Reserve Bank Governor Glenn Stevens has once again thrown down the gauntlet to everyone in the country to have a real debate about taxes, growth and other economic issues.
It was a speech in Brisbane which didn’t mention the current value of the dollar (it is still over 92 USc), but did mention property prices by using the weak performance of Queensland house prices in the past decade as a warning to property markets in Sydney and Melbourne that what goes up, can come down and cause problems.
Mr Stevens supported the suggestions made on Wednesday night by Treasury head, Martin Parkinson, for an expansion of the GST, and his warning on the unsustainability of the federal budget financial position.
Mr Stevens told his audience the story just wasn’t one of fiscal policy or monetary policy or growth versus austerity.
He said reform was needed if governments wanted to spur economic growth and that central banks alone could not come up with policies that drive growth.
It has to be more than budgets, spending and taxes, and include as many in the community as possible. There’s the old favourite of improving our efficiency and productivity, and jobs where he made some surprising points on job losses and forecast a shortage of employees in a decade’s time.
"The debate here has, I would have to say, been overly focused on budget outcomes in particular years. The real issues are medium-term ones," Mr Stevens said in referring to Mr Parkinson’s speech on Wednesday night in Sydney, and the continuing focus on the yearly budget cycle.
"Put simply, there are things we want to do as a society, and have voted for, that are not fully funded by taxes over the medium term, as is starting to become clear in the lead up to the May budget."
He was referring there to policies such as the Gonski education reforms and the National Disability Scheme which remain unfunded in the forward budget estimates.
"A conversation needs to be had about this,“ Mr Stevens pointed out. "Our situation is not dire by the standards of other countries but neither are the issues trivial."
The government, in the shape of Federal Treasurer Joe Hockey and deputy Liberal leader Julie Bishop along with shadow Treasurer Chris Bowen yesterday rejected any talk of increasing the GST – thereby ending any chance of a debate on the issue (perhaps it will change after the WA Senate poll on Saturday, or next month’s Federal Budget).
Mr Stevens said yesterday that it was important to drive the conversation about fiscal policy away from the "growth versus austerity" debate towards pursuing agendas that "spur growth potential, which would mean, among other things, that the accommodative policies of central banks could get more traction".
He said that reforms and policies that spur growth weren’t always on the to-do list of governments.
"There is something of a tendency for governments, when asked to outline their growth plans, to list the things that they already want to do for political reasons, and then to claim that they will help growth," Mr Stevens said.
"Some of those things may well help growth, but in fact many of the things that are needed to spur growth seem not to make it onto such lists."
And what sort of policies was he talking about?
"Things that boost competition in markets, that genuinely free up trade, that reform the governance and financing of infrastructure projects (and the pricing of use of infrastructure), that put retirement income streams on a sustainable footing, that re‑align incentives, that allow exchange rates to be more market determined, that encourage labour market mobility and participation, that enhance human capital, and that minimise distortions from tax – many of these often don’t make in onto ‘to do lists’ in the way that perhaps they should,” Mr Steven said.
Many of these are micro economic reforms which require strong government involvement and drive – others are bigger and need the help of the wider community to support the government.
The RBA governor said the Group of 20 (which Australia is chairing this year) goal of increasing global economic growth by 2% won’t be achieved by "clever programs of cheap money devised by central banks".
"Nor is it to be the result of fiscal adventurism," he said.
"We are trying to shift the conversation away from the ‘growth versus austerity’ framing of recent years, which is ultimately a rather sterile discussion.
"No one has ever achieved growth simply by austerity, but equally the approach of simply ignoring the gaping hole in public finances in many countries has reached the limits of its credibility.
"We need a refocused conversation, around doing things that spur growth potential, which would mean, among other things, that the accommodative policies of central banks could get more traction," Mr Stevens said.
And finally, Mr Stevens had a nice riposte to all those gloomsters about jobs and the continuing string of losses.
Pointing to a common question these days of ‘where are the new jobs to come from’ he said:
"In the middle of 1991, at the low point of the last serious recession, people were very pessimistic about future employment prospects.
"The rate of unemployment was in double digits. But today, over 20 years later, there are nearly 4 million more jobs in the economy than there were then. The rate of unemployment, even though it has gone up recently, is just slightly more than half what it was at its peak in the 1990s.
"It’s worth noting that none of those additional net jobs came from manufacturing. The manufacturing sector in fact shed about 100,000 jobs over that 20-year period.
"But other sectors increased their employment. Mining employment tripled and that alone more than offsets the reduction in manufacturing, without taking into account the growth in construction, health care and a number of other services sectors where the number of jobs has roughly doubled.
"As of today, even with some recent weakness, there are more jobs in the economy than ever before.
"The second thing to say is that, cyclical things aside, the more likely problem in the medium-term future won’t be one of not enough jobs, but instead, not enough workers. At present the number of new entrants to the labour force after finishing education each year exceeds the number retiring.
"Ten years from now those numbers could be roughly equal, absent a further rise in labour participation in the older cohorts.
"The question will be less ‘where will the jobs come from?’ and more ‘where will the workers come from?
"It’s true that migration adds to the workforce as well, though migration also adds to the number of people not working and retiring."
He said that demographic trends point in the direction of a smaller proportion of the population working, and a larger proportion needing support in their later years, even as other demands on the public finances for the provision of social goods increase.
"That looks like a pretty uncomfortable combination of trends. How do we reconcile them?
"The answer – the only answer – is growth.
"To some extent we will, hopefully, be able to lessen the problem through higher labour participation, for longer.
"But most of all we will need higher productivity of those working.
"That means making the system as flexible as possible and as encouraging as possible to innovation," Mr Stevens added.
