Has Australia lost its appetite for economic reform?

By contrast, over the three years from March 2001 to March 2004, the volume of manufactured exports increased by a total of four per cent and services by one per cent, while rural and resources exports both declined.

Defenders of the complacent view point to a number of specific causes of weak export growth in recent years: the drought of 2002; the effects on tourism of SARS and the Iraq war in the first half of 2003; and the US recession of 2001.  Yet closer analysis shows that by the March quarter of 2004, the record grain harvest of 2003 was making its way through the export terminals. International tourism had recovered strongly in the rest of the world. Economic recovery in the US, unexpected growth in Japan and the China boom helped to make the March quarter perhaps the strongest yet for imports into Australia's export markets.

The best groups of applied economists in Australia are in the Reserve Bank of Australia and the Treasury. Such is their intellectual dominance that private sector economists ensure their own forecasts do not vary much from those of these authorities. But even my friends in the bank and Treasury seem to have succumbed to the great Australian complacency of the early 21st. century.

In the May 2001 budget papers, Treasury forecast export volume growth of five percent - said to be a "little below trend". The next year's budget reported the outcome at minus two percent. The same forecast for 2002-03 was six percent. The reported outcome was zero. The forecast outcome for 2003-04 was again six percent. The outcome was reported the next year as two percent. So what do we make of the latest budget forecast of eight percent growth in export volumes?

The contemporary data provide reasons to expect new disappointments in the budget papers for 2005.

Domestic demand has to be reduced significantly from its present trajectory for a start to be made on correcting the dangerous imbalances in the economy. The anticipated correction in the housing market can deliver only part of the adjustment that is required.  The necessary policy adjustment would be less damaging to long-term growth the earlier it came. It would be least disruptive if it were led by a tightening of fiscal policy. But this is hardly likely in the febrile heights of a year-long election campaign - or soon after a campaign has been won by one party or the other by promising that the easy times will continue forever.

If budget surpluses were increased for the duration of the excessive domestic demand, monetary tightening would still be necessary, but would not have to go so far. The increases in interest rates would be less the earlier they came. Leave it too late and the markets will impose their own sudden and disruptive solution. But judiciously timed monetary policy, too, is constrained by the year-long election campaign.  When it comes, the tightening of monetary policy will temporarily exacerbate the problem of competitiveness, by lifting the dollar (or, more likely, constraining the fall that would otherwise be associated with the weak external payments). Like it or not, sustainable, non-inflationary improvements in competitiveness may be preceded by what seems a backward step.

Is there no happy ending? Won't the China boom, with India to follow, avoid the need for adjustment by continuing to raise our terms of trade?

Without Chinese growth, we may have had a crisis before now. But the China boom of early 2004 is about as good as it gets. We will indeed be the lucky country if the terms of trade hold at their present high levels. The next period of sustained prosperity, like the one that is now fading, will be made in Australia.