That open letter. Labor had so little to do with it...

...it didn't even know about it. Trust me.

More than 50 of Australia's leading economics professors and lecturers have entered the political fray declaring in an open letter that Labor's stimulus program worked and the economic achievements of the Labor government" should be "recognised by the population".

Organiser Raja Junankar from the University of NSW said the letter had nothing to do with the Labor Party and developed from a meeting with his colleagues 10 days in which expressed despair at a stream of newspaper articles "claiming the stimulus didn't work, that it cost a lot of money, that it caused deficts".

"The Australian had a big front page a week ago quoting Warwick McKibbin who they said was a Reserve Bank director saying the stimulus didn't work," he told the Age.

"The only people who have been quoted by Tony Abbott are McKibbin who is in fact an ANU economist who sits on the Reserve Bank board and Griffith University professor Tony Makin, and possibly one other."

"I don't think anyone could get anything like the 50 signatures we have obtained of leading academics taking the other point of view."

Some academics decided not to sign because they felt the letter was too political, others because they thought it might affect their position within their university.

Asked whether the name of the political party in power would have really affected the handling of the global crisis Professor Junankar said he thought it would.

"I do give a lot of credit to the Treasury for designing some of the programs. I am sure the Treasury would have proposed something similar to a Caolition government had it been in office instead. But would the Coalition have done the same thing? My view is it would have gone softly softly. It would have worried about the deficit more than the economy."

Published in today's Age


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What could possibly unite Henry Ergas and John Quiggin? Criminally dodgy work by Queensland's government.

In fact it's united a veritable Who's Who

An extraordinarily high-powered group of academic and private sector economists from across the political spectrum have released an open letter attacking the Queensland government's $16 billion port, rail and motorway privatisation program and the $1.9 million television and letterbox advertising campaign that supports it.

Labeling the case presented by Queensland Premier Anna Bligh "economically unsound" and "based on spurious claims" the letter says the people of Queensland "deserve a robust and well-informed public debate over the costs and benefits of privatisation and so far have not received it"...

Signed by economists identified with Labor such as John Quiggin and Nicholas Gruen and others identified with the Coalition including Henry Ergas and Warwick McKibbin the letter says they have a range of views about merits of privatisation in particular cases but "share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments."

Attacking the arguments in the taxpayer-funded booklet Facts and Myths on Asset Sales  it says they compare "apples with oranges" and understate the value of keeping the assets up for sale.

Twelve of the signatories are are professors of economics. Two have served on the board of the Reserve Bank. The Queensland Council of Unions has launched its own anti-privatisation TV campaign and sought advice from accounting professor Bob Walker.


Statement by academic and business economists on the Queensland government’s case for asset sales

Decisions on the sale or retention of public assets have important implications for competition and public policy, as well as for the fiscal position of governments. These decisions cannot be resolved on the basis of general ideological arguments for or against public ownership, and require informed public debate in each case. The normal lines of economic debate include whether a given business is more efficiently operated in the private or public sector, the appropriate allocation of risk and the extent to which the enterprise is required to pursue social as well as financial objectives.

The signatories of this statement have a range of views on the appropriate balance between the public and private sectors and on the merits of privatisation in particular cases. However, we share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments.

The arguments put forward by the Queensland government in its booklet ‘Facts and Myths on Asset Sales’ do nothing to promote a well-informed debate. Two central claims are particularly, and sadly, noteworthy. In relation to five public assets proposed for sale, the "Facts and Myths" booklet states

Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can’t be spent on roads, schools or hospitals.

This claim is economically unsound. Forgoing income generating investments, and borrowing an equal amount to fund investments that return no additional revenue, leaves the government with no flow of income to service the associated debt. The necessary income must be raised by increasing taxes or cutting expenditure.

Selling public assets will improve the public sector’s fiscal position only if the price realised for the assets exceeds the value of the income stream that the asset would otherwise generate for the public sector. In this respect, the ‘Facts and Myths’ booklet states

The total return from all five businesses in 2008-09 was approximately $320 million … When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.

This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments and the interest paid by the government business enterprises to service their debts.

The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment. Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.

Signatories

Harry Campbell, Professor of Economics, University of Queensland

Tim Coelli, Adjunct Professor of Economics, University of Queensland

Henry Ergas, Economic Consultant, Canberra

John Foster, Professor of Economics, and former Head of School, University of Queensland

Paul Frijters, Professor of Economics, QUT

Joshua Gans, Professor of Economics, Melbourne Business School

Ross Guest.Professor of Economics, Griffith University

Nicholas Gruen, CEO, Lateral Economics

Christopher Joye, Managing Director, Rismark International

Stephen King., Dean, Faculty of Business and Economics, Monash University, former Commissioner ACCC

Andrew McLennan, Australian Professorial Fellow in Economics, University of Queensland

Flavio Menezes, Professor and Head of School of Economics, University of Queensland

Christopher O’Donnell, Professor and Deputy Head of School of Economics, University of Queensland

Andrew Leigh, Professor of Economics, ANU

Adrian Pagan, Professor of Economics, QUT, former member RBA Board

Rohan Pitchford, Australian Professorial Fellow in Economics, University of Queensland

John Quiggin, Federation Fellow in Economics, University of Queensland

John Rolfe, Professor of Economics, Central Queensland University

Prasada Rao, Australian Professorial Fellow in Economics, University of Queensland

Rabee Tourky, Professor of Economics, University of Queensland

Warwick McKibbin, Professor of Economics, ANU, current member RBA Board

Published in today's Age

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Son of Wallis, daughter of Campbell

Its time is approaching

The growing power of Australia's big banks has been targeted by a coalition of six influential economists who have petitioned the Prime Minister and Treasurer to set up an a new inquiry into Australia's financial system - the first since the Wallis and Campbell inquiries of 1997 and 1981.

Since the onset of the financial crisis Australia's banks have increased their share of the mortgage market from 80 per cent to 92 per cent and have taken over non-bank lenders including Aussie and RAMS and second-order banks including St George and BankWest.

The open letter expresses concern about the way in which the banks are using their privileged access to government guarantees, saying they are "rushing offshore" to expand despite Australians being "repeatedly told that our banks were lucky not to have had substantial overseas exposures"...

The Campbell and Wallis inquiries were aimed at opening up Australia's financial system. Campbell recommended floating the dollar, letting in foreign banks and abolishing exchange controls. Wallis recommended 'light touch' regulation allowing banks to expand into superannuation and insurance.

But the letter says much of what it brought in was inappropriate or is now out of date. It cites as an example the Wallis Inquiry's decision to reject the use of deposit guarantees, tools which turned out to be "critical" during the current crisis.

The open letter is signed by economists who have advised both sides of politics including Dr Christopher Joye who chaired former Prime Minister John Howard's 2003 Home Ownership Task Force and Dr Nicholas Gruen who is chairing current Finance Minister Lindsay Tanner's Government 2.0 Task Force.

Delivered to Mr Swan's office late yesterday it has sparked support across the political spectrum receiving backing from Trade Union President Sharan Burrow as well as Coalition Treasury Spokesman Joe Hockey.

But a spokesman for the Treasurer appeared to reject it straight away saying Australia's financial system had performed "very well" during the crisis compared to others and that the government was "not contemplating" any major systemic review.

"The Government of course remains vigilant in relation to our financial system and Australia is a full participant in current G20 reforms to the architecture of the international financial system," he added.

Dr Joye, who runs the research and investment firm Rismark, labelled the response an example of the complacency the open letter is warning against.

“Everybody knows that providence has played a part in Australia’s ability to skate through this crisis," he said. "When a coalition of top academic economists calls for a review to evaluate improvements to Australia’s decades old regulatory system, politicians should listen.”

Also signed by Melbourne Business School Professor Joshua Gans, Monash Professor and former ACCC commissioner Stephen King, Queensland University Professor John Quiggin and management consultant Sam Wylie, the letter says Australia would "do well not to discount the possibility that a roll of the dice left us without more significant system failures.

It adds, "in future, we may not be so lucky."

Twelve years on from the inquiry that neither foresaw the current crisis nor developed tools to deal with it, the new inquiry would examine whether Australia's banks should pay a "systemic capital charge" to account for the risks inherent in their business, whether they should be required to accumulate capital in good times, and whether the government should set up a "basic bank" that would allow ordinary Australians to deposit money with Australia Post and have it managed by the Future Fund.

Shadow Treasurer Joe Hockey said yesterday while he thought the Wallis Inquiry got things 85 per cent right, the crisis had taught us "about the other 15 per cent".

"We can't be policy lazy," he said. "This is a debate worth having."

ACTU President Sharan Burrow said Mr Rudd and Swan had been understandably scrambling "to apply bandaids to symptoms," but now needed to formulate an overarching policy.


Is Australia ready for...

the third wave?

The Campbell Inquiry: 1981

- led to floating the dollar

- allowing in of foreign banks

- dismantling exchange controls

- abolishing interest controls


The Wallis Inquiry: 1997

- allowed banks to manage super

- set up APRA and ASIC

- favoured "light touch" regulation

- found against government guarantees


The Next Inquiry: 2009?

- banks to pay for their advantages?

- a new "basic" government bank?

- official oversight of foreign debt?

- Reserve Bank to target bubbles?


Published in today's SMH and Age

Read more >>

The letter that leaves Turnbull naked

Read the full letter

Prime Minister Kevin Rudd has seized on an open letter from 21 leading economists including former Reserve Bank Governor Bernie Fraser and ANZ economic chief Saul Eslake to claim that the Coalition's campaign against government debt lacks mainstream support.

Brandishing the letter in Parliament and noting it was also signed by academic economists John Freebairn, John Quiggin, Joshua Gans, Andrew Leigh and Nicholas Gruen as well as a former Treasury Secretary Tony Cole and a former Reserve Bank Deputy Governor Stephen Grenville.

Mr Rudd quoted them saying that even the extra debt forecast in the Budget Australia would retain "a very healthy margin of safety in its reputation for economic prudence".

The letter says Australia's net debt will stay below 14 percent of GDP "compared with an average of over five times this in comparable countries which nevertheless retain their creditworthiness in capital markets."

While Opposition leader Malcolm Turnbull spoke Wednesday of an "larger and larger and less sustainable burden of debt, both on our shoulders and those of our children", the economists say "fears and phobias" about debt exacerbated the Great Depression...

"Of course other things being equal it is better for governments to be debt free," the letter says.

"But as any homebuyer knows, debt can help us build assets now that we couldn’t otherwise afford, and repay the costs when the assets bear fruit."

Explicitly backing the government's multi-billion dollar series of cash handouts the letter says there was "no more effective way to stimulate the economy quickly".

"The success of these measures can be seen in the relative strength of Australian retail sales compared with almost any of our peers," the authors say.

"Deploying our strong balance sheet to use otherwise idle resources – or to put it more compellingly, deserted factories and unemployed workers – to build assets that improve our lives and our economy in the future, seems much more appealing, much more commonsensical than retreating into phobias," it concludes.

Overseas signatories include Stephen Koukoulas, the London-based global strategist for TD Securities and Max Cordon, emeritus professor at Johns Hopkins University. Other Australian signatories include Mike Waller, a former chief economist at BHP Billiton, and Glenn Withers and Fred Argy, both former heads of the government's Economic Planning and Advisory Council.

The economists go further than defending a build up in government debt for the purpose of dealing with the current downturn arguing that as Australia's population and infrastructure needs grow, Australians will have to "decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth".

The current Reserve Bank Governor Glenn Stevens also endorsed running up debt to fund stimuls programs in an address to university students in Townsville saying the resulting stimuls would be "substantial."

While expressing concern about other countries that had run up government debt in excess of 100 per cent of GDP, he said he had no such concern about this government's plans.

New figures released yesterday highlighted the depth of Australia's economic challenges, showing that exports fell 11 per cent in April, he worst monthly decline for 12 years.

THE NAMES:

Paul Binsted, Company Director and Economist
Tony Cole, Former Secretary to the Treasury
Max Corden, Emeritus Professor, Johns Hopkins University
Owen Covick, Associate Professor, Flinders University
Steve Dowrick, Professor of Economics, ANU
Saul Eslake, Chief Economist, ANZ Bank
John Foster, Professor of Economics, University of Queensland
Bernie Fraser, Former Governor Reserve Bank and Secretary to Treasury
John Freebairn, Professor of Economics, University of Melbourne
Joshua Gans, Professor of Economics, Melbourne University
Paul J. Gollan, Associate Professor, Macquarie University
Roy Green, Dean, Faculty of Business, University of Technology, Sydney
Stephen Grenville, Former Deputy Governor, Reserve Bank of Australia
Nicholas Gruen, CEO, Lateral Economics
Tony Harris, Former Auditor General of NSW
Stephen Koukoulas, Global Strategist, TD Securities
Andrew Leigh, Professor of Economics, ANU
John Quiggin, Professor and ARC Federation Fellow, University of Qld
Mike Waller, Former Chief Economist, BHP Billiton
Glenn Withers, Adjunct Professor, Australian National University

Read more >>

You died "vomiting money to anyone registered to vote"

Bernard Keane's open letter to Malcolm Turnbull and Julie Bishop:

From Crikey

Dear guys,

I know it's hell being in Opposition generally and particularly hellish during periods of crisis when people only really care about what the bloke in charge is doing. But you're also both intelligent, reasonable people -- particularly Malcolm, who's got a brain the size of a planet. So I know you'll take my comments in good part.

As you know, the budget is in deficit. Not officially, but we all know it is, even before the stimulus package that will come out very shortly. But every time the word "deficit" is mentioned, you get a glint in your eyes, and suggest, ever so subtly -- and sometimes not so subtly -- that this is the Government's fault. Now, however unreasonable this is, no one can blame you for this, because in Opposition you live off scraps. Half-truths, deliberate misinterpretation and wilful obscurity are every bit the staples of communication that they are in government...

For a couple of months last year, around about the time Kevin Rudd and Wayne Swan were refusing to talk about deficits, you were saying we shouldn't be going into deficit. When they suddenly started talking about deficits -- not so much acknowledging the elephant in the room as recognising that it had deposited an enormous pile of dung right in the middle of it -- you changed tack and started saying deficits should be a last resort and that it was the "quality of the spending" that was important.

I’m not sure what "last resort" actually means. Does that mean the Government should boost taxes before a deficit? Slash spending before seeing red ink? Wait until unemployment is over 10%? Anyway, we won't dwell on that.

But in case you haven't noticed, just about every economist on the planet is calling for massive government spending to replace at least a small part of the huge gap in private demand left by the financial crisis. This spending will, at least for some Australians, mean the difference between having a job and not having a job. If we learned anything from the last recession it's that unemployment is a bastard of a problem to fix and pernicious in its effect on our social fabric.

Playing political games with the deficit is grotesquely irresponsible. Other conservatives are being rather more sensible. Barry O'Farrell this week proposed cutting payroll taxes and sending the NSW Budget further into deficit to help employers. And the Canadian Government -- that'd be the one led by Stephen Harper, who wants to be John Howard so much he plagiarises his speeches -- has just announced a stimulus package that will take Canada US$30b into deficit.

But you seem determined to maintain the fiscal hairy-chestedness. As part of that, you like to maintain that when you were in Government, you were the height of fiscal responsibility.

That's complete bollocks and I'm sick of hearing it. The first two Howard Budgets were excellent. They cleaned up the profligacy of the last Keating budgets and began seriously implementing a small-government agenda of the sort a lot of us had been looking for for years. But after that, you dropped the ball. Subsequent budgets got slacker and slacker, especially once the mining boom kicked in. After 2001, your budgets got downright bad as you shelled out money to buy votes. After 2004, you were shovelling money out the door so fast slow-moving people were getting buried under it.

If you'd had just a little regard for the longer term you could have used the boom years to hand out tax cuts and built the surplus up further, or make a serious start on fixing our infrastructure, or get an ETS up and running so we had it built into our economy before the crisis hit.

But no, you died vomiting money to anyone registered to vote.

You also completely abandoned the small government agenda. This was a profound betrayal, one that has left Australian with a legacy of middle class welfare and a handout mentality that will take years to undo -- if any politician has the guts to try to undo it. You could have used the boom years of full employment to wean voters and businesses off government handouts. You’re the conservatives. You're the ones who are supposed to keep government in check, to reduce the burden of government on a free society. But instead your reached hitherto undreamt-of heights of profligacy.

So don't give us this "keeper of the fiscal flame" act, because it's rubbish. Julie, you've just come back from America, and declared that the Americans had "moved on from focusing on the malaise to what they do when the economy turns -- how to get the government out of the market".

Not sure what America you actually went to, but that description of the United States couldn't be more wrong. Moreover, I simply don't believe you when you talk about reducing the role of Government anyway. You and your colleagues had 12 years to show what you were made of on that issue and you did exactly the opposite of what your party philosophy says you believe in. I will never believe the Liberals again when they talk about smaller government, not until they spell out what programs and expenditure and welfare and pork barrelling and handouts you’re going to nix when you get into government -- and then do it.

Having wasted vast amounts of money when times were good, it seems you're determined to criticise the Government for taking us into deficit when things are at about their worst since men wore hats, the world was in black and white, and FDR had a permanent lease on the White House. I'm starting to worry that if I turn on the radio, Roy Rene will be on.

Instead of pursuing this deficit-is-evil rubbish, why don't you get creative like other conservatives, and start arguing for clever ways of generating a lasting stimulus to demand rather than demanding tax cuts we'll all stick on the mortgage, retooling the economy for greater efficiency and competitiveness when growth returns to the world economy, and ensuring unemployment doesn’t become a poverty trap tearing our social fabric and damaging our economy? It'd challenge the Government, and you'd be more credible on that stuff than trying to tell us what great fiscal managers you were. Beause, quite bluntly, you weren't.

Read more >>

"Cut the super levy, PM told"

The idea is taking hold.

Jacob Saulwick reports this morning:

THE compulsory superannuation rate should be lowered to put more money in the pockets of workers and help stimulate the economy, an open letter to Kevin Rudd from eight prominent economists says.

And the economists are top notch, including former Treasury secretary Tony Cole, former Australian Competition and Consumer Commission chief Allan Fels and Fair Pay Commission chief Ian Harper.

The letter itself is below:

This is the text of an open letter to the Prime Minister delivered this Thursday.

Dear Prime Minister,

We write as concerned Australians to underline the importance of swift and substantial economic stimulus to combat the current downturn in Australia’s economy. In doing so we highlight the opportunity such stimulus presents to accelerate progress towards longer term national goals.

Australian governments have had a knack for turning crisis into opportunity despite the short term political risks it can involve.  Emerging from the recession of the early 1980s, the Hawke Government overhauled wages policy and opened the Australian economy to the world.  Following the recession of the early 1990s, the Keating Government accelerated competition policy reform.  And the Howard Government pursued tax reform through the last economic downturn in our region. All these reforms, conceived and born in hard times, underpinned our subsequent prosperity.

Your Government should vigorously resist the global economic slump using all policy levers at its disposal. Monetary policy is being deployed aggressively, as is appropriate. However, its full impact will take time to develop and at a time of great uncertainty, particularly in our financial markets, its effect may be somewhat muted. The Government’s initial fiscal initiatives to stimulate consumption, housing and local infrastructure will certainly help. But much more is needed.

Fortunately, Australia enters these difficult times in a far stronger position than many other countries. Our public sector balance sheet is effectively debt-free—we have salted away around $70 billion in surpluses over the past decade. Even starting from weaker financial positions than ours, other countries plan to run large budget deficits, possibly for some time. We should have no hesitation in doing the same for as long as necessary. Other countries also plan to expand government borrowing to fund public investment.

We agree with the OECD that short-term stimulatory initiatives should be ‘timely, targeted and temporary’. However, we suggest a fourth criterion of action: wherever possible, policy measures should advance longer-term national goals, including reinvigorating our flagging productivity growth, mitigating climate change and tackling economic challenges posed by Australia’s ageing population.

We have a chance to make a virtue of necessity. We should take the opportunity presented by straitened economic times to take some hard decisions—decisions which we found too easy to put off when times were rosier but which, sooner or later, we must face anyway. We ought not to push them to one side yet again.

We propose three strategies for a second package of stimulatory measures:

. a one-off downward adjustment to compulsory superannuation contributions to free up funds for short-term consumption combined with an acceleration of contributions towards a target of 12 percent as the economy recovers;

. a sustained program of nation-building public investment, funded by additional public borrowing, to modernise Australia’s ageing economic and social infrastructure; and

. targeted temporary assistance to our households and businesses to improve their energy efficiency and help them adjust to climate change.

1. Superannuation flexibility

Policy faces a double challenge: to increase savings in the long-term while stimulating activity in the short-term. Compulsory superannuation gives us the tools for a uniquely Australian solution to this challenge.

From next January the Government should reduce compulsory superannuation contributions from nine to six percent, requiring businesses to pass these savings immediately into employee wages.

The Singapore Government reduced employer contributions to its compulsory savings scheme to counter an economic downturn in the mid 1980s and again in response to the Asian financial crisis in 1999.

Higher take-home wages would immediately stimulate household consumption. Unlike other proposals, such as a temporary reduction in the GST rate, this policy would very likely improve the Budget bottom line as superannuation contributions are typically taxed at a lower rate than wages.

Access to preserved superannuation should also be relaxed immediately for those in financial distress or unemployment, enabling them to access a part of their accumulated savings to re-train or meet mortgage payments.

This should be done while reaffirming our need to increase national savings over the longer term (the Achilles’ heel of our economy continues to be our substantial and rising foreign debt). So the proposal to lower super contributions in the short term should be accompanied by legislation to increase compulsory contributions over the longer term—specifically by one percentage point each year from 1 July 2010 until 1 July 2015 when the target rate of 12 percent would be reached.

We should build in a provision to increase contributions towards the target more quickly if the economy shows signs of early recovery and, especially, if it threatens to overheat.

2. Building the nation: borrowing to invest and modernising government finances

Borrowing to invest

We welcome your recent statement that the Government is prepared to go into cash deficit if necessary to make major national investments. Even without the current extraordinary circumstances, this is a welcome return to the basic economics of government investment.

Borrowing strengthens a government’s capacity to invest. Recurrent spending should generally be met by revenue from today’s taxes (and preferably with some operating surplus through the cycle for contingencies). However, because investment builds future assets, it is both fairer and more efficient for investment to be funded in large measure by debt so that part of the financing cost is borne by the beneficiaries of the investment, i.e., future taxpayers.

The appropriate level of public investment is determined by the set of worthwhile investment projects available and the social opportunity costs of those investments compared with using the funds in other ways. In Australia our central government has no net debt—meaning that additional public borrowing will not appreciably increase borrowing costs—but we do have a deficit of high quality infrastructure and our population is growing.

So we have ample need to modernise our economic infrastructure. This will help to expand our productive capacity, support improvements to our education and health systems, and address pressing needs for cleaner energy and lower urban congestion.
We should expand the Government’s three nation-building funds in infrastructure, education and health—funded by new borrowings of up to 10% of GDP over the decade ahead. These funds should be deployed as rapidly as possible and in as counter-cyclical as fashion as is feasible.

Modernising government finances

In a similar spirit, the Australian Government should follow the lead of some businesses and accelerate payments to its creditors from 30 days to 7 days. Where appropriate, it should help fund State Governments to do likewise. Instituting ‘just-in-time’ government payments brings a double benefit of improving long-term economic efficiency while improving cash flow to businesses large and small to help them weather the storm.

Where funding relates to State Government infrastructure, the Commonwealth should borrow these funds on behalf of the States. This is preferable to easing the States’ borrowing restrictions through the Loan Council, as it secures funds at the Commonwealth’s lower cost of capital.

All Commonwealth funding of infrastructure, including State Government infrastructure, should be accompanied by strong safeguards to optimise choice of projects. Further, States should be required to maintain capital investment effort at appropriate levels, operate their Budgets within agreed parameters, accelerate payments, and deliver national infrastructure reforms.

The Commonwealth Budget should report clearly the consolidated assets and liabilities of Commonwealth, State and Territory Governments—distinguishing between operating Budget balances and borrowing for public investment.

To reassure all Australians, and the markets from whom governments borrow, that the pattern and extent of government borrowing is fiscally responsible, an independent expert panel should be established to provide regular public advice to the Government on its fiscal policy stance, the management of its balance sheet and the restoration of budget operating surpluses at an appropriate pace.

Greater independence in the setting of monetary policy has clearly improved the quality of public debate and deliberation around this important policy instrument. We might expect the same from enhanced independence of the setting of the fiscal stance, distancing it as far as possible from day-to-day party political manoeuvres. This will be of particular benefit should it become necessary, which it may well, to run operating deficits for some time to avoid choking off a nascent recovery.

3. Preparing for Climate Change—A Generational Retro-fit

The need for temporary economic stimulus presents an opportunity to prepare households and businesses for the carbon-constrained world we are building. If well designed and combined with appropriate pricing measures, a short-term investment in energy efficiency could prove a highly cost-effective means of reducing emissions.

Credible, independent studies suggest that incremental investments in energy efficiency are often deferred because they are not ‘front of mind’ and can easily be put off.  Creating a specific and temporary opportunity for action can thus generate substantial scope for large emission reductions at zero or negative net economic cost.

Australian households and businesses should be given around one year to commence such improvements and to qualify for generous government support. Alongside this time-limited ‘carrot’, tighter future regulation would be held out as the potential ‘stick’ The purpose would be to pull forward cost-effective investments that both save money and reduce emissions. This would combine immediate stimulus to economic activity with the promotion of long-term economic efficiency.

Eligible investments to improve the energy efficiency of households and businesses would be based on rigorous analysis taking into account long-term economic and environmental considerations.

For households, this could include smart meters, insulation and solar hot water systems—measures that genuinely increase the value of homes rather than just prop up their market prices. For businesses, incentives could support major capital upgrades and new business management systems that improve energy efficiency.

Conclusion

We have laid out three specific examples of how creative economic policy can align the need for a second economic stimulus package with the need to tackle major policy challenges of coming decades. We need to look through and beyond as well as at the current crisis.

We would be happy, individually or together, to discuss any aspect of the proposals we have outlined.

Prime Minister, we encourage you to seize the opportunity provided by our current difficulties to build for the future. No doubt we must fight our way through these trying times; but we must do so without losing sight of the need to build a better future for succeeding generations of Australians.

Yours sincerely,

Tony Cole, Head of Mercer Investment Consulting, Asia Pacific, formerly Secretary to the Treasury and Chairman of Productivity (then Industry) Commission.

Saul Eslake, Chief Economist, ANZ

Allan Fels, Professor and Dean of the Australia and New Zealand School of Government

Rod Glover, Formerly Senior Adviser to the Prime Minister and Director of Strategic Projects and National Reform for the Victorian Department of Premier and Cabinet

Nicholas Gruen, CEO, Lateral Economics

Ian Harper, Senior Consultant, Access Economics and Professor Emeritus of the University of Melbourne

Tony Harris, Formerly Auditor General of NSW; Chief of Staff to Treasurer Dawkins, Acting Chairman of the Productivity (then Industry) Commission and senior official in the Department of Finance

Mike Waller, Formerly Senior Official for the Department of Prime Minister and Cabinet, Chief Economist, BHPBilliton, currently Director & Partner, Heuris Partners.

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