NEWSFLASH! In September I will join The Conversation as its Business and Economy Editor. I have been honoured to work at The Age for the past ten years, originally alongside the legendry Tim Colebatch, and for the past four years as economics editor in my own right.

At The Conversation, my job will be to make the best thinking from Australia's 40 univerisites accessible to the widest possible audience. That means you. From the new year I will also write a weekly column.

On this site are most of the important things I have written for Fairfax and the ABC over the past few decades. I recommend the Search function. The site is a record for you, as well as me.

I'll continue to post great things from The Conversation and other places here, and also on Twitter and Facebook. Enjoy.

Sunday, May 31, 2015

More than vows. Why gay marriage matters

It's more than just marriage.

I held hands with my Dad as we walked to the polling booth at my primary school, 48 years ago. There were two questions that day. One dealt with the number of seats in the House of Representatives and the Senate. The booklet sent to households ahead of the referendum presented both arguments: "for" and "against". The other question dealt with discriminatory references to Aboriginal people in Australian Constitution. The booklet set out only one case: for removing them.

"Why?" I asked my Dad. "Why isn't there an argument against this one, as well as an argument for?" "Because there isn't an argument against," my Dad replied. "We want to count Aboriginal people in the census and we want to treat them like other people."

That day, 90 per cent of the electorate voted yes. While I have been proud of my small part in what happened that day, for much of my life I have thought of what happened as a mere administrative change. The Commonwealth became able to make laws with respect to Aborigines and was forced to include them in the census. But I've discovered more recently that for Aboriginal people it meant much more.

They'd previously not known what Anglos and others thought about them. Every bad encounter made them believe the worst. After the vote they realised that the overwhelming majority of Anglos liked them and wanted them included. Almost every Anglo they had seen in the street or on the bus or at the school had said yes.

That's what a vote for gay marriage will do if it happens this year. It'll be about more than marriage. It'll be about inclusion. It'll be the Australian Parliament saying, "Welcome to Australia".

Because despite laws that make discrimination illegal and despite all the talk about the pink dollar and enviable lifestyles, gay and lesbian and bisexual and transgender people aren't as included as the rest of us.

It shows up in the stats, if not in what hetro Australians like to believe about what they believe.

The Household, Income and Labour Dynamics survey is Australia's version of Seven Up. It has been tracking about 20,000 Australians each year since 2001. In 2012 for the first time the survey asked questions about their sexual identity.

Around 1.6 per cent said they were gay or lesbian, and 1.5 per cent bisexual. Around 0.8 per cent were "other" and 3 per cent preferred not to say.

The gay men earned much less than the straight men, about 20 per cent less, even when the figure were manipulated to adjust for education and other characteristics.

The gap is because those gay men who had jobs earned lower wages (about 11 per cent lower when adjusted) and because they were less likely to be employed at all, an astonishing 15 per cent less likely.

And it was all the worse when their sexual identity was obvious. Although 2012 was the first year in which the survey explicitly asked about sexual identity, it had been asking the gender of live-in partners since the beginning. The gay men who were (fairly openly) living with same-sex partners did much worse than the single gay men who were better able to keep their identities secret. And they did worse over time. While the earnings of all types of gay men had climbed more slowly than those of hetrosexual men since 2001, the earnings of those in relationships had climbed the slowest.

In contrast, lesbians were just as likely to be employed as straight women (although bisexual women and women who preferred to not to say were underemployed). And they took home more, about 33 per cent more. However, the extra pay was almost entirely due to the fact that they put in extra hours. Their hourly rates were little different to those of other women. It was the same whether or not they had partners. On average they got paid less than men (as all women do on average) and got extra pay only for extra work.

Joseph Sabia and Mark Wooden from the Melbourne Institute of Applied Economic and Social Research say their findings are consistent with discrimination against gay males. Gay females are taken advantage of rather than paid higher wages. Their lower likelihood of easing back on work to have children could be in part the result of discrimination against potential lesbian parents.

Allowing gay marriage, as the Parliament is set to do, will be wonderful for those wanting to get married. But it will also be good for those that don't. It'll show all of us that we want to include all of us. It'll make it harder to leave people out.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, May 26, 2015

Alright for the rich. Double standards in welfare crackdown

Where will the police turn up next? They are already mixing it with the department of immigration in Operation Sovereign Borders. They're smartening up the place as well. I am told departmental staff have been asked to dress sharply and get haircuts. They've even been directed not to wear their photo IDs when they leave the building. They have to be careful.

Now it's Human Services' turn. Essentially a call centre and payments organisation, the department that runs Centrelink is about to get a "tough cop on the beat". A "senior police officer" is to lead its crackdown on welfare fraud, or so a Sunday newspaper tells us. Never mind that the department's annual report shows it already has nine federal police working with it, apparently appointing an extra one to lead a taskforce could claw back an extra $1.5 billion in overpayments. The minister says so.

It got me wondering what other government departments the police could help. Communications came to mind, although that would have been in the days when the government collected radio and television licence fees. Anyone caught listening or watching without a licence was fined.

Education and Health offer few opportunities - the Commonwealth runs neither hospitals nor schools. And then it struck me. Police could be embedded in the tax office.

But although that does happen for serious financial crime (the tax office is on a joint taskforce with the Federal Police), there are no plans to get police to crack down on ordinary taxpayers claiming deductions.

Instead the tax office has lost 10 per cent of its staff. The Coalition used its first budget to bring forward staff cuts planned by Labor in order to bring about "the largest reduction to public service jobs over the forward estimates".

It makes its crackdown on fraud unbalanced. Australians who misreport their incomes for the purpose of claiming benefits are about to get further hammered but not Australians who misreport their incomes for the purpose of escaping tax.

Even within the department of human services the crackdown will be unbalanced. Minister Marise Payne says it will apply to the recipients of Newstart unemployment benefits and age and disability pensions, but not to the recipients of family tax benefits. That's because family tax benefits are "supplementary payments". They are middle-class rather than life-sustaining welfare.

It's a distinction that is running through everything the Abbott government does.

Within weeks of taking office it set up a Commission of Audit. Its terms of reference required it to "eliminate wasteful spending" but said nothing about tightening up wasteful tax concessions. The commission took the instruction to heart, saying nothing about the wasteful concessions on super but plenty about how to wind back spending on pensions.

When asked why it had examined only one sort of waste - the waste in payments intended to help people survive - the commission said tax concessions would be the subject of a separate tax white paper to be delivered in 2015.

The Coalition's first budget tightened spending on pensions and Newstart as foreshadowed but left superannuation alone. Its turn would come, we were assured.

There were reasons to believe it would. The government had told the authors of the tax white paper that nothing was off limits. They were free to point out waste wherever they found it.

The Murray financial system inquiry found that super tax breaks were not "well targeted to achieve provision of retirement incomes", which is another way of saying much of the money was wasted. The discussion paper released to set off the tax white paper process reached much the same conclusion, finding that despite the tens of billions of dollars offered annually in super tax concessions, the total effect of taxes on savings was "uncertain".

Treasury calculations prepared for this year's budget show the cost of the concession on employer contributions is set to climb from $16.3 billion to $20.15 billion by 2018-19. The cost of the concession on super fund earnings is set to climb from $13.4 billion to $30.4 billion. By way of reference, the cost of the age pension is set to climb from $41.6 billion to $50.4 billion, meaning that by then super tax concessions will cost as much as the age pension and will overtake it unless reined in.

And the bulk of the concession goes to extraordinarily high earners, the type who would be saving anyway. The treasury believes the top 1 per cent of Australian earners, a mere 132,000 people, take home between them 9 per cent of Australia's super tax concessions.

And so Joe Hockey and his departmental head John Fraser began speaking out. On Jon Faine's program on faABC radio the Treasurer called for "a bipartisan approach". Whoever was in government, "whether it's a Liberal government or Labor government, whoever it is, we're going to have the same problems", he said. Fraser told a gathering at the Australian National University it was time for a "fundamental rethink about the interaction between superannuation and tax and the whole welfare system".

And then Abbott decided it was off. Eyes fixed on the next election, be declared there would no changes to the super tax concessions, not now, not ever.

I am just one who's been taken for a ride. Welfare lobbyists who cautiously supported the winding back of pension access in return for action on super; the super industry itself, which offered up modest savings; the opposition, which drew up its own proposals, believing the offer of bipartisanship was genuine - all of us have been waiting for something we are now told won't happen.

Except that it will. After the election whoever wins will (re)discover that tax concessions skewed to Australia's highest earners exceeding the cost of the pension are not sustainable.

In the meantime, welfare cheats on far lower incomes should expect to hear from the police.

In The Age and Sydney Morning Herald
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Tuesday, May 19, 2015

How the East West Link cooked Abbott's budget numbers

Tony Abbott thinks we're mugs.

Deflecting attention from a budget that left Australia's second biggest state with only a fraction of Australia's infrastructure spending, he said he was so committed to the East West Link that he "gave Victoria $1.5 billion to actually get cracking".

It's true, he did give Victoria $1.5 billion for the East West Link in his first 2014-15 budget ($500 million of which was diverted from other Victorian projects). But in extraordinarily odd timing, he handed it over in 2013-14, just ahead of the year to which that budget referred.

Like all budgets these days the 2014-15 budget was handed down in May. The 2013-14 financial year had seven weeks to run. The budget shovelled out the money immediately, before 2014-15 began and well ahead of when it could possibly have been needed. The East West Link contract wasn't signed until September.

The immediate payment had nothing to do with enabling Victoria to get cracking. It had everything to do with cooking the books.

Labor's last budget covered 2013-14. By shovelling out the East West Link money before 2013-14 ended he loaded up Labor's last financial year with extra spending. The 2013-14 deficit climbed from a forecast $18 billion to $48.5 billion. A lot of the deterioration was due to the collapse in commodity prices. The iron ore price slid from $US124 to $US93.

The rest was due to higher spending, most of it tacked on to Labor's budget by the Coalition. It directed $8.8 billion to the Reserve Bank within weeks of taking office, pushing up "Labor's" deficit by $8.8 billion. Then it directed $1.5 billion to Victoria well before it was needed.

The manoeuvres not only made Labor's last budget look bad, they made the Coalition's first two look good...

Having funded the East West Link in 2013-14 the budget didn't need to fund it in 2014-15 (nor as it turned out in 2015-16) and it didn't need to find several billions in 2014-15 to top up the Reserve Bank's reserve fund. Indeed, with the reserve fund topped up the bank resumed paying dividends, giving Abbott $1.235 billion from its performance in 2013-14; half of which he directed to the 2014-15 budget, and half of which he held over until July in order to boost the 2015-16 budget.

And the early gift dressed up Denis Napthine's final Victorian budget. Taking it back will harm Daniel Andrews' first one.

It's particularly irksome that he gave Andrews no notice that he planned to take it back. Victoria's budget, delivered a week before the federal budget, is based on the assumption that the $1.5 billion can stay.

Abbott is using Victoria as a piggy bank. He paid it $1.5 billion at a time when it would hurt a Labor budget. He wants to take it back out at a time when it will help the Coalition's. He has already booked it in the budget as having been returned.

The billboards he is sending around Melbourne's eastern suburbs are a smokescreen. "Stuck in traffic! Blame Labor" they say. What they don't say is that the East West Link is such a bad project that a conventionally-constructed benefit cost analysis finds it returns just 45 cents for every dollar it costs. What they don't say is that the $1.5 billion could be better spent on projects whose returns exceed their costs. What they don't say is that Victoria voted against the East West Link in an election Abbott himself described as "a referendum on the East West Link".

Victorians voted for a rail project, one Abbott ought to be prepared to submit to Infrastructure Australia along with the East West Link. After all, that's what the policy he took to the federal election said he would do: "We will require all Commonwealth-funded projects worth more than $100 million to undergo a cost-benefit analysis by Infrastructure Australia to ensure the best use of available taxpayer monies," it said.

By refusing to do what he said he would do he is setting up a stand-off between Victoria and the Commonwealth, one that will enhance his budget's bottom line for as long as it goes on. If he can drag it out another year it will enhance the next budget's bottom line as well.

But he'll have to cave. Victoria has 25 per cent of Australia's population but is getting only 12 per cent of its infrastructure funds. Billboards and bluster can't obscure that forever.

And there are plenty of other sleights of hand in Abbott's second budget. He is advancing $5 billion over five years for non-commercial infrastructure facilities in Australia's north, the kind the banks won't touch. Because the $5 billion will be "lent" rather than spent, it won't add to the most widely quoted measure of the budget deficit. But loans for non-commercial ventures are (by definition) highly likely to never being repaid. Eventually some, maybe even most, of the $5 billion will find its way on the deficit. But not now. That's a problem for the longer term. Right now Abbott wants to us to think he's fixing the budget.

In The Age and Sydney Morning Herald
Read more >>

Monday, May 18, 2015

Company tax cuts won't spark investment explosion says treasury chief John Fraser

The push to cut Australia's 30 per cent company tax rate in order to attract more investment has reached a roadblock in the form of John Fraser, the former investment manager who now runs Australia's treasury.

Mr Fraser told a budget forum in Melbourne on Friday that while he understood the argument about attracting more investment, his own experience told him that tax rates were a second or third order issue for corporates considering investments.

Mr Fraser headed UBS Global Asset Management in London for twelve years before returning to Australia in December to rejoin the treasury.

He told the Grattan Institute forum other factors were more important in making investment decisions.

"Generally the internal rates of return that are required - the hurdle rates - are so high it would be false to say the taxation rate, unless they were ridiculous, really large, make a big difference. Whether the tax rate is 30 per cent or 35 per cent frankly is not as important as other issues such as governance and dispute resolution," he said.

Exchange rate risk was also important.

"The rule of thumb for most big firms looking at acquisitions, I'll put a number on this: it's well above 20 per cent, because things go wrong."

For Australian firms, especially small and medium sized ones, the tax rate did matter, and he supported cutting the corporate tax rate to help them. But dividend imputation made the tax rate less important for bigger firms.

Dividend imputation refunds to Australian shareholders tax that companies have already paid creating their dividends.

A plea in the treasury's tax discussion paper for the government to consider removing dividend imputation appears to have fallen on deaf ears.

Asked his own view, Mr Fraser said the government had "made its views clear" and he wasn't going to stroll into the issue. But he added: "in the longer term it's something you've got to look at, it is something I would hope one day will be looked at holistically"

He had already had several sessions with big accounting firms seeking their input into the tax white paper due in December.

"What we need are real life experiences," he said. "The industry associations are very professional and very good, but often the circumstances of particular companies differ greatly. That's why we've got this big engagement process over the next few weeks."

"The tax system is designed for another era, it's a FJ Holden. We've got to have a good look at it because when reform does come I suspect we will be stuck with it for 30 years.

"We've got to have a few warriors out there."

In The Age and Sydney Morning Herald
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Tuesday, May 12, 2015

It's a Swan of a budget: Hockey channels Labor

Joe Hockey is turning into Wayne Swan and then some.

Whereas Swan allowed small businesses to write off spending on equipment up to $6500, Hockey is allowing them to instantly write off spending up to $20,000. And to do it again and again. There's no limit on the number of times small businesses can get the Tax Office to fund a big chunk of $20,000 right through until July 2017.

He is turning into Swan because that's what treasurers do when businesses aren't investing. Non-mining firms (as well as miners) have been telling the Bureau of Statistics they plan to actually cut investment spending in the year ahead.

And you forecast a pickup in the economy, which is doubly useful because it allows you to forecast steadily shrinking deficits.

If things turn out much worse than you forecast, you can always say you were blown off course. For both treasurers, it's true. The iron ore price dived far further than they could have reasonably expected. It has halved in the past year. Hockey is forecasting a further fall in the year ahead, but perhaps not enough of a fall. He is forecasting a quicker lift in the economy than is the Reserve Bank. The budget measure of economic growth is languishing at 2.5 per cent. The Reserve is picking an unchanged 2.5 per cent for the financial year ahead. Hockey and Treasury are picking 2.75 per cent. It's a small enough difference to be believable (honest estimates can reasonably differ) but big enough to make his budget numbers look better.

And you hope.

You talk about seeing the "glass half full" as Hockey did in the budget lockup, but you act as if it's nearly empty. This budget and the measures leading to it since December will push an extra $2.153 billion into the economy in 2015-16. They'll add $2.153 billion to the budget deficit. It's not what you do if you think the economy is going to be strong. In subsequent years the balance changes and they remove money from the economy, but not much. By 2018-19 they will have removed only $1.605 billion.

An attack on the deficit, delivering "a surplus for every year of our first term" as Hockey once promised in opposition, could drain the glass.

Several of the longer acting measures in last year's budget that were scheduled to bring about a surplus by the end of the decade are missing from this one. Pensions will now be indexed by the highest of wage increases or prices each six months rather than simply prices, meaning they won't steadily shrink the deficit. But remarkably Hockey still forecasts a return to surplus at about the same time.

The trick is lower interest rates. The government's borrowing rate has collapsed since the last budget, hitting an all-time low of 2.4 per cent last month, although it's been climbing since. Plug in that lower rate and the cost of the annual interest payments on debt scarcely climbs even while the debt balloons. That's why the Treasurer was able to claim that he is now paying just $96 million a day in interest on debt, down from $133 million under Labor. It isn't because he has shrunk the debt. It's because, like all of us, he is finding it easier to manage.

But the debt itself shows no sign of leaving. Whereas last year Hockey was able to claim his government would be free of net debt by 2024, this year he is unable to claim it'll ever be debt-free. The line on the graph remains high well into the 2030s, further than the eye can see.

There's one respect in which Hockey isn't Swan. For all the talk about spending big on infrastructure (which would certainly be a good thing) he is offering next to nothing new. The biggest spend is $142 million on offshore resettlement facilities for asylum seekers. It won't even be spent here.  

In The Age and Sydney Morning Herald

The Zombies that make the numbers look good

The coalition's second budget is propped up by "zombie measures" from its first. Announced in a year ago but not yet passed in the Senate, they are politically dead but not yet formally abandoned, meaning the income or savings they would have raised can be used to dress up the second lot of budget forecasts regardless of reality.

The biggest are the cuts the funding formulas for state hospitals and schools. Due in 2018-19 but unlikely to ever be legislated, they were to save the Commonwealth $80 billion over 10 years. There's not a mention of them in the second Hockey budget, but they are there nevertheless.

The budget totals for grants to states for hospitals and schools are noticeably lighter in 2018-19, the last year for which there are detailed forward projections, and the broad brush graph of the budget balance that goes beyond that gets a lift from then on.

It means that trying to come to grips with the deficit projections is like wrestling with ghosts. Even it dead, they live on in the projections until they are formally renounced.

One that has been renounced is the Medicare copayment and the associated cut in payments to doctors. It is indeed dead and no longer propping up the budget.

But others linger on. The Coaltion's first budget lifted co-payments on prescriptions and made it harder to take advantage of the pharmaceutical benefits safety net. It's politically dead, unlikely to ever be approved by the Senate, but it's dressing up the numbers.

University graduates will no longer be charged an above-inflation interest rate on student. The government has confirmed that, and it's not in this budget. But silently left in the budget is the requirement to start the repayments earlier and the 20 per cent cut to university funding, even though they'll most likely never happen. They are improving the budget forecasts without seeing the light of day.

Last budget the government tried to limit Family Tax Benefit B to families with children under 6. The Senate wouldn't let it do it, although now there's a least a chance it might as part of a trade off to get Scott Morrison's childcare package. It lives on in the numbers nevertheless.

And the big cuts to Newstart that would have made young people wait six months before getting the dole live on as well, although in a scaled-back form. They'll now only have to wait one month. It may never get through the Senate, but it's in the budget.

In The Age and Sydney Morning Herald
Read more >>

The timid budget. Why they'll merely make do tonight

There's been something odd about the lead-up to tonight's budget.

Time and time again Joe Hockey has floated ideas only to have them knocked down. He suggested what he would soon be doing about negative gearing only to have Morrison and Abbott slap him down. He suggested he would look at super tax concessions, only to have just about the entire party slap him down.

Tony Abbott, not Hockey, chaired every one of the expenditure review committee meetings. The last time around he let Hockey deputise for him when he was away. Scott Morrison, not Hockey has been fronting budget press conferences. One of the cruelest photos on The Age's website shows Hockey posing for pre-budget photos in his inner office while in the outer one Scott Morrison is on the TV announcing the childcare package.

And the usual post-budget salesmen are ducking for cover. I know of two instances in which government MPs have turned down invitations to speak at post-budget functions, saying they would rather leave it to others to defend the budget.

The new Treasury boss John Fraser has abandoned a 20-year tradition in which his predecessors have fronted up to business economists in Sydney on the Tuesday after the budget.

Instead he will appear on Friday in Melbourne at the newspaper-unfriendly time of 6.30pm "in conversation" with John Daley of the Grattan Institute. He'll face questions, but it won't be a grilling.

The nervousness may have to do with the impossibility of the task...

The government wants to cut the deficit. It has said so often enough. Abbott once declared a "budget emergency". Hockey held out the prospect of delivering surpluses "in each year of the first term of a Coalition government".

However, the deficit keeps rising. Labor forecast $18 billion for 2013-14, the Coalition forecast almost $30 billion for 2014-15, and tonight it'll forecast something north of $40 billion for 2015-16. That's because the price of the stuff Australia sells keeps sliding. When Labor drew up its last budget iron ore was $US124 ($157) a tonne. A year later it was $US102 a tonne. This morning it's about $US61 a tonne.

The Treasurer says every $US10 that the iron ore price falls adds about $2.8 billion to the deficit, a rule of thumb which would suggest that, all other things being equal, the government has lost $17 billion since the last budget as iron ore exporters pay it less tax. However, all other things are not equal. The dollar has slid from US93¢ to US79¢. Meanwhile, iron ore exporters churn out more product, and the net effect has been to drain the budget of revenue.

From the comfort of opposition it's easy to say that the right approach is to slash government spending or at least wind back its growth, and that's exactly what Hockey et al said. But in government it's wise to consider the consequences of taking money out of an economy that's already losing billions.

A year ago Hockey said he didn't want to do anything to dent confidence (which was actually climbing in the lead-up to the budget). Now confidence is genuinely weak. It's not only mining companies that are scaling back their investment plans, it's also non-mining companies, which were meant to take up where mining left off. Non-mining firms plan to invest 9 per cent less in the next financial year than in this one, mining companies 21 per cent less. The much talked about transition from mining investment to something else is "virtually non-existent" in the words a market analyst. The firms the Reserve Bank regularly talks to say they are reluctant to invest until they see a durable pickup in consumer spending. It has been picking up, but it isn't durable.

If last year was the wrong time to dent confidence, this year is worse. Both of Australia's leading private sector budget forecasters are talking quietly about the need to prepare a game plan to prevent the economy sliding into into recession.

The Reserve Bank reported on Friday that public spending was unchanged throughout 2014. That means the Australian government did nothing to boost the economy as unemployment climbed, but at least >the government didn't harm it.

Doing no harm is now the top priority.

The Treasurer says the budget will be only "mildly contractionary", although he said that some time ago and might have since been overruled.

The big themes of the budget will be families, taxation and jobs. Although many of the families and taxation measures are known, the jobs measures are not. What is known is that they cannot cost much money. Even if it has made a deliberate decision to go slow on cutting the deficit in order to protect the economy, the government most certainly won't have decided to allow the deficit to blow out in order to boost the economy.

Measures that would have helped the budget long-term such as more slowly lifting the age pension are now off the table. They were too unpopular and couldn't get through the Senate.

Measures such as attacking negative gearing and withdrawing superannuation tax concessions won't even make it to the table. They stand the best chance of winding back the budget deficit over time (the cost of the super contributions tax concession will climb from $16.3 billion to $19 billion over three years and the cost of the super earnings concession will climb from $13.4 billion to $26.8 billion) but the government has decided to retain them in order to create a point of difference with Labor.

Tonight we will get a budget that will do little in net terms, even though it could. Its authors are hoping it's enough.

In The Age and Sydney Morning Herald
Read more >>

Saturday, May 09, 2015

Budget preview. 'Tastes nothing like the old one'

A few years back Coca-Cola decided to enter the energy drink market. It launched a product called Mother that was so bad eight out of 10 consumers said they hated the taste. Instead of deleting it Coca-Cola completely reformulated it and printed on the top of every can: "New. Tastes nothing like the old one".

Tuesday's budget is genuinely new. Two of the six-member expenditure review committee that put it together weren't there before – the new Social Services Minister Scott Morrison and the new Assistant Treasurer Josh Frydenberg. The three top bureaucrats who put it together are new in their jobs – Michael Thawley in prime minister and cabinet, John Fraser in treasury and Jane Halton in finance. 

This time the Prime Minister Tony Abbott chaired almost every meeting. The nominal Treasurer and deputy chair Joe Hockey played less of a role.

On Tuesday Abbott and Hockey took part in a contrived photo opportunity pretending to go over drafts. Hockey didn't make eye contact. He looked deflated and upset. He didn't look like the budget's author.

At the heart of the budget are measures pushed by Morrison and Frydenberg rather than Hockey. In place of the indexation measure in the last budget that would have silently stolen pensioners' pay rises, Morrison's new package increases payments to pensioners of modest means and removes or cuts the part pension of only the wealthiest retirees.

Morrison's childcare package, to be unveiled on Sunday, will replace the confusing and overlapping system of childcare benefits and rebates with one simple payment linked to the number of hours in work. He'll also announce an $800 million a year safety net to ensure disadvantaged families get childcare. The money will come from the ditched paid parental leave scheme that in its original form would have paid the most to high earners.

Frydenberg has secured an extension of the GST to overseas-based online retailers such as Netflix. It'll be sold as a fairness measure, putting overseas and Australian retailers of web-based services on an even footing. He is also cracking down on the rort that allows the employees of not-for-profit organisations to pay food and entertainment expenses out of untaxed income without limit. The new limit will be $5000, after which their employers will face fringe benefits tax.

Fairness was a concept missing from the Coalition's first budget. It would have pushed young unemployed Australians onto a payment even lower than the dole and made them wait six months. It would have imposed co-payments on bulk billing, clipped future pension increases, ripped $80 billion out of schools and hospitals and lumbered university graduates with ever-increasing debt repayments. 

So unfair were the measures that the usual table that explained the kind of households it hurt and the kind it helped was missing. An attempt to replicate it by the Australian National University showed unemployed 23-year-olds would lose 18.3 per cent of their income. A childless couple on $360,000 would lose nothing.

Most of those measures have been blocked by the Senate, and in most cases rather than trying again the new budget will emphasise the point that it's "nothing like the old one".

On health, rather than pursuing co-payments the new minister Sussan Ley is going to extract greater value from the Pharmaceutical Benefits Scheme and the government's deal with pharmacists. She is considering allowing pharmacists to discount prescriptions, and may remove cheap drugs such as paracetamol from the scheme altogether.

Small businesses will be treated to a tax cut of 1.5 percentage points. They will be given back accelerated depreciation, scrapped in last year's budget, allowing them to write off up to $10,000 per year as well as the cost of setting up a business.

Some of the unpopular measures in last year's budget will remain, at least on paper. They are 'zombie measures' – not actually alive, but included in the budget to dress up the deficit forecasts. One is the much lower grants to schools and hospitals due in 2018 after the expiry of the Coalition's promise to match Labor's pledges for four years. Another is the savings that would flow from cutting grants to universities and allowing them to charge higher fees.

It isn't only fairness that will make the new budget different. The 2014 budget was meant to drive "the biggest investment program in Australia's history". It hasn't happened, in part because one of the projects the Commonwealth insisted on funding, Melbourne's East West Link, wasn't wanted by the Victorian voters.

This budget will try again, devoting money to infrastructure and opening up new possibilities for Victoria to get money in different ways.

What about the emergency?

Abbott declared a "budget emergency" back in 2013 after Labor forecast a deficit of $18 billion. On Tuesday Hockey will announce a deficit closer to $45 billion. But the emergency will have vanished.

In the lead-up to the budget Hockey pointedly redefined success. It is no longer getting the dollar value of the deficit down; it is now reducing it as a proportion of GDP. In a growing economy that's possible even if the dollar value of the deficit doesn't fall. Which is just as well – the latest projections from Deloitte Access Economics have it scarcely falling at all in 2015-16 although falling thereafter.

What's changed is that the government no longer has the political strength to make big inroads into the deficit. Bruised by the reaction to its first budget and behind in the polls it will face an election next year. 

The other thing that's changed is the economy. It is worse on almost every measure than it was a year ago. Post-budget the iron ore price collapsed from $US100 to $US60. Economic growth slid from 3.2 per cent to 2.3 per cent. Unemployment climbed above 6 per cent. Private businesses are telling the Reserve Bank they are reluctant to invest until they see a durable pick-up in consumer spending. But spending, and the confidence that drives it, are fragile. Talk of a second tough budget could dent it. Some of the economists most worried about Australia's outlook are reluctant to even talk about their fears. Like the government, they don't want to dent confidence and make their prophecy self-fulfilling.

This time there are good economic as well as good political reasons for producing a budget completely different to the last one. And turnarounds can work. After Coca-Cola reformulated Mother in 2007 its sales soared to take it within striking distance of Red Bull.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald
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Thursday, May 07, 2015

Census saved. $250 million boost for ABS

EXCLUSIVE

The census has been saved and the Australian Bureau of Statistics will get a $250 million funding boost as part of the biggest technology upgrade in its 110-year history.

The five-year grant, which will be included in next week's federal budget, will be used to replace computer systems that are up to 30 years old, some of which fail to perform properly weekly and daily.

The government's expenditure review committee was told the bureau had 500 separate computer systems. One in three were unreliable and one in six were so outdated they were no longer supported by their vendors.

The bureau proposed releasing it from the obligation to conduct next year's census as a way of funding the upgrade but the budget committee rejected the request after sounding out Labor. The Census and Statistics Act requires the bureau to conduct the census every five years and ny change to that Act would have needed support in the Senate that Labor was unwilling to guarantee.

The $250 million boost is a win for the treasurer's parliamentary secretary Kelly O'Dwyer, who championed the bureau's cause before the expenditure review committee.

The committee was told the bureau's systems had become so run down they were calling into question the reliability of the monthly employment statistics which are compiled using components first commissioned in 1982.

Ms O'Dwyer said the previous Labor governments had ripped $45 million out of the ABS. "They treated it like a honey pot, they put it at risk. Critical infrastructure was left to deteriorate. The labour force figures were unreliable as a result."

The bureau's chief David Kalisch said the money would enable the ABS to perform an entire technology upgrade with most of its systems to be replaced with three common platforms; one for data collection, one for processing and one for statistical products.

The new systems would connect "computer to computer" to other parts of government taking in data such as births, deaths and marriages and immigration statistics. Over time the bureau would be able to expand to collect data automatically from organisations such as the Tax Office.

The system would also be able to deliver data direct to government departments and economic analysts.

Mr Kalisch said he was delighted and encouraged by the confidence that the government had shown.

The ABS will now deliver the full census on August 9, 2016 as originally planned with preparations well advanced. It will be Australia's first "digital first" census, with two-thirds of households expected to complete their forms online.

Martin Bell, a professor of human geography at the University of Queensland who has been campaigning to keep the census, said: "If the census had gone, or gone 10-yearly instead of five-yearly, it would have been a bloody disaster. It really is the only comprehensive source of information we have at the local level. There is no substitute."

"If we had lost it, we would have been at risk of making uninformed decisions about investments in infrastructure, in social services and urban planning. The government is to be congratulated."

In The Age and Sydney Morning Herald
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Tuesday, May 05, 2015

Expect a do-nothing budget that will cost us time

The Coalition's biggest mistake was not to tackle super in its first budget.

If it had, it could have argued it was inflicting pain all around. As it was, with the honourable exception of the (temporary) deficit repair levy, just about all the measures in the budget took money from the least well-off and left it with those on high incomes.

Which means the budget took money from women.

A gender analysis of its retirement income> measures finds that women are almost 80 per cent more likely than men to be on the age pension (which the budget wound back). Men are twice as likely as women to be in the income bracket that benefits the most from super tax breaks (which the budget left untouched).

Siobhan Austen from Curtin University told a conference in Canberra last week that by tackling pensions and not super, the budget further widened the income gap between women and men. Many of us wouldn't have consciously realised this (I didn't) but it left us with the unconscious impression that something about the budget wasn't quite right – that the decisions in it weren't legitimate, which made it easy for the Senate to frustrate it.

Joe Hockey and Tony Abbott defend their decision not to touch super by saying they promised to make no adverse changes to it in their first term, but they also promised that about pensions, a commitment they were able to skirt by saying that the new lower rate of indexation wouldn't cut in until after the next election.

In one way they have learnt their lesson. A week out from this year's budget, they are saying it will be "fair", which is an improvement. But in another way they have learnt the wrong lesson. Their definition of fairness seems to be to not offend anyone...

A collapse in revenue means this year's budget deficit will be more like $46 billion than the $30 billion forecast last budget night. Next year's will be more like $45 billion than the forecast $17 billion. There's not a surplus in sight. The longer the deficits continue and the longer the interest costs of running the deficits compound, the less likely it is there will ever be a surplus.

But rather than raise money in ways that might cut the deficit (however fair), Hockey and Abbott are ducking for cover. Budget cabinet has reportedly knocked back a plan to impose the goods-and-services tax on books and other low-value items that flood into the country in packages, in competition with those sold through shops. It would be fair, but what if someone took offence?

Until Sunday the government looked set to knock back a proposal actually supported by welfare organisations to cap the presently uncapped value of meals and entertainment expenses their employees can claim through the fringe benefits tax system. Even though welfare sector knows it's a rort and offered it up, the budget cabinet was nervous. The latest signs are that it will look again and might well agree to accept what the industry is offering it.

After Hockey mused about imposing a sort of limit on negative gearing (his mate, Sunrise presenter David Koch, once said that while he didn't want to lose negative gearing altogether, "there's got to be a limit"), Abbott and his social services minister Scott Morrison shut discussion down.

Meantime Abbott and his colleagues are spending money as if there is little need for restraint. Bypassing the usual channels, they are giving $4 million to the University of Western Australia to set up a "consensus centre" run by the Danish climate change contrarian Bjorn Lomborg.

They are spending $11 million on a series of largely incomprehensible advertisements promoting the idea of their intergenerational report. And an extra $35.5 million on a continuing festival of Anzac commemorations throughout the next financial year.

The message we are set to get next Tuesday is that there's no budget crisis (even though it's got worse) and that no one needs to get hurt (even though someone will have to be). It's the opposite of what we pay our leaders to do. As unlikely as it seems, it's not too late for them to improve things. One week out, the budget still hasn't been put to bed. That's expected on Thursday.

But big measures that offend large numbers of people are effectively off the table. Abbott promised to consult before any further major changes like the ones to Medicare, higher education and government benefits in his first budget. He hasn't consulted (at least not publicly), and that leaves him able to do very little. One week to go, the government looks like a rabbit in a spotlight, unable to do what's needed, and taking its time.

In The Age and Sydney Morning Herald
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No budget blockbuster as Victoria's new team settles in

Tim Pallas has delivered a 'back to basics' budget rather than a blockbuster.

He had to.

Last year the Coalition promised the East West Link, the Melbourne Rail Link, the Cranbourne-Pakenham rail corridor, the CityLink – Tullamarine widening, the Monash Children's Hospital and a stack of other projects as part of a what it said would be Victoria's biggest-ever infrastructure spend.

How it funded it is something of a dirty secret. Instead of growing by the usual 3 per cent, the government's operating expenses were to grow by just 0.7 per cent in 2015-16. It was planning to squeeze the ordinary business of government in order to deliver flashy promises. Over four years ordinary spending was to grow by an annual average of 2.5 per cent at a time when Victoria's population was growing by 1.8 per cent and prices by 2.6 per cent.

Some of the slower growth due to a one-off transfer of some functions to the Commonwealth, but even taking that into account, the projected spending on the ordinary business of government was unreasonably low. It was keener on building hospitals than staffing them.

Pallas has restored spending growth to 3 per cent. It means he'll be able to pay for wage rises and put on staff. Spending on wages accounts for about 40 per cent of his budget. That spending will climb an impressive 7.1 per cent in 2015-16 as part of a shift back to building up services. The treasury believes wages will climb only 2.5 to 3 per cent, meaning there will be plenty of room to spend the rest of the increase on more staff in hospitals, schools and emergency services. Surprisingly, the budget papers don't say how many extra people will be  put on. It's likely to be whatever can be funded after wage rises have been taken into account. The higher the wage rises, the smaller the number of extra staff who will be used to boost services.

The government's decision to boost services won't win it headlines. But it believes that over time people will notice.

To find the money it has eaten into the surplus. It is promising $1.2 billion in 2015-16, less than half the $3 billion projected in the Coalition's last budget. And it has wound back infrastructure spending. In 2015-16 it will spend $5.2 billion instead of $7.5 billion.

Abandoning the East West Link explains some of the lower spending, as does a deliberate decision to spend more slowly.

Pallas told the budget press conference that he would rather get things right than build them quickly. The RACV identifies Chandler Highway bridge across the Yarra as Melbourne's number one congestion point. It's where four lanes converge into two. It'll cost $108 million to widen, but rather than do it immediately Pallas will spend only $2.1 million in 2015-16 and the rest over the following two years. He'll get it right, but we will have to wait until late 2018.

A bold incoming government would have abandoned concern about maintaining a surplus and borrowed to do the things it wants to do now. Where a project has immediate benefits it should easy enough to convince the rating agencies that it's better to borrow than wait.

But that's what a bold government would do. This one is cautious with its finances. Exceedingly so.

It'll fully fund the Gonski reforms to schools as agreed with the Commonwealth government, but only for the 2016 and 2017 school years. After Abbott pulls the plug in 2018 Pallas is offering no guarantees.

Victoria's new government is settling in.

In The Age and Sydney Morning Herald
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Sunday, May 03, 2015

What's Pallas getting right that Hockey is getting wrong?

What's Tim Pallas doing right that Joe Hockey is doing so wrong?

On Tuesday, Victoria's new treasurer will deliver surpluses as far as the eye can see. A week later in Canberra, Joe Hockey will deliver only deficits. Pallas will claim to have met every one of his election commitments. Hockey could only hope to meet his.

Partly it's the advice they got before their elections. Hockey's told him what he wanted to hear. He could abolish the carbon tax, keep paying out compensation for the carbon tax, abolish the mining tax and cut the company tax rate and match Labor on funding schools and hospitals while paying down debt.

Pallas'> advisers were more cautious. Tearing up the East West Link would save billions (despite the concern about letting the few hundred million the Coalition had already spent go through to the keeper). While building level crossings and the Melbourne Metro would be expensive, the spending would build up slowly.

But mainly it's where they are making their money. Victoria's budget is powered by real estate. In the past year Melbourne house prices have surged 7 per cent. Every new sale hands Pallas a whack of stamp duty. Hockey's budget used to be powered by iron ore. But in the past year prices have plunged 38 per cent.

What can we expect from Pallas on Tuesday? Less than you might think. The end of the East West Link contract means he will commit to less infrastructure spending than Denis Napthine did in his final budget.

But it makes sense. Napthine didn't release the benefit-cost analysis behind the East West Link before the 2014 election because it was appalling. It showed the project would return a benefit of just 45¢​ for each $1 spent. More than half of the money would be wasted. When it expanded the benefit by factoring in so-called "agglomeration benefits" (what happens when businesses cluster near each other) it got a loss-making return of 84¢ per $1 spent.

Labor won't make that mistake. Melbourne Metro will return about $1.90 per $1 spent. Infrastructure Australia (the body that never got to look over the East West Link) ranked it as among Australia's best projects. Many of Labor's level crossing projects look good as well. Labor is committed to these projects as well as the Westgate Distributor and widening the Tullamarine Freeway because it took them to the election, but after them it'll turn off the tap for a while.

All future road and rail projects, including small and medium-sized ones, will have to run the gauntlet of Infrastructure Victoria, a new body it'll set up in the second half of the year. Its reports will be made public. If the projects don't stack up, it'll say so.

That's why Pallas won't be announcing any new projects in Tuesday's budget. He'll have to wait until Infrastructure Victoria has run its ruler over them. He will set aside a small amount for the sort of small projects he thinks will get up (they will be buried in sections with names such as "unallocated capital expenditure" and "decisions taken but not yet announced") but he won't commit to them until the new umpire has taken a look.

He won't even commit to Melbourne's second container port. Labor took to the election a clear preference as to its location, but said it would decide only after advice from Infrastructure Victoria.

It's a new way of governing. It'll make budgets and elections less contentious. And it'll mean that when the government next changes hands the new mob will be far less likely to repudiate contracts after discovering that the old mob hadn't been telling the truth.

Pallas has been lucky in other ways as well. He is expecting a large sum from the long-term lease over the Port of Melbourne. When he uses the proceeds for his own projects including Melbourne Metro and those approved by Infrastructure Victoria he'll be eligible for the 15 per cent Commonwealth contribution introduced by the Abbott government to encourage asset recycling. And the Grants Commission has just given him $400 million over the next four years by changing the way it divides the goods and services tax revenue between the states, much to Western Australia's annoyance.

Two treasurers will be delivering budgets over the next two weeks. One of them will be relaxed.

In The Age and Sydney Morning Herald
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My most important lessons, I've learned from chess.

My most important lessons, I've learned from chess.

I have learned not to get distracted by keeping the score. The only thing that really matters is whether you're working toward your long-term goal.

In chess the two aren't the same. While it's possible to count who has the most points as you go, it doesn't you win the game. If you are greedy, you're likely to lose.

And I have learned that the least impressive pieces can be the most important. Every piece has a part to play, even those that appear to be doing nothing other than covering a square. In chess, as in life, no matter how unimpressive the task, if it is done well the entire enterprise benefits.

And I've learned to be nice when I lose and generous when I win. The last moves in a game of chess are necessarily cruel: it's a game of hunting and being hunted. But it usually isn't personal. Everyone takes turns at losing.

As well as other things. While it's necessary to think through problems as much as you can, it's not enough. You also need to recognise patterns. "What happened last time I was in a position like this?" "What's my subconscious visual memory telling me?" It's important to tap into your inner self. It is better at finding solutions than is brute force.

Had I never played chess it is possible that I would have picked up these lessons from somewhere else, but I doubt it. Not all of them, not in the same place.

Chess teaches lessons about life because it has evolved and been refined throughout the last 15 centuries of human life. It has become uncommonly good at teaching us who we should be.

John Adams believes there's more to come. You might have read about him in the papers a few weeks back. A former adviser to Coalition senator Arthur Sinodinos, he has been lobbying the government to allow Australians with higher education debts to get early access to their super to pay them down.

While that's on the backburner (the government says it won't do it in this budget) he has turned his attention to chess, and the way it might help Australia face the sort of challenges identified in the Intergenerational Report.

Our jobs are increasingly going to involve our minds rather than our muscles. We are going to be doing them longer, well beyond traditional retirement age. And we are going to have to compete against the best in the world, wherever they are.

Does that sound like a job for chess?

Chess is particularly good at developing high-level mental skills, not only in maths but in a whole range of things that involve focusing, visualising and applying reasoning. As strange as it sounds, reading is one of them. Study after study shows that children who play chess are better at reading, as well as better at reasoning.

And it might be able to delay diseases such as Alzheimer's. In his new book The Brain's Way of Healing, Norman Doidge details the remarkable ways in which the deliberate use of our brains can rewire and make them stronger. He says brains are "neuroplastic", capable of healing themselves with the right exercises.

Might chess be useful enough to be worth spending government money on? Should it be taught in schools in the same way as music? Should it be funded as a sport in the same way as sports such as soccer?

For a few years in the 1980s at the insistence of the Labor sports minister John Brown chess actually was funded as a sport, out of the Sports Commission budget. Since 1999 the International Olympic Committee has recognised it as a "mind sport" along with bridge, although it hasn't yet put it the Games.

Adams says he doesn't know the answers. In his new role as government relations director of the Australian Chess Federation he has begun a literature review and research project that will examine the extent to which chess can play a role in boosting Australia's intellectual capacity and equipping it for the challenges of the 21st century. It'll be published early next year in time for the budget and before the election when the political parties will be scratching around for policies.

Chess has a number of advantages. It is cheap, almost certainly makes us better able to think, and fun. It would get us recognised around the world for doing something other than kicking and hitting balls. And it might make us better people.

In The Age and Sydney Morning Herald
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