Formula one economy driven by reckless P plater

I suspect that the Reserve Bank must be getting ever so slightly sick of warning the Coalition government to listen to its warnings regarding inflation. Lo and behold, John Howard admitted in the face of the imminent rise:

"If you have a strong economy, you have high world oil prices and you have a drought - some inflation in the system is unavoidable,"

Costello has been telling anyone who listens that he is fiscally responsible in holding a surplus of 1% of GDP as a check on inflation. Perhaps this would be sufficient in a textbook ideal economic climate. Clearly an oil price of $90+ a barrell with an export sector weighed down by an agricultural depression and a high exchange rate does not fit this scenario. One would expect the 'greatest Treasurer in Australia's history' to do something different. But Costello sails merrily along, sitting on the Treasury benches doing...well, not much other than glorified administration.

According to the ABS, the main causes of inflation pressure are vegetable prices, housing and rents. The exponential oil price has not yet fed through, but is sure to put up the price of almost everything. Given the peak oil predictions, a prudent economic manager would be planning for the future, managing a carbon transition program so that oil dependence would be scaled back progressively and reducing our exposure to oil shocks.

On housing, rent and associated costs such as insurance, the Coalition's steadfast refusal to acknowledge the problem has created an inflationary cycle. Rates rise to slow inflation, which causes rents to go up to cover the rate rise. Meanwhile homeowners cannot afford a mortgage, so demand goes up pushing rents up.

If the IPCC climate predictions eventuate, Australian food prices will be permanently higher. This means that some serious planning has to occur to manage those price increases keeping both rural suppliers viable and urban consumers able to afford quality produce.

The main way that the impact of higher oil prices on inflation could be reduced is to encourage rail as a means to transport goods. Either this or greater use of biofuels or gas must be considered.

A major inflationary pressure is the capacity constraints on the economy. Simply put there is insufficient infrastructure (a product of Labor governments terrified of running deficits and Coalition disinterest) to maximise production through major ports such as Newcastle. A further pressure is the skills crisis, particularly in trades, causing wage pressure for those tradesmen.

Australia's economy does behave in some respects like a Formula One vehicle, growing at an average 3.6% a year for the past sixteen years. However, the government's continued insistence on spending money on a cynical basis without a wholisitic long term plan amounts to economic recklessness. It is notable that when Costello produced the Intergenerational Report plotting the challenges of the next 30 years, the main priority was the tax base adjusting for an aging population. There was barely a mention of the need to take any measures to alleviate climate change.