Treasury's main fear: good times

TREASURY has warned the federal government that the economy has entered a mining boom running at close to full employment and manufacturing and tourism will have to shrink to make room for it. In an unprecedented burst of open government, Treasury yesterday released a censored version of its confidential "red book", briefing the new government on a range of policy problems and steps it should take.

While about 10 per cent of the report was blacked out, the rest treads on hot coals on a wide range of issues. It urges the government to move quickly and boldly to introduce an emissions trading scheme, tackle tax reform, increase consumer taxes, consider making patients pay more of their health bills and stop "propping up inefficient industries".

A key theme in the book is that Treasury fears the economy is at risk of overheating. It urges the government to make more spending cuts, close tax rorts singling out self-managed superannuation funds as "the tax minimisation vehicle of choice" and institute reforms to get more bang for buck.

It warns that Australia's huge foreign debt, housing debt and high housing prices make it vulnerable if foreign lenders lose confidence or if a new global financial crisis erupts when most Western countries have used up their means to fight it.

But Treasury's big fear is not that things will go badly, but that they will go too well. It fears the mining boom, coupled with the shortage of skilled workers, could drive up inflation and interest rates, intensifying damage to the rest of the economy.

"For an economy at or near full capacity, this requires a relative decline in trade-exposed sectors like manufacturing and tourism," it says.

It urges the government to slash industry support which bolsters jobs in Victoria and buy more defence equipment overseas rather than building it.

It also urges more "measures to lift labour force participation and productivity" to reduce pressure for interest rate rises.

"A number of policy settings will also require adjustment, tax in particular," it says. "It will be important to shift taxes away from domestic investment towards other less mobile tax bases such as land, resources and consumption."

It urges sweeping reforms of state taxes, scrapping stamp duties on house sales and business deals, reforming payroll and land taxes by removing exemptions, and introducing traffic congestion charges.

Treasury says our housing, water and infrastructure markets are "chronic failures" in need of reform. And it urges speedy introduction of emissions trading, saying it is "the most cost-effective way" to cut emissions, and the direct action both sides propose "will not do the job".