Governments have been grappling this month with the challenges arising from Australia’s prosperity.
That makes the latest comments by the current governor, Glenn Stevens, to a Committee for Economic Development of Australia dinner, particularly notable.
“On all the indications available, we are living through an event that occurs maybe once or twice in a century,” he told the dinner last week.
The subject of his comments was the terms of trade, which measure the price of Australia’s exports, such as iron ore and coal, relative to the price of Australia’s imports, such as consumer goods.
After putting in a few qualifiers, Mr Stevens concluded that, “the terms of trade are as high as anything we have seen since Federation”.
Those of us who do business here in Western Australia see the evidence all around; Mr Stevens was addressing an east coast audience that probably is not tuned in sharply to the state of the WA (and Queensland) economies.
“It does not make much imagination to see that an event of this magnitude is expansionary,” he added, with consumer spending and business investment set to rise.
“So a very important question for us is: how do we handle all this? We obviously have to be wary of overheating.”
Mr Stevens, like all pundits, is unsure how long the current high commodity prices will last.
He noted that large falls have been the norm after prior boom periods.
“On the other hand, experienced people seem to be saying that something very important – unprecedented even – is occurring in the emergence of very large countries like China and India.”
Mr Stevens’ advice was that Australians should not allow all of the increased income to flow into consumption spending. He counseled that the nation should seek to lift savings, while also pursuing reforms that will lift productivity.
“It would be a mistake to rest on recent achievements, as significant as they have been, and to fail to press on in our efforts to do better,” he said.
His advice provides a useful perspective on another speech delivered last week, also to a Committee for Economic Development of Australia event.
The second speech was delivered by Prime Minister Julia Gillard, whose speech writer coined a snappy phrase to encapsulate her pitch: “2011 will be a year of delivery, and 2011 will be a year of decision”.
The preamble used many phrases that would have sat comfortably in the Reserve Bank governor’s speech – investing in economic capacity, continued reform, fiscal consolidation, supply-side reforms, etc.
But what was the detail?
On the subject of tax reform, Ms Gillard said the government would be cutting the company tax rate to 29 per cent, the first cut in a decade.
But she didn’t say this would be a small cut, of one percentage point, nor did she say the federal government was planning to impose a brand new tax on the mining industry.
Ms Gillard said the government would be delivering high-speed broadband. She didn’t mention the high cost of the National Broadband Network, variously estimated at $36 billion or $43 billion, nor did she address Mr Stevens’ comment one week earlier that the NBN should be subject to a cost-benefit analysis.
Another boast was the government would deliver health reform, via a deal under which the states would hand over GST revenue so the Commonwealth can cover a higher portion of health costs.
The only problem is that the WA government has already rejected that deal, and with this week’s surprise change of government in Victoria likely to be a followed by a change in New South Wales and possibly other states next year, the whole deal is looking very shaky.
Finally the prime minister said: “2011 is the year Australia decides on carbon pricing”… if there is a broad consensus on the best way to put a price on carbon.
It was a speech that barely mentioned topics such as infrastructure investment, labour shortages, and rising energy costs – the issues that rank highly for business in WA, which constantly have to confront the challenge of prosperity.
