I spoke in parliament today about the state of the Australian and global economy (and snuck in a few words of thanks to my staff, interns, volunteers and family).
Review of the Reserve Bank of Australia Annual Report, 29 November 2012
The review of the Reserve Bank of Australia’s annual report is an opportunity to reflect on the strength of the Australian economy and on some of the potential threats to that ongoing strength. If you had told any economic policy maker two decades ago that, three years after the biggest downturn since the Great Depression, the Australian unemployment rate would have a ’5′ in front of it, inflation would be in the middle of the target band and growth would be at around the long-term average, they would say that you were dreaming. But that has been the stand-out performance of the Australian economy over recent years.
We have an unemployment rate which is low by the standards of recent decades, although we should always work to get it lower. The dispersion of unemployment is also lower than it has been in recent years, meaning that the differences across regions are not as marked as they have been in other periods. There has been talk of various threats to this continued prosperity and I want to take a few minutes to go through some of those, drawing as I do so on the recent RBA Statement of Monetary Policy and a terrific speech by RBA Governor, Glenn Stevens, delivered to a CEDA conference.
One potential threat is the end of the mining boom, as it is said. This misses the fact that the mining boom is moving through a three-phase cycle. The first is the significant rise in prices—in some cases a doubling, tripling or quadrupling of prices—from their long-term average. The second phase, which we are now moving into, is a significant run-up in resource sector physical investment. There have been questions as to whether mining investment is coming off, but we have to put these into perspective. The long-run average of resource sector investment is one to two per cent of GDP. We are now arguing over whether resource sector investment is going to come off from nine to eight per cent of GDP. But, by historical standards, resource sector investment is extraordinarily high. When we are talking about projects conceived in an environment of extremely high prices, it is no surprise that some of those projects will not come to fruition. The third phase is an increased rate of extraction, which will be ongoing. The capacity of the mining sector has been possibly permanently increased as a result of the current boom, and that phase will continue for many years to come.
Another risk often raised is the potential slowdown in Chinese economic growth. I have just returned from an Australia-China Forum discussion in Beijing, which I found incredibly valuable. It was striking to me that, since I had previously visited Beijing in 2006, China’s economy had nearly doubled. As Glenn Stevens has pointed out, the increased size of the Chinese economy means that, even if growth slows from 10 per cent to, say, seven per cent, the total amount that China adds to world output every year will actually be higher than it was. He points out, for example, that seven per cent growth in 2013 adds more to global GDP than did 10 per cent growth in 2003. So, while there are of course risks—the Chinese housing market, political transitions, the management of state owned enterprises—I think we will see strong growth from China for many years to come.
Another risk sometimes raised is the higher household savings rate. I do not regard this, however, as a bad thing. The savings rate in Australia has historically been over the current 10 per cent, and I think the rebuilding of household balance sheets in the years following the global financial crisis has been no bad thing.
Another is sluggish productivity growth. Productivity has not in recent years been a standout performance, although we have seen with some of the recent numbers some indicators that productivity may be ticking up again. I would commend to the House the outgoing speech of Gary Banks, chair of the Productivity Commission, whom I praised in the House this week, and his discussion of policy reforms to boost productivity. I am particularly enamoured of his focus on good evaluation. As an advocate of randomised policy trials, I think this is an effective way of ensuring sustained prosperity.
A final potential threat to world economic growth is what has been called the US fiscal cliff. If the US goes off the fiscal cliff, estimates are that annual growth in the United States will be three to four percentage points lower in 2013 than it would otherwise be. Experts are suggesting that would lead to a recession in the US in the first part of the year. What indicators we have suggest that the chance of that is around 20 per cent, but that is clearly far too high.
Why is the US facing a fiscal cliff at the moment? Part of that is the intransigence of a Republican opposition that is unwilling to countenance any increases in taxation. I have seen from my second cousin, Alison Laughlin, who lives in Oregon, the importance of maintaining unemployment benefits in the downturn, but the fiscal cliff includes the end of Extended (Emergency) Unemployment Benefits in the United States.
I think there are two lessons for Australia in this. The first is that parties that have an ideological tax-cutting obsession are going to get themselves into terrible trouble—and we see that here in Australia where the coalition has an ideological obsession with scrapping the mining tax and the price on carbon. As a result, they have gotten themselves into a terrible fiscal hole with their budget costings. The second is that Australia’s system of superannuation, had it been adopted by the United States in the early 1990s, would have put the United States in a far better position than it currently enjoys. We think back to the early 1990s in Australia and the introduction of universal superannuation, which was hard fought. One can only imagine the fiscal situation Australia would be in now if people like the member for Mackellar, then Senator Bishop, had had their way and had blocked universal superannuation.
I pay tribute to the chair of the economics committee, the member for Parramatta, who gave a group of us a beautiful Liszt piano recital in the Great Hall this morning. I close by acknowledging the valuable work of my staff this year: Louise Crossman, Nick Terrell, Lyndell Tutty, Damien Hickman, Gus Little and Claire Daly; and earlier this year, Bob Harlow and Eleanor Cubis. I have been well served by a group of diligent interns: Phillip Metaxas, Matilda Gillis, Trudy McIntosh, Byron Hewson, Rebecca Mann, Michael Jones, Daniel Carr, Ben Molan, Tanya Greeves, Emily Murray, Kyneton Morris and Jack Brady; and by some hardworking volunteers: Barbara Phi, Ken Maher, Alison Humphreys, Shalini Arumugam, Joshua Turner and Samm Cooper.
Finally, none of us could do this job without the support of our families. I thank my extended family and, particularly, my extraordinary wife, Gweneth.
Mr Jenkins: Mr Deputy Speaker, I seek to intervene.
The DEPUTY SPEAKER (Ms Vamvakinou): Does the member wish to take an intervention?
Dr LEIGH: I would.
Mr Jenkins: I wish to ask the member whether parenthood had changed in his view as an economist about the way that the community should interact with financial matters.
Dr LEIGH: I thank the member for Scullin for that intervention. Parenthood has changed me in many ways, not least reducing the amount of sleep that I come to this chamber with. Also, like I am sure the member for Chifley has felt, it has made me perhaps a little softer around the edges in my thinking of the world than I might have been in the pre-parenthood years.