Here’s an open letter to the Prime Minister proposing further stimulatory measures by the following signatories which is receiving some coverage today.
Tony Cole, Saul Eslake, Allan Fels, Rod Glover, Nicholas Gruen, Ian Harper, Tony Harris, Mike Waller
Dear Prime Minister,
We write as concerned Australians to underline the importance of swift and substantial economic stimulus to combat the current downturn in Australias economy. In doing so we highlight the opportunity such stimulus presents to accelerate progress towards longer term national goals.
Australian governments have had a knack for turning crisis into opportunity despite the short term political risks it can involve. Emerging from the recession of the early 1980s, the Hawke Government overhauled wages policy and opened the Australian economy to the world. Following the recession of the early 1990s, the Keating Government accelerated competition policy reform. And the Howard Government pursued tax reform through the last economic downturn in our region. All these reforms, conceived and born in hard times, underpinned our subsequent prosperity.
Your Government should vigorously resist the global economic slump using all policy levers at its disposal. Monetary policy is being deployed aggressively, as is appropriate. However, its full impact will take time to develop and at a time of great uncertainty, particularly in our financial markets, its effect may be somewhat muted. The Governments initial fiscal initiatives to stimulate consumption, housing and local infrastructure will certainly help. But much more is needed.
Fortunately, Australia enters these difficult times in a far stronger position than many other countries. Our public sector balance sheet is effectively debt-freewe have salted away around $70 billion in surpluses over the past decade. Even starting from weaker financial positions than ours, other countries plan to run large budget deficits, possibly for some time. We should have no hesitation in doing the same for as long as necessary. Other countries also plan to expand government borrowing to fund public investment.
We agree with the OECD that short-term stimulatory initiatives should be timely, targeted and temporary. However, we suggest a fourth criterion of action: wherever possible, policy measures should advance longer-term national goals, including reinvigorating our flagging productivity growth, mitigating climate change and tackling economic challenges posed by Australias ageing population.
We have a chance to make a virtue of necessity. We should take the opportunity presented by straitened economic times to take some hard decisionsdecisions which we found too easy to put off when times were rosier but which, sooner or later, we must face anyway. We ought not to push them to one side yet again.
We propose three strategies for a second package of stimulatory measures:
- a one-off downward adjustment to compulsory superannuation contributions to free up funds for short-term consumption combined with an acceleration of contributions towards a target of 12 percent as the economy recovers;
- a sustained program of nation-building public investment, funded by additional public borrowing, to modernise Australias ageing economic and social infrastructure; and
- targeted temporary assistance to our households and businesses to improve their energy efficiency and help them adjust to climate change.
1. Superannuation flexibility
Policy faces a double challenge: to increase savings in the long-term while stimulating activity in the short-term. Compulsory superannuation gives us the tools for a uniquely Australian solution to this challenge.
From next January the Government should reduce compulsory superannuation contributions from nine to six percent, requiring businesses to pass these savings immediately into employee wages.
The Singapore Government reduced employer contributions to its compulsory savings scheme to counter an economic downturn in the mid 1980s and again in response to the Asian financial crisis in 1999.
Higher take-home wages would immediately stimulate household consumption. Unlike other proposals, such as a temporary reduction in the GST rate, this policy would very likely improve the Budget bottom line as superannuation contributions are typically taxed at a lower rate than wages.
Access to preserved superannuation should also be relaxed immediately for those in financial distress or unemployment, enabling them to access a part of their accumulated savings to re-train or meet mortgage payments.
This should be done while reaffirming our need to increase national savings over the longer term (the Achilles heel of our economy continues to be our substantial and rising foreign debt). So the proposal to lower super contributions in the short term should be accompanied by legislation to increase compulsory contributions over the longer termspecifically by one percentage point each year from 1 July 2010 until 1 July 2015 when the target rate of 12 percent would be reached.
We should build in a provision to increase contributions towards the target more quickly if the economy shows signs of early recovery and, especially, if it threatens to overheat.
2. Building the nation: borrowing to invest and modernising government finances
Borrowing to invest
We welcome your recent statement that the Government is prepared to go into cash deficit if necessary to make major national investments. Even without the current extraordinary circumstances, this is a welcome return to the basic economics of government investment.
Borrowing strengthens a governments capacity to invest. Recurrent spending should generally be met by revenue from todays taxes (and preferably with some operating surplus through the cycle for contingencies). However, because investment builds future assets, it is both fairer and more efficient for investment to be funded in large measure by debt so that part of the financing cost is borne by the beneficiaries of the investment, i.e., future taxpayers.
The appropriate level of public investment is determined by the set of worthwhile investment projects available and the social opportunity costs of those investments compared with using the funds in other ways. In Australia our central government has no net debtmeaning that additional public borrowing will not appreciably increase borrowing costsbut we do have a deficit of high quality infrastructure and our population is growing.
So we have ample need to modernise our economic infrastructure. This will help to expand our productive capacity, support improvements to our education and health systems, and address pressing needs for cleaner energy and lower urban congestion.
We should expand the Governments three nation-building funds in infrastructure, education and healthfunded by new borrowings of up to 10% of GDP over the decade ahead. These funds should be deployed as rapidly as possible and in as counter-cyclical as fashion as is feasible.
Modernising government finances
In a similar spirit, the Australian Government should follow the lead of some businesses and accelerate payments to its creditors from 30 days to 7 days. Where appropriate, it should help fund State Governments to do likewise. Instituting just-in-time government payments brings a double benefit of improving long-term economic efficiency while improving cash flow to businesses large and small to help them weather the storm.
Where funding relates to State Government infrastructure, the Commonwealth should borrow these funds on behalf of the States. This is preferable to easing the States borrowing restrictions through the Loan Council, as it secures funds at the Commonwealths lower cost of capital.
All Commonwealth funding of infrastructure, including State Government infrastructure, should be accompanied by strong safeguards to optimise choice of projects. Further, States should be required to maintain capital investment effort at appropriate levels, operate their Budgets within agreed parameters, accelerate payments, and deliver national infrastructure reforms.
The Commonwealth Budget should report clearly the consolidated assets and liabilities of Commonwealth, State and Territory Governmentsdistinguishing between operating Budget balances and borrowing for public investment.
To reassure all Australians, and the markets from whom governments borrow, that the pattern and extent of government borrowing is fiscally responsible, an independent expert panel should be established to provide regular public advice to the Government on its fiscal policy stance, the management of its balance sheet and the restoration of budget operating surpluses at an appropriate pace.
Greater independence in the setting of monetary policy has clearly improved the quality of public debate and deliberation around this important policy instrument. We might expect the same from enhanced independence of the setting of the fiscal stance, distancing it as far as possible from day-to-day party political manoeuvres. This will be of particular benefit should it become necessary, which it may well, to run operating deficits for some time to avoid choking off a nascent recovery.
3. Preparing for Climate ChangeA Generational Retro-fit
The need for temporary economic stimulus presents an opportunity to prepare households and businesses for the carbon-constrained world we are building. If well designed and combined with appropriate pricing measures, a short-term investment in energy efficiency could prove a highly cost-effective means of reducing emissions.
Credible, independent studies suggest that incremental investments in energy efficiency are often deferred because they are not front of mind and can easily be put off. Creating a specific and temporary opportunity for action can thus generate substantial scope for large emission reductions at zero or negative net economic cost.
Australian households and businesses should be given around one year to commence such improvements and to qualify for generous government support. Alongside this time-limited carrot, tighter future regulation would be held out as the potential stick The purpose would be to pull forward cost-effective investments that both save money and reduce emissions. This would combine immediate stimulus to economic activity with the promotion of long-term economic efficiency.
Eligible investments to improve the energy efficiency of households and businesses would be based on rigorous analysis taking into account long-term economic and environmental considerations.
For households, this could include smart meters, insulation and solar hot water systemsmeasures that genuinely increase the value of homes rather than just prop up their market prices. For businesses, incentives could support major capital upgrades and new business management systems that improve energy efficiency.
We have laid out three specific examples of how creative economic policy can align the need for a second economic stimulus package with the need to tackle major policy challenges of coming decades. We need to look through and beyond as well as at the current crisis.
We would be happy, individually or together, to discuss any aspect of the proposals we have outlined.
Prime Minister, we encourage you to seize the opportunity provided by our current difficulties to build for the future. No doubt we must fight our way through these trying times; but we must do so without losing sight of the need to build a better future for succeeding generations of Australians.
Tony Cole, Head of Mercer Investment Consulting, Asia Pacific, formerly Secretary to the Treasury and Chairman of Productivity (then Industry) Commission.
Saul Eslake, Chief Economist, ANZ
Allan Fels, Dean of the Australia and New Zealand School of Government
Rod Glover, Formerly Senior Adviser to the Prime Minister and Director of Strategic Projects and National Reform for the Victorian Department of Premier and Cabinet
Nicholas Gruen, CEO, Lateral Economics
Ian Harper, Senior Consultant, Access Economics and Professor Emeritus of the University of Melbourne
Tony Harris, Formerly Auditor General of NSW; Chief of Staff to Treasurer Dawkins, Acting Chairman of the Productivity (then Industry) Commission and senior official in the Department of Finance
Mike Waller, Formerly Senior Official for the Department of Prime Minister and Cabinet, Chief Economist, BHPBilliton, currently Director & Partner, Heuris Partners.