Tuesday, September 28, 2010

Don't listen too closely to Treasury, PM

AUSTRALIA is catching up with New Zealand. After an election, NZ departments put on the web their briefings to incoming ministers. Last Friday, Treasury became the first Australian department to do the same and what a briefing it was.

Treasury's red book, as it is known, tripped across almost every policy portfolio federal or state with criticisms, hints, warnings and reform plans. It was terse, just 80 pages of which 10 per cent was blacked out. But it was engrossing stuff: flawed but forceful, pointed and positive.

But pity the PM seeking guidance as to what should be her top priorities, when her government could be forced into a sudden-death election at any time. The red book is a great big Treasury wish-list, with no sense of priorities.

But some messages come through loud and clear: most of them important, a couple misguided.

As I read it, these are Treasury's priorities:

To persuade the government to make room for the mother of all mining booms in WA by shepherding resources finance and workers there from other states and industries.

Treasury argues (ludicrously) that the economy is now close to full employment. To avoid inflation, manufacturing and tourism must shrink so mining can grow. It urges the government to speed this by scrapping support for "inefficient industries", apparently meaning cars and shipbuilding.

If adopted, this advice would shut down car manufacturing in Australia: the Ford plant at Broadmeadows, the Toyota plant at Altona and the Holden plant in Elizabeth, SA, where unemployment is already 19 per cent.

Treasury offers no proposals to address the devastation this would cause in Melbourne and Adelaide. It seems to assume that the unemployed workers would migrate to the WA mining towns.

The projected budget surplus in 2012-13 is uncertain. If the world economy slows and mineral prices fall, it might not happen. Treasury wants the government to cut spending and resist pressure for tax cuts, both to secure the surplus and to generate savings to pay for difficult reforms.

As Access Economics director Chris Richardson puts it, the government's surplus forecast "is a pure punt that China and India will keep growing faster than the world's miners can keep digging deeper . . . If that punt is wrong, then Australia and its budget have big problems ahead."

Australia needs to introduce emissions trading as soon as possible. It is clearly the cheapest way to reduce emissions. And without it, we will not reach the bipartisan target to reduce emissions to 5 per cent below 2000 levels by 2020.

Tax reform must be tackled hard, with reform of state taxes, taxes on investment income, trusts, superannuation (especially tax dodges by self-managed super funds), welfare traps, and simplification as priorities.

Welfare reform to increase workforce participation is a priority. But Treasury warns that this is likely to cost big money, which could rule it out until the budget is stronger.

Co-operation between the Commonwealth and state governments is essential to reform. But Treasury's agenda is 100 per cent centralist. One thing it sees no need to reform is the mismatch of federal and state taxing powers, which has made the states beggars needing Canberra's money to do their job.

There are many vague hints and warnings: unstated fears about the national broadband network; patients should pay more of their own health bills; the navy should buy its ships overseas; and private investors should build more of our infrastructure.

These issues are important for Australia's future, especially tax, climate change and the budget. Between 2000 and 2008, governments cut income tax far more than we could afford, badly weakening the budget.

Chris Richardson points out that income tax as a share of wages and salaries has fallen 25 per cent since 1999-2000, to its lowest level in decades. He warns that global supply of minerals will catch up with demand in future, putting minerals prices back on their long-term declining trend.

That means we will not be able to rely on taxing mining profits to fund the long-term entitlements we have created. The budget will be in trouble.

But the implications of a future minerals bust go well beyond the budget. As Ross Garnaut put it two weeks ago: "The resources boom is not sustainable". Mining prices and investment will fall sharply at some point, putting pressure on the budget and on the economy. And industries being weakened by higher interest rates and the high dollar might not be there to rescue us.

"We've been pulling resources out of other sectors of the economy," Garnaut told a Melbourne Institute lunch. "Other trading sectors will have been very substantially weakened when they will be asked to make a bigger contribution".

Garnaut cited tourism and education, but the same is true for manufacturing and agriculture.

Treasury wants an economy where we put all our eggs in one basket: mining. That will be more volatile, more recession-prone, and massively disruptive.

Wrong way. Go back.