more, why not ask electricity consumers to pay more, and then at the end of the year you can a rebate of the carbon taxes you've paid. It would be burdensome, all taxes are burdensome, but it would certainly change the price of carbon, raise the price of carbon, without increasing in any way the overall tax burden."
The context? Well the context is important.
Here's the whole thing. The interview was unedited and ran for 13 minutes. Abbott made the case for a carbon tax unprompted. He wasn't led into it.
Yes, in the interview he also with declared his support for Malcolm Turnbull, said the Coalition should agree to the emissions trading scheme, and spoke of the need to return to elements of WorkChoices -- all positions he has since repudiated.
Yes, the carbon tax he proposed would be ineffective.
But it is worth listening to the context. The carbon stuff begins 7.00 minutes in:
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Saturday, July 02, 2011
About that bigger surplus. Perhaps not - Hockey
In his first public qualification of his commitment to deliver a bigger budget surplus than Labor, Mr Hockey said he would be prepared to hurt the budget bottom line if it meant cutting taxes.
"The truth about tax reform is that you have to leave money on the table for people, even if it means you are reducing the size of the surplus," he said.
"If you are taking people on a journey where they are going to restructure their affairs, it costs them money. Many Australians are actually prepared to embrace tax reform, but they have to believe that for the pain they go through they are going to be better off."
The Coalition had pledged to return the budget to surplus sooner than Labor, which it is planning to do in the next financial year. It had also pledged a bigger surplus than the $3.5 billion promised by Labor.
Mr Hockey also backed tax increases... telling the conference he opposed capping local government rates because "the people who are accountable for spending the money should also be accountable for the way they raise the revenue".
"A fundamental principle I want to see developed over the next few years is that the governments that raise the money spend the money, the governments that spend the money raise the money," he said.
The Treasury secretary, Martin Parkinson, was pessimistic about the likelihood of future tax reform, telling the conference Australians had become complacent.
Around half the workforce had never experienced anything other than sustained economic growth, he said. Even mild reforms such as trimming access to family payments were "easily undermined by the populist media campaigns that we saw after the budget", he said.
The Treasurer, Wayne Swan, told the conference before the May budget there were "wide-ranging calls for cuts to family payments to so-called middle class families".
After the budget, he faced cries of anguish "from the very same voices in the media that had previously called for even tougher cuts".
Dr Parkinson said the changed environment meant governments had to be careful not to try to do too much.
"If you think you can do 10 different reforms all at the same time with limited political capital, you run the risk you may not be able to implement any of them effectively," he said.
The defeat of the originally-proposed mining super profits tax was particularly unfortunate. "Australia is selling non-renewable assets. Yes, we have large supplies, but once sold those assets cannot yield any further return," he said.
"This means that it is critical that society receives an appropriate return on the assets, rather than the value being captured solely by the Australian and foreign shareholders. Arguably, this is not presently the case."
Mr Swan said he would release a "framing paper" this month to encourage debate in the lead-up to the October tax summit.
Published in today's SMH
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