Henry on the intervention

The head of the Treasury has distanced himself from the Howard government's approach to aboriginal intervention saying that policy makers and administrators “haven’t been very good at” delivering programs in a cost effective and non-threatening way.

Delivering the keynote address to the Australian Institute of Health and Welfare conference in Canberra yesterday Dr Ken Henry said that while it was important for the government to provide sustainable macroeconomic growth, with low and stable inflation and unemployment more was needed to make sure that that all Australians shared in the nation’s prosperity.

Indigenous Australians had without doubt experienced the highest levels of disadvantage, however measured, over the longest period of time.

But programs aimed at ending indigenous disadvantage would fail unless they gave indigenous people an opportunity to shape the policies that would affect their destiny...

“A considerable body of international literature suggests that indigenous engagement in policy development is key to achieving better results. In itself, it reduces the passivity of solutions, creating ownership of both the problem and the solution. And it is fundamental to indigenous self-esteem,” Dr Henry said.

“Active participation in the decision-making that affects one’s community can be a powerful source of identity, even of pride. And it is an obvious means of recognising inspirational role models.”

The Treasury Secretary said that “multiple inventions” were needed but to improve aboriginal disadvantage, but that they had to be targeted to local needs, integrated and delivered in a cost effective and non-threatening way.

“This is important for the proper functioning of government; but it is equally vital for those people for whom the programs exist — indigenous people themselves. As policy makers and administrators, we understand this at a conceptual level. But we haven’t been very good at allowing that understanding to affect the way in which we implement things.”


Note his earlier speeches on these topics.

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What the Treasury is saying in private...

...the OECD usually says in public.

It is saying: "no tax cuts now".

The Organisation for Economic Co-operation and Development has spoken out against the tax cuts promised in during the Australian election campaign, saying they will make economic management more difficult and could prove unsustainable.

The Organisation's latest Economic Outlook released overnight in Paris also declares that Australia's Reserve Bank “will” further lift interest rates in order to bring inflation back into control.

The thoughts of the OECD are significant because they are believed to represent the thoughts of Australia's Treasury which briefs the OECD on its visits to Australia and appoints a permanent representative to organisation in Paris...

The report says that Australia's promised tax cuts are likely to heighten the pressures on capacity which are putting pressure on inflation.

Without “the additional reduction of taxes on households announced by the main political parties on the eve of the elections” the budget surplus would have been 0.25 per cent of GDP higher, an outcome that would have posed “no problem in view of the expected strength of the economy”.

The report acknowledges the argument made by both sides of politics during the campaign that the tax cuts could be expected to benefit the economy somewhat by encouraging people into work, but it says that benefit will be overwhelmed by the immediate expansionary effect of the cuts.

In an editorial attached to the report not specifically directed at Australia the OECD's acting chief economist Jorgen Elmeskov warned that the revenue bonanza facing many OECD governments might prove to be temporary, reflecting a boost in business profits and activities related to finance and housing that would not last.

“There is a risk that decisions could be taken in countries that cannot afford it to permanently raise spending or reduce taxes on the basis of temporarily high receipts,” he said.

When taxation revenue fell governments might find that they hadn't saved enough money to pump it into the economy when it was needed.

“Therefore fiscal policy needs to stay on the straight and narrow despite buoyant revenues,” Mr Elmeskov warned.

The OECD report treats further hikes in Australian interest rates as certain saying than a projected slowdown in economic growth next year “will be accompanied by a further tightening of monetary policy in order to keep inflation in line with the Reserve Bank's inflation target”.

The OECD is forecasting a lower inflation rate in the years ahead than in Australia's Reserve Bank and a gradual winding back in Australia's economic growth rate from 4.3 per cent to 3 per cent over the next two years, a pace that it believes is sustainable.

It says although economic growth forecasts have been revised down nearly everywhere in the OECD “the outlook is actually not that bad”. It does not expect a recession in the United States.

In Australia a report to be released today by the Centre for South Australian Economic Studies will back up the OECD's view about interest rates. The report says that Reserve Bank will lift interest rates twice in the first half of next year, by a total of 0.5 percentage points, taking the standard variable mortgage rate to around 9.1 per cent.

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The Bank's gift to its new Treasurer - another bloodless coup

"The Reserve Bank, Australia's unelected and largely unaccountable manager of the money supply, has used the change of government to grab even more power."

Wayne Swan's baptism as Treasurer could hardly be more different to Peter Costello's.

Back 11 years ago a nervous and initially tentative Peter Costello took the reigns at a time when inflation was falling. It kept falling, and within months the new Treasurer was declaring that “the inflation dragon is dead”.

Australia's private banks voluntarily slashed their mortgage rates (because of a lower cost of funds they said, but really it was because of competition from upstarts such as Aussie and RAMS) and the Reserve Bank Governor Bernie Fraser announced the first in a string of official interest rate cuts that would add up to almost three complete percentage points.

The new Treasurer had landed in clover. He didn't give Labor the credit he might have, but he had arrived in office at the right time...

By contrast Wayne Swan yesterday took to the podium at a time when inflation was soaring and the private banks were preparing to hike mortgage rates of their own volition (because of the cost of funds they said, but really because of the troubled times facing upstarts such as Aussie and RAMS).

The Reserve Bank made it clear that it feels to the need to push up rates once again, and that the only things staying its hand are concern about “global financial turmoil” (its words) and the feeling that by fattening their margins the private banks might do its dirty work for it.

He must be wondering who to thank.

But there's a common thread linking Wayne's world in 2007 to Peter's in 1996. The Reserve Bank, Australia's unelected and largely unaccountable manager of the money supply, has used the change of government to grab even more power.

In 1996 Bernie Fraser made it clear to his incoming boss that he would decide the timing of interest rate moves independent of political considerations. He cut rates in July rather than waiting until after the August budget as his Treasurer wanted in order to make his budget look good.

In 2007 Glenn Stevens has presented his incoming boss with a fait accompli. From now on the Reserve Bank will publish a commentary on its thoughts immediately after each of its monthly board meetings, followed exactly two weeks later by the minutes of that meeting explaining those thoughts in detail.

The timing means that every two weeks the thoughts of the Reserve Bank will be part of the Australian news cycle. The Treasurer and the elected government will be forevermore working in the Bank's shadow.

Its probably no bad thing. We are entering very uncertain times.

Yesterday's National Accounts show that while the economy continues to grow strongly at an annual rate of 4.3 per cent things are becoming patchy. Productivity has taken another dive, and the ACT economy has gone backwards, as has South Australia's.

We've begun saving more, perhaps sensing that good times are no longer guaranteed.

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Ever wondered what's going on inside the Reserve Bank's walls?

Fear of worldwide economic turmoil has forced the Reserve Bank to put on hold its plans for a further hike in Australian interest rates.

The Bank yesterday broke with tradition and made public the reasoning behind its decision at Tuesday's board meeting not to lift rates, saying in future it would do so after each of its monthly meetings whether or not it decided to move rates.

It also said that beginning immediately it would make public the minutes of each of its board meetings, opening its decision-making process to an unprecedented level of scrutiny.

The Bank's Governor Glenn Stevens, in the job for just over a year, announced the decision after consulting with his new Treasurer Wayne Swan...

Mr Swan said he had a long discussion with the Governor about the moves last week and had offered him complete support.

The minutes for the November board meeting made public yesterday indicate that indicate that at the mid-point of the election campaign board members were becoming increasingly concerned about the rate at which election promises were eating into the projected budget surplus.

The minutes say that a surplus of 2.5 per cent of GDP had been in prospect but that “new expenditure and revenue measures announced since the budget and in the early part of the election campaign had since reduced the projected surplus to around 1 per cent of GDP”.

They conclude that the tax and spending promises had roughly “offset the automatic fiscal stabilisers” meaning that the government had offered the Bank no help in fighting inflation.

Mr Swan said that his government by contrast would help, and declared tackling inflation to be his number one priority.

But he defended matching $31 billion of the Coalition's $34 billion of promised tax cuts during the election campaign saying they would add to productivity.

He said he had become aware of information that suggested that the former Treasurer Peter Costello had tried to “lean on” the Treasury in its preparation of the pre-election financial accounts but he said the Treasury had told him that that the accounts were nonetheless accurate.

The documents released by the Bank indicate that its view about the global economic outlook changed dramatically between its November and December board meetings.

The minutes for the November meeting at which it decided to push up rates portrayed the outlook as benign forecasting that although worldwide growth would slow it would remain “still well above the average of the past three decades”.

The report of this week's December board meeting said that “global financial turmoil” had shaken market sentiment and that growth could fall to little more than the long-run average.

It said that in Australia pressure from the turmoil had been less pronounced than elsewhere but that borrowing costs had risen and that further increases were likely.

In an apparent nod of approval to banks who might want to pass on higher borrowing costs to consumers as the Adelaide Bank did this week to its mortgage customers it said that such moves would take pressure off it to increase official interest rates.

The Treasurer Wayne Swan backed up the Bank saying that while he would “certainly urge all of the banks to think carefully before they raise rates again” such decisions were commercial ones for the banks and that the Governor had “outlined, I think very accurately in his statement today, the commercial environment”.

On Monday the Adelaide Bank lifted all of its standard variable and low-doc mortgage rates by 0.25 percentage points, adding an extra $800 to the annual cost of servicing a $400,000 loan.

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Everything Wayne Swan will need to know, set to music

Principles of Economics, Rap Version

Click twice on the forward arrow to play.

HT: Juris Naturalist, via Greg Mankiw.


And then there's this: the 10 principles of economics, translated.

Even more brilliant, by the Standup Economist, found for me by Ross Gittins.

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We were lied to. Part 1.

John Howard, Prime Minister, June 4, 2007:

"We do at the moment have a target for reducing our greenhouse gas emissions, and that target is the one set by the Kyoto Protocol of 108 per cent of our 1990 levels and that’s got to be achieved between 2008 and 2012 and we are on track to meet that."

Peter Costello, Treasurer, October 10, 2007:

"It is Government policy to meet our Kyoto target, and we are on track for that."


Kevin Rudd, Prime Minister Elect, Monday December 3, 2007:

The advice I have, and this comes from, of course, the most recent tracking to Kyoto target by the Australian Greenhouse Office, is that we are currently likely to exceed our, or overshoot our Kyoto target by one per cent.

The commitment period is on an annual average between 2008 and 2012. I'm just being cautious and up front with you about what the publicly available advice is.

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Sunday dollars+sense: This'll be worth millions!

Dishonest spruiking masquerading as economic analysis.

The standard of journalism on commercial television, rarely high, hit a new low on Wednesday.

That’s when were told in all seriousness that the visit of David Beckham to Sydney would boost its economy by $20 million.

They are the sorts of claims frequently made but hardly ever tested.

The Australian government has done everything it could to frustrate independent testing of the absurd claims made about the Sydney 2000 Olympic Games. It was meant to bring in an extra 1.5 million tourists in the months that followed. In fact tourism numbers collapsed - even before the September 11 terrorist attacks.

In Canberra at that same time a series of V8 car races was meant to bring the city $11 million to $13 million each year by creating a “vibrant city”.

Our government kicked in $4.5 million in capital works and a $2.5 million per year subsidy, which climbed to $4.7 million.

On this occasion the Auditor General did get to look at the books. Mark Harrison, the consultant who prepared the report, was stunned.

Here’s what he told me at the time: “The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It involved double counting, and the benefits it did list were vastly exaggerated.”

He concluded that the event had actually cost the territory money. In his language, it brought “significant negative economic results”.

As it battles to survive I am half expecting the National Capital Authority to claim that Friday’s Elton John Concert brought the territory a net economic benefit.

It certainly benefited him. But Canberra, or the nation?

Most of the people who go to these events are locals (nearly all of the visitors to Floriade are). If they spend money or time there, it is likely they are not spending money somewhere else.

Most of the non-locals come from other states. Even if their spending boosts the ACT’s economy, it doesn’t boost Australia’s.

And if ever thousands (or millions) of visitors did come from overseas for a big event and spend like crazy, the main effect would be to push up Australia’s exchange rate and hotel room rates. And perhaps even interest rates.

So please, no more talk about the Beckham effect. And no more about Sir Elton. Unless it’s about football or music.

ACT Auditor-General’s Office, Performance Audit Report. V8 Car Races in Canberra, Costs and Benefits July 2002.

Peter Martin, The Economics of Big Events, Insight, SBS TV, October 09, 2003 (transcript below):

The economics of big events:

The Rugby World Cup kicks off tomorrow across the country. There will be 48 games from 20 national teams spread over seven weeks.

We've been promised it'll create jobs in every Australian city and give our nation an $800 million economic boost. But do the figures stack up? Economics correspondent Peter Martin.

PETER MARTIN: This man is obsessed with rugby.

TIM HARCOURT: It's the game they play in heaven.

The game is as important to him as economics. Tim Harcourt is the economic chief at Austrade, where he speaks about Australia in terms of rugby.

TIM HARCOURT, AUSTRADE: If you think about the Australian economy, it was very much closed and sort of very amateur, a bit like rugby used to be.

The Rugby World Cup, bringing 20 nations to Australia for 48 games in 10 cities, from tomorrow, will be a defining moment for the game in Australia and perhaps for Australia itself in the view of economists like Tim Harcourt.

TIM HARCOURT: In terms of direct benefits, the Australian Rugby Union estimates around 800 million.

REPORTER: Extra boost to the Australian economy?

TIM HARCOURT: In terms of expenditure.

REPORTER: Almost $1 billion?

TIM HARCOURT: There's been ranges, up to 800, some have been 400, some have been 800, some have been up to a billion. We've also seen estimates of international visitors, people coming here. The estimates have ranged between 40,000 and 55,000 visitors, internationally.

BOB CARR, NSW PREMIER: Distinguished guests, ladies and gentlemen, Sydney is greatly honoured to be hosting the Rugby World Cup.

They are forecasts enthusiastically endorsed by Bob Carr the Premier of the main host State. He speaks about a benefit to NSW alone of $300 million an extra 2,500 jobs, an extra $2 million in payroll tax. They're impressive-sounding numbers of the kind we've heard before, but can we take them seriously? In the case of the Rugby World Cup probably not. In an earlier life, John O'Neill was head of the State Bank of NSW, he's now head of the Rugby Union, and in charge of the Cup. John O'Neill came up with the figure of an $800 million World Cup by extrapolating from a Victorian estimate of the benefit of hosting the Bledisloe Cup in 1997.

JOHN O’NEILL, AUSTRALIAN RUGBY UNION: So if it was $60 million for one match over three days, and you think about 48 matches over 7 weeks and it's a World Cup, 40,000 visitors from overseas, 100,000 Australians travelling interstate to watch games, I don't think it's very hard to substantiate, albeit a guesstimate, of 800 to $1 billion of economic impact.

But the Victorian Government estimate was based, in part, on spending in Victoria by visitors from interstate. It's irrelevant in a national context because it doesn't take into account the money the interstate visitors would have spent had they stayed at home.

ADVERTISMENT: For every fan who's travelled from afar to support his or her country, Australia is ready. You beauty!

And there are other more fundamental problems with the estimates of benefits from the World Cup, as there are with the estimated benefits of just about every other big event ever held in Australia.

As good a place as any to begin to understand the mysterious art of estimating the economic benefits of big events is Floriade, Canberra's annual spring flower festival. Each year it attracts 300,000 visits. But that's not the economic benefit - which is what Angela Smith and her team from Canberra University have been commissioned to determine. They start by eliminating those visits that don't add to the ACT economy.

ANGELA SMITH, CANBERRA UNIVERSITY: Well, firstly, we screen out local residents - they were gonna be spending that money anyway, so, for example, going to the local mall to buy a coffee or going to the local nursery to buy some flowers.

ANGELA: So how many times a year do you come to Canberra?

And then we move on and talk to those who are from out of town.

ANGELA: OK, would you have travelled to Canberra on this occasion if it were not for Floriade? OK. Thank you very much. Enjoy your stay. Thank you, bye-bye.

We want to screen out those people who came basically to Canberra for other reasons. They have bought money into the local economy but Floriade is not what bought their money into the local economy.

Their conclusion - the benefit to Canberra isn't the 300,000 people who pass through the Floriade turnstiles, it's the mere 38,000 visitors attracted to Canberra especially for the event, and the money they spend. But even that is most probably an overestimate of the benefit to Canberra. It takes no account of those visitors who would have come to Canberra but stayed away because they knew Floriade was on.

What the promotional videos don't say is that every big event brings with it negative effects as well as positive. The Sydney 2000 Olympics illustrated that perfectly. The Games were good for restaurateur Stan Sarris and this business in the heart of Sydney's party zone, but very bad for others.

STAN SARRIS, WINEBANC: And it was reported. I mean, it's quite common knowledge, it was reported some businesses were down 20% or 30%.

They're negatives not usually counted when economic impact statements are compiled.

MARK HARRISON, ECONOMIC CONSULTANT: They tend to exaggerate the benefits and ignore the costs and, in fact, the net benefits that result from these things are often only 5% or 10% of the kinds of numbers that these studies come up with.

Canberra resident Mark Harrison was employed by the ACT Auditor-General to examine a Government decision to back a series of V8 car races. He was shocked at what he found.

MARK HARRISON: The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It didn't deal adequately with the risks that were being imposed on ACT taxpayers by the agreement to underwrite the race. It involved double counting, and the benefits it did list were vastly exaggerated, I estimated by over 50%.

The shoddy state of the assessments used to justify big events is an open secret among Australian economists.<>
Peter Forsyth is Australia's pre-eminent micro-economist. With John Madden, he's part of a small team attempting to introduce what he calls best practice into the assessment of big events. That means evaluating their surprising costs as well as their more obvious benefits.

PETER FORSYTH: If, for example, people come from overseas to go to the Rugby World Cup, these people will come and spend money in Australia, so what we've got is a - let's say a mini export boom. Now, what we know from export booms is that they tend to push up exchange rates. That tends to squeeze out other export industries. So these industries could be the primary exporters, the mining industry and indeed, the elaborately transformed manufacturing industry.

Using techniques that are standard in other areas of economics, Peter Forsyth is able to trace all of the connections to estimate the net effect of an event on Australia's gross domestic product, which he then slashes to work out the net national benefit.

PETER FORSYTH: When you get an increase in GDP, this invariably means that extra resources, extra inputs have to be used. More labour, more capital, more land, you name it - they're not free, and we have to factor in that cost.

REPORTER: And when you do that, how much lower is the economic benefit?

PETER FORSYTH: When you take into account other costs, for example, the cost of building up infrastructure, any environmental costs that some of the special events might have, then the net benefit from these events could well be negative.
Even if we accept that big events are beneficial, even the biggest of them has had only a tiny effect on the Australian economy. The $6.5 billion Olympic boost sounds big, but it was an estimated benefit over 12 years, and amounts to only 0.1% of Australia's GDP each year.

JOHN MADDEN: And it might not have been as high as 0.1% if in fact the effect on real wages or the number of tourists weren't exactly what we assume they were before the event.

And they almost certainly weren't. The Government assumed an extra 1.5 million tourists would visit Australia in the years following the Olympics, 10 times as many as came here during the Games itself. In fact, tourist numbers fell a year later as a result of other global events and showed little sign of recovering. However, there's one very big beneficiary of the hype associated with the World Cup - and that's the Australian Rugby Union. It's convinced each of Australia's State Governments to pay it money in return for the right to host some matches in the weeks ahead.

JOHN O’NEILL: Governments make these decisions with their eyes wide open. It really is the business that governments are in these days. Sports, business and politics do mix.

Politicians love big events. They get to rub shoulders with sports stars...

PREMIER BOB CARR: It doesn't come better than this.

..and seduce the media into taking an unusually non-critical approach.

REPORTER: This must be a proud moment for you tonight. It's times like this where we can build on this, isn't it - tourism, other industries? And, as you say, there's a long-term benefit, not just a short-term benefit?

BOB CARR: It brings money into the country. All those people who have been doing it tough - tourism industry, the restaurants with low bookings, the hotels with low occupancy rates, this is a boost to them.

They can play up economic expectations and then move on before the outcomes are properly assessed.

STAN SARRIS: People will get, you know, quite tired of the World Cup being in their face all the time.

Bar owner Stan Sarris isn't taking chances in the weeks ahead.

STAN SARRIS: We're going to make it more of a comfort zone. It's a getaway, it's a chill-out zone, if you like, from the World Cup.

TIM HARCOURT: We've got nearly, as of this morning, nearly 6,000 members of the rugby business club.

While at Austrade, Tim Harcourt is talking up the Cup's potential to create what he calls accidental benefits for exporters.

TIM HARCOURT: 50% of new exporters meet, you know, meet their partners by accident. It's like a Jewish matchmaking service. We basically find the companies from overseas that are going to come here to watch rugby and we're gonna match them up with exporters here.

It's an approach that may miss the point of what the World Cup is really all about.

PETER FORSYTH: I think we have lost sight of the ball in the case of valuing special events. The main purpose of the Rugby World Cup is to have some great games of rugby and the main benefits are likely to be in the benefits that the consumers of rugby, namely the rugby fans, are getting. And those benefits are probably very substantial.

JOHN MADDEN: Don't see this as a big economic boost, right. It's not a big economic boost. It's a really big sporting event.

Worth enjoying on its own terms, without pretending it will do much at all for our economic health.

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Happy birthday prosperity, thank you PJK

My colleague Shane Wright of the West Australian remembers:

“This is the recession we had to have.” — Treasurer Paul Keating, November 29, 1990.

It is 17 years today since Paul Keating uttered some of the most infamous, misunderstood and deliberately misconstrued words in Australian politics.

After the release of that year’s September quarter GDP figures, Mr Keating stunned Australians — and plenty of ALP backbenchers — with his declaration that it was a recession the nation needed.

A recession is technically defined as two consecutive quarters of negative growth. The 1990 recession Mr Keating referred to is generally regarded as Australia’s last recession. However, it actually reached well into the middle of 1991, with negative quarters of growth in March and June of that year.

What is most striking about Mr Keating’s utterances is not that what he said was devoid of any empathy for the thousands of business owners and workers who would soon be tossed on the unemployed scrap heap. It is what that recession marked and what’s happened since...

A quick scan of Australian Bureau of Statistics figures shows that since that June 1991 negative quarter (when the economy contracted 0.2 per cent) there has only been two three-month periods since when the economy has shrunk — September 1993 (a drop of 0.1 per cent) and December 2000 (a drop of 0.8 per cent).

The reason for all these statistics is to give the context of the current period through which we are all living. Economists call it the Great Moderation. It may not sound as imposing as the Great Depression, or as solid as the Great Wall, but in terms of greatness, well, it’s hard to go past.

The Great Moderation refers to the way the global economy, particularly in the developed world, has lost much of its volatility. Let’s put it this way. There hasn’t been a technical recession since Mr Keating’s comments. That’s a record stretch of almost 17 years.

Between 1959 and 1990, however, there were six recessionary periods or one nearly every five years.

And it’s not just Australia that has enjoyed the fruits of the Great Moderation. Great Britain is enjoying the same period of uninterrupted growth, as is much of the OECD.

The US, and some other nations, did dip into recession in the 2000-01 period, but it was neither as deep nor destructive as past financial downfalls.

Now there has been plenty of discussion in economic circles about why the globe is going through perhaps its greatest period of economic stability, and growth, in recorded history.

American economist Peter Summers, in a paper for the Kansas City Federal Reserve, has highlighted three factors as reasons for this global phenomenon. He found monetary policy, the control of inflation and better handling of inventories by the business community, and the interaction of them, were likely to be root causes.

In this context, he’s talking about the decision to take monetary policy control out of the hands of politicians and handing it to central banks (such as the Reserve Bank of Australia), giving those banks an inflation target (normally somewhere between one and three per cent) and the fact businesses now have a much better idea of what they need to produce rather than leaving great piles of goods in warehouses.

Professor Summers found the amount of economic volatility in the G-7 group of nations and Australia had effectively halved. In Australia’s case, he put the date of this abrupt ending in volatility as the third quarter of 1984.

HSBC Australia chief economist John Edwards became an adviser to Paul Keating just ahead of those famous 1990 words.

He says the Great Moderation in the Australian context can be largely attributed to four factors: the advent of enterprise bargaining, the cutting of tariffs, the rise of China (and East Asia) and financial deregulation.

And surprisingly, he puts enterprise bargaining at the top of the reasons of Australia’s economic success.

“The introduction of enterprise bargaining is the point where the market decided wages, where productivity was put into the system and we forever ended the notion of relative wage justification delivered by a centralised industrial relations commission,” he said.

Dr Edwards also puts a lot of importance on the rise of China, and the increased competition faced by Australian businesses by opening up the economy through tariff cuts and financial deregulation.

He said China, and other East Asian nations, had helped deliver low inflation globally while becoming the world’s manufacturing base (and also providing a huge revenue injection of commodity nations such as Australia).

Some experts believe the 1990 recession also marked the death of inflation in this country. With the Reserve Bank developing an inflation target after the recession, it had the starting platform from which it has since fashioned monetary policy where official interest rates with a six in front of them are considered high.

But Dr Edwards said the path to low inflation was set before the recession.

“It was coming down in the mid-1980s,” he said. “A recession of the sort that we had, it did bring inflation down but there are better ways to do it.”

So why is the Great Moderation so important?

I’ll let current US Federal Reserve boss Ben Bernanke explain with these comments he made in 2004.

“Reduced macroeconomic volatility has numerous benefits,” he said. “Lower volatility of inflation improves market functioning, makes economic planning easier and reduces the resources devoted to hedging inflation risks. Lower volatility of output tends to imply more stable employment and a reduction in the extent of economic uncertainty confronting households and firms.”

Hopefully, it means that a future Australian treasurer won’t have to make the same type of comment Paul Keating did on that day 17 years ago.

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Everything's getting cheaper - even the unemployment figures

Australia’s monthly unemployment figures - the most expensive the Bureau produces outside of the census - are about to become cheaper, but slightly less reliable.

The Bureau announced yesterday that in the coming months it will be shrinking the size of its monthly employment survey from around 65,000 Australians to 55,500 – its smallest sample to date...

The head of the Bureau’s labour and demography branch, Paul Sullivan said that recent improvements in the way the data was interpreted meant that it should be possible to cut the sample size without compromising the accuracy of the employment estimate.

But the unemployment estimate – a smaller, harder to obtain figure – should become “slightly” less accurate.

Mr Sullivan said the smaller sample should save the Bureau around $100,000 each year, some of which it would need because the booming labour market itself had made the survey more expensive.

The Bureau tries to collect data from each household it surveys for eight consecutive months. But with fewer people at home during the day that is becoming more expensive, requiring more repeat phone calls and return visits.

Even at the reduced sample size of 55,500, the Bureau’s labour force survey will remain the biggest apart from the census. Each political opinion poll quoted during the election campaign surveyed no more than around 2,000 people.

The Bureau has been making its estimates more accurate in recent months by under-weighting the answers given by people who are responding for the first time. These answers are thought to be less reliable and they don’t reflect changes in employment status in the same way that the subsequent answers do.

Under the new procedures the Bureau will much more intensively sample residents of the Northern Territory who were previously only as intensively sampled as residents of the ACT.

After the changes one in every 54 Northern Territorians will be asked about their employment status, up from around one in every 100 as in the ACT - greatly improving the accuracy of the Northern Territory’s figures.

Paul Sullivan said that the increased inaccuracy of the Australia’s unemployment total would not usually be noticeable by the time it had been turned into an unemployment rate. The extra uncertainty should account for less than one tenth of one percentage point, meaning that what would have been a national unemployment rate of 4.3 per cent would most probably remain an unemployment rate of 4.3 per cent.

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This Turnbull fellow, what's he like?

Greg Barns describes the next Liberal leader, in today's Crikey:

From May until November 1999 I spent almost every day with the man who now wants to lead the Liberal Party, Malcolm Turnbull. I was Malcolm’s National Campaign Director in the 1999 Republic Referendum.

So what sort of leader is he? Has he got tactical nous – the sort of nose for Opposition politics that requires positive policy development alongside plain old bloody minded negativity?

First, a caveat in my observations. As I said, it was eight years ago...

And since that time he has mellowed in my view. He is a little more patient these days with his critics, and with his opponents. Mind you, the monarchist leadership group in the Referendum of David Flint and Kerry Jones would have tested the patience of Job, given their capacity for disinformation and scare tactics.

The one thing that stands out in my memory of the stint I had with Turnbull all those years ago was his indefatigability. This is a man who sends you emails at 3am. He is someone who constantly churns out ideas, strategies and missives to his staff. Turnbull works and works and works and travels, travels and travels for the cause. It does not matter what hour of the day. Just assume that Malcolm will be thinking and working. Of course he does sleep. But he struck me as being in the mould of Margaret Thatcher – requiring little sleep in order to function effectively.

There is in Turnbull also an endearing and genuine sense of egalitarianism that many in the Liberal Party lack. He is an inveterate user of public transport. Instead of taking a cab back to his office up the other end of town, he and I would often jump on a bus at the corner of Park and Elizabeth streets in Sydney, and hop off up at his Goldman Sachs office at the Bent/Phillip street corner. Turnbull engages people in a surprisingly natural way. I saw this at close hand during the fraught months leading up to the November 1999 Referendum. You could take Malcolm to a pub or a shopping centre, and know he wouldn’t look or feel awkward.

I have described Turnbull elsewhere as being the "brightest bloke" in the Australian Parliament. He is intellectually brilliant, no two ways about it. (I saw him write a speech in about 30 minutes on his way from Sydney to Brisbane during the campaign – and it was a cracker). He grasps concepts easily and runs with them. This of course means that suffering fools gladly is inherently difficult for him. Having said that, I was often surprised at Turnbull’s patience in dealing with the myriad of egos and strong personality types that dominated the upper echelons of the Republic campaign. Turnbull would often vent his spleen privately about X or Y, but publicly the only sound you would hear would be the grinding of the Turnbull teeth.

The question that many ask about Turnbull – and it arose again in the election campaign when he made sure the world knew he wanted Australia to ratify Kyoto but Howard vetoed the idea – is whether or not he is a team player. Is he too much of a lone ranger to lead a beleaguered Liberal Party, out of government everywhere for the first time in its 60 odd year history?

The capacity to win hearts and minds and to capture the confidence of his fellow party members is Turnbull’s biggest challenge. Some will argue that the Republic Referendum failed because he could not do that, and that he was just a little too brilliant for his own good. Some of the key advisers to the Republic campaign felt Turnbull wouldn’t take advice – that he wasn’t a listener.

I don’t put myself in that camp. Sure there were times when the collective wisdom of luminaries like now Liberal MP Andrew Robb, former Hawke strategist Peter Baron, pollster Rod Cameron, Neville Wran and the advertising gurus at John Singleton’s agency appeared to be ignored, or at least only partially heard by Turnbull during the campaign. But then, can anyone name a political leader of any note around the world who sometimes decides to back his own instinct against that of his advisers.

One thing is certain. If the Liberal Party goes for Turnbull it will be backing someone who is very different from John Howard, Peter Costello, or Brendan Nelson. It will be a roller coaster ride with Malcolm as leader, but then the Liberals have nothing to lose and everything to gain by throwing caution to the wind.

And since that time he has mellowed in my view. He is a little more patient these days with his critics, and with his opponents. Mind you, the monarchist leadership group in the Referendum of David Flint and Kerry Jones would have tested the patience of Job, given their capacity for disinformation and scare tactics.

The one thing that stands out in my memory of the stint I had with Turnbull all those years ago was his indefatigability. This is a man who sends you emails at 3am. He is someone who constantly churns out ideas, strategies and missives to his staff. Turnbull works and works and works and travels, travels and travels for the cause. It does not matter what hour of the day. Just assume that Malcolm will be thinking and working. Of course he does sleep. But he struck me as being in the mould of Margaret Thatcher – requiring little sleep in order to function effectively.

There is in Turnbull also an endearing and genuine sense of egalitarianism that many in the Liberal Party lack. He is an inveterate user of public transport. Instead of taking a cab back to his office up the other end of town, he and I would often jump on a bus at the corner of Park and Elizabeth streets in Sydney, and hop off up at his Goldman Sachs office at the Bent/Phillip street corner. Turnbull engages people in a surprisingly natural way. I saw this at close hand during the fraught months leading up to the November 1999 Referendum. You could take Malcolm to a pub or a shopping centre, and know he wouldn’t look or feel awkward.

I have described Turnbull elsewhere as being the "brightest bloke" in the Australian Parliament. He is intellectually brilliant, no two ways about it. (I saw him write a speech in about 30 minutes on his way from Sydney to Brisbane during the campaign – and it was a cracker). He grasps concepts easily and runs with them. This of course means that suffering fools gladly is inherently difficult for him. Having said that, I was often surprised at Turnbull’s patience in dealing with the myriad of egos and strong personality types that dominated the upper echelons of the Republic campaign. Turnbull would often vent his spleen privately about X or Y, but publicly the only sound you would hear would be the grinding of the Turnbull teeth.

The question that many ask about Turnbull – and it arose again in the election campaign when he made sure the world knew he wanted Australia to ratify Kyoto but Howard vetoed the idea – is whether or not he is a team player. Is he too much of a lone ranger to lead a beleaguered Liberal Party, out of government everywhere for the first time in its 60 odd year history?

The capacity to win hearts and minds and to capture the confidence of his fellow party members is Turnbull’s biggest challenge. Some will argue that the Republic Referendum failed because he could not do that, and that he was just a little too brilliant for his own good. Some of the key advisers to the Republic campaign felt Turnbull wouldn’t take advice – that he wasn’t a listener.
I don’t put myself in that camp. Sure there were times when the collective wisdom of luminaries like now Liberal MP Andrew Robb, former Hawke strategist Peter Baron, pollster Rod Cameron, Neville Wran and the advertising gurus at John Singleton’s agency appeared to be ignored, or at least only partially heard by Turnbull during the campaign. But then, can anyone name a political leader of any note around the world who sometimes decides to back his own instinct against that of his advisers.

One thing is certain. If the Liberal Party goes for Turnbull it will be backing someone who is very different from John Howard, Peter Costello, or Brendan Nelson. It will be a roller coaster ride with Malcolm as leader, but then the Liberals have nothing to lose and everything to gain by throwing caution to the wind.

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Kevin Rudd's morning

Mr Rudd, why did you drive yourself to work this morning? Don’t you have people to drive you around?

RUDD: Hey, I can drive. It’s a free country. Since Saturday it still is. Why did I drive to work? I wanted to take Marcus, my son, to school. So, I drove him to school. I dropped Therese at the office and then came in here.

JOURNALIST: Do you think that your life is going change dramatically now?

RUDD: No. I’m still Kevin, still from Queensland.

JOURNALIST: Still here to help?

RUDD: Still here to help. No, I wanted to take Marcus to school. I was trying to do it yesterday and it didn’t quite work out. Have you ever tried getting a 14 year old out of bed in the morning on time?

JOURNALIST: How did his school friends respond to the concept of the Prime Minister-elect rolling up at school?

RUDD: I, just as most of the other parents, let him out of the car door, gave him a kiss on the head and off he went.

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TUESDAY COLUMN: Memo to Rudd

Kevin Rudd was never an economic conservative. Not until he took on the Labor leadership in December. A search of parliamentary Hansard and newspaper files reveals no mention of the term in Australia, by anyone, until then.

Overseas it was a label worn by Stephen Harper, Canada’s Prime Minister and the leader of its Conservative Party.

Kevin Rudd is about to learn what it really means...

At a photo opportunity at a Brisbane school yesterday he spelt out his first three priorities - installing a computer on the desk of every secondary student in years 9 to 12; ratifying Kyoto and introducing Labor’s industrial relations changes.

They are straightforward moves and none of them are economically risky.

As it happens a US study of 9,500 students in years 1, 4 and 6 has found that they do little better with computers than without.

In Singapore a study of 657 university students found that that in aggregate those using on-line learning tools do no better than those that do not. The on-line tools helped the students who were already ahead but were “more of an added burden” to those falling behind.

Ratifying Kyoto gets Australia a seat at the table for the world’s most important international negotiation and costs us nothing.

The industrial relations changes outlined in the campaign won’t damage the economy at all, despite the horror scenarios peddled by the Coalition. Business appears not to be worried (the Australian share market surged two per cent yesterday) and the economic studies forecasting doom and gloom look sillier by the week.

(The most outrageous claim made by the outgoing Prime Minister during the campaign was that abolishing WorkChoices would destroy 200,000 to 400,000 jobs. He based it on a simple piece of analysis that accredited all of the increase in jobs not linked to Australia’s trade weighted index to the start of WorkChoices on March 27, 2006. As a lark the ANU’s Professor Adrian redid the analysis to find out how many new jobs it would ascribe to the ascension of Kevin Rudd to the Labor leadership on Monday December 4, 2006. It ascribed more than WorkChoices.)

It is likely that Kevin Rudd’s weekend briefing from Treasury officials in Brisbane didn’t deal with any of these top three priorities.

Instead it will have told him that the budget forecasts around which both sides built their campaigns are obsolete.

Shortly after every election is called the Treasury releases a sort-of guidebook for campaign promises. Its proper title is the Pre-election Economic and Fiscal Outlook. The idea is to give both sides the latest official information with which to work.

This one said that inflation was on track to remain steady at around 2.75 per cent for the foreseeable future.

Importantly for the campaign the forecast was made after budgeting for the Howard government’s two biggest promises: $34 billion of tax cuts and $4 billion in assorted payments to pensioners, carers and retirees.

The implicit message – delivered to each side on Monday October 22 – was that as far as the Treasury could tell even big election bribes wouldn’t push inflation into the Reserve Bank’s danger zone.

Two days later on Wednesday October 24 inflation figures came out that rendered those forecasts obsolete.

The Reserve Bank wacked up interest rates at its next opportunity and then released much more alarming updated forecasts in its regularly-scheduled Quarterly Statement released just hours before John Howard delivered his campaign speech.

(The Treasury hasn’t had a chance to make public its replacement forecasts public, but it will have been delivering them to Kevin Rudd and Wayne Swan in Brisbane over the last two days.)

The Bank’s new forecasts show inflation climbing beyond the top of its target band to 3.25 per cent and staying there for at least a year.

Even by the end of the year after that, more than half way through the new government’s term, the Bank says it can’t be sure that inflation will be comfortably back within its comfort zone.

The forecasts suggest that inflation could spiral out of control.

Even with things as they are it is heading up and will require at least one more hike in interest rates to bring down.

Add in tens of billions of dollars in tax cuts and associated promises and still more interest rate hikes look certain.

A true economic conservative presented with such a scenario would ditch the tax cuts.

Completely ditching them isn’t politically possible. But right now the consequences of delivering the tax cuts as promised look worse. Does Kevin Rudd really want to be remembered as the Prime Minister who brought on three or more interest rate hikes during his first term and pushed mortgage rates up towards 10 per cent?

If he doesn’t, he might have to consider adjusting or staggering the delivery of the promise. He might be being told that in Brisbane right now.

Breaking tax promises in the light of new information has an impressive history. Dr Barry Hughes, a former advisor to Paul Keating makes the point that John Howard himself did it.

Days into his new job as Treasurer in the Fraser government in 1977 John Howard let his name to a campaign that promised a “fistful of dollars”. He failed to follow through after the election declaring the cuts unwise. Bob Hawke cancelled promised tax cuts on gaining office in 1983 and Peter Costello failed to deliver on a 1996 promise that if he became Treasurer he wouldn’t never increase taxes. He introduced several new taxes which labeled “levies” instead.

Paul Keating did it in perhaps the most honorable and economically responsible way in 1993, replacing his promised “L-A-W law” tax cuts with non-inflationary superannuation contributions.

It is not beyond the wit of Kevin Rudd to come up with something similar. Dr Hughes says the obvious solution is to “imitate airlines and railways by arriving late.”

The new Prime Minister would take us into his confidence and say something along the lines of: “I have promised to deliver these tax cuts and I will. But to do so right now would mean higher rates. As a true economic conservative I don’t want to do that. Instead I will deliver the tax cuts later when the pressure is off inflation and things have turned down. That’s when you’ll need them.”

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Peter Costello at close quarters

Costello "liked to weild the power that had been bestowed upon him.”

There was “an implicit threat of unspecified retaliation”

Question time has lost its spark. No-one in parliament could hold a candle to Peter Costello as an entertainer.

All the talk about him “throwing the switch to vaudeville” if ever he became leader ignored the fact that vaudeville was what he did.

His daily routines whenever the parliament was sitting made watching a thrill.

Without Peter Costello making people laugh and taking them along with him for the kill the new Opposition will lack oomph. Whoever else is elected leader may well be good, but in terms of parliamentary pizzazz will be no Peter Costello.

However, as a winner of hearts and minds in his role as Treasurer Peter Costello has cost the Coalition dearly...

Saul Eslake is the chief economist of the ANZ bank. He hasn’t felt free to tell this story until today.

He made it known to me and a number of other people some time ago on the condition that that nothing was printed until either he or Peter Costello was no longer in his job.

As Eslake put it to me in an email: “much as I would love to see this brought to the attention of a wider audience, I obviously can't allow that to happen in circumstances where Costello could inflict damage on the ANZ”.

Outwardly relations between the ANZ and Peter Costello have been good. His wife Tanya Costello is a senior manager with ANZ Philanthropy Partners.

But beneath the surface things have been tense.

In February 2002 Eslake was asked at a chartered accountants conference whether the Howard government had ever engaged in creative accounting.

He replied that it had: in its accounting treatment of the GST; in its timing of Reserve Bank dividend payments; and in using its sell-off of Canberra buildings to appear to improve its underlying cash surplus when it has really improved little.

But he stressed that what it had done had been “no worse than any previous government".

Saul Eslake says Peter Costello phoned the ANZ head John McFarlane and threatened to take what McFarlane subsequently described as “regulatory action which ANZ would not like” if Eslake said that sort of thing again.

Eslake says a member of the Treasurer’s staff also sent a copy of a news report about Eslake to the chairman of the ANZ Charles Goode with an offending quote circled.

McFarlane asked Eslake to ring Costello “to square things off” but Costello wouldn't take the call.

Eslake has told me that “since then there have been other examples where Costello's office has complained to McFarlane's office, or to our media relations people, about things which I have said in terms which have conveyed an implicit threat of unspecified retaliation”.

I know of another chief economist who has described similar behaviour on the Treasurer’s part.

He has told me that he was asked to leave his job as a result.

I put Eslake’s claims to the Treasurer’s office last night but received no response.

In his negotiations with political stakeholders the man who was able to captivate parliament proved similarly unsubtle.

Richard Denniss is these days the chief of staff for the Greens’ leader Bob Brown. In 2002 he was the chief of staff to the then Democrats’ leader Natasha Stott Despoja. In Mr Costello’s budget speech that year he had announced that pensioners and other concession card holders would have to pay more for their medicines. Their co-payment would climb from $3.60 to $4.60 per prescription.

The Democrats said they would oppose the measure in the Senate. Some weeks later Senator Stott Despoja and Dr Denniss were summoned to the Peter Costello’s office.

Denniss says Costello took them through page after page of laminated graphs, talking at them for the best part of an hour. The Treasurer seemed surprised to discover that they hadn’t been won over.

“At one point Costello said: Natasha, you don’t appear to understand the numbers. To which she replied: I do understand the numbers Peter, you don’t have them in the Senate and you won’t be passing this bill”.

A few days later the two were summoned to the Prime Minister’s office. Denniss says he had expected Mr Howard to be even worse.

Instead they found Howard “effusive in apologising for being late, come in sit down, can I get you a cup of tea – lots of chit chat, lots of actual conversation”.

The Prime Minister said “I know you spoke to the Treasurer last week and I’m sure he showed you all his graphs” and I understand your position: “we are trying to drive up the price of medicine for sick people, of course the Democrats are going to oppose it”.

And then he said: “How about ten cents? That wouldn’t hurt anyone.” “It absolutely floored us.”

Howard said: “Natasha, you’re the leader, I’m the leader, can’t we just settle this right now?”

Denniss says he found the Prime Minister almost impossible to resist. “His genius was to make us feel powerful.”

Costello by contrast “wanted to wield the power that had been bestowed upon him.”

As a student Peter Costello studied law rather than economics. He mastered his portfolio in the impressive way that lawyers master briefs. Observing him during several budgets I have never seen him excited about economics. But I have seen his eyes light up at the mention of commercial law.

As Australia’s longest-serving Treasurer and the Howard government’s best parliamentary performer Peter Costello had many of the qualities needed to be a great Treasurer. But perhaps not all.

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Sunday dollars+sense: Put a contract on yourself

From December.

Visit www.stickK.com right now and all you will see is the intriguing invitation to “put a contract on yourself”.

But after the site goes live in December you’ll be able to hand over $1,000, perhaps $10,000, safe in the knowledge that you won’t get it back unless you lose weight.

Will it be an invitation to lose money? You bet. Unless you lose weight instead...

It’s the brainchild of Yale University’s Professor Ian Ayres, who’s both a lawyer and an economist. The economist in him knows that financial incentives work. The lawyer in him knows that they won’t work unless they are watertight.

It is not enough to say to your spouse or friend, “unless I lose five kilos you get to keep the $1,000”. Your friend might take pity on you and hand you back the money anyway.

Ayres has tested the system. A few months back he contracted to lose a pound a week, agreeing to permanently part with $500 for each week he failed. Now that his weight has reached the target he had to keep it there each week or face a penalty. He reckons so far he has avoided $21,000 in penalty payments.

Would such a system of voluntary coercion work? Health economist Eric Finkelstein has tried it with incentives. He found 200 overweight volunteers in North Carolina and paid some $7, some $14, and some nothing for each percentage point of weight they lost.

Three months later those who received nothing had lost 2 pounds, those who had been paid $7 had lost 3 pounds, and those paid $14 had lost 5 pounds.

He’s been working with Tangerine, a company employed by US corporations to bribe their employees to better health as a way of cutting their healthcare bills.

www.stickK.com will use sticks rather than carrots. It won’t get to keep the money that its customers sign away. It’ll send it to charity. If its customers are particularly it’ll send it to ones they don’t like.

It is not yet clear how it will monitor weight loss. Tangerine does it by workplace weigh-ins. StickK might recruit its customers to agree to keep tabs on each other.

Economists are very interested. They going to get valuable data on the sort of contracts that work… so long as they suspend their disbelief.

To classically trained economists the whole idea of voluntary coercion is laughable. People are meant to be rational, never needing to bribe or threaten themselves. If no-one signs up to StickK they’ll be proved right. I think they’ll be proved wrong.

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The last desperate reelection strategy of the Howard government

Didn't work. In the US they call it jury nullification.

The last desperate reelection strategy of the Howard government was to lose the vote but to somehow win enough seats.

It can work, but rarely. It worked for the Hawke Labor government in 1987 and for John Howard himself in 1998.

But to defy a national swing by overpowering the voters in the right number of specific seats with money, advertising and promises to the point where they can’t say no requires extraordinary attention to detail and no room for bad luck.

The luck ran out repeatedly...

The government set aside $45 million to take over the running of a Tasmanian state government hospital in the marginal seat of Braddon and then couldn’t make the deal work by the deadline it had set because the hospital’s staff wouldn’t work under WorkChoices. It was forced to guarantee that they wouldn’t and lost the seat anyway.

In Lindsay in Western Sydney the husband of the retiring Liberal member and the husband of the replacement Liberal candidate were caught out engaging in dirty tricks and the party lost the seat anyway.

But even without the bad luck the strategy was never likely to work this time.

The veteran political analyst Malcolm Mackerras has a phrase for the phenomenon: “when the swing is on, it’s on”.

The swing to Labor of almost 6 per cent – the third biggest since the second world war – was impossible to fight seat by seat.

With targeting and luck the Coalition was able to take one, possibly two seats from Labor, both of them in Western Australia. It was able to win a swing to Malcolm Turnbull in Wentworth, a seat that it should have lost given the nationwide swing.

But these successes were more than offset by Labor wins in seats Labor had no hope of getting had the swing been uniform – most of them in Queensland.

That’s how it always happens according to Mackerras. The swing is never uniform. There are surprises on either side.

Right at the start of this year in a special article for the Canberra Times Mackerras predicted a Ruddslide and was the first to predict that the Prime Minister would lose his own seat.

In the final week of the campaign he said Labor would get 89 seats. It looks to have got 86. But in the tally room last night he said he could never have been precise about which seats. On the national swing it should have won Boothby in South Australia. But the Labor Party made the mistake of picking a footballer’s wife as its candidate and was punished in a state where it otherwise did well.

The surprises tell us much about Australia’s new political geography. Labor has excelled in Queensland, the home of Kevin Rudd and a big beneficiary of the mining boom. But unlike in Western Australia its mining workers are mainly employed under enterprise agreements. They’ve done well without WorkChoices and don’t associate it with their prosperity.

Labor has also done well in NSW and South Australia, two of the states least enjoying the benefits of Australia’s mining-fuelled wave of prosperity, and most likely to feel that times are tough.

In Western Australia, the epicentre of the boom, the Howard Government’s Australian Workplace Agreements are widespread and associated with prosperity. It’s the state in which Labor has done worst.

It’s easy in hindsight to talk about the common sense of the Australian people, but often we do seem to get it right. While moving against John Howard in his own seat, we ensured the survival of his two potential successors, swinging votes towards Malcolm Turnbull and Peter Costello.

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Go on, try to make sense of their costings

Here, or here. A pox on both their houses!

For the election-day paper:

Labor has made an impressive 171 promises during the election campaign, 54 of them being promises to save money.

It says their net cost will be a modest $5 billion compared to the Coalition’s $10.3 billion.

The reconciliation released yesterday takes no account of the tax cuts and other commitments that were factored into the government’s accounts before the campaign began...

Labor’s promises have been audited by a three-person committee made up of a former senior Treasury official Greg Smith, a former senior partner with KPMG John Brown and the editor of the Accounting, Auditing and Accountability Journal Professor James Guthrie.

They have found that Labor’s costings “present a fair estimate of the net financial impact on the federal budget’s underlying cash balance.”

The party has had less luck with the Department of Finance. It reported late yesterday that it had received 36 of labor’s policies too late to cost.

One of Labor’s promises, its $4.7 billion broadband network is claimed by Labor to have no budgetary cost because it will be funded from the future fund.

Of the polices that the department of Finance did cost, it said the promised tax breaks for foreigners who used Australian firms for funds management would cost $505 million instead of the $105 million claimed by the Labor party.

Late yesterday the Treasurer Peter Costello described the difference as a huge hole, providing “400 million reasons why labor can't be trusted”.

But Finance costed some other Labor promises more generously than did Labor itself.

The Coalition concedes that its spending bill is somewhat higher than Labor’s but says it is still on track to achieve budget surpluses of greater than 1 per cent of GDP in each of the next four years.

Labor’s analysis suggests that the Coalition’s surpluses would in fact slip marginally below 1 per cent in the financial year beginning in 2010 - falling to 0.96 per cent.

Labor’s Wayne Swan described the finding as the Coalition’s “$1.1 billion black hole”.

And he said the Coalition had “relied on dubious accounting tricks to give the appearance of meeting its surplus target”, such delaying $398 million of defence spending due in 2010.

The costings suggest that in broad terms there is very little difference in the bills being run up by Labor and the Coalition. Both are targeting a budget surplus of around 1 per cent of GDP in each of the next four years.

This campaign has been the most expensive ever, with each side promising more than $50 billion, including tax cuts.

In the 2004 each side stopped at $13.5 billion.

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SPIN DOCTOR: Flawed from the beginning

The Coalition had the wrong message

On the morning after the Coalition’s last defeat in 1983 the conservative commentator Frank Knopfelmacher appeared on ABC radio and was asked why he thought they had lost.

He replied with anger: “They had nothing to say and they kept saying it”.

The same can’t be said about the Coalition this time. It has had a message, but the wrong one.

It was encapsulated in its slogan and the Prime Minister talked it up again in yesterday’s final campaign address, which was overshadowed by the controversy about the distribution of fake campaign material...

As Mr Howard said: “I haven’t heard Mr Rudd talk about full employment. I haven’t heard him talk about further reducing unemployment. Unlike me, he does not have a goal of reducing unemployment to three per cent during the next term.”

That was actually an embellishment on the goal John Howard set at the beginning of the campaign when he said there was “no reason why the current unemployment rate in Australia should not be markedly lower than it is and certainly with a ‘three’ in front of it.”

But the sad truth is that neither goal is something that Australians currently want.

And it should have been obvious. Advertising works best when it hooks into a perceived need. A promise of water works well during a drought. A promise of jobs works well during a recession.

But a promise of even more water when people already have more than they can handle is unlikely to work at all.

Right now almost anyone who wants a job has one and knows that there are more going begging. In the ACT (Australia’s tightest labour market) there are actually more jobs vacant than there are people available to fill them. A promise of even more jobs adds nothing.

It’s the same with John Howard’s broader (and uncomfortably abstract) concept of “growth”.

You won’t find any politician acknowledging it before election day but Mr Howard was broadly right when he told parliament in March this year that working families had never been better off.

A promise of even faster economic growth, an even greater boost in spending power, isn’t particularly compelling when spending power has climbed an extraordinary 25 per cent since the start of the decade.

Particularly not when the Reserve Bank has mentioned “growth” in the same breath as “inflationary pressures” on every one of the last ten occasions on which it has pushed up interest rates.

It is possible the see our lack of interest in the Prime Minister’s primary selling proposition as a classic “insiders” versus “outsiders” divide: The insiders who have jobs aren’t particularly keen on measures such as accelerated economic growth and WorkChoices that might make life uncomfortable for them while reducing unemployment further. The outsiders who want jobs would welcome the growth and welcome WorkChoices.

Or so the argument goes. But the other truth that no politician will acknowledge right now is that there are very few outsiders left. The head of the Treasury Ken Henry made the point in a leaked address to his staff in March. By and large what is good for those of us with jobs is good for the nation.

Electorally and economically the Coalition chose the wrong selling points in this election, and when they had installed the backdrop and started talking they couldn’t stop.

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If we are on the verge of a worldwide recession...

...might that render our all-powerful Reserve Bank impotent?

Guest poster Fred Argy writes (in Troppo):

Most economists like myself have come to believe that monetary policy now carries so much punch – because a reduction in interest rates has a compound impact on borrowing costs, on exchange rates and on asset prices – that it is unthinkable that we will have a serious recession ever again. That is, the RBA will always come to the rescue.

Paul Samuelson, the famed textbook writer who first taught me economics and subsequent winner of the Nobel Prize for Economics, has now shaken my belief more than a little. He has written a piece in the Herald Tribune (November 19) which is surprisingly pessimistic about the role of monetary policy in the current sub-prime mortgage crisis...

He writes (brackets are mine):

“It used to be enough for a central bank to lean against the wind. That means lower interest rates when unemployment is too high….. Today central bankers cannot know whether current interest rates are too high or too low. The safest bond interest rates are indeed low (he means relative to inflation). But financial panic (engendered by the mortgage lending crisis) means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory”.

If he is right, the present crisis could easily develop into a serious US recession. Samuelson reminds us that, while China, India, Russia etc. may partly make up for any US recession, US still accounts for 20 per cent of global output. And financial market contagion across the world can be deadly.

His policy prescription is radical. First, he wants quasi-public agencies, like Fannie May and Freddie Mac, to fill the vacuum in the lending market and secondly (perhaps at a later date?) he wants prudential regulations tightened to discourage predatory lending. Samuelson obviously does not believe that central banks can solve the problem on their own. I have no problems with his prescriptions as an ultimate resort but I am not so sure he is right about the impotence of the central bank. Still, it makes one think!

Back in Australia, the implications are twofold. Firstly, it is possible to argue that the RBA was a little rash to raise interest rates earlier this month. A ‘wait and see’ policy might have been better. Secondly, fiscal policy may need to play a bigger role in preventing a recession here. If monetary policy does prove less effective, let’s hope a Howard or Rudd government will not be afraid to go into deficit financing (net borrowing or drawing on Future Fund) to pay for badly needed social and economic infrastructure. Unfortunately, although both Howard and Rudd say that they will run surpluses “over the business cycle”, they seem at times to be promising cash surpluses come what may. Heaven help us if that proves correct!

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John Howard's turn...

At the National Press Club, lunchtime:

* On the fake election leaflet: "There are myriad criticisms that can be made of the Australian Labor part6y, but I do not believe the Labor party has any sympathy for the Bali bombers."

* If a Liberal candidate's husband distributed the leaflet there is no need to sack her. "Because her husband may have done a stupid thing there is no reason that should be visited on her. I would have thought that was a very old-fashioned view of women in Australia.

* "I have dissociated myself from it. I think it's stupid, it's offensive, it's untrue. I mean for heavens sake get a sense of proportion."

* "I do not think that what has happened in Lindsay is evidence of any underlying racism in the Liberal party."

* "We I say we need to keep reforming I am speaking generically. On industrial relations I think we have got the balance right."

* "I don't believe Rudd's talk about a meat axe to the public service. The role of the public sector unions would be too great. If he is elected on Saturday you can be sure that is one promise that he will never carry out.

* I have been in a lot of elections and this is not an angry campaign, and by the way it is not a dirty one either. I don't think people do want to change the fundamental direction, whereas in 1996 a lot of people were cranky with the lopsided political correctness.

* "I think when it comes to the Murray Darling plan we have had the most disgraceful obstruction from the government of Victoria." The Federation has got to make way for the nation when it comes to these issues.

* "I have seen a transition to a new leader work on the other side of the world in a country with a very similar political system to us, from Mr Blair to Mr Brown, and it worked. We are open about this, we are not concealing anything, we don't have any Kirribilli House pact.

That's it - perhaps John Howard's last National Press Club address. Voting in 42 hours.

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So what is it with the Liberal party and fake leaflets?

This is the evil piece of work doing the rounds in western Sydney, distributed by the husband of the outgoing Liberal MP Jackie Kelly:



And this is the leaflet circulating in the ACT falsely claiming that the Greens support legalised drugs, and authorised by the director of the ACT Liberal Party - not that you would know that.

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SPIN DOCTOR: It's welfare Jim, but not as we know it

Expect to hear about a "transition from a welfare state to an opportunity society" when John Howard fronts the cameras at the National Press Club today.

He has coined the phrase just recently and used it in his policy launch, in an address to the Institute of Public Affairs, and in a campaign interview with Laurie Oakes.

Googling by Labor suggests that another Prime Minister came up with the idea first.

Britain’s Tony Blair (a Labour man) three years used John Howard’s formulation saying he wanted to move the United Kingdom “from the traditional welfare state to an opportunity society that helps families with the daily problems they face”.

Both leaders seem to share the same idea of an “opportunity society”.

Despite what they say they don’t actually oppose welfare...

Figures released yesterday by the Australian Institute of Health and Welfare show that welfare spending by all levels of Australian government has ballooned 57 per cent in seven years to a record $90 billion.

That’s faster growth than the consumer price index, which climbed 22 per cent in seven years, and even faster than Australia’s soaring gross domestic product, which jumped 50 per cent.

It is all the odder when it is borne in mind that welfare payments normally shrink as an economy boomed. Fewer people need them.

And the Institute’s figures don’t include a number of the Howard Government’s newer welfare measures directed mainly to better-off Australians such as the $3 billion uncapped private health insurance rebate and billion tax holiday for superannuation payouts costed at $2.3 billion a year and set to grow.

The Prime Minister himself made it clear in his policy launch that he doesn’t object to his sort of welfare.

Right after saying that he wanted to move Australia from being a welfare state to an opportunity society he said: “The Coalition is committed to Australia remaining a great home-owning society, indeed one of the greatest in the world, where the dream of home ownership remains at the heart of the Australian experience and within reach of each successive generation. Today I announce new measures to assist Australians looking to get a foot in the door of their first home.”

John Howard’s vision of an opportunity society is about giving a leg up to people who are upwardly mobile.

When it comes to education he says the Coalition parties are “unashamedly the parties of parental school choice. The blossoming of low-fee independent schools in the last decade, which we have supported, has given many families for the first time real choice over the school to which they send their child”.

In health he supports “a tax break for private health insurance”.

It's welfare, for people who want to get ahead.

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Tanner reveals the razor

Labor is to slash the budget of nearly every public service by 2 per cent if elected as part of a one-off measure designed to help it save $10 billion and fund its spending promises.

The 2 per cent increase in the government’s so-called efficiency dividend announced late yesterday would take it from 1.25 per cent to 3.25 per cent for one year only.

Exempted from the impost would be departments and agencies affected by other Labor cutbacks including Employment and Workplace Relations, the National Capital Authority and the Australian Securities and Investments Commission. The operational areas of Defence would also be exempt...

Labor’s Finance spokesman Lindsay Tanner told the Canberra Times he expected the increased $1.5 billion dividend to be affordable, with most of it coming from reduced spending on advertising, consultancies, recruitment, market research and media monitoring in accordance with Labor’s new priorities.

However he could rule out redundancies. “Current vacancy rates, turnover and attrition” would help but when asked whether he could guarantee that no public redundancies would result Mr Tanner replied “we say we believe there will be no need for redundancies”.

A virtual freeze on net new public service hirings would slow the ACT’s economy dramatically, while allowing the real estate market to come back into balance putting downward pressure on rents and house prices.

Mr Tanner has also been given the task of running the razor gang promised by the Labor leader should he win office, cutting deeper into what Mr Rudd described yesterday as a “bloated” public service administration.

Other programs to be axed by Labor include continuing work on the government’s stalled Access Card (saving $933 million) the “bloated WorkChoices bureaucracy" saving $258 million.

Labor’s plan to increase funding for the tax office by $179 million over four years in order to gather an extra $740 million largely from large businesses and high wealth individuals received a partial tick from the Department of Finance late yesterday. It costed the payoff at $708 million.

Labor has now submitted all of its $10 billion in planned savings to the Finance Department for costing, although many may have arrived too late. It says on its website that it only guarantees to cost proposals received by 5.30pm last Thursday.

At the start of the campaign Mr Tanner pledged that all of Labor’s spending promises would be completely offset by savings to be revealed during the last week of the campaign. He stressed that the pledge did not apply to Labor’s tens of billions of tax promises.

Asked by the Canberra Times last night whether he had in fact been able to fully offset all of Labor’s spending promises he paused and replied, “no further comment”.

Labor’s $10 billion in promised savings covering about $12 billion of spending contrasts with the Coalition’s $12 billion of spending promises most of which are not offset.

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