Friday, May 29, 2009

The secret Swan couldn't keep

His biggest

As Australia's Treasurer, Wayne Swan knows the importance of keeping secrets.

But even before this year's much-leaked Budget he learned that it isn't easy.

In the lead-up to the 2001 election he discovered he had cancer.

As he revealed at Parliament House this week, he decided to tell hardly anyone.

Apart from his mate Steven Smith, now Foreign Minister, he told no-one else in politics, and within his immediate family told only his wife and his two older daughters...

"My second daughter immediately burst into tears," he explained at the launch of a prostate cancer DVD in which he features.

"We had excluded our younger son because I wasn't really keen on it becoming public knowledge that I was probably dying, on the eve of an election."

"Of course secrets never last in politics, and one of the reasons my secret almost got out was that my son Matthew who had been excluded from the discussions had actually been picking up a lot that was going on."

"Some weeks before the surgery he wandered off to show-and-tell at his school."

"When it came his turn he put up his hand and said that his Dad had cancer, and that the class was not allowed to tell anybody - especially Laurie Oakes."

Wayne Swan's secret held, but only just.

Despite his own Dad having died from prostate cancer in 1989 he had had no idea that meant that his chances of getting it were 1 in 3.

He says many are reluctant to have tests because they are scared of what surgery might do to their sex lives.

Swan's slogan, delivered at talks to men's groups is that they "can't have sex in a coffin".

Once one of the men told the Treasurer that he had.

Dr Phillip Stricker of Sydney's St Vincents Hospital made the DVD in his spare time with money donated from survivors including the developer Lang Walker.

Available from doctors for $15, it uses real patients including Mr Swan to set out the treatment options for a disease that hits 18,000 Australian men each year.

"When I speak to them in my surgery they are usually too shocked to take anything in - the 45 minutes is wasted," said Associate Professor Stricker who treated Mr Swan.

"But I've stated giving them the DVD. They sit down and watch it at home with their wives and come and see me in a more accepting fame of mind, able to take in what I am telling them."


Thursday, May 28, 2009

Canberra in Autumn

Here's the way the camera on my mobile phone tells it:


What is "social inclusion"?

The Minister, Julia Gillard, has been trying to define the term ever since she took up the portfolio.

Now, her Social Inclusion Board has completed the task.

Its definition has 11 points.

360 pages - pulped!

Here is is - my own well-thumbed copy of Budget Paper number one, which is actually ten documents, totalling around 360 pages, some 15mm thick.

I'll let AAP take up the story.

CANBERRA, May 27 AAP - A key budget document needed to be pulped and reprinted the day before the budget was handed down on May 12, a senior officer of the Department of Finance and Deregulation confirmed on Wednesday.

Budget paper number one, which contains the economic outlook and key economic and fiscal assumptions, had to be reprinted on the Monday before the traditional delivery of the budget on Tuesday.

"I can confirm that there was a budget document that was reprinted," general manager of finance's budget group, Paul Grimes, told a Senate estimates hearing on Wednesday.

"Budget paper number one ... was reprinted on the Monday ... the day before the budget," he said.

The Department of Treasury is due to face Senate estimates hearings next week.

This is the side of politics that complained about 100,000 dumped Work Choices Mousemats.

Wednesday, May 27, 2009

Work 'til we're 67?

Colebatch: "A higher pension age, and a longer working life, are inevitable side effects of people living longer and healthier lives. That's what we want. Let's stop the whingeing and accept it."

Gittins: "We simply can't design an economy-wide pension system for the 21st century around the peculiar needs of an ever-diminishing minority of manual labourers."

Stand by for lots more smoke

I've been at the Minerals Week conference

India has signaled that agreement at the December Copenhagen climate change talks will be hard to reach, declaring that it will not accept anything less than the right to lift its emissions per head to Australian levels.

Addressing a minerals conference in Canberra India's High Commissioner to Australia, Sujatha Singh described the negotiating stance as a concession "not lightly given".

"You cannot have an agreement whereby countries that reach a certain standard of living, a certain level of development, turn around and tell the rest of the world that what we have we get to keep; what we have, you can't even aspire to."

"That would be what a restriction on India's emissions would amount to"...

Were India's emissions per head to grow unrestricted until they reached Western levels it would become the largest or second-largest emitter in the world.

"We are telling you that we need to grow if we are going to give our 600 million people who live under $2 US dollars a day a decent standard of living," Mrs Singh told the conference.

"Our per capita emissions will increase, there's no doubt about it."

"But I am assuring you that they will never increase to what you yourselves are emitting. So you have an incentive to bring it down. Bring it down, we'll match it, we won't exceed it."


Russia and India are stepping up pressure on Australia to sell them uranium in the context of international climate negotiations.

Both Russia's Deputy Trade Minister and India's High Commissioner to Australia used Minerals Week in Canberra to stress that they wanted decisions on access to Australian uranium soon.

India's High Commissioner Sujatha Singh said there were other countries prepared to supply India if Australia would not.

On winning office, Labor overturned a Howard government decision to sell uranium to India on the ground that it was not a member of the nuclear non-proliferation treaty.

It put on hold an in-principle agreement to sell uranium to Russia after receiving a treaties committee report last September raising concerns.

"We are just expecting its position on this issue," he said through a translator. "Certainly we are waiting for the Australian decision."

Indian High Commissioner Sujatha Singh called on Australia to change its mind.

"If you are concerned about greenhouse gasses then it is worth considering that Australia exports coal to India but not uranium, which would help India move to cleaner energy sources," Mrs Singh said.

Here I would like to place on record that India is grateful to Australia for its support to India at the nuclear suppliers meeting and the International Atomic Energy Agency on the special exemption that allows India access to international co-operation and civil nuclear energy.

She thanked Australia for its support for a deal that allows India access to United States uranium for civilian purposes even though India has not signed the non-proliferation treaty.

"Looking into the future we hope that this support will be taken to its logical conclusion," she added.

"We are already talking to other countries. We are taking to France and Russia, and to Kazakhstan and Mongolia.

"When the moment is ripe, I would like to see Australia added to this list."


China has stepped into the row over whether Australia's Foreign Investment Review Board should approve the $19.5 billion proposed investment by the Chinese aluminum maker Chinalco in the Anglo-Australian miner Rio Tinto.

Ahead of the decision due next month China's Ambassador to the Australia Junsai Zhang told a conference in Canberra that China "does not intend to control Australian energy" and that it would not be possible for it to do so.

Mr Zhang said the deal, which could eventually give Chinalco 18 per cent of Rio, merely reflected China's status as Australia's largest trading partner.

"China's actual investment here only accounts for 1 per cent of foreign investment in Australia," he said. An increase in Chinese investment in Australia would be "nothing strange".

"However some people in Australia have different views. They argue that the Chinese investment is from state-owned enterprises, and they will control Australian energy and mineral resources to the detriment of its national interest."

"Such worries are understandable but unnecessary."

"State-owned is not state run. In some of our state-owned enterprises the government owns a big share. In some it is a smaller share. Some is listed on the share market."

"Yes, the chief executives are appointed by the government, but their performance is judged whether they can make money or not," he told the conference.

"We are interested in win-win situations. In the current crisis opportunity still knocks. China-Australia relations are still growing."

Rio Tinto's iron ore chief Sam Walsh poured scorn on the notion that state control mattered.

"Our competitor BHP Billiton has downstream joint venture partners across all of its Pilbra operations, including joint ventures with Chinese state-owned enterprises.

"This is precisely as it should be."

"History shows us that when customers or companies with strong links with customers are involved in major resource developments the resulting trade with those customers grows and prospers."

"Indeed one of the strategic attractions of our proposed Chinalco transaction is exactly that it involves Rio's and Australia's now major market for iron ore, potentially deepening the relationship," Mr Walsh said.

The iron ore chief called on critics of the proposed deal to "get a grip".

"Rio Tinto worldwide has more 40 joint ventures, nearly all of them with customers," he told the conference.

"It beggars belief that anybody can now object to this is 2009 on the basis of some principle entirely new to this industry after nearly 50 years of experience both here and internationally which has shown definitively that companies can have both close and productive relationships with customers and at the same time maintain commercial independence."

Mr Walsh claimed that the deal could even be good for Australia by ting Chinese buyers more closely to Australian sellers.

"Customers can go elsewhere, and we have seen this in the past," he said.

"Australia and we recovered that mistake, although not before Brazil was established as our competitor."

"This is a time to recognise that trade and investment in resources go together and to position ourselves accordingly.

After speaking earlier at the conference Treasurer Wayne Swan refused to commit himself to a timetable for making a decision.

"I never speculate about decisions that are before me as the responsible Minister for administering the Foreign Investment Review Board and the Act," he said.

Asked whether he would be meeting Rio Tinto's new chairman, Jan du Plessis, who arrives in Australia within days the Treasurer said he did not "usually speculate about meetings I'm having day by day".

Mr Walsh later told reporters the Chairman was planning to meet with "major investors and government and others".

Tuesday, May 26, 2009

RBA offshoot spends $10 million on "translation services"!

Here's the latest from today's Age.

Commentator Andos asked what I thought.

The Age stuff seems solid.

Just as this will be viewed through the prism of the AWB (and should be, based on what we know so far), the Reserve Bank will be reacting through that prism.

AWB Limited bore something close to the ultimate cost for ignoring advice it commissioned from Peter Sandman.

He advised it to fess up straight away and take the public into its confidence.

The RBA shouldn't hire Sandman - he is too expensive, even by the standards of a $10 million Vietnamese translator - but it should read his website. It is full the right advice about what to do.

Even politicians take notice of him (when things turn bad).

Monday, May 25, 2009

Not so shiny

Behind the scenes at the firm that manufactures Australia's squeaky-clean money
"ALONG with the Hills hoist and the lawn mower, the development of polymer banknotes rates as one of Australia's most innovative offerings to the world.

Australia began the switch to the durable and more secure plastic notes in 1988. Eight years later, the RBA and Belgian plastics firm UCB became joint venture partners in a company called Securency.

Over the next decade, nearly 30 countries, including Romania, Nigeria and Guatemala, switched to or tested the polymer notes.

While the company's operations, as well as its partnership with the Reserve Bank, is relatively unknown in Australia, Securency's success has been increasingly noted in the boardrooms of its overseas-based competitors. An executive from a competing firm says one question that is regularly pondered is: "How can a company that is owned 50 per cent by the Reserve Bank be so successful in some of the most corrupt countries in the world?"

Here's The Age's full report.

Saturday, May 23, 2009

The Reserve Bank gets out of bed early

This from the Bank at 8.40 am:


No: 2009-11
Date: 23 May 2009
Embargo: For Immediate Release


Allegations have been made in
The Age newspaper today that payments made to agents by Securency International Pty Ltd, a company in which the Reserve Bank is a shareholder, may have been used by the agents to pay ‘kickbacks’ to foreign government officials.

The Board of Securency has referred the matter to the Australian Federal Police.


Securency International Pty Ltd is a joint venture between the Reserve Bank of Australia and Innovia Films, a UK based film manufacturer. It is headquartered in Craigieburn, Victoria.

Securency manufactures Guardian® which is the polymer substrate used in Australian banknotes as well as banknotes issued in 27 other countries around the world.

Media Office
Information Department
Reserve Bank of Australia

This is what they are responding to.

Although I work for The Age I had nothing to do with the story and know nothing other than what I read this morning.

Friday, May 22, 2009

Now you can bet on a higher unemployment rate

What do you reckon? It's now 5.4%   Pick a lower rate, if you're game

There's about to be another way to be on the health of the economy, besides taking a punt on the recession and interest rates. Centrebet has opened Australia's first online betting market on the unemployment rate.

Most-recently 5.4 per cent after sliding from 5.7 per cent, the agency will pay out $4.00 to any punter prepared to put a dollar on the rate being steady when the next figures come out next month.

The odds it's offering suggest it believes the most-likely result is a jump back to 5.7 per cent, and the least-likely, a recovery to below 5 per cent.

The Alice Springs-based bookmaker will pay out a generous $34 to anyone brave enough to put a dollar on an unemployment rate of 4.9 per cent or below...


"This is the sort of thing punters talk about," said spokesman Neil Evans. "So we've tried to frame a market that will give them the opportunity to be proved right or wrong."

Treasurer Wayne Swan described an earlier Centrebet market on whether Australia would enter a recession as "utterly irresponsible".


Thursday, May 21, 2009

Is Australia's Treasury independent?

Of course not

Here's how it is, as I have been describing it for years:

(The full version of this post also has my transcription of Ken Henry's answer to the question at Tuesday's post-Budget Q&A)

The job of the Treasury is to advise the Government in accordance with Treasury's own assessment of conditions and what is needed. If the government is wise, it will listen, and then make its own decision. It is then up to the Treasury to impliment that that decision.

We elect governments to govern - the Treasury (as with all departments) merely helps them.

Simple? Simple.

Once upon a time Malcolm Fraser wasn't happy with the quality and range of advice he was getting from the Treasury.  Here's what he did.

Clicking on the link below will give you what Dr Henry said:

"In response to your first question, is the Treasury independent?

In a sense 'no' and in a sense 'yes'.

So, let me answer this.

Strictly of course we're not. The Treasury department is a department of state. It is part of the executive government. it works to the government of the day, whatever the political persuasion of the editor of the day.

And os in that sense of course the Treasury is not independent of government and it can never behave as if it is.

But there is another sense in which it does have independence and that is that the Treasury conducts its analysis without government interference. It is up to the government of the day to decide whether to accept that aqnalysis or to reject that analysis.

Over the years in which I have been in the department the general practice has been that government's have accepted the analysis, particularly economic forecasts. But it hasn't always been the case.

And with respect to the policy advice that the institution provides - well we would like to think that governments always follow our policy advice, but as ever person in this room would know that's not always the case either.

So in that sense we are independent - the sense in which we are left to craft our own analysis and our own policy advice. But we are not independent in the sense that at the end of the day it is the government that decides what the policy position should be. It's also technically the government that decides what numbers should go into the public domain."

UPDATE: Robert Carling in The Australian.
THE Treasury's independence has featured in the post-budget commentary. As a former commonwealth and state treasury official I find this surprising, because I can recall very few moments of independence in 27 years. I suspect that this generation of treasury officials across the country has even less reason to feel independent.

Claiming independence for the Treasury, as the Prime Minister did in a post-budget television interview, is a way of ducking government accountability, even though a glance at the budget papers shows that they are "circulated by the Treasurer and the Minister for Finance for the information of honourable members".

The reality is that the Treasury is a department of state whose constitutional role is to give policy advice to the government, implement policy decisions of the government, and administer certain pieces of legislation.

It has statutory obligations that cannot be overridden by ministerial command, but in any other sense it is not independent. It is not a think tank or a university. It is not even like the Reserve Bank, which does have independence in monetary policy and issues its own forecasts.

So, independent is the wrong word, but stopping the story there would be selling the Treasury seriously short.

The nature of its responsibilities and the talent and motivation of its staff are such that as an institution it can contribute enormously to the rigour of public policy, provided it is allowed to do what it does best without political second-guessing.

It can be a protector of the public interest and a bastion of fiscal discipline and credibility when there are precious few others to serve in those essential roles. This is what a former secretary to the Treasury meant when he often described his department as a "national treasure".

But it can only be a national treasure if the government of the day allows it to be. It is up to the Government how much free rein Treasury is given to do and present its technical work and participate in the public debate on matters within its domain.

Any government can trash the national treasure by demanding fudged figures and turning the Treasury into just another spruiker for government policy. That is a power any government would abuse at great damage to its own credibility and that of the nation's fiscal policy. A government would be insane to abandon the self-discipline of a Treasury kept a safe distance from political interference.

Insanity has not yet taken over, but over many years there has been a gradual weakening of the dividing line between the political work of the government and the technical work of the Treasury.

Even the budget speech was once written by senior Treasury officials. The result was long, eloquent, credible and boring. Now it is just theatrical and boring. And the language of the spruiker now infects the budget papers, like a virus that has mutated from the budget speech.

We are told in statement 3 that "the Government has been prepared to make the hard decisions now in order to position Australia for the future". Really? One wonders how such a statement got there.

We are also reassured that "there is scope for tax receipts to recover, while maintaining our commitment to keep taxation as a share of GDP below the 2007-08 level".

If those words were penned in the Treasury, the author presumably did not feel independent.

Then there is the voluminous ex-post rationalisation of the fiscal stimulus packages, which contributes to the extraordinarily defensive tone of the budget papers. The budget papers are devalued by this sprinkling of politically inspired bulldust.

Economic forecasting is technical work, and revenue and expenditure estimation (for a given set of policies) even more so. The Treasury and others involved must be allowed to do their best technical work without political second-guessing, not because they know all but because they know more and because this work has to be kept beyond political temptation.

Interference need not be anything as crass as an instruction to substitute one number for another. I never experienced anything of that kind. It can take more subtle forms, such as microscopic political scrutiny and questioning of the forecasts and estimates, which can lead public servants subconsciously to anticipate the politicians' views in the judgmental overlay that has to go with any technical work.

There is no reason to think that the economic and revenue forecasts in the latest budget are anything other than Treasury's best guesses.

For all that has been said, they look plausible. But the more the Government feels it necessary to make false claims about the Treasury's independence, and the more the Treasury is drawn into the political process, the more it seems we really do need a new and truly independent fiscal authority to put the budget basics beyond political temptation.

Robert Carling is a senior fellow at the Centre for Independent Studies.


The Budget has made us feel uneasy

Most of us, anyway

THE federal budget appears to have shattered an emerging recovery in consumer confidence, with the Westpac-Melbourne Institute index recording one of the worst post-budget results on record.

The survey, conducted during the week of the budget, showed confidence down 4.3 per cent, undoing half of the promising 8.3 per cent gain recorded the month before.

"This is the second-biggest fall following the release of a budget in the past 10 years," Westpac chief economist Bill Evans said. "In fact the only larger fall occurred in May 2006, although the reason for that was a surprise interest rate hike just before that budget."

Opposition shadow treasurer Joe Hockey told the National Press Club the figures showed the Government had bungled the selling of the budget, spinning a story of recovery far too optimistic to be believed...

"Now is the time for us to be optimistic, but it is the time to be fair dinkum," he said. "The Prime Minister and the Treasurer have been so focused on the spin of the budget that they have undermined confidence, as revealed in this data.

"Australians know when they have been spun a magic pudding story. The Government handed out $900 cash splashes, yet Australians will be paying $500 a year interest on the debt."

An Age analysis of the components of the institute index shows that views about personal finances plummeted in budget week, with the proportion of Australians surveyed believing their finances would improve in the year ahead sliding from 30 to 24 per cent. The proportion expecting an improvement in the Australian economy over the next five years also fell, from 30 to 24 per cent.

But in apparent renewed enthusiasm for retail spending, the proportion agreeing that now is "a good time to buy major household items" climbed from 43 to 46 per cent.

Mr Hockey said the Rudd Government was the "biggest-spending government in modern history", drawing on statistics that also identified the government in which he was a minister as the previous biggest spender.

"They've spent just short of $10million an hour since the moment Mr Rudd was elected, in new spending ... Some day, some way, somehow, someone's got to pay for it."

While attacking the level of debt being run up by the Government, Mr Hockey refused an invitation to identify the level of debt the Coalition thought would be appropriate.

"That's a schoolboy argument," he said. "But I'll tell you what, it would be a lot less that what Labor is racking up."

Wayne Swan responded by saying Mr Hockey had no alternative plan and was unable to demonstrate that a Liberal deficit would be one cent less than Labor's.
The institute survey shows striking differences in the way voters responded to the budget.

Coalition voters, and both low and high income earners, lost confidence during budget week. Labor voters and middle-income earners gained confidence.

Consumer Sentiment May 2009


Wednesday, May 20, 2009

Do you think we're being overcharged?

The latest broadband statistics are out from the OECD.

Get a look at the prices:
(click to enlarge)

The second column is for prices measured at purchasing power parity, which is a way of converting currencies based on their purchasing power.

I suppose broadband is even less affordable in the Slovak Republic and Mexico.

"It is real" - recovery looms

So say our mandarins

China's economic recovery is "real" and could bring about an Australian recovery within months - far sooner than predicted in the Budget, according to Reserve Bank Governor Glenn Stevens.

In the strongest sign yet that officials believe the economic tide is turning Governor Stevens told a post-Budget business briefing that developments in China and at home were "consistent with the view that a recovery will get under way toward the end of the year," bringing forward the 2010-11 recovery forecast in last week's Budget.

His assessment came as Treasury Secretary Ken Henry went on the offensive over the Budget declaring that many of its critics lacked the "reading age" to understand it and would have preferred Australia go into recession rather than run up the deficit needed to fight it.

Mr Stevens said he did not doubt that there had been "a genuine pickup in economic activity in China - quite a significant one" over the past four or five months.

Reserve Bank calculations of China's unpublished quarterly growth numbers indicate that "the pace of growth has picked up and the March quarter is the best quarter for about 3 quarters".

"It is real," the Governor told the business audience...

"The durability is the open question, and we don't really know the answer at this point".

Going beyond the findings about China in the Reserve Bank's board minutes also released yesterday, Governor Stevens said the upturn appeared to be "generated more or less entirely by domestic factors in China - not by a pickup in China's exports to the rest of the world".

It would mean investment in the sort of domestic infrastructure likely to push up demand for Australian exports and Australia's terms of trade.

Data released in Bejing after the Governor spoke lent weight to his assessment. Chinese retail sales rose 14.8 per cent in the year to April and industrial production 7.3 per cent. Urban fixed asset investment, including spending on roads and power plants, soared at an annual rate of 30.5 per cent buoyed by China's domestic stimulus program and a banking sector that lent more than the government-specified target.

Mr Stevens said there was a chance Australia could recover far more quickly from recession than either the Bank and the Treasury expected because many Australian businesses had merely put their expansion plans on hold rather than axing them in order "to see how things turn out".

"If there were some factor that somehow reduced that uncertainty materially - and what would that be is the question - but if that happened, it is plausible you could see a significant resumption of a lot of those expansion plans," he said.

The Treasury Secretary told a separate post-Budget function that while the proceeds of the late 1980s boom had been largely squandered on commercial office property, the proceeds of the latest boom had been invested more productively, often in the mining sector.

"These investments have added materially to productive capacity, allowing output to accommodate the demand from China for our resources, positioning the economy to take immediate advantage of the global recovery when it starts," he said.

Critics of the Budget's growth projections should be aware, "in case there is any doubt," that they came from the Treasury and not its political masters. "They are also the government's numbers of course," Dr Henry added, noting that his previous political masters had not always adopted Treasury projections as their own.

Signaling the approach he is likely to take at the upcoming Senate Estimates Hearing Dr Henry's said the Treasury's projection of above-trend growth of 4.5 per cent in 2011-12 had not been "simply plucked out of the air" but had been the result of a rigorous process in which the Treasury brought married short-term and medium term projections with the conservative assumptions in the long-term intergenerational report.

"Call us fastidious if you like, but we don’t like discontinuities in our economic projections. We wanted to be sure that we were describing a medium term scenario that is consistent with long-term conservative assumptions."

"In just about every meeting, senior ministers had three sets of tables and charts in front of them recording the impact of their decisions in each of those three timeframes. These were not mere props. They framed the decision making," he said.

Critics who doubted whether the Budget would return to surplus by 2015-16 should note that the spending restraint needed was far from unprecedented, although they could be forgiven for thinking so if they had "no experience to go on apart from the last half dozen years".

During the final years of the Coalition government spending soared by a 25.7 per cent in real terms, a rate unmatched by any other in the historical tables with the exception of the Whitlam and Fraser governments of the 1970s.

"In similar circumstances in the past – that is, circumstances in which the economy was emerging from recession with a sizeable budget deficit – Australian governments have managed to exercise the sort of discipline that the present Government has embraced," he said.

"Perhaps it is too early to be declaring that we will come out of this period of global economic crisis in much better shape than most other developed countries. But I’m prepared to make that prediction."

The complexity of the Budget appeared to have "exceeded the reading age of many".

Dr Henry said some its critics might have preferred the government to wait "for the recession to hit our shores before tackling it".

"Then they wouldn't have had anything like last week’s document to confuse them. Things would have been simpler."

Tuesday, May 19, 2009

Henry's closing words:

"As intellectually enriching as I have found the last 18 months, it has been an experience that I hope not to repeat."

From Ken Henry's speech today, attacking reporting of the Budget

Not yet up on the web:

"Consider, for example, the reporting of the budget in the Wall Street Journal Asia last week.

According to that reporting, in all of the decisions taken by the Government in response to the global recession, the only ones that will have any stimulatory impact on the economy are the ‘tiny’ personal income tax cuts announced in the 2008‑09 Budget.

The journal also informs its unfortunate readers that revenue downgrades alone would not have driven the Australian budget into deficit.

And to cap it off, readers were told, in what is surely one of the most ironic sentences ever uttered in macroeconomic analysis, that ‘(t)his Keynesian revival comes at a particularly bad time, given that tax revenues are falling as the economy slows, a normal feature of economic downturns’.

Apparently, the right time for a ‘Keynesian revival’, involving the spending of large amounts of public money, is when tax revenue is strong and rising, a normal feature of economic boom times.

As you know, I don’t always agree with Australian commentators. But our newspaper readers can be thankful that they don’t often have to confront material that is quite that bad."

UPDATE: The WSJ defends its accuracy.  And describes Dr Henry as Mr Henry.

Monday, May 18, 2009

Could the Coalition have been cleverer than we thought?

Could what you and I may have thought of as irresponsible, really have been a cunning, successful attempt to starve the beast?

At Core Economics Mark Crosby writes:

Deficits and Debt: It’s the Coalition’s Fault!

I’m sure that the Coalition complaints about the size of the budget deficit and public debt profile will continue for some time yet. But as any good political theorist will tell you, if the Coalition really wanted to reduce debt levels and the size of government in particular they should have run bigger deficits when in office! In a very well known paper in the Quarterly Journal of Economics by Torsten Persson and Lars Svensson in 1989, it was argued that governments that prefer a small public sector should run large deficits when in office, so as to tie the hands of a potential successor with preferences for a large public sector.

He goes on to assume that this isn't what our Coalition government did because it ran a surplus.

But it may well have, deliberately, by running a far smaller surplus that was wise.

The fascinating paper he refers to is here:

Why a Stubborn Conservative would Run a Deficit: Policy with Time- Inconsistent Preferences, Torsten Persson and Lars E. O. Svensson, The Quarterly Journal of Economics, Vol. 104, No. 2 (May, 1989), pp. 325-345

Sunday, May 17, 2009

"A simple, authoritative, even human account"

Wayne Swan's Post-Budget address to the National Press Club

The text is here.

"The speech wasn't perfect. But it gave us a simple and authoritative, even human account of what's been going on, all this time. It's impossible not to respect the hard work that both Kevin Rudd and Swan have put in since this whole mess started. But too often they miss the opportunities to bring people along with them; to explain simply these vast decisions to the very voters in whose name they are made." -

Annabel Crabb

Saturday, May 16, 2009

This could have been us

"In the midst of the worst global downturn since the Depression, Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent and its ledger is entirely free of debt."

Read the full NYT article here.

I have written about the very very clever Norwegian Petroleum Fund here and here and here.

East Timor saw the wisdom of what Norway was doing. Not us.

HT: Marek. Thanks!

UPDATE: Bill Mitchell has problems with the NYT report.

April 29 2009: Treasury thought the China-fuelled resources boom would last decades, but the slump shows how wrong it was and how Australia failed to reap a lasting legacy. Paul Cleary reports.

With the benefit of more than a century of hindsight from Australia's life as a boom-crash commodity economy, it's not unreasonable to expect that the government's economic advisers would get it right.
Surely Treasury's economists told the government the river of gold from China was a temporary surge in income that would sooner or later be followed by a crash? Unfortunately not, as the record of policy advice uncovered by The Australian Financial Review now shows.
The legacy of the most recent resources boom is that Australia failed to stash the cash during a period of glorious economic sunshine, leaving the country in a vulnerable state during the economic downturn.
Instead, what emerges is an unshakeable belief held by many Australian economists - including those in the Treasury - that the China-led resources boom would go on for decades.
Treasury thought the surge in the terms of trade, the weighted average of a country's export prices relative to its import prices, could be considered a "permanent" increase in national income. This view may well have encouraged the loosest fiscal policy since the Whitlam years, in which more than $300 billion in new spending and tax cuts was unleashed between 2004-05 and the 2007 election, fanning higher inflation and interest rates.
The record of policy advice uncovered by a request for documents under the Freedom of Information Act reveals that although Treasury examined the policies of countries that had successfully managed sharp swings in resources income, such as foreign currency sovereign funds, it did not press the government to follow these examples.
Treasury put its view about the commodity boom's becoming permanent in a ministerial briefing to then treasurer Peter Costello in June 2007. The advice to Costello is just one example of the department's forthright thinking at the height of the mining boom.
A year later, Treasury declared in the Rudd government's first budget that the terms of trade, after rising to the highest level in 50 years, would surge by a further 16 per cent in 2008-09, despite the growing global uncertainty. This forecast is certain to be dramatically altered in the budget on May 12.
"Robust growth in the emerging economies is supporting further large rises in Australia's terms of trade from levels that are already the highest in more than 50 years," Treasury wrote in the 2008 budget's economic outlook.
The department expanded on this confident outlook two months later in its first substantial research paper on the boom, which argued that unlike other spikes in commodity prices, this one was likely to be more enduring. Australia need not worry about the so-called "resource curse" and could look forward to higher living standards.
"The prospect of the rise in the terms of trade being sustained therefore need not be considered a 'resource curse' that will simply create problems," the paper's authors concluded. "If well managed, the transition to higher terms of trade presents an opportunity to raise Australian living standards."
Warwick McKibbin is one of the few commentators to have advocated the creation of a foreign currency fund to deal with Australia's boom-bust cycle. Early in 2008, the academic with the ANU and Brookings Institution, who is also on the Reserve Bank board, called for windfall revenue from the resources boom to be parked in a Norway-style foreign sovereign fund.
Unlike the Future Fund, which is restricted to providing for public service pensions, this fund would hold assets in foreign currency and it could be designed to help manage the economic cycle. The money could be brought back into the country when the terms of trade declined, McKibbin argued at the time.
McKibbin says Australia could have amassed a foreign currency fund of between $50 billion and $100 billion had it earmarked additional revenue from the resources boom over the past few years. The money would now be worth considerably more in Australian dollars.
He argues that it was wrong to view the recent boom as permanent, and that viewing it as temporary would have driven an aggressive savings strategy. "You never know if it is permanent," McKibbin says. "By deciding it is temporary you should put some substantial part away - as much as you can."
The reasons policy failed on this front say a lot about the quality of public debate in Australia. McKibbin says special interests that ignored the national interest swamped debate.
McKibbin says he raised the concept of a foreign savings fund at several high-level meetings and plans to canvass it in greater detail in an address to an international conference in June. He believes Australia should start planning for the next upswing in commodities.
As for Treasury's silence on the issue, McKibbin notes that the department had its fingers burnt early this decade when it suffered paper losses from foreign currency investments because the dollar moved against it. Labor in opposition savaged the department for mismanagement, and the experience may have deterred new policy advice on foreign currency investments.
One senior official argues that Treasury refrained from pushing for a sovereign fund because private sector economists and newspaper commentators have not demanded such policy action.
It was difficult for Treasury to push the policy boundaries when many economic commentators were simply calling for the mining boom's billions to be channelled into massive tax cuts, which in turn fuelled inflation. The Australian newspaper, for example, in 2007 went as far as criticising Treasury for having failed to predict the mining boom, thereby denying massive tax cuts to people.
ANZ chief economist Saul Eslake, one of the few economists to have criticised Costello's spending binge, says most economists advocated tax cuts rather than structural reform because this was popular. He alleges Costello's aggression towards his critics made most economists fearful of criticising the government's management.
He also believes that warnings by the then US Federal Reserve chief Alan Greenspan about undue influence of sovereign funds on public companies could have helped suppress any push for an Australian sovereign fund.
Treasury appears to have taken up the US government's concerns about these funds. A briefing in November 2007 for officials attending the Group of 20 meeting said the combined value of the funds, at about $US2.5 trillion, meant there were reasons to fear their power. "There exist concerns due to the sheer size of these investment vehicles, their lack of transparency, their potential to disrupt financial markets, and the risk that political objectives might influence their management," the Treasury paper says.
Another prominent critic of the government's reckless spending was Chris Richardson of Access Economics, a former Treasury economist who called for a much bigger savings effort, but he admits that neither he nor other economists articulated to the government the mechanism for achieving this end. Richardson puts the failure down not only to that of economists, but of political leadership. "Neither side explained to the Australian people that this was a temporary surge," he says. "It was not at all clear that it was permanent."
Rather than highlighting concerns about the pitfalls of windfall resource revenue, Treasury's analysis of the mining boom played down concerns about the resource curse, which is also known among economists as the "Dutch disease".
The department's most substantial work on the most recent boom, a July 2008 working paper titled Structural Effects of a Sustained Rise in the Terms of Trade, says that while previous booms have been "short-lived, there are reasons to believe that the current boom could be more enduring".
The paper, written by Treasury's principal adviser for forecasting, Adam McKissack, and three others from the domestic economy division, appears to be a badly timed piece of research that is already outdated. Senior officials in Treasury, including David Gruen, the executive director for the macro-economic group, also commented on the paper before it was published.
Despite having full knowledge of the Howard government's inflationary spending, the paper argues that "Dutch disease" effects from the high exchange rate have not flowed through to the traded goods sector as "strongly as could be expected".
The paper's only policy recommendations are to address the obvious skill shortages emerging in the resource-boom states of Western Australia and Queensland, in part by boosting immigration.
Its concluding paragraph says the resource boom is here to stay; Australians need not fear any negative consequences and can only look forward to higher living standards.
The paper does not represent policy advice as such, but its views are an echo of what had been put in the high-level briefing note to Costello in mid-2007. Treasury argued in discussions with a delegation of economists from the International Monetary Fund that the government faced a permanent increase in revenue from the surge in the terms of trade.
In the Treasury executive minute to Costello on June 29, Treasury reveals it has argued in the IMF talks that there could be a case for spending the additional revenue from the boom if the surge in Australia's terms of trade could be considered permanent.
In summarising the discussion, the brief to Costello says: "Article IV discussions with Treasury had a strong focus on the appropriate role of fiscal policy during a terms of trade shock. The IMF agree that there is a strong case for spending additional revenue from the increased terms of trade to the extent that the increase is considered permanent."
In defending increased spending, however, Treasury was possibly playing its institutional role as apologist for government policy, although it is unusual to support a loosening of fiscal policy when the economy is approaching full capacity.
The Reserve Bank was much more cautious in its assessment of the boom. In a paper to a conference in Canada in June 2008, governor Glenn Stevens said "no one can know whether a change of this nature is permanent or not". He went on:
"So markets and/or policymakers are often in the position of not knowing how much response to make. They may end up making or accepting a partial response in case it is permanent, but not, initially, the whole response, in case it is not. Indeed, one reason commodity prices across the board are so high is that producers did not anticipate the persistent nature of the stronger demand."
Reserve Bank economists, however, have shown little interest in advocating creation of a fund to help manage the commodity cycle.

* * *
The AFR made an FOI request for all ministerial briefs from January 1, 2005 to May 2008 on the role played by foreign sovereign wealth funds for managing windfall revenue from commodities; all briefs examining Norway's fund; and all briefs over the past year on managing natural resource revenue in Pacific neighbours and East Timor.
The request singled out the developing countries because, unlike Australia, they have put in place systems to deal with commodity income.
The 29 documents identified by the search show that from early 2006 on, Treasury studied best-practice models in several countries, particularly Norway's well-regarded model, but this analysis did not inspire a single ministerial brief to the Treasurer recommending he take note or consider new policy.
The first document - a minute in July 2006 by Kirsty Laurie, from Treasury's budget policy division - notes that Norway's model of investing all the oil revenue into a foreign currency fund "promotes exchange rate stability".
That is, putting the money into foreign currency avoided the pitfalls that inspired the Norway model, namely Holland's experience in the 1970s when a sudden influx of North Sea oil revenue over-inflated the currency and the rest of the economy. This experience gave rise to the term "Dutch disease". Since its float in 1983 the Australian dollar has experienced wild swings as a result of shifts in commodity prices.
Warning about the painful adjustments that result from living on commodity income, Laurie concludes: "Norway appears to be very conscious of avoiding the Dutch disease so that restructuring costs are not excessive when petroleum revenue declines."
Laurie is co-author of an influential paper released immediately after the 2007 election that documented the gross fiscal excesses of the Howard government. The paper, published in the Treasury Economic Roundup in early 2008, shows that from 2004-05 new spending decisions and income tax cuts reduced the budget surplus by $314 billion, out of a total revenue increase of $334 billion.
"Effectively, the additional revenue from the commodity boom has been spent, or provided as tax cuts," the authors conclude.
The analysis shows that one of the main channels for Australia to experience the inflationary effects of the Dutch disease is through excessive government spending. This was noted at some length during the IMF consultations in 2007. The IMF said in its talks with Treasury that Costello's last two budgets were "providing a stimulus in an economy with limited spare capacity".
A second Treasury paper on managing windfall resource revenue - written in August 2007, after the IMF raised its concerns - identified the dangers of being inundated with commodity revenue. The paper, Commodity Hedging for Government, by Michael Bath, said that in these circumstances governments "struggle to avoid pro-cyclical fiscal policies". This is exactly what happened in last years of the Howard government.
Bath's paper focuses on the role of commodity-linked sovereign funds to deal with the "negative side effects associated with a sudden increase in revenue". He says the Norway fund model seeks to "immunise the budget from oil price volatility".
Bath's paper, of which about a page is deleted under Section 22 of the FOI Act, makes clear that Australia's Future Fund does not play a role in insulating the economy from swings in commodity income. The fund, which holds all its assets in local currency, is limited to addressing the impact of population ageing on public finances by building up assets to pay for public service pensions.
Norway's fund has more far-reaching objectives. "It transforms the wealth associated with a non-renewable, finite stock of resources into a perpetual source of relatively steady revenue," Bath's paper says, before concluding that the Norway model is "an excellent case study in managing commodity risk in a manner that maximises fiscal sustainability".
Treasury did succeed in convincing the Howard government to divert some of the windfall revenue into new funds to pay for future outlays for pensions, higher education and health.
But as Bath says, these funds do not help insulate the budget from volatility in commodity income, and nor do they help manage commodity risk. Key differences are the fact that successful models invest only in foreign currency, and the amount of revenue diverted is vastly greater than what Australia has attempted.
The Norway fund was launched in 1996 to manage the revenue from North Sea oil. All Norway's oil-related revenue bypasses the budget and flows directly into the fund, which invests in foreign currency government bonds and blue-chip equities. The government draws down on the fund after seeking approval from parliament. Essentially, the country spends real interest on its natural resources, and it will be able to keep doing this every year, long after the oil resources have been exhausted.
The fund now known as the Government Pension Fund was worth 2275 billion kroner ($473 billion) on December 31, 2008, and has doubled in value since 2004. Sovereign wealth funds, like super funds, have been hit by the global financial crisis, although some have been insulated because they invested solely in government bonds.
Treasury's detailed analysis of international experience also covered examples found in Russia, Chile, Alaska and Papua New Guinea, among others. The analysis shows that other countries were setting up sovereign wealth funds or refining their policy frameworks to squirrel away surplus revenue from the resource boom while in Australia the policy response to the challenge was limited.
A briefing paper in May 2007 by Laura Doherty to Treasury's general manager for the G20, former ANU professor Gordon de Brouwer, notes that in April that year the Russian parliament transformed the Oil Stabilisation Fund into a Future Generations Fund and a Reserve Fund. Russia invested all its assets in high-grade government bonds and foreign securities, the paper observes.
Like Russia, East Timor has invested all its surplus oil revenue into US government bonds and after just two years of saving amassed $US4.2 billion, all of it insulated from the global downturn. The value of East Timor's fund is already about 10 times the size of its non-oil gross domestic product.
Even PNG, which is widely regarded as a basket case of mismanagement and corruption, offers some lessons to Australia. A December 2007 note on PNG's medium-term fiscal strategy by Stuart Kinsella says the 2008-2012 budget strategy creates a new concept of "normal" mineral income, which is the amount of revenue that could be derived in the absence of a commodity boom.
The benchmark is set at mineral income equivalent to 4 per cent of GDP. Income above this level is used to both retire public debt and to fund public investment.
PNG's strategy is clearly used not only to save money during the boom times, but to also protect the country during the down times, Kinsella notes.
"Movements in world commodity prices, particularly on the down side, are an important risk factor to the outlook for PNG revenue over the next few years," he writes.
The policies adopted by PNG and East Timor reflect the influence of Australian Treasury officials who have been seconded to the governments of both countries, although at home the department did not appear to drive similar policy solutions.
It seems extraordinary that while examining international practice in detail, Australia has never considered any of these policy options for managing its commodity income. There might be no better time than now, when the pain of another commodity famine is becoming acute, to prepare a set of policies to deal with the next boom.
The Treasury discounted the cost of the AFR's FOI request in view of public interest considerations.

We'll see more clearly

Australia will once again drive with the lights on.

The Statistician has reversed a decision to hobble the employment figures that has made it hard to tell what's real as Australia enters recession.

In July last year in the lead-up to the downturn the Bureau of Statistics cut the size of its monthly employment survey from around 54,400 people to 41,100. In Victoria the sample was cut from 1,500 people to 8,700.

The resulting figures were derided by market economists as "a waste of space, and "like believing in the tooth fairy"...

"Given the uncertain effects of the crazy cost-cutting shift to a new one-quarter-smaller survey-sample size, the data now are a waste of space for economy-watching purposes," wrote Macquarie economist Rory Robertson at the time.

"Anyone who believes that full-time jobs actually rose by 53,700 and that part-time jobs actually fell by 42,800 in July probably also believes in the tooth fairy," added CommSec economist Craig James.

Even more recently with the changes bedded down the monthly movements have raised eyebrows. This year's April figures released on the eve of the Budget had the number of Australians in jobs climbing 27,300.

In a warning attached to the figures the Bureau said it could only be 95 per cent confident that the true movement was somewhere between a drop of 33,300 and an increase of 87,900.

The Statistician Brian Pink announced yesterday that a result of winning an extra 15 million per annum in the federal Budget the employment survey would be restored to its former size from December.

Also restored from November will be the Bureau's quarterly job vacancies survey, which until it was suspended last May was regarded as more reliable than the private surveys which counted only jobs advertised.

That survey suggested that in in May 2008 there were 3 Victorians unemployed for each vacant Victorian job compared to a national average of 2.6. Since then there have been no statistics available with which to make the calculation.

In an associated cutback last year the Bureau wound back the accuracy of its retail spending survey, only to restore it in November ahead of the December "cash splash".

Amid concern that Australia was weakening its ability to read economic signals at the time they were needed the Department of Finance and the Treasury reviewed the Bureau's base funding in the lead-up to the Budget and recommended an increase.

But some cuts will remain. The Bureau's Statistical Yearbook will be issued only every two years, and the 2011 census will use unchanged questions from those asked in 2006, when a poorly-worded question about volunteering was added at the insistence of the previous Treasurer Peter

Friday, May 15, 2009

"Framed by PM who wants to be loved"

Laura Tingle in today's Financial Review:
"The media has been a bit dazed and confused about the budget. But then it has seemed at times the government has also been a bit confused. For example, Treasurer Wayne Swan spent the first half of his Press Club speech on Wednesday defending previous stimulus packages.

And of course there was the perplexing gap between the "hard choices" rhetoric and the reality, a sufficient gap to prompt discrete inquiries about whether there had been some last-minute chickening out on the part of the government.

No. It seems not. But this says much about the culture of largesse - and how it has influenced politicians' views of just what constitute "hard choices" - in the past decade...

In budget lock-ups, ministers and political staffers circulate, advocating their budget strategy with journalists, sniffing out signs of impending critical coverage.

On Tuesday night, ministers and staffers seemed at times perplexed and shocked at the feedback that their spending cuts weren't tough enough. In other words, the government had gone into the budget feeling it really had made tough choices and had been expecting some broadsheet reward for it...

The full thing's in print, or here, following payment


A Welfare Analysis of the Commonwealth Seniors Health Card

It's not real good

Peter Siminski, The Economic Record, Volume 85, Number 269, June 2009 , pp. 164-180(17)


The Commonwealth Seniors Health Card (CSHC) is a key element of a suite of benefits for Australia's `self-funded retirees'. Its main component is a pharmaceutical concession, which is analysed as a form of public health insurance. The utility gain through risk-pooling is found to be negligible under conservative assumptions. The deadweight loss through moral hazard may be considerable. Finally, the CSHC may be seen as an inequitable transfer, because CSHC holders are a particularly wealthy population.

Are State Elections Affected by the National Economy?

Unemployment costs votes

Andrew Leigh, Mark Mcleish, The Economic Record, Volume 85, Number 269, June 2009 , pp. 210-222(13)


Using data from 191 Australian state elections, we test how voters respond to economic conditions. We find that unemployment has a strong impact on election outcomes, with each additional percentage point of unemployment reducing the incumbent's re-election probability by 3-5 per cent. However, when we separate luck (unemployment in other states) from competence (unemployment in that state relative to the rest of Australia), we find that both luck and competence are equally important. This is consistent with a psychological theory of the `fundamental attribution error', in which observers consistently underestimate the importance of situational constraints. We also find evidence that unemployment driven by a clearly exogenous source - the US economy - has a non-trivial impact on the re-election probability of Australian state governments. Our results suggest that Australian voters either retain too many state governments in economic booms, vote out too many state governments in recessions, or perhaps both.

Ah, television

I used to work in television, and don't let anyone tell you it's easy.

Painstaking, frustrating, exhilarating at times - but easy?

I have done all of the things Ali Moore has been captured on YouTube doing here:

My Dateline interview with Paul Krugman was put together that way...

I was actually in my pajamas in my study in the middle of the night when it was "filmed" and I acted my on-camera in-studio talking-to-a-big-screen parts later.

When I worked with Max Walsh he was legendary at it.

I have posted this not to poke fun at Ali Moore (who is a friend) but to show the work that she and others and ABC staff generally put into the product that goes to air.

Might our recession end mere months after starting?

That's the tantilising prospect held out by the latest lending finance figures which, together with retail and employment figures released before the Budget, paint a picture of an economy healthier than had been believed and beginning to recover.

Housing, personal and commercial borrowing jumped 12.9 per cent in March in the third gain in four months.

In trend terms borrowing has been recovering since the December $8.7 billion "cash splash" after sliding for eleven consecutive months...

"While future trends are still uncertain, this is encouraging," said Commonwealth Securities economist Craig James.

Housing lending climbed 7 per cent between February and March with loans to buy new homes and to buy blocks of land climbing to record highs.

"At this rate it won't be long before investors get the message and dive in as well," said Mr James. "The Budget has given first home buyers another three to six months to take advantage of the generous government grants, suggesting the momentum will hold. Home construction will be at the forefront of the recovery."

Commercial finance jumped a seasonally-adjusted $5.2 billion or 20 per cent in March to a five-month high of $30.5 billion, more than reversing a slide of 7.9 per cent the month before.

The figures track those for retail spending, which also jumped strongly with the December cash splash, held on to those gains and then jumped further with the March cash slash to hit a record high.

They are in accord with surprisingly good employment figures released just before the Budget showing that 27,300 Australians found jobs in April, moderating the trend at which the labour market had been deteriorating.

However more-detailed employment figures released yesterday show the long-term unemployment queue is climbing, with the trend number of Australians out of work for more than a year hitting 46,300 in April, around 10,000 more than at the low point in December 2007.

Although early indicators, the figures lend support to forecasts by the Reserve Bank of a recovery later this year, and by the Treasury of a recovery in late 2010.