Dog Days: Australia After the Boom (Redback) (20 page)

Bitterly attacked from the beginning as a ‘great big new tax’ that would put a wrecking ball through the economy, the legislated carbon price had much less support than the CPRS in May 2011 (30 per cent support; 60 per cent opposition). In fact, the 2011 package was similar to the CPRS, with two departures that registered with the community – the increase in the tax-free threshold funded by the carbon pricing, which was popular; and the higher fixed price for a three-year transition period, which was unpopular when the 2010 decline in the European price left it high by international standards. The most important of the other differences provided for better governance of the 2011 scheme, which did not attract community interest.

Most polls did not ask about the package as a whole, as distinct from the ‘carbon tax’ component. When polls asked respondents what they thought about carbon pricing when the whole of the revenue was going to be used for tax cuts, household social security payments, renewable energy and compensation for industry – as it was in the 2011 package – the package received consistent majority support. For some reason, which may have had its origins in the focus group, the government mostly chose not to present the carbon pricing and household payments as a single package. If the separation was to allow the government to receive separate recognition for the cut in income tax (principally by raising the tax-free threshold), it backfired politically. The Opposition also separated the carbon pricing from the tax cut and household payments, and then promised the good bits without the bad, at a large cost to the budget.

While there was a strongly negative view of carbon pricing in isolation, the polls reveal majority opposition to repealing it, majority opposition to a double dissolution election on the issue and, before the election, support for the carbon pricing policy on its own over the Coalition’s proposal for Direct Action.

These views were clearly observed even among Coalition voters in an exit poll at the 2013 election conducted by JWS Research and commissioned by the Climate Institute. Reminded that the Coalition supported targets of reducing emissions unconditionally by 5 per cent and conditionally by up to 25 per cent, 40 per cent of Coalition voters thought it more important to meet the targets than to repeal the carbon ‘tax’, and only 32 per cent that it was more important to repeal the tax. Only 3 per cent thought that ‘scrapping the carbon tax’ was the most important of the issues that the Coalition had put to voters.

An Essential Vision Poll on 1 October 2013 provides insights into changes in opinion with the new government in place. Respondents were asked whether they supported ‘the previous Labor Government’s carbon pricing scheme which requires industry to pay a tax on the amount of carbon pollution they emit’ (no mention was made of how the revenue would be used). Whereas the responses were evenly balanced in May 2013 (43:43), there were more negative responses after the election (39:37). Asked directly whether they preferred the carbon tax (no mention of the use of the revenue), or the Liberal Party’s policy on providing funds for planting trees and paying companies to reduce carbon emissions, a majority supported the ‘carbon tax’ in May (39:29), but a minority after the election (31:35).

The smog of politics encouraged by private interests increased the difficulty of introducing a carbon-pricing package, and provided cover for a relentless attack on its central feature, but it did not turn majority opinion against the package as a whole. With firm and agile prime ministerial leadership, the Gillard government was able to legislate an effective policy. This time, in contrast to what happened with the mining tax, the government (and the Parliament) held its ground against huge pressure from private interests.

The main long-term consequence of the smog may turn out to be the cover it provided for the survival of an economically and environmentally weak alternative that can be expected to have disappointing results.

The Abbott Opposition was effective in its attacks on the ‘great big new tax’ because of two things that will not be part of future debates. One was Prime Minister Gillard’s acquiescence to the leader of the Opposition’s description of an ETS with an initially fixed price as a ‘tax’. This could then be presented as a breach of the commitment that there would be no carbon tax under a government that she led. The second was the gap that opened up between the level of the fixed price in the first three years of the scheme ($23 and rising) when European carbon prices, initially well above that level, fell to around $A5 ($A7–8 in September 2013) as economic activity foundered and the European target became much less costly to achieve. The linking of the Australian ETS to Europe meant that this price discrepancy would have been removed from July 2015. Prime Minister Rudd, in July 2013, said that the link to Europe would be brought forward to July 2014 if he won the 2013 election.

Any regulation to reduce emissions involves costs that are as real as, and larger per unit of carbon emissions than, carbon pricing. The sum of the costs of mitigation measures – mostly Direct Action, not carbon pricing – in 2013 in Europe, the United States or China (as a proportion of household income or of the economy) is much higher than the costs to households or business of the $A23 fixed price in Australia once the distribution of the permit sales revenue is taken into account.

This is too complicated a point to be widely understood under the smog of attack by private interests and the Opposition. As a consequence, it is politically impracticable to maintain a carbon price that is higher than in Europe in these circumstances. The linking of the Australian scheme to Europe recognises this reality. It follows that carbon pricing here, as elsewhere, must be supplemented for longer than originally anticipated by other regulatory interventions if we are to achieve cuts that are commensurate with those in other countries.

While we do not yet know the relevant details of how Direct Action would work, analysis of the information available indicates that it would be more costly for Australia to meet our targets through Direct Action than through an ETS linked to Europe. So the repeal of the 2011 legislation would mean that the smog had obscured the victory of private interests over the living standards of Australians. Or, if the high costs of Direct Action deter a serious effort to meet our commitments to the international community, it will have obscured the victory of private interests over the international effort to reduce the dangers of climate change.

Does this suggest that it is now impossible to implement policy in the public interest in Australia? Let’s not rush to judgment. The smog did not prevent the legislation and implementation of a strong policy package. Indeed, the 2011 legislation stands out as a goal for market-oriented reform scored against the run of play in the mature years of the Great Australian Complacency. With the disparate objectives of minority senators, one cannot be certain yet that the package will not survive the Senate’s consideration of repeal bills. And if repeal succeeds, it was a sufficiently close-run thing for other outcomes to have been possible.

CONFLICTS OF INTEREST ARE INCREASING

Most holders of high office and their close advisers through most of our democratic history have sought their reward in the satisfaction of performing well a role that is important to the community. In the apt words of Tony Abbott on taking office, a life in high policy is a vocation. It is an honour to serve the people of your country in a way that improves their lives.

Some people close to the exercise of power have always had other motives. Some have seen the attainment of high office or influence as a largely commercial activity – a way to a more lucrative career and a path to wealth. We have succeeded as a nation because few of our most senior leaders have involved themselves in politics and policy with pecuniary motives. For example, our three long-serving post-war Coalition prime ministers, Menzies, Fraser and Howard, have been exemplary in their living of their vocations.

The revelation of corruption in the NSW state government’s administration of mineral leases has shocked us. Yet this terrible case is in a sense reassuring, because the crimes will attract an appropriate punishment.

Less blatant but nonetheless seriously damaging uses of official office for the advancement of business interests are now accepted as normal. It is now normal for people to move directly and without delay from senior government roles into positions in which their intimate knowledge of personnel and processes has high commercial value. It is now normal for people to move directly from positions of confidential influence in the offices of heads of government and ministers into lobbying roles for companies in which their access to decision-makers and presumed influence over them is a valuable asset.

Do we really think it is right for a minister of the Crown with a portfolio related to gambling, who is also a recent state secretary of the governing party, to move directly to work for a company in the gambling business that has huge private interests in issues before the federal and state governments? Or for federal and state ministers to move straight into lobbying businesses, or positions with investment banks, in which at least part of their value derives from their influence over decisions of relevance to their new employers?

The revolving door was an important factor in the political contests over resource taxation and carbon pricing. It is a serious counterweight to the public interest in shaping contemporary policy. As the influence of money grows, we need to defend the integrity of the democratic process with a sensitivity that may have seemed unnecessary in earlier generations. We have to be clear and straightforward in our management of conflict of interest and the use of public office to advance private pecuniary ends.

The Commonwealth Public Service has a well-earned reputation for integrity. To preserve that integrity, we must defend its best traditions when they are breached. It is unfortunate that strong and prompt action was not taken on two 21st-century revelations of corrupt behaviour in areas of commonwealth responsibility: the Australian Wheat Board’s relationship with the regime of Saddam Hussein in Iraq; and the payment of bribes by the Reserve Bank’s note-printing subsidiaries. Justice was not seen to be done in relation to people who may have had responsibility in various ways for serious corruption.

The election of three Palmer United Party senators at the 2013 election requires us to think through how we manage conflict-of-interest issues in our Parliament. The leader of the party, Clive Palmer, has major mining interests, including in Queensland coal, that would be affected by the removal of carbon pricing. (They would also be affected by the removal of the MRRT; while quantitatively of less importance, the principle is the same.) Palmer has made it clear that the three senators will be subject to party discipline under his leadership in using their votes within the Senate.

Palmer has been asked whether he would withdraw from his mining investments if elected to the Parliament. He responded that he would handle the conflict in the way that would be appropriate on the board of a public company: by removing himself from discussions affecting his interests.

Palmer’s expressed concern about the role of lobbyists in our political life is a positive and welcome contribution to a debate that should go much further. His statement that he would recuse himself from decisions affecting his own private interests is welcome and appropriate. It is important that the leader of the Palmer United Party advise senators who have acknowledged his leadership to adopt the same approach: they too should recuse themselves from decisions in which their leader has a material pecuniary interest. The democratic legitimacy of a Senate decision to abolish carbon pricing that depended on votes from the Palmer United Party would be tainted.

The early twenty-first century has seen a major change in the role of private interests in the policymaking process that has made reform in the public interest more difficult. This has placed a smog over the policymaking process, rather than an impenetrable wall. It has created an environment in which governments can lose their nerve and do the bidding of private interests. However, the evidence so far indicates that private interests are still not able to block a government with a clear idea of its objectives and which seeks to appeal to the electorate in the name of the public interest.

I am writing this in the week after the September 2013 election. The data that comes in week by week is confirming that the economy is growing well below capacity. Employment is growing much less rapidly than the working-age population. The resources industries are subtracting from growth in incomes. Our competitiveness in resources continues to decline as the exchange rates of all our main competitors fall much more than our own: Indonesia and South Africa for coal; Brazil (and sometimes India) for iron ore; Russia for natural gas and other minerals to China. There are no signs yet of an expansion in investment and production of the industries outside resources – nor should we expect this with Australian costs way above those of other countries.

The mood among business is a bit better than before the election, but the economic fundamentals are a bit worse. The exchange rate has retraced some of its decline. Estimates of the budget deficit for this and future years were greatly increased at the end of August 2013, and yet we are now much more comfortable with the bigger deficit than we were with a smaller one.

The election has been followed by a shift from talking down to talking up the economy in the News Corp majority press. Consumer and business confidence has continued to rise since the August cut in interest rates. There has been a lift in some of the financial markets. There is talk that increased confidence from the change of government will lift spending and economic activity, and even that the resources boom will burst back into life. That the employment and growth and budget and external payments challenges will go away.

Sorry. That’s not the way the economy works. Increased investment in any industry is shaped by calculations of expected profit. None of the purported increase in confidence and none of the high-profile election promises of the government will change profit calculations in ways that increase investment. None will help us to meet the fundamental challenge: to improve Australian competitiveness and to increase investment and activity in trade-exposed industries while keeping the budget on a path to long-term stability.

There are some mercies. Unlike in the early months of 2013, no one close to the levers of power is saying anymore that a strong dollar is unavoidable and possibly desirable – but nor is anyone saying that there is an urgent need to improve Australian competitiveness. In fact, the government has said that it will not make any large policy change to lift productivity until after another election.

The public signs are that policy has settled into somewhere between the ‘business as usual’ and ‘budget stimulus’ approaches identified in Chapter 5. The treasurer has spoken of increasing infrastructure investment as a stimulus to the economy after the resources boom. Public spending on infrastructure is a good way to provide stimulus, and much better if it is guided by sound analysis of the costs and benefits of alternative investments. Somewhere between business as usual and stimulus is a better place to be than austerity, which had such prominent support from much of the political elite in the media, business and Opposition through the last Parliament. But it cannot be the main response to our challenge.

Business as usual plus stimulus may lift employment and output, as it did in the crisis following the Great Crash of 2008. But it won’t do it sustainably, because our budget and external financial outlooks are weaker now. Stimulus is just storing up problems for the future unless there is a large real depreciation. And if there is a large real depreciation, not so much of a stimulus is needed to restore full employment.

The fall in the Australian dollar so far in 2013 helps, but it is not nearly enough. We may get lucky and the tightening of monetary policy in the United States and elsewhere may take the dollar lower again. Or it may not – or not until the chance to avoid high unemployment is behind us.

As noted, the hard part of the adjustment will be turning the fall in the exchange rate into a real depreciation. Real depreciation means decreasing real incomes for many businesses and households, and for Australians on average. There are beneficiaries of real depreciation in the trade-exposed industries, notably farming. But these are much fewer than the average Australian who has to tighten her belt. The biggest beneficiaries are those people who would otherwise have lost their jobs or whose businesses would have been damaged or destroyed in a much bigger downturn. They will not even know their good fortune because they will be unaware of the fate that has been avoided.

The politics will be all about the many who must accept lower real incomes. That is politically difficult in any context. It does not happen at all without effective leadership and public education based on a sound programme of reform to improve efficiency and equity.

The fall in the dollar so far has occurred without a framework for turning it into a real depreciation. There will be resistance and political tension associated with every bit of the squeeze on living standards. Whether the policies can be maintained through this pressure will depend on whether the prime minister and his government can explain the necessity and the fairness of what is being done. In short, making this big adjustment work depends on building a new reform era.

The new Australian political culture makes a prime minister seeking to govern in the public interest vulnerable to attack from an Opposition focused on unpopular developments and measures. The Dog Days provide exceptional opportunities for negativity. The approach of the Opposition matters for reform. Whatever it might do to its own hopes for early return to government, an Opposition that offers broadly constructive support for a new reform era, with criticism focusing on departures from a clearly articulated conception of the public interest, would improve the prospects of a successful Australian transition.

AVOIDING THE NEED FOR SUCH PAIN IN THE FUTURE

Australians should be able to agree on one big lesson from this latest episode of resources boom and decline. When strong growth in newly industrialising countries increases demand for our commodities, neither government nor business knows how much of the increase is here to stay.

History tells us that after a period of boom, commodity prices usually pull back a long way. Because we do not know how much of the increase will stay with us, governments should hold back on spending most of the increment in revenue until we know more. The reason for this is that it is painful, politically difficult and economically wasteful to increase costs and force changes in industry to accommodate them, and then to remove the increases in living standards and costs and rebuild the industries that have been destroyed. Better to wait and see whether the changes are necessary at all.

A second reason for delaying the spending of revenue from high export prices is that they are likely to be followed by an investment boom to expand supply. This increases the demand for domestic labour and supplies, while pushing up domestic costs and the real exchange rate. Best not to let increased government spending exacerbate the increase in costs. If government has saved the increased revenue from the temporarily high export prices, it can spend it on infrastructure and in other productive ways when the boom is receding.

The lessons are similar for the private sector. Temporarily high prices are not a licence for reckless expansion. Caution will avoid the destruction of value that comes with writing down boom-time capital investments when the end of the boom makes production unprofitable. There is no need for a repetition of the destruction of shareholder wealth that we have seen in the Australian thermal coal industry in 2012 and 2013.

These are old lessons that we should not have had to learn anew. We had to learn them anew because many people thought that this time was different. They thought that this time was different because in the huge Chinese economy there was no limit to demand for the goods that Australia supplied. Above all, this time was different because the Reform Era had instilled a new flexibility in the Australian economy, so that if our costs and real exchange rate rose when prices and investment were temporarily high, they would fall smoothly, without cost and painlessly if and when the boom ended.

‘This time’ never turns out to be completely different. Never different enough to warrant the abandonment of prudence.

Would it help to save the increment of revenue in a sovereign fund, as Norwegians and others have done with success and profit? Yes, if it helps to institutionalise the idea that the higher revenues are temporary and should be saved. Yes, if it makes it easier politically not to spend the increased revenue. There is nothing magical about a sovereign wealth fund to manage cyclical variations in revenue, but if it helps with saving boom-time revenue, let’s have it in place for the next time round.

HOW WILL YOU KNOW IF I AM WRONG?

I began the book by saying there are two possible futures for Australia in the period ahead. One is business as usual (now with talk of it being tempered by stimulus spending on infrastructure). This gives us economic growth well below our capacity of 3 and a bit per cent per annum, slowly deteriorating employment conditions for a growing population, and a slow squeeze on real incomes. The officially projected budget surplus in 2016–17 does not materialise. The modest economic growth is worse than it looks because it is dominated by increased resource exports that contribute relatively little to Australian jobs and incomes.

The other possible future contains an early and large real depreciation, with a hard start but better outcomes. A fair distribution of the burdens of adjustment, and strong reform to raise productivity and efficiency, are part of the ‘real depreciation’ strategy. Greater spending on demonstrably productive infrastructure is a useful complement to depreciation.

Other contributors to the contemporary Australian economic discussion say there are other alternatives. The resources boom will revive, and consumption and investment are about to take off. The reader will know soon enough who is right and who is wrong – but alas, not soon enough to avoid hard years for many Australians if my diagnosis is correct.

I have written with some confidence because I have been living for a long time with the issues raised in this book. But let us remember the story of Chapter 1. The big currents of economic development are inherently uncertain. China may fail in the implementation of its ambitious structural reform; this would hold up some of Australia’s resources boom for a while and then dump us much harder. A combination of other large developing countries may grow so strongly that we enter a new resources boom in a few years’ time. A new crisis in financial markets could appear as the developed countries’ central banks phase out their exceptional monetary policies.

The policy reforms that I have suggested in Part 2 would give us a good start on doing harder things if the future deals us a worse hand than I have anticipated. And it will do no large harm to have started to improve competitiveness and avoided excessive expansion of domestic spending if the future unfolds in a favourable way.

You will know that I was unnecessarily worrying my fellow citizens if the weakening labour market of the past two years goes into reverse before too long and takes us back to the full employment of the official projections in 2015–16, and if the budget deficit starts shrinking rapidly after this year (as in the official projections) – and all without large real depreciation or concern about the financing of our external deficits.

However, the reader should be worried that I might be right if the availability of employment for a growing population continues to drift downwards and there are no signs of increased investment in trade-exposed industries. Or if we deal with immediate employment problems by increasing domestic spending without a big improvement in competitiveness, and Australian indebtedness to foreigners starts to grow strongly again.

I hope that neither of these latter circumstances arises. But if they do, we will have to make a late start on the largest adjustment challenge to face any but the oldest living Australians.

WHAT IF AUSTRALIA GETS IT WRONG?

If I am right and Australia gets it right, we will endure a period of moderate falls in living standards, without any part of our society suffering badly from the adjustment. After a while, living standards will start to rise again – moderately, in line with the higher productivity growth that a new reform era has made possible. We will be in a sound position to manage any major disruption to the international economy. We will feel comfortable with our democracy, and others will see our democratic capitalism in a positive light.

Tolstoy tells us in the opening of
Anna Karenina
that every happy family is the same, while each unhappy family is unhappy in its own way. He oversimplified the story of happy families, but he was right that there are many ways that things can go badly.

If we fail to take an early opportunity to adjust down the cost levels that have hung over from the China resources boom, we can look forward to economic instability, inflation, stagnation and high unemployment. Governments will do their best to deal with parts of the problem where solutions seem to be constrained less tightly by political reality, and stir up new nests of opposition for their troubles. We will become an unlucky country, run by second-rate people who share the country’s bad luck.

The downside from getting it wrong is big. Rising and high unemployment and business failures would place great stress on many of our people and on our institutions. If our country fails the challenge, Australians would be foolish to ignore the weakness in our democracy that contributed to failure – the rise in power of private interests; the fragmentation of the national conversation about policy; increasing comfort with conflict of interest. We would be wise to heed the lessons from the political history of other resource-rich countries in which democratic institutions have been broken by the power of resource-based wealth.

It matters to Australians that the public interest wins in the great struggle to shape the aftermath of the China resources boom. At a pivotal time in the spread of modern economic development throughout the world, the fate of democratic capitalism in our ancient continent matters for others as well.