STEVENS AFR PHOTOGRAPH BY GLENN HUNT 3rd July 2013.
NEWS - Reserve Bank Governor Glenn Stevens speaking at an Economic Society of Australia Business Luncheon in Brisbane.

Reserve Bank Governor Glenn Stevens has highlighted some of the politically difficult challenges facing the Australian economy.

Busy scrapping for West Australian Senate seats, the last thing politicians want is a reminder of the politically unpalatable decisions ahead of them.

The stuff that’s been too hard for them to admit to the electorate, maybe even to themselves.

So it’s great timing then that the nation’s top two economic bureaucrats have served up just such reminders, within 18 hours of each other.

While pollies of all stripes were rapidly putting distance between themselves and the tax challenges highlighted by treasury secretary Martin Parkinson last night, Reserve Bank governor Glenn Stevens has pointedly endorsed his counterpart.

Two challenges

In a speech in Brisbane, Stevens said he wanted to highlight two major long-run challenges Australia faces beyond its immediate transitioning from dependence on resources investment:

First, fiscal sustainability. The debate here has, I would have to say, been overly- focused on budget outcomes in particular years. The real issues are medium-term ones. Put simply, there are things we want to do as a society, and have voted for, that are not fully funded by taxes over the medium term, as is starting to become clear in the lead up to the May budget. Here I refer to the very important speech given last evening by my colleague, Treasury Secretary, Martin Parkinson. Our situation is not dire by the standards of other countries but neither are the issues trivial. A conversation needs to be had about this.”

But apparently not by politicians just ahead of an election. Parkinson pushed the importance of broadening the GST if the federal budget is to be brought back to surplus as governments faces a raft of sharply rising costs. Many of those costs flow from the other major challenge Stevens focused on:

“Second, demographics. More people will be moving into retirement, and fewer people entering the workforce, over the years ahead.”

Future jobs

Stevens said that while current concern is about where future jobs will come from, the more likely problem in the medium-term will be that we won’t have enough workers:

“At present the number of new entrants to the labour force after finishing education each year exceeds the number retiring. Ten years from now those numbers could be roughly equal, absent a further rise in labour participation in the older cohorts. The question will be less ‘where will the jobs come from?’ and more ‘where will the workers come from?’ It's true that migration adds to the workforce as well, though migration also adds to the number of people not working and retiring.

“So demographic trends point in the direction of a smaller proportion of the population working, and a larger proportion needing support in their later years, even as other demands on the public finances for the provision of social goods increase.

“That looks like a pretty uncomfortable combination of trends.”

Stevens said the combination could only be reconciled by economic growth and higher productivity from those who will be working.

“That means making the system as flexible as possible and as encouraging as possible to innovation.”

Growing growth

The governor said the G20 agenda of increasing growth was very pertinent for Australia and provided a list familiar to those who have followed the RBA-Productivity Commission two-step:

“There is something of a tendency for governments, when asked to outline their growth plans, to list the things that they already want to do for political reasons, and then to claim that they will help growth. Some of those things may well help growth, but in fact many of the things that are needed to spur growth seem not to make it onto such lists. Things that boost competition in markets, that genuinely free up trade, that reform the governance and financing of infrastructure projects (and the pricing of use of infrastructure), that put retirement income streams on a sustainable footing, that re‑align incentives, that allow exchange rates to be more market determined, that encourage labour market mobility and participation, that enhance human capital, and that minimise distortions from tax – many of these often don't make in onto ‘to do lists’ in the way that perhaps they should.”

But that’s hard stuff for politicians to deal with in any more than generalities two days before an election.

Housing warning

The governor’s speech stayed clear of the currency talk that seemed to preoccupy market commentaries over the past week, but he did include another warning about investors putting too much faith in housing capital gains.

To use an old Simpsons line, he went close to saying something along the lines that if the south-east Queensland housing market couldn’t be a good example, it would have to serve as a dire warning:

“At present there are welcome signs that the Queensland housing sector is now lifting off the bottom. But this has been a long cycle. The price of Brisbane dwellings was historically about 60–65 per cent of those in Sydney. At their peak some years ago they reached about 85 per cent of Sydney levels. Now they are back to about 60–65 per cent of Sydney levels again. The cycle has taken about a decade. That the cycle can be so drawn out is a salient lesson, including for those outside Queensland. Even if a full-blown crisis does not eventuate, as was true of Australia, overdoing it on housing on the way up is usually followed by a fairly extended period of working off the problems.”

Cutting the gloom

But the governor wasn’t all doom and gloom. In the context of the G20 meeting scheduled for Brisbane in November, he returned to a familiar theme of local commentary being too negative:

“Australia can host this meeting with a strong reputation for economic performance. While you might not know it from the tone of much domestic discussion, most – if not all – of the G20 membership looks at our relative growth, financial stability, banking soundness and public finances with a good deal of admiration. This has given Australia, at the margin, just a little bit of additional credibility in putting forward our agenda.”

One might wonder who has been providing the gloomiest commentary on the Australian economy over recent years…but the Reserve Bank governor didn’t venture that far.

Michael Pascoe is a BusinessDay contributing editor.