Up until now, water and infrastructure policy has focused on simple decisions like picking projects. Yet, as the Productivity Commission has highlighted, this can make bottlenecks worse rather than better if those decisions allocate more resources to lower productivity yielding infrastructure.
It would be far from ironic, if in seeking to set national strategies for infrastructure, that the mistakes of the last decade were made in choosing projects based on political timing and rewards rather than detailed cost benefit analysis and greater responsiveness to user pays principles.
Therefore COAG should agree to more market signals in pricing water. This would transfer water resources to more productive uses and support larger populations in urban areas in Southern Australia.
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COAG should also outline a route to reform freight pricing and road congestion charging, even if this is reliant on full consideration of the Henry Review first. A pointer toward this intent will be important.
The completion of electricity competition reform will be welcome. This includes privatisation in New South Wales and of the Snowy Hydro scheme, the full rollout of smart meters and removal of unnecessary electricity market interventions like price caps and the renewable energy target.
The injection of market discipline into infrastructure and water policy is required to reduce demand from low productive activity as well as increase supply of critical infrastructure and resources to the most productive uses.
But as we saw with the decision on the parallel importation of books, the government chose to leave the barrier to imports in place even though there were obvious economic and consumer benefits from removing them. While in reality this is a small reform by comparison to tax or emissions trading, it looks like an important marker of the willingness of the government to act on difficult decisions.
And yet, the productivity agenda requires that some industries shrink and some expand. This is the creative destruction of markets at work. We have to remove barriers to the best allocation of resources for the productivity agenda to succeed and for interest rates to stay low.
We will see if an emboldened Prime Minister, riding high in the polls, can break the shackles soon.
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