Saturday Forum: Australia is not a two-speed economy

Everyone knows that Australia is a two-speed economy. In top gear is Western Australia along with Queensland and the Northern Territory.

On the slow setting is the rest of the country (apart from the high-flying ACT, which is a special case).

But what if everyone is wrong?

That’s the suspicion of the man whose view probably matters more than anyone else’s. You have probably never heard of him.

Glenn Stevens is a 49-year old amateur pilot from McMansion-infested suburb of Sylvania Waters by the Georges River in southern Sydney. Appearing before a parliamentary committee this week he took time out to stress that his own house was more typically Australian - “a piece of spec rubbish built in the1970s”. He’s also the Governor of the Reserve Bank...

Appointed in September after a decade of sitting alongside Governor Ian Macfarlane in parliamentary hearings, first as his assistant and then as his deputy, on Wednesday Stevens got the microphone to himself.

He said when people look at earning and spending in the mining-fuelled Western Australian economy and compare it to earning and spending everywhere else the differences appear stark. But the differences in production and employment were nowhere near as great. That’s because money earned and spent in the west is making its way east.

“Are there spillovers? Absolutely. They are through higher incomes for shareholders and employees that feeds into demand and spreads around the country. Some of that higher income of course is owned by foreign investors... but a good deal of it stays at home for shareholders and workers here, and governments get some as well,” he said.

Governor Stevens had prepared for the parliamentary committee a graph going back to the 1970s charting the economic performance of whatever was Australia’s best performing state at the time along with whatever was doing the worst. Even a quick look at it shows that the gap between Australia’s states has been narrowing over time, not widening.




On jobs, where NSW is commonly believed to be Australia’s basket-case and Western Australia our nirvana, the gap has almost closed.

Statistics compiled for the Governor show that during the year to January employment grew by 2.1 per cent in NSW and 2.4 per cent in Victoria. In the supposed boom state of Western Australia it grew by a broadly similar 2.2 per cent.

(Only in Queensland was jobs growth still racing ahead, at 5.4 per cent. The ACT figure - not in the information compiled by the Bank - is 4 per cent.)

At times in his first solo appearance before the parliamentary committee on Wednesday the Governor appeared to show frustration with its insistence that there were two quite different Australias.

Told by the Committee Chair, Liberal Bruce Baird that “some economists believe that Western Australia’s economy is growing faster than China’s while New South Wales is in recession” he replied with a tutorial in statistics.

He said it was true that New South Wales was growing below average at the moment. “That is not at all surprising. In the current circumstances it will not be Western Australia or Queensland that grow below average; they will be above average, helping to pull the average up.”

This did not mean that NSW and the rest of southeastern Australia were not sharing in the benefits of Australia’s minerals-fuelled prosperity. The connectedness of Australia meant that the rising tide in the west and north was lifting all of Australia’s boats. NSW, the ACT, Victoria, South Australia and Tasmania were better off with the minerals boom than without it.

The NSW rate of unemployment, admittedly the highest in the country, was just 5 per cent - a rate once thought unattainably low. And employment was growing in that so-called basket state, which made it unlikely that it was in recession.

Australia was enjoying a boom in minerals prices not seen in most Australian’s lifetimes. It was completely unsurprising that it should benefit Australia’s mining states first. “The terms of trade for Australia are at the highest level since the early 1950s. That is not an event that comes along very often. That does have a very big effect on Western Australia,” the Governor said. But the benefits were fanning out.

He might have added that the ACT is particularly big recipient of recycled mining income. The boom in mining in Australia’s west and north is feeding through into record and rising company profits that are pushing the Commonwealth’s tax take up to new highs. Much of this money gets spent on extra government programs (and many more of them will be set up in this election year) and many of them get administered in the ACT.

Right now the boom in the ACT appears to be putting especial pressure on ACT rents, but Governor Stevens was keen to point out that here as well the differences between Australias states are no where near as wide as is believed. After soaring more quickly than the rest of Australia, house prices in Perth are easing off, and the rental market is in bad shape nationwide.

“Rental vacancy rates are low right around the country; no particular region stands out all that much. It is quite common. But let us think back to what the fundamental economics are here,” Stevens said.

“The fact is that because of the much higher price level for housing around the country the rental yield, which is the actual running yield as a return to the investor for holding that investment, is quite low. In the period when the investor was getting a return from price appreciation he was getting some of the return that way. But it is hardly sustainable for a major asset market to continually give you most of your return through capital appreciation.”

The Governor said that rental yields would have to rise.

“That could happen by the rents going up; it could happen by the prices coming down… One way or another that higher rental yield will need to be re-established and that will alleviate this excess demand situation.”

Governor Stevens is an optimist. He believes that, left to themselves most financial markets sort themselves out even if there are “a few bumps on the road” along the way. He lamented on Wednesday that to the media “everything is a crisis”. But not to him.

Even big promises of extra government spending in the coming election won’t worry him much. He told the committee that most of this year’s election promises would “sound like a lot of money over five years, but in any one year - and in particular in the year or two ahead, which is when we are trying to have our influence - the effects may not be as big”.

As well: “We do not know which of these proposals will actually be implemented. We cannot know that this side of polling day. All I would say is that I think it is generally accepted on both sides that we need to keep the public finances in good, long-run shape. By and large, we have done that for quite a long time now, stretching back many years. It is a truism to say that clearly that needs to continue, but I think everybody knows that, don’t they?”

Mid-last year Stevens was invited to Melbourne to speak on “risk and the macro economy”. He took off in a light plane from Sydney’s Bankstown Airport and flew himself, taking an instructor along for instrument training.

As a recreational pilot he has seen more of Australia than most, and he knows how inconnected it is. The new Governor gaves the impression this week that he was not too concerned by risk, and he knews how to handle it.

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The Treasurer takes on the People for Ethical Treatment of Animals: "I am not trying to shut down free speech"

Treasurer Peter Costello is to amend the law to make it easier to take legal action against an animal rights group calling for a boycott of stores selling Australian wool.

People for Ethical Treatment of Animals (PETA) is currently being sued by Australian Wool Innovation Ltd under sections 45D and 45E of the Trade Practices Act on the ground that it has organized an illegal secondary boycott.

The amendment announced by the Treasurer yesterday will enable the Australian Competition and Consumer Commission to bring its own action against PETA and seek damages...

Addressing the Pastoralists And Graziers Association of Western Australia Mr Costello identified PETA which he said had been joined by the tennis legend Martina Navratilova and the popstar “Pink” as the main target of the leglislation.

"We're going to amend the law so the ACCC can bring legal action on behalf of all Australian farmers, on behalf of those who are tying to boycott their wool, and boycott their wool on these spurious grounds," he said.

Navratilova and Pink have both campaigned against mulesing – the removal of skin from the rear of Marino sheep to prevent flystrike – and called for a consumer boycott of American and British stores that sell Australian wool. After a visit to Australia early this year Pink withdrew her support from the campaign.

Mr Costello said that he was not trying to shut down free speech. “Martina Navratilova and Pink will still be able to attack Australian wool as they do, ignorantly – it is just that people who organise boycotts that cost farmers money, won’t be able to continue with their boycotts,” he said.

The leader of the Greens Bob Brown warned the proposed change could turn the ACCC into a new McCarthy Committee and pledged to oppose it in the Senate.

“The Treasurer is proposing to give the ACCC the power to intervene on behalf of corporate Australia in disputes with community groups. In the past, community pressure has highlighted the death of dolphins in the tuna industry and the destruction of old growth logging. Under the Treasurer's plan it would be the deep pockets of the taxpayer and the imprimatur of the ACCC that was deployed against community groups rather than the current situation in which companies have to fund their own actions,” he said.

Section 45D makes it illegal for two people to act together to hinder or prevent a third person from supplying goods or services to, or acquiring goods or services from, a fourth person. In theory it could apply to health-related boycotts such as those dealing with the sale of cigarettes or the promotion of breast milk substitutes.

But legal experts contacted by the Canberra Times said to date the Australian courts had interpreted the section narrowly. Political campaigns had not been held to prevent or hinder trade. On its face, the Treasurer’s proposed amendment did not change that.

“The amendment he has come up with has nothing to do with whether or not conduct is illegal. For him to suggest that he is now arming the ACCC with the ability to take action against people who organize consumer boycotts, he hasn’t made any change to the law of section 45D at all,” said one practitioner who asked not be named.

The case Federal Court mounted by Australian Wool Innovation Ltd and 102 individual woolgrowers against PETA is set down for trial in the Federal Court at the end of this year.

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Want more mathematics and science teachers? Try something else, anything else.

A key part of Kevin Rudd’s promised “education revolution” has come under attack from a former top Labor advisor.

The Labor leader last month promised to spend $111 million cutting the Higher Education Contribution charge for university students studying maths and science as a way of attacking the shortage of qualified maths and science schoolteachers.

Under Mr Rudd’s plan the HECS charge facing maths and science students would fall from $7,118 to $3,998 per year. He has also promised to have the government meet half of the HECS repayments of maths and science graduates for up to 5 years if they take up employment in an occupation such as teaching.

Economist Bruce Chapman of the Research School of Social Sciences at the ANU designed the HECS scheme in 1988 while working as an advisor to the Labor education minister John Dawkins. He later worked as an advisor to the Labor Prime Minister Paul Keating.

In a review of the Kevin Rudd proposal to be published today Professor Chapman says that despite Labor’s claims, cutting in the HECS charge is “unlikely to have discernible effects on enrolments in the short term”...

In 1997 the incoming Howard government adjusted all of the HECS charges, more than doubled the charge for students studying law. Professor Chapman says there was hardly any change in enrolment numbers as a result.

“This does not auger well for the likelihood of [HECS cuts] being an effective instrument in the short term to increase the supply of maths and science education students”, his paper says.

“A significant amount of research over the years has consistently found that changes to HECS, even large changes to HECS, have only tiny effects on the private financial return to having a degree.”

Professor Chapman also points out that in Australia the composition of enrolments at universities depends not on student demand but on the number of places offered. “The composition of enrolments is essentially agreed between the government and individual universities, and there is not a lot of change between years.”

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Glenn Stevens tells it like it is.

But is that what we expect from Reserve Bank Governors?

Dr Alan Greenspan, the former head of the US Fed once warned an audience: "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said." Not so our new bloke.

Did you know, as John Garnaut has reported, he flies a plane?

Below is my report of what he said in tomorrow's Canberra Times, and my analysis, which says he is the real deal...

The head of the Reserve Bank has put Australia’s politicians on notice – the next move in Australian interest rates is likely to be up, and he won’t be afraid to do it in an election year.

Addressing his first meeting of the House of Representatives economics committee the new Governor Glenn Stephens said he wanted to address the “crazy” notion that an “almost unspoken tradition” prevented the bank from pushing up rates in the lead up to an election.

“I have seen a number of references to my predecessor supposedly having said that. I don’t recall that he did say that, what I can recall is that he said that we would not be keen to change them during the month of the election campaign. He also said if it had to be done it would be"...

“I do not accept and I do not think we ever could accept the idea that in an election year, which is one year out of three, we can not change interest rates. I don’t think any central bank could accept the notion that a rate change is off limits one year out of three, that would be crazy,” Dr Stevens said.

Asked whether he we be prepared to push up rates this August after the release of the much anticipated June quarter inflation figures he replied, “if in August if it needs to be done it will be done”. The election is expected in October.

The Governor said he expected Australia’s headline rate of inflation to fall in the months ahead, but the so-called underlying rate, watched by the bank, would remain near the top of its target zone.

“It will probably fall noticeably below 2 per cent on an annual basis as falling petrol and banana prices have their effect. After that, it will rise again as those temporary factors fade and we currently expect that CPI inflation will be around 2¾ per cent by early 2008. That is it appears likely to be lower than recent outcomes, but closer to the top than the bottom of the target range.”

Asked whether that meant that rates were more likely to rise rather than fall, the Governor agreed. “At the moment then the likelihood that some surprising set of events that takes us above the target is higher than the likelihood that you would get a set of events that takes us below. So it flows more or less axiomatically that a rise is more likely than a fall, so, if that’s what you’re asking, then yes, that’s the answer,” Dr Stevens said.

Also in Perth for a Cabinet meeting the Prime Minister said that he was not concerned by the Governor’s remarks and that he was not among those who had been suggesting that rates would fall. “I simply observe that the inflation figure for the last quarter was a good figure for stability in interest rates and I myself have not encouraged the view that rates were likely to fall in the near future. That has not been encouraged by me or any of my colleagues,” Mr Howard said.

The Governor rejected the contention that Australia’s present level of interest rates was too high and creating a housing crisis. He said the problems in housing market were to do with house prices. “The crises that we keep reading about are basically the problems of people that would like to be in the housing market but are not yet there. The real problem for those people isn’t that the rate of interest is high, the problem is that house values are so high,” he said.

On rental housing, the Governor restated his view that rents had to climb in order to get into alignment with house prices.

“The fact is that because of the much higher price for housing around the country the return to the investor for holding that investment is quite low. In the period when the investor was getting a return from price appreciation a low rental yield didn’t seem to matter so much. But it is hardly sustainable, I think, for a major asset market to continually give you most of your return through capital appreciation.”

“Ultimately the running yield, the rental yield has to be higher than it has been, and that’s what’s starting to happen,” Dr Stevens said.

Analysis:

The Reserve Bank Governor says he would be prepared to push up interest rates in an election year if he had to, but would he really?

An interest rate hike – or even a cut – in the lead up to an election is unprecedented.

One of Glenn Stevens forebears in the top job Bernie Fraser waited until just after the election that brought John Howard to power before beginning what was to be a series of six dramatic interest rate cuts, earning the enduring displeasure of the outgoing Prime Minister Paul Keating who could have done with a cut - or a hint of one - before the election.

It was important for Fraser to demonstrate that the Reserve Bank was not, as Keating was said to have claimed, “in his pocket”.

Glenn Stevens has no need to prove anything. After a decade of formal independence and a record of successful management that is envied worldwide, the Reserve Bank now has more credibility than does the Treasurer himself. If Stevens believe that rates need to be moved, he will move them and let the chips fall where they may. People who know him say that’s his style.

In answers to the House of Representatives economics committee yesterday Glenn Stevens didn’t much care who he offended. Renters would have to get used to higher rents, the real problem for home buyers was not high interest rates but high prices (pushed high, he might have added, with the help of the government’s tax policies), the drought wasn’t going to much damage to the economy or push up inflation, and a return to an union-dominated award-based wage-setting system would make his job more difficult.

Central bankers were once said to speak in ways that were hard to understand. Not now, not this one.

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Tuesday Column: What exactly is emissions trading?

Twenty years ago as share prices collapsed all around him during the 1987 stock market crash television reporter Charles Wooley, then with the Sunday program performed a social experiment.

He introduced one of Australia’s brightest futures traders, sat her down for an interview, and then asked her to explain how the futures market worked. She fell about laughing.

His point was that a simple explanation wasn’t possible, even though we deserved one...

R.S. Gilbert of Turner has written asking for an explanation in “simple, layman’s terms” of how an emissions trading scheme would work and why it would help. He says that unless we can understand it we are unlikely to vote for it.

And we will be asked to vote for it later this year, at least by Labor, but quite possibly by the government itself. The Prime Minister has set up a taskforce to advise on the best model and report to him by May 31. It is accepting submissions for another fortnight.

One of the things that is hard to understand about emissions trading is how the buying and selling of licences to pollute could possibly cut pollution. Surely if we want to cut pollution we should ban it rather than licence it.

But carbon emissions are different from some other forms of pollution. They are not all bad. At the personal level each time I exhale I emit carbon dioxide and I quite keen to keep doing so.

Carbon emissions are something we need to limit rather than ban altogether. Like firearms. Guns can kill human beings but in certain circumstances they are useful. So we licence them, banning their use except by certain people in certain circumstances.

Licences to emit carbon work a little differently. What is important for carbon is not who can emit or for what purpose, but the total amount of emissions. Carbon emission licences would be a bit like some of the licences used in some places to prevent over-fishing. There the government decides each year on how many fish it wants caught (or in this case how many tonnes of carbon it wants emitted) and then issues licences for the catching of that many fish (or the emission of that many tonnes of carbon) and for no more.

The real wizardry of an emissions trading system begins after the permits have been issued.

(Theorists will tell you that it doesn’t actually matter much how the permits are issued. It could be by an auction at which the firms that need the permits can bid, each existing emitter could be given an allocation, or in a particularly ingenious scheme proposed by the ANU’s Dr Warwick McKibbin existing emitters could be given about half of what they need and the rest could be distributed like share certificates to each Australian citizen. Would be polluters would have to buy them from us.)

What is important is that the total number of permits that are issued be limited to allow for less pollution than is being done at the moment.

To simplify, let’s suppose that the only emitters of carbon in Australia are power stations. Lets say that this year they have been emitting 100 units.

If an emissions licensing and trading scheme were introduced next year the government might only hand out enough licences to allow the emission of 90 units.

Obviously each power station could comply if it cut its emissions by 10 per cent. It would be the same as if the government had legislated for a station-by-station 10 per cent cut.

But it would be a bad way of cutting total emissions by 10 per cent. Some power stations would find it difficult if not impossible to meet the10 per cent cut. They would be crippled. Others might find it easy. At little cost they might even be able to cut by 20 per cent.

Without trading in permits the stations that found it hard to cut would suffer, while the stations that could easily cut by more than required would be given no reason to do so.

Trading removes those problems. In the language of the economists, whatever the target for cutting emissions is, trading allows industry to meet it in the least damaging way possible.

Here’s how. A firm that can easily cut its emissions (perhaps because its coal-fired generator is nearing the end of its life and it can easily be replaced with a wind one) will find it has permits to spare. It might have been issued nine but only need seven, having two to sell.

Another firm, that can’t cut emissions without incurring a tremendous cost will find it cheaper to buy spare permits from the firm that no longer needs them. Its cost of producing power will go up but by nowhere near as much as it would have had it had no choice but to meet a target. Over time that firm will find that business case for switching to cleaner technology increasingly persuasive. But not all at once.

The firm that can easily cut emissions will have discovered a new way of making money, and the cleaner it makes its business the more money it will make. As a former Liberal Party leader used to say, it will become “incentivated”.

That’s the theory. It was put to the test in 1990 in the United States when President George Bush senior signed into law a new act designed to combat acid rain, caused by the emission of sulphur.

In a sharp break with the approach of the past the Bush administration issued annual permits to allow the continued emission of sulphur, but not quite as much as before. Then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be traded.

Each year the administration handed out fewer annual permits. Over ten years the price of a permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back easily found themselves rich. Those that couldn’t found business increasingly expensive — but not so expensive as to force them out of business straight away.

Over that decade sulphur emissions halved throughout the US. In some parts of the country acid rain declined 25 per cent. The annual saving in healthcare costs was said to top $US20 billion.

That’s the promise held out the promoters of emissions trading schemes for carbon. To work best the schemes would have to be national, not state based, or supranational as is the two-year old trial in Europe. Some promoters would like an world-wide trading scheme as proposed in the Kyoto Protocol, but fluctuating exchange rates and financial flows as well as disparate national objectives might make that difficult.

All sorts of variations are possible. But at its core emissions trading schemes allows businesses to use the tools that they are familiar with to cut emissions rather than having someone else tell them what to do.

That’s why the Prime Minister’s taskforce is likely to recommend such a scheme at the end of May.

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When Ray Martin and Dick Smith come out against you, you've lost the middle ground

I spoke to Dick Smith last night.

On the Nine network yesterday both he and Ray Martin came out publicly against the Australian government's treatment of David Hicks.

I am reminded of a story about Edward R Murrow.

Apparently when one of McCarthy's friends heard that Murrow was doing to come out against McCarthy on CBS he explained that it meant the game was up. McCarthy would lose.

Why, asked McCarthy, were Murrow and CBS that powerful?

No, came the reply, but if Murrow and the CBS decided to come out against you, it meant that you had already lost the middle-ground.

Below is my report of my conversation with Dick Smith...

The millionaire businessman Dick Smith has bought in to the dispute over the treatment of David Hicks telling the Canberra Times that he has spent $60,000 of his own money assisting with the family’s legal expenses.

He said that it was money the Salvation Army and similar organisations were being denied. “I am going to donate a certain amount of money to social causes each year and, unfortunately if I am forced to donate it to try and get an Australian a fair trial that means it is less money for other important causes.”

Mr Smith said he approached the family around two years ago after he heard that even US military prosecutors were privately unhappy with the process believing that it was not fair. He noted that no US or UK citizen was be subjected to a military commission trial. The process was contrary to US law and the UK had successfully demanded the return of its detainees.

“I am not a supporter of David Hicks, never have been” Mr Smith said last night. “I am a supporter of an Australian citizen getting a fair trial"...

The philanthropist businessman said that he had spoken personally to the Prime Minister in December warning of political danger if the proposed US military trial went ahead.

“If they do have a trial and he is released without a conviction that will be a disaster for the government, but if they have a trial and he is convicted when so many reliable people are saying that the system is flawed that will be worse, a catastrophe. He will be turned into a martyr, which he should never be.”

Mr Smith said he had also spoken to the new US ambassador Robert McCallum and told him that he believed a trail could severely damage US-Australian relations.

“I supported Australia going into Iraq and I support the US alliance. I believe that John Howard has been badly let down in this one instance. If the US goes ahead with this flawed process it will damage the government tremendously, in the lead-up to an election.”

“It is all so unnecessary for one person who can’t possibly be a threat to us if he comes back because he is famous and they can put him on a control order,” he said.

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Driving blind. Our government turns off its lights.

Today's Canberra Times editorial:

If you were getting into a taxi at night and your driver donned dark glasses and dimmed the headlights before taking off, you would have every right to feel concerned.

You would be concerned as well about a government that attempted to shut its eyes - and ears - as it managed the Australian economy.

Senate estimates hearings last week revealed that the Government's Employment Advocate has stopped collecting statistics on what is in them...

Last year he embarrassed the Government by revealing that all of the AWAs registered with it had removed at least one award condition.

63 per cent had cut penalty rates, 52 per cent had removed shift-work loadings. This year the Employment Advocate Peter McIlwain told the Senate employment committee that he had stopped collecting information on award conditions that were lost in June last year.

McIlwain said neither the former workplace relations minister, Kevin Andrews, nor his replacement, Joe Hockey, asked for this to be done. Labor's Senator Penny Wong asked how then the minister could claim, as he did on ABC television last week, that the new agreements were providing bucket-loads of flexibility. The minister's representative, Senator Eric Abetz, replied that Joe Hockey relied on information from his backbench colleagues and his own consultations.

It is not only in the area of AWAs that the Government has shut off its access to information. It introduced and defended the WorkChoices changes without the benefit of an economy-wide analysis prepared by either the Treasury or the Department of Workplace Services. Similarly, it introduced its wide-ranging media reforms last year without an economy-wide analysis prepared by either Treasury or the Department of Communications.

On climate change, the hottest political issue of the year, Treasury officials conceded before estimates hearings last week that they hadn't prepared any detailed economic analysis because the effect was not yet sufficiently large.

The Treasury official in charge of macroeconomic policy, David Parker, told the Senate economic committee that climate change was ``an issue of potential relevance in the future, but hitherto it hasn't been something which has been a large feature of macroeconomic development''.

Shadow Treasurer Wayne Swan described the statement as ``akin to John Howard saying we do not need security assessments because we have not had a terrorist attack on Australian soil yet''.

Certainly it contrasts with the attitude in Britain where the Government was hungry enough for information to ask the second permanent secretary of its Treasury, Sir Nicholas Stern, to examine climate change in depth.

On water, arguably the other biggest political issue facing Australia this year, the Government hardly seems to have involved its economic or financial advisers at all. Last week's hearings were told that until days before the Prime Minister's announcement of his $10 billion plan, the Finance Department did not know about it. It was then given a single piece of paper. The head of the Department's Infrastructure Division, Lembit Suur, told the committee that aside from the announcement of itself, that is the only documentation we have received in relation to this plan.

Finance Minister Nick Minchin defended keeping the plan from the cabinet, the Department of Finance and the Department of the Treasury as it was drawn up, saying the cost of the 10-year program was just ``one billion a year, which is less than half a per cent of Commonwealth government expenditure, let's keep it in perspective''.

Whether the amount of money involved is big or not, and some would say it is very big, the departments of Treasury and Finance are in the best position to advise on whether it is well spent.

Cynics might suggest that the reason the Government has not asked its economic and financial advisers to examine the impact of WorkChoices, media reform, climate change and its water package is that it fears what they might have to say.

If so, that is the wrong way to govern a country.

The policy divisions of the Australian public service are expensive. They contain within them some of the best brains in the country. The Australian people deserve to have important decisions made using the benefit of their expertise.

All this is surprising behaviour for a Government that has been in office for more than a decade. Traditionally governments are at their most suspicious of their public service advisers when they arrive in office and become more comfortable with them over time.

Governments are elected to govern. They have every right to reject every single piece of advice they are offered, especially when they are given a mandate to implement an election policy. But in the political system that has served Australia well they are also expected to seek and listen to advice from the advisers we pay good money for them to employ.

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Saturday Forum: Water billions held hostage

With characteristic immodesty this week the Minister for Water Malcolm Turnbull declared it “the most important statement about the future of water any government has ever made in our country’s history”.

Yet while there has been broad support for the idea of the $10 billion Australia Day water package put together by the Prime Minister and Malcolm Turnbull, there is now growing disquiet among economists and water industry professionals about what is actually in it.

Few experts doubt that with sole control of the Murray Darling basin river system the Commonwealth government will be in a much better position to fix the problems than have been the four state and one territory governments through whose land it flows, especially given their record.

But to state plainly what the experts confide in more diplomatic terms, they doubt whether this particular Coalition Commonwealth government is the best one to do it...

Missing from the Prime Minister’s 10-point plan is the single most effective means of fixing Australia’s water problems. The government has been told about it often enough.

In August last year the Productivity Commission reported that allowing farmers to get out of water-guzzling crops and sell their entitlements to city water authorities was both financially and environmentally better than building new infrastructure such as desalination or recycling plants.

For every city other than Sydney it is technically easy to divert water from irrigators, for whom it has a low value, to city dwellers who are prepared to pay a lot for it.

In November last year in a report commissioned for the Department of Prime Minister and Cabinet Marsden Jacob Associates found that “Canberra, Sydney and Melbourne are all close to the supply grid provided by the Murray-Darling-Snowy systems which opens major opportunities for trade. Political government often finds this fact uncomfortable”.

Even in Sydney there was the opportunity for significant but limited rural-city water trade.

Rural water entitlements can be bought for 60 cents to $1.50 a kilolitre. By contrast water from a new recycling plant would cost $1.68 to $2.61 a kilolitre, and from a desalination plant $1.15 to $3.00 a kilolitre. As the report to the Prime Minister’s Department sees it the massive expenditure about to be wrought by a number of cities on engineering solutions to create more water is unnecessary. They can simply buy the water from farmers who can become richer by selling it than they could by farming.

Last Monday in a report commissioned by the Committee for the Economic Development of Australia a former ANU economist John Quiggin found the same thing. He pointed out that not only would trade make both city water authorities and irrigators financially better off, but it would also give irrigators an incentive to save water that at present is not worth saving.

“Consider the situation of an irrigation user who can implement measures to reduce losses of water through leakage or waste at a cost of $150 for each megalitre saved. With annual allocations of irrigation water commonly trading at around $100 a megalitre in non-drought years, here is currently little incentive to pursue such options. The result is that less cost-effective water saving options may be adopted in urban areas, where the price of water is around $1 a kilolitre ($1000 a megalitre),” Dr Quiggin said.

At the moment city lawns and trees are dying for lack of water than irrigators find cheap enough to waste. Trading would see us get pay less for our water than we otherwise would and farmers get more for it than they can irrigation-farming.

Why is an idea commended in two reports to the government and one to the Committee for Economic Development of Australia missing from “the most important statement about the future of water any government has ever made”?

Perhaps because one of the partners in that coalition government is the National Party.

Shortly after I arrived in Parliament House in October to begin covering economics for the Canberra Times I went to a press conference on water attended by both the (Liberal) parliamentary secretary for water Malcolm Turnbull and the (National) minister for agriculture Peter McGauran. Turnbull talked up the virtues of a scheme that would allow farmers who saved water through efficiencies to sell it to the government.

McGauran stressed that under no circumstances would farmers who wanted to get out of irrigation-intensive farming be able to do the same thing.

I emailed him later and asked why on earth shouldn’t farmers be able to sell water their entire water entitlements to whoever was prepared to pay the most.

He replied: "Governments have such deep pockets, they will inevitably win every auction and neighbors and other potential purchasers can’t compete. It is not a problem of willing sellers, it is a problem of willing buyers being swamped by the financial might of governments”.

The idea that farm water has to stay with farmers and not travel down a pipe into the city where it will be more valued has an impressive lineage. The rural patriarch Sir Henry Bolte who ran Victoria for 17 years as both a Liberal and Liberal-Country Party premier once famously declared that “not a drop of water will cross the divide to meet the needs of Melbourne''.

The result – huge infrastructure expenditure in Melbourne that was unnecessary - is about to be repeated in other cities including Canberra. A water recycling plant for Canberra is cheaper and more effective than a new dam, but it nowhere near as cheap as buying water from nearby farmers who are prepared to sell.

As a general rule the government opposes wasteful expenditure, but the Coalition’s water policy encourages it. Not only will desalination and recycling plants be built that are not necessary, but farmers will be encouraged to spend more to stay in irrigation when they would be better off getting out it.

John Quiggin says points out that if a rice farmer “spends substantial resources on new irrigation systems to reduce water use, the government will purchase the water saved as a result. On the other hand, if the farmer decides to grow dryland wheat instead of irrigated rice, policy precludes the purchase of the water saved.”

Denying farmers the right to sell water they save by abandoning irrigation doesn’t help farmers. But it might help the National Party. It’s veto over free trade in water is a demonstration of its remaining power, and the limits it is able impose on the power of true economic liberals such as Malcolm Turnbull. When Mr Turnbull and the National Party leader Mark Vaile met a delegation of farmers to discuss water this week it would have been in no doubt that Turnbull didn’t pull all the strings.

Denying farmers the right to give up their water for city use also appeals to the romantic ideas many of us have about the worth of farming. But as John Quiggin points out most of us don’t think that way about farmers who give up their land for city use.

“A useful way to think about this issue is to mentally substitute ‘land’ for ‘water’. Cities have always grown by converting farmland to residential use… few would support a total ban on the conversion of agricultural land to residential use, or a policy that required cities to accommodate all future population growth within their existing boundaries.”

Just as allowing cities to use what was once rural land hasn’t meant the end of farming in Australia, neither would allowing cities to use what was once rural water. Urban water use is small compared to irrigation. As the Prime Minister Howard noted in his Australia Day address irrigation soaks up roughly 70 per cent of all the water used in Australia. Quiggin calculates that even if 20 per cent of all the urban water demand in Australia was met by transfers from farmers, irrigation would contract by only 6 per cent.

In announcing his $10 billion Australia Day water plan the Prime Minister said it was detailed and costed. But officials from his Department of Finance revealed in Senate hearings this week that that what they were actually given to look at before the announcement amounted to a single sheet of paper. They had neither the detail nor the time to cost it.

Nor were they asked to the cost the alternative proposal recommended to the government by the Productivity Commission, and Marsden Jacob on behalf of the Prime Minister’s Department.

They might have found that the $10 billion Australia Day water plan is an expensive and wasteful way to fix Australia’s water problems (but no more expensive and wasteful than was necessary to placate the National Party).

In broad terms the Commonwealth is to spend $6 billion helping install water saving technology on farms that the farmers themselves haven’t thought it worthwhile to install given the low price they pay for water. It’ll get to keep half of the water saved, and will spend another $3 billion buying back over allocated water licences. The water it ends up with will be “managed to restore the health of the rivers and wetlands”. It won’t be made available to cities.

A government composed of economic liberals, instead of Nationals and Liberals, would allow the market to allocate water to the places that need it most.

We are about to waste billions on recycling plants and desalination plants that we probably don’t need because we don’t have one.

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Universities without politics would be...

Just like the ones we have here.

The head of Charles Sturt's Bathurst campus, Greg Walker, said yesterday political parties would not be allowed to pitch to students during O-Week because it was "inappropriate" for first-year students' introduction to the university with their parents.

Who would have thought it? Who would want it? Why on earth has it come to this?

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It's better to live on your knees than die on your feet...

Where's the power, where's the passion?

Get a load of this (complete) Peter Garrett transcript from Thursday.

It is an amazing document. No scriptwriter could have crafted it better.

I predict it will be whizzing around the internet very fast among the people who once admired the man who used to personify power and passion.

Could he really be just another polly?

It's "just enough to make you want to cry"...

PETER GARRETT MP and WAYNE SWAN MP, Federal Labor Shadow Minister for Climate Change, Environment and Heritage; and Federal Labor Shadow Treasurer

DOORSTOP INTERVIEW, PARLIAMENT HOUSE CANBERRA

GARRETT: The fact that the Treasury have not seen fit to consider detailed assessments of the impact of climate change on the Australian economy is yet another example of the Howard Government completely failing to understand the significance of climate change and the risks that it poses to Australia’s community and to our economy.

The Government has been on notice for a number of years that climate change is an important economic and environment issue.

The Government’s own Climate Change Risk and Vulnerability Report 2005 made a series of recommendations about climate change and stressed the need for further research. But it seems that the Treasurer simply ignored the recommendations from the Government’s report.

At the same time the Government has presided over a complete lack of action on climate change, no detailed plans on how to deal with reducing emissions and the prospects in the medium term of Australia’s greenhouse gas emissions ramping out of control.

Inaction on climate change and a failure by the Treasurer to even consider what climate change will do to our Australian economy is something of an order of seriousness that most Australians will be scratching their heads about.

Why won’t they get serious about climate change? Why won’t the Treasurer recognise that there are serious economic issues at stake here? And why is it that the Government simply sits on its hands and pretends that this is not a serious issue for us, whilst at the same time, the scientists and the community around us are telling us that we need to act resolutely on climate change now?

I make one final point. Inaction on climate change is a great threat to Australia’s future prosperity.

Labor is clear that we need to address climate change. We need to have a responsible long term plan. We need to reduce greenhouse gas emissions. We need to ratify the Kyoto Protocol. We need to set targets. We need to increase mandatory renewable energy targets and we need to say once and for all that we’re going to get serious about dealing with climate change, and yet here we have the Treasurer not even in the loop on one of the most important issues Australia faces.

SWAN: I just wanted to make a couple of points. The reason that Peter and I are here this morning is that climate change is a serious economic and environmental issue, but the Howard Government is so blinded by its ideology, so befuddled by its incompetence, it will not even consider the impact of climate change on the economy, and that’s the significance of what we heard this morning.

They’re not even modelling the impact of climate change when it comes to its impact on our future prosperity. Modern governments around the world are doing that. The British Government commissioned the Stern Report. Gordon Brown has put climate change to the centre of the agenda. Peter Costello has got it in the too hard basket. He has not mentioned climate change once in 11 Budget speeches – not once from Peter Costello in all of those Budget speeches.

If you ever wanted an example of how the Howard Government is out of touch, out of time and out of ideas, it’s climate change.

Journalist: Peter, you’re well known for your views on the US alliance. How do you feel about...

GARRETT: I’m astonished that the Treasurer hasn’t actually had his eye on the ball on climate change. Climate change poses one of the greatest risks to our future prosperity and to our environment and for the Treasurer not to have had detailed economic modelling done on the likely impacts of the economy, is an astonishing, astonishing revelation.

Climate change aside though, do you have concerns about a new US communications base out in...

GARRETT: I’m here to remind Australians that the Howard Government has taken its hands of the wheel on climate change. That’s what we’re talking about today.

SWAN: Absolutely and there will be plenty of other people to talk to you about that including the responsible Shadows, which is not Peter or I.

Peter, you’ve said your previous views on US bases on Australian soil...

GARRETT: Appropriate Shadows will respond to these questions. What we’re here today to say is that Mr Costello hasn’t seen and understood the importance of climate change and that’s clear from reports today. It’s also clear that the approach of the Government, and I noticed the comments of Mrs Halonen yesterday, the Finnish Leader, when she said you need to have the widest portfolio of energy sources to deal with climate change. This Government hasn’t even considered that.

I asked the Minister for the Environment a simple question in the House. The first question I asked him which he still hasn’t answered – when will he raise Australia’s mandatory renewable energy targets?

When it comes to climate change policy the Howard Government is simply asleep at the wheel and the fact that the Treasury is not even doing serious modelling on the impacts of climate change is proof positive of that.

Why don’t you tell us what you really think about this new US base?

GARRETT: I want to tell you what I think about climate change today. That’s what the issue is for me and that’s what the issue is for Labor and that’s what the issue is for Australians who care about this matter.

We recognise that climate change poses an enormous risk and an enormous threat to us – to our economy, to our environment and it’s up to the Government now, to explain why, it’s sat on its hands for so long and hasn’t taken this issue seriously.

You’ve sung songs before about you’re opposition to US bases on Australian soil. Have your views changed since then?

GARRETT: My views are clear and they’ve been clear since I’ve come into the Parliament.

I’m here as a member of the Labor Party to talk to Labor policy. We have a plan for dealing with climate change. We have laid out a framework for actually reducing greenhouse emissions, for building economies, for building jobs sustainably into the longer term.

That’s what the Government hasn’t got and that’s what I’m here to talk about.

END OF PRESS CONFERENCE

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The money shifts to Rudd

Want to bet on Labor winning the federal election?

You've left it too late.

My colleague Andrew Fraser reports in this morning's Canberra Times that for the first time the weight of money on Centrebet is predicting a Labor win:

One of the most trusted indicators of voting intention has shifted for the first time to predict that Kevin Rudd will lead Labor to victory at this year's election.

Centrebet, which prides itself on its accuracy ahead of much of the opinion polling, has installed Mr Rudd as the $1.80 favourite ahead of Prime Minister John Howard ($1.90) in the race for The Lodge. There has been something of a plunge, with Labor having been at $2.75 when Mr Rudd took over only 2 months ago, when the Coalition had been at $1.40.

Labor is a far shorter favourite to retain power at the March 24 NSW election, with a Centrebet quote of $1.20 against the Coalition of Peter Debnam at $4.

Andrew Leigh has written rather a lot about the predictive power of political betting.

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So you've stashed some money away offshore... watch out

The Australian tax office is set to “ramp up” prosecutions flowing from Australia’s biggest ever white-collar criminal investigation.

Project Wickenby has already scored one high profile scalp – the music industry identity Glenn Wheatley who has managed John Farnham, the Little River Band and Delta Goodrem. Wheatley’s lawyer told a Melbourne court earlier this month that he would plead guilty to charged relating to tax fraud.

The Tax Commissioner Michael D’Ascenzo told a Senate estimates committee yesterday that the Australian Federal Police and the Australian Crime Commission had 10 ten criminal investigations under way and that the Tax Office and the Securities commission were investigating in excess of another 100...

Last year three people were arrested and charged in Queensland.

Wickenby is a joint operation set up by the Commonwealth to recover more than $300 million dollars believed hidden offshore by high-wealth individuals using a scheme promoted by a Swiss-based accountant Philip Egglishaw.

A brochure obtained from a Sydney hotel room in 2003 said Mr Egglishaw’s services had "proved particularly attractive to entertainers (including actors and pop stars), film directors and producers, sportsmen, international executives ... and other clients who have already established offshore structures".

Commissioner D’Ascenzo told the estimates committee yesterday that he expected a ramp up in prosecutions and guilty pleas in the months ahead.

He said already 20 suspects had pleaded guilty in order to avoid a trial, making the tax office more than 30 million dollars.

“We are now seeing people, like the recent example where the person involved is saying ‘I don’t even want to go to committal. I want to come and plead guilty and co-operate and get on with things’.” Mr D’Ascenzo said.

Until recently an avalanche of legal challenges had slowed the project’s progress. “In the last 2 to 3 years the Australian Crime Commission has had more than 20 challenges to its authority. The ACC has been successful in all 20 cases, , but it goes to show how tenacious those that don’t want to see due process achieved are, and how well resourced they are,” he said.

The Commissioner said he had been successful in fighting claims for legal professional privilege. “When you look at legal professional privilege, there is two types, one is in regard to contemplated litigation, which is not the type of area that we would be concerned about. The other is in relation to the advice given as to how you could structure your affairs to avoid the tax laws. Privilege should not and cannot go to the commission of an offence. If you are providing advice to break the law then professional privilege doesn’t really take you far”.

Mr D’Ascenzo said he would like understanding what the concern of lawyers about access to their tax advice really was.

He said the government had promised legislation that would allow the Tax Office to share otherwise confidential information with its partners in Project Wickenby, something that should speed the investigation.

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See no evil. On climate change

The SMH reports this morning that Australia's Treasury hasn't bothered to examine the impact of climate change.

Club Troppo reports that Australia's employment minister Joe Hockey was at a disadvantage in debate on the 7.30 Report last night because the government hasn't done an economic analysis of the effect of Workchoices.

And as I mentioned earlier the government never did an an analysis of the effect of its so-called media reforms.

Why would that be?

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It is only $10 billion - why ask the Cabinet?

First our PM is trampling on the states like Whitlam did.

Now he is conjuring up multi-billion dollar programs out of thin air.

Only 10 billion?

Or as the Finance Minister Senator Minchin put it before a Senate estimates committee “1 billion a year, which is less than half a per cent of Commonwealth government expenditure, let’s keep it in perspective”.

Perspective? It's about half as much again as the budget of the much anguished about ABC.

Here's this morning's story:

The Prime Minister’s Australia Day promise of $10 billion for the Murray-Darling basin was neither properly costed nor approved by Cabinet.

Revelations before the Senate’s Finance and Administration estimates committee confirm that the only costing details made available to the Department of Finance were one sheet of paper and the announcement itself. The Cabinet was not consulted.

Under questioning from Labor’s spokesman on Public Administration and Accountability Senator Penny Wong yesterday, the head of the Finance Department’s Infrastructure Division Mr Lembit Suur said that it was given very little detail about the $10 billion dollar plan.

“We were given a page which had the different components of the plan on it and a draft ten-year profile and to date, aside from the announcement of itself, that is the only documentation we have received in relation to this plan,” he said...

Senator Wong asked Mr Suur whether he was sure, whether a single page was all the department had received.

He replied: “Yes Senator”.

Earlier before the same committee the Minister for Finance and Administration Senator Minchin confirmed that the plan did not go to cabinet for approval before the Prime Minister announced it in his Australia Day address on January 25.

But he played down the significance of the package describing the $10 billion over 10 years as “1 billion a year, which is less than half a per cent of Commonwealth government expenditure, let’s keep it in perspective”.

“If the states continue their political intransigence, it may not even come to fruition. There are many steps yet to be taken before this thing becomes a reality, he said.

The department’s secretary Ian Watt told the committee he had been asked only to "run an eye lightly over the costings" before the announcement. He said he would have the plan fully costed by the time of the May budget, should state and territory leaders agree to it.

The plan requires Queensland, NSW, Victoria, and the ACT to cede control of the Murray Darling to the Commonwealth. A leaders meeting to discuss the package broke up without agreement on Thursday. The leaders will meet again next week.

Victoria’s Premier Steve Bracks said yesterday that the revelations added to his doubts about the $10 billion package.

"The more we learn about it the more concern we have," he said.

"Today we learnt this matter hasn't gone to federal cabinet. Can you believe that?

“One of the most significant issues facing the nation in relation to the Murray-Darling Basin ... has not gone to cabinet."

In Parliament Labor’s finance spokesman Lindsay Tanner asked the Prime Minister why a deciswion to spend $250,000 of taxpayers' money on a new carriage for the Queen had gone to Cabinet but not the $10 billion Murray-Darling water package.

Mr Howard replied that both decisions had been handled correctly.
"Appropriate processes were followed in both cases," he said.

The Opposition Leader Kevin Rudd who has until now backed the Prim Minister’s plan told ABC radio he was beginning to have doubts.

"I've tried to be positive about this but when we find things like this, that such a major proposal as this is not even taken to the Cabinet, then we begin to raise questions about how well thought out the individual policy, the administrative and financial details of the package in fact are," he said.

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Comments on commenting systems please

Commenter Kevin tells me:

Peter if you want more comments then I suggest you move to a better blog comment tool. It is too hard to put up comments and this is the second time I have tried to enter this short one.

Commenter Bring Back the EP says the same thing.

My question, to anyone who can navigate Blogger2's comment system - what is the best one to use (that works with Blogger2)?

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Canberra life was less certain before searchable computer records.

The Department of Finance has revealed that it only became aware in January last year that the ACT government had no title to the land on which the Googong Dam is located.

The acting head of the department’s Asset Management Group David Yarra told a Senate estimates hearing yesterday that until then it was “very strong received wisdom” within the department that it was in the process of transferring the land to the ACT.

The Commonwealth acquired the Queanbeyan River dam from NSW in 1973 in order to ensure Canberra’s water supplies. It has long been believed it intended to transfer the land to the ACT on self-government in 1988.

Mr Yarra told the Senate’s Finance and Administration Committee that in September 2005 while working on completing the transfer, one of his officers began to have doubts about whether the Commonwealth ever did intend to transfer the land.

“We became suspicious, progressively. It took some time for a number of us to form the same view as one of our officers who was doing most of the work on it and to confirm that view,” he said.

The investigation involved an ever-widening examination of archival documents...

“We had done a pretty good analysis on all the logical files going back 15 or 20 years, but then we turned to other files not actually logically related to the Googong Dam,” Mr Yarra said.

“What we turned up was an answer to a question by the then Senator [Graham] Richardson at the time saying it was never the intention of the Commonwealth to transfer the ownership of the land. The intention was only that the ACT to manage the Dam.”

“We launched further inquires and spoke to the drafter of the [ACT self-government] legislation and the person who prepared the drafting instructions, and we confirmed from a number of angles that was never the intention to transfer the title of the land that was purchased in 1973. It had always been intended that the ACT manage the dam on behalf of the Commonwealth through an agreement,” he said.

It was only in January 2006 that the department examined the archives in detail. It briefed the Finance Minister Senator Minchin in June 2006 and took legal advice from Clayton Utz in July 2006.

Mr Yarra conceded to the committee that he had other departmental officers had in the past created many official documents acting as if the land was to be transferred to the ACT, but he said they were wrong to do so.


“At that time our understanding of government policy and government intent was that the land be transferred and we were acting consistent with that. We were wrong. The policy was not that. Therefore as public servants we would always act of course consistent with government policy and intent. If it changed, then we change our position,” he said.

Mr Yarra told the committee that it was beyond legal doubt that the Commonwealth, not the ACT owned the land. “It may that another outcome should be the case, but the fact is that we own the land, whether that was an appropriate outcome is up for other people to discuss,” he said.

The ownership of assets on that land such as pipes, houses and the dam wall itself was less clear because of “vagueness” in the archival documents.

In January the NSW Opposition announced a plan to use Commonwealth ownership of the dam to pipe water from it to Goulburn without consulting the ACT government.

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Reserve Bank to landlords: push up your rents.

Landlords contemplating pushing up their rents have received support from an impressive quarter.

Australia’s Reserve Bank says in its latest Quarterly Economic Statement that while house prices have climbed by around 175 per cent over the last decade, housing rents have climbed by only 35 to 60 per cent.

“The result has been an approximate doubling in price-rent ratios or a halving in rental yields”.

With rents unusually low compared with the cost of buying a home there has been a surge in the proportion of householders wanting to rent. At the same investors have become understandably less keen to buy houses for renting out, particularly so as there now appear to be only limited opportunities making a capital gains when properties are sold.

Across all Australian cities vacancy rates have fallen to their lowest levels in more than 20 years...

The Bank says that as a result nationwide rents climbed 3.7 per cent in December, the strongest rise since 1991.

But it says rents are increasing much faster for new rental contracts, meaning that nationwide rents have some distance to climb.

When rents climb high enough the Bank expects Australia’s rental squeeze to ease. It doesn’t say how high it expects rents to climb.

The Tenants Union in the ACT said last night it was concerned by the Reserve Bank’s statement.

Executive officer Deborah Pippen said the Bank’s apparent endorsement of rent increases would make things more difficult for Canberra tenants who even now can barely afford to stay in their homes.

“It is quite easy to believe you are objective when you are not the person paying the rent,” she said.

“The Bank is talking as if housing rents are just another financial instrument. But people live in homes. You are not looking at something that people can choose whether or not to purchase. If the Reserve Bank won’t address housing affordability and why it matters as a social issue, other arms of government will have to.”

In Parliament yesterday the Treasurer Peter Costello welcomed the Reserve Bank’s prediction that Australia’s underlying rate of inflation would fall but was silent about its views on rents.

The Chairman of Raine & Horne, Max Raine endorsed the Bank’s view saying he believed the “worst was yet to come” for rents.

He said near the centre of Sydney tenants were facing rent hikes of up to $150 per week.

“Vacancy rates of about 2.5% traditionally indicate full occupancy as there is always a degree of movement of tenants between properties. But with vacancy rates currently at around 1.5%, there is clearly a pool of people who simply cannot get accommodation,” he said.

The Canberra-wide the vacancy rate is at present 1.1 per cent. But many agents say they have nothing whatsoever to rent. Canberra’s rents are the nation’s second-highest after Perth. In the September quarter the median rent for a three-bedroom home Canberra home was $320 a week, around 20 per cent higher than in Sydney and one-third higher than in Melbourne.


Related: Rate rise off the agenda

Australia's three million mortgage holders can rest easy. The Reserve Bank
says inflation will soon be back under control. It in its latest Quarterly
Statement the Bank says it expects Australia's underlying rate of inflation
to fall from its present peak of 3 per cent to around 2.75 per cent by
mid-year.

That fall would push inflation back down below the Bank's danger zone and
toward the centre of its 2 to 3 per cent target band. The Bank says it
expects Australia's underlying inflation rate to remain between 2.5 and 3
per cent throughout 2007 and 2008.

In previous statements it had said that it expected the rate to remain at
around 3 per cent and had warned of the need for vigilance.

Following the release of the Statement the Macquarie Bank's interest rate
strategist Rory Robertson said that what was now in prospect was ``a plateau in
rates at 6.25 per cent, following earlier plateaus at 5.25 per cent and 5.5
per cent''. He said it was too early to predict whether and when interest
rates would actually fall.

The standard bank variable mortgage rate is at present 8.07 per cent after
three hikes of 0.25 per cent over the last year. But the Reserve Bank says
in its statement that very few new borrowers actually pay that much. It
says the typical discount is 0.6 per cent, meaning that most new borrower
pay around 7.45 per cent.

In Parliament yesterday the Treasurer welcomed the Bank's more relaxed
inflation forecast but said: ``We are not out of the woods yet, because
with an exceptionally cold northern winter it is possible that more pressure
will come back on oil prices.''

He said that there was also a chance of a wages breakout given Australia's
historically low unemployment rate, but that his government's WorkChoices
legislation had lessened the risk.

``If we had a system of centralised wage fixation, that took wage
settlements from profitable areas from the Australian economy and bought
them back and spread them uniformly across the whole economy, then we would
have the kind of inflationary breakouts that we've seen in previous mining
booms,'' he said.

``The good thing is that we have changed the industrial relations system and
it wouldn't be possible if we hadn't of done that.''

The Bank noted that wage growth ``remained reasonably stable in the face of
sustained strength in the labour market.'' It noted as well that union
officials had lowered their expectations of future inflation.

Completing the Bank's rosy view of the Australian economy it said it
expected non-farm GDP to grow faster over the year ahead at 3.25 per cent.
Importantly, the forecast appears to imply that there will b be no rate
rises in the year ahead.

The only downside in the Reserve Bank's statement is the forecast of a
further side in rural GDP of around another 20 per cent in the year. The
Bank expects this to trim Australia's overall rate of economic growth by
around one half of one per cent.

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Tuesday Column: Ken Henry's public service survival tip - think long and hard before doing good things that might look bad.

As a public servant you probably think it’s your job to save the public money, to manage things well.At a junior level that is what most public servants do. But not at the top.

Australia’s top bureaucrats listen to the radio, read the papers, watch Parliament and think all the time about how what they are doing will make them and their Minister look should it get out.

Their behaviour goes beyond having political awareness. It extends to vetoing good ideas on the ground that they might be perceived badly.

Don’t believe me? That’s the truth as seen by the man at the very top of the public service, Australia's Secretary to the Treasury...

In an address to project managers at Australian Defence Force Academy on Friday Dr Ken Henry made explicit what Australia’s top mandarins have until now only hinted at. He gave the impression that he wasn’t particularly happy about the reality he was describing, but he wanted to stress that it was reality, and that senior public servants ignore it at their peril.

The Treasury Secretary’s number one rule for surviving at the top: If you come across an idea that you expect to save the taxpayer money, but that carries with it a small risk of an embarrassing cost blow out, “think long and hard before proceeding”.

The reason is what Dr Henry refers to as an ‘asymmetry between penalty and reward’: “If you do something that saves the taxpayer a bucket of money, don’t expect any external praise. But if you do something that costs the taxpayer any amount of money, expect criticism, and expect that you are going to have to devote a lot of valuable time and effort in responding to that criticism,” he says.

Government ministers believe they face an even more extreme asymmetry. That’s why according to Dr Henry “with some notable exceptions, ministers usually appear to have a tolerance for risk that is close to zero”.

Ministers know that they will get beaten up by the press and by the Opposition if something little goes wrong. If something big goes right it will be ignored. So politically, it is often better not to undertake a program that will usually work well in order to avoid the risk of it occasionally working badly. At the Ministerial level perception is often more important than reality.

As Dr Henry puts it: “I am sure you have heard people say that you shouldn’t believe anything you read, watch or hear in the media. Most people working in government would be aware of instances of highly inaccurate media report of things in which they are expert. You may well have formed the view, by extension, that all media stories are wrong. Well, believe it or not, that is beside the point. In the political environment in which you operate, what matters is not whether the story is true or false, accurate or misleading. What matters is whether the story is positive or negative, complimentary or critical, supportive or hostile.”

The problem according to the Treasury Secretary is that when negative publicity starts it is almost impossible to turn around, especially for the sort of complex projects that he has been responsible for.

“The defence will always involve a level of complexity far higher than the, often simplistic, criticism. And complexity is very easily interpreted as obfuscation. There is a fair chance that anything you say will be construed as a cover-up,” he said.

Dr Henry learned this the hard way, although I am not at all sure that he learned the right lesson.

In March 2002, just short of one year into the top job, a photographer snapped him shopping in Queanbeyan on a Saturday morning. The headline in the next day’s Sydney Sun Herald read “The $6 Billion Loser”. The report began: “Meet Ken Henry, the Treasury boss in the middle of a political storm brewing over the loss of $6 billion of taxpayers' money.”

Ken Henry had inherited responsibility for a program that was set up in order to save taxpayers money.

In the 1980’s the Hawke-Keating government decided to stop borrowing overseas. All borrowing had to be in Australia. The decision played well politically, but was expensive. In 1987 it cost 14 per cent to borrow in Australia and only 7 per cent to borrow in the United States. So some conscientious Treasury officials discovered a way to borrow within Australia at US interest rates. It was what was known as a cross-currency swap. It carried with it a risk that if the Australian dollar collapsed the repayments would soar, but that risk was no greater than applied to actually borrowing in US dollars. To keep the risk acceptably low $US swaps were limited to 10 to 15 per cent of borrowings.

By mid-1997 the strategy saved the taxpayer a lot of money, around $3 billion according to the Treasury’s calculations. But then after the outbreak of the Asian financial crisis both the Australian dollar and the Australian-US interest differential collapsed. By 2001 what had been a $3 billion gain turned into a $2 billion loss. It was possible to claim that Ken Henry, by then in charge of the program had squandered $5 billion. Add another billion, as the Sun Herald did, you could label him “The $6 Billion Loser”.

In order to kill the story the Treasurer Peter Costello killed the program. By the end of 2003 the swaps had been unwound.

By then the Australian dollar had risen enough to put the program back in the black. Looked at over its entire 16-year life the program actually made around $800 million, a fact Ken Henry says has until now gone almost entirely unreported.

He notes as well that had the program not been cancelled in response to the bad publicity it would by now have made several billion of dollars. “This might strike some of you as ironic”, he told his audience.

There are two potential take home messages to draw from Dr Henry’s experience. One is that the Treasurer and Dr Henry should have ignored the clamor of the media and the Opposition and continued to do what they believed to be right.

As he sees it, we would have all been better off for it.

The other is that it is probably not worthwhile attempting to save the public money if you know it’ll expose you to political embarrassment.

Dr Henry told his audience on Friday that if he and his colleagues had known then what they know now “we probably would not have embarked on the cross-currency swaps strategy, even had we known with certainty that it would end up saving the taxpayer almost $800 million”.

It is the more depressing of the two potential messages and it is the one taken to heart by Australia’s number one economic bureaucrat.

He softens its impact only slightly by saying that it might be possible to do the right thing if you prepare the public for it ahead of time by using the media.

It’s a brutally honest if unsettling conclusion from the man who on Australia day received the Order of Australia for service to the development and implementation of economic policy.

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Advice from Dr Ken Henry: Think very carefully before saving the public money.

The head of Australia's Treasury Dr Ken Henry writes the best speeches in public life. And there can be no doubt he writes them himself.

Friday's had the intriguing title of Political Awareness. It was delivered to an International Project Managers Symposium at the Australian Defence Force Academy Canberra. I cycled there on my way to work.

I begin my report in today's Canberra Times this way:

The head of the Treasury has bleak advice for Australia’s public sector managers. Think long and hard before attempting to save the public money.

Here are some highlights from an amazing and impressive speech that is still banging around in my mind a day later, the way a good movie does:


. “If you do something that saves the taxpayer a bucket of money, don’t expect any external praise. But if you do something that costs the taxpayer any amount of money, expect criticism, and expect that you are going to have to devote a lot of valuable time and effort in responding to that criticism. “

. “Your performance may be judged, by your political masters, according to how well it plays in the media, or how well it would play if it became a matter of media interest.”

. “What matters is not whether the story is true or false, accurate or misleading. What matters is whether the story is positive or negative, complimentary or critical, supportive or hostile.”

. “As a general rule, the more complex the subject, the easier it is to criticise, and the more difficult it is to defend. There is a fair chance that anything you say will be construed as a cover-up.”

. “If you have managed half a dozen projects, meeting all criteria relating to timeliness, scope and cost, and then have one, even relatively small, project that fails against one of those criteria, you will find that in the public consciousness that failure will – for some time at least – represent your entire biography.”

Below is my 700 word article in today's Canberra Times:

The head of the Treasury has bleak advice for Australia’s public sector managers. Think long and hard before attempting to save the public money.

Dr Ken Henry told a conference of international project managers at the Australian Defence Force Academy yesterday that he had arrived at that conclusion after a “baptism of fire” working as the Treasury’s Deputy Secretary responsible for the Office of Financial Management in the late 1990’s.

He was in charge of a program of currency swaps that over 16 years saved the public around $800 million. But at a time when the market was moving against the Treasury he was photographed while shopping in Queanbeyan and written up in Sydney’s Sun Herald newspaper as ‘Australia’s $7 billion loser’.

“The only time any commentator or politician, other than the Treasurer, took any interest in the policy was when it looked like it was going wrong,” he said.

His message was that “while there may be many things that public sector project managers could do that they would have good reason to expect might save the taxpayer some money, that doesn’t necessarily mean they should do them”.

“If you do something that saves the taxpayer a bucket of money, don’t expect any external praise. But if you do something that costs the taxpayer any amount of money, expect criticism, and expect that you are going to have to devote a lot of valuable time and effort in responding to that criticism. So, if there is something you can see to do that, from a project management perspective, has an expected cost saving, but would involve some risk of cost increase, think long and hard before proceeding.”

Dr Henry said that when a complex government project came under attack, and most of them were complex, it could be almost impossible to defend. “The defence will always involve a level of complexity far higher than the often simplistic criticism. And complexity is very easily interpreted as obfuscation. There is a fair chance that anything you say will be construed as a cover-up,” he said.

The Treasury Secretary warned that what mattered the most to the politicians to whom public servants reported was not the success or failure of a program, but how it was reported by the media. “What you think of as ‘project management’, your political masters may well think of as ‘issues management’. You may well have formed the view that all media stories are wrong. Well, believe it or not, that is beside the point. In the political environment in which you operate, what matters is not whether the story is true or false, accurate or misleading. What matters is whether the story is positive or negative, complimentary or critical, supportive or hostile,” he said.

At a personal level Dr Henry had found that one way to stop bad stories developing a life of their own was to build up good long-term relationships with reporters and commentators. “You can not really survive in the political environment for a couple of decades at a reasonably senior level without having pretty good relationships with at least senior journalists,” he said.

“But that doesn’t mean that they are always in a position to help you out. The more time you have spent with them in advance of a crisis the more likely it is that they will be in a position immediately to make the story go to water. But of course once the story gets running; well - what’s their advice to the editor: ‘I’ve got a clever idea to stop selling newspapers’? It would be absurd to expect that of any journalist no matter how good your relationship.”

Dr Henry said many of his observations happened to be backed up by research in the new field of behavioural economics. “Events in the short-term time horizon are overvalued relative to events at a distance. If you have managed half a dozen projects, meeting all criteria relating to timeliness, scope and cost, and then have one, even relatively small, project that fails against one of those criteria, you will find that in the public consciousness that failure will – for some time at least – represent your entire biography.”

“Had we understood these lessons of behavioural economics back in the late 1980s we probably would not have embarked on the cross-currency swaps strategy, even had we known with certainty that it would end up saving the taxpayer almost $800 million. At the very least, we would have devoted a lot more resources to ‘framing’; to the conditioning of public expectations,” the Treasury Secretary said.


Memories:

The $6 Billion Loser
By Fia Cumming,
Political Correspondent
SunHerald
3 March 2002

MEET Ken Henry, the Treasury boss in the middle of a political storm brewing over the loss of $6 billion of taxpayers' money.

The Opposition has identified DrHenry as the key player in the disastrous cross-currency swap policy that continues to cost the country billions of dollars.

And when Parliament resumes next week, Treasurer Peter Costello will be quizzed on whether he approved a promotion and performance bonus for Dr Henry.

Treasury officials have reluctantly revealed that between July 1997 and July 2001 they lost $4.875 billion on the foreign currency deals.

But the cross-currency swap from Australian to US dollars is expected to cost a further $1 billion over the next year bringing the total to almost $6 billion.

Dr Henry and other Treasury officials have refused to answer anyquestions about the currency swap.

When The Sun-Herald tried to ask him questions at a Canberra shopping centre yesterday, Dr Henry sped off in his salary-package SS Commodore.

``There has to be a question mark over the Treasury official who helped Mr Costello preside over this scandal,'' Opposition finance spokesman Stephen Conroy said yesterday.

Treasury and other government departments refuse to disclose details of the performance bonuses regularly paid to their top officials.

As Treasury secretary, Dr Henry is eligible for bonuses of up to $50,000 a year on top of his $305,000 annual salary package.

Dr Henry was Mr Costello's right-hand man on the GST tax reforms and Mr Costello holds him in such high regard that he was awarded the top Treasury job last year when he was just 43.

The currency swap, which traded interest payments in Australian dollars for payments in US dollars, went massively wrong when the Australian dollar dived compared with the greenback.

Before taking over as Treasury secretary in May 2001, Dr Henry was head of Treasury's economic group from October 1998, where he had oversight of the Australian Office of Financial Management (AOFM).

When the AOFM, which looks after government debt, became a separate agency in July 1999, Dr Henry was the Treasury representative on its advisory board. The AOFM and Treasury continued the currency swap despite a warning from the Auditor-General in 1999 that it was risky and should be reviewed.

In November 2000, they took an even bigger gamble when they abandoned the policy guidelines specifically designed to limit losses.

The guideline said that only 15pc at most of the Government's debt should be held in US dollars.

Treasury and the AOFM have done their best to hide the resulting losses. The latest loss figures were buried on page 80 of the AOFM's most recent annual report.

When Treasury and AOFM officials were questioned at recent Senate estimates hearings, they had to correct their evidence three times before admitting the scale of the losses.

But Dr Henry still denied there was a problem, insisting that the losses did not matter because they were not yet ``realised''.

Senator Conroy said Treasury and Mr Costello should have quit the swapped loans and accepted the losses long ago.

``But they continued to speculate and it's cost taxpayers $6 billion,'' Senator Conroy said.

Senator Conroy said Mr Costello was as much to blame as Dr Henry, despite his attempts to disown the policy.

``The buck stops with the Treasurer,'' he said.

HOW TO LOSE A FORTUNE

* Trying to reduce the cost of the Federal Government's $62 billion debt, Treasury took advantage of low US interest rates. It speculated in financial derivatives known as cross-currency interest rate swaps. In effect, the Government swapped future interest payments due in Australian dollars for payments in US dollars, exposing it to adverse currency movements.

* Between 1988 and 1999, Treasury cross-currency swaps generated benefits of about $140 million a year.

* Treasury exposed 15 per centof the government debt tocurrency fluctuations.

* Although the Australian dollar (US60cents in mid-2000) was expected to gain in value, it fell to US47-50cents (2001). Instead of the debt cost being reduced, the foreign currency exposure climbed to 20pc by June 2001.

* As payments had to be made in US dollars, the value of these obligations increased as the Australian dollar fell. For every 1pc drop in the dollar's value, we lost $200 million.

* Treasury has revealed that between July 1997 and July 2001 we lost $4.875 billion. The swap is likely to cost another $1 billion.

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Tonight on the 7.30 Report: Turnbull vs Garrett

The former rockstar vs the former investment banker.

The first head to head battle between Australia's millionaire Environment
Minister and millionaire Shadow Environment Minister.

It'll be the full half hour.

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