Labor turns the boom into a crisis

THE crisis now engulfing Australian manufacturing has been long predicted and much foreseen yet the inescapable impression is that our decision-makers have been taken by surprise and are scrambling to do something.

There are two unpalatable questions for Gillard Labor. Did Labor expect such job losses from the biggest terms of trade boom for a century? Or has Labor misjudged the boom and made a serious policy blunder?

After his company's announcement, BlueScope Steel chairman Graeme Kraehe said: "All this structural change has been forecast for several years, it is not as though it has suddenly hit us. In my view it is an indictment on everybody concerned: business, industry associations, governments and unions."

It is, in truth, a collective failure but not the type of failure that many assume. The problem, in essence, has been the inability to promote productivity-enhancing policy when the terms of trade were high and national income was surging - a hard task. That would have seen Labor thinking outside and beyond the boom.

The real policy schism is represented in remarks by Australian Industry Group chief Heather Ridout on behalf of manufacturing and Treasury boss Martin Parkinson in last night's Shann Memorial Lecture, with his views guiding Julia Gillard and Wayne Swan.

Ridout said: "AI Group has been warning for some time that the resources boom has not been going to plan and despite the predictions of optimists is not delivering the promised growth and related opportunities." She said the high dollar meant "our competitiveness has just been literally bombed out of existence".

Ridout's point is that Gillard Labor, relying on the views of Treasury and the Reserve Bank, has been too passive in the teeth of the high dollar and too ready to let the market make the adjustment, meaning manufacturing must make room for mining. She argued manufacturing "as a whole" faced the same pressures as BlueScope: weak demand, high interest rates, rising labour costs, absence of productivity gains, rising electricity costs and the high dollar. The fear is that worse job losses lie ahead.

When deconstructed, some of Ridout's elements are beyond government control and some of them are the result of explicit policy.

What is beyond government control is the 140-year terms of trade peak and the extent of dollar appreciation. The float is the key to the present situation because it means the economy adjusts to the boom by a higher dollar rather than higher inflation - this is a plus because it extends the boom's longevity.

The core point, however, is that many of the present problems are tied to Labor policy, priorities and flawed decisions. In November last year, former Treasury boss Ken Henry said the rise in the terms of the trade could constitute "the biggest external shock to our economy in history". Treasury says this structural change based on China and India will endure for decades with long-run opportunities for Australia. Parkinson put the Treasury line last night: the priority must be "a flexible responsive economy" and it is pivotal to "facilitate structural adjustment, not oppose it". That means rejection of protectionist measures to prop up manufacturing. Gillard and Swan are holding to this framework, so far.

Given the century-defining nature of this challenge, it had to be the supreme policy task for Gillard Labor this term. That meant making the boom work in all its dimensions. Yet this was not Labor's top priority. Since the August 2010 election its priority in terms of energy and political capital has been pricing carbon, not managing the resource boom of the century - a strategic blunder.

If Labor had no political option but to proceed with carbon pricing it should have been framed differently as just one part of the epic resources boom challenge.

Australia's history proves resource booms are saviours and destroyers and often end in tears. Since this boom emerged in about 2004 it has helped to finish two prime ministers and weaken a third. John Howard misjudged the economy's strength and ran on Work Choices; Kevin Rudd would have survived if not for his poor management of the mining tax; Gillard believed the strong economy would underpin her carbon pricing scheme. Gillard and Swan would dispute such criticism. "This is something we've understood for a long period of time," the Prime Minister said. The Treasurer pointed to the $3 billion skills package in the last budget to meet the terms of trade phenomenon.

Yes, the government has been acting. The critique, however, is it has not acted enough. Its political mismanagement of the mining tax in early 2010 despite the convincing case for a new commonwealth-based resources tax was a major blunder. Its corporate tax relief is too modest given cost pressures. Its re-regulation of the labour market has reduced flexibility and diminished productivity. Its instinct for government initiative means excessive red tape and regulation on industry.

Labor, in short, has had a competitiveness strategy but it hasn't been pursued with enough conviction or whole-of-government rigour. Ross Garnaut kept saying the adjustment from the resources boom would far outweigh the adjustment from the carbon tax. The irony of this truism is Labor's priority has been the smaller, not the bigger, adjustment. Now Labor is caught out. The nightmare Labor faces in 2012 is rising unemployment when the carbon tax begins.

The speech given yesterday by Reserve Bank deputy governorRic Battellino shows the diabolical dilemma Labor faces - the mining boom proved to be stronger than expected; the economy overall proved to be weaker than expected with demand falling away; yet inflation is likely to be higher than envisaged. So in Australia's two-speed economy, the fast lane got faster and the slow lane got slower. The miners got fatter profits and the manufacturers had disappearing profits.

Gillard's reassuring words conceal a government trapped by forces that demanded an earlier and stronger policy response. Gillard said yesterday that manufacturing had a "bright future" but that Australia's economy was undergoing a "transition". Ridout jumped on her. "Transition to where?" she asked. Ridout wants a transition around a manufacturing strategy but Parkinson wants a market transition that accepts the Asia-driven structural changes in our economy. Gillard is stranded between them.