Economic reform:the new climb

The Treasury chief, Ken Henry, is urging another bout of 1990s style reform of the Australian economy.

And the Prime Minister Kevin Rudd is listening. He is even thinking seriously of making Mr Henry his own right hand man. That is, appointing him head of the Department of Prime Minister and Cabinet.

The economic reforms which hit Australia in the 1990s were, without doubt, the most difficult – and the most rewarding – that the nation ever seen. The $A was floated, tariffs were cut and the old arbitration system was put out of its misery. We can smile, now, at all that. Even laugh, when we recall that a visiting British journalist once described old arbitration as a device that was as certain to produce inflation as a bicycle pump. But those reforms, back in the 1990s, did produce much pain and severe imbalances, for a while. Inflation escaped. Home loan interest rates hit 17 per cent. And voters became very annoyed, indeed.

But those reforms did lay the foundations of Australia’s modern, vibrant economy.

So what happens, now? What does this potentially troublesome treasury chief have in mind this time, for Australia’s long suffering public?

Ken Henry is not saying. And there have been no leaks yet. At least not in any great detail. This is worrying. Especially as the times don’t appear right for reform. Not large scale reforms, anyway.

Inflation could escape, again. The US could well be on the edge of a recession.
And the new Rudd government has promised $31 billion worth of staged tax cuts.

Its razor gang, headed by Finance Minister Lindsay Tanner, is now searching for matching cuts, in government spending, to offset that risky burst of potentially reckless fiscal generosity.

Scrapping the promised tax cuts, though,  is not  feasible. Memories of what happened to the Keating government, after it deferred the second tranche of the now famous L.A.W. tax cuts, are still too fresh. Mr Keating’s wonderful idea of putting that money into voters’ superannuation funds, instead of paying it out in cash, just didn’t work. Ir was such a good idea, at the time, that a leading union official is suggesting that it be resurrected now.  He is recommending that part of the promised $31 billion in tax cuts, should be paid into superannuation funds, rather than in cash.  That, too, is an excellent idea. But it won’t wash with the government’s hard heads.
Running a disciplined government, in all these circumstances, will be very difficult, without the extra worries, that inevitably go with large scale economic reform. Especially as Mr Rudd, already, has his own, very full agenda. That is the one that he put to the Australian people, before the last election.

But the small signals, now emerging in Canberra,suggest that he won’t be stopping there.

So the 20-20 summit, that is to be held in the national capital in April, might well prove to be as critical, to the future of the Australian economy, as Bob Hawke’s 1983 summit.

Mr Rudd is letting it be known that he is looking for “dozens” of new ideas, from the 1,000 or so of Australia’s “best and brightest” who will be consulted, over that weekend.
“We are just at the Everest base camp,” Rudd is saying.

Expect a long, painful climb ahead, with uncertain results.

Building industry heading down

Australia’s building industry could be in for a tough time as the nation’s population ages.

Figures released by the Bureau of Statistics produced today show, yet again that building approvals for private sector houses fell December, plunging 4.9 per cent during the month, from the level of December 2006.

Approvals for private apartment projects, though, rose by 8.2 per cent, over rthe year.

This trend, which has been gathering strength for some time, reflects the movement of older Australians from homes they can no longer manage, into smaller, more compact apartments.

Thats isn’t good for the building industry, even though it is now getting more work in the high density sector.

There simply isn’t the amount of work in apartment projects that there is in a steady stream of orders for new houses.

Rising interest rates, too, are taking their toll on Australia’s builders.

Many young families, who might have been able to afford a new house, at the interest rates that prevailed, say, five years ago, are now finding that mortgage finance is beyond their financial reach.

The fresh rate rise, that the Reserve Bank is expected to announce at 2.30pm today, will just make things worse.

The bureau also reported today that Australian shoppers spent $23.6 billion in December, almost 7.6 per cent more than they did in December 2006.

It noted too, that a record 23 million ttravellers crossed Australia’s borders last year, a remarkable feat for a country with a total population of just 21.2 million.

Two private surveys, also released today, confirm that Australia is facing problems, even though its economy is still robust.

The National Australia Bank’s quarterly business survey suggests that business confidence is about to ease.

And another, conducted jointly by the Commonwealth Bank and the Australian Chamber of Commerce and Industry, concludes that business momentum is slowing.

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Rising inflation – and rates – force the government to alter course

Rising inflation has already forced the new Rudd government to “strengthen” one of its pre-election promises.

On the eve of another expected rate rise, the Treasurer, Wayne Swan and Housing Minister Tanya Plibersek, announced that cabinet had approved Labor’s promised First Home Saver Accounts.

And those accounts will be more generous than previously signalled.

The two ministers said, they will allow a couple on average weekly earnings, who are saving for their first home, by putting aside 10 per cent of their incomes, to accumulate a deposit of more than $85,00, in just 5 years.

Like the previous government’s first home owners’ grant, this is essentially a stop gap political measure, that could easily be overwhelmed by market forces.

That is, if house prices keep rising rapidly.

And there has been little sign, so far, of any easing.

In fact, figures released by the Australian Bureau of Statistics, just yesterday, show that the price of established homes, in most Australian capitals, are accelerating.

They rose by a hefty average of 12.3 per cent last year. That’s up from 10.6 per cent in the 12 months to the end of September.

Details of the new savings scheme are still being worked out.

Mr Swan said there would be a consultation paper, later this week, spelling them out.

He said, though, that the “improvements” would include:-

• Boosting assistance for low income earners through the provision of a minimum 15 per cent government contribution on after tax contributions of up to $5,000 and
• Delivering a streamlined up-front government contribution directly into accounts, rather than through a more complex system of salary sacrificing.

Predictably, the building industry has welcomed the plan.

Ron Silberberg, of the Housing Industry Association, said his body had first raised the concept of a first home owner super saver to help first home buyers raise a deposit and to reduce the current, risky reliance on 100 per cent plus loans.

The figures below, taken from the government’s announcement, show the government contribution levels proposed under the new scheme, which is expected to cost some $850 million over its first four years.

For more, see www.treasurer.gov.au

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