Conserving energy at the core of politics

AUSTRALIA has conquered its historical curse. It has become good at managing its prosperity - but this challenge will only intensify with slower economic growth, struggling productivity, population ageing and new environmental tests.

AUSTRALIA has conquered its historical curse. It has become good at managing its prosperity - but this challenge will only intensify with slower economic growth, struggling productivity, population ageing and new environmental tests.

With the release this week of the Stern Report there is one certainty that runs contrary to the media hysteria. No Australian government, Liberal or Labor, will destroy Australia's comparative advantage in energy, undermine our export sector and impose the punitive price rises on petrol, electricity and other carbon products explicit in Stern.

This is the real message coming from John Howard and Kim Beazley. Both leaders reject a carbon tax outright, though Beazley's emission-trading model seems tantamount to a tax. Such caution is the foundation upon which Australia's policy will be conducted. It recognises that our primacy as an energy power imposes strict limits upon the necessary and serious stance Australia must adopt towards climate change.

The significance of the Stern Report is that it takes the global warming debate to its economics, its price effects and what de-carbonisation means. It is long overdue. This will transform the politics from fantasy to reality. Prepare for some shocks. They will only intensify when it becomes clear that Stern's (only) solution of an all-inclusive global emissions trading regime is a rich-nation European pipedream that won't happen over the next decade.

This imposes its own iron logic. Without a truly global regime, the cost of market pricing carbon becomes prohibitive.

The most bracing warning to the fourth economic and social outlook conference hosted this week by The Australian and the Melbourne Institute of Applied Economic and Social Research came from Brian Fisher, former chief executive of the Australian Bureau of Agricultural and Economic Resources.

"Stern has used very radical targets and he calls for a global emissions trading system over the next 10 to 15 years," Fisher said. "That is a laudable aim but in my experience it will be exceedingly difficult. And the price varies dramatically depending upon whether you have everybody in or only some people. The second, more likely scenario (not everybody in), involves something like a doubling of petrol prices and an increase of between 50-100 per cent in electricity prices.

"Should we tax Australia's LNG so China can burn more coal? Does it make sense to shut down or tax heavily Australian industries that are more carbon friendly than fossil fuel industries in other nations?

"We might actually make the climate situation worse. So it still makes sense from a climate change argument for Australia to export its energy to the rest of the world."

Climate change is about the non-European world, notably the Asia-Pacific. That world, led by China and India, will not compromise its historic industrialisation, transforming the lives of three billion people, without making its own calculations about such trade-offs and reaching conclusions different from Europe.

Carbon price signals will have to be incorporated into the global economy. For Australia, the way this is done is pivotal, given our global comparative advantage in energy products. This test is best framed as another challenge for Australia's boom: the theme of this year's conference.

In the mid-1980s The Economist magazine said: "Australia is one of the best managers of adversity the world has seen and the worst manager of prosperity."

This was Treasury Secretary Ken Henry's template to argue in his dinner speech that Australia had overcome the curse identified by the magazine.

The past 15 years showed its ability to manage prosperity, but Australia had to purge its instinct for "soft options".

"There is a temptation to think that we can indulge ourselves in consuming the fruits of this economic boom," Henry warned. "That this lucky country of ours can afford the luxury of the soft option. But in that temptation lurks an intergenerational tragedy: if we succumb to the temptation, we will impose an unnecessary burden on our children and grandchildren. Is that to be the legacy of this period of prosperity?"

Turning to economic policy, Henry issued a series of sharp warnings: that the policy task with an economy so stretched was to reform the supply side, boosting productivity and workforce participation; that calls for special handouts, tax breaks and subsidies that stoked demand must be avoided; and that Australia should accept the gains from trade in services and "off-shoring", and thereby repudiate any resurgence of protectionist nostrums.

This conference was shaped by three themes: the extent of the prosperity engendered by the boom; the great gains made by middle Australia along with an identification of the groups that had been left behind; and, most critically, the imperative to intensify reforms to sustain the prosperity.

Access Economics principal Chris Richardson said that from 1990 onwards, Australia had reversed the tide of history with a magnificent lift in its economic performance. "Australia's income per head is back at its highest level for about 50 years," Richardson said. "The result is that the Howard Government is experiencing a revenue surge unprecedented in the lifetime of today's middle-aged Australians." (Henry pointed out that Australia's living standards now surpassed all G-7 nations except the US.)

Ross Garnaut, of the Australian National University, highlighted the amazing way this occurred: Australia had enjoyed in succession a productivity-driven growth phase followed by a housing boom, and when the housing bubble sagged a China-driven commodities boom had taken over. Garnaut was an optimist on China, predicting its "strong growth will continue for a long period". That meant our resource prices should remain high for the first quarter of this century, an immense opportunity for Australia if well managed.

Ann Harding, director of the National Centre for Economic and Social Modelling (NATSEM) at the University of Canberra, said: "The boom has delivered. Average incomes have grown very substantially across the board. The middle income group has made the greatest gains. These are couples with children earning roughly $55,000-$80,000 annually."

Harding's results, taking account of inflation, show income gains for the middle group of about 30 per cent over the decade.

"The middle has done very well," she says. Households with children are doing better than households without children. The story is manifest: it is driven by Howard's family payments.

Her survey disputes the dictum that the rich are the big winners. Indeed, income gains in the top two deciles are 24 per cent. "The top has done roughly the same as the average income earners," Harding says. "The tax cuts of the last budget bolstered their position. Yet these tax cuts just brought the top up to the average. You can see why the Government did that."

The bottom decile shows a 25 per cent gain, though Harding has a query about the data here. The second lowest decile has the lowest gain but it is still 14 per cent over the decade. This group is heavily biased to pensioners and disability support pensioners and reflects population ageing.

"The most favoured household in social policy has been the traditional single-income family with children on middle incomes," Harding says. The next favoured group are older people with modest private resources, including self-funded retirees. Harding's survey shows those who have done least well are couples without children, single taxpayers on $25,000 to $50,000 annually and sole parents on welfare.

Harding sees the income surge being driven by three factors: higher wages, more jobs and households converting from single to dual incomes.

The unifying conference message was the imperative to renew reform momentum. Richardson said: "I think we can make the boom pay. We can do better than what we are doing now. The good times are rolling but the reforms are not. The risk is that the current boom is being squandered."

Garnaut's message is that Australia has the ability to avoid a recession. But the easy income gains from the housing and consumption booms are fading. Australia must get used to hard choices again. That won't be easy. It involves spending choices and deciding between tax cuts and lower interest rates. The task is to raise productivity again via reforms that boost education, training and skilling, deliver a flexible labour market and keep immigration strong.

Henry issued a de facto official warning: much of the reform agenda was conducted through the Council of Australian Governments and federalism was at a crossroads. It had to deliver more "than it has previously proved capable of delivering".

For Henry, there was a gap between political declaration and policy delivery. In a warning to governments, he said that "to date progress against commitments has been slow". In short, co-operative federalism was not performing.

Kim Beazley pledged to institute a co-operative federalism that went beyond states' "rights and wrongs". Revealing the influence of Victorian Premier Steve Bracks, the federal ALP leader said: "To me, the states are partners, Labor or Liberal. Partners in economic reform and national building." Beazley referred to estimates from economist Saul Eslake that the federal Government had an extra $263 billion over four years from revisions due to the commodities boom, and pledged to "a fresh wave of reform to build a modern, competitive economy".

This is important because the new reform agenda involves responsibilities shared by Canberra and the states. The reality, however, is that Australia is doing too little, too late. This is the overwhelming message and the evidence is persuasive. It is documented in two classic areas that demand new thinking: education and water.

Water reform is blocked by huge political obstacles. Presentations from the Wentworth Group of Scientists, parliamentary secretary Malcolm Turnbull and the Productivity Commission revealed a shared outlook: the need to establish a proper market for water. This means buying back water for over-allocated river systems, price rises to reflect the market, trading water rights between urban and city areas and focusing on the source of the problem, building more water supply.

The Nationals, the junior Coalition partner, opposes much of this Howard government agenda. The state Labor governments, hooked by politics and a misguided media, champion the wrong policy by squeezing demand instead of providing more supply. John Howard said earlier this year he wanted a revolution in thinking about water. Well, the revolution is not on the horizon. The drought has created a sense of crisis yet Howard has not seized this opportunity to outline a policy framework that challenges the old political thinking.

On education, the story is better but progress still remains incremental and piecemeal. University of Melbourne vice-chancellor Glyn Davis put both Howard and Beazley under pressure by announcing that the federal Government's university funding model did not work and undermined its declared goal of higher education diversity.

Davis said the model locked universities into extensive cross-subsidies of disciplines because it did not "cover the real costs of delivering a place in each discipline".

"That revenue should cover costs is, of course, far from an original idea," he noted rather drily.

"But achieving the goal of self-sustaining disciplines is an essential starting point if we are to move towards institutional diversity."

This is about university accountability and responsibility, goals the Howard Government is supposed to uphold. Davis recommended the Productivity Commission review the issue, mindful that once the gap between income and cost was defined the political problem remained of who would pay for the shortfall: government, students or universities?

On schooling, the most searching critique came from Labor MP Craig Emerson, who said that "in the 21st century, education stands alone as the paramount source of productivity growth". Yet Australia's effort was weak.

Emerson produced new data to argue some shocking outcomes: that one-third of students in 2005 did not finish high school; that almost 40 per cent of boys did not finish high school; that almost half of boys from disadvantaged backgrounds failed to finish high school last year. The usual quoted figure for Year 12 completion is 77 per cent. Of course, it is inadequate. But if Emerson is right, Australia is storing up huge social problems down the track.