Wednesday, December 31, 2014

Ridiculous, but they work. Why we continue to make New year's resolutions

New Year's resolutions are ridiculous.

Think about it. People who want to change their behaviours  decide to change their behaviours and then all do so at once at midnight. But if they really wanted to change their behaviours they would do it of their own accord, without waiting.

At least that's what anyone who has ever studied economics has been taught. People are meant to be straightforward, literally single-minded.

But we're not, and the success of New Year's resolutions proves it. That's right, success. Because despite all of the jibes the truth is that New Year's resolutions work, and work far better than alternative of simply deciding to change behaviour and then changing it.

The reasons why give us an insight into what it means to be human and into why many of us are never quite sure who we are.

Here's the evidence, assembled by a US psychologist John Norcross. In the leadup to New Year's Eve 1995 he and a team from the University of Scranton in Pennsylvania phoned hundreds of Americans at random and asked whether they were planning to make a specific measurable resolutions at midnight or whether they weren't but still had measurable goals they would like to achieve.

Half a year later an impressive 46 per cent of those who had made resolutions claimed to be meeting their goals, compared to only 4 per cent of those who had not.

Conceding that self-reported success might be exaggerated, he said his findings should be seen "in a comparative context - compared to what".

"In this case, the success rate of resolutions is approximately 10 times higher than the success rate of adults desiring to change their behavior but not making a resolution."

His findings have been replicated repeatedly: resolutions work.

And they suggest that rather than being single-minded many of us are better thought of as having at least two minds, each fighting for control. One might be the saver, the other the spender; one the worker, the other the shirker; one the dieter, the other the eater.

Economist Richard Thaler had his epiphany when he invited a group of graduate students to his house for dinner. While he was cooking he brought out a bowl of cashews.

"We started devouring them," he later explained. "I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me."

And then it hit him. He was being thanked by graduate economists. They wouldn't be thanking him at all if they really believed human beings were rational. "After all," he recalled in his biography, "if we wanted to stop eating cashews, we could have done that at any time".

Economics has traditionally explained away what appear to be two separate selves by saying each of us is one self with stable preferences moderated by a discount rate. Because we care most about the present we "discount" whatever good or bad things are likely to happen in the future when comparing them to the good or bad things we are facing now. We are said to have a constant discount rate of around 8 per cent per year.

But the explanation doesn't stand up. Rather than being constant, our discount rate seems to climb the closer we get to the choice we have to make.

Ask someone today to choose between working seven hours on April 1 or eight hours on April 15 and that person will almost certainly choose the easier day on April 1. But ask again when April 1 arrives and the same person will almost certainly choose the harder day in a fortnight's time.

The example comes from US economists Ted O'Donoghue and Matthew Rabin who in 1999 published a paper in the American Economic Review eviscerating the traditional idea of a constant discount rate and proposing instead a model of two selves in which the first was concerned only about the present (always wanting to put off anything unpleasant) and the second was concerned about where that would lead.

The two fight it out. There's no single 'self' always in command.

If they are right it explains the success of resolutions - they are a tool the long-term self can use to trap the short-term self into acting.

And it explains why certain types of resolutions are more likely to succeed than others - those that are specific and are made in public and no room for backing out.

John F Kennedy did it most famously in 1962 with his commitment to send a man to moon "before this decade is out" and just as effectively a year earlier declaring that the US would regard any attack on West Berlin "as an attack upon us all".

In both he was influenced by Thomas Schelling, an adviser to President Truman who later won the Nobel Prize in Economics and probably invented the concept of Mutually Assured Destruction, which against all odds has kept the world free of nuclear attacks for seven decades.

His insight was that closing off options can be empowering. The US was formidable when it declared that it would send a man to the moon no matter what, frightening when it declared it would defend Berlin no matter what and terrifying when it declared it would respond to nuclear force with nuclear force no matter what.

His advice for tonight is to eschew vague resolutions and go for absolutes: "Just as it may be easier to ban nuclear weapons from the battlefield in toto than through carefully graduated specifications on their use, zero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration."

And say it out loud. Lock yourself in. You might be surprised at what you can achieve.

In The Age and Sydney Morning Herald

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Tuesday, December 16, 2014

Advice for Hockey: Slug super and fix the budget in one hit

Sooner or later Joe Hockey is going to do what's needed.

He is running out of other options. In opposition he said returning the budget to surplus would be easy: "Based on the numbers presented last Tuesday night, we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term," he promised just 18 months before the election.

As the election came closer he became more cautious, refusing to set a date. And then in his first budget, in May this year, he said he would deliver a surplus in 2018-19, a deadline now a mere memory.

Many of the things he thought would be simple turned out to be difficult. He was going to axe 12,000 public service positions before discovering Labor had already set in train processes to axe 14,000. He hemmed himself in with promises not to cut health, education or pensions, each of which he has had to honour in the breach.

Some of his promises made things needlessly hard. Axing the carbon tax (while keeping the associated compensation measures) will cost the budget $7 billion.

And the iron ore price collapsed. It'll rip $14 billion from the budget over the next four years. It's a truly massive problem, yet rather than find a massive fix Hockey has so far used piecemeal measures such as shaving foreign aid, indexing petrol excise, penalising job seekers, giving less to universities and trying to charge for previously free visits to the doctor.

Each doesn't save much, and each arouses so much opposition as to make it scarcely worth his while, even if it gets through the Senate.

What he needs instead is one really big tax hike (spending cuts won't raise enough), but one won't rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year....

Labor's own tax review has already pointed the way, but at the time Labor was too scared to take any notice.

What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.

Instead of being paid by the fund the tax would be paid by the employee at the same time as all their other tax, in the same way as other tax and at the same rate as other tax. Nothing could be simpler.

The Treasury says the present tax arrangement will cost the budget $17.8 billion this financial year, $19.15 billion next financial year and $20.7 billion the following year. The figures exclude the incredibly generous concessions for the income earned within super funds, which needn't be touched. But they do include the tax concessions on extra contributions made over and above what's compulsory. To the extent that they are made merely to avoid tax they will vanish, cutting the benefit for the government to about $12 billion a year – which happens to be about what's needed.

Former Treasury economist Steven Anthony of the Canberra consultancy Macroeconomics has come up with the $12 billion figure, from taxing wages paid as super in the same way as wages paid as wages. He says it's extremely conservative and it would climb each year.

The thing about compulsory contributions is that they are compulsory. They can't be cut. The government would lock in an extra $12 billion per year (and climbing) at the stroke of a pen. It shouldn't dent household spending in the same way as would an increase in income tax, but it might make households more wary of spending, believing they've less tucked away for when they retire.

Which is where Hockey's just-completed financial system review comes in. It's come up with a plan to boost retirement incomes by between 25 per cent and 40 per cent, largely by the simple expedient of cutting the other "superannuation tax" – the fees imposed by fund managers for performance that's usually no better than ordinary.

The plan is wonderfully simple. The market would cut the fees all by itself. All the government would do is conduct an auction every three or so years for the right to manage all new default accounts. With a huge business up for grabs, the fund managers would fight among themselves to bid the fee down. Right now fees range from 0.48 per cent 1.84 per cent. When Chile adopted the scheme it got the fees for new accounts down to 0.4 per cent and customers in other schemes switched over. The Grattan Institute reckons it would save around $10 billion per year, which coincidentally is close the $12 billion extra the government would take from them by properly taxing their super contributions.

As it happens the Coalition is in a good position to blame Labor when it grabs the $12 billion. It is Labor that set up compulsory super in 1992. It is Labor that taxed all contributions at 15 per cent regardless of the taxpayer's rate. It is Labor that was prepared to leave the woefully deficient scheme in place until right near the end when budget pressures forced it to take limited action against high earners – action that it didn't have time to put through parliament.

If anything it is the Coalition that has a better track record. Peter Costello introduced a 15 per cent super tax surcharge for high earners (they paid 15 per cent plus 15 per cent) which he later removed after it led to "enormous complexity and compliance costs".

This wouldn't. There is nothing simpler than taxing all income as if it is income. And the pay-as-you-earn tax system is set up to collect it.

It's over to Joe, and the tax inquiry he is about to commission. He could solve his problems in one hit.

In The Age and Sydney Morning Herald

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Wednesday, December 10, 2014

Why you'll pay much more for the doctor. The three-card trick that purports to save $3.5 billion

How can a $5 GP co-payment that excludes the young and those on benefits save just as much as a $7 co-payment that applies to everyone?

That's what we'll be asked to believe when the budget update is published next week. We'll be told Prime Minister Tony Abbott's new health package will save $3.5 billion whereas his old package would have saved $3.6 billion.

Part of the trick is that it isn't the co-payment that saves the government money, it's the cut to the Medicare rebate. That cut was always going to be $5 per consultation. If doctors had had the ability to charge a $7 co-payment they would have got an extra $2 in their pockets. Now they won't.

Another part of the trick is that the government will now cut some rebates by much more. Standard so-called Level B consultations of up to 10 minutes currently attract a $37.05 rebate. Under the changes they will classified as Level A and attract $16.95 for the young and concession holders and $11.95 for everyone else.

And the two-year freeze on increasing the amount of Medicare rebates that was going to extend to June 2016 will now become a four-year freeze, extending to June 2018.

Doctors will lose just as much as before, but in different ways and for longer.

At least that's what the budget update will say.

All of the changes but one will be introduced through the back door by regulation rather than by legislation, which requires the approval of Parliament. But regulations can be disallowed by the Parliament after they are introduced. Just last month the Senate disallowed the regulations that purported to water down consumer protection under financial advice law.

There's every reason to think it's prepared to do so again if it doesn't like co-payments, meaning that, while the $3.5 billion saving will be in the budget update, most of it will never be banked.

In The Age and Sydney Morning Herald

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Abbott's GP co-payments aren't dead: it's a tweak not a termination

Tony Abbott has cut the size of the co-payment and he has excluded children and Australians on benefits, but he is insisting on a co-payment, or as he puts it a "price signal".

Like a price signal for pollution (the carbon tax) or a price signal for traffic congestion (road tolls) the theory is that if we are charged for something we'll use less of it.

But visits to the doctor aren't quite like those other things. One of the things we are buying when we go to the doctor is information - information about whether we really needed to go in the first place. We can't know until we go. Doctors and patients have what health economists call an "information asymmetry". And so that makes it entirely possible that co-payments could deter necessary, as well as frivolous, visits.

It's what the giant Rand health experiment in the United States found. It sent some people to the doctor for free, charged others small fees and others big fees. In the words of the Rand report: "Cost sharing did not seem to have a selective effect." Serious as well as trivial visits were equally discouraged and those visits that were discouraged were almost entirely first visits, those that let the patients know whether it's serious or trivial...

His move might help the budget, but it might not help public health, and there's reason to think it mightn't even help the budget as much as he thinks.

If general practitioners do find their work their work slowing down as patients are turned away by co-payments, what are they expected to do? What they are likely to do is to see other patients more intensively - to recommend follow-ups and to make their consultations last longer. They'll get less from the government per consultation (Abbott is cutting the Medicare rebate by $5 for all but young patients and concession card holders) but they are unlikely to put in fewer hours.

And these changes are unlikely to pass the Senate. Most of them are being introduced by regulations rather than legislation bypassing the need for Senate approval, but the Senate still has the ability to disallow regulations, and just last month it showed it was prepared to use it when it was presented with watered-down financial advice regulations. It isn't over yet.

In The Age and Sydney Morning Herald

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Tuesday, December 09, 2014

Want lower interest rates? Attack negative gearing

There's only one thing standing in the way of lower interest rates, and the Abbott government has just been handed a way to deal with it.

When the Reserve Bank board gets back from its summer break on February 3 it will be told that the economy is weak and (on the latest figures) getting weaker.

It will be told that the government is unable to do what's needed to boost it. Hemmed in by the deficit and its talk about the deficit it won't boost spending and, aside from promised tax cuts due next July, it won't cut taxes further. (Credit where credit is due. At least Joe Hockey says he won't cut spending further in next week's budget update. That would be "in the current circumstances quite irresponsible," he says.)

So it's up to the Reserve Bank.

Another cut in its cash rate from 2.5 per cent to 2.25 per cent would boost the economy by giving mortgage holders access to more cash (an extra $51 dollars each month for someone on a $350,000 mortgage) and make it cheaper for businesses to borrow.

And it would make Australia a less attractive place for foreigners to park money, knocking out a support for the high dollar and making it easier for Australian businesses to compete with imports and sell overseas.

Normally it's fear of inflation that holds the Reserve Bank back from cutting interest rates, but not this time. Both price growth and wage growth are disturbingly low.

But not house price growth. Since house prices bottomed in 2011 the typical price has climbed a frightening $100,000. For much of this year prices have been climbing at an annual rate of 11 per cent in Melbourne, 16 per cent in Sydney. Just recently the pace has slowed, with prices actually slipping in Melbourne. The latest annual figures are 8.3 per cent in Melbourne, 13.2 per cent in Sydney...

The Reserve Bank is worried about reigniting what it regards as an unsustainable boom in house prices and pushing them to the point where they collapse and cause financial damage.

It's the only thing standing in the way of it cutting rates.

The Bank's governor Glenn Stevens has been thinking out loud about ways to restrain house prices in order to make get room to cutrate cuts possible. Importantly he has discovered that ordinary homebuyers aren't the problem. In the past year the amount borrowed by personal investors to buy property has climbed at almost twice the rate of the amount borrowed by owner occupiers. Investors now account for $1 in every $3 1 in every 3 dollarsborrowed to buy property. Stevens is thinking about imposing tougher lending standards and capital requirements for lenders to investors but leaving owner occupier loans alone.

And now the Murray financial system inquiry suggests something else...

On Sunday it pointed its finger at the tax system. In its words: "The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".

EverSince the Howard government halved the headline rate of capital gains tax in late 1999, investors have enjoyed a low rate of tax on the profits they make when they sell properties while being able to deduct from their taxable earnings the full interest costs of the borrowing they use to make those profits.

The Murray review calls the tax treatment "asymmetric".

For well-heeled households it has made investing in second, third and even fourth properties a no-brainer.

As Macquarie Bank economist Rory Robertson told his clients at the time, "since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries".

By becoming landlords they have provided renters a useful service, but by elbowing would-be owner-occupiers out of the way in order to buy properties on which to run up interest bills they have also been creating those renters.

Since Howard changed the rules, the proportion of households forced to rent has climbed from 27.2 per cent to to 30.3 per cent.

House prices have run way ahead of household incomes ever since.

Doubling the rate of capital gains tax to make it the same as the tax paid on other income would take the wind out of the investor housing market. If the government wanted to merely do it to new housing investors (leaving existing investors untouched) it would take out the wind slowly. Or perhaps it could do it only to investors who buy existing properties rather than ones built from scratch. The Murray inquiry isn't prescriptive. It wants capital gains tax and negative gearing investigated by the tax inquiry Abbott is expected to announce this week.

Abbott could give the Reserve Bank cover by announcing at the same time as the tax inquiry that he is inclined to act against negative gearing. He could say that when the new rules are decided on they will apply from December 2014, deflating the housing market straight away and making it easy for the Bank to push down rates.

It would help the Bank help him, and quite possibly allow much lower interest rates. And it would rake in more tax as well.

In The Age and Sydney Morning Herald

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Duty calls John Fraser back to head Australia's treasury

John Fraser says he felt he had little choice when approached a few months ago in London about running Australia’s treasury.

A former treasury official who rose to the rank of deputy secretary, he had spent most of the last two decades working in investment banking, much of it overseas with the financial conglomerate UBS.

“This country has been very good to me, and life's been very good to me and I felt I might be able to make a contribution,” he said after the governor general approved his appointment as Australia’s 17th treasury secretary.

“I don't want to sound as if I'm a saint - I am not. But I think all of us, particularly those who have been a bit lucky, have a moral obligation to do something for our country.”

Mr Fraser was jetlagged as the Governor-General approved his appointment. He had arrived from London at 2am and been unable to sleep.

Asked how he’ll run the department differently from his predecessor Martin Parkinson who was forced to resign by the prime minister Mr Fraser said he had no set views and was still learning about how the department had changed.

“Martin has been very helpful in briefing me, and indeed I'll be spending a day with the treasury team before Christmas to go through everything. But no I don't have any thoughts. It’s a broader organisation than when I was there.”

Treasurer Joe Hockey paid tribute to Dr Parkinson who leaves on Friday describing him as a “loyal servant of the Australian people”.

Dr Parkinson was effectively sacked by Mr Abbott shortly after the Coalition took office. Mr Abbott asked him to stay on only until after the May budget. The recently published biography of Mr Hockey indicates the decision was taken without the treasurer’s knowledge. Mr Hockey later managed to negotiate an extension for Dr Parkinson.

“He has utilised his enormous intellect to pursue and affect significant policy change. He is a man of great personal integrity. I wish him all the very best for his future,” Mr Hockey said in a statement.

Mr Fraser said he believed the treasury’s job was to work with rather than for Australia’s political leaders.

In The Age and Sydney Morning Herald

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Thursday, December 04, 2014

GDP Weak. Rate cut looms

An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.

Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.

"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."

Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."

The bleak outlook is both economically and politically complex for the Abbott government.

While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.

Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...

With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.

"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."

Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.

Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.

The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.

The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.

Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.

On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.

Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.

The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.

Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.

"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."

The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.

NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.

In The Age and Sydney Morning Herald

Why the Reserve Bank board is poised to cut

After a year of finely judged inactivity, the Reserve Bank is stirring.

The bank's board met for the last time this year on Tuesday and concluded as usual that "the most prudent course is likely to be a period of stability in interest rates".

But after the national accounts it's no longer so sure.

It isn't just that economic growth is weak; it's that it's been weak for two quarters in a row.

In the past six months Australia has stepped down from an annualised economic growth rate of 3.6 per cent to an annualised rate of 1.6 per cent.

Put politically, during the Coalition's first six months in office, economic growth was high; during the past six months it's been low.  There are few signs it will pick up without help.

The Treasurer will do what he can, or as much as he feels he is able to. He says he won't cut spending any further ahead of Christmas.
But it won't be enough.

That's why the Reserve Bank board is considering cutting its cash rate when it next meets on February 3 after a two-month break.

A cut isn't completely locked in and a lot can change in two months. But most of the arguments line up in favour of a cut.

One is that a cut would boost the economy without stoking damaging inflation. Wage and price rises are too low and unemployment too high for inflation to be a concern.

Another is that a cut would help bring down the dollar, which itself would boost the economy. It would help stem the inflow of hot money that's keeping the dollar high.

The only cause for concern is that it might restoke an unsustainable real estate boom. The bank has other measures in mind to deal with that including tougher lending standards for banks that lend to real estate investors.

There's little reason not to cut.

In The Age and Sydney Morning Herald

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Tuesday, December 02, 2014

Memo to Abbott. Mess with Victoria and you mess with the nation

Here's a tip: Tony Abbott won't make good his threat to rip $3 billion out of Victoria's economy.

Before the election he said the money promised for the East West Link would vanish if an incoming government used it for any other purpose.

"I want to make it absolutely clear to the people of Victoria that the $3 billion the Commonwealth government has committed to this project is for one purpose and one purpose only - and that is to build East West Link," he wrote to both Dan Andrews and Denis Napthine. "If a future government is not prepared to spend the money on East West Link, then that money will not be forthcoming."

Such a decision would shrink what Abbott repeatedly calls the biggest infrastructure investment program in Australia's history. And it would shrink it in the state where he needs to spend the most.

Victoria accounts for more than one-fifth of Australia's economy. No other state, apart from NSW, produces more. Yet in the past six years its output per person has stalled. Victoria produces scarcely any more per person than it did in 2008.

Victoria's construction industry stood still in 2014. Over the year to September it grew just 0.7 of one per cent. No other state performed as badly. The NSW construction industry grew 19 per cent.

To withdraw a promised $3 billion from Victoria's construction industry (half for East West Link stage 1, half for stage 2) would be to deny a boost to the state that needs it the most, and to deny a boost to the national economy in the process. Abbott himself said building the East West Link would create almost 7000 temporary jobs.

There's every reason to believe that Melbourne Metro would create as many jobs. It is the purpose for which the $3 billion was originally intended before Abbott diverted it into roads...

On Sunday his language softened. He said merely he was determined to do what he could to ensure the East West Link proceeded.

Melbourne Metro would do far more for Melbourne than would East West Link. That must be what the cost-benefit statements show, otherwise Napthine would have made them public. When Andrews makes them public in a matter of days Abbott will have to explain why he was determined to lock Victoria in to the least beneficial of the two projects.

He is granting money to every Australian state for a major infrastructure project. In NSW it is WestConnex, in Brisbane it is Gateway Motorway North, in Adelaide it is the South Road upgrade and so on. In every case it is money collected from the citizens of those states via taxes.

It is inconceivable that he would damage the national economy by leaving out the one state that needs it, especially when it was he who dubbed the election "a referendum on the East West Link".

And here's another tip: Abbott and Joe Hockey as good as wrote off Victoria during the campaign in order to salvage their budget. And not in the way you might think.

It would have made political sense to ditch the Medicare fee increases and the bulk of the changes to university funding before or during the election campaign. They weren't likely to get through the Senate.

Instead they, kept them as government policy to tide them through to an event they believed was more important than the Victorian election - the release of the Mid-Year Economic and Fiscal Outlook on December 16.

If those programs are still regarded as government policy Abbott and Hockey can include them in the statement as zombies - neither alive nor dead. They can book the best part of $5 billion they would have raised from them even if it won't come near the budget.

As shadow treasurer, Hockey, every budget night, was keen to distribute a very useful document detailing the accounting tricks Wayne Swan had used to forecast yet another unlikely surplus.

This year he'll be the one using accounting tricks if he persists in booking the income from zombies. He might as well. The Coalition denied Napthine a lifeline so that he could.

It will fool no-one of course. Budget analysts will simply add the best part of $5 billion to whatever deficits he forecasts for the next four years and mark him down for trickery, like they marked down Swan. Even without the zombies the budget update is looking horrific.  

The ABC reports the Treasury will use an iron-ore price of about $60 a tonne. The budget itself was struck when the price was $103. Deloitte Access says even with the zombies this year's income will be $2.3 billion worse than the budget forecast and next year's income $7 billion worse.

Most of it will be due to the impact of a lower iron-ore price on company profits and tax receipts. But not all.

Disturbingly, Deloitte notes that "whereas once the red ink was mostly confined to the profit taxes, the combination of wobbly job growth and an extended period of weak wage gains now looks like being just as big a budget buster". Income taxes are set to fall short of budget estimates by $2.9 billion this financial year and $4.2 billion next financial year.

Victoria's jobs growth is close to the weakest in the nation. In the past year Victorian employment has climbed by less than 0.5 per cent, about half the weak national growth rate of 0.9 per cent.

In The Age and Sydney Morning Herald