Thursday, May 29, 2008

National FuelWatch. It's on

The leglislation goes into Parliament tonight.

In the frosty Prime Minister's courtyard the PM issued this challenge to the Opposition:

"Either you vote for consumers, or you vote for a cosy deal with big oil companies."

"That's the choice. Why do you think all the big oil companies are opposed to what we are proposing?"

The updated information available from the ACCC puts this beyond reasonable doubt.

As Joshua Gans summarises it this afternoon:

"The ACCC has updated their econometrics on FuelWatch and it reinforces the positive effects of that policy found in WA. The new updates do two things:

First, they respond to claims that price falls in WA were the result of the entry of Coles rather than FuelWatch. The ACCC uses a test for endogenous structural breaks to look for significant events. They find that both Coles’ entry and FuelWatch were such events but that FuelWatch’s effect was almost three times as large.

Second, the ACCC looks at the highs and lows of the petrol price cycle. They find that the introduction of FuelWatch in WA, not only reduced prices by 3.5 cents per litre on high priced days it reduces prices by 0.7 cents per litre on low priced days. So that means that even bargain hunters were better off."

There is other interesting information out today as well...

Made public by the Coalition Consumer Affairs spokesman Luke Hartsuyker, it is ACCC data on what volumes of petrol were bought for what prices in Sydney vs Perth during the month of August 2007.

The ACCC couldn't make use of it for its economic analysis because it doesn't go back far enough. But it suggests that the ACCC's ideas about "average" margins in perth vs "average" in eastern states before and after FuelWatch overstate the difference FuelWatch made.

But its conclusions about minimum margins would stand.

Here's the info:

In Sydney 34.5 per cent of petrol is sold for prices in the lowest decile of prices.

In Perth a smaller 18.1 per cent is sold for prices in the lowest decile.

In Sydney 18.1 per cent of petrol is sold for prices in the next lowest decile.

In Perth a smaller 8.5 per cent is sold for prices in the next lowest lowest decile.

In Sydney 15.9 per cent of petrol is sold for prices in the third lowest decile.

In Perth a smaller 9.8 per cent of petrol is sold for prices in the third lowest lowest decile.

Taking the lowest three declies together, in Sydney 65.3 per cent of petrol is sold for those prices; in Perth it is 36.4 per cent.

For the highest-priced decile, in Sydney only 3.1 per cent of petrol was sold; in Perth 11.7 per cent of petrol was sold.

Did Western Australia's relative fuel price margin fall after January 2001?

It certainly looks as if it did:

This is the graph included in Appendix S of the ACCC's fuel price report, which concludes that FuelWatch in Western Australia has cut the margins charged by service stations there.

The Government wants to take FuelWatch national. We now know that four government departments opposed the idea in their co-ordination comments on the submission presented to Cabinet.

As I explained in the
Canberra Times this morning, dissenting co-ordination comments are not unusual. Very common in my memory. (I once had a small role in drafting them.)

The Cabinet probably made the right decision in deciding to adopt FuelWatch in the face of what we now know was concern expressed by four government departments that reported to it.

The concerns were expressed robustly. That’s how Australia’s Cabinet co-ordination process works. Each of the relevant departments gets to comment on each submission put forward by the most relevant one.

Sometimes they argue their case in strong terms, just to make sure the Cabinet has a full debate.

There is absolutely nothing unusual about the process, as every public servant who has ever worked in a policy department and every person who has ever looked at the Cabinet documents released under the 30-rule knows...

In this case the Australian Competition and Consumer Commission was putting forward a proposal through the Treasurer and Assistant Treasurer.

It recommended that the FuelWatch scheme, in operation for eight years in Western Australia, be taken nationwide.

There each petrol station is required to freeze the price it will charge for petrol for 24 hours from 6.00am each day

It notifies FuelWatch of its planned price at 2.00pm on the day before. FuelWatch puts the information up onto its website and SMS service and gets it to the media by 4.00pm.

People planning to buy petrol the next day can know with absolute certainty where they will get the cheapest deal. If a service station indicates that it is planning to increase its price they can even get in early and get their supplies before the price goes up.

The oil companies hate it. Here is a list of the organisations that made submissions to the ACCC opposing the scheme, in the order that they are named in the ACCC’s petrol price report: Caltex, Coles, Woolworths, Mobil, BP and Gull Petroleum.

Each suggests that it opposes FuelWatch because it doesn’t bring about lower petrol prices.

Given that each is a petrol retailer it is more likely that each opposes FuelWatch precisely because that is what it does do.

The econometric analysis prepared for the ACCC finds that the average price of petrol in Western Australia is 1.9 cents per litre cheaper than it would have been without FuelWatch.

The lowest price is lower also, although by a smaller 0.9 cents per litre.

In the graph presented in Appendix S of the Commission’s report, the difference is apparent to the naked eye.

Before Western Australia introduced FuelWatch at the start of 2001 the margins charged by Perth retailers were typically somewhat higher than those charged in the eastern states. After FuelWatch they were somewhat lower.

In the language of statisticians the difference is “statistically significant”.

The study concedes, generously, that there might be something else missing from its analysis that explains the narrowing of petrol station margins from the start of 2001.

However it says that “the use of the eastern capitals for relatively means that any missing items would need to have a significantly different effect for Perth relative to the other capitals”.

In other words, it’s not likely.

Subsequent advice to the Treasurer from the ACCC was that it wasn’t likely at all.

There are many potential objections to the scheme, none of them strong.

One is that it’ll impose a heavy administrative burden on petrol retailers, costing them $20 million a year.

It is hard to see where the expense could come from. Is it the price of the phone calls or emails to FuelWatch? Or is it something else? In any event the government has promised to reimburse the service stations for any extra expenses they face.

As it happens almost every service station in the land already supplies its price information minute by minute to a company called Informed Sources, which sells the aggregate information back to it.

Under FuelWatch each station would only need to provide that information once a day and it wouldn’t be charged for getting it back.

As one witness told the ACCC inquiry: “FuelWatch had made it easier to read the market at almost no cost to the business as the cost was being borne by the taxpayer”.

The Opposition and apparently the Prime Ministers Department have argued that there is no need to freeze each petrol station’s prices for 24 hours to get the benefit of FuelWatch, it is enough just to put pricing information on the internet.

But information without a short-term price freeze is no information at all. Not if a price can change the minute after someone looks it up and gets into their car.


Wednesday, May 28, 2008

The ever-stronger Aussie - within sight of US$1.04

The ANZ Bank says fair value would be US$1.12

The ANZ Bank has sharply revised up its forecasts for the Australian economy predicting at least one - and probably two - more official interest rate hikes before the end of the year.

The forecasts spell trouble for the Rudd government whose leader Kevin Rudd yesterday took responsibility for interest rate moves by telling Parliament that his Budget had “put downward pressure on interest rates”.

The ANZ has revised up its forecast for inflation, expecting it to reach a new long time peak of 4.9 per cent in the second half of this year prompting the Reserve Bank to push up interest rates in August and again in November.

The two hikes would take the money market cash rate to 7.75 per cent - one of the highest in the developed world, and take standard variable mortgage rates to 10 per cent.

They would add weight to criticism that the Budget didn't cut spending nearly hard enough to make inroads on inflation and forestall further interest rate rises...

The ANZ's predictions are stronger than those made by other banks.

Westpac and National Australia Bank say rates will stay on hold this year, while the Commonwealth Bank is tipping one rise of 0.25 per cent.

The good news to flow from the ANZ's new forecasts would be a much higher Australian dollar, so high that the Bank says it itself should put downward pressure on inflation.

The bank expects the Australian dollar to climb above its post-float peak of 96.5 US cents and then to US$1.00 and then to US$1.04 before the year's end.

In a briefing note sent to clients late yesterday the bank's Head of Foreign Exchange and International Economics Research Amy Auster said that the Australian dollar should outperform most currencies in the world in the next 6 to 12 months, because Australia would be the only OECD country in which interest rates were on the way up “thanks to a home-grown inflation problem and booming terms of trade”.

This month's budget papers forecast an extra 20 per cent hike in Australia's terms of trade this year on top of the 40 per cent rise over the last four years.

The Australian dollar closed yesterday near to 96 US cents, a 24-year high.

The ANZ's briefing note says that 96.5 US cents is the next hurdle and that “a move above this level would reinforce the view that the Aussie can move to levels comfortably above US$1.00.”

The bank says that the Australian dollar has been above US$1.00 in the past, before it was floated in 1983. In the early 1980s it climbed past US$1.18 and in 1973 climbed past US$1.47.

“We are not arguing for a move back to these highs, but we think a move above US$1.00 would see some follow-through,” the briefing note says.

The Bank's “fair value” model which predicts where the Australian dollar should be on the basis of fundamentals points to a US$1.12 Australian dollar before the end of the year, although the bank says that “in recent months, the dollar has traded at a discount to our fair value model.”

A study released yesterday by unions including the Community and Public Sector Union and the Finance Sector Union warns that the high dollar will continue to encourage the hollowing out of Australian employment as banks and other firms shift their back-office operations offshore.

Based on modelling conducted by the National Institute of Economic and Industry Research it predicts that 850,000 jobs are at risk over the next 20 years – one in ten of all service sector jobs.

Tuesday, May 27, 2008

Rudd and Nelson want lower petrol prices. Garnaut doesn't.

Who is going to win? I've got a very bad feeling about this.

The government will release the draft of its emissions trading guidelines in a month or so. Garnaut wants transport fuels included. Cautious Rudd may now not.

Here's my colleague Shane Wright in the West Australian:

"There is a very big elephant at the bowser being ignored by Brendan Nelson and Kevin Rudd.

The elephant has a name — climate change — and all the chest-beating about lowering taxes on petrol just ignores the pachyderm that is coming down on the Australian economy at a rate of knots.

Both alternatives, Dr Nelson’s to cut excise by 5¢ a litre and Mr Rudd’s, which is to look at removing the GST impact from the excise, merely fiddle at the edges.

We’re talking 5¢ or 3.8¢ out of a price that in Perth at the weekend averaged 151.9¢ a litre...

That’s with a global price of about $US130 a barrel. Now, if analysts are correct, that price will push upward towards $US200 a barrel this year and maybe $US300 a barrel early next decade.

Yep, that 5¢ or 3.8¢ will be noticeable when you turn up to the servo and have to shell out $3 a litre or more.

While there is political mileage to be made out of reducing pressure on those notorious working families, both politicians are ignoring the longterm implications of their policies.

Ultimately, the contribution of petrol to climate change needs to be taxed.
Malcolm Turnbull and Dr Nelson tried to signal last week that maybe petrol should be excluded from any emissions trading scheme.

That ignores the problem that by trying to protect motorists, the cost of reducing greenhouse gas emissions will be increased for those other sectors left to carry the load.

You might be saving Mr and Mrs Average in their Pajero a few cents a litre, but they won’t be able to heat the house or switch on the air-conditioning because electricity costs will have ballooned, thanks to this policy loophole.

The emissions trading scheme is supposed to be up and running towards the end of 2010, but that’s off in the never-never for two major parties trying to pretend they can save motorists a couple of bucks a week by fiddling with petrol taxes.

Mr Rudd created a problem for himself in last year’s election campaign by suggesting he could do something about petrol prices. He can’t.

Dr Nelson is following down the same path but he is just as impotent on petrol as the PM.

The price we’re seeing today is a reflection of demand and supply. A price of $1.51 a litre is a pretty big signal to motorists to reduce their car usage or use public transport.

It’s a signal to car manufacturers that maybe the world doesn’t need another 4WD with 20 cup holders but an ultra-efficient vehicle.

Hell, maybe even one that doesn’t require petrol to drive the internal combustion engine.

And it should be a signal to political leaders that the road to a low carbon economic future will be rocky enough without promising something that simply will not deliver.

Look out for those elephants on the way."

Tuesday Column: Ignore the private health insurance guilt merchants:

These men want you to feel guilty.

Have you ever felt guilty about receiving a gift?

Thanks to the Budget, from July many of us are about to be suddenly free of the Medicare Levy Surcharge.

The gift will be worth $500 a year to someone earning $50,000; $700 a year to someone earning $70,000; and so on.

At the moment the levy is charged to anyone earning more than $50,000 and to most people in couples that have a combined income of $100,000.

You can escape from it by buying private health insurance but the effect on your bank balance is the same or worse – anywhere from $10 to $25 a week.

From July thanks to the Budget the surcharge will only apply to the small number of Australians who earn more than $100,000 a year or a combined $150,000 as a couple.

Most of us will get let off.

The Opposition wants us to feel guilty...

Its Treasury spokesman Malcolm Turnbull asks what the relief will cost “an already overstrained hospital system”.

Its health spokesman Joe Hockey predicts “a catastrophe for our already overrun public hospitals’’.

And its leader Brendan Nelson puts a (totally erroneous) figure on the damage saying it will remove “a net $300 million from Australia’s hospitals”.

How would this long-overdue adjustment of the Surcharge threshold do any damage at all to Australian hospitals?

The argument is that as people who at present feel compelled by the surcharge to join private funds drop out they will pour into public instead of private hospitals.

But if you think the effect is straightforward, or even significant, you’ve been spending too much time listening to Malcolm, Joe and Brendan.

The figure the Opposition Leader used in his Budget In Reply speech - “a net $300 million from Australia’s hospitals” – doesn’t refer to money that will no longer go into hospitals at all. It refers to money that will no longer go into the hands of people who take out private health insurance, because fewer are expected to take up private health insurance after the surcharge threshold is lifted.

What happens to hospitals is a different thing altogether. A point that the Secretary to the Treasury Ken Henry was keen to make in an unusually personal way at his post-Budget address last week.

Many, many people who take out private health insurance rather than pay the surcharge do so only for that reason.

The funds help them to do it.

Try this yourself. Go to the Medicare Private website and get yourself a quote. You will be asked what you main priority is. Among the options is number 6: “Reduce Tax”.

There you will find a policy that will help you do that, but not much else.

The one offered by NIB Health Insurance fully funds only the removal of teeth, minor knee, hip & shoulder investigations, the removal of tonsils and appendixes, minor hernia surgery and the use of an ambulance.

Anything else is covered only to the extent of a shared room in a public hospital, which as the NIB says “won't go anywhere near the cost of a stay in a private room in public hospital”.

And a lot more is explicitly excluded including major joint surgery, pregnancy and renal dialysis.

It is a good policy unless you plan to get ill.

The NIB product and ones like it are designed to help people escape the surcharge rather than provide them with cover. They are the fastest-growing category of “health insurance” products, and most are never used.

Ken Henry himself had one.

“I myself had one of those insurance policies that voided the Medicare levy surcharge, I don’t remember using it, some pretty cogent reasons for that,” he said last week.

One of those reasons might be that if he did try to use it in an emergency at a public hospital he would run the risk of being charged for extras, something that doesn’t happen to uninsured patients.

The golden rule among people buying tax-dodge policies is to put them in a draw and never use them. Enter public hospitals as a public patient and accept the (usually very high) standard of care you are offered.

These are the policies that hundreds of thousands of grateful Australians are likely to drop first (or no longer take out) when the Medicare Levy Surcharge is lifted.

They are no loss. As financial engineering rather than health insurance products they take not an iota of strain off “an already overstrained hospital system”.

Of course some Australians affected by the surcharge do take out genuine private health insurance. For them, lifting the surcharge threshold will make little difference. They don’t pay it anyway. They will continue to buy private health insurance if they believe it continues to offer value them for money. And they will continue to get the separate tax rebate paid to them for doing so.

There’s a third group affected by the surcharge, and at last week’s function Ken Henry gave a hint that he might be among them. He used the past tense when he said he “had one of those insurance policies that voided the Medicare levy surcharge”. He might not have one now.

I don’t have one. The latest available tax figures suggest that another 14,019 Canberra residents liable for the surcharge don’t either.

Nationwide, almost half a million Australians prefer to pay the Medicare Levy Surcharge rather than join a fund. Even though they know they could save money by doing so.

Why do so many people do something so apparently irrational?

In my case it is an abhorrence of financial engineering. If the government wants money from me I would rather pay it than be pushed into what is effectively a tax-avoidance scheme.

From July most of us will be freed from that dilemma. We will no longer be prodded into buying fake private health insurance and we will be able choose to buy the real thing (or not) based on its merits.

Those merits are not obvious - at least not in my case, and perhaps not in Ken Henry’s. In an emergency there is no better place to be than in a public hospital.

You can get elective surgery there as well, and if the wait is too long you can buy it in a private hospital.

We shouldn’t be made to feel guilty for spending our money wisely.

Hospitals need public support. Private health “insurance” does not.

Monday, May 26, 2008

Some weirdness - the Aussie dollar speaks... me.

As part of a new WeekAhead section the Canberra Times will present a profile a likely "newsmaker" each Monday.

I got to do the first one. A profile of the remarkable Aussie Dollar. Busting through 96 US cents and heading north.

I took a decidedly positive view of the move. As I see it, increased buying power has to be a good thing. Was I right?

The Aussie speaks:

MOST of the time I work behind the scenes. Everyone’s complaining about high petrol prices right now, but has it occurred to them that if it wasn’t for me, quietly climbing from 77 US cents at the start of last year to 96 US cents today; petrol would be really expensive – around $2.00 a litre rather than $1.60 by my reckoning.

Of course that’s not really fair of me. I couldn’t have stayed still while the price of oil was climbing. Every time the price of oil climbs the dealers who buy and sell me push up my price. They figure if the price of oil is going up so too will the price of other fuels such as gas, coal and uranium which Australia produces in abundance. The more Australia’s customers pay for those resources the more they’ll need Australian dollars and so the more they will pay for those dollars. Or that’s what the dealers think...

It’s funny being a currency. You would think my price would be set by the foreigners who buy me in order to invest in Australia, buy Australian exports or visit Australia and the Australians who sell me for foreign currencies in order to invest overseas, buy imports or visit other countries.

But in fact my price is set by the dealers who speculate about what is likely to happen to my price. It’s a bit like being on Big Brother. Everyone’s watching and placing bets on what’s going to happen to me.

So when there’s news about what might happen to me in the future my price moves quickly. Last week it was an indication that the Reserve Bank has been actively considering pushing up Australian interest rates. Kapow! I shot from 95.5 US cents to well above 96 US cents like that. The traders see no reason to wait until foreign money pours into Australia to take advantage of higher interest rates. They push up my price4 straight away.

Life’s good for me at the moment, and good for the Australians who rely on me. Almost everything that’s imported is cheaper than it was or cheaper than it would have been had my price not soared – including petrol.

It didn’t used to be like that. September 2001 marked a low point. With no talk of a resources boom, and with the US dollar riding high I sank below 50 US cents. That’s right. I was a two-for-one special. Americans who wanted to come here could get two of me for one of there’s. I was humiliating. I could only buy half of a greenback.

But since then the US has run into strife and I’ve become what people buy if they think world commodity prices are going to keep climbing – which people do.

Soon I’m likely to worth one US dollar and if people keep thinking commodity prices will climb there’s no reason why I won’t climb beyond US$1.00. Westpac is tipping US$1.02 by March.

Even against the basket of the currencies that I am swapped for (the so-called Reserve Bank Trade Weighted Index) I am headed for a post-float high. I am getting close to 100 Japanese Yen and 50 British pence. I remember when I used to buy only one third of a British pound.

My Australian detractors say that I am getting too high for our exporters to be competitive. But they sure look competitive to me.

Contract prices for coking coal are set to climb by more than 200 per cent in the year ahead. Thermal coal prices are set to climb 125 per cent, iron ore prices by at least 65 per cent.

Food prices are also soaring, which is good for our farmers - where they can get the water.

Our manufacturers will find it even more difficult, but even for them any inputs they buy from overseas will be cheaper than they would have been.

Overall I am happy being high. I can help spread Australia’s new wealth. Shoppers in Sydney, Melbourne and Canberra are getting more for their dollar when they buy imported shoes, clothes and electronics goods because iron ore miners in Western Australia are getting a better price.

It won’t last forever but (just between you and me) I can’t see it stopping.

Our best teachers are worth $130,000 per annum

The Business Council of Australia is to present the government with a radical proposal under which Australia’s best teachers would be paid up to $130,00 each in order to remain in the classroom.

At the moment the top salary for a classroom teacher is around $70,000.

The proposal, outlined in a paper released this morning entitled Teaching Talent: The Best Teachers For Australia’s Classrooms, would eventually cost an extra $4 billion per year, to be funded half by the Commonwealth and half by the states and territories.

Justifying the expense the Business Council paper says there are “no cost-neutral ways to ensure that in the future Australia will have a teaching profession equal to the best in the world”.

“But there will be major costs if we do not"...

The Council proposes setting up a new national agency to run a voluntary advanced certification system for teachers.

Those judged to be “Accomplished Teachers” would be rewarded with a salary twice the graduate starting level.

Those judged to be “Leading Teachers” would receive 2.5 times the starting salary.

The certification agency would be run by teachers themselves.

Certification would be required in order for teachers to be promoted to leadership positions.

The Business Council report says that “salary may not be a strong reason why current teachers have chosen to teach, but it is a strong reason why many abler graduates choose not to teach, and this is cause for considerable concern if we want our education system to remain among the
best in the world”.

“There is no justification for assuming from this that our society can continue to get away with not paying teachers what they are worth,” the report says.

The report finds evidence of a “a largely hidden
resignation spike” after eight to ten years of teaching, when teachers reach the top of their salary scales.

“For some teachers, this may be a case of ‘now or never’ when it comes to seeking a new career, a decision that crystallises when teachers reach the maximum and final salary step.”

The report says good teachers are often being replaced by new teachers of a lesser academic quality.

Universities have been dropping their entrance requirements and were “free to enrol students in teacher education courses until they fill course quotas”.

In some courses the entry level is less than the 60th percentile, “which means Australia is recruiting substantial numbers of primary teachers from the middle third of high school graduates rather than the top third,” the report says.

Most states do not require students taking up teacher training to have passed either Year 12 maths or science.

The report recommends that entry scores for teaching courses not fall below the 75th percentile and that all intending primary teachers be required to have studied maths, science and English to Year 12.

“The quality of learning by our children is critical in ensuring Australia has the skills and knowledge required to meet its future challenges, and quality and effectiveness of classroom teachers are the most important influences on effective learning,” the report says.

“Nobody can believe that capping the top salary for classroom teachers at about $70,000 places enough value on the enormous contribution they make to the future prosperity of our nation.”

The Business Council’s recommendations dovetail with those made by the economics group at the 2020 summit which called for Australia to have one of the best education systems in the world by 2020.

They also fit in with Labor’s pre-election commitment to recognise teaching excellence by paying bonuses to highly accomplished teachers of up to $10,000 per year.

Tuesday Column: Paying teachers for performance, Canberra Times, March 6, 2007

Lessons must be learnt if we are to keep teachers, Sydney Morning Herald, Wednesday, January 12, 2005


Now Rudd's in on it. Less gas tax.

Spare us. The Opposition Leader Brendan Nelson is actually in a powerful place when he can get the Prime Minister to match him no matter how stupid his idea is. What hope is there for even mildly-courageous decisions under Rudd?

The Rudd government has held open the prospect of axing the GST it charges on its fuel excise – the so-called “tax on a tax” that adds 3.8 cents per litre to the price of petrol.

Government sources said there was a chance the extra tax would be gone by the end of the year.

The Families Minister Jenny Macklin yesterday confirmed that the tax inquiry to be chaired by the head of the Treasury Ken Henry would examine exempting the fuel excise from the Goods and Service Tax...

“That is one of the issues that we will address in this major tax inquiry that the Treasurer has announced,” she said.

“It will look at that issue and a wide range of other critical matters that haven't been looked at for such a long time."

The inquiry is not due to deliver its final report until the end of next year, but has been asked to report in stages - meaning that the GST could come off the fuel excise later this year.

In setting up the inquiry the government promised to respond “in a timely way” to the Review’s recommendations as they were released.

The Tax Review will be made up of the head of the Treasury Dr Ken Henry, a Canberra tax specialist Greg Smith of the Australian Catholic University, the head of the Families, Housing, Community Services and Indigenous Affairs Department Dr Jeff Harmer, Heather Ridout of the Australian Industry Group and Professor John Piggot from the University of New South Wales.

It will be begin work in July after receiving a discussion paper prepared by the Treasury.

The announcement comes amid skyrocketing petrol prices which have hit 162.9c a litre in Sydney and 159.9c in Canberra.

The 3.8 cents a litre tax cut would go some way to meeting the Coalition’s post-Budget promise of a 5 cents a litre cut.

While that promise was attacked by economists and energy experts as irresponsible, the removal of the “tax on a tax” could be presented as justifiable in terms of taxation theory and flowing from an independent review of the tax system.

The new Petrol Price Commissioner and the planned FuelWatch scheme would be used to make sure that the 3.8 cents a litre tax cut was fully passed on at the pump.

But any resulting joy experienced by motorists would be short-lived.

The price of oil has climbed through $US130 and is expected to pass through $US150 within weeks. When that happens the Australian retail petrol price is expected to climb to more than $2 a litre.

As well the emissions trading rules to be adopted by the government later this year have the potential to push up the price further. A discussion paper released by the Government’s Garnaut Climate Change Review in March recommended that the emissions trading rules apply to fuels used for transport.

Any decision to remove the Goods and Services Tax from the fuel excise would change the nature of the GST, which was intended to be comprehensive, applying to all financial transactions and goods and services with a very limited number of exemptions.

The states and territories would apply for compensation for the GST revenue lost, which would exceed $1 billion.

The Opposition Senate Leader Nick Minchin yesterday welcomed the government’s move saying that the fuel tax cut was “a great Liberal policy that Mr Rudd should take up”.

He held open the prospect of blocking the government’s proposed FuelWatch scheme in the Senate saying the Coalition had “not made a decision” on whether to let it pass.

“All of the evidence is that Western Australia’s fuel watch scheme hasn't made a difference. We don't think that watching prices go up makes a difference. We think that the government should adopt our policy of cutting the fuel excise by 5 cents a litre.”


Sunday, May 25, 2008

Brendan didn't go far enough: "Free Gas"

From the US Colbert Report:

HT: Economists for Obama

Saturday, May 24, 2008

Sunday dollars+sense: Brendan's big idea

“An idea so ridiculous, so unworthy of the people aspiring to lead our nation, it takes your breath away.”

Not long ago Australia's Liberal Party stood for prudent economic management and the freedom of the individual.

Today it stands for cheaper petrol.

Its leader Brendan Nelson has been saying so continuously.

We stand for lower petrol prices”, “five cents a litre off petrol is what we stand for”, “what we stand for is five an a half cents a litre off the price of petrol at the pump” and so on.

He is beginning to sound like Hillary Clinton and John McCain. In the US both of them (but conspicuously not Barack Obama) are proposing an 18.4 US cents a gallon gas tax holiday - an amount which when converted to Australian currency works out at 5 cents a litre, the same as Australia's Opposition leader is proposing.

Because at least one of them will be a presidential candidate, American economists have to treat the idea seriously...

Paul Krugman, in other circumstances a Clinton supporter,) calls it as “pointless and disappointing”.

Thomas Friedman says it is “so ridiculous, so unworthy of the people aspiring to lead our nation, it takes your breath away.”

An open letter signed by 150 of the world's top economists (including three Nobel Prize winners) described it as “bad idea” that would generate “major profits for the oil companies while doing nothing to encourage conservation”.

It would effectively blunt the price signal that is meant to be telling us use less oil – it would be “shooting the messenger”.

An Australian economist living in the US, Justin Wolfers said that the condemnation made him “proud to be an economist”.

“In any election silly season, you can usually find someone willing to support just about any kind of nonsense. But it appears that the economics profession just isn’t that silly,” he wrote.

And then he issued a challenge.

Was there a single coherent economist in the US who actually supported the plan?

Three weeks on, despite wide publicity, he has received no takers.

Clinton herself was asked to name a single credible economist who agreed with her.

She couldn't, and replied: “Well I’ll tell you what, I’m not going to put my lot in with economists.”

“We’ve got to get out of this mindset, where somehow, elite opinion is always on the side of doing things that really disadvantage the vast majority of Americans,” she added.

One of those 'elite' economists Arnold Kling responded: “Soon I expect to hear the Senator from New York promise to jump out of a tenth-story window and fly, to demonstrate defiance of elite physicists who doubt the feasibility of the project.”

Brendan Nelson has taken the Coalition down an interesting road.


Thursday, May 22, 2008

Friday Fun: The Budget, the CPI, and the movies.

First, fun with the budget:

Budget Hero, created by the team at American Public Media, is a life-like test of skill, for a Treasurer. Such as you Wayne. Turn on the sound.

Now, graphing the CPI.

All of Inflation’s Little Parts is an intuitive, almost organic graphical representation of what makes the Consumer Price Index (in the US):

Play with it. Roam around and zoom. It tells you a lot.

Finally, the movies.

The Ebb and Flow of Movies: Box Office Receipts 1986 — 2008 is at the cutting edge of graphic design: ultra intuitive, ultra-organic, packed full of information, and a thing of beauty. I am in love with it.

Play, and learn, and then read the story of how it was created.

Hat tips: Shane Wright, Zubin Jelveh.

Luxury cars: "perfectly legal, elegant tax avoidance"

Get a load of the front page of today's Age:

Here's a close-up of the text of the ad:

... which was placed right below Nassim Khadem's story "Luxury car owners to be targeted in new crackdown on tax evasion"

The same thing happened in the Sydney Morning Herald with Jessica Irvine's story.

I understand that the ads had been pre-booked and the placement was a un/helpful coincidence.

My story on the front page of this morning's Canberra Times (not placed next to a related ad) is below the fold.

Luxury car owners, already reeling from a Budget which will lift the rate of tax they pay on buying their cars by one third, are about to be hit something worse – special attention from the Tax Office.

The Tax Office yesterday gave notice in the Commonwealth Gazette that it would ask each state and territory motor registration office to supply it with the names, addresses, phone numbers and dates of birth of each Australian who has bought or sold a luxury car between July 2005 and July 2007.

The Tax Office defines a luxury car as any vehicle bought or sold for more than $57,000 – the current luxury car tax threshold.

It is a definition that at odds with that used by the Coalition Treasury Spokesman Malcolm Turnbull who told the National Press Club yesterday that “the vast bulk of the cars sold in that $57,000 and more category are not regarded as particularly luxurious.”

The tax increase on cars above that price level “should be called a Tarago tax,” he said.

“It is not a tax on people of high incomes."

But the Tax Office said yesterday that its luxury car program would identify “those earning high incomes” who accumulated assets.

“The intention of the Luxury Vehicle Data Matching Project is to trace both high risk non-lodgers and those with undeclared income based on the value of the assets they acquire which indicate conspicuous wealth,” the Office said.

The program is an extension of its Conspicuous Wealth Project.

Results from a pilot program suggest that as many as one in four Australians who buy or sell a luxury car have at least one outstanding tax return.

The Office said it would cross-reference the sales data obtained from the states and territories with its internal records to identify Australians who appeared to have tax debts, undeclared income and unlodged tax returns.

Australians who had bought or sold cars and were unknown to the Tax Office would receive a letter asking them to confirm that they had tax records.

“We have not been able to confirm your details with Tax Office records,” the letter would read.

“If we have not had a response within 21 days a field officer may visit you to confirm your Tax Office record details.”

The Tax Office will ask registry offices to supply it with details that identify both the purchasers and sellers of luxury cars and also the dates of the sale, the sale prices, the garage addresses and the Vehicle Identification Numbers.

Where luxury cars have been bought or sold by companies the Office will ask the registration authorities for the Australian Business Number or the Australian Company Number of the companies involved.

The protocol released yesterday says the Office recognises that “certain persons with conspicuous wealth may use various strategies to conceal their ownership of a vehicle”.

“These strategies can involve registering the vehicle under the name of another person or entity when buying or selling.”

“Alternatively, it may be that the actual owner undertakes a vehicle ownership transaction when claiming to act on behalf of another person or entity which may or may not exist.”

It says it will extend its data matching activities to investigate further persons of interest such as sellers, licensed dealers, fleet managers and leasing companies “to determine if the use of interposed persons and the use of false or proxy ownership represent a significant threat to the revenue”.

The Commonwealth Securities index of luxury car sales hit record high in 2007, climbing 11 per cent to 48,820.

The index includes data on sales by 15 luxury car manufacturers including Aston Martin, BMW, Bentley, Ferrari, Hummer, Jaguar, Lamborghini, Lexus, Lotus, Mercedes Benz, Porsche and Rolls Royce.

Luxury car dealers have been advertising heavily ahead of the budget tax rise due in July saying that the increase in the luxury car tax from 25 per cent to 33 per cent will push up the price of a $100,000 car by around $2,500.


Tuesday, May 20, 2008

Rate hikes: Just when you thought it was safe to go back into the water

A further interest rate hike is back on the agenda following a surprise revelation that the Reserve Bank board discussed pushing up rates at this month's meeting and a call from the head of the Treasury for the Bank to take tough action against inflation.

The minutes of the Reserve Bank's May 6 board meeting released yesterday confirmed that, as had been believed, the Bank's executive recommended that the board keep rates steady in May because consumer confidence and spending were weakening.

However they also reveal that despite this board members at the meeting “spent considerable time discussing the case for a further rise in the cash rate”.

An interest rate rise in May would have been the Bank's fifth since August...

...and would have taken the cash rate to 7.5 per cent and mortgage rates to more than 9.5 per cent.

The minutes say that on balance the board “decided that it was appropriate to allow the current setting of monetary policy more time to work”.

They added that “should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the stance of policy would need to be reviewed”.

The account of the meeting, taken as preparing financial markets for the possibility of a further rate hike, sent the Australian dollar soaring above 96 US cents for the first time since 1984.

The dollar hit a 24-year high of 96.16 US cents shortly after the release of the minutes and remained above 96 US cents at the Australian close of trade.

The Bank's message was backed up the head of the Treasury Secretary Ken Henry who used a post-budget address in Sydney to aggressively defend the the Bank's role in raising interest rates in order to fight inflation.

Referring to critics of the Bank's actions, who include the Shadow Treasurer Malcolm Turnbull, as “seriously misguided” Dr Henry said that the Reserve Bank would not be successful in controlling inflation if its methods were “put aside the moment they are tested”.

Mr Turnbull has argued that a good deal of inflation “oil prices, food prices” comes from outside Australia and is not amenable to control by interest rates. Much of the rest comes from housing costs which he says are made worse by interest rate hikes.

Dr Henry said there was “no reason to think” that the Bank could not restrain the effects of higher world food and energy prices through the use of interest rates.

Properly understood, those outside factors were “demand shocks” whose effects could be contained by interest rates, not supply shocks beyond the bank's control.

Dr Henry's remarks are significant because in addition to being Secretary he is one of the nine members of the Reserve Bank board. It is unclear whether he represents the Treasurer on the board or is able to vote as he sees fit.

The board minutes do not identify the names of the members who speak at its meetings and so do not make clear whether Dr Henry was one those arguing for a further interest rate hike in May.

Dr Henry described the role of budgetary policy was less important than monetary policy in controlling inflation although it could have a role to play.

He said that the government's Budget had allowed “the so‐called automatic stabilisers to work”, which is taken to mean that the Budget was broadly neutral in its impact on inflation, neither pushing it further up nor doing much to bring it down.

He also took a swipe at the Coalition for its “Soviet style” stance opposition to market pricing for water, and for its obstruction to full road user charges for trucks.

The day after the Budget the Opposition used its Senate majority to block a regulation that would have increased the road user charge incorporated in the diesel excise.

“This should have been front page news. But it wasn’t. In fact, I have been able to find only one reference to it in the nation’s print media: a tiny side‐bar piece,” he said.

“The road user charge for heavy vehicles is not the most important structural policy matter likely to confront the nation's parliaments this year. But it would be one of the easiest.”

“If this terms-of-trade boom is going to have a happy ending, we are going to have to do better than this – a lot better.”


Dr Ken Henry's speeches are always worth a read

Here is today's post-budget address delivered to the Australain Business Economists in Sydney.

He completely rejects the popular argument (endorsed by the Opposition) that interest rates and targeting can't be used to control inflation.

And he is none too pleased about the Coalition's "Soviet-style" approach to the use of prices.

Tuesday Column: Labor's home saving scheme is now only half a dud

Wayne Swan said his Budget would keep all of Labor’s election promises.

But it didn’t really.

Some of them were too awful to implement in full.

Take Wayne Swan’s promised ‘Low Tax First Home Owner Savings Accounts’.

His pre-election sales pitch promised that “savers will be eligible for a low tax rate of 15 per cent on the first $5000 of income they deposit in their account each year rather than the ordinary tax rate they would pay”.

There were two problems. One was there was no mechanism for charging people one rate of income tax on wages parked in an account and another rate of income tax on the rest. Labor hadn’t realised that.

The other was that Australians on salaries of up to $30,000 (soon to be $34,000) pay no more than 15 per cent tax anyway – for them the so-called ‘low tax’ accounts wouldn’t be low tax at all...

But for someone earning in excess of $75,000, the 15 per cent rate would be valuable indeed. A rate of 15 per cent instead of 40 per cent would mean a gift from other taxpayers of $1,250 for each $5,000 parked in the accounts.

For a very high-income earners on a tax rates of 45 per cent the gift would be bigger still.

Labor didn’t see this at the time, explaining that it was proposing “superannuation-style accounts”.

The tax concessions for superannuation do indeed have such unfair and indefensible features. That Wayne Swan didn’t see them that way is disheartening.

He continued not to see the problems after the election when the Treasury made them clear.

In advice to the Treasurer mainly blacked out from documents released under the Freedom of Information Act the Treasury said that they couldn’t charge one rate of tax on income put in one place and another on income put in another unless the specially taxed accounts were to be funded by employers as are superannuation accounts.

But the Treasury said Wayne Swan could achieve the same effect as his policy would by paying a government co-contribution directly into each First Home Saver Account. If he wanted exactly the same effect, he could direct the biggest contributions into the accounts of the highest income earners.

I am guessing that the Treasury said this to make a point, one the Treasurer failed to get – that his policy was untenable.

Instead in February Wayne Swan and the Housing Minister Tanya Plibersek actually published something very close to the Treasury’s ‘suggestion’ under their own names in a consultation paper.

It was hoot - the equivalent of a ‘kick me’ sign.

It even included a table making clear that an Australian on up to $80,000 could get $750 from the government (Swan and Plibersek had at least abandoned the idea that low-income earners should get nothing), someone earning more than $80,000 could get $1,250 and someone earning in excess of $180,000 could get $1,500.

Expressed as a per cent the matching contribution would be 15 per cent of what most earners put in, 25 per cent of what higher income earners put in, and 30 per cent of what very high-income earners put in.

Then Swan and Plibersek asked for submissions.

Unpublished until now, the public submissions excoriate the ministers’ clever idea and their dumbness in actually putting it forward for comments.

One member of the public, Leah Fawcett, wrote:

“I would like to know why an earner of $180,000+ will receive the most contribution from the government, while a low to middle income earner will receives the least.”

“I understand that higher income earners pay more tax. But someone with an income of $180,000 will still take home more than an average income earner. That person should be more able to afford their own home.”

Another, Ian Hafekost complained that under the proposal:

“Those individuals with a taxable income of up to $80,000 per annum, who you would think might need the most help in saving for a deposit, receive the smallest Government contribution.”

Yet another, David Ng was “shocked and utterly disillusioned to find that the government contribution is twice as much for those paying the highest rate of income tax (i.e. with the most income) as for those with the lowest”.

“I cannot comprehend how rewarding those who earn around $80,000 per annum with a $1,250 contribution, and those who earn $40,000 with $750, even though they have both saved $5,000, could possibly do anything other than to push house prices even further beyond the reach of the latter, who is after all competing with the former,” he said.

“To portray it as being even vaguely beneficial to lower-income earners is a fallacy, as not only does their higher-earning competition have equal access to the scheme, and not only do these richer aspirants escape paying the higher rates of income tax that would normally be applicable to their savings; they are to be given more money solely because they earn more.”

“Not because they have saved more, but because they earn more,” he added for emphasis.

David Ng said that as it stood the proposal might even push housing further out of the reach of low income earners.

“The proposal is a tax-break for middle-to-high income earners that will enable them to spend more on housing, thus pushing up prices which are already beyond the reach of most low income earners.”

The proposal would be the right one only if the aim was to “push up house prices and exacerbate the housing schism”.

As he put it: “Tax reform to help the rich should be publicly debated rather than advanced under the guise of improving housing affordability”.

What would Wayne Swan and Tanya Plibersek do without such selfless Australians as Leah Fawcett, Ian Hafekost and David Ng prepared to spend their own time gently pointing out the blindingly obvious ways in which their Ministers have stuffed up?

The Treasurer sheepishly and belatedly backed down on Budget night. His budget documents said that the government contribution had been changed to a flat 17 per cent “in order to increase assistance to low and middle income earners”.

Because of the late change the start of the scheme was pushed out from July to October.

But it is still an untenably unfair scheme. The earnings of the a First Home Owner Savings Accounts will be taxed at 15 per cent – a concession that’s worth nothing for a low-income earner, but a lot for a very high-income earner.

The Treasurer and Housing Minister mightn’t have twigged to that.

Sunday, May 18, 2008

Sunday dollars+sense: Tax alcopops. To extinction.

What is it about prices that the Coalition doesn’t understand?

Push up the price of something and people usually buy less of it than they would have had its price remained low.

Especially when those people are young, and so not yet addicted to it and short on cash.

Alcopops look and taste like soft drinks. They are brightly-coloured, in small bottles – attractive to children. Their sweetness masks the taste of their alcohol.

Young people don’t like the taste of alcohol. (It is acquired later, just as is the taste for chilies.)

But give a teenager a few red or green strawberry or melon flavoured alcopops and he or she will gradually get used to alcohol and want more of it...

Alcopops are starter drinks for kids.

Medical research suggests that the longer the consumption of alcohol can be delayed the better. It acts as a as neurotoxin for children and adults below the age of 25. Their brains are not fully-developed.

Disturbingly, the sales of alcopop starter drinks are soaring. That’s good news for the manufacturers, but bad news for the brains of young people.

The Treasury believes that its proposed tax hike will slow down the growth in sales by 43 million bottles.

The Opposition has pretended not to hear. It has latched on to another part of the Treasury analysis that says the sales of alcopos will continue to climb even after the tax increase.

They will, but by less than they would have. What part of that doesn’t the Opposition understand?

Or perhaps it does understand. In his Budget in Reply speech on Thursday night the Opposition Leader Brendan Nelson put forward the apparently contradictory position that the tax hike would be so effective that it would turn young people away from alcopops toward cheaper forms of alcohol and drugs.

For people used to alcohol there will indeed be substitution to cheaper forms of it. (The drugs suggestion was a bit of a stretch.)

But for young people not yet enticed onto alcohol early by easy-to-drink alcopops the price increase will help. It will make the take-up of alcohol more difficult.

The Opposition also seems confused by the proposition that a tax hike on something could both raise money and turn young people away from it.

Have they not been paying attention to what’s happened to smoking?

The tax hike will raise money from people already addicted, while dissuading potential addicts from trying it out.


Saturday, May 17, 2008

Saturday Forum: The Budget that didn't hurt

All throughout the bureaucracy at the end of this week they are asking the one question: how many tough ideas were bowled all the way to the up to the Prime Minister’s office in the lead-up to the Budget and then knocked back?

There must have been many.

As early as last November just before the election Kevin Rudd warned us that his first Budget would be tough.

“When I talk about a razor gang, I'm dead serious,” he told the National Press Club.

“It's probably not the right town or a popular place to talk about it here in Canberra. But I have lived in Canberra, Therese and I have lived in Canberra and it just strikes me as passing strange that the Coalition Government, which supposedly belongs to the conservative side of politics, has not systematically applied the meat-axe to its own administrative bloating"...

In January the Finance Minister Lindsay Tanner put flesh on the meat-axe metaphor, warning that he was going to slash spending by an extra $3 billion to $4 billion - perhaps more - in the months ahead.

“It's a big task. We have set the bar high, and there will be pain,” he declared, noting that “there inevitably will be pain when you cut spending, but it is critical that we get inflation back in check.”

The Prime Minister agreed, observing that “nothing happens in politics for free and there will be pain on the way through, I accept that”.

The Treasurer said the three of them would “take the axe to the reckless spending spree that the Liberal Party went on for the last three years”.

And then the language softened.

By the final week Lindsay Tanner was cautioning that “we do not believe that there will be substantial pain, or really major pain for any significant groups of people but inevitably when you make spending cuts, that means that there has to be pain.”

Mr Tanner was right. There wasn’t substantial pain, or even really major pain for any significant group of people.

The promised axe was replace with a scalpel. After taking new spending into account the net savings appeared to amount to $2 billion - not the $3 billion to $4 billion plus promised.

That figure is widely believed to be not enough to put significant downward pressure on inflation.

“The budget won't add to upward pressure, but nor can it really be said that it exerts maximum downwards pressure,” said the ANZ Bank's chief economist Saul Eslake.
The Canberra based consultancy EconTech told its clients on Friday that it had been surprised by just how little net spending had been cut.

On its estimate the net savings were $0.9 billion – “close to zero” - and as a result the budget would have a “broadly neutral effect on the economy”.

What happened along the way? Someone got cold feet.

There is no doubt that all sorts of extremely worthwhile savings measures were considered by the departments of Treasury and Finance and by their Ministers.

There were leaks. The Australian Conservation Foundation is certain that Swan and Tanner were very seriously considering its proposal to remove the special Fringe Benefits Tax position enjoyed by workers who use salary sacrifice to get their employers to buy them cars.

The concession is on track to cost $2 billion a year, and because it gets bigger the more kilometres people drive is thought to create as much extra greenhouse pollution as a medium-sized coal-fired power plant.

Someone stymied it at close to the last moment.

Melbourne’s Herald Sun reported just before the budget that the Prime Minister has personally intervened to overturn a cut that would have cost nursing homes $100 million.

It’s possible that he or his department intervened to overturn many of the cuts proposed by Finance and Treasury.

They may have overturned enough of them to neuter the downward pressure the budget was going to exert on interest rates.

Wayne Swan promised it, back in March, telling the ABC’s Tony Jones “the most important thing we have to do is put maximum downward pressure on inflation so we can put maximum downward pressure on interest rates”.

But Tuesday night when he read the Budget speech there was no talk about putting downward pressure on interest rates.

The “most important thing” was missing.

If Kevin Rudd or his department did overturn proposed savings measure after proposed savings measure in the final weeks of the budget process he is following a model set by Malcolm Fraser as Prime Minister in the late 1970s and early 1980s.

Fraser’s ineffectual Treasurer John Howard put to Fraser tough proposal after tough proposal that had been developed in the Treasury and had them knocked back.

Malcolm Fraser wanted to be liked.

So too it seems does Kevin Rudd. It was apparent well before the budget. When it was discovered that the Coalition hadn’t budgeted to pay the seniors and carers bonuses in the future and that Kevin Rudd was under no obligation to do so he stepped in and guaranteed that they would be safe.

The Budget was shaping up to be a test of whether he would ever be prepared to take unpopular decisions.

He appears to have failed it. And the implications are severe.

No particularly unpopular decisions are expected in the next budget. It will be delivered while the tax and benefits inquiry chaired by the Treasury Secretary Ken Henry is still sitting.

Those decisions will be put off.

The inquiry will report at the end of next year.

By then Australia will gearing up for the next election and the odds of unpopular decisions being announced are small.

This budget, as with all post-election budgets delivered by incoming governments, is the one in which the tough decisions were most likely to be taken.

For people concerned about getting the tax system right the omens don’t look good.

Removing the special tax treatment for salary-sacrificed cars was a no-brainer. There were no valid arguments against it.

As it happens, the Australian car industry was better placed than usual this year to absorb the impact of the change. The Mitsubishi plant had just closed.

Even measures that wouldn’t have hurt the Australian industry at all, such as applying the same import duty to four-wheel drives as to other cars, were seen as too hard.

The argument isn’t too hard to follow.

Ordinary cars face a 10 per cent import duty. Gas-guzzling four wheel drives built to lower safety standards only face a 5 per cent duty, apparently because they were once predominantly used by farmers.

Only a government really frightened of offending the urban professionals who are shifting to four wheel drives at a frightening rate (sales are up 16 per cent in the last year) would allow the rort to stand.

Instead the government upped a motor vehicle tax that would hurt very few people and is itself a standout example of bad tax design.

The extra tax on luxury cars costing in excess of $57,123 has a basis in history, not in logic. By rights it should have vanished when the flat 10 per cent Goods and Services Tax replaced the previous multi-rate wholesale sales taxes.

It remained in order for the Coalition government to avoid the bad publicity that would have come from slashing the price of the cars bought by the very well off. It is a historical analogy, one that on tax design grounds should have been allowed to wither rather than made worse.

It is easy to believe that the government upped the luxury car tax in order to distract attention from its failure to correct the Fringe Benefit Tax anomaly enjoyed by cars and the special treatment enjoyed by four wheel drives.

It is easy to believe that it is a mark of cowardice.

Asked yesterday what measures the government should have taken but didn’t, one very senior ex-Treasury bureaucrat said: “Just open the Tax Expenditure Statement. You’ll find 60 billion of them.”

Produced by the Treasury at the start of every year the Tax Expenditure Statement is a list of the all of the ‘spending’ programs that are delivered in the form of tax concessions.

Worth $51 billion this year, they are set to climb to more than $61 billion over the next two years.

More than half of that total relates to the extremely generous treatment handed out to superannuation (now extended by labor to first home savers, no matter how rich).

Disappointingly for those who care about good administration, Ken Henry’s inquiry has been directed not to touch tax-free superannuation payments for the over 60s. it has also been told not to extend the Goods and Services Tax and not to recommend against future cuts in the top tax rate.

The caution apparent in the Budget and beyond might be appropriate if the Australian economy was on an even keel.

No-one, certainly not the Treasury, would argue that that is the case.

In its words in the budget papers, “powerful countervailing forces are confronting the Australian economy”.

If the forecasts were delivered with less certainty than usual.

If things do turn out as the budget documents suggest everything will be okay. Our economic growth will slow despite an almost unprecedented boom in our terms of trade, and there won’t be a need for another interest rate rise.

But there are a lot of ‘ifs’ in those qualifications.

The terms of trade is a measure of the prices we get for the things we sell overseas as a proportion of the prices we pay for the things we import from overseas.

In the four years since the minerals boom started they have soared 40 per cent – faster than those of any other country.

The budget papers say that in this year alone – 2008 - they are on track to soar another 20 per cent, which because of compounding will mean they have soared 70 per cent in five years.

Foreign income is set to flood into Australia in a way it has never has before.

In the face of that flood all the new government has done is to have held its financial position fairly steady.

That caution demonstrates considerable faith that more restraint won’t be needed in order to avoid another round of interest rate rises.

The grounds for that faith are far from clear.

If circumstances do conspire to give us another round of interest rate rises, they will correctly be said to have been the fault of Wayne Swan and Kevin Rudd.

Or perhaps just Kevin Rudd.

The government had a once-in-a-parliament opportunity to build up Australia’s defences against a renewed wave of inflation and interest rate hikes.

This week someone chose not to take it.


Friday, May 16, 2008

Nelson's Budget howlers!

Spare us

It is difficult to work out whether Brendan Nelson was paying attention during his decade in government.

And just as difficult to work out whether he was paying attention during Tuesday's night's budget.

Here are some howlers from his speech last night replying to the Budget:

“We do not support higher taxes and higher spending.”

Excuse me, but that's exactly what the Coalition did support in each of its last ten budgets.

And some of the increases were massive. Tuesday night's budget slowed them down.

"Devastatingly for carers, there is no commitment in the budget papers to pay the Carers Bonus in future years."

The same as in each of the Coalition budgets that paid the Carers Bonus.

“How can any government boast of a budget that proposes to put 134,000 Australians out of work?”

Wayne Swan's budget doesn't propose to do that and doesn't even forecast it. In fact it forecasts an increase in employment in the year ahead. The increase won't be big enough to absorb all of the new job entrants, but that isn't the same as saying that existing Australian workers will lose their jobs.

“Health insurance premiums will increase with measures that will see a so far confirmed figure of half a million mainly young people, drop out.”

Why will that happen Dr Nelson?

And what exactly are the measures that you won't describe?

They are measures to reduce the health costs faced by some one million Australians.

Dr Nelson says he will oppose the measure. Good luck to him. He will be opposing a tax cut.

He will also be opposing the increased tax on 'alco-pops'. He says it's a “$3.1 billion tax on one alcohol product”, which makes it sound unfair.

But did he notice that all it does is tax premixed spirit drinks on the same basis as unmixed spirits, which doesn't sound at all unfair.

“As incomes rise over time and workers move into higher tax brackets, the value of today’s income tax cuts will be eroded in the future. Economists call this bracket creep. We call it tax increases on the sly.”

“There must be a commitment to future relief.”

The fact is that the budget does contain a commitment to future tax relief. It spells it out on page 10 of statement one and backs it up with an allocation of $6 billion for 2011-12 which is outlined on page 15 of the revenue estimates.

If the Coalition wanted to index tax rates in order to abolish bracket creep, it had twelve budgets in which to do it.

It didn't.

It says it will next time.


The Opposition Leader Brendan Nelson last night committed the Coalition to using its Senate majority to block the budget increase in the duty on pre-mixed drinks and to block the tax break for Australians at present punished for not joining a private health fund.

The decisions, announced in the Budget in Reply speech, will see the Coalition oppose a measure widely popular amongst the medical profession and also oppose a tax cut potentially available to one million Australians.

In addition Dr Nelson put forward a proposal to cut the price of petrol by cutting the petrol excise by 5 cents a litre.

He said the cut would actually save motorists 5.5 cents a litre because they would also escape some GST.

It would cost $1.8 billion per year.

“Ninety per cent of Australian households have a car,” the Opposition leader declared.

“Right now they all need some help. Real Help.”

He stopped short of committing the Opposition to introducing the measure into the Senate, which it will control until the end of June.

But he did say that the Opposition would use its numbers in the Senate to attempt to block the alcopops measure, the private health insurance measure and the budget's changes to income test for the Commonwealth Seniors Health Card.

“For all his talk of slaying some dragon, the Treasurer has breathed new life into inflation with a budget that delivers something Australians have not known in Commonwealth budgets for some time – tax increases,” Dr Nelson said.

“The price of alcohol is up. The price of cars is up. The price of groceries will be pressured in part from higher taxes on trucks. Taxes on computer software are up and workers are about to have the Treasurer bite into their hard earned money with a tax on canteen meal cards.”

Describing the increase in tax on premixed drinks as a “$1 slug on responsible Australians who happen to enjoy a pre-mixed Bundy and Coke or Scotch and Dry” Dr Nelson said the measure would not improve health and questioned whether binge drinking was a growing problem.

“The Government’s own National Drug Strategy Household Survey confirms binge drinking by young women has actually declined since 2001 and alcohol abstinence in this age group has increased.”

“Any parent, let alone a health economist, will confirm that if you jack up one price in isolation from other measures, kids will simply move to another alcohol product or to a drug.”

“This is nothing more than a tax binge falsely presented to Australians as a health measure. We will oppose it.”

Earlier in the day Health Minister Nicola Roxon tabled Treasury modeling that showed the excise increase would cut consumption of pre-mixed drinks by 43 million bottles in 2008-09, which was equivalent to about 800,000 litres of alcohol.

“We want to know whether the Opposition Leader has got the guts to support our measure,’’ Ms Roxon said.

The Opposition's health spokesman Joe Hockey came into question time armed with two bottles of drink – a 200ml bottle of champagne and a 275ml alcopop that each cost $4.50.

The champagne contained twice as much alcohol as the alcopop and attracted only half the tax.

“It just shows this is a tax grabbing con,’’ Mr Hockey said.

The Prime Minister Kevin Rudd replied that the Opposition Leader had supported the measure when it was first announced.

ABC television last night aired film taken in 1996 of Dr Nelson arguing that pre-mixed drinks did encouraged excessive drinking among young people.

In the Budget in Reply speech Dr Nelson promised to convene a national forum of “alcohol specialists, educators, police, parents and people with expertise in this and related fields to develop a truly integrated approach to what is an undeniable problem”.

He said the budget, like the Government, had put “media spin ahead of substance, bureaucratic doublespeak ahead of people and more than 100 reviews, inquiries and committees ahead of decisions.”


Thursday, May 15, 2008

"Don't confuse tough with stupid" - Swan

Under attack for not doing enough to take pressure off interest rates the Treasurer Wayne Swan yesterday claimed that had he done more, Australia's economy could have “slammed into a wall”.

Speaking to the Canberra Times at the annual post-budget Press Club lunch Mr Swan agreed that Canberra residents were breathing more easily after after Tuesday's Budget.

“All those dire predictions didn’t happen,” he said.

The Budget papers describe the public service jobs cuts as “modest”, amounting to 1,200 staff nationwide.

Asked whether his future budgets would be even less tough Mr Swan replied: “You shouldn’t confuse tough with stupid”...

“If we took some of the advice we are being given to cut spending and to rein in demand we could slam the economy into a wall.”

“We’ve got very uncertain international environments, slowing growth, and we’ve got higher domestic inflation. Each of those things mean that we have to strike a balance, and the balance that we have struck is we believe the right one for the long-term health of the country.”

Private sector economists disagree. Most who were contacted yesterday said they believed the budget cuts were too mild to take pressure off interest rates.

“The budget won't add to upward pressure, but nor can it really be said that it exerts maximum downwards pressure,” said the ANZ Bank's chief economist Saul Eslake.

“Interest rate hikes remain an open question,” said the chief equities economist at Commonwealth Securities, Craig James.

“Over this year and next, decisions made by the government in the budget will actually be stimulating, not constraining the economy.”

Chris Richardson of Access Economics said that if the Treasurer wanted to notably reduce the ongoing inflation risk he should have cut another $3 billion out of spending in the coming financial year.

“That is not an easy thing to do, cutting spending does involve pain,” he conceded.

“But it is pain that is going to be felt anyway, either in mortgage rates or in the decisions of this government.”

The Macquarie Bank's Rory Robertson said he would be “surprised if the Reserve Bank or anyone feels a sudden need to lower their inflation or interest rate forecasts” as a result of the budget.

The market reaction to the budget's release at 7.30pm Tuesday bears this out. Both the dollar and bond prices were little moved as a result of the Treasurer's speech.

By contrast the release of lower than expected wage price figures yesterday moved the markets sharply, pushing up the share market by 50 points and pushing down the dollar one quarter of a cent.

Wages climbed by only 0.9 per cent in the three months to March and by 4.1 per cent over the year. “This will be music to the ears of anyone with a mortgage and music to the ears of the Reserve Bank,” said Craig James.

Mr Swan told yesterday's post-budget lunch that he wanted to explain why he had gone “as far as we did and didn’t go further”.

“If you slam the breaks too hard it might have other consequences that you don’t want,” he said.

“It is true that we might have been able to do more and we are certainly going to go back in Razor Gang Mark II and look for further savings.”

“But we have gone as far as we thought we needed to go given the temper of the times”.

Mr Swan said the second razor gang review would begin soon.

“I'm not sure that it will be starting tomorrow. The Finance
Department might have a few issues with that. But we will get to work soon.”


Wednesday, May 14, 2008

Budget 08: The commentators weigh in.

Here are the big ones:

Ross Gittins: 'If Wayne Swan is Robin Hood, I'm the Sheriff of Nottingham.'

KEVIN RUDD has failed to grasp the nettle. In his effort to demonstrate Labor's credentials as a good economic manager he is off to a disappointing start.

The budget could have been worse - as it almost certainly would have had John Howard been re-elected - but it could have been much, much better. By better, of course, I mean more unpleasant.

By all the rules of politics and economics, this budget should have been a stinker. It isn't. If you think that's good news you may live to repent your error. It's pleasure now at the risk of pain later.

Mr Rudd needed to seize the unrepeatable opportunity of his first budget to cut hard at his predecessor's profligate spending programs. He did a bit, but not nearly enough. At his first test, he has failed to live up to his rhetoric.

This budget is not as "tough as all hell" because it hasn't "taken the axe to irresponsible spending"...

We were told the budget would "exert maximum downward pressure on inflation and interest rates".

It doesn't. Wayne Swan has cut government spending, but not sufficiently to counter the effect of his $11 billion tax cut from July 1. The budget will therefore do little to reduce the need for any further increase in interest rates. So the claim that the budget gives relief to hard-pressed "working families" is a sham.

It's temporary relief that could well come at the cost of additional pain in coming months. Even if further interest-rate increases don't prove necessary, the budget does nothing to bring forward the day when the Reserve Bank is able to start cutting rates. The good news in the budget is that Mr Rudd has broken the mould of politicians feeling free to go back on their promises.

The bad news is that most of the promises he has insisted on keeping were weak, vote-buying policies and now quite inappropriate to the present economic circumstances. The Government seems to have been working under the belief it could come up with a popular tough budget. Not surprisingly, such a contradiction wasn't possible.

This budget won't be particularly unpopular, simply because it isn't sufficiently tough. The plain truth is that working families constitute too much of the economy for them to be protected in any budget tough enough to take pressure off interest rates. It is Mr Rudd's misguided desire to shield middle-income households that has rendered the budget inadequate to protect their interests in the longer term.

Mr Swan has laboured hard to create the impression that the budget achieves the required savings largely at the expense of high-income earners. Don't be taken in. There aren't enough of them to make a big difference to the budget's bottom line and, in any case, they've been thrashed with a feather.

The alleged means tests have been set at such high incomes they apply to few people and will save surprisingly small amounts. The withdrawal of family tax benefit part B from families earning more than $150,000 a year, for instance, won't spending on family assistance by 0.4 per cent.

And while Mr Swan has been taking from the well-off with one hand, he's been giving with the other. Whereas "working families" will get combined tax cuts of between $20 and $30 a week, individuals earning $180,000 a year or more will get $50 a week.

From July 2009, working families will get a combined tax cut of less than $9 a week, whereas high-income individuals will get more than $40 a week. High-income earners will gain from the new unmeans-tested first-home buyers' saving scheme and better-off families will do well from the decision to raise the unmeans-tested child-care rebate from 30 to 50 per cent.

So if Wayne Swan is Robin Hood, I'm the Sheriff of Nottingham.

With the economy expected to slow, that was all the more reason to bring down a much tougher budget and thereby take the pressure off interest rates. That didn't happen. Perhaps Mr Rudd is too nice a guy to make an outstanding economic manager.

Tim Colebatch: 'No priority beyond that of don't offend anyone who might vote for us.'

This is not an exciting budget, but it is not a bad one. It is cautious. It takes no risks. Despite pages and pages of changes, it really changes very little. That is its strength, and its limitation.

Is it economically responsible? You bet. Visionary? Not really. Will it cut through the knots to solve any of Australia's problems? No.

Like last week's Victorian budget, this is a political document. It is about placating an extremely diverse range of interests, by giving something to everyone. There is no clear sense of direction, no absolute priorities other than the electoral one: don't offend anyone who might vote for us.

Yet even those of us who love to see political daring have to admit that this is not a good time for it. The economic problem facing Australia is inflation. This budget had to be contractionary, and it is — a little bit on its own numbers, but probably a lot more by the time the real numbers unfold.

Treasury predicts the budget surplus for 2008-09 at $21.7 billion, or 1.8% of GDP. Only a net $2 billion of that was due to the Labor Party, which, roughly speaking, saved $7 billion by raising taxes or cutting spending, and spent $5 billion in new spending and tax cuts.

But Treasury always underestimates. I forecast that — assuming that all revenue windfalls are added to the surplus, as Labor has promised — the surplus will end up between $25 billion and $30 billion, possibly even more. If I am wrong, I will donate $100 to the charity of Treasury secretary Ken Henry's choice. If I am right, I invite him to do the same.

Two things make this budget unusual to draft, and unusually difficult to sell. The first is that it comes after an election campaign featuring huge spending by both sides, paid for by the resources boom. Six months ago, Australians were promised mega billions of new spending, mega billions of tax cuts — and that, at a time when, we now know, inflation was already accelerating to the highest levels since the 1990-91 recession.

Politically, the problem for Kevin Rudd and Wayne Swan is that they have already reaped the credit for all that — six months ago, when Australians voted them in.

This budget is essentially about delivering on those promises. And it's a bit hard to claim new credit for doing what you told us you would.

To win new credit from voters would mean offering them something new. And that brings us to Labor's second problem. Tucked away in Treasury's economic overview is a forecast that GDP in current dollars will accelerate next year by 9.25%. In plain words, that means that Australians next year will have 9.25% more money to spend. At a time when inflation is already running hot, that's the biggest growth in nominal income for 20 years. Not what the doctor ordered.

That might seem odd when GDP in volume terms is forecast to rise just 2.75%. The gap between them is explained partly by domestic inflation, which is expected to be 3.5% over 2008-09, and partly by soaring prices for the 20% of our output that is exported. The ratio of export prices to import prices is tipped to leap 16%. That alone would add $35 billion to $40 billion to our national income, and about $10 billion to budget revenue.

Frankly, to deliver that new spending and tax cuts in this environment is economically irresponsible. But not to deliver them would be politically irresponsible, and cost Labor votes. Rudd is not into things that cost him votes, so the economic imperatives had to give way. And to compensate, this budget offers very little in new goodies other than those promised in the election campaign.

Its net changes add $1.93 billion to revenue and subtract $64 million from spending. Of $7.3 billion in gross savings, only $295 million will come from "soak the rich" stuff: the luxury car tax hike, and cutting off the richest Australians from family benefits and the Baby Bonus.

The biggest savings in 2008-09 come from lifting the tax on alcopops ($640 million), scrapping the OPEL broadband network in the bush ($634 million), imposing the crude oil levy on condensate ($564 million), cutting departmental spending across the board by 3.25% ($412 million), and scrapping the Howard government's Access Card ($310 million).

Many of Labor's savings are only temporary. It will still have to roll out broadband to the bush one day. It will still need some form of ID card for welfare recipients, it will still need to widen Constitution Avenue in Canberra (the one city that was singled out for serious spending cuts in what the Canberra Times dubbed "capital punishment" — Canberra always votes Labor, so it can be punished without fear of reprisal).

This budget even has the nerve to claim bringing in another 37,500 migrants as a savings measure, because they will increase revenue. Yes, but they will also add to the nation's desperate housing shortage, on which Labor has offered nothing new since the election campaign. So OK, bring in these people — but, for Pete's sake, this time can you try to find some migrants who know how to build houses?

Shane Wright: 'If telling people earning $150,000 that they don’t deserve a handout was tough then he simply wasn’t trying.'

Wayne Swan has not saved Australian mortgage holders from another interest rate rise with his first budget.

Despite all the rhetoric ahead of it, about this budget being a key part of the war on inflation, Mr Swan and the rest of the Rudd Government razor gang have done the easy yards – not the hard ones.

To paraphrase the Treasurer, the hunt for spending cuts was more like a turkey shoot where the blokes with the shotguns went home empty-handed.

The raw figures are startling.

Despite the turmoil on global financial markets and share markets, Commonwealth tax revenues will still grow the best part of $10 billion.

Company tax receipts are expected to grow more than 10 per cent to $73 billion.

Mr Swan has tried to argue total savings equate to $35 billion over the forward estimates, starting with $7.1 billion this financial year.

But these "savings" include a fair whack of extra tax (for instance, the alco-pop tax increase, the axing of condensate excise exemptions for the North-West Shelf), an efficiency dividend on the public service ($1.8 billion over four years), ending the Access Card ($1.2 billion) and abandoning the OPEL broadband contract.

Real savings are either small or highly targeted, such as means testing the baby bonus and Family Tax Benefit B which will improve the bottom line by about $1.2 billion.

Indeed, Mr Swan said the hardest decision was to means test both benefits.

If telling people earning $150,000 a year that they don’t deserve a government handout was his toughest budget decision, then he simply wasn’t trying.

The Treasurer has a point that to cut too deeply could put in jeopardy the entire economy.

"It would be nonsense to have made much more substantial spending cuts. You would have hit the brakes so hard that you might have had a negative impact on the economy," he said.

There are doubts over the US economy, financial markets are still clogged, and the commodities boom must end some day.

But if the world economy picks-up, as most pundits expect, by the end of this year, and the worst of the global credit crunch is over, then the savings of this budget seem small beer.

The Reserve Bank would be happy that at least this new Government didn’t find more ways to hand back the proceeds of the commodities boom to taxpayers like the last guys did.

On that count, they have saved mortgage holders from a lot more pain.

The various enormous cookie jars for infrastructure, health and education do provide the basis for long-term funding for key productive parts of the economy.

However, there is still so much spending, so many handouts, in an economy where inflation is well above the target band, unemployment is at generational lows and the terms of trade lifting to 50 year highs.

Ultimately, Mr Swan has to be judged on his pre-budget rhetoric, what he delivers, and what the Reserve Bank does next.

The Reserve knows its job hasn’t been made harder with Wayne Swan’s first budget. But it hasn’t been made any easier.

George Megalogenis: 'The budget is meant to be read two ways, because it tries to have it both ways.'

It is a change-of-government budget in the most mundane sense of the term, because its main transaction for 2008-09 is $5.7 billion in new revenue measures and spending cuts to pay for $5.3 billion in election promises.

No prizes for originality here, unless you count the absence of broken promises as something new.

What is different about this budget is the surplus. It won’t go into Peter Costello’s Future Fund because that fund is full. Instead, it will be divided three ways, between infrastructure, health and education investments.

How and when the money will be spent will be up to the Government. This is a piggy bank like no other.

Wayne Swan has $40 billion set aside for these three policy areas. It is the sum of just two surpluses—2007-08 and 2008-09. There will be more top-ups before the next election.

The Treasurer hasn’t said yet what he will do with his initial war chest of $40 billion, but he hasreserved the right to spend the capital as well as the fund earnings.

This is where the real budget story lies, in Labor’s flexibility to spend up on infrastructure for the next election and beyond.

Mr Swan is the first treasurer in history with no commonwealth debt to cover.

There is no borrowing to pay off, or public service super liability to meet. Just a surplus that has to be returned to voters at some point.

This is, indeed, a revolution. Labor has the luxury of thinking long-term because the budget itinherited from the Coalition allows it to.

The budget cuts are not as grand as they seem.

The simplest way to unpack the numbers is to see where the budget would have been if Labor wanted to break every one of its election promises apart from the tax cuts.

The figure is a surplus $19.7 billion for 2008-09, which, incidentally, is a surplus that would have met Kevin Rudd’s January target of 1.5 per cent of gross domestic product.

But Labor implemented every promise because it could. The bill for staying sweet with voters was $5.3 billion in 2008-09. This was offset by $5.7 billion in new savings. A further $1.6 billion in savings had already been flagged at the last election, bringing the total cuts to $7.3 billion.

Now subtract the savings of $7.3 billion from the promises of $5.3 billion and you have a $2 billion addition to the surplus, to $21.7 billion.

If this looks like small beer, it is. The real budget headline was the $40 billion that Labor has set aside for itself.

There is a back story which Mr Swan tried to tell last night.

These huge surpluses are also a function of the Coalition’s withdrawal from the real economy. Mr Costello, remember, used to complain about infrastructure bottlenecks, but gave the states no spare change to clear them.

He forced the states to borrow, then accused them of bad management.

Mr Swan will have to share his fighting fund with the states.

A budget that can pitch to the long-term may be a new concept to get used to.

But what would really change the way we look at these documents is when the money can be shown to have gone to a productive, as opposed to a political, purpose.

Alan Wood: 'As for Swan's promise of a new era of economic management...'

IT was Kevin Rudd who declared war on inflation as his Government's primary economic policy objective - and the federal budget surplus as its weapon of choice - so it can hardly object if its first budget is judged against this benchmark.

So how well has it met the challenge? The short answer is not well enough to relieve the pressure on monetary policy.

According to Wayne Swan, Reserve Bank governor Glenn Stevens will be happy with the outcome.

Stevens is unlikely to contradict him, certainly not publicly, and in any case would probably agree with Swan's description of the fiscal stance of his first budget as "a mild tightening".

The rule-of-thumb test of a budget's impact on the economy is the change in the cash surplus asa percentage of GDP from year to year.

According to the budget estimates, the surplus will be 1.5 per cent of GDP in 2007-08, while the surplus in 2008-09 will be 1.8 per cent, a contractionary swing of 0.3percentage points of GDP.

The cynicism born of many budget lock-ups says that this is a remarkably convenient pattern of surpluses, and the surplus drops back to 1.5 per cent in 2009-10.

Even if we put this suspicion to one side, it is not going to do much to make the RBA's task easier.
However, it is also true that it could have been much worse, and on its track record in its final years, under the Howard government it would have been.

By quarantining the revenue windfall, as it promised, the Government has allowed the budget's economic stabilisers to work.

But as far as the fight against inflation goes, the budget's contribution is pretty neutral.

The Government has beaten itsown estimates that it would cutspending by $3-4billion in 2008-09, with total cuts of $7.3billion. It also spent $5.2billion, leaving net savings of $2billion, which is what matters in the war against inflation

Given this, it is hard to see why Treasury's inflation forecasts are more optimistic than the Reserve Bank's, although the difference admittedly is not great.

In both monetary and fiscal policy, it is always a decision about the balance of risks.

There is no argument with Swan's claim that he is facing a complex web of conflicting economic forces, with booming terms of trade, tax cuts and rising world prices for oil and food boosting demand on the one side, and weaker world growth and signs of a domestic slowdown on the other.

But if the Government was serious about making a real push against inflation and for lower interest rates, it should have biased its risks on the downside, that is, weaker than forecast economic growth.

As it is, Stevens is still the one with the responsibility for doing the heavy lifting on inflation.

The RBA thinks, or more accurately hopes, it may have done enough with interest rates, but its own inflation forecasts stretch the limits of policy credibility, with inflation only coming back with its 2 to 3 per cent target band in late 2010.

To get away with this, the economy will need to show clear signs of slowing sharply this year, or there is a real risk of having to put up interest rates gain.

There are various indicators that when we get the GDP figures for the March quarter next month there will be drop in growth, from 4 per cent in the year to December to less than 3 per cent.

This could help contain wage demands.

But what really matters is what happens after June, when the big boost in our terms of trade from higher coal and iron ore prices and tax cuts deliver a sharp lift to incomes. This is why it would have been prudent to have a tougher budget, despite the risks and extra political pain,

As for Swan's promise of a new era of economic management, the budget is heading in the right direction, but it will take more than one budget before we can sensibly make a judgement on how successfully it will be delivered.

There is many a slip between the budget cup and politician's lips.

Alan Kohler: 'More Tanner’s budget than Swan’s or Rudd’s.

There are no new spending measures, only new savings, and remarkably the Finance Minister has found $2 billion more in savings than Swan and Rudd are spending.

The first Swan/Tanner budget actually reconciles the irreconcilable: the need for fiscal restraint to fight inflation while fulfilling the Government’s election promises and not crunching the economy so hard that it risks exacerbating the coming slowdown.

And it had been done simply by carving into middle-class welfare and cutting out the fat left by John Howard’s profligacy.

When the former Treasurer Peter Costello said at a remarkable doorstop press conference this morning that Wayne Swan is the luckiest new Treasurer in history, he was absolutely right – but not for the reason he meant. It’s because there was so much fat left in Government expenditures that could be painlessly cut away.

The Government, meanwhile, is playing down the centrepiece of its first budget. It is not mentioned at all in Wayne Swan’s budget speech; he just sums up all the nice things that have previously been announced.

The core of the budget – what it’s really all about - is contained at the back of budget paper No.2 - from page 361 to p.427. Here you will find 66 pages detailing 134 new savings measures, on top of the 46 cuts announced during the election campaign, totalling $1.6 billion in 2008-09.

The new savings total $5.7 billion in 2008-09, 11 dozen of them – big ones, small ones: nip cut slash.

The big picture of this budget is that the Rudd Government has announced $5.3 billion worth of new spending for 2008-09 leading up to it, and has now announced savings of $7.3 billion, increasing the surplus by $2 billion.

In addition to that there are a total of $5.4 billion in unexpected increases in tax receipts and other windfalls since the pre-election fiscal outlook (PEFO) that was issued by Treasury during the election campaign last year.

As a result the $14.3 billion surplus forecast in the PEFO has now turned into a $21.7 billion surplus ($14.3 billion plus $2 billion plus $5.4 billion).

So whereas the Howard Government spent every cent of the commodities boom windfall, the new Government has so far put it all into the bank, and added another $2 billion to it by cancelling some of its predecessor’s spending.

Even Kevin Rudd’s tax cuts actually represent a saving. The PEFO surplus estimate of $14.3 billion included the tax cuts announced by Howard Government; Rudd announced identical tax cuts but dropped them after 2009-10 for people earning more than $180,000.

That produces no savings in 2008-09 against PEFO, but provides $5.3 billion in savings over the following three years.

One of the big savings measures is a bit of a fiddle though. The cancellation of the $959 million “Australia Connected” fund that was awarded to Singtel Optus and Elders has been counted as a saving, but the $4.7 billion National Broadband Network amount that replaces it is not counted as an expense because it hasn’t been spent yet and is not detailed in the forward estimates.

But on the whole this budget is a remarkable achievement. The Government’s net financial worth goes from -$25.8 billion to -$3.6 billion in one year, with the unfunded superannuation liability of $112 billion now almost entirely offset by investments.

Sometime in 2009-10 the Government will have a positive net worth, probably for the first time.

Alan Mitchell: 'The time for a much tighter budget was last year.'

Quality in the budget is not so much in the coming cuts as the change in direction.
After adjusting for the Rudd and Howard governments' accounting fiddles, the budget last night represents, at most, a modest tightening of fiscal policy.

The budget therefore will make little difference to inflation and interest rates in the coming year. As in the past, the heavy lifting will have to be done by the Reserve Bank. There will be no significant change in the mix of fiscal and monetary policies.

Of course, Treasurer Wayne Swan might say that things would have been much worse had the government not had the courage to cut spending inherited from the previous government.

But, in truth, the Rudd government's spending cuts have been pretty limited. Federal spending has grown by $40 billion since the start of the decade as revenue from the resources boom has flooded into the government's coffers.

The new government's expenditure review committee could find spending cuts of only $5.3 billion, and these have been offset by its own new spending.

Net "savings" from the tax and spending decisions announced in this budget amount to only $2 billion. And that, of course, will be totally swamped by Kevin Rudd's election campaign decision to adopt the Howard government's promise of a $7 billion tax cut on July 1.

The quality in this budget is not so much in the coming year's cuts as the general change in direction.

The government has made a decision to "bank" rather than spend the windfall gains in revenue. It has budgeted to cut real growth in spending from an average of 4 per cent a year over the past four years to 1.1 per cent in 2008-09. If that is achieved, it will be the lowest spending growth rate in almost a decade.

The forward estimates promise a continuation of this new spirit of restraint, although they do not include the inevitable increase in spending associated with the reform of federal-state financial relations.

The budget also lays some important foundations for the new reform agenda, adopted with the states, to increase productivity growth by investing in infrastructure and "human capital" in the form of increased skills and better health. As part of that strategy, there is an interesting initiative to control the rate of federal and state infrastructure spending in the interests of macro-economic stability.

Heavy spending by the states to make up for past underinvestment on infrastructure is contributing to inflation pressures.

The Rudd government now proposes that the federal-state Loan Council will in future advise the governments on whether their proposed capital spending can be achieved without prejudicing the government's inflation target.

But despite the promise of future quality decisions, it is likely the Rudd government's first budget will receive poor reviews, mainly because of its failure to cut deeper into spending and to do more to take the pressure off inflation and interest rates.

On a charge of wimping out of the fight against inflation, the government's most likely plea is that the economy is slowing, and risks associated with a more vigorous tightening of fiscal policy would have been too great. Not everyone will accept that argument. But critics may take some consolation from the thought that the conduct of monetary policy will be less complicated as a result of the government's decision.

Had the Rudd government tightened fiscal policy more sharply, the political and popular pressure on the Reserve Bank to cut interest rates would have been immense.

And yet, with the economy about to be hit by a large increase in the terms of trade, it is even possible the RBA could have found itself wanting to raise rates after a contractionary budget.

The present "mix" of monetary and fiscal policies may not be ideal. But the argument for tighter fiscal policy has weakened with the economy. The time for a much tighter budget was last year.