Saturday Forum: Australia's Chinese future

Australia's Rio Tinto used to find it hard to give away some of the iron ore it pulled out the dirt in the Pilbra. This week it scored a near doubling in its iron ore selling price - on top of the doubling it has enjoyed since 2004. Its critics say it could have got even more.

On the outskirts of Melbourne Australia’s biggest tyre factory this week declared that it had to close, throwing 600 Australian workers onto the streets. Its owner, Goodyear, is able to import tyres for much less.

And in Canberra the Treasurer Wayne Swan opened the door to tightening Australia’s previously very liberal foreign investment regime by suggesting that state-owned corporations might face tougher restrictions than purely private investors.

The common link in these three very different stories is China. And this week wasn’t too different from any other.

Overseas we learnt that China now has more internet users than does the United States. It has twice as many mobile phone users. Its population of millionaires jumped 20 per cent in the last year. Its billionaire population doubled.

It is undergoing a seismic shift: a once-in-a-planet event a bit like the ending of an ice age.

Much of the world will find itself hurt by the shockwaves. Not Australia. Most probably. But even we will have to make adjustments.

Marvin Goodfriend from Carnegie Mellon University says it is “a one-off in the history of the planet earth”...

“Taking China and India together, roughly half the planet is becoming modern,” he says.

“We have never had it before in thousands of years of planet earth and we are not going to have it again in a few thousand years.”

“It has to happen. The relative prices of food and fuel are going to adjust. We will never be able to go back go back.”

The ANU’s Warwick McKibbin, an academic economist so highly regarded that he is only one who sits on Australia’s Reserve Bank board, says we are witnessing a sudden jump in the China’s standard of living to western levels. He expects it to be complete by 2100.

For the past 400 years it has been pitifully below those levels. As recently as 2003 citizens of the United States earned $US25,000 on average. Citizens of China earned $4,800.

But McKibbin points out that a sudden jump to parity would actually do no more than restore China to its former place, the one it enjoyed for the first 1,600 years of the modern AD calendar.

“In year zero, China and India had 58 percent of the global population and 59 percent of global GDP in that year; and the respective numbers in year 1600 were 53 percent and 52 percent,” he says.

But much slower growth in the past four centuries has pushed them way behind.

“By 1973, China and India’s share of world GDP had fallen to only 7.7 per cent although the two countries accounted for 37 percent of world population.”

Things began improving as China and India began to open up their economies to the rest of the world at around the start of the 1990’s.

What’s under way right now is the last dramatic lift in their standard to living to the best the world has to offer.

In 2003 China accounted for 20.5 per cent of the world’s population and but only 15 per cent of its income. McKibbin expects it to make 20 per cent of the world's income - population parity – by 2100. He expects India to get there by 2150.

The maths make it seem inevitable. Chinese income is growing at the rate of 10 per cent a year. India’s is growing at 8 per cent.

Singapore, once regarded as a less-developed country that Australians visited for cheap holidays, now enjoys a standard of living more than a third higher than Australia’s. It is the fifth richest nation in the world in terms of purchasing power per citizen - just behind Qatar, Luxembourg, Norway and Malta.

Australia is in 20th place, not too far away from Japan, another country that just 50 years ago was impoverished by comparison.

Singapore’s transformation began when it was expelled from Malaysia in 1965. Japan’s gathered pace after the second world war.

What sparked China’s?

It is a question Austrade’s Chief Economist Tim Harcourt has been pondering on each his repeated visits to a nation he says is changing almost beyond recognition each time he visits.

“We expected it to grow quickly and we keep forecasting that, but each year our forecast have been overtaken by what’s been happening on the ground,” he says.

“It overtook Japan as our top trading partner last year. We now have as many small and medium sized enterprises exporting to China as export to all of Europe.”

“It is no longer true to say that we are Japan’s beach and China’s quarry.”

“China in the midst of an enormous mass migration from the country to industrial cities. That’s where Australian businesses fit in, in the second and third tier cities – the so-called country towns of 8 million people.”

“Australian architects and infrastructure companies are doing well there. The Communist party is trying to move income distribution from Beijing and Shanghai in the east to the west. It is trying to open up the west to industry, and that’s where we are doing quite well.”

“But what made it happen, what switched it on?” I ask, somewhat naively.

“The Party. It makes broad announcements, like – we’re going to build the west, or become more green and so on, and off they go,” he replies.

“It’s not like in Australia. In China announcements are translated into action. Four or five years ago the Party decided that now as the time to industrialise, and that they would make it happen, and joined the World Trade Organisation to make sure their goods could be sold.”

Much of the foreign money that China is accumulating as a result of exports is simply being stored. China’s foreign exchange reserves, worth $US30 billion back in 1990 are now worth $US1,760 billion – and are said to be accumulating at the rate of $US100 million per hour.

It is enabling China to lend money to fund the world’s debtor nations, such as the United States and Australia. Australian and US home loans, once the result of domestic savings, are now likely to be “made in China”.

Countries such as the US and Australia can console themselves with the knowledge that it is quite likely to be their own money that they are borrowing back. They sent it over to China in return for well-priced goods. But the money is controlled by China – often by its Communist Party government.

Should China want to, it could pull the plug on debtor nations such as the US at any time by simply refusing to refinance their loans. It is a power that it has shown no inclination to exercise, but one that it has only enjoyed for the past few years.

More worrying for Australia in the meantime is the use to which Chinese state-owned investment corporations are putting their newfound investment powers. They are attempting to buy up Australian resource companies. They even had a go at Rio Tinto itself earlier this year.

In play at the moment is the West Australian iron ore miner Murchison Metals, facing a bit from China’s Sinosteel. On Thursday the Treasurer Wayne Swan indicated that while he welcomed investment from China, he would protect the national interest amid reports he was planning to limit investment bodies owned by foreign governments to 49.9 per cent stakes in local firms.

If China succeeded in a bid for a company such as Rio Tinto it is easy to imagine that Rio Tinto would find itself settling for smaller price rises for Australian commodities than the 85 per cent increase in the price of iron ore it announced on Monday.

There’s more to it than iron. China’s appetite for copper seems insatiable. Each new Chinese city apartment eats up kilos of copper wire. Its new power stations and transmission lines use much more. It is already buying one quarter of all the copper produced in the world each year and its consumption of copper is growing at the rate of 13 per cent per year.

Its demand for copper, lead, iron ore, liquefied natural gas, uranium and wheat – all produced by Australia – appears insatiable.

Oil appears to be about the commodity that Australia is unable to supply to China, along with thermal coal in which China has until now been self-sufficient. That self-sufficiency is about to end, and as a result Australia’s Bureau of Agricultural and Resource Economics is forecasting a doubling in its price in the next twelve months with Australian income from thermal coal sales jumping 70 per cent.

The forecasts, released on Monday suggest that Australia’s income from coking coal will jump a further 123 per cent, our income from iron ore pellets will jump a further 72 per cent, our income from liquefied natural gas will jump 67 per cent and our income from alumina and aluminum will jump 20 per cent and 12 per cent.

These price rises are on top of a jump of 40 per cent over the past four years in Australia’s terms of trade, which is a measure of the price received for exports as a proportion of the price paid for imports.

The jump began at about the time as China began rapidly industrialising. The Treasury and the Reserve Bank are forecasting a further jump in our terms of trade in the coming financial year of 20 percent, which with compounding will result in a 70 per cent jump over five years.

The reserve Bank Governor Glenn Stevens told a closed Treasury seminar in March that Australia was living through “one of the largest transformations in the structure of the global economy, as far as Australia is concerned, for a century”.

“But while the Korean War boom of the early 1950s was temporary, all the indications are that the rise of China is not just a cyclical event, but a structural change of the first order,” he said.

“China certainly has a business cycle, like all other economies, and will slow at some point. Even so, it is highly likely that, short of some catastrophic event, the rise of China will not be a flash in the pan of economic history.”

“In essence, we are seeing a very large change in relative prices in the world economy, and a relative price change that is more important to Australia than to almost any other country.”

Alone among industrial nations Australia produces almost all of the things that China needs in order to lift itself up to a Western standard of living.

Australia’s terms of trade have climbed faster than those of any other nation in the four years of China’s rapid industrialisation. Only oil-rich Norway has come close. Canada has been a distant third.

The United States and Europe have good reasons to fear the consequences of China’s rapid industrialisation. It is permanently increasing the prices of commodities such as oil that they need. And by selling good products cheaply, it is hollowing out their local industries. It wasn’t that long ago that US congressmen were smashing Japanese radios in protest at what they were doing to US manufacturing.

Thanks in part to the farsightedness of a former Australian Ambassador to China Ross Garnaut, Australia has already lost many of the firms that would have suffered as a result of China’s industrialisation. As Prime Minister Bob Hawke’s economic advisor in the 1980s he drove the tariff cuts that helped move some of those firms to China early.

If the 19th Century belonged to Europe, and the 20th Century belonged to the United States, the 21st is likely to belong to China.

And as unsettling as many of us may be finding the transition, it is taking us along for the ride.

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Saturday Forum: What's up with petrol?

If, like most of us, you are worried about the price of petrol, I am the bearer of bad news. You are likely to worry more.

The reason why, has a lot to do with whales.

But before turning to the creatures that used to provide our oil for heating in the days before petroleum, it's worth looking at how we're coping now.

In a remarkably successful attack on the government in recent weeks the Coalition has claimed both that the high plus-$1.50 per litre price of petrol is hurting us and that it is not cutting our use of the stuff.

This is, on the face of it, an odd position to come from the side of politics that says it believes in the workings of markets...

But its environment spokesman Greg Hunt has been arguing it with apparent sincerity.

Tackling the government over the proposed emissions trading scheme which will push up the price of petrol has asked how “whacking a great new 20-cent tax” on petrol would decrease emissions.

“We have serious reservations and scepticism about petrol tax, given that prices have increased four-fold in the last decade and petrol volume hasn't changed at all,” he said, asking “can they explain how a 20-cent tax will decrease emissions?”.

The economics team at Westpac is able to explain it fairly well.

Economist Matthew Hassan has examined how our behaviour has changed over the last three years – when the price of petrol has really been climbing.

He has found that our spending on petrol as a proportion of our total spending has remained relatively steady at around 3 per cent.

That means that the amount we are now spending more on petrol than we used to - $16.90 per week instead of $13.50.

But the amount of petrol we have bought per person has slipped, from 13.5 to 12.9 litres per week.

Figures on the distance traveled per vehicle bear this out. In 2001 the average car drove 14,600 kilometres per year. By 2006 that average had fallen to 13,800 and has probably fallen further since.

Mr Hassan cautions that the cut in distance driven per person may not be as big as the cut in distance driven per vehicle because we have more cars, but he believes that even that has fallen.

He also notes that we are still buying more fuel per week than we were in the low years of 2001 and 1991 when we bought only 12.5 litres.

Our consumption has further to fall, which is just as well.

For some people on high incomes or who live in near their place of work the price increases to date “haven’t even touched the sides”.

For others, the high prices are biting. It is the outer suburbs of Sydney, Melbourne and Perth in which families are most likely to be falling behind in their mortgages, the suburbs in which people need to travel long distances and lack access to public transport.

“While it would be surprising if fuel price rises were the key factor behind the rise in arrears, they will clearly be adding to the stress on already stretched households in these areas,” he says.

Our petrol price has roughly doubled in the last four years from around 77 cents per litre to more than $1.50 a litre.

The bleak news, delivered to both the Treasury and the Reserve Bank this week, is that it isn’t going to go back.

Professor Marvin Goodfriend, an advisor to the US Federal Reserve for 25 years, is visiting Australia as a guest of the United States Studies Centre at the University of Sydney.

Over tea and scones at the Canberra Hyatt on Wednesday after speaking to officials from the Australian Treasury he sketched out the dimensions of the change that he believes is taking place.

It has very little to do with speculators pushing up the price of oil and nothing to do with oil producers attempting to cut supply as they did during the oil price “shocks” in 1974 and 1979.

“China and India are going through a transition that is a one-off in the history of the planet earth,” he told me.

“Roughly Half the planet is becoming modern.”

“We have never had it before in thousands of years of planet earth and we are not going to have it again in thousands of years.”

“Let’s put this in perspective, it has to happen: The relative prices of food and fuel have to adjust.”

Professor Goodfriend thinks we are in the middle of a fundamental shift, a bit like tectonic plates moving as a result of China and India moving quickly toward Western standards of living.

As he puts it: “the scarcity of the goods that nature produces is rising, relative to the scarcity of the goods and services that man produces”.

He adds: “Let me repeat that,” and then says that the price of food and fuel has to rise relative to the price of most other things and that there is nothing than anyone can do to stop it.

“Speculation is adding to that, but the basic fact is that China and India are beginning to modernize very quickly.”

“Nature’s ability to produce food and fuel is limited in the short run, so we are facing a fundamental change in the scarcity of those two products compared to almost every everything else”.

He says unlike other forms of inflation Australia’s Reserve Bank and its kindred organisations are powerless to act against rising food and fuel prices.

If they push up interest rates and try to contain the overall rate of inflation they “have to create deflation somewhere else in the economy so that the aggregate inflation rate is stable.”

“When central banks create deflation it is almost always associated with unemployment. That will in turn push down wages and other prices and in the end you will still get the reduction in the standard of living and the shift in relative prices that has to flow from higher fuel and food prices.”

“The fact is that countries have to live with the rising prices of food and fuel compared to the prices of the industrial goods that they produce.”

Australia is probably in the best position of any developed country to cope with rising fuel and food prices. We export both fuel and food (although we import oil).

The Australian dollar is being pushed up by the tectonic shift and it is shielding us from the full horror of the adjustment.

If the Australian dollar had stayed still rather than risen since the start of last year, the petrol sold at Australian pumps would already be costing $2.00 a litre.

It is likely to head there. The US Federal Reserve has examined spending patterns in almost 180 countries and concluded that a doubling of per capital income more than doubles per capita use of oil.

As it puts it, “big nations moving quickly up the income ladder have huge implications for oil markets.”

Not surprisingly the rapid changes in India and China have caught oil producers by surprise. They are unable to keep up.

Believers in “peak oil” who contend that worldwide supplies have already peaked argue that producers will never catch up.

People concerned about climate change who actually want to cut the use of carbon-emitting fuels argue that producers never should catch up.

So what’s going to happen?

That’s where we might be able to learn from what happened to whales.

Before petroleum there was whale oil.

Writing in the London Financial Times the British historian Edward Chancellor quoted Herman Melville as noting that at the mid point of the 19th century – not that long ago – whale oil was used for “almost all the tapers, lamps, and candles that burn around the world.”

In 1851, the year Moby Dick was first published, more than 10,000 whales were killed and output peaked at around a third of a million barrels.

“Chasing whales was big business. But they became scarcer over time. This drove up the price of whale oil, which made it profitable for voyages to extend further from port and also induced whalers to take greater risks.”

“In 1859, Colonel Edwin Drake struck oil at Titusville, Pennsylvania. In a few days, Drake extracted as many barrels of oil as a whaling ship could gather on a four-year voyage. The price of petroleum soon fell far below that of whale oil. Whaling became unprofitable and was only carried on for the bones which went into ladies’ corsets. Eventually, even these were substituted with flexible spring steel.”

He says that while whales are living creatures and unlike crude oil a potentially renewable resource, the course of the whaling industry provides a guide to the future.

“The history of whaling shows that when demand rises faster than supply, prices rise in real terms. This provides an incentive to search for substitutes. It is hardly a coincidence that the US crude oil industry got going within a decade of the whale oil production peak.”

“As fresh supplies of whale became harder to find and a substitute appeared, the smartest whale merchants left the business and invested their capital in the new crude oil industry. Even without whales, lamps carried on being lit and tapers burnt”.

It’s an optimistic message. But at its heart is the absolute necessity for the oil (and the petrol) price to rise before we are freed of the need to use it.

It looks as if it will keep rising. Nothing – not even FuelWatch or tax cuts – will be able to stop it.


James L. Coleman, The American whale oil industry: A look back to the future of the American petroleum industry?, Journal Natural Resources Research, Volume 4, Number 3, September, 1995

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Saturday Forum: Garnaut's woes

His report is due out in four weeks.

Professor Ross Garnaut is upset.

In his lecture at the ANU on Thursday night he said the public discussion of his climate change review had become “pretty ragged”.

In his ageless book-lined office in the ANU’s Coombs Building he is more blunt, using words he asks me not to print.

The distinguished economist, former ambassador to China, former right hand to Bob Hawke as Prime Minister and now head of Australia’s “Stern Report” style inquiry into climate change doesn’t know whether some commentators are deliberately trying not to understand what he is doing, whether they haven’t read what he has written, or whether they could read but could not understand.

He probably didn’t help his case by titling Thursday’s public lecture “Measuring the Immeasurable”.

So inside the ANU office which has been his base for almost four decades he is going through it again for me one more time - one last time actually, because he is planning to say nothing else until he releases his interim report in four weeks time...

When Kevin Rudd in concert with eight state and territory Labor governments appointed Ross Garnaut to the job in April last year no-one paid too much attention.

Kevin Rudd was in opposition and Garnaut wouldn’t report until September 2008. But given funding and staff by Australia’s state governments and later by Kevin Rudd’s Commonwealth government Ross Garnaut took his responsibilities seriously.

So seriously, that Mr Rudd and his Climate Change Minister Penny Wong have been distancing themselves from Garnaut’s work describing it as an “input”. They’re preparing their own parallel green paper on emissions trading within the Department of Climate Change.

Professor Garnaut is also distancing his work from theirs.

Asked whether there was any case for exempting petrol from the costs to be imposed by an emissions trading scheme, at least right now while prices are high, he replies that he can’t see one.

“Once you introduce emissions trading the price of permits will be rising over time so you might say – why not wait and bring in transport later when the scheme really starts to bite?”

“But would it be any easier to introduce emissions permits when their price was higher? I would think not.”

“If you’re going to end up with a good system it is better to start with it,” he says.

Does he know whether the government agrees with him?

“I don’t know. But this is an independent review and our job is to work out what we think works best.”

“It’s Kevin Rudd and Penny Wong’s job to decide what they can manage. But I can’t see any good reason for excluding transport.”

Like Britain’s 2006 Stern Review (also conducted by an economist) the Garnaut Review is assessing costs and benefits.

Sir Nicholas Stern weighed up the global cost of taking action to halt climate change against the cost of doing nothing.

Garnaut is attempting to weigh up the costs and benefits of Australia taking its own action to slow climate change in order to work out how much we should do.

Unlike Stern he has an immediate focus. Kevin Rudd has promised to introduce an emissions trading scheme in 2010.

Ross Garnaut needs to work out how much restrictive that scheme should be.

His problem is that while the costs of tough action are apparent, many of the benefits are slippery.

Some can be measured .

“Climate change comes - as a result you get lower wheat yields, you produce less and that has an impact on the economy. Or water - if the costs are higher you can work out how much more that will cost you and the impact on the economy.”

“But some benefits which we should be able to measure, we can’t because we can’t get any estimates.”

“Tourism is an example. If we don’t succeed in keeping carbon concentrations down to 450 parts per million we will probably lose most of Great Barrier Reef, Kakadu, the forests of South West Western Australia.”

“There will be big impacts, but we couldn’t get any experts in the tourist industry to give us a number.

“Our neighbors are another example.”

“Almost certainly if there is a unmitigated climate change we get a big increase in the sea levels and serious disruption in the lives of our neighbors - the sort of things that we spent millions of dollars a year on in Timor and the Solomons.

“There’s not much doubt about that, but no one will give us a number to put into our modeling”.

And then there are the effects for which Garnaut can come up with an average or likely numbe,r but for which that average hides the true horror of what might happen.

“We are normally prepared to take out insurance in case our house burns down, even though the likelihood of that is very small – right out on the tale of a distribution.”
“The further you dig into these issues the more you are worried about those tails.”.

“For example, the average or likely rise in the sea level this century if we hold carbon emissions to 550 parts per million is somewhere between 50 and 60 centimetres. But there is some chance of it being very much higher than that - such that Greenland starts to melt.”

“Normally humans are prepared to pay a fair bit for insurance against extreme outcomes.”

Garnaut says he is looking at cutting edge modeling solutions.

“A lot of what we are doing is pioneering. We see ourselves as taking the first step,” he says.

And then there’s the fourth category of costs from climate change and benefits from taking actions. Those that are genuinely immeasurable – the topic of his talk.

“To give you an example, we’ve got very good modeling on health impacts. When you put into the model the costs of the extra hospitals and the extra days in hospital of old people as a result of hot weather, it doesn’t move the meter very much.”

“But there will be quite a lot of old people dying in these heat waves.” “Wouldn’t Australians value stopping that or would they only value the market effects – the cost of the hospital and so on.”

“If we do lose the Great Barrier Reef and Kakadu there will be some market impacts on the tourist industry, but there is a lost of value that most Australians would feel. Most Australians would be prepared to pay something not to have that happen.”

“Another category is the valuation that Australians put on avoiding disruption in other countries. If there is unmitigated climate change it will have a very big impact on our region. Now some of that response will be financial, but Australians actually care about what happens in other countries.”

“When there is a disaster we are prepared to make quite a big effort to help”.

And that’s only the beginning of Garnaut’s conceptual challenges.

“We are getting a bit philosophical here but one of the big questions is how we trade off the sacrifices we make now in order to help people in the future.”

“By the end of the century - and one of the reasons the work is taking so long is that we are modeling the economy out 100 years – by then Australians will have a lot of goods and services we don’t have. They’ll be better conventionally under almost any scenario.”

“Amongst Australians today we think of a dollar of income for the poor being more important than a dollar for the rich.”

“Well we are poor in goods and services compared with people in the future. Where’s the case for us sacrificing what we have in order to help them?”

“But then I introduce the awkward thought that if they materially rich and environmentally poor, they may not really be better off than us today. Which turns the calculation around again.”

“This is a diabolically rich question.”

Economists traditionally solve it in a simple way, using what is called a discount rate, often the market rate of interest, to discount benefits that spending now will bring in the future.

Garnaut won’t.

“I you use a market discount rate then you don’t value the future very much,” he tells me.

“If humanity was to go extinct at the end of 100 years it wouldn’t show up in any cost benefit analysis that used a market interest rate.”

“These are important philosophic points.”

“But we make a decision whatever we do.”

“Doing nothing would be a decision”.

“The decisions that we take will determined whether our great grand children can visit the Great Barrier Reef.

“I care about my grandchildren at least as much as my children. So I actually think about these things.”

Garnaut expects to have the results of the economic modeling being carried out in the treasury in September.

He is hoping the decisions he makes then turn out to be easy.

“If the modeling shows there is a clear case for taking tough action against climate change simply in terms of the things we can measure it will simplify things.”

“If not it’ll be more difficult.”

Garnaut Review.

Department of Climate Change.

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Saturday Forum: Stop the phoney fuel price debate

Every second longer that is spent on the current phony political debate about petrol prices increases the permanent price pressure soon to hit Australian households.

It may already be too late.

To understand why ordinary Australian households are actually at risk from the petrol-price posturing that’s going on in Parliament it is necessary to look at the other energy debate taking place in the government at the moment – the one about climate change.

The Department of Climate Change is weeks away from completing the green paper that will outline the workings of the government’s emissions trading system – the one that’s due to start in 2010...

The scheme will work by setting a target for the amount by which Australia’s carbon emissions need to be cut - most likely 60 per cent by 2050 with interim targets along the way.

It will auction an increasingly limited number of permits every few years in order to ensure the targets are achieved.

The more severe the targets that are chosen, the more limited will be the number of permits auctioned, and the higher will be their price and the resulting prices of gas and electricity (and the products made from them).

But it isn’t only more severe targets that have the potential to increase the ultimate energy prices faced by consumers as a result of the scheme.

It is also narrow coverage. If for instance the oil industry were to be shielded from the trading scheme, the other industries that were left in the scheme would have to have their permit allocations cut back even harder in order to meet the emissions target, pushing up energy prices further.

That’s the little-spoken-about prospect opened up by the past fortnight’s bitterly-fought “me too” debate about petrol prices: that the government will decide to exempt petrol from the trading scheme and as a result further push up the price of electricity.

The Coalition’s Treasury spokesman Malcolm Turnbull has already made the case. Although the official Coalition policy supports “bringing transport fuels into the Australian emissions trading system” Mr Turnbull told the National Press Club a fortnight ago that he was “very sympathetically inclined” to push for their exemption.

If that happens it wouldn’t just be a case of electricity prices being higher than they otherwise would have been while petrol prices were lower. The total household energy bill would be higher.

Here’s why. The beauty of an emissions trading scheme is that it ensures that the cheapest means of cutting emissions are tried first, those that economists call “low hanging fruit”.

This keeps the total cost of meeting any given emissions target as low as possible.

Among the “low hanging fruit” for cutting carbon emissions are walking and cycling instead of driving, avoiding unnecessary trips and switching to cars that use less petrol.

With petrol excluded from the emissions trading scheme and with these low-hanging fruit not fully exploited, the price of electricity would have to increase by more than it otherwise would have as more expensive methods are used to cut emissions.

Petrol is responsible for about 10 per cent of Australia’s greenhouse gas emissions. Exempting it from Australia’s emissions trading system would be likely to push up the prices on other forms of energy by more than an extra 10 per cent.

And yet exempting petrol from the scheme is an obvious political response for a Prime Minister who has cowered and attempted to match a completely irresponsible promise by his opposite number to cut the price of petrol.

Brendan Nelson’s proposed 5c per litre cut in the petrol excise would cut the price at the pump by 5.5c per litre because it would also cut the Goods and Services Tax take.

The Government responded on Sunday by suggesting that it might axe the GST it charges on top of the fuel excise – the so-called “tax on a tax” that adds 3.8 cents per litre to the of petrol price. It referred the idea to its tax inquiry.

And then it promoted FuelWatch; its planned national version of the scheme in Western Australia that the Competition and Consumer Commission says has cut the price of fuel there by 1.9 cents per litre.

As revealed by the Canberra Times this morning the 1.9 cents per litre average saving quoted by the Prime Minister is an overstatement, caused by a misuse of the word “average”. The typical saving resulting from FuelWatch would be smaller.

But FuelWatch is popular. An astounding 86 per cent of West Australians say they use it to help them buy petrol. By letting them know ahead of time exactly what each station will be charging for the next 24-hours they get certainty and a sense of control.

These feelings are about as important to consumers as the price of petrol itself. Research conducted in Canberra, Sydney, Melbourne, Brisbane and Adelaide for the ACCC has found that the biggest concern motorists have about fuel prices is not their absolute level but the way in which those prices are changed ahead of long weekends and holidays. Other very high concerns include price movements over different days and price movements within days.

The results for the Perth survey suggest that by eliminating price movements within each day and lessening them between days FuelWatch has made Perth motorists less anxious.

FuelWatch has also squeezed retailers margins in Perth, if by less than the Prime Minister has claimed.

The ACCC regards this as a good thing because it suspects that petrol retailers tacitly collude. Its December report found that while there was “no obvious evidence” of price fixing or collusion, the petrol industry operated in a “comfortable oligopoly”.

By freezing prices for 24-hours each 24-hours Perth’s FuelWatch scheme makes tacit collusion difficult. Price-setting becomes an auction in which each retailer is unable to see what the other is bidding.

At the moment in Sydney, or even in somewhere like Braddon in the ACT, each service station needs to merely look out of its window to see what its neighbour is charging. It knows that if it cuts its price, that cut be matched.

In Perth, FuelWatch rewards service stations that strike out on their own and cut prices by preventing instant retaliation. As a result Perth margins are (slightly) lower than they used to be.

They are unlikely to be lower Australia-wide if the only part of FuelWatch that Australia adopts is the price reporting; as the Opposition and three government departments reportedly want.

The temporary price freezes make the system work, just as they make Australia’s wholesale electricity market work.

There each Australian electricity generator is required to freeze its prices for 30 minutes at a time in order to prevent collusion.

There is no particular reason why the national FuelWatch system should freeze prices for 24-hours at a time as does Perth’s. It could do it for six hours, or two and achieve the same effect, and such an idea might form the basis of a compromise that might get FuelWatch through the Senate.

That’s assuming that Kevin Rudd wants to get FuelWatch through the Senate. He might reasonably decide that the Opposition can either accept the scheme as it is or wear the opprobrium that will come from rejecting something demonstrated to (slightly) reduce prices.

He gave a hint of this on Thursday when he challenged the Opposition to either “vote for consumers, or vote for a cosy deal with big oil companies”.

The companies that have opposed FuelWatch include Caltex, Coles, Woolworths, Mobil, and BP.

“That's the choice,” the Prime Minister declared. “Why do you think all the big oil companies are opposed to what we are proposing?”

As worthwhile as it would be to take perhaps one cent per litre out of the hands of petrol retailers and put it back into to the pockets of motorists, by continually speaking about the topic this week the Prime Minister has created difficulties for himself.

Calculations performed by the resources economist John Quiggin suggest that an emissions trading scheme that put a price of $100 a tonne on carbon dioxide would push up the price of petrol by 25 cents a litre.

That’s the sort of increase Kevin Rudd needs to be preparing us for unless he is planning to exempt petrol from the trading scheme and push up the price of other forms of energy even more.

Even in the absence of an emission trading scheme the price of petrol is likely to soar. The rising Australian dollar will lessen the blow, but if the price of oil climbs from US$130 a barrel to US$200 in the coming months we will be paying $2.00 a litre before Christmas.

Qantas is treating what’s happening as a reality. It is cutting its routes and grounding planes. It is certainly not wasting time hoping the higher prices pass.

By each investing so much time in these past two weeks creating the impression that they could take the pressure off petrol prices Kevin Rudd and Brendan Nelson have given us false hope.

They have encouraged us to delay making the adjustments that we will have to make and may have even ensured that our future energy prices will be higher.

Read more >>

Saturday Forum: The Budget that didn't hurt

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

There must have been many.

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

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

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

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

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

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

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

And then the language softened.

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

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

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

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

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

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

What happened along the way? Someone got cold feet.

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

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

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

Someone stymied it at close to the last moment.

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

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

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

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

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

The “most important thing” was missing.

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

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

Malcolm Fraser wanted to be liked.

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

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

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

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

Those decisions will be put off.

The inquiry will report at the end of next year.

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

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

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

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

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

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

The argument isn’t too hard to follow.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If the forecasts were delivered with less certainty than usual.

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

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

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

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

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

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

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

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

The grounds for that faith are far from clear.

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

Or perhaps just Kevin Rudd.

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

This week someone chose not to take it.

Read more >>

Saturday Forum: The pages of the Budget are being glued together

The pages of the Budget are being printed and glued together. The hard work is over. Saturday is usually the deadline for printing and binding the budget papers. The printers say that if they don’t start by then, the glue won’t be dry by Tuesday night.

It’ll be a thicker book than usual. This one contains an extraordinary 649 spending decisions, nearly all of them spending cuts.

In contrast by last year’s final Howard-Costello budget virtually none of the measures – a mere 1.5 per cent –saved money.

A Treasury count suggests that a decade earlier when Howard and Costello took office a full one-third of their budget measures saved money - an indication both of how undisciplined they became and of how much flab has been offered up to the razor gang headed by Lindsay Tanner, Wayne Swan and Kevin Rudd to cut...

It isn’t only that the public service has ballooned.

Lindsay Tanner says that excluding Defence, the Australian Security and
Intelligence Organisation and the Australian Federal Police, public service
numbers have expanded 25 per cent since the start of the decade.

The number of senior public servants has soared 44 percent.

Programs have also ballooned.

The $1 billion per annum Baby Bonus of $4,187 per child, soon to climb to
$5,000, is widely regarded as a disaster in social policy terms. Even the
Coalition leader Brendan Nelson has said so.

Extraordinarily, it is handed out to some of the wealthiest people in the
country - as is the Family Tax Benefit part B, another Howard government
initiative.

Before the election Labor promised to withdraw that benefit from women whose
partners earned more than $250,000 per annum.

The Expenditure Review Committee has considered a proposal that the Budget
go further and withdraw the payment from any woman whose partner earns more
than $150,000, which is where the top marginal tax rate kicks in.

It has also considered means-testing the baby bonus and the First Home
Owners Grant.

The language of the Committee’s Chairman Lindsay Tanner suggests that it has
taken those tough decisions.

"People at the upper end of the income scale will be receiving very healthy
income tax cuts and they are in a better position to cope with a bit of
Budget pain than people at the bottom of the scale," he said on Thursday.

Tanner, Swan and Rudd are buoyed in this approach by Treasury research
prepared at their request showing that families with an earner in the top 3
per cent have enjoyed an 85 per cent increase in their disposable incomes
since the Howard-Costello government came to power - around 1.7 times the
increase enjoyed by middle-income earners.

At the same time they have seen their average tax rate fall twice as far as
middle-income earners.

The process of going through every single government program line by line
has been exhausting for all concerned.

Or it was, up until a Cabinet meeting two weeks ago at which most of the big
decisions were agreed to.

Chatting to the Canberra Times the day after that meeting the Treasury
Secretary Ken Henry said that the process had been relentless in part
because the new Treasurer and Finance Minister wanted not only to implement
each of their own programs but also to examine every single program
introduced by the previous government.

Her said he had never been involved in another budget like it.

Facing each other across the lawns of Parkes Place the Treasury building and
the Finance building have been alive and lit until well into the night for
months now.

Parents working in the departments joke that they keep pictures of their
children by their desks so they remember what they look like.

Not that they are complaining. Too much.

The morning after Kevin Rudd was elected Prime Minister with Wayne Swan as
his anointed Treasurer in November a team from the Treasury flew to Brisbane
to brief them.

Awestruck, one of them has said that they were listened to more in those two
days than they had been by the previous Treasurer Peter Costello in two
years.

A few months later the view in the department changed. They were getting so
many requests for information from the Treasurer that they began to wonder
whether they could meet them and still keep up the day-to-day running of the
department.

Some of the calls began early in the morning.

The Treasurer may have helped impose an extra one-off 2 per cent efficiency
dividend on Australian government departments, but the Treasury hates it.
It is being asked to much more than before – probably more than its existing
staff can cope with – with fewer staff.

It has also found the economic forecasts in the budget among the most
difficult it has ever had to prepare.

Dr Ken Henry joined the Treasury in 1984 and moved to the office of the then
Treasurer Paul Keating in 1986, returning to the Treasury in 1991. Peter
Costello made him Treasury Secretary in 2001.

Dr Henry says that he has only been involved in one other budget in which
the forecasts proved as difficult – and that was the budget of 1989 in which
the forecasting process went okay, but the forecasts themselves turned out
to be completely wrong.

Instead of continuing to boom the economy headed south and the Treasury had
egg over its face.

This time it is the forecasts themselves that are difficult.

On one hand our economic growth is weakening, in part because of higher
interest rates and in part because of the share market collapse and
financial turmoil overseas.

Dr Henry says this is cutting into government revenue. Company tax receipts
are likely to be lower and capital gains tax collections could slide $5
billion.

But on the other hand Australia’s terms of trade were soaring. The terms of
trade is a measure of the prices received by Australians for the goods that
they sell overseas as a proportion of the prices Australians pay for the
goods they import from overseas.

Dr Henry said that in the last four years Australia’s terms of trade had
soared 40 per cent, an increase unprecedented since the Korean wool boom.

But price rises for coal, iron ore and other resources already announced or
in the pipeline pointed to an acceleration in Australia’s terms of trade
growth, which could give us to a 70 per cent increase over five years.

In the face of those developments it was harder than usual to forecast
inflation, harder than usual to forecast economic growth, and very difficult
to forecast what would happen to government revenue.

The Reserve Bank had a go in its Quarterly Statement on Friday released a
few days earlier than usual to get in ahead of the Budget.

Noting that “the net effect of these forces is quite uncertain” the Bank
said it expects economic growth to slow sharply during 2008 weighed down by
weak consumer confidence, big increases in petrol prices and much higher
interest rates before accelerating again in response to the surge in export
prices in 2009.

Inflation on the other hand will be well above the Reserve Bank’s target
band, climbing to 4.5 per cent by the end of 2008 before gradually slowing.
It won’t return to the Reserve Bank’s target band until December 2010.

It warns that there are risks to these forecasts in both directions.

The Treasurer Wayne Swan has been keen to emphasise the downside risks
warning last week that the indications that he was receiving were “simply
that the revenue boom that has been there in recent years is not going to be
there to that extent in this budget, and people should not assume it”.

Australia’s most experienced private-sector budget analyst Chris Richardson
of Access Economics thinks the Treasurer is wrong, and is deliberately
trying to lower expectations for the good economic news (and revenue
windfall) that he is sure will be revealed on budget night.

“Remember the negatives have been very newsworthy, which helps to explain
why they’ve dominated the front pages,” he told his clients in a Friday
briefing.

“It may therefore be surprising to realise Australia’s economy and budget
have positives that are stronger than the rather better publicised
negatives.”

“For the coming year, Australia’s national income will benefit enormously
from huge amounts of money being handed to us on a platter for doing what we
already do: digging stuff up and growing stuff.”

“Strikingly large increases in coal and iron ore prices will soon send what
is already Australia’s biggest commodity price boom in half a century even
further into the stratosphere.”

“China’s strength is still the biggest single economic driver of Australia’s
2008-09. The Australian Budget comes with a ‘made in China’ stamp,” he told
his clients.

In one sense it doesn’t matter much for the make up for the budget whether
the government and the rest of us will be flooded with Chinese money in the
year ahead or whether the downturns in consumer confidence and the share
market will be more important.

Lindsay Tanner has pledged to hack $3 billion to $4 billion out of
government spending and tax giveaways no matter what.

If the government is flooded with an extra windfall from China it has
pledged not to spend it. Mr Tanner’s cuts are to be from existing, not
projected, spending. As he puts it, his commitment is to “bank” any upward
surprises to revenue.

Which raises the question of just where he would bank a budget surplus
likely to be as much as $20 billion.

Previous surpluses have been directed into the Future Fund set up by the
Coalition to accumulate money to superannuation benefits to public servants
in defined benefit superannuation schemes.

But with all public service defined benefit schemes other than military ones
closed to new members closed to new members the Future Fund now has close to
all the money it needs.

The previous government reacted by setting up a new Higher Education
Endowment Fund and granting it $5 billion of the surplus which it later
lifted to $6 billion.

On budget night Wayne Swan will announce a third fund: the Building
Australia Fund, and quite possibly folding the Higher Education Endowment
Fund into it.

It’ll be used to kickstart the most important infrastructure projects
identified by the newly established advisory body Infrastructure Australia,
headed by business veteran Sir Rod Eddington.

The Prime Minister hinted at the new body in Western Australia on Wednesday
when he said that he wanted to ensure that “this extraordinary boom, and the
dividend from it, is invested into the state’s and the nation’s long-term
global competitiveness. That is the mission statement of the Government I
lead.’’

Canberra economist Fred Argy, himself a former advisor to several Prime
Ministers and Treasurers is a strong supporter of the idea.

He says that infrastructure projects are best started when the economy is
turning down. That’s when there isn’t inflationary competition for workers
or resources, and it’s when the labour market needs the work.

But turndowns can come quickly and that’s why the funds need to be built up
ahead of time and the right projects identified.

By setting up the fund and perhaps leaving room for it to have other
objectives – such as funding maternity leave or dealing with climate
change – the new government could beat the old government at its own game.

Peter Costello as Treasurer was able to have his surplus and appear to spend
it as well. He was applauded by educational institutions last May for
setting up the Higher Education Endowment Fund and at the same time
applauded by fiscal conservatives for bringing down a big surplus.

But Peter Costello and John Howard were never as keen on big surpluses as
are Wayne Swan, Lindsay Tanner and Kevin Rudd.

They are looking to create something really big. In five years the Building
Australia Fund could be worth $100 billion.

It will make Labor’s $4.7 billion broadband project and its planned $31
billion in tax cuts seem tiny.

And Wayne Swan will give birth to it on Tuesday night.

Read more >>

Saturday Forum: Our nation's capital is also the nation's poker machine capital

Welcome to Canberra, delegates.

We in the Australian Capital Territory have long prided ourselves on our support of progressive causes.

The only state of territory to vote for a republic at the referendum (and overwhelmingly so), more than 60 per cent of us regularly vote Labor after preferences are distributed.

We introduced Australia’s first Human Rights Act, we were the first to recognise same-sex unions (until the Commonwealth overruled us) and our Chief Minister Jon Stanhope is only one to have stood up to the former Prime Minister John Howard over his Anti-Terrorism Bill.

Our households are keen on green power, recycled water and banning plastic bags.

But suddenly, on the issues that matter to the new Prime Minister, we are getting left behind.

The new wave of causes being pushed by Kevin Rudd seem less than attractive to the man who is by now Australia’s longest-serving state or territory leader...

Jon Stanhope is vocal in his support of the ACT’s poker machine operators.

He has told our Legislative Assembly that when most people play the poker machines “there is no harm done to anyone”. “Imagine Canberra without our clubs,” he has said.

He won’t cut the number of machines and he won’t ban automatic tellers from the venues that house them.

Kevin Rudd wants to do both. He is having success with other states.

Queensland’s Premier this week cut the cap on poker machines and stopped them operating before 10.00am. Victoria said it would remove ATMs from pokies venues in 2012 when it ends the billion-dollar pokies duopoly enjoyed by Tattersall’s and Tabcorp.

But our leader offered nothing.

And he hasn’t been to the forefront on electoral reform.

Kevin Rudd has proposed capping the size of political donations. The NSW Premier Morris Iemma this week said he wanted to ban them altogether.

The ACT was in the uncomfortable position of being upstaged by NSW – the state whose electoral sleaze was laid bare on Four Corners this week in a program entitled “Dirty Sexy Money”.

In the ACT the money to run the local Labor Party’s election campaigns comes predominantly from the operators of poker machines. In no other state is the ruling party so funded.

Tim Costello, who will be chairing a forum that will discuss gambling at this weekend’s 2020 Summit says our Chief Minister is “brought to you by the gaming industry, he's an extension of the gaming industry”.

The latest Electoral Commission returns show why.

According to their figures, in the last financial year $238,552 of the ACT Labor Party’s $587,123 of income came from just one donor – the Canberra Labor Club, a money-making machine that operates more than 400 poker machines at its venues in Civic, Belconnen, Charnwood and Weston Creek.

The Canberra Labor Club is the seventh-biggest political donor in the entire nation, and by far the biggest in the ACT.

The Electoral CommissionA says the ACT ALP’s next biggest donor is the Woden Tradesmen's Club, which happens also to be an operator of poker machines.

ClubsACT says there is nothing surprising about these donations to the ALP. Its President David Lalor wrote in The Canberra Times last year that the Labor Club was “set up to support the ALP”, just as the Hellenic Club supports the Greek community, the Ainslie Football Club supports the AFL, and the Vikings Group the rugby union.

But the electoral commission records suggest that the Canberra Labor Club hasn’t supported the ALP by fund raising in the traditional sense. Neither in the last financial year when the threshold for reporting donations to organisations such as the Labor Club was $10,300 nor in the previous two years when the threshold was $1,500 did it report receiving any donations to advance the Labor cause.

Instead it has operated as a business, operating poker machines.

The purveyors of businesses such as the Canberra Labor Club are treated more gently here than they are anywhere else in Australia.

This graph, sourced from the industry-funded Australasian Gaming Council tells the story. The ACT has more poker machines per head than does any other state in the nation, even the supposed poker machine capital of NSW.

At 20.7 machines per 1,000 adults, we have more than NSW at 19.5 and almost half as much again as does Australia as a whole at 13.

On average each ACT resident pumps $746 into the machines each year, the second-highest spending rate in the nation, behind NSW.

And yet oddly, the ACT has taxed the purveyors of poker machines much less than has the typical Australian state.

Taxation figures released this week show that the ACT Treasury made $31 million from gambling machine tax last financial year – around $90 per resident.

But Australia-wide the total was $140 per resident. In NSW it was $160 per resident.

Our government has been prepared to both tolerate more poker machines per head than any other state and to raise much less revenue from them (although it did announce a tax increase in its last budget).

And it has been also extraordinarily protective of the special position of clubs such as the Canberra Labor Club when it comes to deciding where the poker machines should be housed.

Every other state of territory has allowed poker machines in its casino. Not the ACT.

Every other state or territory that does allow poker machines in clubs, also allows a fair few in its hotels. Not the ACT.

Whereas in Victoria the poker machines are evenly split between the clubs and hotels, and in NSW the clubs have three times as many as do the hotels, in the ACT the clubs have 5,000 poker machines to the hotels 100-odd, according to the Gaming Council.

The ACT Labor Party - predominantly funded by the purveyors of poker machines - allows more of them to operate more than would be allowed anywhere else, taxes them more lightly, and appears to protect the operators from competition.

The Chief Minister maintains that for most of us of us his support for poker machines is harmless. He has told The Canberra Times that he sees them as “an outlet” and has asked: “Who am I to deny people their pleasure?”

There is much that is good about the clubs that operate poker machines. They keep ACT residents from going across the border to Queanbeyan to play the pokies as used to happen before the pokes were allowed in almost 30 years ago.

Around 500,000 of us are members of the clubs, although many of us have joined for the food rather than pokies and would probably be happier if their spinning wheels fell silent.

The ACT’s clubs are required to spend 7 per cent of their poker machine revenue on sporting and other community activities, even if they are required to pay less tax than they would have to elsewhere.

And we should be able to cope with a high concentration of machines better than the residents of other states. We earn more.

For that reason the amount we spent on pokies is low as a proportion of income compared to other states, although it is creeping up.

No more of our gamblers are “problem gamblers” than is typical in the rest of Australia, according to the Productivity Commission.

But nevertheless, perhaps because of our high incomes, we’ve proven ourselves to be particularly bad at handling the money we gamble with.

The Gaming Council says the ACT has the highest gambling and speculation related bankruptcy rate in the country.

While our population is a mere 1.6 per cent of Australia’s total, we account for 4.8 per cent of Australia’s gambling-related business bankruptcies and 5.8 per cent of gambling related personal bankruptcies.

Our government could act to reduce this toll, as Kevin Rudd wants. It could eliminate the use of $10 and $5 notes in the machines and limit them to coins. It could ban ATMs, which in many Act clubs are sited just metres away from the machines.

It could wind back the number of licences, and push up the tax rate to the Australian standard.

Refusing to accept political donations from the gambling industry might be a big ask, given that it provides half the ACT Labor Party’s income, but outlawing political donations of any kind, as NSW says it wants to, might not be.

An end to political donations (or at least a limit on their size – perhaps to $2,000 per donor) would ensure that the Labor Party’s local business-funded opponents were never able to outspend it, and should be electorally popular.

Jon Stanhope hasn’t left it too late to show leadership on both issues, but the doors are closing.

In seven weeks time South Australia’s extraordinarily popular “No Pokies” politician Nick Xenophon will join the Senate. He will be keen to forge alliances to wind back the pokies industry nationwide. The Prime Minister has already indicated that he is on side, and the 2006 WorkChoices High Court case established that the Commonwealth had the power to override the states when it comes to regulating corporations.

Should there be any lingering doubt about the Commonwealth’s power in this area, it could start by imposing tougher controls on poker machines in the ACT, where it has undisputed ultimate authority.

The ACT Chief Minister could avert this possibility by showing that he is as serious about winding back the influence of poker machines as are the Premiers of Queensland and Victoria.

And in the ACT’s May Budget he could push the tax take from poker machines up to the Australian standard.

Without action, the ACT and the ACT Labor Party are at risk of being punished financially.

With less tax taken from poker machines than the Australian standard, the ACT is setting itself up for less compensation than other states when the Commonwealth or the Commonwealth and the states in combination take action.

And with more than $200,000 of the ACT Labor Party’s funds sourced from one donor in the poker machine industry it is setting itself up for a collapse in revenue should donations be limited.

It is a good time to wean both the ACT and ACT Labor off their poker machine addictions.


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Saturday Forum: Lindsay Tanner, not quite unplugged

The most revealing moment in my interview with the man charged with wielding the government’s razor came at the end.

Lindsay Tanner had been talking for the best part of an hour about his Expenditure Review Committee and the pressure on it to cut billions in order to fight inflation and avoid another interest rate rise.

I asked whether he would still be trying as hard to cut spending if he didn’t need to do it in order to fight inflation.

“Yes,” he replied, after only a moment’s hesitation.

“Why?” I asked. Cutting spending isn’t normally thought of as the first priority for a Labor administration.

“Waste,” he replied. “There has been too much of it. We have to spend public money well.”

It was clear that he meant it...

His Parliament House office is almost bare, which is probably not that unusual in ministerial suites at the moment, but in Lindsay Tanner’s case it seemed to reflect an ethos.

Behing him is a caricature. I ask who drew it. He says he doesn't know. He gave a speech at a business function ten years ago and everyone who spoke got one.

His most recent book, his forth (Peter Costello used to deride him as a member of Labor’s “book club”) deals with relationships. Possessions, it says, are not as important.

One of the former trade unionists that the Coalition’s election ads said we should fear (he ran the Federated Clerks Union in Victoria) Tanner makes the point that he is the son of an accountant.

While other kids in his small town in East Gippsland grew up with copies of the Racing Guide or TV Week he grew up reading The Taxpayer.

“It taught me a bit about financial prudence, but it also taught me of the central role of tax and financial management in the lives of ordinary working people,” he said.

“I've never forgotten an incident when I was working for the Forest Commission, when I was a kid during the fire season fighting bushfires, and I was out with a variety of characters who I didn't really know, they only knew my Christian name. They were sitting round talking about things, this was just after Christmas, and one of them said, oh, I had a pretty good Christmas, I was able to afford to buy the kids some decent presents - Joe Tanner got me a good tax refund.”

“It was an interesting insight to me, not only about what my father actually did, because I was only 17 or something, but more importantly about how critical the role of government is in delivering value for money and keeping the tax burden on ordinary people low.”

Tanner has nine weeks left in which to find $3 billion to $4 billion of extra savings. And he is finding it hard.

“It’s tough going. Particularly when you bear in mind that we announced substantial savings before the election and by definition they tended to be the low-hanging fruit.”

“Most of the easy options have been taken,” he tells me.

His Expenditure Review Committee has been at work for three weeks. Its members are Tanner, the Prime Minister Kevin Rudd, his Deputy Julia Gillard, the Treasurer Wayne Swan, the Assistant Treasurer Chris Bowen and the Trade Minister Simon Crean.

Are they it finding it more difficult than they expected?

“I don’t think any body expected that it would be anything other than tough. You see, if it was easy to cut programs and reduce expenditure then even the former government would have done it.”

He says unlike the former government in recent budgets he won’t be rescued by a unexpected surge in revenue.

Figures out from the Treasury out this morning show that in the last four budgets unexpected surges in revenue brought in a total of $334 billion. The Coalition gave away $314 in new programs. As the document says: “effectively the additional revenue from the commodity boom has been spent or provided as tax cuts.”

Tanner says there may or may not be another surge in revenue again – “there’s no indication one way or the other” – but if there is, his government is committed to banking it rather than spending it. He’ll still have to find $3 billion to $4 billion.

“We are committed to substantially reducing expenditure irrespective of what happens on the revenue side. And the important thing to keep in mind is that if there is a substantial surge in revenue that means there is a substantial surge of money coming into the economy more generally, which means there is an increase in inflationary pressures.”

He gives the impression that if there is another unexpected surge he’ll want to cut spending even harder.

“Government expenditure is projected to increase by 4.5 per cent in real terms. In an economy that’s been supercharged by mining boom revenues, that’s simply irresponsible,” he tells me.

Might his committee go even further and cut more that the $3 billion to $4 billion it needs to cut in order to deliver a projected surplus of at least 1.5 per cent of GDP?

He leaves the possibility open.

“I am making no comment one way or the other on where we may or may not head, but our public position is that, subject to the global growth circumstances, we aim to deliver a surplus of 1.5 per cent of GDP.”

In order to find the money, his committee is considering axing entire programs; news that will be welcome among nervous public servants because it means the cuts won’t fall solely on “administration”.

(The $1,600 Carers’ Bonus, which the government reportedly plans to “scrap” doesn’t fall into this category. It was never a continuing program, but merely a series of one-off budget announcements never factored into forward estimates.)

Asked what is in or out as far as his committee is concerned, he replies: “We are bound by our election commitments and by contracts, otherwise there is no constraint on what we can consider. That obviously includes programs.”

Does it include programs within Defence, a department apparently protected by an election promise?

Well, yes it does. Tanner’s committee is actively looking for savings within the Department of Defence.

As he explains it: “We made a commitment prior to the election that we would maintain Defence spending at 3 per cent growth in real terms in forward estimates, so we are bound by that commitment.”

“However that does not preclude us from examining the detail of Defence spending and finding savings and efficiencies, if for no other reason that the pressures for Defence spending to go beyond that limit are significant, and therefore we will at the very least need to find efficiencies in Defence to help keep the growth in spending to that level.”

And after the Labor promise to protect total defence spending expires, will Tanner’s Razor Gang be able to attack it?

If it would like to, he won’t say: “I am expressing no view one way or the other about what happens beyond the forward estimates,” he replies.

But then perhaps he is too busy to think about it. Right now his committee also has the task of examining tax expenditures, better known as tax concessions or tax breaks.

As Tanner puts it: “tax concessions have not been arbitrary excluded from our examination.” This too is welcome news for public servants. It means that big savings might be made without big cuts in the number of people employed in government departments

The Department of Finance says right now tax breaks are costing revenue $51 billion each year, a figure that is climbing by $3 billion a year. Half of it goes to tax breaks for superannuation.

But Tanner gives the impression that his committee won’t be pushing for any completely new taxes.

“It is not my position to make any comment about new taxes. You will need to seek comment from the Treasurer on that, but I would remind you of the title of the Expenditure Review Committee,” Tanner replies.

He suggests that the razor will be applied more carefully than in the past.

“We are working on the questions of redeployment to maximize the opportunities for people whose positions are abolished to quickly get new positions,” he says.

“It is important to bear in mind that, particularly in Canberra, it is a very tight labour market. Unemployment is about 2.5 per cent. The larger agencies, we believe, should be comfortably able to absorb these things through ordinary turnover.”

“But there will be difficult circumstances in some agencies that we will need to deal with to ensure that people do have appropriate opportunities for redeployment. We are working on those matters.”

If it is all about cutting spending and not cutting the size of the public service as Tanner is now suggesting, why did he make speeches prior to the election drawing attention to the growth in the size of the public service – 25 per cent since the start of the decade not including Defence and related agencies.

“If you go back to those speeches you will see that that was being presented as evidence of spending running out of control. That was being presented as a symptom, not the problem. We are now tackling the problem,” he replies.

“We are focusing on spending levels, not on head counts. A lot of government spending occurs in ways that have very little connection with employment levels in the public service.”

“Tanner’s axe,” as Tanner himself describes it, has already hit parts of the public service. He has imposed a one-off extra 2 per cent efficiency dividend believed to be hitting some agencies hard and imposed early severe cuts on organisations such as the National Capital Authority.

How are the agencies coping? Will some find it hard to balance their books as the end of June nears?

“Look, the circumstances vary from agency to agency for all kinds of reasons, so I wouldn’t express a view.”

“But one way or another we have to achieve the outcome because government spending has been growing much too fast and this is one way of winding it back.”

What is his own department telling him about how well the agencies are coping?

“I am not going to comment on what my department may be advising me about.

Well, does he think the agencies are managing the extra efficiency dividend and the cutbacks okay?

“I have no comment to make on that I am afraid.”

The government’s chief axe wielder is determined, yet intent on delivering what he has promised in the most careful way possible.

At the start of this year he warned that “there will be pain” in the May budget, a phrase that he hasn’t repeated since and didn’t use in his interview with me.

He gives the impression that he is trying not to cause unnecessary pain.

In his book Crowded Lives Tanner writes about the importance of work and the people we work with for defining who we are.

He also talks about the importance of our children and neighbors.

He had been in Brisbane at a Cabinet meeting the day before we met. He had flown back to Melbourne to see his wife, his one year old and his preschooler overnight and then taken the early fight to Canberra for another meeting.

I asked him whether he thought it was all worth it. He told me he thought it was.

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Saturday Forum: Deregulation, the Spice Girls way

Lindsay Tanner may not realise it, but the Minister for Finance and Deregulation has just appointed a Spice Girls fan as his deregulation advisor.

And even more bizarrely that advisor uses a Spice Girl’s lyric – Tell Me What You Want, What You Really, Really Want – as a metaphor for how he sees the future of regulation and the Australian economy.

He uses it to open the draft of his as yet unpublished book, Reimagining Economic Reform.

In another life Dr Nicholas Gruen would be an academic. He is in fact a visiting fellow at both the Melbourne and Australian National Universities. But his interests have always been broader than that.

He engages in passionate debates on blogs about all manner of economic questions (as a sort of unpaid academic), runs a discount mortgage broking company and works for anyone interested in ideas.

Among his former employers are the 1980’s Labor Industry Minister John Button, the 1990’s Treasurer John Dawkins, the Business Council of Australia, where he was the Assistant Director in charge of its ideas unit and the Productivity Commission where he used to conduct inquiries.

Many of his ideas involve cars, a legacy of working for Senator Button with whom he developed the Button Car Plan.

One of his favourite regulatory war stories - one that the Spice Girl’s lyric helps illustrate – explores why Australia didn’t make the world’s first keyless car...

In the 1970s NRMA mounted a campaign against the ease with which thieves could steal cars. As Dr Gruen says, “just insert coat hanger and drive away”.

The Australian subsidiary of the German firm Bosch had became a world leader in the manufacture of cutting edge technologies such as engine immobilisers and keypads. They supplied them for Falcons in Australia and exported them to Europe for use in luxury cars such as Fiats, Volvos, Porsches and Ferraris.

By then, he says, car keys were pretty much dispensable.

Why didn’t Australia go the next step?

Dr Gruen says it didn’t help that selling a keyless car would have been illegal.

Design Rule 25 required car manufactures to install mechanical door, ignition and steering locks. It even specified the number of tumblers in each lock.

While Gruen was at the Productivity Commission in the 1990s it recommended that the design rule be repealed.

Nothing happed until six years later when the design rule was expanded to require engine immobilisers as well as locks.

Gruen’s point isn’t merely that the regulation was stupid.

It is that regulations will always be stupid for as long as regulators are doing the regulating.

He envisages a different world in which, when faced with such a plainly silly regulation, car manufacturers could say to the authorities, “tell us what you want, what you really, really want.”

The answer would have to be “cars that are difficult to steal”.

Gruen believes that, armed with that answer, the manufacturers should be able to ignore the letter of the regulation and instead fall in behind its intent.

He is proposing deregulation in the most literal sense.

If Lindsay Tanner runs with his ideas, as he is inclined to, it would make Lindsay Tanner Australia’s first Minister for Deregulation in the most literal sense.

As he put it in an interview with the Canberra Times, “The old idea that you just sit around allowing life to go on and then every now and then dip into it and say ‘oh my goodness there’s all this red tape you better do something about it’, and then change a few things here and there and then go back to sleep again, just isn’t good enough.

How would Tanner describe a Gruen world? As one in which the regulatory systems as essentially self-cleansing?

“Yes, essentially that’s right,” the Minister replied.

Australia has embraced the concept of deregulation repeatedly over the last 20 years. Bob Hawke as Prime Minister declared that Australia should have “minimum effective regulation” in the 1980’s and introduced a new regulation to make sure it did.

Proposed new regulations should be accompanied by a Regulatory Impact Statement (RIS) before they were passed into law. In subsequent decades a report presented to the Howard Government by Charlie Bell, then the head of McDonalds in Australia and a report presented by Garry Banks of the Productivity Commission recommended the same thing.

Gruen points out that while these reports were being considered, the Howard Government introduced the GST, whose poorly designed reporting requirements sparked the only red tape revolt in Australian history, and later WorkChoices whose rules infuriated even the businesses they was meant to help.

The WorkChoices RIS read “more like a corporate brochure than a piece of analysis”.

One Tuesday night while announcing Gruen’s appointment to a business audience Tanner promised to make sure that the RIS process really was real and mandatory.

And he promised a “one-in one-out” rule. No Minister in the Rudd government will be able to introduce a new regulation without specifying which old one they would remove.

But to Gruen himself these promises are beside the point.

He retells another of his favourite stories in the forward to a report he prepared for the Victorian government last year.

In 1994 while conducting an inquiry for the Productivity Commission he asked the Federal Office of Road Safety why they wouldn't change Australian Design Rule 61 to allow vehicle manufacturers to cut their costs and improve security by replacing aluminium compliance plates with self-voiding plastic stickers.

It’s response, captured in the transcript of the inquiry’s hearing:

“It’s not that easy. We would have to do a regulatory impact analysis and that takes time and resources we don’t have.”

In Gruen’s ideal world manufactures wouldn’t have to wait for changed regulations or for Regulatory Impact Statements. They could go ahead and do things properly.

He admits that it’s a big ask.

For one thing businesses themselves might not be keen.

As he warned the Victorian government last year: “Businesses’ business is business. Though businesses must comply with regulation, contributing to its improvement has so far proven a long, uncertain and generally unrewarding process. And if it is successful in improving regulation, a business will have done so for all
its competitors.”

He suggested that the Victorians start by exempting from general regulations those firms whose internal systems can demonstrate (and continue to demonstrate) their own commitment to excellence.

Would he eventually like to see all firms exempt form the black letter law of regulations, and required only to abide by their spirit as the Spice Girl’s lyric implicitly suggests?

“That’s one end of a spectrum,” he replies. “I think you’ve got to get somewhere between the two alternatives.”

The weak alternative is to merely let businesses suggest improvements to the wording of regulations. The strong one is to let them ignore the wording of regulations.

“In a sense we have already tried the weak alternative,” he adds. “I would say we have already tried the weaker version and what we now have to do is to try something stronger.”

He likens the idea to what Toyota and other car manufacturers did in Japan. They didn’t merely involve workers in decision making by putting a suggestion box in the corner, they continually asked workers for their ideas about how to do things better and gave them the power to do so, even if it meant stopping the production line and retooling of their own accord.

He describes it as “harmonising aims” rather than regulation. It would do away with the need for much regulation.

The Deregulation Minister Lindsay Tanner is making no commitments – yet – about how far to run with Gruen’s ideas. But he says Gruen is one of the few people in the country who has them.

It might run in the family. 35 years ago as a youthful advisor to Gough Whitlam his late father Fred Gruen ignited a revolution by convincing the new Prime Minister to cut Australian tariffs by 25 per cent across the board.

His son has set his sights about as high.


Lateral Economics, Beyond Taylorism: Regulating for innovation. Some ideas for discussion for the National Innovation Agenda, August 2007

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