Australians, including the Federal Government, companies, all political parties, trade unions, professional groups and others in the community have been warned, the Reserve bank Governor wants to make sure we don’t fritter away the benefits of the second resources boom now dominating the economy.
We have done that in the past quite well, in the 1950’s and in the early 1980’s.
The latest boom started in 2006-07, was pricked by the GFC and global recession in 2008-09, resumed towards the end of last year and has accelerated this year.
Iron ore and coal prices are driving the surge, supported by higher prices for LNG, copper, gold and a host of other commodities.
This has happened despite the dollar’s surge this year to above parity with the US dollar and back to around 96-97 USc this week.
For how long this boom will go on, no one quite knows, but RBA Deputy Governor, Ric Battellino speculated in a speech last month that it could last for the best part of the next 20 years, all things being equal.
But the RBA sees the pressures the boom is unleashing in the economy, hence the surprise lift in interest rates on November 2 and expectations of more to come in 2011.
In his final speech for 2010 in Melbourne last night, RBA Governor, Glenn Stevens made it clear he sees the most important thing from the boom is to save the benefits.
His speech to a business dinner was entitled The Challenger of Prosperity.
In it his message was a taste of what will be the medium to longer term policy thrust for the bank from now on, the need to save the extraordinary surge in our terms of trade and not waste it.
It’s not the first time he has discussed this challenge in public, but the issue didn’t dominate as it did last night.
In fact he went so far as to suggest several ways we could increase our savings, and cushion the economy against the impact of the boom.
His message was especially directed at Government, because that’s where the big decisions can be made and the larger savings vehicles or ideas constructed.
"A prudent approach might be to use the current period of exceptionally favourable international prices to raise our saving, while maintaining a disciplined approach to ensuring there are no impediments to lifting productivity.
"Consumption deferred – private or public – can easily be enjoyed in future; consumption we get used to today is harder to wind back in the future if circumstances change.
"It is possible that this behaviour might be managed through the decisions of private savers.
"There might also be a case for some of it occurring through the public finances.
"That would mean accepting considerably larger cyclical variation in the budget position, and especially considerably larger surpluses in the upswings of future cycles, than those to which we have been accustomed in the past.
"There would also be issues of governance and management of any net asset positions accumulated by the government as part of such an approach, including whether it should be, as some have suggested, in a stabilisation fund of some sort."
Mr Stevens pointed out there had been a significant improvement in Australia’s savings, from the private sector.
"As it happens, there does seem to be a good deal of saving going on, thus far, in the private sector.
"A little-noticed recent statistical release was the annual national income accounts for the year 2009/10.
"In that release, the Australian Statistician has made some major revisions to the estimates for household saving (which of course is a residual arising from other major aggregates).
"The revision lifted estimated household saving by $45 billion, or about 5 percentage points of income, from the previous estimates.
"The net saving rate is now seen at some 9–10 per cent of income over the past year or two, up from about -1 per cent five years ago."
Now that is a very high rate for Australia and should put to rest that this country is incapable of saving, as many commentators and analysts have said in the past.
"In all the circumstances, considering what has happened around the world in recent years, more cautious behaviour by households is not surprising. Nor, I would argue, is it unwelcome," Mr Stevens said.
"With the stimulus from the terms of trade and the likely investment build-up, the economy can cope with more saving by households for a time.
"On the other hand, to expect it to absorb a major surge in consumption at the same time as an historic increase in investment is also occurring would be rather ambitious.
"In fact, we probably need private saving to remain on a higher trajectory, and we will also need public saving to rise, as scheduled."
And public saving is in fact saving by governments.
The cause of this surge in savings, and the need for it to go on and be added to by government, is the extraordinary rise in our terms of trade.
Mr Stevens said the rise in our terms of trade "is expansionary."
On all indications available, we are living through an event that occurs maybe once or twice in a century," he said.
"Higher export prices would prompt a build-up in investment supply, business investment and other expansionary effects that pose the challenge of structural adjustment to the economy.
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