We need tighter fiscal, monetary policies

But what if commodity prices are stronger than now expected? In that case, the less risky approach to policy is to act on the most likely possibility, with some allowance for the consequences of surprises in different directions.

In the case of Australia's renewed mining boom, the main risks are of economic activity and therefore inflation higher than now expected. The IMF praised the Henry tax review, but said, with Blind Freddy, that it should be taken more seriously. The mining tax should be widened to tax minerals other than coal and iron ore, never mind the case to tax profits of banks, indeed all companies, at a higher rate if this is indeed the optimal way for a government to slow a boom likely to run out of control.

David Uren, who drew our attention to the IMF report last week, says the IMF would also "welcome more reliance on consumption-based taxes", such as the GST, because this would allow for the elimination of inefficient state taxes and allow for cuts in personal income taxes "that would encourage increases in labour supply and saving".

That is the most sensible part of the report, so far as this writer can judge.

The IMF, Uren suggests, believes Treasury has not done sufficient planning for a sharp fall in commodity prices, saying it should be prepared for them dropping back to their long-term average, which is barely a third of their current level.

"A sharper fall in commodity prices than currently analysed in the budget would illustrate the importance of running larger surpluses during the good times to strengthen the fiscal position," the IMF is quoted as saying.

A mining boom stronger than now assumed requires tighter fiscal and monetary policies now. If this is not provided, the main alternative is the Reserve playing catch-up after inflationary expectations have began to rise.

Last week, Wayne Swan stood by his department's forecasts that commodity prices would decline gradually, dismissing a report from Access Economics that the budget was exposed to a price collapse from a Chinese downturn as "professional pessimism". I suppose the Treasurer would describe someone who is concerned at the possibility of stronger commodity prices as a "professional optimist", or simply mad. We shall see, Mr Swan. Contact the writer if you would care to make a modest bet on the matter.

On my judgment of the risks, time's a wasting, and we actually need tighter monetary and fiscal policies now.

And while we are at it, taking tax reform seriously, including a broader and possibly higher GST, would be a great idea. Is that a whole platoon of flying pigs going past my window, I wonder?