David French | 26/06/2009 9:40:27 AM

This Article was published in The Morning Bulletin on Saturday 6th June 2009.

Are you worried about the debt the Government is running up? Why is the Ruddster so relaxed about maxing out the government credit card?

During a downturn, people spend less and lose their jobs. Company profits and commodity prices fall. As a result revenues raised through GST, PAYG, company tax, and mining royalties all take a hit. Social security payments rise as more people go on the dole and remain on it. All of that is completely normal. According to press reports, at least $100 billion of the forecast deficit is attributable to those factors. To fix this cyclical aspect of the deficit, the Ruddster won’t have to do anything – stop the handouts and as economic recovery sets in, the surplus will return.

More importantly, this economic downturn might not be as serious as the Government and press would have you believe. As foreshadowed in this column, export growth supported by a weaker $A, the stimulus package, and improving sentiment in financial markets have all underpinned GDP. Rapidly improving economic conditions would be good, but not at the cost of the labour shortages and price increases we saw through 2006 and 2007.

Persistent increases in the price of goods and services result in higher interest rates, reduced purchasing power and increased costs for business. Tax bracket creep benefits the Government, but everyone else misses out. How can we avoid a spike in inflation?

The answer lies in producing more with the existing stock of capital and labour, so that increases in demand do not put undue pressure on prices. Australia’s productivity record has been poor since the late 1990’s. If Australia is to grow and maintain living standards, things have to become more efficient.

Investment in infrastructure, innovative ideas, such as conveying loaded trucks on trains, and electronic recording of patient records are some ideas that could be implemented relatively quickly. Selling off Government owned enterprises generally makes them more efficient as does eliminating duplication of services between the states and the federal public service.

The productivity problem is that there are not enough people for the jobs available. Freeing up markets and capturing efficiencies created massive employment growth in telecommunications and the airlines, while prices in those industries fell. Early implementation achieves the twin goals of staving off inflation and increasing employment. It is a critical agenda that the Government needs to begin working on now.

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