Tuesday, February 25, 2014

Spending on health is sustainable precisely for the reason that we want to sustain it

Unsustainable? A generation ago the veteran Labor MP Barry Jones led an inquiry into expectations of life in the 21st century. He said the question was being framed as whether Australia could "afford" an ageing population. "At first sight this seems an ordinary sort of accountant's question," he reported. "Like: can we afford a new car?''

"But decisive differences emerge when we consider the answers. If we can't afford a new car, we don't buy one, and nobody suffers. But what if we decide that we can't afford the coming increase in the aged population?"

Jones said it was a deeply sinister question. Or a silly one.

Peter Dutton is Australia’s health minister. Joe Hockey is Australia’s treasurer.

(Dutton shouldn't be confused with the assistant health minister Fiona Nash who is more famous for pulling down health websites and defunding preventative health organisations).

Within weeks of taking on the health job last year, Dutton declared the system was on track to becoming "unmanageable".

Last week, in an address to the Committee for Economic Development of Australia, he said spending on Medicare was "spiralling", future costs were "staggering", and we were on an "unsustainable path with no prospect of meeting the needs of the health of our nation in the 21st century".

Then Hockey piled in: "If our health, welfare, and education systems stay exactly the same, Australia is going to run out of money to pay for them," he said as the G20 summit got under way.

Hockey is one of the few people who has read the Commission of Audit report. His concerns would reflect its concerns. But when it comes to health they are misplaced.

Health is about the last thing we will run out of money for. It matters more to us than does almost anything else. Jones was right. Spending on health is sustainable precisely for the reason that we want to sustain it.

We are spending more on health because more of us are getting older (the phenomenon Jones was inquiring into) and also because we are buying new and better health services. We would be mad not to. It is not normally thought of as waste to spend more to buy something that is better.

A year ago, Hockey had a relatively new form of surgery known as a gastric sleeve. As much as 80 per cent of his stomach was removed to make it more like a sleeve. It's expected to save lives. A few years ago it wasn't possible. It costs Medicare millions.

Offered a choice between an old dial-up internet connection and a new broadband service most of us would opt for the broadband. It isn't wasted money. Nor is it unsustainable, given rising incomes. Broadband matters to us. Health matters even more.

But the difference is that health is predominantly provided by governments. We tend to see it as a problem when governments buy more, even if we want them to, whereas we don't worry when we do.

There's little doubt that we want to pay more tax for health. The latest increase in the Medicare levy (due in July) was approved with scarcely a murmur. It'll help fund the National Disability Insurance Scheme.

Some 19 per cent of the Australians surveyed in the latest Australian National University election survey rated health as their No.1 priority. Only 11 per cent nominated tax. It used to be the other way around.

As recently as the 1990s, Australians were more concerned about tax than health. But we are richer now, and older. We are able to, and keener to, spend more of our GDP on health.

It's always wise to get value for money, but it would really be stupid to buy less of what we really want.
In The Age and Sydney Morning Herald

Tuesday, February 18, 2014

Protecting predators. What is it with assistant ministers?

What is it with assistant ministers? First the assistant health minister pulls down a healthy food labeling website, then the assistant treasurer insists he’ll plow on with plans to neuter Australia’s new financial advice rules.

One took two years to build, the other took five years. The food website had just gone live. The Future of Financial Advice legislation has been in place seven months.

What assistant ministers Fiona Nash and Arthur Sinodinos have in common is a willingness to buckle to the least consumer-friendly parts of the industries they regulate.

Nash was helped by a Chief of Staff who had an undisclosed conflict of interest. Sinodinos was until recently a senior executive at the National Australia Bank.

The legislation Sinodinos plans to stifle was born out of the collapse of Storm Financial.

Thousands of elderly and poor investors lost everything they had and more, persuaded by their advisors to borrow against their homes to buy shares and then to borrow more using the shares themselves as collateral. When the share price collapsed in the global financial crisis they lost the lot and owed even more.

The owners of Storm financial pocketed 7.5 per cent of everything that was sent their way, upfront. That’s 7.5 per cent of everything the clients invested as well as everything the clients borrowed. They directed huge chunks of it as rewards to the advisers the clients trusted.

After a landmark parliamentary inquiry and three years of subsequent negotiations Labor introduced a new law designed to make sure it could never happen again.

Financial planners would be required to act in the “best interests” of their clients. It was that simple. Sure, there were also specific requirements, but behind them was a straightforward requirement to act in their client’s “best interests”.

One of the specific requirements was a ban on commissions and other forms of conflicted remuneration...

It’s hard to work for a client when you are being rewarded for steering your clients in a particular direction. Doctors are unable to receive payments for scripts from drug companies. It’s fairly straightforward.

And advisors who continued to receive annual so-called “trailing commissions” from the makers of products they had previously sold would be required to let their clients know, by letter, once a year.

Every two years the clients would be asked by letter whether they wanted to continue to have the trailing commission deducted from their funds. If they failed to “opt in” the deductions would stop.

It would be fair to say much of the industry has already adapted to the changes (just as much of the food industry has already adapted to the food labelling changes that annoyed the assistant health minister).

Financial planners whose business model was built around commissions have left the industry. Many of those that remain are keen to serve their clients.

During the election the Coalition said little about the Future of Financial Advice Act (just as it said little about food labelling). Sinodinos didn’t know he would have the portfolio.

Just before Christmas he declared that the law had gone “too far”. They had created “unnecessary complexity”.

Oddly the part of the law he was keenest to remove was the simplest - the requirement for an advisor to act in their client’s “best interests”.

Taking it away would leave the process-related steps, the boxes that should be ticked, making it legal for an advisor to tick each box and yet not act in their client’s best interests.

Conflicted payments would be allowed once again, where the advice was general in nature and not personal. Put simply, if an advisor promises not examine a client’s circumstances, they are able to receive a kickback.

Advisors continuing to receive trailing commissions won’t need to let their clients know. Annual letters will be required only to clients signed up after July 2013. Sinodinos says “applying this requirement to existing clients is overly onerous” - an odd statement given that trailing commissions are said to be a continuing fee for an ongoing service.

And “opt in” will become “opt out”. Clients will be able to stop financial planners getting what might be an ongoing 0.5 per cent of their funds each year, but only if they find out about it and only if they make the effort of “opting out”.

It’s the delivery of a wish list which is making some in the industry blush. Although not the banks. They hated it the new law. They want to be able to continue to incentivise their employees for steering their customers into their own products. Being freed from the need to act in a customer’s “best interests” is worth a lot.

If Sinodinos was going to change the law he would have to act quickly. It has been in place since July 2013. Waiting until the Senate changed in July 2014 would waiting too long.

So he is going to try and do it by regulation. Regulations can be disallowed by the parliament, but that needn’t be an impediment if Sinodinos introduces them just after the parliament rises on March 27. It won’t sit again for six clear weeks giving his regulations the force of law - if they are legal, which the top law firm of Arnold Bloch Leibler believes they are not.

Regulations are intended to implement the provisions of an laws rather than nullify them it says in advice to Industry Super. Sinodinos will be hoping that by the time anyone challenges the regulations a more compliant Senate will have amended the law, giving him cover.

But it’s a big risk for an infinitesimal political gain.

Sinodinos is looking like Nash.
In The Age and Sydney Morning Herald

Tuesday, February 11, 2014

Loads of money: it's the route to happiness

Never believe a rich person who tells you money doesn't matter. I used to be one of them. Not rich in financial assets, but on a high-enough income.

I used to appear on the ABC and in newspapers spouting the then conventional economic wisdom that (beyond a certain point) more money didn't make people more happy.

Of course it seems to, I would say. An individual who gets a pay rise will feel better off than his or her less fortunate neighbours but that's just because of a change in status. If an entire nation (or an entire state) gets a pay rise no one in it will feel any better off.

It's what the data seemed to show. In the United States average happiness had merely bounced around for decades as income per person climbed. Internationally high-income countries seemed to be scarcely any happier than low-income ones, except for cases of extreme poverty.

The buzzwords of the time were ''habituation'', ''homeostasis'' and the ''hedonic treadmill''. We were meant to have a sort of thermostat inside us. People who had lost their legs were said to feel little worse than when they had them. People who had won the lottery were said to feel little better than if they had lost. As Ethan Hawke put it in the movie Before Sunset: ''If they were basically optimistic and jovial, now they're optimistic and jovial in a wheelchair. If they were petty and miserable, now they're petty and miserable with a new Cadillac, a house and a boat.''

By all means get more money, the argument went, but if you really want to be happy, stop comparing yourself to your neighbours.

It reached its high point in 2006 with an article in the prestigious Financial Times headed: ''The hippies were right all along''.

Victoria's Treasurer had better hope they were indeed right. In the past six months 27,000 Victorians have lost their jobs. Melbourne incomes are growing at only half their usual rate and on one measure are falling.

But the hippies are wrong. And I was wrong, and probably Ethan Hawke. A re-examination of the data shows money is about as closely related to happiness as could be.

After comparing the results of 160 Gallup polls in 160 nations with gross domestic product per capita in those nations, Australian economist Justin Wolfers described it as ''one of the tightest cross-country relationships I have ever seen''.

Previous surveys had only compared handfuls of nations.

In 2008 he and University of Michigan colleague Betsey Stevenson found that GDP per person wasn't merely correlated to happiness, but correlated at a level of 0.8. And that was assuming the data was accurate. Wolfers believes the underlying correlation is even stronger.

Both GDP per capita and happiness are hard to measure. (Happiness turns out to be easier. It's a simple question, asked on a scale of 0 to 10 in all countries all around the world. GDP is harder. It is calculated by adding up everything produced, spent and earned in each nation. In some places it isn't done well.)

''It is amazing that the estimated correlation is as high as 0.8, given that it's a correlation between two noisy measures,'' Wolfers says. The actual correlation might be nearer 100 per cent.

And just as with income there seems to be no limit. The more money a person or a society gets, the happier they get - without end. Wolfers and Stevenson find that a doubling of a high income lifts happiness by about as much as a doubling of a low income. ''If there is a satiation point, we are yet to reach it,'' Stevenson says.

The downside is that as income per person slides, happiness or ''life satisfaction'' slides. We feel uneasy.

Which brings us to Victoria. SGS Economics and Planning says Melbourne's economy has typically grown by 3 per cent per year. In the past financial year it grew only 1.7 per cent.

When adjusted for population, GDP per person went backwards. On average, each resident of Melbourne made and earned less than the year before.

Treasurer Michael O'Brien doesn't like the conclusion. He points out that Victorians are having babies at a record rate. He says it's the births that have turned GDP per person negative. Adult Victorians probably may not have lost real income.

But Melbourne's GDP per capita has slipped in three of the past five years. It's looking like a trend.

The finance industry has grown. SGS says it accounts for 12 per cent of what Melbourne does, up from 7 per cent. Much of it is setting up in Southbank and the Docklands, straining the ability of public transport to get people to work.

Away from the centre, work in the middle and outer suburbs is hollowing out.

It's probably adding to frustration and anxiety. And if the established relationship between GDP per capita and happiness holds, it's making us grumpy.

It's an awful environment in which to be standing for re-election.

In The Age and Sydney Morning Herald

Sunday, February 09, 2014

Romance. Why is a ''basic woman'' is so attractive to a basic man?

Sixteen Valentines Days ago economist Herbert Stein stumbled across perhaps the ultimate question.

Why is it, he asked, that a “basic woman” is so attractive to a basic man?

He was quick to point out that he could have asked the question the other way around.

Stein had worked presidents Nixon and Ford. He was a senior fellow at the American Enterprise Institute. He was 81.

The question is harder to answer than you might think.

Stein liked to ponder it as he sat at an outdoor table watching couples walk arm-in-arm up the hill leading to New York’s Kennedy Centre.

“I look particularly at the women in those couples. They are not glamorous,” he wrote in Slate Magazine.

“Some of them are pretty, but many would be considered plain. Since they are on their way to the Kennedy Center, presumably to attend a play, an opera or a concert, one may assume that they are somewhat above average in cultural literacy. But in other respects one must assume that they are, like most people, average.”

“But to the man whose hand or arm she is holding, she is not average,” he wrote. “She is the whole world to him. They may argue occasionally, or even frequently. He may have an eye for the cute intern in his office. But that is superficial. Fundamentally, she is the most valuable thing in his life.”

And then his question: “Why is this basic woman so valuable to the man whose hand or arm she is holding?”

In their new book, An Economic Theory of Greed, Love, Groups, and Networks Australian economists Paul Frijters and Gigi Foster actually attempt an answer, but at a personal cost...

Forster writes that while the prospect of understanding love is intellectually compelling, “actually witnessing the demystification of the love mechanism is also shocking on a personal level.”

“One must find a way to carry on after this experience as a normal individual, despite having deconstructed love (and hence one’s own loves) into constituent parts.”

They see love as a strategy, in the same way as trade and stealing are strategies. Each is about getting something we want, but love is a strategy that changes us.

Economists have long known about the other two. We are acquisitive. If we see something we want we take it. If we can’t take it we trade something for it. But what if neither taking nor trading works? What if we are powerless to get what we want?

Newborn babies are as powerless as could be. Taking things isn’t an option, they can scarcely move. Nor is trade, they have nothing physical to trade.

So they do the only thing they can. They completely subjugate themselves to a higher power.

As Frijters puts it: “Someone who starts to love begins by desiring something from some outside entity. This entity can be a potential sexual partner, a parent, society, a god, or any other person or abstract notion.”

“From a position of relative weakness, the loving person tries to gain control over this entity by incorporating the entity into his own sense of self.”

The needy person makes themselves a mere part of something larger, be it society, a religion or (hopefully) a couple.

And then they are hooked. They are no longer just themselves. It’s hard to fall out of love with something you’ve become part of. The other person, the society or the church or cult has becomes your everything.

Why is this basic woman so valuable to this basic man?

Stein says it isn’t necessarily sex, although it may once have been. He says it’s something even more primitive: human contact.

And conversation.

“The primary purpose of this conversation is not to convey any specific information,” he writes. “Its primary purpose is to say, I am here and I know that you are here."

And it’s being needed.

“If no one needs you, what good are you, and what are you here for?” he asks. “Other people - employers, students, readers - may say that they need you. But it isn't true. In all such relationships you are replaceable at some price. But to this woman you are not replaceable at any price.”

“So this ordinary woman - one like about 50 million others in America - has this great value to this man she is going to the theatre with. He surely does not make a calculation. He probably never says how much he values her, to himself or to her. But he acts as if he knows it.”

How did Stein, a mere economist, know it? He wrote: “My wife and I walked up that hill to the Kennedy Centre many times”.

In The Age and Sydney Morning Herald

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Wednesday, February 05, 2014

We've drawn a line in sand on industry support. Sure.

Within minutes of treasurer Joe Hockey declaring an end to “the age of entitlement” on Monday the assistant infrastructure minister Jamie Briggs stood on a highway on the outskirts of Hobart and announced a grant of $3.5 million to a Tasmanian seafoods manufacturer, Huon Aquaculture.

It would help “provide the equipment to process fresh fish, as well as smokehouses and other machinery for boning, skinning, portioning and mincing,” he said.

The Tasmanian government was kicking in $1.5 million, the Commonwealth $3.5 million and Huon Aquaculture itself $7 million.

As it happens the proportions are roughly similar to those asked for by SPC Ardmona to save its fruit canning plants in Victoria. SPC had suggested $25 million from the state government, $25 million from the Commonwealth and $90 million from itself. In fact as a proportion of the total SPC had asked the Commonwealth for less than Huon - two dollars in every ten rather than three.

Why did the Commonwealth reject one, creating “an important marker” and not the other? On Tuesday finance minister Mathias Cormann tied himself in knots explaining that one was a “grant” while the other was a “co-investment”, although at it wasn’t always clear which.

“Let’s just be very clear,” the finance minister said.

“We were not being asked to make a co-investment, we were being asked to make a grant from the taxpayer to an individual business so that they would be able to invest in a $12 million dollar restructure of their business. We were not being asked to make an investment, if you make an investment you actually get a share in the business and you end up getting a return from your investment.”

Governments of all persuasions support businesses, sometimes by direct grants, sometimes by tax breaks, sometimes by tariffs and sometimes by the provision of services such as Austrade, subsidised water and electricity, technical colleges and the CSIRO.

Often the support has a broader justification. We are told the grant to Huon Aquaculture will “support Tasmania's contribution to this vital industry”.

The $16 million to Cadbury in Tasmania is “essentially an investment in tourism infrastructure” according to the prime minister.

What will eventually be $750 million per year in “direct action” grants to carbon emitters is as much about the environment as it is the businesses that benefit.

It’s the same with the $5.5 billion per year private health insurance rebate. It’s about the patients as well as the funds...

Government support for business is as hard to escape as it is to quantify.

The Australia Institute says the mining industry receives $4.5 billion per year in subsidies and tax concessions, half of it from fuel subsidies. The Productivity Commission comes up with a lower total - $700 million per year.

The motor vehicles industry costs $621 million, and another $785 billion in tariffs. Food manufacture costs relatively little in terms of grants and concessions ($45 million and $62 million) but a whopping $1.7 billion in tariffs.

All up the Productivity Commission says Australian governments deliver $10 billion per year in industry support.

An end to support - “a line in the sand” as a backbencher put it - would be something to see. But we’re nowhere near it and we probably never will be.

In The Sydney Morning Herald and The Age

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Saturday, February 01, 2014

2014 Economic Survey. Steady as she goes: rates on hold all year

Here is is, the 2014 BusinessDay economics survey:

As the Reserve Bank prepares for its first board meeting of the year the BusinessDay forecasting panel is predicting a rarity - an entire year without a move in official interest rates.

It hasn’t happened since 2004.

A unique blend of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations, the BusinessDay panel includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of its individual members.

A year ago the average forecast was for a cut in the Reserve Bank’s cash rate from 3 per cent to 2.7 per cent. The Bank cut to 2.5 per cent. In 2012 the average forecast was for a cut from 4.5 per cent to 3.6 per cent. The Bank cut to 3 per cent. This time the average forecast is for no cuts. The average comes in slightly below the current rate at slightly below the current rate at 2.46 per cent by June and slightly above at 2.55 per cent by December.

If rates do say on hold at around 2.5 per cent for the entire year it will be because the settings are already in place to deliver just enough (anemic) economic growth to keep further unemployment (almost) at bay.

The average forecast reflects a panel evenly split. Nine of the 25 members expect rates to fall further, nine expect rates to climb, and seven expect them to stay put. Two of the panel expect cash rates to fall to an ultra-low 2 per cent. One of them, Macquarie Group’s Richard Gibbs expects it to happen in the first half of the year. The most bullish forecast is from Stephen Koukoulas of Market Economics who expects 3.5 per cent by the end of the year and 3 per cent by June. As it happens Koukoulas was spot on last year, predicting a near-record low of 2.5 per cent by year’s end.

The central forecast is for improving global growth partly offset by a further easing in China. The panel expects the world economy to grow 3.3 per cent in 2014. In the United States it expects through-the-year growth to climb to 2.7 per cent. China’s growth should slip further to 7.4 per cent, but there is a wide range around the forecast. Melbourne University’s Neville Norman expects China to grow by 8.2 per cent. Stephen Anthony of the Canberra consultancy Macroeconomics expects 6.5 per cent.

Weaker Chinese growth would mean a further slide in Australia’s terms of trade. The price of Australia’s exports relative to imports has already slid 18 per cent from the peak in late 2011. The panel expects a further slide of 3.9 per cent. Only Richard Robinson of BIS Shrapnel and Gareth Aird of the Commonwealth Bank expect an improvement. Their forecast upturns are modest: 1.4 and 0.7 per cent.

Business investment is expected to stagnate further as resource prices sink. Non-mining businesses are unlikely to fill the gap. The average forecast is for a further decline in investment of 3.2 per cent. Tim Toohey of Goldman Sachs forecasts the steepest decline: 11.6 per cent. Neville Norman is alone among the panel in expecting an increase, of 5.1 per cent.

The panel expects Housing investment to surge as the full impact of last year’s rate reductions comes through. The most impressive forecast is from Tim Toohey who offsets his pessimism about business investment by predicting a 10.5 per cent lift in home building. The average forecast is for a 5.3 per cent increase. One of the lowest forecasts is from the Housing Industry Association itself, which is expecting 1.8 per cent.

The pace of Household spending is also expected to pick up, climbing 2.5 per cent in 2014 after advancing 1.8 per cent over the past twelve months.

The panel believes the boosts in both housing investment and household spending will be enough to lift the pace of GDP growth from 2.3 per cent to 2.7 per cent. The highest forecast, from Stephen Koukoulas is 3.9 per cent. The lowest, from Jakob Madsen of Monash University is 1.2 per cent.

Although welcome, economic growth of 2.7 per cent would be well below the long-term growth rate of 3.4 per cent, and insufficient to stop the unemployment rate rising. The central forecast is for an unemployment rate of 6 per cent by year’s end, up two notches from the present 5.8 per cent.

Population growth means individual living standards will advance by less than GDP. The panel expects GDP per capita to grow by 1 per cent during 2014, which is an improvement on 2013. Jakob Madsen expects it to fall, slipping 0.5 per cent.

Inflation has been edging up with the falling dollar, most recently reaching 2.7 per cent in the year to December. The panel expect it to stay at recent highs, finishing the year at 2.5 per cent backed by an underlying rate of 2.4 per cent. The ANZ’s Justin Fabo picks the highest headline rate: 3.4 per cent. Nigel Stapledon of the Australian School of Business picks the lowest, 2 per cent.

The panel expects the Australian dollar to drift lower, finishing the year at 86 US cents - close to but not quite at the “magic spot” of 80 and 85 US cents identified by Reserve Bank board member Heather Ridout in an interview with Fairfax Media in January. Only two of the panel expect the dollar to end the year back up above 90 US cents: Su-Lin Ong of RBC Capital Markets who expects US 95 and Stephen Koukoulas who expects parity. The lowest forecast, from Stephen Anthony is for US 78.

And the budget deficit will come in pretty much as forecast, both this year and the next in the view of the panel. The result is more surprising than it seems. The forecasts in the government’s pre-Christmas budget update were presented as if they reflected badly on the outgoing Labor government. The update predicted a deficit of $47 billion in 2013-14 and $33.9 billion in 2014-15, unless something changed. The government has set up a Commission of Audit to recommend changes in time to shrink the deficit in 2014-15, but the panel expects little progress. It’s opting for $47.6 billion in 2013-14 and $32.8 billion in 2014-15.

Given the panel’s relatively weak forecast for Australian economic growth it might be of the view that the economy couldn’t take too much progress on the cutting the deficit. If the government reaches a different view and cuts hard, the panel’s central forecast of unchanged interest rates may turn out to be on the high side.

In Business Saturday

The most accurate of the Business Day forecasters this past year was only half human.

“Barry” is a dynamic stochastic general equilibrium model of the Australian economy. Its creator is Stephen Anthony, a former Treasury modeller who set up a private consultancy Macroeconomics in 2007.

Dr Anthony uses his own judgement about fiscal policy and monetary policy and then uses Barry to spit out results for everything else. Barry is built from more than fifty equations.

Last year Barry said the Australian economy would grow by 2.5 per cent (so far it’s been growing at 2.3 per cent), China would growth 7.3 per cent (so far 7.7 per cent), the US would grow through the year growth by 2.1 per cent (2.0 per cent), household spending would grow 1.8 per cent (1.8 per cent) housing investment 2.1 per cent (1.7 per cent). Barry said the Australian dollar would end the year at 90.5 US cents (it ended at 89.2) and a current account deficit would reach $55 billion (it reached $52 billion).

Not everything came out the way Barry and Stephen predicted. Inflation was higher at 2.5 per cent rather than 2.1 per cent, unemployment was lower at 5.8 per cent rather than 6.3 per cent and the cash rate was nowhere near as low. It ended the year at 2.5 per cent, well above the machine-human hybrid’s prediction of 2 per cent.

Only five out of the Business Day panel got the cash rate completely right, and they were completely human: Shane Oliver of the AMP, Nigel Stapledon of the University of NSW, Frank Gelber of BIS Shrapnel, Stephen Koukoulas of Market Economics, and Brad Crofts of the Australian Workers Union. Most of the panel thought it would end the year much higher, some above 3 per cent.

The inflation rate of 2.7 per cent was an easy pick for most of the market economists, but for no-one else apart from Neville Norman of Melbourne University.

Where the academics came into their own was the 2012-13 budget deficit. None of the other forecasters predicted anything like the eventual outcome of $18.8 billion. Professors Bill Mitchell and Jakob Madsen came about as close as possible, picking $20 billion.

All of the other forecasters who went for a lower deficit can be excused. The Treasurer had been predicting a surplus.

In Business Saturday

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