Their biggest challenge? Avoiding a recession

Albo, or Plibersek, or whoever turns out to be the next Labor leader, might have had a lucky accident. Usually, it’s Labor that inherits an economy turning down.

This time, it’s the Coalition. And because of regular updates from the Reserve Bank and the Bureau of Statistics strikingly at odds with their public position that the economy is strong, they ought to be finely attuned to it.

Economic growth, the catch-all that is supposed to show us where the economy has been and where it is headed, is frighteningly small.

The Treasury’s best estimate of potential growth – how strongly the economy could be growing over time if things were well managed – is 2.75% per year.

The reality, for the two most recent quarters for which we have data, is 0.3% and 0.2%.

The economy is anaemic, despite the crowing

If you add those two numbers together and multiply by two you discover that for six months the economy has been growing at an annualised pace of just 1% – way, way short of its potential.

Stripping out population growth and minimal price growth, real living standards have been going backwards.

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The result of what the Reserve Bank describes as “persistently slow growth in household incomes and declining housing prices” has been something of a strike in consumer spending. The real value of spending per household hasn’t been falling, but it hasn’t really been climbing either.

The bank says consumption growth has slowed most noticeably for discretionary items that tend to have the strongest relationship with home buying, such as furnishing and household equipment. It says growth in other types of discretionary spending, such as eating out, has also slowed. Consumption of so-called “essential” items is holding up.

We’re going to need a boost

It means we can’t rely on household spending to revitalise the economy (although the government will give it a go, stumping up a bonus of as much as $1,080 to be delivered with each tax return from July in a much-needed boost that will be disguised as a tax cut rather than spending).

Household spending accounts for three-fifths of gross domestic product. The bank identifies uncertainty over household spending, which itself derives from uncertainty over income growth, as a “key risk” for economic growth:

Should households conclude that low income growth will be more persistent than previously expected, households may adjust their spending by more than currently projected and consumption growth could remain weak for a longer period.

Labor would have helped stabilise uncertainty over income growth by immediately intervening before the Fair Work Commission to get higher wages, directing it to draw up a long-term strategy for higher wages, restoring cut penalty rates, and funding the increases of some childcare workers itself.

Having won an election opposing those things, the Coalition will have to try other things, perhaps even bigger and earlier tax cuts.

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Prayer would help – prayer that international commodity markets remain strong, that the Reserve Bank cuts rates on June 4 (it is practically certain to), that it cuts them again before the end of the year (financial markets are literally 100% certain that it will) and that home prices stabilise.

Perhaps a very big boost

On the face of it, none of these would be enough to force economic growth back up. If it falls even further and continues to fall, Australia will enter a recession within this term of government, an outcome to which the academic economists polled by The Conversation in January assigned a 25% probability.

So far employment growth has been the economy’s brightest light, but in its quarterly update released a week before the election the Reserve Bank pointed out that employment growth can lag economic growth by up to nine months, meaning it might be about to turn down, although it added that it was not unusual for “trends in GDP growth and the labour market to diverge for sustained periods”.

If employment growth does turn down (and the bank says “near-term leading indicators of labour demand have softened”) it is likely to happen first in the construction and retail industries. The construction jobs will come again (and the government is doing its best to bolster them with promises of spending on infrastructure) but the retail jobs might never return, the nature of retailing having changed.

The economy matters more than the surplus

If needed in order to avoid a recession the government will have to be prepared to abandon its promised 2019-20 budget surplus. If the prospect of a recession does loom, it’ll have the political cover. And if it looms early in its term, it might still be able to deliver a budget surplus by the end.

Scott Morrison and his treasurer, Josh Frydenberg, were elected to manage the economy, and that means doing whatever is needed to avoid a recession and the long-term damage to lives and living standards it would deliver.

Speaking personally, I’ve no doubt they are up to the task, just as Labor would have been. In a way it’s a pity they didn’t adopt one of Labor’s key economic promises, which was to have a new budget in August, to refresh things.

And it matters more than superannuation

And they’ve got to focus on lifting living standards over the longer term where, conveniently, they have a big advantage over Labor.

Labor has a blindspot when it comes to superannuation. It wants to lift compulsory contributions from 9.5% of salary to 10% on July 2021, and then by another 0.5% the next year and another 0.5% the next year and so on for five consecutive years, apparently regardless of what it will do to incomes now.

It’s a good thing that, unlike Labor, the Coalition will be relaxed about pushing out the timetable if the economy can’t stand it, as it has done before.

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Read more: The next government can usher in our fourth decade recession-free, but it will be dicey

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Before the election it was preparing to respond to the landmark Productivity Commisson report that found that unintended multiple accounts and the defaulting of new workers into entrenched underperforming funds were costing members an extraordinary A$3.8 billion per year.

The Coalition can set up super for the future

Weeding out the chronic underperformers, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a short menu of good funds and stay in them for life would give the typical worker entering the workforce an extra A$533,000 in retirement.

The commission recommended a full-blown independent inquiry into how much superannuation we need.

Labor, wedded to a series of increases, would never have done it. The Coalition can.

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Read more: No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election

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Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Read more >>

Stephen Anthony. Australia 'has few tools left' to fight recession

A further downturn in China would leave Australia exposed, without sufficient tools to avoid a recession, one of Australia's leading forecasters says.

Stephen Anthony is a former BusinessDay forecaster of the year. In 2015 he took up a role as the chief economist for Industry Super Australia after having run his own economic consultancy and worked on forecasting in both the Treasury and Department of Finance. On Saturday, January 30, when the next set of BusinessDay forecasts are published, he will once again be awarded the title, this time for having most accurately predicted 2015.

"I think the risk of a recession is higher than most people would price it," he told Fairfax Media. "Most people are talking about a less than 30 per cent chance this year. I think it is higher."

Dr Anthony said the government had far less "wriggle room" to avoid a recession than it had before the onset of the global financial crisis in 2008.

In January 2008 the Reserve Bank's cash rate was 6.75 per cent, giving it plenty of room to cut interest rates. In January this year the cash rate is just 2 per cent.

In January 2008 gross government debt totalled just $55 billion. It's now $415 billion, or 25 per cent of GDP, giving the government less room to borrow more without alarming rating agencies.

Australia is going into 2016 with an expected budget deficit of $35.1 billion. In 2008 it had an expected surplus of $19.7 billion.

"The real question is how severe is China's downturn going to be," Dr Anthony said. "Are we going to see Chinese growth fall to 6 per cent, to 5 per cent, or to 4 per cent? A Chinese economy growing at 4 per cent is probably very bad news for Australia because it will cut the volume of our exports as well as the prices."

To date real estate investment had been propping up Australia's economy, but it had been deliberately slowed as the authorities had tightened conditions on investor loans...

Forecaster Nicki Hutley, of Urbis Consulting, said the probability of a China-linked crisis in the next 12 months was "pretty low, about a one in 10 chance".

"Some people might say that's not low," she added. "But the point is it's nowhere near the central case."

If Australia needed to respond to a downturn it would be unable to rely too much on the Reserve Bank.

"Not only does the Reserve Bank only have two percentage points left, but the experience of Europe and the United States suggests that those last few percentage points won't do much," she said.

"Investors don't respond in the same way to dropping rates from 2 per cent to zero as they do from 7 to 5 per cent."

The government had plenty of room to expand the budget.

"Australia has a very low debt-to-GDP ratio. Even the Prime Minister and Treasurer have significantly changed their language on this. Subject to the need for a path to recovery in the budget, they shouldn't feel uncomfortable about spending to stave off a recession."

"In fact a massive recession would itself damage the budget, so they would be better off making use of the budget to stop it."

Economist Saul Eslake said the government had far less budget firepower than it did in 2008 but that if necessary it should abandon its commitment to maintain a AAA credit rating.

"If needed, we should do what we did in 2008 - go early, go hard and go households," he said.

"The best option is too much rather than too little. If you do too much you can wind it back later. If you do too little it won't work, and you will have undermined the credibility of any attempts to do more."

The 8 per cent collapse in the Chinese share market in the first days of the year was important not because it meant China's economy was in trouble but because it showed China's leadership was no longer in control.

"It was almost a Wizard of Oz moment. Far from the Wizard being as omniscient as Dorothy and all the munchkins believed, he was just an old man behind a green screen."

Dr Anthony said the best thing Australia's government could do to was to focus on its core business of creating a stable environment. 

"It should remove the ephemera, the noise; crazy stuff like beating up on unions or creating disputes over television programs. It should remove impediments and instil confidence."

In The Age and Sydney Morning Herald

 

Read more >>

2014-15 Economic Survey. Dollar dive ahead

The Australian dollar is set to dive to its lowest level in half a decade.

This year’s BusinessDay economic survey has it hitting 86 US cents by June 30, a fall of 8 per cent from its recent range of 93 to 94 US cents.

In another welcome result none of the BusinessDay panel expects particularly weak economic growth. On balance they expect the unemployment to stay at 6 per cent rather than climb to the 6.25 per cent forecast in the budget.

But they expect somewhat slower economic growth than the budget and weaker consumer spending as the economy continues to navigate away from mining investment to new drivers of economic growth.

The BusinessDay forecasting panel is made up of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations. It includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of individual member.

The panel expects Australia’s terms of trade to slip 4.9 per cent during 2014-15. It appears to be a better outlook than the budget’s which expected a slide of 6.75 per cent, but much of that slide was delivered almost immediately as iron ore prices plummeted 9 per cent between budget night and June 30. The panel’s average forecast masks wide differences in individual expectations. Steve Keen expects a slide of 10 per cent in 2014-15. Gareth Aird, of the Commonwealth Bank, expects a slight increase, the only panel member to do so.

China’s economy is expected to grow at its present pace, advancing 7.3 per cent, as is the United States and the global economy at 2.2 per cent and 3.3 per cent.

Growth in household spending will be anemic, climbing just 2.6 over the year, much less than inflation and population growth combined. The weakest forecast, from Bill Mitchell of Newcastle University, is for spending growth of just 1.8 per cent. Independent economist Stephen Koukoulas is the most optimistic predicting 3.25 per cent, nowhere near the likely combined rate of inflation and population growth suggesting that inflation-adjusted spending per capita will continue to fall.

After falling for a year real wages will mark time, barely climbing. The panel expects inflation of 2.6 per cent and wage growth of 2.9 per cent, well below the rates of 3 per cent that were common this decade and 4 per cent in the last half of the last. Paul Bloxham and Jakob Madsen are the most optimistic, predicting wage growth of 3.5 per cent and Steven Keen and Bill Mitchell the most pessimistic, expecting 2 per cent.

Tom Skladzien, of the Australian Manufacturing Workers Union, ought to have a good handle on wages. He plumps for 2.5 per cent, beneath his forecast for inflation, which is 2.7 per cent. By contrast Julie Toth, who works for employers at the Australian Industry Group, expects wage growth of 3 per cent, well above her inflation forecast of 2.5 per cent.

The lowest forecast for headline inflation is 1.8 per cent from Tim Toohey of Goldman Sachs. But his forecast for underlying inflation is a more standard 2.5 per cent, suggesting he believes the one-off removal of the carbon price to affect the headline but not the underlying number. Shane Garrett of the Housing Industry Association has the highest headline inflation forecast, 3.1 per cent. But he expects a tamer underlying result of 2.8 per cent. The panel member forecasting the worst underlying inflation is Gareth Arid, who predicts 3.1 per cent.

The average unemployment forecast of 6 per cent hides diverging views....

Saul Eslake, of Bank of America Merrill Lynch, expects the unemployment rate to climb to 6.6 per cent by June 2015. Stephen Koukoulas expects it to fall to 5.5 per cent.

Housing investment is set to climb a healthy 7.4 per cent in the view of the panel, but the range of forecasts is extraordinarily wide from a low of 1.4 per cent from the HIA's Shane Garrett (who ought to know about housing) to a high of 15 per cent from Peter Jones, of Master Builders Australia, (who also ought to know about housing).

The entire panel expects business investment to continue to slide, as did the budget. The budget went for a slide of 5.5 per cent. The panel goes for 5.8 per cent  but with wide variation. The most optimistic, Neville Norman of Melbourne University, expects a further fall of just 1.3 per cent. The most pessimistic, the National Australia Bank's Alan Oster, expects 10.2 per cent.

It adds up to historically weak, but not disastrous GDP growth of 2.8 per cent. Steve Keen who this time last year expected growth to go backwards (a recession) is this year happy to forecast 2 per cent suggesting that the worst that is likely won’t be that bad.

But nominal GDP growth (the amount of income generated unadjusted for prices) will grow by just 4.1 per cent, well below the heady rates of 8 to 10 per cent a few years back when the rest of the world was prepared to pay over the odds to grab Australian resources. Weak growth in nominal GDP means weak growth in government revenue, but the panel seems to believe that has been fully accounted for in the official forecasts, opting for a budget deficit forecast little different from the government’s own. Jakob Madsen is by far the least trustful of the official line, predicting a blow out to $65 billion in 2014-15, more than double the government’s forecast. Events in the Senate this past week are making his forecast look more likely by the day. Stephen Koukoulas is the most optimistic, expecting a slide in the deficit to $15 billion in line with his generally rosy view of economic growth.

Most of our panel expect the Reserve Bank to sit on its hands for the rest of this year, leaving the cash rate at 2.5 per cent. In the first half of next year most expect an increase, with two increases to 3 per cent the most popular pick. Commonwealth Bank's Gareth Aird is out on his own, expecting one increase this year and a further two in the first half of next year taking the cash rate to 3.75 per cent undoing two years of cuts.

Most expect an increase in the Commonwealth bond rate as unusually low worldwide rates vanish.

The Aussie dollar is set for a big fall. Only Gareth Aird expects it to climb above its present 94 US cents with Chris Caton, Alan Oster, Stephen Anthony and Shane Garrett expecting 82 US cents and Stephen Koukoulas and Peter Jones expecting 80 US cenPeter Martin is economics editor of The Age

It would be a silver lining to an otherwise manageable but unspectacular year.

In The Age and Sydney Morning Herald










Who got things right, and where did our team get 2013-14 wrong?

This time last year they were far too optimistic about business investment, on average expecting it to stay steady. When the figures are in it will have slid 4 per cent. That mistake probably derived from another one. They expected the Aussie dollar to slide to 89 US cents. Instead it climbed to 94.20.

And the budget blew out in a way none of them foresaw.

This time last year the treasurer Wayne Swan predicted a budget deficit of $18 billion. Our forecasters went for $20 billion. The wildest forecast was for $32 billion. The reality, confirmed by treasury in this year's budget papers, will be close to $50 billion. Our panel are entitled to complain that it is difficult to forecast something that couldn’t have been foreseen. Within weeks of taking office late last year Joe Hockey blew out the deficit by $9 billion in order to top up the Reserve Bank’s reserve fund.

A lot of other things the panel got pretty right. The panel forecast economic growth of 2.75 per cent in the year to June. The most recent figure for the year to March is 3.5 per cent, but the June quarter is expected to be weaker putting the final outcome in the ballpark of the forecasts. The panel got the cash rate exactly right. It expected 2.5 per cent and got 2.5 per cent. It was also spot on about the 10-year bond rate, expecting 3.5 per cent. The final rate was 3.57 per cent.

The ASX 200 climbed broadly as expected, although moved somewhat higher than the panel predicted, finishing at 5395.70. The panel picked 5235.
The hardest task in forecasting is being right where others are wrong. Several of our team were right about business investment where others were wrong, and several were right about the dollar where others were wrong. But only one was right about both. Step forward Professor Jakob Madsen. He picked a slide in business investment of 5 per cent and an Aussie dollar of exactly 94 US cents, both bang on the money.

He says his secret is not to use an economic model.

“I don't believe in models. There is no model in this world that can predict the exchange rate with confidence,” he told BusinessDay from his office at Monash University.

“We can make a guesses, but they are guesses about emotions because the exchange rate is partly driven by emotions.”

Coming from outside of Australia (he used to prepare forecasts for a Danish bank) Madsen was able to think about how Australia would be perceived by foreigners.

“If you would put your money somewhere last year, where would you have put it?  It would have to be somewhere with sound economic prospects,” he says.
He attributes his correct forecast of a dive in business investment to a gift for the obvious. “I couldn’t understand why the others forecast steady investment,” he says. “Investment is sensitive to the business cycle. It was turning down.”

His final tip is to ignore the newspapers. “No offence,” he says. “But if you are always focusing on what’s just happened you are unable to consider what’s happening underneath.”

In The Age and Sydney Morning Herald


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Read more >>

Here's to you, Martin Parkinson (lyrics)

Joe Hockey hung the Treasury boss Martin Parkinson out to dry today. Offered two opportunities to endorse him in the role he declined.


Mr Hockey pointedly refused to express confidence in the present head of the Treasury Dr Martin Parkinson who would be head of his department should Mr Hockey become Treasurer.

He had “deep reservations” about the numbers presented in the budget.

When told Dr Parkinson had taken ownership of those numbers saying they were the work of the Treasury rather than the Treasurerhe said he “would have expected Dr Parkinson to say nothing different” because he was “quite appropriately a servant of the government”.

Mr Hockey’s “starting point” was to “give public servants the benefit of the doubt about their intentions and their preparedness to work with us”.


Here's the song. Music by Simon and Garfunkel. Lyrics by the ever-clever Stephen Long:

And here's to you, Martin Parkinson

Swanny loves you more than you will know (wo wo wo)

God bless you please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey


We'd like to know a little bit about you for our files

We'd like to help you learn to help yourself

Look around you all you see are Coalition eyes

Tough pre-election outlook, or you go


And here's to you, Martin Parkinson

Swanny loves you more than you will know

wo wo wo


God bless you please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey


Hide the revenue in a place where pollies never go

Put it in your pantry with your tax reform

It's a little secret just the Parkinson affair

Most of all, you've got to hide it from the spivs


Coo coo ca-choo, Martin Parkinson

Swanny loves you more than you will know

wo wo wo


God bless you, please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey


Sitting in the Treasury on a Sunday afternoon

Looking at the candidates' debate

Laugh about it, shout about it when you've got to choose

Every way you look at it you lose...

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Read more >>

Swan's numbers. Why he is cautious, this time

BELIEVE ME THIS TIME

FROM THIS:

Projected outcomes, May 2012

2011-12 $44.4 billion deficit

2012-13 $1.5 billion surplus

2013-14 $2 billion surplus

2014-15 $5.3 billion surplus

2015-16 $7.5 billion surplus

TO THIS:

Projected outcomes, May 2013

2011-12 $43.4 billion deficit

2012-13 $19.4 billion deficit

2013-14 $18 billion deficit

2014-15 $10.9 billion deficit

2015-16 $0.8 billion surplus

2016-17 $6.6 billion surplus

In the face of enormous pressure to return the budget to surplus quickly, Wayne Swan has run the other way.

Extra spending this financial year and the next will boost the 2012-13 deficit by a further $2.4 billion and the 2013-14 deficit by $720 million.

Only in the following two years will the cuts in the budget overwhelm the extra spending, pushing down the 2014-15 deficit by $6.2 billion (to a small projected surplus) and pushing down the 2015-16 deficit by $12.3 billion (to a substantial surplus).

The Treasurer has adopted what he calls this "sensible, calm and responsible approach" in part because of a fear the economy could not take a sharp shift to surplus, a concern shared by shadow treasurer Joe Hockey, who told an investment conference last month the Coalition would not "go down the path of austerity simply to bring the budget back to surplus".

Mr Swan puts it this way: "Just because the global economy took an axe to our budget does not mean we should take an axe to our economy."

Changed economic conditions have ripped $60 billion from the four-year total of expected tax collections since the last budget update in October.

The budget papers include a graph making the point that if tax collections had remained as high as in the final year of the Howard government (23.7 per cent of gross domestic product), the budget would still be roughly in balance.

Swan is clawing back two-thirds of the missing $60 billion by making $43 billion of savings, most of which increase over time instead of biting now when the economy is weak.

Emblematic is the freezing of the thresholds beyond which Australians can't get the family tax benefit. The freeze will hurt no one in the coming financial year but then will raise $207 million in 2014-15, $400 million in 2015-16 and $609 million in 2016-17. The $94,316 cut-off for the family tax benefit part A seems generous now, but it will seem less generous over time as income growth pushes more and more people beyond it.

The decision to increase tobacco excise in line with average weekly earnings rather than the much slower growing consumer price index is another measure where the impact will start low and then grow.

The extra Medicare levy, to be locked in a fund labelled DisabilityCare Australia, won't bite at all in the coming financial year. But from mid-2014 it will take $3.3 billion from incomes, then, two years later, $4.2 billion. Set at 0.5 per cent of incomes, it will climb as incomes climb.

The phasing out of the net medical expenses tax offset as recommended by the Henry tax review will save only $175 million in its first year. But it will save $510 million per year by 2016-17.

So much do the measures Swan has put in place grow over time that he reckons he can fund 10 years' worth of the national disability insurance scheme and the schools improvement program with them.

But the projections aren't worth much coming from a Treasurer who, more than most, is acutely aware of how much things can change in just one year...

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The budget documents make clear that any numbers produced beyond the next years are "projections" rather than forecasts. The difference is that "projections" assume standard rates of economic growth rather than forecast what it will be. By definition, "projections" don't encompass the possibility of recessions. If Australia did manage to last another 10 years without a recession, on world-record 21 it already lasted, it would indeed be a world-beating economy and would certainly able to afford DisabilityCare and the Gonski education payments.

Much depends too on an assumption that as mining investment fades mining production will ramp up to fill the gap. Investment detracts from tax collections, production builds them. But it is a guess about what will happen assuming demand from China remains high.

The projections assume an Australian dollar "around US103 cents".

This was where it was when the budget was being finalised, but it isn't where it is now. It fell below US100 cents on Tuesday and may well stay there, highlighting how difficult it is to forecast a week ahead, let alone a decade into the future.

And some of the measures involve guesswork. Tightening the tax rules to prevent multinational corporations shifting profits offshore and related tax measures are said to raise $4 billion over the next four years. But the assumption is multinationals will agree to pay the extra tax and won't find new ways not to.

If all goes as planned, government debt will peak at $192 billion, instead of the previously forecast $145 billion. The total is 11 per cent of GDP, instead of the previously expected 9 per cent. Net debt would be eliminated in 2021-22, one year later than previously expected.

In The Canberra Times, The Sydney Morning Herald and The Age


Australia's economic future is strong but uncertain, according to the Treasurer. The massive resource investment boom is shifting to a boom in production and exports. The rest of the economy is "transitioning towards broader sources of economic growth".

But while the opportunities are "great" and the future "bright", the transition "will not be seamless".

The prices Australia gets for its exports have slipped 17 per cent in the past 18 months when expressed as a proportion of the prices the nation pays for its imports, the budget papers say.

The Treasury is expecting only a small further decline in the year ahead - just 0.75 per cent in 2013-14, followed by 1.75 per cent in 2014-15. It isn't particularly confident in the forecast, observing that the prices of key non-rural exports remain "highly volatile".

One scenario modelled on worse-than-expected export prices has employment growing at 1 per cent instead of 1.5 per cent.

The economy would grow at 2.75 per cent instead of 3 per cent and tax collections in 2014-15 would be $5.6 billion lower.

This time last year, Treasury forecast an unemployment rate of 5.5 per cent. Now it is forecasting 5.75 per cent, an outcome in part reliant on those "highly volatile" assumptions.

The department is hoping investment in housing surges in the year ahead to fill some of the gap left by mining investment.

After sliding in 2011-12 and growing at just 0.5 per cent in 2012-13, a 5 per cent improvement is expected in 2013-14. Business investment will not be of much help. Treasury expects its growth rate to slide from 10.5 per cent this financial year to 4.5 per cent in 2013-14.

Inflation, which had been a deep concern for the Treasury this time last year, and had been forecast at 3.25 per cent fuelled by the carbon tax, is now just 2.25 per cent.

That's the figure the department is targeting for the next two years, punting on the dollar staying high and underlying household demand being weak enough to force retailers to continue to discount in order to shift goods.

Business profits should remain very weak in 2012-13, slipping 0.75 per cent before recovering to record 4.75 per cent growth in 2013-14 and 5.5 per cent in 2014-15. Even after the recovery, profits will rise at much less than their historical pace of about 7 per cent a year.

The Treasury blames the high dollar, which it says is having "an acute and enduring effect on profits" as companies "squeeze margins to remain competitive".

The department's central forecast is the economy will muddle through. Economic growth will be 3 per cent this financial year, 2.75 per cent in 2013-14, and 3 per cent in 2014-15.

But it makes a point in the budget papers of saying the forecasts can turn sour - they are "always subject to a margin of error".

It says its biggest forecast errors last year concerned business and housing investment.

Ratings agencies Moody's and Standard and Poor's reaffirmed Australia's AAA credit rating on Tuesday night, saying the budget made only slight changes to previous projections and the country's debt level remained low.

In The Canberra Times, The Sydney Morning Herald and The Age


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Big Data. The former minister wants it, others not so much

Conference website here.

Rudd backer Kim Carr - a casualty of Labor’s leadership turmoil - will use a speech in Melbourne Thursday to attack “bureaucratic blockers” in the public service and his own party’s commitment to open government.

Until March the minister for human services responsible for Centrelink, Medicare and the pharmaceutical benefits scheme, Senator Carr will say most governments start off believing in open government, but that “the will tends to ossify”.

Senator Carr broke new ground by throwing open previously closed departmental records to researchers examining questions such as the link between prescription drugs and birth defects and the health impacts of low incomes.

Invited to open Thursday’s health informatics conference when he was minister, he agreed to open the conference as backbencher after the invitation was re-issued.

“Who isn’t in favour of accountability? Who isn’t a fan of evidence-based policy?” his speaking notes say.

“The trouble is our practice doesn’t always live up to our aspirations.”

“As Sir Humphrey observed in Yes Minister: If people don’t know what you’re doing, they don’t know what you’re doing wrong.”

“The authority to approve data release is usually held by very senior public servants. However this power is often delegated right down to ‘middle management’ positions.”

“I have been told that officers with the delegated authority often ‘sit on’ requests for inordinate amounts of time. Sometimes it’s due to an overblown assessment of the privacy risks. At other times, they simply lack the time to jump through the hurdles"...

The department processes 200 million payments per year. It holds 7 million gigabits of data.

“President Obama has recently announced a great new project to map the human mind. We have here the great map of Australian society: life as it is lived,” Senator Carr will say.

“Public servants need to constantly be reminded and perhaps reassured that government wants them to release data in accordance with legislation.”

“I have approached members of the Coalition on this front, and I have been very pleased with their response.”

In The National Times


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The shocking truth about forecasting

Wednesday column

Whoops. As far as forecasting errors go, the latest confessed to by the International Monetary Fund is a whopper. It’s in a category of its own.

Other contenders might be the man who turned down the Beatles (“groups with guitars are on their way out”) or the movie executive who said home video recorders would kill the motion picture industry (“I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone”).

But those misforecasts never caused massive human misery (all the more so because they weren’t taken seriously).

The IMF on the other hand solemnly advised the nations of Europe coming out of the financial crisis to raise taxes and wind back government spending. Its commandments had weight. Yes, it had failed to foresee the crisis in the first place, but it was the lender of last resort. They might need it.

And it had modelled what would happen if they did what it said. For every dollar they cut their budgets their economic growth would suffer just 50 cents. Its forecasts said so.

On Friday in its first working paper of the year it revealed the full horror of what did happen. Personally authored by the Fund’s chief economist Olivier Blanchard the mea culpa says for every dollar those nations cut their budgets their economies crumpled something more like 150 cents.

That’s right. Rather than suffering far less than the savings they made on their budgets, their economies suffered far more. As mistaken advice it’s monstrous - like going to see a doctor who tells you the medicine won’t hurt much and finding it lays you low for years.

The Fund forecast that if the Eurozone took its advice it would grow 1.8 per cent throughout 2011. It grew 0.7 per cent. Italy would climb 1.3 per cent, it slid 0.5 per cent. Spain would surge 1.8 per cent, it grew not at all.

The errors are completely unlike those made forecasting the Australian budget which were largely the result of unexpected events.

The shocking thing about the IMF misforecasts confirmed by its chief economist is that there were few unexpected events... The global environment was broadly as forecast. The nations of Europe did what was forecast. The consequence was nothing like what was forecast. The Fund misunderstood the mechanics.

As Olivier Blanchard put it, his forecasters “significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation”.

His defence is that in normal times they would have got it right. In normal times a budget cut of one dollar would have cut economic growth by 50 cents. But the times weren’t normal. European interest rates had been cut to nearly zero, meaning there wasn't the normal room for authorities to cut further, and households were more heavily indebted than normal meaning cuts to their income flowed through more quickly than normal to cuts in their spending. And the starting point was different. The European economies had been in recession, which was far from normal.

You or I might say the forecasters didn’t do a thorough job. The Wall Street Journal says they may have been ‘intellectually lazy’.

But they weren’t alone. The European Commission, the Organisation for Economic Co-operation and Development and the Economist Intelligence Unit all made the same mistake. The IMF tells us so.

When forecasters are wrong, they are usually wrong together.

A year ago only two of the panel of 20 professional forecasters assembled for this newspaper’s BusinessDay economic survey picked Australian dollar above $US1. They were the only two that were right. This time only four picked an Aussie below $US1.

There’s a reward for staying with the pack. You’ll keep your job if you are wrong in good company, even if the people who act on your advice lose the lot.

The shocking and little-acknowledged truth is that most expert forecasts are wrong. Not only wrong, but more wrong than if they had been generated at random.

Two decades ago psychologist Philip Tetlock of the University of California Berkeley began testing the forecasts of 284 famous Americans who made their living pontificating about politics and economics. As he says in his book Expert Political Judgement: How Good Is It? it wasn’t easy to pin them down. When stripped of rhetoric their predictions were surprisingly slippery.

So he surveyed them asking every few months whether the variable they covered would (a) stay the same, (b) increase or (c) decrease.

More than 82,000 testable forecasts later he found that as a group the experts performed worse than if they had just selected (a), (b) then (c) in rotation. They performed worse than a dartboard.

Two Reserve Bank economists have just found the same thing about the Reserve Bank itself. One year out its unemployment forecasts have been “less accurate than a random walk”.

There are exceptions. Weather forecasters are especially good, as we are discovering right now. The New York Times data geek Nate Silver got the presidential election spot on. These exceptions tell us something. Neither Silver nor our weather forecasters think they are experts (Silver comes from sports rather than politics). They are guided by the data - regardless of who it offends - rather than their own judgement.

By contrast experts have reputations to protect. Whether they realise it or not they often play games, avoiding intellectual curiosity if it will leave them out on a limb away from the pack. They remember their good forecasts and bury the bad. Put plainly they are not the sort of people you would want providing economic advice that could have catastrophic consequences.

Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable and the new book Antifragile asks why predictors keep predicting, given that their predictions are so often wrong. His answer: “They are not harmed by what they are doing”.

He says instead of asking a doctor what you should do, you should ask what the doctor would do him or herself.

In today's Sydney Morning Herald and Age


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Ultralow. Could next year's cash rate be 2 per cent?

Sharply weaker mining conditions, a “tepid” recovery in the non-mining economy and a collapse in job advertising have prompted the ANZ to forecast four more interest rate cuts next year - enough to the take the Reserve Bank cash rate from 3 to 2 per cent.

The new rate - almost certainly the lowest in a century - would mean ultra low rates for depositors who are already earning just 1.7 per cent on cash management accounts, 3.05 per cent on online accounts and 0.5 per cent on building society and credit union accounts.

For mortgage holders now paying the discounted variable rate of 6.65 per cent it would mean a further saving of $182 per month on payments on a $300,000 loan. If the banks passed on only 80 per cent of the cuts as has been their recent practice the saving would be $145 per month.

The ANZ had previously been forecasting one or at most two more rate cuts in the year ahead. The bank’s head of Australian research Ivan Colhoun said he now expected four cuts because the non mining economy was failing to pick up fast enough to fill the “hole” that would be left by mining.

“The economy has grown below trend in each of the past two quarters,” he said. “Real net disposable income fell in the September quarter. The key issue is whether the weakest sectors of the economy - retail, housing, manufacturing and non-mining investment - will strengthen sufficiently to offset the anticipated slowing in mining investment. The Reserve Bank’s two most recent interest rate cuts suggest it wants further insurance.”

Mr Colhoun said business conditions were their weakest since the global financial crisis. Forward orders weakened sharply in November and capacity utilisation fell to its lowest since mid 2009.

“Each of these trends, if maintained, warns of slower economic growth ahead and of the need for further policy stimulus to avoid a further rise in unemployment. This will likely require a further 0.50 to 1.00 of rate cuts in 2013 - with the bigger figure likely if the Australian dollar remains high or rises further"...

Reserve Bank deputy governor Philip Lowe said in a speech last week the average level of interest rates would most likely be lower for longer than in the past due to changed global conditions and the decision of Australian households to save an unusually large 10 per cent of their income.

Further cuts would make saving less attractive and borrowing still easier.

The Bank cut its cash rate from 4.25 per cent to 3 per cent during 2012. Standard variable mortgage rates slid from 7.30 to 6.45 per cent. The Bank board is not due to meet again until February.

Treasurer Wayne Swan adopted a hard line with state treasurers at a summit Monday, failing to agree to any requests for extra money. But he supported in principle their request to impose the goods and services tax to imported parcels worth $500, instead of the present $1000 as at present. Officials will develop a business case for the change.

In today's Sydney Morning Herald and Age


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Big Man, Big Data. Kim Carr's incredibly audacious plan

He wants to know what you need before you know it yourself

Kim Carr is impatient. Fiona Stanley is angry. Between them Australia’s new minister for Human Services and the former Australian of the Year want to solve some of Australia’s most intractable problems by mining what could be Australia’s greatest resource – its data.

Unexpectedly, the Victorian senator has found himself sitting on top of more data than any minister before him. In March, Julia Gillard withdrew his beloved manufacturing portfolio a few months after taking away innovation, industry, science and research. Human Services looked like a consolation prize, or a punishment for backing Kevin Rudd in the leadership struggle.

But the former research minister quickly came to see the department (and the data) as a research gold mine. Created just eighteen months ago it not only processes Centrelink payments as its predecessor used to, but also Medicare payments, pharmaceutical benefits payments, rehabilitation support and child support. It knows an amazing amount about each of us and it is amassing that information from cradle to grave.

Its information technology network - built from a number of previously separate networks - is the biggest in the southern hemisphere: five times the size of the Commonwealth Bank’s. It costs $1 billion a year to run. It processes 200 million payments each year, recording each one on a computer system that already holds three million gigabytes. It has twice as much again stored on magnetic tape.

The department has always linked its data to the maximum extent permitted by the law, gaining what some might see as a disturbingly complete picture of our activities. But until now it has done it mainly in order to fight fraud. What it has hardly ever done is to interrogate the data to make its services more effective, or as the minister puts it, to “make Australia work better”.

At a time when the “evidence-based policy” has become a setup line for jokes, Senator Carr uses the phrase proudly even though he knows it exposes him to ridicule. “Every politician loves evidence-based policy,” he says. “Actually for some it's as useful as lamp-posts for drunkards - good for support, not illumination. I am told we have called for it, or claimed to have had it, on more than eighteen hundred occasions in the parliament this year.”

“But if you start from the premise that you are serious about evidence-based policies you realise you can actually develop them by using the data you’ve already got.”

“We know where people live, we know when they’ve worked and how they’ve responded to major shocks. We know what illnesses they have suffered, and how they were treated. We can follow a family’s journey right down the generations. I want to open up that information to researchers who can find patterns. For example I would like to know what type of medical admissions take place ahead of applications for child support. If we knew that we would know where to best direct resources before they were needed”.

Predicting what’s needed before it is needed is one of the mainstays of science fiction. In The Hitchhiker's Guide to the Galaxy elevators can see far enough into the future to arrive at floors before potential passengers realise they need them, saving them from the embarrassment of waiting around.

But Carr has something grander in mind for what he calls “big data” - it’s more like Minority Report where the authorities can use glimpses of the future stop crimes from being committed at all...

“Let's not pretend that there isn't entrenched poverty in this country. Let's not pretend that some people's postcodes don’t predetermine their life chances,” he says in his parliament house office. “I want to find the mechanisms to even up those chances. It’s what the social security system is supposed to be all about.”

On the other of the country in Perth former Australian of the Year Fiona Stanley has been working with an unusually cooperative state government for 35 years to gain glimpses into the future. She has been given access to birth records, health records and educational records - all linked in a way that enables her to build a complete picture of someone’s life that isn’t allowed in other states.

She reckons she’s just discovered a disturbing answer to one of the senator’s questions, although she wishes she had been able to do it with national data and with data sitting on Senator Carr’s pharmaceutical benefits computers.

“Disabled children are much more likely than other children to be subsequently (physically) abused. It’s an important finding.”

“Knowing that, or knowing anything like that, means we can direct resources where they are likely to be needed rather than directing them at random,” she says.

Kim Carr employs one quarter of the Commonwealth public service. He runs a Centrelink office, a Medicare office or an agent in every Australian town. He concedes that until now his department and its predecessor have been seen as a payments organisations - it now shifts two-fifths of the Commonwealth’s budget. But a lot of the payments work is being automated (he calls web-based delivery “home delivery”). Technology is both freeing up staff and making data even easier to collect.

“I want the department to deliver more personalised services, “ he says.

“We deal with people who are homeless, people who are sick, people who are students, people who are thinking about retiring. We are the first boots on the ground with the army after a natural disaster. We help people clean up their circumstances. We offer financial counselling, although I’m not allowed to call it that.”

“It’s a wrap-around service, but I want it targeted where it is needed. To find that out I am going to open our data to researchers.”

Until now they’ve been locked out. Fiona Stanley and her colleagues at the paediatrics and child health unit at the University of Western Australia used to get occasional access to pharmaceutical benefits records until the Commonwealth cut it off with what she says was no explanation. Kim Carr has swiftly approved data requests from RMIT University, the Australian National University and the University of Queensland. He has also inherited an earlier program (set up by himself as research minister) in which the CSIRO mines data in Centrelink records.

Last month he invited researchers from five universities to Canberra to meet officials from his department and the CSIRO to toss around ideas. Professor Stanley’s paper was entitled “Lessons from Western Australia: You can do it and the sky won’t fall”.

“In 35 years of doing this in Western Australia we have never once had a privacy breach,” she says. “We are given anonymised data - it is linked so we can join together health records, birth records, postcodes and the like but it can’t be used to identify individuals. We’re not interested in that anyway.”

Richard Denniss, executive director of the Australia Institute says he understands privacy concerns but says they are outweighed by the good that is likely to come from “joining up” data.

“Sure, privacy is a concern, but the data can be anonymised and you can have sanctions for researchers who try to unpack it. At the moment your bank probably knows an awful lot about you - how much you earn, how you spend your money, when you get fired, when you get divorced, when your loved one dies, whether you pay child support. That data is in no way anonymised. Your bank is free to mine it for any commercial purpose it can dream of.”

“Anyone concerned about privacy would be better off directing those concerns at what profit-seeking corporations can do rather than ways in which researchers can use government data to improve public policy.”

Half a century ago (and far too late) the mourning sickness drug thalidomide was removed from shelves after thousands of mothers gave birth to disabled children. Professor Stanley says if researchers back then had had access to real-time prescription and birth data they would have spotted the link sooner. What really disturbs her is that they don’t have access to that data today.

“The whole reason we set up birth defects registries across Australia was to pick up the next thalidomide,” she says. But until now we haven’t been able to link those registries to the Pharmaceutical Benefits Scheme. It’s insane,” she says.

The anti-arthritis drug Vioxx was withdrawn in 2007 after years in which its users died of heart attacks. Professor Stanley is certain access to Carr’s Pharmaceutical Benefits prescription data and Medicare data would have allowed researchers to spot the link sooner.

“Heart attacks are quite common, so it was hard to see the link. You need data from 100 per cent of the population. Surveys aren’t very good. They are always biased by the people who who choose not to participate. And you never know the extent to which they are biased.”

Professor Stanley and colleagues in Western Australia have drawn unnerving conclusions about the relative effectiveness of schooling in educating children, conclusions they could not have been able to draw without linking the state’s birth, health and education records.

“Parental factors are far more powerful than anything in the school system,” she says.

“Children who are born underweight because their mothers smoke or drink in pregnancy or fail to eat well or have sexually transmitted disease when pregrant, they are likely to have poor education outcomes regardless of the quality of their schooling. Birthweight matters. Resources directed there can make a bigger difference than extra resources directed at schools.”

Another important and previously-unacknowledged finding is that Perth psychiatric patients are much more much likely than others to later suffer from heart disease and diabetes. Targeting resources for preventing those diseases to them would be akin to pre-programing the lifts in the Hitchhiker's Guide to the Galaxy or stopping a crime before it took place along the lines of Minority Report.

Stopping health problems and poverty before they get started is Kim Carr’s holy grail. It makes him part health minister, part minister for social inclusion. He sees his role as improving people’s lives.

Human services may not have been a portfolio he sought, but he gives every indication he is relishing it and is keen not to waste time.

In today's Age


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Less than brilliant. How the ABE sees the year ahead

Economic growth is set for a fall, business investment will hit wall, and the government is heading for a deficit this financial year rather than a surplus. Those are chief findings of a dismal set of forecasts assembled by Australia’s leading business economists for their annual forecasting conference.

Australia’s annual economic growth rate has already slipped from 4.3 per cent in March to 3.1 per cent in the September quarter figures released Wednesday. The forecasters expect 2.8 per cent next year with one pumping for an annual rate as low as 0.7 per cent.

Elected by their peers to the Australian Business Economists executive committee, the 16 forecasters work for big firms including the Macquarie Group, Deutsche Bank, JP Morgan and the Westpac, Commonwealth, National Australia and ANZ banks.

Growth in business investment - until now a driver of economic growth - is expected to slip from 16 per cent this year to 9.3 per cent next year and then close to zero (0.7 per cent) in 2014.

“The committee believes the peak in the prices phase of the mining boom is over,” said ABE chairman Stephen Halmarick of Colonial First State... “The peak in the investment phase will follow soon. The export phase of the mining boom is viewed as having much longer to run.”

The committee expects a further a sharp fall in the terms of trade of 5.5 per cent in 2013, following this year’s slide of 9 per cent. “These falls will mean the economy is likely to lose some of its insulation,” the report says.

Household consumption is more slowly in 2013 notwithstanding the run of interest rate cuts before recovering somewhat in 2014.

Dwelling investment is expected to improve, climbing 3 per cent and 5.7 per cent in 2013 and 2014 after sliding 5.4 per cent in 2012.

Government income will be particularly hard hit by sliding company tax revenue, resulting in a budget deficit of $8 billion this financial year rather than the forecast surplus of $1.1 billion. The range of budget forecasts is particularly wide, from a low of a $20 billion deficit to a high of a $0.1 billion surplus. The 2013-14 forecasts range from a deficit of $7.9 billion to a surplus of $1 billion.

Unemployment will peak at 5.8 per cent (up from 5.5 per cent) but the range of forecasts is particularly wide with the highest forecast a peak of 6.8 per cent and the lowest a peak of 5.7 per cent.

The carbon tax should headline inflation should brush the top of the Reserve Bank’s target 2 to 3 per cent target band next year, but the committee expects the more important measure of so-called underlying inflation to remain contained at 2.6 per cent during both 2013 and 2014.

On balance the committee expects the Reserve Bank’s cash rate to stay steady at 3 per cent for the next two years, but forecasts for next year range from a low of 2.5 per cent to a high of 5.3 per cent.

In today's BusinessDay


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Expect two more rate cuts, starting now - OECD

Neat interactive graph:

The Reserve Bank is set to cut interest rates two more times - once in December and once near the start of next year - taking its cash rate to 2.75 per cent, a new all-time low.

The new forecast from the Organisation for Economic Co-operation and Development has the cash rate staying at the new floor until halfway through 2014. If fully passed on the cuts would bring the standard variable mortgage rate to near 6 per cent, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.

The OECD credits budget cuts with its forecast of two further rate cuts, saying the government’s determination to achieve a surplus will “dampen demand”, forcing the Reserve Bank to act to shore up the economy.

It says the Bank will be able to act in December because inflation is “contained”, an achievement reached “despite the introduction of a carbon tax in July”.

The OECD forecast of rate cuts exceeds that of the market. Interest rate futures contracts assign only a 55 per cent probability to a rate cut next month. The OECD draws up its forecasts after consulting closely with the Treasury and Reserve Bank. The Treasury has a representative stationed at the OECD headquarters in Paris.

The OECD’s economic forecasts are broadly consistent with those in the Treasurer’s mid-year budget update. It expects Australia’s economy to grow by 3.7 per cent this year, 3 per cent in 2013 and 3.2 per cent in 2014.

It has downgraded its forecasts for global growth to 3.4 per cent in 2013 and 4.2 per cent in 2014, most of which will be driven by China and other emerging economies. The biggest risks to the outlook come from the so-called euro zone which should be in or near recession until well into next year and the possibility of a “fiscal cliff” in the United States when scores of tax cuts and spending measures expire at the end of this year.

The report paints a picture of an uneven economy with mining investment expected to “expand vigorously in 2013 on the basis of announced plans” while job creation slows, unemployment hovers at around 5.5 per cent, and the rest of the business climate is “challenging, particularly in construction”...

The Australian dollar has remained higher than would be expected in the face of lower export prices, holding back exporting and import-competing businesses.

The government’s determination to return the budget to surplus has held back the economy, although not by as much as “would first appear”. Much of the apparent turnaround is the result of shifting spending between financial years and “changes in the accounting treatment of unclaimed financial assets” as well as cuts in defence spending and foreign aid which will have a “limited impact on domestic demand.”

Should economic conditions deteriorate significantly the OCED says the government should delay its planned return to surplus, advice also offered by the International Monetary Fund in its report on Australia earlier this year.

Treasurer Wayne Swan welcomed the forecasts saying since last November official interest rates had been cut five times bringing mortgage rates well below the 8.5 per cent that applied when the government changed hands.

“A family on a $300,000 standard variable mortgage is saving around $4500 a year in repayments compared to what the Liberals saddled them with when they left office,” he said.

In today's Canberra Times, Sydney Morning Herald and Age

Australia OECD November 2012



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Who says RBA forecasts are hopeless?

The Reserve Bank says so.

Me on ABC NightLife, Wednesday November 14

9 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Me on ABC Adelaide 891, Wednesday November 14

6 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Who says most Reserve Bank forecasts are hopeless?

The Reserve Bank itself says so in a research paper released Monday.

To be strictly accurate, the paper is by two of its economists Peter Tulip and Stephanie Wallace. Released by the Bank, it is prefaced by the usual warning that its findings “do not necessarily reflect” those of the Bank. Nevertheless Tulip and Wallace find Reserve Bank forecasts explain only 15 per cent of the variation in unemployment in the short term and beyond that are “less accurate than a random walk”.

The Bank’s forecasts for GDP growth aren’t likely to be accurate at any time. Even in the very short-term the historic mean provides a better guide. For the year to December 2013 the Bank is forecasting economic growth of somewhere between 2.25 and 3.25 per cent. Tulip and Wallace say a more likely range is somewhere between 0.9 and 5.7 per cent.

The Bank’s forecasts for inflation are pretty good (better than those of the market) but only for one year ahead. After that they also are also no better than random. Tulip and Wallace say the best longer term predictor of inflation is 2.5 per cent, which is the centre of the Reserve Bank’s target band. The finding makes sense. The Bank is good at hitting its target

And what about market forecasts of the RBA’s own decisions? Tulip and Wallace say the judgements backed with money and baked into the yield curve predict short-term interest rates “only slightly better than a random walk”. Sorry.

In today's CBD

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Garnaut to miners. You've conned yourselves over China

Read his full speech below. It is very good.

Climate change advisor Ross Garnaut has lambasted mining executives for destroying shareholders funds in the blind belief China's demand for Australia’s big three exports would continue to climb.

While they had splurged on “wasteful overinvestment” China had been making good on its promise to cut its emissions intensity and had been sourcing iron ore from elsewhere.

“It happens that the Chinese structural change has had its most severe effect precisely on the three commodities which have been at the centre of the Australian resources boom - iron ore, metallurgical coal and thermal coal,” he told a Melbourne Institute conference.

“The awful reality is that parts of corporate Australia have dissipated shareholders’ funds by underestimating the seriousness of Chinese commitments to reduce the emissions intensity of economic growth.”

Speaking at the same conference Treasurer Wayne Swan warned of a “savage blow” to the global recovery unless Republicans and Democrats in the United States could agree on a way to prevent a crisis in December when large numbers of tax cuts would automatically expire.

Professor Garnaut said China had exceeded its ambitious emissions targets, cutting coal-fired generation by more than 7 per cent in the past year. A rapid expansion in hydroelectricity, and wind, biomass, solar and nuclear power had pushed down coal’s share of energy production from 85 to 73 per cent.

Australia’s iron ore exporters would soon have to compete with massive new Chinese-funded mines in West Africa created in part by Australia’s decision to block Chinese investment at home.

The forecasts for iron ore and coal exports in the government’s Asian Century white paper were barely believable, their credibility protected only by the presence of “low” projections along with so-called medium and high projections.

Gas and uranium would be far more important to Australia’s prosperity than the “diminished prospects for the staples of the early twenty first century”...

Mr Swan built on his September attack on the “cranks and crazies” he said had taken over parts of the Republican Party saying the “looming fiscal cliff” in the United States could plunge it back into recession.

The legislated unwinding of a decade’s worth of tax cuts and spending programs on December 31 would “left unattended, see the the US economy suffer a crushing annualised contraction of 2.9 per cent in the first half of next year”.

“Whoever wins the presidential election in less than a week’s time and whoever controls the Congress will have choices to urgently make,“ Mr Swan said.

“A few weeks ago I described in colourful terms the risk posed by those who were
pushing the most extreme points of view.”

“I got a lot of support for that speech, but some of my dependable critics misunderstood it as a political statement, when any economist or policy-maker following the fiscal cliff crisis knows all too well this is about risks.”

Mr Swan will fly to Mexico for the G-20 finance ministers meeting on the weekend and then to Washington for meetings with the head of the International Monetary Fund Christine Lagarde and the head of the US Federal Reserve Ben Bernake.

Professor Garnaut told the conference Australia had been blessed to have a mining boom immediately following the largest consumption and housing boom on record.

The immediate challenge was to “come down from our hump in incomes and expenditure without precipitating recession”.

In today's Canberra Times, Sydney Morning Herald and Age


Here's my favourite bit, about Japan:

"Some observers see Japan’s economic stagnation as a failure of the Japanese economy and polity. Many Japanese do not feel that their country is in crisis. Unemployment is low. Income is more equitably distributed than in the United States, although some Japanese are disturbed by increasing disparities. Health services are excellent by global standards and longevity incomparably high. Japanese enjoy high and subtle literacy and good education, and a rich cultural life. There is private financial and personal security and incomparable public security—natural disasters aside. To be sure, the ageing of the population slows national economic growth and reduces national strategic weight, and a more dynamic polity would remove some longstanding imperfections. But if Japan is the end point of modern economic growth, then modern economic growth is no bad thing."


Ross Garnaut 2012 Economic and Social Outlook Conference



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