An open letter in support of further stimulus

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.

Conclusion

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.

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10 Responses to An open letter in support of further stimulus

  1. Ken Coghill says:

    Congratulations on your initiative. It is well thought out and highly credible. It deserves strong support and advocacy to the PM and other members of parliament.

    The most urgent is the third point – stimulation of investment in measures to ameliorate climate change. Averting the collapse of the environment on which mankind depends puts everything eles in the shade!

    No doubt the third point be further developed. For example, requiring builders to develop highly energy efficient designs within 12 months, with a subsequent ban on approval of any building application which failed those standards (the ban would be enforced using corporations powers). The development of design skills and the actual re-design would themselves generate employment. The standards would be based on the best practice world wide and subject to continuous improvement beyond the initial 12 months.

    Beyond the three points of the open letter, I’d like to hear some thoughts on how to move to a steady-state/stationary economy.

    Ken Coghill, Monash Governance Research Unit, Monash University (former MP & Speaker, Victoria)

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  4. Rafe Champion says:

    What about something on labour market flexibility?

  5. trubell says:

    I absolutely disagree with the suggestion to reduce compulsory super contribution!

    As it is, Australians are contributing nowhere near enough to super and to reduce an already abysmally small percentage, will only serve to make things more difficult down the track.

    If this recommendation was acted on, I would hope that many Australians would salary sacrifice the amount this amount instead. I certainly would!

    One can only wonder why these people would even suggest such a weird thing, unless it is aimed at reducing future salary claims as the additional 3% artificially inflates their stated income.

  6. Niall says:

    I second the comment of trubell. Fiscally and economically on a micro level, such a proposal is detrimental to individuals, as I point out in my post earlier today. Porposals 2 and 3 have merit, but superannuation MUST remain sacrosanct and NOT subject to deterioration for the individual for the supposed benefit of the whole. The latter is also highly debatable.

  7. Fred Argy says:

    I too disagree with your comments on super, although for different reasons. It might be acceptable to reduce super contributions (although it could prove disruptive), but your idea of increasing the figure to 12% is laughable – at least on its own, without your previous reservations about changing the tax system to make it fairer.

    As you might expect, I am happy with deficit financing of investments in infrastructure and I accept the need for a highly cost-effective means of reducing emissions, although they are currently under review.

    But there is one thing you have forgotten Nicholas. We already have three attacks from monetary policy (correct the price of money, attack on liquidity, atacking fear of adequate capital and solvency, including independent variants of quantitative easing). And you have included elements of fiscal policies.

    What you overlook is the one thing you have been going on about for years – the complete breakdown of traditional information news, about ratings agency, real estate agents, risk assessment model, what bank books say, etc.

    What can be done about accounting standards or required disclosures to help the stability of financial institutions? Can you give people greater incentive to improve their remunerations? What sort of regulatory changes are needed to address non-bank institutions? How do you give executives a greater incentive to plan longer term?

    This is a big field – all ready for you.

  8. Putting aside the recomendations by Nick & friends (which I mostly think will be ineffective), I’m curious about the question by Coghill.

    The former MP and current Monash academic is asking how we could get to a steady-state economy. The question is baffling. Of course we never could. But more to the point, we would never want to!

    The only way we could reach a steady state is if all knowledge and all preferences stayed constant.

  9. Tel_ says:

    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.

    If the government had a reliable way to measure emissions, and they wanted to reduce those emissions then they would most effectively spend the money by directly paying for emission reduction. That’s what they sort-of tried to do with their carbon credit scheme, except that… they discovered they could not really measure emissions, the formula for issuing carbon credits was unfathomable (I never got issued with any) and the process was based on principle that the biggest polluter gets the biggest windfall (ensuring that everyone is encouraged to be as bad as possible before the credits are issued so they can win the “most improved” award afterwards).

    Using other types of investment incentive is fundamentally an admission that they have no idea how to measure emissions, and that carbon trading is too difficult. The result of this method is that some committee says, “we think X technology is green” then they dump money into X. After a short time, the industrial giants learn to stack those committees and teach them to say, “we think technology is green”. The environment doesn’t stand a chance.

    The most urgent is the third point – stimulation of investment in measures to ameliorate climate change. Averting the collapse of the environment on which mankind depends puts everything eles in the shade!

    Sounds nice, but we don’t actually know whether the environment is going to collapse, nor do we know which actions are the most effective ways to improve our environment. I’ve been watching people burn candles every “Earth Hour” and uselessly increase their carbon footprint. Now we have the big “say no to plastic bags” campaign where they try to get you to buy their “green bags” which are made out of spun polypropylene fibers (yeah, they are taking your plastic bags and giving you thicker and heavier plastic bags, good trick huh). The only action that is completely sure to improve the environment is population reduction and I don’t see too many people advocating that.

    Meanwhile we have a government living in constant fear of the smallest fuel price rise, handing MY tax money to the motor car industry (presumably too many people were catching the train, not enough buying cars) and encouraging them to build vehicles vastly more powerful and heavy than anyone needs with heavy (and toxic) nickel/cadmium batteries (which are evolving into flamable lithium-ion batteries). We pretend to believe in the “free market” so we can’t force people to buy small cars or motorcycles, but when the car makers fail to turn a profit and when vehicle drivers don’t want to pay a tax on their CO2 generation, we abandon the free market and decide to support key union pressure groups instead.

    Policies such as imposing a small carbon tax, and using this money to build cycleways and promote telecommuting would return a guaranteed reduction in CO2 at least from the perspective of burning less petrol (and people would also buy less cars). Direct investment into railway and bus infrastructure would have a similar return. We still wouldn’t know whether our environment was going to collapse, nor would we really understand the global CO2 cycle, nor would we know what effect that has on the weather, but we could at least give an accurate measure of how much fuel we were burning which might be a small step in the right direction.

    What we will actually do (and this is guaranteed) is find a bunch of feel-good causes, and promote those to provide smokescreen for the lack of clear thinking on any real solution. Then hope that someone else finds an answer (unlikely because none of them are in any better position) and ultimately just deal with the consequences of whatever happens.

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