“We’re back”.  That was one clear message from The Australian – Melbourne Institute “New Agenda for Prosperity” conference held late last week at Melbourne University.

The new Labor Prime Minister, Kevin Rudd gave the keynote speech to open the conference, Rudd’s ministers including Treasurer Wayne Swan, spoke, Professor Glyn Davis introduced the PM and was seen about the place, Professor Ross Garnaut gave a most important speech on the challenge of global warming, many other distinguished Australians  argued passionately about policy ideas.  The Labor faithful gripped and greeted each other with the standard “G’day mate”.

Henry’s “We’re back” theme is not intended to imply that either The Australian or the Melbourne Institute is a front for Labor ideologues.

Rather it is based on the fact that in Australia Labor is the party of ideas and policy reform.  For the ideas men and women of Labor, the long period of the Howard government was deeply frustrating.

Henry nowadays is an old conservative, having been like Brendan Nelson in his youth a member of the ALP. He was for a number of years privileged to participate in reform of Australia’s financial system, including the seminal change of floating the Australian dollar.  So he understands well the reformist, policy oriented focus of the Labor Party and of Labor governments.

John Howard’s Coalition government participated in these conferences but with far less enthusiasm.  Policy reform was not a major focus of the Howard government – the GST being an honourable exception and WorkChoices being a far less successful one.  The Coalition rode the resource boom and delivered both budget surpluses and limited cuts to rates of income tax.  Business regulations and Australia’s income tax act grew like topsy.

Australia’s economy was allowed to overheat despite the Coalition’s bold initiative to grant “independence” to the Reserve Bank and emphasise its inflation fighting mandate.

But, as Professor Garnaut in his keynote speech noted: "I am afraid that the inflationary pressures that have been building in the economy since 2005 are now deeply entrenched and will be difficult to remove,"

 How serious are the consequences of the Coalition’s overheating will not be known for some time – but watch the rate of inflation and the current account deficit as crucial indicators.

The Australian’s National affairs editor, Mike Steketee, in The Weekend Australian summarised well the various strands to the economic policy discussion at the conference – and the same newspaper naturally covered well most of the debates.

Steketee opened with the optimistic conclusion of most participants: “THERE is a good chance that Australia will avoid the recession that is starting to bite in the US but climate change and our flagging productivity performance present big challenges for securing our long-term prosperity”.

The quotes in the remainder of this article are from Mike Steketee’s presentation unless another source is specifically mentioned.

This was Mr. Rudd’s first attendance at this conference (while it was Mr. Swan’s and Professor Garnaut’s fifth).  Rudd “grasped the long-term challenge with both hands, putting the need to lift productivity at front and centre of his Government's approach. He has embraced the "three Ps" agenda - productivity, workforce participation and population growth - pushed by Treasury and the Productivity Commission to make the economy more productive and efficient.”
The trouble, of course, is that influencing the “three Ps” takes time and will be difficult, and the economy is overheating now.

“… when it comes to the short term, there is a question whether the Government has so bound itself up with its election commitments that the settings in its first budget, in six weeks, will be too loose, increasing the chances of further interest rate rises”.

Access Economics director Chris Richardson says that the government “has been deliberately pumping up the boom, with the result that the demand for goods and services is crashing against a supply unable to expand rapidly enough”.

The question is whether the tax cuts promised by Howard and endorsed by Rudd will add to the problem of overheating.  This is a core promise and will help lift workforce participation (although not quickly or greatly on their own), and the tax cuts will come as promised.

Other Rudd government initiatives to raise workplace participation will include increasing workforce skills and provision of more affordable child care.  More important would be reforms to prevent the combination of welfare payments and tax from discouraging people from taking up paid work
This is an old theme for the Melbourne Institute and Henry will say more on this below.

On the third “P”, it seems clear that productivity growth has slowed substantially.  While there are some short-term influences, such as the drought and new investment in mining infrastructure in advance of additional sales, the productivity decline is arguably due to the relatively small number of productivity boosting initiatives by the Howard government.

Mr. Rudd has adopted the conclusions of Treasury's second intergenerational report:  to achieve the same improvement in living standards as in the past, productivity growth will have to rise to 2.25 per cent and be maintained for 40 years.
 
Partly this will come from the reform of “bloated” bureaucratic machines.  Henry does not recall anyone suggesting the removal of one layer of government, incidentally, although Treasurer Wayne Swan talked up the revamping of the work of the Council of Australian Governments as "the crossing of a significantly new reform frontier".

Steketee continues: “Beyond the headline issues of health and water at the COAG meeting in Adelaide this week, the Prime Minister and premiers have advanced this agenda on a broad front. The question is whether the improved atmosphere among the all-Labor caste of leaders will overcome the frustrations of federal-state co-operation and co-ordination, which for the past 15 years has led to glacial progress at best”.

Policies to raise productivity will be pursued but, as Ross Garnaut pointed out: "... all the productive responses take a long time to have an effect."
 
Welfare reform is the debate we have to have, and is the area that the coalition government shirked most thoroughly.  “The reality in an age of unprecedented prosperity is that 1.8million Australians are receiving government income support: in round figures, 700,000 on disability support pension, 600,000 on parenting payment for sole parents and 500,000 on unemployment benefits. Only 300,000 of the total are in any form of part-time employment”.
 
The Centre for Independent Studies' Peter Saunders is Australia’s leading reform warrior in this area. At the conference – as at earlier similar conferences - Saunders confronted the Government with an alternative to the conventional wisdom that we need to invest in people to improve their skills and make them more attractive to employers. Many people will not benefit from training, he says.  But cutting the minimum wage by 20 per cent would generate 100,000 new low-skilled jobs.

Naturally, this suggestion always generates a storm of protest.  To make such a policy more acceptable, Saunders and his fellow market reformers say there should be cuts to income tax for unskilled workers on low wages.

As at previous conferences in this series, the problems of indigenous Australians were discussed passionately. 

Galarrwuy Yunupingu spoke passionately about his people’s ownership of the land and the need for land owners to be allowed to make use of the land to extract far greater returns.  My notes were extensive and at this point I quote from them rather than from Mike Steketee’s account of the conference.

Yunupingu said “I am a big landowner but I do not get treated with the respect of non-Aboriginal landowners”.
“I remain locked out of the wealth”.  His people get royalties but this is not “real economic activities”. 

The current dependence on welfare is unacceptable.  “The little ones must get to school, but what is there for the little ones when they are educated? “

Mainstream Australia must “Lock in the rights of the first nations, give them the respect that is so overdue”.

Other speakers on this topic were equally passionate, and clearly the debate is moving.  Minister Jenny Macklin had just come from Arunkun “as tragic a place as one can find anywhere in Australia”.

Macklin echoed Yunupingu’s views when she spoke of the “abiding and pervasive loss of purpose” in so many remote settlements.  Macklin said that the problems of Aboriginal Australia had been “generations in the making” and cannot be fixed quickly or easily.  She said more than once that current policy is bi-partisan, and Henry adds that Mal Brough’s dramatic intervention in the Northern Territory must be seen as one of the Howard government’s finest contributions to the psychic health of Australia.

Clearly, however, there is massive progress needed and we are only now starting out.  Henry is far from confident that the diagnosis is right yet, though fixing health and education, providing civilised accommodation and finding ways to protect people from drug, alcohol and sexual abuse are obvious things that can be greatly improved.

The overarching objective must be to restore a clear “sense of purpose” for Aboriginal Australians and others locked into a self-defeating cycle of poverty and dysfunctional economic and family culture.

To return to Mike Steketee’s report: “Clouded by interest rate rises, global financial turmoil and the debate about our future, it is easy to lose sight of the dimensions of the Australian prosperity. Garnaut told the conference dinner: ‘The times are better than optimistic Australian economists of my generation once, a few decades ago, thought they would ever be ... Remarkably, we are just entering our 18th year of economic growth, by far the longest period of unbroken expansion in our history’.

Continuation of the China-India boom will maintain, even increase further, the extraordinary boom is Australia’s terms of trade that has so transformed our prosperity and potential prosperity.

“Garnaut points out that this extraordinary burst of prosperity also has brought forward the risks of serious climate change. ‘Australia is perhaps the most vulnerable of developed countries both because of direct impacts and because we will be affected more than other developed countries by stress in neighbouring countries," he says. Banks describes the mitigation actions that will be required "as possibly the biggest regulatory challenge Australia has ever faced’.

(Henry’s report of Garnaut’s presentation is linked here.)

Mike Steketee concludes: “The challenge for government is to avoid being seduced by the idea of a never-ending boom and instead plan for a future in which prosperity is less certain, the population is ageing and climate change bites hard”.

Previous reports in this series are linked here.

Hard heads, warm hearts, 2002.

Equality and opportunity, 2003

Sustaining prosperity, 2005