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Macroeconomic policy challenges: Dilemmas for the new Australian Government

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It is my pleasure today to welcome you to this Melbourne Institute Public Economics Forum on Macroeconomic Policy Challenges: Dilemmas for the New Australian Government.

We will be hearing from three eminent speakers: Professor Deborah Cobb-Clark, recently appointed Director of the Melbourne Institute and Ronald Henderson Professor at the University of Melbourne; Professor Guay Lim, Professorial Research Fellow at the Melbourne Institute; and Professor Ross Garnaut, Vice-Chancellor’s Fellow at the University of Melbourne.

Professor Cobb-Clark will be presenting news from the Melbourne Institute. We will have a short break and then I will ask Professor’s Guay Lim and Ross Garnaut to present to us on the topic of today’s forum. As usual, there will be time following their presentations for questions from the floor in a panel discussion which I will facilitate.

Having overcome the external shock arising from the Global Financial Crisis, we are facing again the challenges of an economy operating at near to full capacity and a terms of trade boom that reflects strong commodity prices. Some would say that this is the sort of macroeconomic policy challenge that you want to have.

At the same time, downside risks in particular are evident in the sovereign debt concerns focussed on Europe; uncertain, perhaps faltering, economic growth in the United States; and constraints in an increasing number of countries to make any greater countercyclical use monetary and fiscal policies. China also has domestic challenges, though not of the same kind; including avoiding overheating and continuing to deal with long standing non-performing loans.

These risks may manifest themselves in further financial instability, and, if that were to lead to another sharp contraction in world economic growth, in a weaker terms of trade for Australia.

Similarly daunting short-term challenges and risks will undoubtedly also be part of our medium to longer term macroeconomic environment, but in thinking that far out there are also several long-run structural challenges to worry about:

  • the rise of China and India and the continuation of trends known collectively as globalisation;
  • challenges in mitigating and adapting to climate change;
  • population growth and aging; and
  • the continuing transformative effects of innovation and technological change, including ICT.

Many of these trends will affect the rate of productivity growth; all would be more manageable with stronger productivity growth.

As the Government’s most recent Intergenerational Report made clear, for the decades ahead, as for the past, it is productivity growth that will drive growth in real GDP per person and hence material living standards as conventionally measured.

The IGR assumed that the 30-year historical average of 1.6 per cent would continue. That would imply stronger productivity growth than we have observed in the last of those decades, but weaker productivity growth than we experienced in the 1990s. Of course, this sort of performance is not a given – and no self-respecting economic policy adviser would want to accept that it is. But what if we really can do no better than that?

Our speakers today will focus on particular facets of these challenges. Professor Guay Lim will discuss some of the macroeconomic issues faced by a small open economy in an increasingly globalised world and the difficulties of maintaining balanced sustainable growth. Professor Garnaut> will discuss various ways – productive and disruptive – in which expectations of rising living standards without productivity growth might be resolved.