The economic challenges

This is all the more reason for the Government to avoid adding to inflationary pressures through fiscal policy measures, and to conserve its fiscal firepower for when it might actually be genuinely required.

There are also of course longer-term economic challenges facing the Government which cannot be ignored.

Climate change represents Australia’s greatest medium- and long-term economic and environmental, challenge. I accept the scientific consensus regarding the likely course and consequences of global warming. Like many other economists, I have some reservations about some of the calculations in the Stern Report, but those reservations don’t lead me to doubt the importance of taking actions to reduce the carbon-intensity of economic activity. I accept that doing so may entail greater change for Australia than for many other advanced economies given the relatively high carbon intensity of our existing economic structure. And along with four other economists working in the financial markets, last year I publicly supported policy interventions directed towards that aim, such as a carbon emissions trading regime incorporating a numerical target for overall emission reductions.

Although it may come as a surprise to some, I would also nominate rising inequality as a challenge which the new Labor Government would do well to address. The evidence suggests that the distribution of income, after taking account of the impact of Australia’s tax and social security systems, has not altered significantly over the past decade, except perhaps at the very top end; but that there has been a significant increase in inequality in the distribution of wealth. Over time this will, if unaddressed, accentuate the existing inequalities in the distribution of economic opportunities.

The market-based economy facilitates the creation of wealth and economic opportunity but does a poor job of distributing it in a way that doesn’t offend most people’s notions of social justice. Striving for that balance is, perhaps, another great long-term challenge for a modern Labor Government.