by David Hetherington and Tim Soutphommasane
Appeared in The Australian September 18, 2010
HAVING secured government, Julia Gillard faces her greatest challenge yet. The task of holding together a minority government is enormous. The risk that this parliament will fail to produce a reforming government is real.
Although survival will be a preoccupation, the Gillard government cannot ignore the long-term policy challenges facing the country.
There are three in particular: addressing our long-term economic vulnerabilities; delivering a coherent population and infrastructure policy; and fixing our broken climate change debate. In each lies opportunity.
This is the real test for this government: Can it marry policy reform with political survival?
The economy: Australia's strong economic performance masks serious vulnerabilities. Our consumption is underpinned by sustained house price rises. Yet house prices are out of alignment with historical price-to-rent ratios. The Economist's fair value housing index rates Australian property as the most overvalued of any of the 20 markets it tracks, with a 60 per cent overvaluation. Any correction will be traumatic.
This is compounded by our low levels of household saving. Australia's household savings rate has dropped markedly in the past 30 years. This leaves households without any buffer to deal with another global slowdown, which remains a possibility.
A global double-dip recession would constrain Australia's access to foreign capital, restrict business investment, drive up interest rates and increase loan defaults.
We're also highly exposed to the volatile nature of the global commodities cycle. If China's demand for resources, in particular, flags, our national income would contract markedly.
Even if the resources boom runs its natural course, we will face enormous restructuring challenges when it eventually ends. The key lies in restarting Australia's productivity growth, which has lagged over the past decade.
Population and infrastructure: An explicit national population strategy is needed to provide greater clarity. Any strategy must take into account the imperatives of economic prosperity, demographic balance, environmental sustainability, urban and regional development, social cohesion and quality of life.
A long-term strategy should be guided by one of three population trajectories: high growth (to 40 million-plus by 2050), moderate growth (30-40 million) and reduced growth (20-30 million).
Short of accepting a lower standard of living or achieving a viable economic model of prosperity without growth, moderate population growth seems appropriate.
Indeed, the structural characteristics of Australian demography and economic development suggest increasing demand for labour in the future. Today there are five people of working age for every person aged 65 and over, but by 2050 the number is projected to decline to 2.7.
It isn't realistic to expect an increased population can be accommodated without placing extra demands on social and physical infrastructure. But much of the ongoing debate has assumed population growth and quality of life are incompatible.
This ignores the fact a higher urban density can have benefits, especially in the context of an ageing population: it can enhance economic dynamism by reducing the costs of production and consumption; it can enrich cultural vibrancy by facilitating an easier spread of ideas; and it can promote more efficient public transport networks in cities.
Climate change: Human-caused climate change is real and the necessary responses are well understood: a price on carbon, a shift to renewable energy sources, and more efficiency in energy use.
But definitive reform remains elusive. Public consensus on the necessity of climate change action has broken down. Rebuilding the consensus requires public recognition of the costs of carbon emissions mitigation.
Mitigation of climate change would cost Australia $12 billion to $13bn a year at the outset, falling to between $1bn and $2bn a year until mid-century. However, any costs of mitigation are much lower than the costs of business as usual. The Garnaut report to the Rudd government in 2008 found unmitigated climate change would cause domestic real wages to be 12 per cent lower by the end of the century than they would otherwise have been.
It is clear that relying on the moral urgency of climate change mitigation is not enough. Progress on climate change policy demands positive, practical argument about the benefits of reform.
Policy responses: The response to these challenges should be multifaceted; the solutions can't be found in templates. Among other things, two dimensions of public policy warrant special attention: market design and nation building.
Market design is the progressive response to the role of state in the modern economy. The government's design task is to set the rules of the market interaction to prevent market failures.
Sometimes this will involve introducing market mechanisms in areas of public provision: water, electricity, health and education. On other occasions, it will require the redress of failures in existing private markets: greenhouse emissions in energy, information overload in financial services, undersupply in housing, market power in telecoms.
Design reforms have already been embraced, ranging from reforms in our telecommunications market and water buybacks in the Murray-Darling to income-contingent loans for vocational training and inter- governmental financial arrangements.
But new design opportunities exist. In health, increased co-payments in line with income would allow for self-insurance of health expenses. In the same way they now manage personal pension funds, individuals could build and manage insurance accounts dedicated to health coverage.
In education, the removal of barriers of entry to the teaching profession -- namely, entry by capable, experienced tertiary-educated professionals wishing to change careers -- is to be welcomed. In addition, merit pay for teachers would help retain high-quality teachers within the profession. The best approach would be to trial a pilot scheme in a small number of public schools in which teachers receive bonus pay for delivering improvements in gains in students' test scores from one year to the next.
In energy, an emissions trading scheme remains the most important market design reform available; short of that, a carbon tax is a second-best option.
Additionally, market design can encourage the spread of distributed power generation in government-owned facilities and other medium-sized buildings such as apartments, hospitals and universities. This requires comprehensive feed-in tariffs and streamlined access to the grid.
The natural fuel for this distributed generation is gas: it is abundant, already networked and far less carbon- intensive than our existing coal-fired electricity.
In taxation, a mineral resources rent tax remains critical because it allows us to quarantine the windfall from our natural resources for investment in national infrastructure. The specific form of the investment vehicle might be a conventional sovereign wealth fund. Alternatively, the proceeds from the tax might be paid into individual superannuation accounts.
Under this arrangement, the tax could fund infrastructure investment in the medium term and provide a long- term buffer against the costs of supporting the ageing population.
In financial services, Jeremy Cooper's review of superannuation for the government has made a sensible proposal for low-cost default accounts for all workers. This measure would raise average retirement savings by about $40,000. There is no reason why the Reserve Bank could not offer low-cost savings accounts on a similar basis.
The task of reform can also be understood as one of nation building. At the outset, a clarification is in order. As it has been invoked over the past three years, nation building has served as a shorthand for indiscriminate government spending.
Properly understood, however, nation building refers to strategic state action to reshape institutions in the economy, society and culture. It can involve both soft and hard elements: the soft referring to the cultural cultivation of citizenship and community; the hard to the physical building of economic and social infrastructure.
On population, a nation-building approach would restore much needed balance to our debate, which has focused almost exclusively on our cities, for instance on population density and urban congestion. But regional development is also important, as the rural independents have highlighted. It would be an error to ignore the prospect of directing population movements and growth into regional centres. There are good reasons to consider centres such as Coffs Harbour and Cairns as sites of planned population growth, not least the effect on national housing supply.
It is also important that climate change action is understood as an opportunity for structural economic reform and for building long-term economic prosperity.
Many presume that making the transformation to a low-carbon economy will incur an unjustifiably large cost: lower economic growth, loss of employment, reduced living standards. Yet there is an advantage in acting sooner rather than later.
Early action delivers first-mover advantage and reduces the risk of economic exclusion in carbon-intensive industries when the transition to a lower carbon economy eventually takes place.
In the spirit of the Prices and Incomes Accord struck during the 1980s, which underpinned the Hawke- Keating structural economic reforms, a new coalition is required today to deliver the support of key interest groups for a universal carbon price. Brokered by government, this coalition would bring together leaders from the business, union and community sectors including, critically, mining and agricultural interests.
Such a coalition could provide the necessary institutional backing as well as the grassroots campaigning capacity required to cement public support. It would negotiate adjustment funds payable to displaced workers, affected companies and low-income households.
The long term: The reforms of the 80s and 90s have worked their way through our economy and our society. We have enjoyed their benefits, but the improvement in the standard of living they enabled has faded from memory. This has been replaced by a dangerous complacency, a belief that the task of economic reform is over.
Few governments have delivered on a comprehensive agenda in a single term. It would be naive to expect a minority government would have an easy task. But if this government is able to kickstart productivity, boost infrastructure investment and put a price on carbon, Gillard will have earned her place in the pantheon of reforming prime ministers.
David Hetherington is executive director and Tim Soutphommasane is senior project leader at Per Capita, a progressive think tank. This is an edited extract from their Memo to the Prime Minister, published recently.
For the full letter, link here.
