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Lower interest rates underpinned by market reform

By Corin McCarthy - posted Thursday, 3 December 2009


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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About the Author

Corin McCarthy was an adviser in opposition and government to Craig Emerson MP. He also advised Labor’s 2007 election campaign on small business issues. He has written widely on these issues in The Australian and On Line Opinion. He currently works as a lawyer in London advising on major infrastructure projects. These views are his own.

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All articles by Corin McCarthy

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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