Some counterpoints on Kevin Rudd’s Q&A economics
I enjoyed being part of the panel on Monday night’s Q&A program on ABC TV. It was good to be part of a thoughtful, not unduly earnest, discussion about some of the key challenges Australia faces over the next few years – how to lift educational outcomes, boost productivity, create more flexible workplaces and new jobs, build a post-resources-boom economy and pay for the services people expect their governments to provide.
The panel members had divergent views on these questions, as could be expected from a former Productivity Commissioner, a former Labor Prime Minister, a member of the Reserve Bank board and a Coalition frontbencher. But these were expressed respectfully, with a focus on policy rather than politics.
Perhaps Kevin Rudd and I could have spoken with greater brevity (providing Judith Sloan and Heather Ridout with more airtime) but the show otherwise was a solid example of television engaging with complicated issues in an intelligent way.
Long-form current affairs television isn’t footnoted or fact-checked, however, and I want to briefly respond to three of Kevin Rudd’s contributions with evidence that tells a different story (or at least offers a balancing point of view).
The Resources Tax and the Exchange Rate
Mr Rudd stated his 2010 proposal for a Resources Super Profits Tax (RSPT) was in part designed to “deal with Dutch disease” – the strong exchange rate arising from a booming resources sector, which makes it harder for other trade-exposed industries to remain competitive (or, more colourfully, “is strangling the life out of other sectors”). He claimed the RSPT could have “put a dampener on the massive…activity in the Australian dollar” and the “super-excited state of the resources sector, which was killing the rest of the economy.”
Later Mr Rudd claimd there were “forty years of academic research into the Dutch guilder in the 1960s” to back his view.
There have indeed been forty years of research in this area, with the earliest and most influential contributions coming from two of Australia’s most eminent economists: ANU’s Bob Gregory and the University of Melbourne’s Max Corden. Both have recently updated their work and examined the current resources boom and its effect on the rest of the Austalian economy.
1976 Bob Gregory paper:
1982 Max Corden paper:
2011 Bob Gregory paper:
2012 Max Corden paper
In April I was honoured to participate with both men in a Melbourne Institute discussion hosted by the ANU about the resources boom and high exchange rate. During that discussion Max Corden explained in detail the theoretical basis for his finding that the imposition of a new tax on the resource industry’s profits would not alleviate upward pressure on the Australian dollar
And as I noted in my contribution, the harsh truth is that as Max and most other mainstream economists believe there is very little which can usefully be ‘done about’ a strong currency arising from high commodity prices, with one exception. That is, as I said on the show, a substantial tightening in fiscal policy relative to where it otherwise would have been (and resultant reduction in aggregate demand). This provides the commodity exporter’s central bank with more room to loosen monetary policy (and reduce the positive interest rate differentials which would otherwise tend to support the exchange rate).
Here is my April 2012 speech which deals with the dutch disease issue: http://www.malcolmturnbull.com.au/uncategorized/a-high-exchange-rate-should-we-be-concerned-what-should-be-done-2/
As for forty years of research about the Dutch guilder, Mr Rudd need not have ventured any further than page 4-21 of Wayne Swan’s 2011-12 Budget Paper 1 for the Treasury’s account of the reality that, far from permanently eliminating manufacturing and other export industries, North Sea oil and gas exports from the 1960s onward had only a temporary effect on other traded parts of the Netherlands economy:
“International evidence suggests that these concerns around Dutch disease tend not to apply to advanced countries. It is possible for these countries, with the right institutions and policy settings, experiencing a temporary surge in their resources sector to reverse boom induced structural adjustments. This was the case even in the Netherlands…Dutch manufacturing declined during an intense period of energy resource extraction. This period of intense resource production ended in the early- to mid-1980s, coinciding with an international economic downturn. Subsequently, Dutch manufacturing exports rebounded, both as a share of GDP and as a share of total exports. Manufacturing exports continued its resurgence in the 20 years following the Dutch disease period — reaching nearly 40 per cent of GDP and around 70 per cent of total exports in 1997. This period was also matched by solid long-term per capita GDP growth — matching and, for long periods, exceeding average growth in the OECD.”
There is no question the high exchange rate is making life much tougher for Australian non-resource exporters and import-competing industries (although the dollar is not the only factor in play – high input, tax and regulatory costs and the less flexible labour market resulting from Labor’s Fair Work Act are also important).
But pretending there is a simple policy solution to profound stuctural forces in our economy doesn’t help anyone. And by increasing Government spending by $100 billion a year since 2007-08 (even after most of its temporary stimulus measures have run off the Budget) Labor has shown it doesn’t have the spending discipline for the only policy approach which might work.
Australia’s Net Debt
Another claim Kevin Rudd made forcefully last night is that Austalia “has the second lowest net debt in the advanced world”. Underlying this assertion is the reality that, as we all understand, Australia has largely avoided the very high levels of gross and net public debt which have been run up over the past five years in most advanced countries due to recession and costly financial bale-outs.
The IMF reports net general government debt in Australia will peak at just over 12 per cent of GDP in 2013.
In contrast, according to Statistical Table 4 in the IMF’s October 2012 Fiscal Monitor, net public debt for 2012 will average 89 per cent of GDP across the G-7 economies, and 83 per cent of GDP across those advanced nations which are members of the G-20 (nine large advanced economies including Australia plus the European Union as an entity in its own right).
(It is worth noting net general government net debt is only 24 per cent of GDP for emerging market economies in the G-20 – the era when excessive public indebtedness was an afflication far more common in the developing world rather than the wealthiest economies is long gone.)
So the general point that Australia has relatively low public debt by the standards of other advanced economies is correct. For that we can largely thank the zero net debt and $45 billion of cash at the bank left behind in 2007 by the Howard Government, and a well-regulated banking system which averted any need for taxpayers to fund a massive recapitalisation (as in many other countries, most famously Ireland).
But Mr Rudd’s claim that Australia’s public debt is the “second lowest” is not correct.
According to the IMF, at least five advanced economies have less net debt than Australia in 2012: Denmark, Estonia, Finland, Norway and Sweden. If we are looking at 2010, the year when Mr Rudd left the prime ministership, New Zealand joins the list. And if we consider advanced economies which only report gross (rather than net) debt figures and consider their financial assets, then Singapore and Hong Kong SAR also are in a better position.
So in fact Australia is in the lowest-debt quartile of the 30 economies the IMF considers advanced, but only barely – we are certainly not “second-lowest”. And as IMF Statistical Table 12a (“Structural Fiscal Indicators”) reveals, while Australia’s Budget position averaged a surplus of 1.6 per cent of GDP in 2002-2007, the five years before the GFC, it is projected by the IMF to average a deficit of 0.6 per cent of GDP in 2012-2017, the next five years.
There is no dispute however that the GFC led to a very large fall in cyclical revenues, and that the current phase of the mining boom is also characterised by forces – lower capital gains tax collections and depreciation write-offs by resources companies that are profitable but investing heavily – which are restraining revenue growth normally seen at this point in the cycle.
But regardless of whether one believes the deterioriation in the structural budget position that has occurred under Labor is justified or not (the Coalition has made its view that both deficits and resulting debt should have been substantially lower over the past few years) exaggerating Australia’s relative position, favourable as it may be compared to some countries with which we often like to compare ourselves, doesn’t assist the debate over fiscal policy ahead of us, which will involve tough choices.
IMF Fiscal Monitor: http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf
Asked about the Gonski report into schools funding, which suggested an extra $6.5 billion a year was needed to improve underperforming schools and create a more equitable education system, Kevin Rudd said extra spending on education needs to be “near to the top of the spending priority list”. To be fair this was also the premise of the question he was answering.
Heather Ridout’s point that Australia cannot afford not to invest efficiently in education if we want an economy that supports our high relative living standards was on the money. But so was Judith Sloan’s remark that education spending per student in after-inflation terms in Australia has already risen 40 per cent over the past decade, yet according to the OECD PISA rankings our outcomes (as measured by standardised tests) have declined from among the strongest in the world in 2000 to still fairly good in 2009, but well behind a leading group of five school systemes (four of them in East Asia).
The Grattan Institute held a conference in February 2012 that examined four high-performing school systems in our region (Korea, Hong Kong, Shanghai and Singapore) and wrote a report on what it thought we could learn from them: ‘Catching up: learning from the best school systems in East Asia’.
That report includes the following comments underlining the point that success in schools is not all about money:
“Today’s centre of high performance in school education is East Asia. Four of the world’s five highest-performing systems are Hong Kong, Korea, Shanghai and Singapore…in Shanghai, the average 15-year old athematics student is performing at a level two to three years above his or her counterpart in Australia, the USA, the UK and Europe. In recent years, many OECD countries have substantially increased education expenditure, often with disappointing results. Between 2000 and 2008, average expenditure per student rose by 34% across the OECD. Large increases in expenditure have also occurred in Australia, yet student performance has fallen. The global economic crisis demands budget cuts. Yet education performance is vital to economic growth. As the world’s economic centre is shifting to the East, there is scope to learn from its most effective school systems…Success in high-performing education systems in East Asia is not always the result of spending more money. Korea, for example, spends less per student than the OECD average.”
Education is a topic that is vital to our future, and nobody questions that adequate resourcing by governments is a key part of the puzzle. But as well as focusing on scope to increase resources, we also need to focus on getting the most out of the money we already spend.