What's mining ever done for us? Just wait

What if, suddenly, we were out of the woods?

Quietly, the mining industry has just doubled the price of coking coal. Instead of getting $US81 per tonne as it did back in March, for the next three months it'll get $US200 per tonne from Japan, the most in four years. And Japan has reason to be grateful. The so-called spot price has surged even higher, to $US213 per tonne.

If it stays there, or even near there, a good chunk of Scott Morrison's budget problems will have vanished, just as they vanished for Peter Costello during the mining boom at the start of the century.

The Committee for the Economic Development of Australia believes Morrison needs to boost the budget by $17 billion per year if he is to get the deficit down to zero by the end of the decade. After a quarter-century of economic growth, that's probably where it should be, if not in surplus.

To date he's shown himself to be incapable of much at all. The much-vaunted "omnibus savings bill" he has just got through the Senate saves $6 billion over four years. It's done it largely at the expense of payments directed to women (family tax benefits and the baby bonus) and students. But at the same time he's got through the Senate $4 billion of high-end tax cuts (which will benefit men more than women because they are twice as likely to earn high incomes).

The net effect on the budget won't be much. It'll be improved if his superannuation tax hikes get through the Senate, and harmed if his company tax cuts get through.

The explosion in the price of coking coal could deliver much more. Access Economics says for every $US1 the price rockets, the budget deficit will improve $65 million. Multiply that by the number of dollars the price has rocketed and you get a boost of $7 billion per year if the new price holds. And that's just for coking coal. The iron ore price is up 40 per cent this year. The price of thermal coal (the stuff that makes electricity) is up 55 per cent. It's not bad for an industry that had been shutting mines and laying off workers.

As is often the case, it's China that's been doing it for us. Part of it is an uptick in residential construction. Apartments need steel, which is made from coking coal and iron ore. The other part is a bureaucratic decision of the kind at which China excels. The central government believed the local authorities were mining too much coal (of both kinds) running up losses in order to chase volume. Rather than require them to turn a profit as Australia would have, it instructed them to cut their hours of operation. In April it forced all of its mines to cut their number of working days from 330 to 276.

Suddenly, Chinese furnaces started needing more foreign coking coal. The world's best is in Queensland's Bowen Basin. Mines that had been shut down quickly reopened. Mines that had been barely profitable suddenly started earning enough to pay tax.

If the price is sustained it'll do more than boost Morrison's budget. HSBC thinks it'll boost nominal GDP by 2 per cent. Nominal GDP is the best measure of the dollar value of wages and profits combined. And because the price will also push up the dollar, the buying power of those dollars will grow. There will be much less need to cut interest rates, most probably letting new Reserve Bank governor Philip Lowe off the hook.

Moody's reported on Wednesday that it expects Australia to become the world's fastest growing AAA-rated commodity exporter, beating Canada, Norway and New Zealand. It's not likely to take away the AAA rating any time soon.

Anyone who doubts that the benefits of that growth will spread should check out research the Reserve Bank conducted a few years back on the effect of the two mining booms at the start of this century. Running a computer simulation to work out what would have happened had those booms not happened it found >they lifted real per capita household income by 13 per cent, raised real wages by 6 per cent and cut the unemployment rate by 1.25 percentage points.

Some of us did worse than others. Renters suffered while homeowners prospered. Workers in import-competing industries did less well than workers in industries that serviced mining.

The booms transformed Australia, and more than fixed the budget, without our leaders needing to do a thing.

This time it'll be less spectacular, principally because China can take away what China gives. In September it began loosening its restrictions on mining, allowing 74 mines to operate more days per year. And the rest of the world is in a better position to respond to Chinese demands for resources than it was last time. Our latest brand-new mini-boom might last no more than months, but it's painted a picture of how quickly things can change.

In The Age and Sydney Morning Herald

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Looking for job vacancies? Don't try mining

A tidal shift in the jobs market has seen mining supplanted by aged care and even manufacturing as jobs vacancies in the west vanish and are replaced by new vacant jobs in Australia’s east.

New figures from the Bureau of Statistics show the number of vacant jobs in mining has slipped 5400 in the past two years. The number in construction has slipped 6700. Over the same period the number in manufacturing has slipped just 1200, despite all of the reports of factory closures.

There were 11,000 vacant manufacturing jobs in June, and only 4200 vacant jobs in mining.

Australia’s changing industrial landscape means Western Australia and Queensland are no longer the jobseeker magnets they once were. In the past two years the number of vacant jobs in Western Australia has collapsed 38 per cent and the number in Queensland 41 per cent. In the same period the number of vacant jobs in NSW has climbed 12 per cent. The industries increasingly keen to take on new workers are finance, wholesale trade, the arts, and health care and social assistance. Many are centred in NSW and Victoria. Victoria has 8.5 per cent fewer vacancies than two years ago.

The changing fortunes of the public service have hit the Australian Capital Territory particularly hard. Australia-wide there are 20 per cent fewer public sector vacancies that there were two years ago. In the Australian Capital Territory the number of vacant public sector jobs has collapsed 72 per cent. There are now just 300 vacant public sector jobs in the ACT, the fewest on record...

Western Australia remains the most promising of Australia’s states in which to be unemployed, although nowhere near as promising as it was. In May there were 3.7 unemployed West Australians for every vacancy, a low figure but nowhere near as low as the 1.7 two years ago. In NSW the figure is 4.3 unemployed per vacancy and in Victoria 6.3. Queensland, has a ratio of 6.1, South Australia 7 and Tasmania 8.9.

Nationwide there are 5 unemployed Australians chasing each vacant job. Two years ago there were only 3.6.

In The Age and Sydney Morning Herald


How many unemployed for each vacant job?

Unemployed per vacancy

May 2014 (May 2012)

NSW 4.3 (4.2)

Victoria 6.3 (5.1)

Queensland 6.1 (3.2)

South Australia 7 (4.6)

Western Australia 3.7 (1.6)

Tasmania 8.9 (8.9)

Northern Territory 1.1 (2.2)

Australian Capital Territory 3 (1.6)

Australia 5 (3.6)



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Axing the mining tax would save the Coalition money (so it says)

As unlikely as it seems, axing the Minerals Resource Rent Tax tax will save the Coalition a fortune. In fact its the most lucrative of the policies it took to the election.

Treasurer Joe Hockey put a $13 billion price tag on it on Thursday as he unveiled the draft legislation that would abolish the tax. That’s a $13 billion benefit to the government from axing the tax. Axing the mining tax itself will cost the government $3.5 billion in the years to June 2017. But axing what it says are the associated measures will make it more than $17 billion.

Among those measures, whose repeal is included in the MRRT repeal bill, are the Schoolkids Bonus, the Low Income Superannuation Contribution, the Income Support Bonus, a more generous asset write off for small businesses and accelerated depreciation for business vehicles.

All were to funded by either the mining tax or by Labor’s “spreading the benefits of the boom” package. The Coalition’s position is that the boom is receding and the tax will be no more. Everything Labor tied to extra income from mining would go as well.

With one exception. Labor’s staged increase in compulsory super contributions costs the government money because it means a greater proportion of each salary will be lightly taxed...

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The Coalition will keep the staged increase but delay it for two years.

Its an exception that will help high income earners more than low income earners, made doubly hurtful because the Coalition is withdrawing the low income super contribution. It says it wants to withdraw it from July 2013, which would make the snatching of the bonus retrospective. What is more likely is that the legislation won’t get through the Senate until after it changes in July 2014 giving low earners another year.

The mining tax (and the measures the Labor said mining would fund) might last another year.

In The Age


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Manufacturing will bounce back?

So says the Grattan Institute...

In the wake of major job losses at car manufacturers and as the Rudd government tries to bed down a politically difficult series of budget cuts there is glimmer of good news on economic front with new report suggesting manufacturing will bounce back from the mining investment boom back stronger than ever.

The Grattan Institute report says that far from being “permanently damaged,” the exchange-rate sensitive industries of manufacturing, tourism, education and agriculture “survived the boom in reasonable shape”.

It comes as the government prepares to reveal a downgrade in its economic forecasts along with a fresh round of budget cuts perhaps as soon as this week and as the Reserve Bank prepares to meet next week to consider cutting interest rates once again.

Already at a half century low of 2.75 per cent, a further cut would take the Reserve Bank’s cash rate to the lowest level since the 1950s, well below the so called “emergency low” of 3 per cent that prevailed during the global financial crisis.

Around 400 Holden workers took voluntary redundancy on Friday. The remaining 1700 workers at the Adelaide car assembly plant are considering a management proposal for reduced pay and conditions in order to keep the plant open.

Entitled The mining boom: impacts and prospects the Grattan Institute report concedes Australia runs the risk of a recession as the resource investment boom fades. But it says “recession is far from inevitable”, in part because Australia has avoided the high inflation that accompanied previous booms...

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Figures released in the past week show that excluding the effect of the carbon price Australia's annual inflation rate is less than 2 per cent, easily low enough to allow the Reserve Bank to cut rates further.

The Grattan report says that rather than killing manufacturing, the mining boom “temporarily accelerated” its long-term decline as a share of gross domestic product.

Manufacturing has been sliding as a share of GDP since the 1970s.

An survey of exchange rate hikes in 16 countries similar to Australia shows manufacturing grew particularly rapidly after the exchange rate came back down. “Within three years, manufacturing exports as a share of GDP had risen by more than a third on average,” the report finds.

“Therefore temporarily high exchange rates in economies comparable to Australia have not had long-lasting effects on export volumes and the added value of manufacturing, the report concludes. “Manufacturing exports usually bounce back rapidly and reach trend within a few years.”

Australian Manufacturing Workers Union president Andrew Dettmer said he would “have to believe in the tooth fairy” to think that “once an industry has been devastated suddenly a few economic indicators return and therefore it will somehow return to production”.

Ford was leaving Australia and Holden was considering its future. “The international thinking is that once manufacturing dips 5 per cent of the total economy it is fundamentally lost,” he said.

Manufacturing constitutes around 8 per cent of the economy.

The Grattan report finds neither the Howard nor the Rudd and Gillard governments saved enough of the proceeds of the boom. “Tax decreases and spending increases have been larger than Australia can afford in the long run,” it says. “ Some spending was justified by the response to the global financial crisis and some has been invested, but underlying budget deficits now need to be repaired in more difficult times.”

Australian Industry Group Chief Executive Innes Willox said there were reasons for optimism.

“The currency has come off about 15 per cent since April. If it is held down or falls further those companies that have been able to stay afloat will be very globally competitive,” he said.

In The Sydney Morning Herald and The Age


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Who are you going to believe about the economy, Gillard or Rudd?

Sunday column

Who are you going to believe? Gillard Labor or Rudd Labor? Or something in between? The two are polar opposites.

A week or so ago Julia Gillard told us the economy was “growing, stable and strong”. Now her replacement Kevin Rudd says “the China resources boom is over - the time has come for us to adjust to the new challenges.”

And not minor ones. “This will have a dramatic effect on our terms of trade, a dramatic effect on living standards in the country, a dramatic effect also potentially on unemployment unless we have an effective counter-strategy,” he said two days after taking over.

His Treasurer Chris Bowen rammed home the point: “Since the budget we have seen the price of iron ore fall by around 15 per cent and the price of gold fall by around 21 per cent. Dealing with the decline in our terms of trade will require very careful management.”

Labor is the party best able to provide that management, says Bowen. When you’re sick, you need a doctor.

“Managing large transitions in the economy is what Labor governments do,” he told his first press conference as Treasurer. “It is what Hawke and Keating did in the 1980s and 1990s. It is what the Rudd government did, managing the transition through the global financial crisis and through to the other side more successfully than any other advanced major economy.”

Someone is telling porkies. It’s either Gillard in saying everything is just dandy, or Rudd in evoking a sense of crisis.

I reckon it’s Gillard. Here’s why. Her address to the Committee for the Economic Development of Australia had another theme, along the lines of ‘loose lips sink ships’.

“The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness” she said, laying into economists who spoke of the possibility of a recession. Low expectations could “themselves become an economic problem”.

But that couldn’t be true if the economy really was “growing, stable and strong”. Gillard’s argument contained within it it’s own refutation.

Rudd and Bowen are more believable.

Commodity prices are slipping. That’s a fact. Mining investment is falling away. The graphs show it. Something will have to replace resource investment as an economic driver. The Reserve Bank is doing what it can. It has cut interest rates seven times in eighteen months and succeeded in reigniting the housing market. But housing by itself won’t be enough. And China could stall. Officials there are trying to slow economic growth. If they succeed, smoothly, it’ll cause us few problems.

But the Financial Times columnist Martin Wolf and US economist David Levy argue that a smooth transition will be anything but straightforward...

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The usual assumption is that “a rapidly expanding economy is like a speeding train, let up on the throttle and it slows down,” the say.

But China is more like a jumbo jet: “In recent years a couple of engines have not been working well, and the pilot is now loath to keep straining the remaining good engines. He is allowing the plane to slow down, but if it slows too much, it will fall below stall speed and drop out of the sky.”

In Australia Barclays economist Kieran Davies has run the numbers on what would happen here if China’s growth did temporarily stall.

China accounts for more than one third of Australia’s exports, more than any other developed country’s. Half of those exports are one commodity - iron ore. Davies says a sudden temporary slide in China’s growth would cut Australia’s growth by 1.40 percentage points, enough to trigger a recession. The shock would be cushioned by a collapse in our exchange rate, a blowout in the budget deficit and moves by the Reserve Bank to cut its cash rate toward 1 per cent.

This is not Barclay’s central forecast, merely what it believes would happen if China’s growth stalls.

Even without that Australia will have to find something - anything - to take the place of mining investment as a driver as it winds down.

On Wednesday Reserve Bank governor Glenn Stevens his version of the “all-care, no-responsibility” disclaimer seen on the rides the Royal Easter Show.

“No-one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount,” he said.

And he repeated the point: “No-one can promise that – but we will do what can reasonably be done.”

Stevens is in tune with Rudd and Bowen. Gillard is so last month.

In The Canberra Times, The Sun Herald and The Age


Economic Conditions and Prospects

Glenn Stevens

Address to the Economic Society of Australia (Queensland) 2013 Business Luncheon
Brisbane - 3 July 2013

It is a great pleasure to be in Brisbane once again.

Yesterday the Board, at its monthly meeting, left the cash rate unchanged.

I don't propose to comment about yesterday's decision in particular, or to send any particular messages about the next decision.

Instead I want to step back to look at the broader picture. The economy grew at about its long-term average rate in 2012, but more of that growth was in the first half of the year than the second. According to the latest national accounts, growth in real GDP has been running at an annualised pace of about 2½ per cent over the past three quarters. Our guess is that sub-trend growth will continue in the near term. Consistent with that, the rate of unemployment has tended to increase. Employment is growing – the number of jobs in the economy is at a record high – but not quite as fast as the supply of labour.

Over the past five years, the economy has expanded by about 13 per cent. The corresponding figure for the United States is 3 per cent. For Japan, the Euro area, and the United Kingdom, the figures are negative.

Some of our Asian neighbours and trading partners have also done well, which has certainly helped us. Korea has recorded growth about the same as Australia's (13 per cent), Singapore more (about 18 per cent). And of course China's growth over this period has, despite frequent talk to the contrary, been rather stellar. Chinese GDP has risen by over 50 per cent since early 2008. China's growth over the past year or two has moderated, to be more like 7½ per cent, not the 10 per cent plus seen for some years. Most of the data we are seeing from China are consistent with that pace. This is what the Chinese authorities have been saying they want to achieve.

It's worth noting that while Australia has done relatively well, the economy's average growth rate over the period since the financial crisis erupted in earnest has been only about 2½ per cent. In the preceding decade it had averaged almost 3½ per cent. That was a period in which the rate of unemployment declined from about 7½ per cent to just over 4 per cent. In contrast, the unemployment rate today, while still quite low by longer-run historical standards, at about 5½ per cent, is higher than it was.

There are a couple of points to make here. The first is that Australia's economy was overheating by 2008. Capacity was stretched as the resources sector was in the first phase of its investment build-up while household consumption was still growing briskly and credit growth was still in double digits by the end of 2007. Inflation rose, peaking at about 5 per cent. This was substantially due to domestic pressures, not just international ones (though they were not helping). These were all clear signs that we were not going to be able to keep growing at a pace like that seen in the decade up to 2008. The Reserve Bank had made this point many times, though it was not very popular. While inflation did subsequently abate, this experience showed that if there was to be a very large rise in resources sector activity, other sectors could not continue as they had been doing.

The second observation is that similar declines in rates of growth have been observed in other countries – even the ones which have come through the financial crisis with relative success. Around our region, Korea, Taiwan, Singapore, Hong Kong, New Zealand and Malaysia, although navigating the crisis pretty well, have seen their growth rates decline by at least as much as Australia's. So Australia seems to be part of a broader pattern here. While we have benefitted a lot from China's ongoing emergence in this period, so have those countries.

The fact that no country has managed to return to the sorts of growth seen prior to the crisis is highly suggestive that that growth was to some extent being driven by forces that could not be sustained. Perhaps this has to be a conditioning factor when we think about our own growth aspirations and the way we seek to achieve them.

At this point, we have unemployment at about 5½ per cent, inflation ‘in the 2s’, the banking system is strong and government finances overall sound. Growth is on the slow side, inflation is low. That combination means that we have low interest rates (the lowest for fifty years in fact). Significant structural change is occurring, which is always challenging. But set in context, the macroeconomic data over recent years show a pretty respectable set of outcomes. Those who have memories of the 1970s or 1980s or the 1990s would surely recognise them as such.

Now it has been said that we were ‘lucky’ to have the mining boom, the effect of China and so on. Otherwise, we would have seen much more economic weakness. It's hard to disagree with that proposition as a piece of arithmetic. As a piece of analysis, though, it is incomplete.

It could equally be said that we were ‘lucky’ that the effects of the global economic downturn worked to help reduce inflation in Australia from its peak in 2008 of 5 per cent – which was way too high – to something acceptable. It could also be said that we were fortunate that the sub-prime crisis in the US emerged from early 2007, and not later. Although such lending was less prominent in Australia at that time, it was growing fast and would have become a much bigger vulnerability had it continued at that pace. The fact that things went wrong in the US when they did meant that what was a small problem here stayed small. It could be added that we were lucky that the change in behaviour of households – slower borrowing, more saving – came when it did. For a start, had households continued as they were, they would have become more financially extended, and it is obvious now that that would have been risky. Moreover, this changed behaviour of households has helped us absorb the resources investment boom.

Of course the story is not yet finished. We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant challenges. How will we meet them?

A good way to begin is to have a reasonable starting point, and we have a better starting point going into this episode than we might have had, or than we have had on other occasions. Had we followed the pattern of previous terms of trade booms, we would have had much more inflation, faster credit growth and more asset price inflation, and more excesses generally. And then, when the terms of trade began to fall, we would have been much more likely to have a very big slump. This was the case in the early 1950s, the mid 70s and the late 70s (Graph 1). In each case domestic excesses arose resulting both from flow-ons from high commodity prices with a fixed exchange rate and policy weaknesses, which then made the ensuing downturn worse.


Graph 1: Inflation Cycles



It hasn't been that way this time. On this occasion, the resources boom – a bigger one than anything seen for at least a century – was accommodated without a big rise in inflation, or a big run-up in leverage or an unsustainable asset price boom. In fact, for most of the past several years we have had various industries or regions complaining that they had not felt the benefits of the boom. There were actually positive spillovers. But the excesses were not as great as had been the case on other occasions.

Quite evidently one major feature has been a flexible exchange rate, something Australia did not have in previous resources booms. The exchange rate played the role it is supposed to play when the country receives a large expansionary external shock: it rose. It has been correctly noted by other commentators that the real exchange rate has in recent times been at its highest since the float thirty years ago. Indeed, it has been just about as high as any time in the past century. In the broad that is not a total surprise, given that the terms of trade rise and ensuing increase in resources sector investment has been bigger than anything seen in a century (Graph 2).


Graph 2: Real Exchange Rate and Terms of Trade



Actually, the exchange rate might have been even higher but for the changes in behaviour by households, which have not returned to their earlier spending habits, instead maintaining a saving rate much more in line with longer-run historical norms. Corporations have tended to have a reasonably conservative mindset too, putting an emphasis on reducing debt and maintaining high levels of liquidity.

Had they not done that, all other things equal, we would have had lower national saving, a larger ex ante gap between saving and investment, and a larger current account deficit. Interest rates would have been higher and the exchange rate presumably even higher than it was. Some largely non-traded business areas – retailing or real estate or banking – might have enjoyed an even longer period of households gearing up and spending. I conjecture that some other trade-exposed sectors would have had an even harder time than they did have. Moreover, we would, I think, have been more exposed to the effects of the decline in the terms of trade that we are now seeing.

So the more ‘cautious’ or, more accurately, more prudent behaviour of households, together with some genuine caution by many firms, has been a force that has meant that Australia has accommodated a 100-year high in resource investment. Higher saving by the private sector has helped to ‘fund’ the resources investment boom at lower interest rates, and a lower exchange rate, than might have been the case otherwise. I am not convinced we should lament that performance as much as we seem to do.

That is not to deny that, for many areas of the economy, the exchange rate has been ‘too high’ given the level of costs and productivity in place. But realistically, it is the nature of the shock we experienced that certain high cost or low productivity parts of the economy would struggle with the implications of a big rise in the terms of trade.

In fact, I suspect that many sectors would still have struggled even if the exchange rate had not risen. At a 70c dollar, the resources companies would have had even higher expected profits and an even greater ability to bid for labour and capital. Inflation of wages and prices would have been higher, and in the scramble to keep up many of the same companies that have struggled in recent times would still have struggled. Admittedly, higher inflation might have concealed the problems to some extent, since everyone's nominal revenues would have risen faster, but only for a while. In the end, relative prices had shifted and, at any exchange rate, some sectors were going to find that to their advantage and others to their disadvantage. Moreover, taking the inflationary route would have left a much bigger legacy of problems to come home to roost as the resources boom matured.

That said, the exchange rate was somewhat too high for a period. It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago – nearly two years ago, in fact. In the end, though, market-based exchange rates do eventually adjust – and usually in a less disruptive way than those that are maintained artificially. A flexible exchange rate is an important part of adjustment over all phases of the cycle and it remains a major advantage that we have one. If the economy ‘needs’ a lower exchange rate, it will probably get it.

So I would argue that, as we face the undoubted challenges of the decline in resources sector investment, our starting position is in several important respects a better one than we have usually had at this point of previous episodes of this kind.

Still, a starting point is just that. It is understandable, as we go into this phase, that people will ask ‘where will the growth come from?’ The conventional discussion at present has turned its attention to just this question. Not so long ago people were worried that there were no positive spillovers of the boom, or that there were even, in net terms, adverse effects. Some almost seemed to feel that it would have been better if there had never been a boom. Now suddenly people are worried that there were positive spillovers from the boom after all and that their absence or reversal will be disastrous.

The question of where will the growth come from is one that recurs periodically at moments of uncertainty. Twenty years ago there was an almost despairing pessimism about economic prospects in the wake of what was admittedly a pretty big recession. It was thought likely by many observers that unemployment, then in double digits, would remain so for a long time. In fact, as we now know, we were on the cusp of two decades of good economic performance, at the end of which our country's relative standing for economic management would have improved out of sight. Who predicted that?

Moreover, areas of the economy that we often don't think about have proven to be major drivers of – and participants in – that growth. Over the 21 years to mid 2012, real GDP rose by about 100 per cent. Only 3 percentage points of that 100 per cent came from manufacturing. The largest contributions came from financial services (13 percentage points), mining (10 percentage points), construction (9 percentage points), professional services (8 percentage points) and health care (7 percentage points). The number of jobs in the economy has increased by around 50 per cent over the same period, with around two-thirds of this increase attributable to household and business services of various kinds. Within these sectors, health care (around 9 percentage points) and professional services (around 7 percentage points) have made particularly notable contributions.

In other words, most of the time the answer to the question ‘where will the growth come from’ is that only part of it will come from the old traditional areas, and a fair bit of it will come from new things, often things of which we are only dimly aware. That is, in fact, the nature of a dynamic, evolving economy.

Turning to the current conjuncture, it can be observed, in conventional expenditure accounting terms, that some key areas are well placed to expand once they have the confidence to do so. Non-mining business investment, for example, as a share of GDP has been unusually weak – it is not much above its recession lows of the early 1990s. Many companies, rather than extending themselves, have been financially conservative over recent years and are sitting on very substantial sums of cash. It's hard to believe that this configuration will not change at some point over the next few years.

Likewise, dwelling investment has been low for an unusually long period, with at least some households intent on reducing debt, thereby strengthening balance sheets. Households have accumulated a good deal of cash as well over recent years. Meanwhile, population growth is quite solid and it has been picking up a bit of late. If anything, we will need to build more dwellings than we have been over recent years. Meanwhile, interest rates are low, dwellings are more ‘affordable’, and finance approvals for housing purchases have risen by 16 per cent over the past year. So there are ‘fundamentals’ that favour a pick-up in these sectors.

Of course, we have to add two things. The first is that no-one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount. We have, in fact, had a few handovers over the past five years – from private demand to public in 2009, then to mining investment subsequently. Now we are looking back to household dwelling spending, non-mining investment (and exports). Previous handovers have occurred, largely successfully. That doesn't guarantee the next one will, though it does mean that we shouldn't assume that it won't occur.

The second thing to say is that much depends on ‘confidence’ – that intangible thing that is hard to measure and very hard to increase. We are talking here about confidence that the future will be characterised by growth, that there will be customers for products, that innovations are worth a try, and so on. That confidence seems pretty subdued right now.

To the extent that subdued animal spirits reflect global issues, which they must to some degree, there is not a great deal we can do about it beyond tending to our own national affairs as diligently as possible.

More generally, while there are various ways policy measures can damage confidence, there is no simple policy lever that can be quickly pulled to improve it. Rather, confidence-enhancing conduct of policy involves having well-established and understood frameworks, and acting consistently with those frameworks over time.

The Reserve Bank, for its part, has a well-established monetary policy framework. Guided by this, we will be able to continue to do our part, consistent with our mandate, to assist the transition in sources of demand that is needed. We cannot fine-tune it – no-one can promise that – but we will do what can reasonably be done.

The conduct of other policies likewise needs to be principled and consistent. Notwithstanding the difficulties of achieving a budget surplus in any particular year, which will always be hostage to what happens in the economy and the vagaries of forecasting, there remains a strong commitment to fiscal responsibility in Australia across both sides of politics, even if there are different views about how to achieve it. The importance of that commitment will, if anything, be heightened in the future, given that significant challenges exist over the medium term in funding government initiatives that the community appears to want.

Consistency in other areas that have a bearing on costs and productivity is also important. My assessment is that at the level of enterprises, efforts to improve productivity have been stepped up under the pressure of the high exchange rate and structural change. But we should still be asking whether there are things in the way of faster improvement. Is the combination of regulatory structures of various kinds – however well-meaning and valid in their own terms – imposing unnecessary and excessive costs of compliance, or creating undue complexity for business?

At a previous presentation in Queensland, when asked about this, I made reference to the Productivity Commission's ‘list’. The list is a substantial one. The good side of that is that there are many things that can be done to foster the improvement in living standards we all seek.
Conclusion

We have continued to live in interesting times. Major challenges have been faced, but significant ones lie ahead. No-one can pretend that things will be simple and easy. But, by the same token, prudent policies, within the right frameworks and coupled with private initiative responding to the right signals, can – if we are prepared to accept their requirements – provide Australians with reasons for confidence about the future.


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Not a pretty picture. The latest on commodity prices from the RBA

As the RBA tells it:

"Preliminary estimates for June indicate that the index fell by 4.1 per cent (on a monthly average basis) in SDR terms, after falling by 2 per cent in May (revised). The largest contributors to the decline in June were falls in the prices of iron ore, gold and coal. The prices of many rural commodities and base metals also declined in the month. In Australian dollar terms, the index rose by 1.8 per cent in June.

Over the past year, the index has fallen by 10.5 per cent in SDR terms. Much of this fall has been due to declines in the prices of coking coal, iron ore, thermal coal and gold. The index has fallen by 5.5 per cent in Australian dollar terms over the past year."

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The head of BHP gets how much more?

It's off the old scale

The head of BHP gets paid around 200 times as much as the average Australian. Back at the start of the 1980’s it was six or seven times as much.

The stark finding is in new research that uses BHP records dating back to 1887 to plug gaps in what’s known about long-run trends in Australian executive remuneration.

“What we see is a relatively high ratio of BHP CEO salary to Australian earnings at the turn of the 20th century, around 50 times average earnings, slowly dropping throughout the century save for a spike in the second world war,” said Melbourne University economist Mike Pottenger.

“Then with the arrival Paul Anderson as chief executive in 1998 there’s a vertical jump. He was paid more than 200 times average earnings.”

“Anderson was the first internationally-sourced chief executive since the very first, William Patton who was hired for 4000 pounds in 1887.”

“Anderson's successors, Brian Gilbertson, Chip Goodyear, Marius Kloppers and Andrew Mackenzien have all earned around 200 times the average – it has become the new normal.”

Working with BHP historian Geoffrey Blainey and inequality researcher Andrew Leigh who is now a Labor member of parliament Dr Pottenger constructed a range of likely salaries for the years 1887 to 1984 using the few internal memos that mentioned salaries and the known relationship between the chief executive’s salary and BHP directors fees.

From 1987 he used the executive remuneration reported in BHP annual reports and later the total remuneration including stock options and incentives.

“At all times our estimates have been conservative,” Dr Pottenger said...

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“If critics want want us to exclude the incentives and options, we happy to point out that without them the CEO’s salary is still 100 times the average - roughly double its previous peak and far higher than anything thought possible during the 1970s and 1980s.”

Data provided by Egan Associates on the average CEO remuneration at Australia's top 100 companies for the last few decades suggests that BHP's experience has been typical.

“In BHP's case the merger with Billiton near the turn of this century made it a truly global company,” Dr Pottenger said. “Also just before the merger there was an air of desperation in the company. Its 1999 annual report was titled 'Under Pressure', the 2000 report was titled 'Coming out of a tight corner'.”

Dr Pottenger said BHP and other newly globalised companies appeared to have succumbed to “Lake Wobegon effect,” named after the fictional town in the US radio show A Prairie Home Companion where “all the women are strong, all the men are good looking, and all the children are above average".

“They all want to hire a chief executive who is better than the global median, ” Dr Pottenger said. “If executive's abilities are distributed along a bell curve, the only way to do that is to bid up salaries.”

“In fact they are no longer going up. Around 200 times average earnings seems to be the new normal. Something else is at work.”

In today's  Sydney Morning Herald and Age






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Productivity. We can't really measure it - Productivity Commission

But what we can measure, we don't like

Australia’s productivity growth is weak and likely to weaken further the Productivity Commission has found. But it says Australia isn’t alone.

In the first of what it intends to be a series of annual updates the Commission says in the four years since 2006 so-called multifactor productivity slipped by an average of 1.1 per cent per year. In the previous decade it had climbed by an average of 0.6 per cent per year.

While the update attempts to identify local causes of the downturn it says Australia is “not unique”.

France, Sweden, Ireland, the United Kingdom, the United States, Canada and New Zealand also moved from positive to negative productivity growth in the same timeframe (although in the case of the US from positive to zero growth).

It says the downturn began before the global financial crisis for reasons which are not clear. It quotes the New York-based Conference Board as finding that one of the reasons it is continuing is labour hoarding, “as businesses refrain from making significant cutbacks in resources in the hope of a recovery in global demand”.

Australian multifactor productivity climbed 0.1 per cent in 2011-12 after sliding of 1.2 per cent in 2010-11, a result still well down on the long-term growth rate of 0.8 per cent.

Labor productivity climbed by a much faster 3.4 per cent as more machinery was deployed per worker in a process known as capital deepening.

The Commission concedes that neither measure of productivity is particularly useful...

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Productivity isn't calculated for the “non-market” industries of health, education, public administration and security. Health and social assistance  has become Australia’s biggest employer. And many of the outputs of the industries for which productivity are calculated are not measured, biasing down the published measures. As an example the Commission cites the electricity industry which has switched from stringing putting wires overhead to burying them underground “in response to concerns about visual amenity and safety”.

It says while the cost of putting the wires underground is counted on one side of the productivity equation, the extra benefit of putting them underground is not counted on the other.

Nevertheless the Commission reports woeful productivity performance in the mining and utilities industries with declines in 2011-12 of 10.5 per cent and 5.4 per cent per cent.

One immediate reason mining productivity is declining is a “mismatch” between inputs and outputs as money is spent developing new projects ahead of an expected payoff in production.

A longer-term reason is that easily obtained resources are becoming harder to find. High commodity prices have exacerbated the process, encouraging “even more rapid development of higher-cost less productive resource deposits than would otherwise be the case”. Improvements in mining technology have only partly offset the effect.

Productivity in the electricity industry is declining in part because of what the Commission suspects to have been “greater investment in distribution capacity than was socially optimal”. Productivity in the water industry is declining in part because Australians cut their use of water during the drought and have yet to lift it back to “pre-drought levels”.

In today's Sydney Morning Herald and Age






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Parkinson to RBA. Don't stymie the slide in the dollar

The head of the Treasury says the Reserve Bank should be prepared to cut interest rates further as the Australian dollar falls, if necessary temporarily breaching its target and allowing inflation to climb beyond 3 per cent.

Dr Martin Parkinson is a member of the Reserve Bank board. The Bank’s governor Glenn Stevens has signed an agreement with the Treasurer to keep inflation between 2 and 3 per cent “on average over the cycle”.

As the Australian dollar slid below 95 US cents for the first time in 30 months on Thursday Dr Parkinson told a Senate hearing the Bank should “look through” the inflation consequences of the sliding dollar and continue to keep interest rates low or cut them further even as the falling dollar pushed up prices.

“I wouldn’t wish to speak on the governor’s behalf and as a board member it is always a slightly difficult situation,” he said.

“But they could basically keep interest rates at a particular point, or they could lower them further, and just accept that inflation went out of the band for a period. Then, you know, they could try and stop the second round effects.”

He was backed up by his deputy David Gruen who said the Reserve Bank’s “flexible” target meant it could allow inflation to climb above the top of the 2 to 3 per cent target band so long as it did not spark a wage-price spiral. Inflation is at present 2.5 per cent. A sudden increase in rates in order to contain inflation as the dollar fell could harm the economy and prevent the dollar from falling further. It has slid from 102 US cents to 94.6 US cents in the past five weeks.

Dr Parkinson conceded that some of the assumptions that underlay the Budget forecasts were out of date when the budget was delivered on May 14 and said he took “full responsibility”...

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“When we were bedding down the budget there were movements in commodity prices and we had to say, well what do we do? Do we respond to what has happened, or do we sit? We chose to sit, and I take full responsibility.”

“With hindsight I think I would have been better off jumping in the other direction, but it was an on-balance decision".

The decision means the forecasts in the Treasury’s pre-election outlook will be different to those in the budget, taking into account what will most likely be lower commodity prices and a lower dollar. The likely difference backs the Coalition's contention that it won’t be in a position to release its policy costings until after the Treasury update when the campaign is underway.

Dr Parkinson and Dr Gruen savaged reports in each of Australia’s leading newspapers suggesting that Western Australia was in a demand recession.

“The idea that in the face of the largest export boom we have ever seen you ignore exports and focus on one piece of the economy, demand and claim that that is a recession, it belongs in the comic books,” Dr Gruen said.

State final demand in Western Australia slid 1.5 per cent in the March quarter after sliding 0.7 per cent in the December quarter.

Dr Parkinson said he would would never describe either a state a national economy as being in recession “by counting quarters of negative growth.”

“In Australia it is often said the official definition of a recession is two quarters of negative growth. I don’t know who the official is,” he told the hearing.

Asked what would constitute a recession, Dr Parkinson said he did “not tend to utilise a definition”.

“I reckon a recession is something, you know it when you’ve got it,” he said.

In today's Canberra Times, Sydney Morning Herald Related: National Times


COOL QUOTE FROM PARKINSON:

"I think the whole idea of saying, you’ve got this thing called the economy which is totally interlinked and saying well today what I am interested in is ‘is there a recession in the housing sector or is their a recession in Victoria’, you may as well say ‘is there a recession in houses that are built out of red brick with tin roof, as against ‘is there a recession Ballarat as against Bendigo’."


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Why the Reserve is prepared to cut again

Watch this space, month by month

The Reserve Bank has left the door open to further interest rate cuts, declaring it has “scope for further easing, should that be required”.

The Bank board decided to leave its cash rate on hold at the half-century low of 2.75 per cent Tuesday in part because it saw some signs its earlier cuts were boosting economic activity and wanted to wait and see if there were more.

It was also pleased that since it last met the Australian dollar had slipped below 100 US cents, providing the first boost from a lower exchange rate in more than a year.

But in a statement released after the board meeting Governor Glenn Stevens made it clear the dollar was nowhere near low enough. “It remains high considering the decline in export prices that has taken place over the past year and a half,” he said.

Souring the Bank’s view of the decline in the dollar was the knowledge that in the month in which the dollar fell commodity prices slipped 3 per cent, depriving exporters of the much of the boost from the lower dollar.

The Bank will watch movements in the dollar and commodity prices particularly closely in the next few weeks in order to form an opinion as to whether the recent slide in the dollar is a small one-off adjustment or part of move back to the more normal exchange rate it thinks Australia needs.

The Bank’s focus on the exchange rate means that each monthly board meeting is “live”, with the board prepared to cut rates if needed without waiting for the quarterly inflation result.

Governor Stevens said inflation was under control and “expected to remain so over the next one to two years”.

Economic growth was “a bit below trend,” providing another reason to cut rates again “should that be required to support demand”.

Treasurer Wayne Swan said the Bank had “the flexibility to cut” should it need to...

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The economy was in a transition which would “not be seamless, particularly with the dollar still at high levels”.

As the board met Australia’s biggest wholesale mortgage broker AFG reported that it had processed a record number of mortgages in May, $3.6 billion worth, up 13 per cent from the record $3.2 billion processed in April. AFG makes up ten per cent of the market.

Mark Hewitt, AGF’s general manager of operations said there had been a marked lift in borrowing since February.

“Borrowers of all types were encouraged by the further rate reduction in early May and the expectation that we are in a low rate environment for some time to come,” he said.

“Reassuringly, the growth looks sustainable . We are not seeing the normal characteristics of a boom. The average new loan size is the same as it was over a year ago.”

The increase applies to all types of mortgages: loans for purchasing houses, loans for first home buyers, loans for investors and refinancing.

Futures market prices late Tuesday implied a 100 per cent probability of a further interest rate cut by October. The chance of a cut at the Bank’s July meeting was 32 per cent.

Wednesday’s national accounts are regarded as unlikely to alter the Reserve Bank’s thinking. Forecasts centre around economic growth in the March quarter of 0.8 per cent and annual growth of 2.7 per cent.

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


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Construction after the boom. Builders say it looks okay

Australia’s mining investment boom has probably peaked but the ride down doesn’t look too frightening, according to the Australian Construction Industry Forum.

The Forum’s semi-annual forecasts compiled with the help of ACIL Allen Consulting and Deloitte Access Economics show engineering construction plateauing rather than collapsing, slipping 2.5 per cent this financial year, then 0.8 per cent in 2013-14 and 0.6 per cent in 2014-15.

"New projects are still being commissioned," said Forum executive director Peter Barda. "Just not as many and not as big."

"There is no doubt that in some sectors demand is off and prices are down but there is still ongoing demand for the things we've got to sell."

“We are pretty confident looking out three to five years. Beyond that it is difficult. Firms can and do make sudden decisions to stop what they are doing. But for the moment the world has not stopped, the world continues to need energy and minerals and we continue to be lucky enough to be in a position to provide them at a globally competitive price.”

While engineering construction firms would need to get used to lower or zero growth at a still exceptionally high level of activity, residential and commercial construction was set to climb.

"There has been little investment in shopping centres for some time, since before the global financial crisis. All of sudden the big institutional investors who own the shopping centres are starting to think they look shabby. They are facing competition from online retailers and from big box retailers, and they are starting to spend to smarten them up"...

Things were also picking up in warehousing and logistics.

"The way that supermarkets and others wants products delivered is changing. It's like mining, the name of the game is building facilities that shave factions of a cent per tonne kilometre off the transport cost.”

The Forum expects non-residential construction to climb 7 per cent in 2013-14 and then 1.2 per cent in 2014-15.

Residential construction is expected to climb 7 per cent in 2013-14 followed by a further 7 per cent in 2014-15. NSW will grow much faster than the rest of the nation, and Victoria much more slowly after recent strong growth.

Not all of the construction workers displaced from mining projects would find work in building construction because the skills were different. But building construction was much more labour intensive.

“I doesn't take as many people to bring a mine to market as it does a shopping centre,” he said.

“Generally speaking you don't find too many people who want pretty railway lines, but people do want pretty showrooms, and pretty homes.”

In today's Sydney Morning Herald and Age


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Mining. The invesment boom has peaked, it's probably downhill

Today's evocative graph from the Bureau of Resources and Energy Economics:

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Budget 2013. Bad for shape-shfting multinationals, smokers....

And so many others as it spreads the pain around

Treasurer Wayne Swan has reached out to his colleagues in Russia and the United Kingdom as part of global assault on multinational profit shifting that will form a corner stone of the May 14 budget.

The budget will stop overseas headquartered firms from loading up their Australian arms with debt which used to generate profits that are taxed elsewhere.

When Australian borrowing climbs above 60 per cent of assets the firms will no longer be able to deduct interest expenses from their Australian income. The present limit is 75 per cent.

Mr Swan has written to Russia’s finance minister Anton Siluanov and to Britain’s chancellor of the exchequer George Osborne asking for support for coordinated action against profit shifting at the next G20 finance ministers meeting in July. Russia will chair the meeting. The specific measure included in the budget will raise $2 billion over four years.

Parliamentary Budget Office calculations obtained exclusively by Fairfax show mining tax revenue sliding well below the budget target. Income from the minerals resource rent tax is set to be around $1 billion per year less than expected in October. When more recent iron ore prices are fed into the model the tax will raise only $800 million this financial year instead of the expected $2 billion. In 2016-17 it will raise $1.8 billion instead of 2.8 billion.

The Office modelled a Greens proposal to lift the rate of the MRRT from 22.5 per cent to 40 per cent. It found it would have raised an extra $2.5 billion this financial year and an extra $4.8 billion per year by 2016-17. Other proposals include extending the tax to minerals other than coal and iron ore and limiting the so-called starting-base for the cost of projects. The combined savings amount to $3.9 billion this financial year and $6.5 billion per year by 2016-17.

Up for further consideration is a 25 per cent hike in tobacco excise that would raise an extra $5 billion over four years...

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The increase was considered but rejected in the leadup to the October minibudget. It would push up the price of cigarettes to more than $20 per packet. The proposal would implement a long-standing recommendation of the National Preventative Health Taskforce.

The Foundation for Alcohol Research and Education has revived a proposal for a flat tax on alcohol, one that would remove the low-tax and tax-free status of many types of wine. Recommended by the Henry Tax Review but ruled out by the government at the time, the proposal is backed up by a new cost-benefit analysis that finds it would make 85 per cent of taxpayers better off, hurting only the remaining 15 per cent. It would net the budget $1.5 billion per year.

As Cabinet meets to sign off on further budget measures Monday the Australian Industry group has counselled it not to cut too hard merely in order to bring the budget close to surplus.

Almost half of the 330 manufacturing, services and construction firms surveyed by the group rate returning the budget to balance as the least important of five priorities for the government.

The most important is cutting the company tax rate followed by boosting infrastructure spending and government support for research and development and training.

“It shows that business believes that in this current economic environment balancing the budget is not the main game," said Ai Group chief executive, Innes Willox.

"While businesses appreciate the need for budget discipline, in this slowing economy the majority of businesses rank objectives that will help rebuild competitiveness more highly than bringing the budget back into balance,” he said.

In today's Sydney Morning Herald and Age





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Why it'll be a near $10 billion deficit, with lots of small cuts

Not as dramatic as you've be led to believe

A mere ten days away, Wayne Swan’s sixth budget is nowhere near complete.

Last minute decisions and rapid responses to deteriorating conditions have become a hallmark of what he and his department have put themselves through each May.

Two weeks ago Europe’s carbon price collapsed, robbing the budget of $5 billion per year after Australia links to the European carbon price in 2015.

While not quite working around the clock (as did happen during the global financial crisis) staff in the Treasury building are working until midnight and sometimes beyond in a last-minute scramble to find money and politically acceptable savings, arriving back hours later wrung out.

Until January Jim Chalmers was Wayne Swan’s chief of staff. He says while no six consecutive Australian budgets have been framed in more challenging circumstances, this one is especially difficult.

“It’s the dramatically lower expected tax take,” he says. “If this one makes the necessary room for the schools plan and disability care despite falling company revenues it will be more difficult to land than the others but will arguably have bigger socio-economic dividends.”

His bugbear is forecasting. “It’s like throwing darts at a moving dartboard in a stiff wind,” he says.

The Treasury is being blamed for the revenue forecast spectacularly wrong. As recently as October it was forecasting revenue down only $2 billion on what it expected last May. It is now likely to be down an extra $12 billion, an extraordinary deterioration for an economy not actually in an economic downturn.

The events since October couldn’t have been foreseen and weren’t, despite of queue of critics lining up to say they always thought the revenue forecasts were fanciful.

“The critics were right for all the wrong reasons,” says former Treasury official Stephen Koukoulas, who also briefly worked as an economic advisor to prime minister Gillard.

“Well good on them. They said the budget wouldn’t get back into surplus this financial year and it won’t. They deserve to go to the top of the class for their forecasting ability. Except that their reasons were wrong. They thought the economy would be a lot weaker than the Treasury thought. It isn’t. Treasury got economic growth pretty much right"...

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What Treasury didn’t get right, what no mainstream forecaster foresaw, was that the Australian dollar would stay high as the prices for Australian exports fell.

“It hasn’t happened before. The terms of trade and the dollar typically move together. If you had been within Treasury arguing that the terms of trade were going to fall 13 odd per cent but that the dollar was going to remain high at about 103 US cents no-one would have believed you. You would have been laughed out of the room. It made no sense.”

The high dollar removed the cushion Australia had previously enjoyed whenever export prices fell. The full force of the collapse in late 2012 flowed straight through into Australian dollar income. Company profits shrank. Budget revenue slipped behind target.

That the high dollar is an vote of confidence by international money markets is cold comfort.

So too is the continuing boom in mining investment notwithstanding some high-profile cancellations.

The more that resource companies spend building new plants the more they more they cut their taxable income. That their taxable income is already being hit by an unprecedented combination of lower prices and a high dollar makes the hit to Wayne Swan’s budget all the more painful.

A weaker outlook for resource prices would normally be expected to curb mining investment, but the big projects already underway can’t easily be stopped. In time the canceled projects will benefit immediate tax revenue, just as the completed projects will boost long term revenue. But that’s in the future. Right now Swan’s budget is wearing the pain of an investment boom without reaping the benefit.

And the mining tax itself has raised nothing like what was expected, in part because the government didn’t fully understand what it had signed up to when it sat down around the Cabinet table with the chiefs of BHP Billiton, Rio Tinto and Xstrata. A second tax measure, introduced at the same time, is doing better. The government extended the existing offshore petroleum tax to the North West Shelf and to onshore petroleum. It’s doing so well that the Coalition plans to keep it should it win office, while axing its better-known cousin.

The financial task facing the government isn’t as big as it would have you believe.

It has promised not to make up the $12 billion the budget has fallen short, suggesting it’ll forecast a deficit for this financial year and for the next of around $10 billion to $12 billion. Compared to previous years it’ll be a good outcome. The deficit for 2011-12 was $43.7 billion.

To get there all it has to do is to pay for its new measures with cuts or extra taxes. The big new measures are the National Disability Insurance Scheme and the Gonksi education reforms to the states. The 0.5 per cent extension to the Medicare levy announced this week gets it much of the way.

“It isn’t financially difficult, it’s politically difficult,” says koukoulas. “They only need a few billion, but finding that without annoying people - in an election year - will be awfully hard.”

“I have seen the Treasurer and Finance Minister put up good ideas and have minister after minister knock them down. The process is exhausting. What starts out as a big measure ends up small.”

The cuts to superannuation tax breaks announced early ahead of the budget are a case in point. After considering measures that would have raised it between between $500 million and $1 billion per year, the government settled on a package that made $900 million over four years. Tellingly it received few complaints from the superannuation industry.

“They ended up with a few crumbs off the table,” Koukoulas says. “If they had gone in hard they could have easily got another billion or two and hurt very few people. We would have forgotten about it by now and they would have got a big chunk of cash.”

Koukoulas thinks the government’s reluctance to offend means the big budget decisions are already known. What’s left will be a multitude of small measures, each offending someone, but most of them not too much.

Reports on Friday suggested the government was unlikely to go after the massive $3 billion paid to the mining industry in diesel fuel rebates. The rumours themselves were enough to spark a advertising campaign hammering the message that taking money from mining is “a really dumb idea”.

It’ll go after easier targets, some of whom fear even worse under the Coalition. The public service will get another so-called “efficiency dividend”.

What it won’t be able to do is to lie. Even a minor fudge would be found out. On Monday August 12 the Governor General will issue writs for the election. Ten days later the heads of treasury and finance have to release what’s known as PEFO - the pre-election economic & fiscal outlook. A creation of the former treasurer Peter Costello as part of the Charter of Budget Honesty PEFO has to represent their own views, free from the dictates of political masters. With a change of government likely they will have every reason to call it exactly as they see it. Fiddles will be exposed, which is why there almost certainly won’t be any.

The heads of departments might even go further, offering their own views as to whether finances are sustainable beyond the standard four years of “forward estimates” included in the budget. Such an assessment would be appropriate given that many of the budget measures will have a life of well beyond four years, including the National Disability Insurance Scheme.

And if the heads don’t do it, the Parliamentary Budget Officer will. The new post, set up as part of the agreement with the independents gives former finance department deputy secretary Phil Bowen the right to report on whatever he chooses. Within weeks of the budget he will deliver his assessment of whether it is in sustainable balance, and for good measure he will look back ten years to examine whether previous budgets were.

Calculations released by the Australia Institute on Saturday show the six successive years of personal income tax cuts kicked off by the Howard government in 2003 are costing revenue $38.9 billion per year. The cost over and above the price of merely indexing the tax scales so people weren’t pushed into higher brackets is $25 billion per year.

Swan has a week and a bit to get the pieces to fit. The document needn’t be printed until Sunday. The final piece of the forecasting puzzle - the exchange rate assumption - won’t be settled until Thursday or Friday. He will rise to his feet on Tuesday.

In today's Sydney Morning Herald


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