The road to recovery: Restoring prosperity after the crisis

Managing the recovery, the productivity challenge, economic responses to climate change, the housing market, health care reform, the disadvantaged, and the Indigenous gap

(pages 25-29 of printed journal)

By Mark Wooden, Hielke Buddelmeyer, Paul Jensen, Guyonne Kalb, Guay Lim, Anthony Scott, Rosanna Scutella, Elizabeth Webster and Roger Wilkins

Background

In April 2002, the Melbourne Institute of Applied Economic and Social Research and The Australian newspaper joined forces to hold its first national conference designed to bring leading thinkers together to discuss the priorities for Australia's future economic and social reform agenda. That conference spawned a series of successors, with subsequent conferences being held every 18 months or so. The first five of these conferences were held against a background of strong economic growth and declining unemployment. Indeed, at the time of the previous conference, held in March 2008, 'the overriding domestic economic policy concern was to contain inflation by restraining the growth of demand to a pace more in line with the economy's capacity to supply the necessary resources.'² That said, it is also true that conference participants were very much aware of the possibility that growth would stall or even decline in the US - as actually transpired - and that financial contagion and global illiquidity could undermine prosperity in Australia. Nevertheless, the consensus was that our growing dependence on the developing world economies, especially China, would ensure that any slowdown in Australia would be temporary.³

It is now history that problems in the US market for housing loans ultimately precipitated a Global Financial Crisis that saw the world economy shrink in 2009. In Australia, the policy response was both large and rapid. Most notable has been the large fiscal response, including two rounds of cash handouts, and expenditure equal to about 5.5 per cent of GDP. The effectiveness of these policy responses was the subject of some debate at the 2009 conference, but what does appear beyond dispute is that the duration and magnitude of the economic downturn in Australia, both relative to most other OECD economies and to past recessions in this country, were relatively mild. There was no Great Recession in 2008/09 in Australia and, as Productivity Commission Chairman Gary Banks observed, within the short space between conferences - just 18 months - the Australian economy went 'from boom to bust to incipient recovery'.

It was thus against this background that the 6th Economic and Social Outlook Conference was held.

Managing the recovery

It was widely accepted by the participants that the crisis is behind us; and that the central objective for policy-makers now is how best to negotiate the bumps along the road to the next peak in the business cycle. As Reserve Bank Governor Glenn Stevens put it, the policy debate now needs to focus on how the road to recovery connects to the road to prosperity - an allusion to a previous conference theme.

Despite this consensus, it was just as clear that views about how best to manage the recovery were divided. Access Economics' Chris Richardson highlighted the impact of the fiscal stimulus on the budget deficit and the political difficulties involved in eliminating this deficit any time soon. Banks went further, suggesting that the infrastructure spending phases of the stimulus need to be rethought. His remarks were seized upon by the then Opposition leader, Malcolm Turnbull, who was scathing in his assessment of both the size and composition of the stimulus package. Similarly, ANU Professor Warwick McKibbin was critical of the package, arguing that the magnitude and speed of the response panicked markets and actually made outcomes worse, at least in the short-term.

In contrast, Ross Garnaut, Vice-Chancellor's Fellow and Professorial Research Fellow at the Melbourne Institute, was highly commendatory of policy responses, including not just the expansion of government spending, but also the Commonwealth guarantee provided to the banks and the interest rate policies pursued by the Reserve Bank. However, probably more than any other speaker at the conference, Garnaut was quite pessimistic about the future, urging for 'prudence' in future macro-policy making. He made a strong case for the need to restrain real per capita domestic expenditure. Indeed, he argued that Australia needs to 'go through a period with no real per capita expenditure growth at all'.

At the other end of the spectrum, Brian Fisher, of BAEconomics and a former Director of the Australian Bureau of Agricultural and Resource Economics, argued that Australia was still the lucky country and that long-term trends would continue to favour our terms of trade. For Fisher, the main policy message was the need to avoid impediments to foreign trade and investment.

The productivity challenge: competition, skills and innovation

There were differences in views about the extent to which policy settings need to curtail spending, but it was widely agreed that the macro-policy task would be considerably easier if productivity growth were higher. The importance of reviving productivity growth - which has been zero or negative in recent years - was a theme that was highlighted in a number of presentations, but especially those by Banks, Stevens, Victorian Premier John Brumby (who delivered the Conference's opening address) and Deputy Prime Minister Julia Gillard. Banks, for example, identified three priorities for aiding productivity. First, further reducing the levels of 'unproductive' industry assistance; second, removing the anti-competitive regulatory burden and avoiding adding new ones; and third, rethinking investment in infrastructure, particularly with a view to ensuring maximum returns from our investments.

Interestingly, Banks had little to say about innovation or education, skills and training, despite the fact that these are probably the two major drivers of productivity growth in the longer term. Gillard, on the other hand, emphasised the need for further reforms to the enablers of productivity growth, and she specifically mentioned not only anti-competitive regulation, but also education and broadband technology - a specific type of innovation. Similarly, Brumby acknowledged the importance of easing regulatory barriers and the benefits of improved information and communication technology - and especially high-speed Internet connections. He also stressed the importance of skills and training reforms.

The importance of the skills agenda was pursued in greater depth later in the conference. Philip Bullock, Chair of Skills Australia, highlighted the likely persistence of skills shortages, despite the economic downturn. He believed the shortages are unlikely to be alleviated through market mechanisms, at least not in the medium term. Very differently, Australian Industry Group Chief Executive Heather Ridout referred to the ineffectiveness of 'training on infertile ground' and specifically the failings of our education system in delivering basic literacy and numeracy skills. Collette Tayler, Chair of Early Childhood Education and Care at the University of Melbourne, spoke on the importance of investment in early childhood education, warning that current investment levels are dangerously inadequate. Tom Karmel, Director of the National Centre for Vocational Education Research, argued that a growing number of Australians are overskilled, in the sense that their skills are not being adequately used, although Andrew Leigh, from ANU, took a contrary view. The broader issue of innovation was also pursued in a dedicated session. However, the speakers here were critical of our past performance, arguing that - outside of the mining and agricultural sectors - Australia has patchy and poorly developed social, educational and financial infrastructure for sustaining an innovative economy. Realising this deficiency, the Labor Government has made an explicit commitment to improving Australia's innovation record, especially in manufacturing. The Minister for Innovation, Senator Kim Carr, spoke about how the Government had used the counter-cyclical Global Financial Crisis policies to enhance and broaden public innovation programs.

The Melbourne Institute's Beth Webster summarised the main factors present in the most successful industries over the last two centuries. These included a society that is adaptable, able to cope with change, with a high level of intergroup trust; specialist education and training institutions that are aligned with industry's needs; dedicated government-industry research institutes; and a well-developed informal network structure among members.

Economic responses to climate change

Another major economic policy issue on the agenda, both in Australia and elsewhere in the world, is climate change mitigation. It was inevitable that this issue, and especially the Government's proposed carbon pollution reduction scheme, would be the subject of considerable debate at the conference.

Senator Penny Wong re-affirmed the Government's commitment to an emissions trading scheme. She emphasised that it is not simply a matter of there being costs of acting - there are (larger) costs from not acting. She also noted that establishing a system soon was important for business investment certainty, something Brumby also stressed in his address.

McKibbin, on the other hand, while supportive of the Government's general approach to climate change, was critical of the proposed ETS, arguing that it does not allow for smoothing the cost of emissions abatement over time. He proposed an alternative model based on long-term emission permits with prices fixed for a number of years (say five), with a central bank maintaining price stability through permit trading.

Ross Garnaut made the point that the costs of Australia playing its part do not have to be large, though that will depend on the extent to which rent-seeking behaviours dominate outcomes.

The housing market

Another recurring theme at the conference was the impact of the growing imbalance between supply and demand in the housing market. Unlike many other industrial nations, and contrary to some predictions, the GFC did not result in a collapse in housing prices in Australia. Indeed, as noted by Bill Evans, Chief Economist at Westpac, housing prices have grown at an annualised rate of 20 per cent over much of 2009, and have been a major factor behind the recent interest rate hikes. The Grattan Institute's Saul Eslake attributed part of the reason for this to the Government's own policies, and especially the more generous First Home Owner Grant Scheme. Other speakers emphasised restrictions on land supply, while still others, and notably Stevens, spoke of the role of continued strong population growth. On somewhat of a dissenting note, Rismark International's Christopher Joye presented data on trends in real house prices, revealing that by international standards Australian house prices have not been rising particularly fast, especially if a longer perspective is taken.

However, housing affordability was an issue pre-recession, and it will remain prominent post-recession. Indeed, Eslake noted that the greater difficulties faced by developers in securing finance in the post-GFC world will only exacerbate future housing shortages. Housing affordability thus appears set to continue to deteriorate, something on which both Kieran Davies, Chief Economist of RBS Group, and Judith Yates from the University of Sydney, presented convincing evidence. Davies, however, argued that most households are meeting mortgage repayment obligations and will continue to do so in the face of modest interest rate rises. For him, the key factor for servicing debt is not changes in interest rates but changes in employment, and on this front the indicators are extremely positive. Yates, on the other hand, focused on the housing problems facing the most disadvantaged. These are low-income households who are in the rental market at the low price end, where shortages are most acute. Government policies to support home ownership do little to help these people; indeed they make the problems worse by placing upward pressure on rents. Recent Government initiatives in social and community housing will help, but as Australian Council of Social Services CEO Claire Martin observed, the additional 20,000 dwellings this initiative is expected to create is still a long way short of what is needed. Judith Yates produced estimates suggesting that there is an immediate shortfall of 90,000 units of social housing and, given current trends and policies, this figure could be expected to reach 150,000 within the next two decades.

Ultimately, there seemed to be near universal support for the need to expand housing supply, with the focus not so much on expanding the urban fringe, but on policies designed to increase medium density housing in inner city areas. There was also widespread support for the withdrawal of demand-side subsidies for home ownership.

Health care reform

One issue that is always on the conference agenda is health care. This is to be expected given health is so important for both worker productivity and individual well-being. Health reform, however, has always been something of a 'political hot potato'⁴ - the fear was that calls for reform made at previous conferences were falling on deaf ears. Such fears appear to have been unfounded, with the health care system set to enter a period of potentially wide-ranging reform - the first since Medicare was introduced in 1984 - thanks to a suite of major reform reports that the Government will respond to in 2010.

Tony Scott, from the Melbourne Institute, spoke on some of the challenges in the reform agenda, including the federal-state funding relationship. He argued that the proposal for 'Medicare Select', which involves consumer choice between competing health plans, ignores much of the international evidence which suggests that competition and social insurance systems lead to higher costs and poorer outcomes. In his view, focusing on improving performance through strong incentives and performance management for health care providers should be a key way forward. Mary Anne O'Loughlin, of the Council of Australian Governments Reform Council, argued that closer co-operation between the Commonwealth and state governments was already happening through streamlined financial arrangements, providing a solid basis for cooperative reform. In contrast, John Deeble, one of the architects of the current Medicare system when he was employed at the Melbourne Institute in the late 1960s, questioned the view that public hospitals are performing badly compared to private hospitals. Public hospitals treat more complex patients yet productivity seems to have improved more quickly than in private hospitals - while costs remained about the same.

The disadvantaged

Yet another recurring theme throughout the Conference was that, regardless of how serious the economic downturn was or how rapid our recovery, particular groups in society continue to require targeted assistance. This was at the heart of Claire Martin's presentation, but could also be detected in many of the other sessions dealing with unemployment, the Indigenous gap, social exclusion, the tax-transfer system and, as we have just seen, housing.

The extent of the broad problem was examined in a session on social inclusion. Rosanna Scutella, who holds joint appointments with the Melbourne Institute and the Brotherhood of St Laurence, for example, presented new data drawn from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, documenting the extent of social exclusion in Australia. The central feature of her analysis was how many Australians, while assessed as disadvantaged on one measure, were not disadvantaged on others. Overall, it was concluded that around four to six per cent of Australians are still 'deeply excluded'.

One group of particular interest, given recent events, was the unemployed, and in particular the long-term unemployed and those at risk of becoming long-term unemployed. Chief Executive of Jobs Australia David Thompson spoke on the prospects for the long-term unemployed, presenting a fairly gloomy assessment. While the recession is now past, the effects of the recession are likely to be felt by some for a very long time, and in his view, there is simply insufficient investment in active labour market policies to deal with this issue. In this connection, Jan van Ours, Professor of Economics at the University of Melbourne, urged caution, arguing that the international evidence indicates that active labour market policies can only have modest effects. However, he agreed that active labour market programmes, especially of the mutual obligation variety, should be an integral feature of a job creation policy.

The Indigenous gap

Like health care, a perennial issue at these conferences - one that has long vexed successive Australian governments - is the gap in economic and social outcomes between Indigenous and non-Indigenous Australians. Nevertheless, perhaps for the first time, there seemed to be a feeling that real progress was being made. Tony Abbott, who was Opposition spokesman for Indigenous Affairs at the time, observed that critics can no longer claim that poor outcomes are predominantly due to inadequate provision of health services. He argues that almost all locations with large Indigenous populations have dedicated Aboriginal health services, and that continuing poor health outcomes are more a function of low education, welfare dependency and lack of employment, which in turn are a function of failure of policy implementation at the community level. He advocated a new governance model, based on the Cape York experience, with far greater decision-making power for community issues placed in the hands of a network of lone administrators, perhaps advised by local elders.

Wesley Aird, Coordinator of the Australian Employment Covenant, on the other hand, noted that most Indigenous Australians lived in urban areas and hence the greatest potential for closing the gap lay in getting these people into work. On this front, Boyd Hunter, Senior Fellow at the Centre for Aboriginal Economic Policy Research at ANU, presented evidence indicating that the recent period of strong economic growth had been reflected in relatively strong employment outcomes for Indigenous Australians. Most strikingly, unemployment had more than halved over the last 15 years, and on current trends, the gap in unemployment might even be eliminated within three decades. However, this would occur in part because of continuing low labour force participation rates - hidden unemployment is a far more serious issue in the Indigenous population compared to conventionally measured unemployment. Hunter was also much more circumspect about the urban/rural distinction that Aird highlighted, arguing that the issues of a lack of access to jobs and the consequent high rates of welfare dependency are most serious in remote communities.

¹The Conference was sponsored by The Productivity Commission, the University of Melbourne, and the Faculty of Business and Economics(now Faculty of Business and Economics) at the University of Melbourne.

²Stephen Sedgwick (2008), 'New Agenda for Prosperity', Insights Vol 4 November 2008, p.42.

³ A short summary of the March 2008 Economic and Social Outlook Conference is provided in Sedgwick (2008).

⁴Dawkins, P. and Kelly. P. (eds) (2003), Hard Heads, Soft Hearts: A New Reform Agenda for Australia, Allen & Unwin, Sydney, p135.

Top ^

A short selective summary of the proceedings of the 6th Economic and Social Outlook Conference, held by the Melbourne Institute and The Australian newspaper on 5-6 November 2009.¹ Copies of many of the presentations together with a recording of each speech are available from the conference website.

The authors are all staff members of the Melbourne Institute of Applied Economic and Social Research. Prof. Mark Wooden is Professorial Research Fellow and Acting Director of the Melbourne Institute.

Volume 7 APRIL 2010