Memo

To: Kevin Rudd

From: David Hetherington

Dear Prime Minister:

Governments are defined not only by ideas, but by events. You’ll never be thanked for dodging a bullet. Risk management alone can’t make your government a success but poor risk management will make it a failure.

For your governing project to succeed in the face of external shock, you need to build resilience into the investing society. So in all the enthusiasm of a new government with great hopes and great plans, you must spend some time asking, in effect, “What are the elephants in the room?”

This is one of the huge changes in your responsibilities as you move from opposition to government. Your job isn’t managing a political argument about a risk anymore – it’s actually building an economy and society that can withstand it.

The Aussie dollar. With buoyant markets for our commodities and a steady slide in the greenback, the world’s reserve currency, the Aussie could be set for further strong gains. This could devastate even the most competitive sections of our export industries. The opposite case, where the commodity cycle ends and the dollar tumbles, is almost as bad.

The end of the boom. What really does happen after the boom? The key question is whether we’ll have invested enough in our human capital to be able to turn to high value-add services as the new bedrock of our economy. With existing middle-class service jobs under threat from graduates in India and China, we must use the boom years to prepare for this.

The housing bubble. What if Australia’s long housing bubble finally bursts? The US housing market offers a frightening precedent. As two American bankers argue, since foreclosure prices are typically 20-25% below unforced sales, US house prices will fall markedly in 2008-09, risking a recession and attendant job losses.

Concentrated disadvantage. The investing society cannot succeed unless it improves the life chances of all its citizens. Despite an extended boom, 700,000 children still live in jobless households, indigenous life expectancy is at developing country levels and poverty is entrenched in the housing estates of the inner cities and the urban fringe. There’s a gnawing doubt among policy elites that anything can be done to solve this.

National security. The domestic politics of the War on Terror distracted conservative governments from the growing threats in North Korea, the Taiwan Strait and instability in our immediate region – while the debacle of Iraq has greatly increased the power and influence of Iran. Australia faces massive threats: terrorism, WMD proliferation, and interstate rivalry in North-East Asia, yet you can’t fix them all, and in some cases, what helps deal with one threat can actually make another worse.

We don’t pretend to have the answers to all these challenges, Prime Minister, but we do know this: you’ll need to start making your own judgements about them, and soon.