A rate rise in May "is about as likely as a Bulldogs premiership"

Tim Colebatch in this morning's Age:

"IT COULD be the last bit of economic good news for a while, but it was nice. Australia's unemployment rate has shrunk to less than 4% — 3.97%, to be precise — for the first time since the Long Boom ended, back in 1974.

But that was in February, which may have been the last month of this long summer for Australia's economic welfare — 16½ years of growth, which has seen 3 million people gain jobs, our output per head expand by 50%, and living standards swell from top to bottom.

Now it is March, and what happens next is another matter. The Reserve Bank is worried about inflation. OK, let's be blunt: inflation is yesterday's problem.

There will be inflation tomorrow, but it will not be the problem we, or even the Reserve, will be worrying about.

Analysts greeted yesterday's good news on jobs with the usual knee-jerk reaction: this shows the economy is strong, so it raises the risk of an interest rate rise in May.

No, it won't. An interest rate rise in May is about as likely as a Bulldogs premiership."

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February: One new full-time job every 18 seconds, and an unemployment rate below 4 per cent

A dramatic surge in new full-time jobs has pushed Australia's unemployment rate down below 4 per cent for the first time in more than three decades.

At 3.97 per cent, Australia's unemployment rate for February is the first to fall below 4 per cent since August 1974.

The unexpected result, released yesterday, represents an early achievement of a goal espoused by the former Prime Minister John during the November election campaign when he said there was no reason why Australia's unemployment rate should not have “a three in front of it”, although he added that that would not be possible “if Labor was elected with its anti-small business policies”.

An torrent of 47,663 new full-time jobs swept into the labour market in February, created at the rate of one every 18 seconds; 11,000 of them cannibalised part-time positions...

The Treasurer Wayne Swan welcomed the news telling parliament that “we celebrate jobs, we are the party of jobs, they go to the very core of our existence”. The Opposition spokesman Malcolm Turnbull declared the new record high in employment “the great economic legacy of the Howard Government”.

He said Australia’s economy had never been stronger or more resilient.

The news appeared to sit oddly with the results of consumer sentiment surveys released on Wednesday pointing to a collapse in confidence.

But the ANZ's chief economist Saul Eslake said the two pieces of news were not in conflict. Employment was a “lagging indicator”.

“If the Australian economy is now approaching, or at, a turning point, labour market data will be among the last of the important series to confirm that,” he said.

The ANZ bank, like Westpac, believes that teconomic growth is about to turn down and that the Reserve Bank's next interest rate move will be down, not up.

Last night the Macquarie Bank's Rory Robertson told his clients to expect the Reserve Bank to hold its nerve in the face of the booming employment numbers and to keep its rates “on-hold indefinitely”. He said the Bank knew that employment to continue to climb even after the economy had begun to “head south”.

The ACT gained an extra 500 jobs in the last 12 months, an annual growth rate of 1.1 per cent which is well below the Australian average of 2.7 per cent.

The ACT remains the state with the lowest unemployment rate in trend terms, again reporting 2.4 per cent, well below the next lowest states Western Australia and Queensland, with 2.8 per cent and 3.6 per cent.

New South Wales gained the bulk of the extra jobs in February, boosting its workforce by 18,000. Queensland boosted employment by 14,000 and South Australia by 5,600.


PS: Someone asked how to find out what the unemployment rate to two decimal places.

Here's how:

Go to the labour force page of the ABS website:

http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6202.0?OpenDocument

But instead of clicking on the "details" tab which will give you the
published document which has the answer to one decimal place (4.0 per
cent)...

...click on the "related Information" tab.

- click on the first link "Labour Force, Australia, Spreadsheets -
6202.0.55.001 - Feb 2008"

- click on the "details" tab

- download the spreadsheet "6202.0.55.001 Table 02. Labour force
status by Sex - Seasonally adjusted"

Open the spreadsheet.

Click on "unemployment rate persons, seasonally adjusted"

Go to the bottom of the column, where you will see a figure that says "4.0"

Click on it, so that a box forms around it.

Look at the number that has appeared in the box at the top of the screen.

You should see that it reads 3.96973 etc...

Round that to two decimal places in your head. It comes to 3.97 per cent.

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Well maybe not. Australia's new unemployment rate has a '3' in front of it!

An extra 47,700 full-time workers in February, 11,000 fewer part-time workers, and an unemployment rate of 4.0 per cent, which before rounding is...

3.97 per cent

Oh my gosh!

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It's over. After 12 successive interest rate rises

A dramatic collapse in consumer confidence has caused Westpac to declare that Australia’s record run of 12 consecutive interest rate rises is over. The bank says the next move in professional interest rates will be down - most likely in the second half of next year.

The Reserve Bank’s latest rise of 0.25 per cent has been amplified by the private banks who this week lifted their mortgage rates by between 0.30 per cent and 0.35 per cent - pushing their standard variable rates well above 9 per cent.

The Westpac-Melbourne Institute consumer sentiment survey, conducted within days of last week’s move by the Reserve appears to show that that hike – the fourth in eight months – broke the back of consumer confidence.

The Consumer Sentiment Index collapsed 9.1 per cent on the February result, and 21 per cent on the December result – the sharpest three-month fall since the mid-1970s oil crisis and spiral of inflation and unemployment presided over by the Whitlam government in 1975...

Every component of the Index plummeted. The assessment of family finances slid 15 per cent in the month and is down 25 per cent since the start of this year. The assessment of whether now was a good time to buy a major household item slid 11 per cent over the month and is down 29 per cent since the start of the year.

Mortgage holders suffered the biggest collapse in confidence, down 12 per cent over the month and 31 per cent over the year. Even Australians who had paid off their houses and were mortgage-free suffered a 6 per cent drop in confidence over the month and 22 per cent drop over the year.

Describing the results as “extraordinary” Westpac’s chief economist Bill Evans said they reflected not only the succession of mortgage rate hikes but also the global financial crisis which had precipitated the biggest fall in the Australian share market since the 1991 recession.

“In any interest rate hike cycle there will be one move - usually the last - when the effect is substantially greater than the effect of any previous move. This result probably signals that the Reserve Bank has tightened for the last time in this long cycle,” Mr Evans said.

Westpac’s assessment was backed up by Commonwealth Securities which said that consumer confidence had fallen to the level that historically tended to predict an economic slowdown.

TD Securities also declared that interest rates had peaked, predicting a cut as soon as late this year by which time it said growth would have weakened and inflation risks would have eased.

In Parliament the Prime Minister Mr Rudd said that the drop in consumer confidence combined with growing global uncertainty in financial markets reinforced the need for “responsible economic policy, prudent fiscal management and prudent management of the outlays of government”.

He refused to commit the government to supporting a claim by the Council of Trades Unions for a $26 a week pay rise for Australia’s poorest workers before the Fair Pay Commission.

“The government will be asking the Fair Pay Commission for a fair and reasonable outcome. We want an outcome that takes into account the cost of living pressures on working families and we want an outcome that takes into account the need for restraint,” he said.

“It is in that context that I again call on Australia’s business leaders to show some restraint when it comes to their salaries at the top end of remuneration. I do not want to see a situation where we end up with two Australias.”

At the Press Club the ACTU Secretary Jeff Lawrence called for an end to tax deductibility for pay packets of more than $1 million and noted that the head of the Fair Pay Commission Professor Ian Harper had recently been awarded a pay increase of $38,000 per year which he said took his pay for the part-time position to nearly $120,000.



COMMENT

Whatever you do, don’t take out a fixed-rate mortgage.

After six years of heading up, Australian interest rates are set to head down.

Perhaps not by the end of this year as TD Securities is telling its clients, but almost certainly by the end of next year as Westpac is telling its.

There may be one last hike in official interest rates (although I very much doubt it), and the banks themselves may independently tighten the screws one last time in order to try to restore their profit margins, but after that the worst will be over.

If you can survive with interest rates where they are or perhaps just little bit higher, you’ll survive.

Consumer confidence has plummeted into the range that brings on an economic downturn and is moving towards the range that presages a recession. It’s the sort of thing the Reserve Bank wanted.

Australians are not only telling the people who compile the index that they are planning to wind back spending, they are doing it.

Other figures out yesterday show that in the past five months we have cancelled or reduced $70 billion of credit. We are pulling in our horns.

Access Economics this morning predicts that retail spending is in the process of slowing to a crawl. It says by 2009 real spending should be climbing by just 1.8 per cent nationally, and by only 0.6 per cent in the ACT.

That’s right. Retail spending should hardly grow at all in the ACT. Access says Canberra residents are more sensitive to interest rates than most and we are about to hit with the results of the razor gang and a slow down in the construction boom.

While inflation won’t immediately fall back to where the Reserve Bank wants, it is about to lose its upward momentum.

The Reserve Bank’s problem is going to change from one of trying to rein in the economy to one of managing the slowdown.

It will begin scanning the employment figures as keenly as it has been scanning the inflation figures.

The next ones are out today. Employment has been climbing for an extraordinary 16 months. I wouldn’t be surprised if this month the run ends.

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Tuesday Column: Hypocrisy over carers

Spare me the sob stories.

I used to work in television. I know how it’s done.

First you find someone in need who is going go “suffer” as a result of a government “decision” – in this case Labor’s apparently heartless move to axe the $1,600 a year carers’ bonus.

Then you get that person to describe the genuinely troubling circumstances in which they live, then you get the Opposition to pile on.

Like this: “For God’s sake Mr Rudd, please rule out an attack on Australia’s carers. These are the saints in Australian society. They’re the people that pick up the load when governments and non-government organisations fail."

That’s the Opposition Leader Brendan Nelson.

How about: “I accept that it is important to maintain the fight against inflation. But the idea that carers, who are some of the most vulnerable people in this country, should be front and centre in the fight against inflation is just wrong. And for the government to say ‘we need an even bigger surplus, therefore we are cutting bonuses to carers’ is using carers as human shields in the war against inflation.”

That's from the Coalition’s former Minister for Industrial Relations Tony Abbott.

Never mind that the entire premise is wrong and that it is the Opposition (and arguably the media) who have been using carers as human shields...

The report that broke the story in The Australian on Friday was wrongly headed “Razor gang slices out compassion as carer bonus slashed”. It began: “Labor will scrap annual bonuses of $1600 paid to carers as its budget razor gang carves deep into welfare.”

The razor gang, otherwise known as the Expenditure Review Committee, was never going to slash a carers’ bonus.

There wasn’t a carers’ bonus to slash.

Not only was it not in the forward estimates – the previous government never budgeted for it continue – it wasn’t even in the budget for the financial year that we are currently in.

How could that be? The previous Treasurer Peter Costello gave the game away when he announced in last May’s budget that, as in the previous three budgets, the bonus would be paid by June 30. That’s right, June 30, 2007 - an odd date for a payment that was announced in the 2007-08 budget.

The purpose of the payment, dare I say it, was not so much to support carers as to find somewhere to stash what looked like being an embarrassingly big surplus for the financial year about to end that would otherwise go into the Future Fund and be unavailable for electoral bribery.

Carers weren’t the only people whose needs were treated this way.

Every senior citizen in receipt of a government allowance got a one-off grant of $500 paid just before June 30.

Some of them were bemused.

The 91-year old former Labor Prime Minister Gough Whitlam, who isn’t poorly off, declared himself touched to receive a note attached to his cheque in which he said a government minister finally acknowledged his contribution to the Australian economy.

The mass-produced personalized note from the Veterans Affairs Minister praised Whitlam’s “hard work and contribution to the community” which it said had “contributed in many ways to the good fortune our country now enjoys”.

Three of the unexpectedly lucky recipients thought the payments were so odd they sent them straight to John Howard’s political opponent in the seat of Bennelong Maxine McKew and asked her to use them to help get rid of him.

The extra superannuation co-contribution announced in the May budget was even odder. For one year only the government doubled the co-contribution it made to the super funds of low-income Australians who put in extra money. But in order to get the money out the door before June 30, 2007 the year chosen was 2005-06. That meant that the co-contribution, designed as incentive, could be no such thing. It rewarded only past behaviour that couldn’t be changed.

Australian former Prisoners of War in Europe and their surviving widows did perhaps the best of the lot. They received an uncomfortably large one-off payment of $25,000 each; money that could only have been of use to them if they invested it - unless they were planning a lot of overseas travel.

And then there were the ghost rail projects. The Audit Office reported in February that just before the ends of July in 2004, 2005 and 2006 the Coalition authorised special grants to the Australian Rail Track Corporation, “so as to reduce the budget surplus”.

The Corporation hadn’t asked for the money and couldn’t use it. The Audit Office says it had to park it while it worked out how to use it, costing the government more than $100 million in lost interest.

All up, an estimate by the Australian Financial Review suggests the 2007-08 budget paid out $4.1 billion in last-minute one-off grants to be got out the door before the end of 2006-07 as a means of raiding that year’s surplus.

A last minute surge in revenue and unexpected under spending was threatening to push it up by $5.4 billion.

So big was the $4.1 billion last-minute flood of grants it approached the $6.3 of new spending announced in the budget for the 2007-08 financial year itself.

That’s the way in which the carers bonuses and also the seniors bonus were handed out last year – as a disposable afterthought, a last-minute means of balancing surplus-inflated books.

The Coalition leader may now say “for God's sake, if ever there's a group of people in this community that deserve to be reassured that they're going to continue to receive financial assistance in an affluent country it's got to be carers”, but he wasn’t saying it then.

Carers themselves, while grateful for the Coalition’s last-minute budget-balancing exercises, were never happy about the way in which they were being treated.

The head of Carers ACT Dee McGrath told the Canberra Times last week that “the problem with the bonus payments was they were non−recurrent and this was setting up false expectations and that is always a very dangerous thing”.

It is the Coalition should be condemned for the way in which it treated carers, not the Rudd government.

Had it recompensed them properly it would have cost it a lot more than an extra $1,600 per carer per year and it would have been a permanent part of the budget, impossible to remove and not the subject of hypocritical hand wringing and silly headlines such as “PM punishes the vulnerable”.

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Please don't cut our tax (right now)

Ross Gittins, in this morning's Sydney Morning Herald, is essential reading:

"Why would any Treasurer with a claim to being responsible lock himself into a promise to cut tax by a given amount in the coming financial year, the year after that and the year after that?

It's hard to be confident of what state the economy will be in at the end of the first year, let alone what it will be like in 2010-11.

Worse, why would any Treasurer with a half a brain promise tax cuts at the top of a boom, when the Reserve Bank and his own Treasury secretary had been banging on for ages about the high risk of an inflation break-out with the economy close to full capacity?"

There is much, much more. "All things considered", as they say in American public radio.

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Sunday dollars+sense: But I've got to have it, it costs zero

Last week I mentioned a new book by the behavioural economist Dan Ariely that describes ways in which we are “Predictably Irrational”, the book’s title.

Not only do we base our guess as to what price something should be on the number that most recently passed before our eyes (really, it happened in an experiment I took part in) but we are also decidedly weird about the price zero.

If something is “free” we want it, no matter what it really costs.

He has outlined his findings in an academic paper available (free) on the web entitled Zero as a Special Price: The True Value of Free Products...

In one experiment he asked 60 people to choose between three alternatives. They could either buy (a) a low-value chocolate - a Hershey’s Kiss - for once cent; (b) a higher value chocolate - a Ferrero Rocher - for 26 cents; or (c) nothing.

Around 40 per cent wanted one chocolate, 40 per cent the other, and 20 per cent nothing.

Then he did it again, cutting both prices by just one cent but keeping the relativities the same. The Kiss was free, the Ferrero Rocher cost 25 cents.

The result: almost everyone went for the free Kiss.

As he put it: “A one cent difference in price has an enormous influence on demands if it represents the difference between a positive and a zero price.”

He tried a more complex series of experiments on children who came to his door playing trick-or-treat. In asking them to choose between different combinations of chocolates he discovered that they were unerringly good at calculating and demanding the option that got them the most sugar. Until he presented one of the options (which in fact did have a cost in other chocolate lost) as “free”.

The children jumped at it. It was the only time they failed to calculate the best sugar hit.

And he has discovered that the price “zero” affects us in even stranger ways.

He placed a big box of chocolates in front of two groups of students telling one they were free, the other that each cost 5 cents.

Naturally more students took the chocolates when they were free.

But weirdly when the chocolates were free, most students took only one. When they cost money, the students took more than one each.

Think carefully when someone offers you something for free. Your response won’t be at all rational.


Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, HarperCollins February 19, 2008

Kristina Shampanier, Nina Mazar and Dan Ariely (2007) “Zero as a Special Price: The True Value of Free Products”. Marketing Science. Vol. 26, No. 6, 742 - 757.

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Saturday Forum: Lindsay Tanner, not quite unplugged

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

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

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

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

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

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

It was clear that he meant it...

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

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

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

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

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

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

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

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

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

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

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

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

Are they it finding it more difficult than they expected?

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

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

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

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

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

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

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

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

He leaves the possibility open.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Treasury tells the truth about its past masters, and the Budgets they forced it to write

Strewth! Embargoed until this morning and all.

The Commonwealth Treasury has launched an assault on the previous government’s economic priorities and on the growing size of the public service.

The publication of the Treasury’s assessment of the previous government’s spending record, available this morning on the Treasury’s website, follows a speech by the Treasury Secretary Ken Henry this week that attacked both the previous government’s policy of “aspirational nationalism” and the thinking behind its $10 billion water plan.

The Treasury stresses in the document released this morning that the views expressed in it are those of the two authors, Kirsty Laurie and Jason McDonald from the Treasury’s budget division, and not necessarily those of the department itself...

The release comes as the Finance Minister Lindsay Tanner confirms in an interview in this morning’s Canberra Times that entire government programs, including tax concessions, are facing his Razor Gang’s axe.

The Treasury report says that in the past decade of Coalition government inflation-adjusted spending jumped from $175 billion to $261 billion, and is on track to hit $282 billion unless wound back.

It says real government spending grew faster between 2004-05 and 2007-08 than in any four-year period since the 1990’s recession.

It says the Howard government’s surge in spending was unusual, along with a surge in spending by the Whitlam government in the 1970s, in taking place at a time when the economy is not in recession.

The economic cost of the surge was much higher than it would have been at another time because the economy was “operating at close to its limits of capacity” and resources had to be redirected to the government from other parts of the economy.

Employment in the public service had swelled 29 per cent since 1998 and was likely to be “reducing the supply of highly educated labour to the rest of the economy”.

This is because the proportion of public servants with at least a bachelor’s degree was almost twice that of the private sector – 40 per cent, compared with 23 per cent.

The number of new decisions announced in each budget had doubled over the Howard decade with most of the new decisions involving relatively small parcels of money each worth less than $100 million over the forward estimates.

However the number of spending decisions worth more than $1 billion had climbed from one in 1997-98 to nine in 2007-08.

By contrast savings measures all but vanished over the life of the Coalition government. The Treasury officers say around one third of all the measures in the 1997-98 budget had a savings component. By the end of the Howard government savings measures averaged 1.5 per cent of total measures.

Tax expenditures, otherwise known as tax breaks or tax concessions soared during the life of the Coalition government. The Treasury says they jumped 51 per cent in real terms since 1997-98, climbing from $33 billion a year to $50 billion and are on track to climb higher still. It warns that this spending has “similar impacts on the economy to conventional spending.”

Notwithstanding the recent economic boom, which has cut spending on unemployment benefits, assistance to the aged and families with dependent children had “grown strongly”.

Since the onset of the commodities boom in 2003 government spending on industry assistance had climbed by 6 per cent a year.

The Treasury says since 204 the Coalition gained an extra $334 billion in unexpected revenue. It gave away $314 billion of it in new spending or tax cuts.


A perspective on trends in Australian Government spending, Economic Roundup, Commonwealth Treasury, Saturday, 8 March 2008

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Six reasons not to pour even more money into super

Fred Argy, who I think has it right, in a letter in the AFR today:

Despite the pleas from many eminent economists to deliver the tax cuts through superannuation, I can think of six good reasons against it.

* The diversion of tax cuts to superannuation would further fatten a highly subsidised, protected and bloated tax shelter that, after the Howard government's decision to remove altogether the tax on superannuation benefits when people turn 60 (including full exemption from the Medicare levy), will cost taxpayers about 2.5 per cent of GDP in the years ahead, with the tax benefits captured disproportionately by the richer half of retirees.

* For most middle and high income earners, the present 9 per cent contributions cap will, over a full working life, leave them better off in retirement than when they were at work. Additional superannuation might therefore have perverse effects on their annual saving and encourage them to retire early, hardly what is needed. This does not apply to lower income earners but there are more cost-effective ways of assisting them to save for their retirement, including through a better targeted superannuation co-contribution scheme...

* Lower income families are doing it hard. They should not be denied the opportunity to either accelerate their house mortgage repayments (a form of saving) or to sustain their essential spending in the face of high food and petrol prices, even if this does inject some extra demand in the economy.

* In my view, by the time the tax cuts become effective, the economy will have started to slow down anyway under the weight of market and policy developments. Over the full year 2008-09, the Australian labour market might even benefit from some extra spending.

* Tax cuts at the lower end of the income spectrum would encourage greater workforce participation by fringe workers.

* Another broken promise would further damage the integrity of our political system.

The Superannuation Guarantee Levy was a great leveller and an important incentive to save when introduced in the early 1990s, but it is now becoming a source of growing wealth inequality and losing a good deal of its original economic purpose.

Read more >>

Australia's weakest economy

“When you are being beaten by NSW you know you are a loser”

The ACT is the worst-performing economy in the country according the latest Australian National Accounts released yesterday.

They show (on page 7) that state final demand grew by just 0.2 per cent in trend terms in the December quarter, less than in any other state. Even in New South Wales, traditionally regarded as the basked case among Australian states, state final demand grew by 1.0 per cent.

In the year to December the ACT's state final demand grew by 1.7 per cent in trend terms, also the worst result in the country, well behind the national average of 5.3 per cent.

The Canberra-based director of Access Economics who specialises in measuring state economies, Chris Richardson said the ACT figures were bleak.

“When you are being beaten by NSW you know you're a loser,” he told the Canberra Times...

The construction boom in the ACT had passed its peak. And consumer spending was more restrained as well.

“It can't be our incomes. The ACT has high incomes,” Mr Richardson said. “But we are also more highly mortgaged than most.”

“And perhaps we are better informed. I suspect that Canberra saw the inevitably of further rate rises in the December quarter, before the rest of Australia. Our mortgage holders were probably a little earlier to react than most.”

If so, Canberra residents are behaving as the Reserve Bank would like all Australians to behave, “throttling back without throttling,” in Mr Richardson's words.

The ACT Chief Minister Jon Stanhope rejected the Statistician's interpretation of the ACT's economic health, publishing instead a different measure not presented by the Bureau of Statistics.

He said that measure, trend state final demand “in year on year terms to the December quarter”, grew by 3.5 per cent, well below the Australian average but not absolute bottom, being above the results for South Australia and the Northern Territory.

He said the figure was “a strong result” that confirmed “the strength of the ACT economy, with high levels of activity, record high levels of investment and a robust labour market”.

A record $5.3 billion of investment was recorded during 2007 and non-dwelling was the second highest on record, after 2006.

Mr Richardson said that until now strong economic growth in the ACT had had two supports. One, construction, was easing back. The other was the boom in government spending and public service employment.

Its future lay in the balance, pending the outcome of the Finance Minister's razor gang to be announced in the May budget.

The Commonwealth Treasurer Wayne Swan said the make up of the national accounts strengthened his determination to “look out for wasteful expenditure, to eliminate it, and to direct it towards enhancing the productive capacity of the economy.”

The economy as a whole grew by 3.9 per cent in the year to December and 0.6 per cent in the December quarter, but domestic demand accelerated to grow by a seasonally adjusted 5.7 per cent over the year and 1.6 per cent in the quarter.

At the same time productivity growth stalled.

“The national accounts show there was no productivity growth whatever over 2007. That's right, zero productivity growth in 2007. And over the last five years, average productivity growth has been lower than in any other equivalent period in the last 16 years.”

“When productivity began to turn down inflation began to tick up. And that is the story that the Rudd Government is dealing with,” Mr Swan said.

Read more >>

Top of the GDP pops: Not us.

Trend growth in State Final Demand. (National Accounts, page seven)


The ACT is bottom of the pack.

WA is growing about as fast as in China. Not surprising, I suppose.

Read more >>

Ken Henry "buckets" Coalition policies

The head of the Treasury Dr Ken Henry has moved to distance himself from former Coalition masters, including John Howard, Peter Costello and Malcolm Turnbull, attacking their election program of “aspirational nationalism” and the thinking behind their $10 billion water program.

Delivering the annual Ian Little memorial lecture in Melbourne last night in honour of a former Secretary of the Victorian Treasury Dr Henry said the Secretary would have rejected the policy of “aspirational nationalism” put forward by John Howard in the lead up to last year's election.

Mr Howard launched the policy when announcing that his government would take over the Mersey Hospital in Tasmania in order to stop the state government from closing it down.

The Prime Minister promised that if the Mersey takeover was successful “aspirational nationalism” would be applied more widely...

Dr Henry said last night that the policy implied “a startlingly new concept of vertical competitive federalism – that is, competition between the Commonwealth on the one hand and the States and Territories on the other.”

He said his Victorian colleague would have been “never in any doubt that the national reform agenda had no hope of being implemented” under such a polciy.

The Treasury was excluded from the Mersey Hospital decision and also from the discussions that led to the Prime Minister's announcement of his $10 billion water program in January last year.

In a speech to Treasury staff later leaked to the media Dr Henry suggested that the plan was flawed saying “water has got away from us a bit in recent times, but it will come back for some quality Treasury input at some stage – it will have to”.

Mr Costello rebuked him at the time saying that “Treasury is no water expert. Treasury is good at Treasury, but Treasury has not been engaged in water”.

The Water Minister Mr Turnbull attacked him for “not knowing how much it costs to pipe a channel, how much it costs to replace a Dethridge wheel with a computerised flume gate, and how much it costs to line 10 kilometres of leaky channel along the Murrumbidgee River”.

Last night Dr Henry hit back saying telling his audience it had “been said that while I know about Treasury, I don’t know about water”.

“Instead of talking to you about water, then, I’ll talk to you about Treasury.”

He explained that when he joined the Treasury in 1984 and applied for a home loan he was told that I had to join a queue. A previous Coalition government had capped the price of home loans, forcing banks to ration their supply.

“Remarkably, people in power were surprised to find that the interest rate cap was having a regressive impact. It’s a wonder the political response wasn’t to set up a bureaucratic apparatus.”

“An innovative minister might even have proposed using vast sums of taxpayers’ money to develop imaginative programs that would have reduced the funding needs of borrowers with larger houses as a means of releasing more funds to go around the system.”

“Think that far-fetched? If you do, then you don’t know much about water either,” Dr Henry said.

The Australian water market was beset by “administered prices, legal protections on restraint of trade and, as a consequence, rationing”.

“In the irrigation areas the Dethridge wheels stop turning and the computerised flume gates run bone dry.”

Dr Henry called for a national market in water where free trade would allow it to flow to the people who valued it the most.

He said Australia needed leadership that had “a clear sense of the national interest”.

Read more >>

What on earth is the Reserve Bank thinking?

You can breathe (slightly) more easily. The Reserve Bank jacked up rates in August, in November, in February and in March. It isn't going to do so in April.

Back-to-back rises, like the two we have just had, are unusual. The Reserve regards this double header – its first in four years – as a way of "turning up the speed" of its assault on inflation.

Having kicked unusually hard, it will wait and see what damage it has done. It won't know until the next official inflation reading comes out on April 23, just days after the Prime Minister's Australia 2020 summit in Canberra...

It won't hike before then at its next scheduled meeting next month.

And if there are clear signs that it is making inroads into inflation
it won't hike at its May meeting either.

The Bank's statement released yesterday points to tentative signs that
it is making inroads. It says household spending seems to be
moderating (we will know more after the release of today's GDP
figures) and that business and consumer sentiment is softer with
household borrowing slowing.

Perhaps the economy is turning down as the Reserve Bank wants.

Certainly the big banks would do it a favour (at a cost to their own
image) if they jacked up their mortgage rates by more than the 0.25
per cent increase the Reserve Bank will initiate today.

The Bank gives the impression it wouldn't mind if they did.

They would have done some of its work for it.

If inflation turns out not to be weakening when the next figures are
out the Bank will push up rates again.

It doesn't buy the increasingly popular argument that it should go
easy on inflation because a lot of it is beyond its control.

It knows that a fair bit of it will respond to higher interest rates
even if it has to hurt a lot of people as it keeps pushing those rates
up.

It isn't particularly squeamish about the damage it causes along the way.

In the words of the Macquarie Bank's Rory Robertson, himself a former
Reserve Bank employee, its attitude is that if tight monetary policy
isn't hurting, it's not working.


THAT WAS THE "COMMENT", BELOW IS THE "STORY" (NEWSPAPER SPEAK):

The Prime Minister has said he “takes responsibility” for spiraling mortgage rates and hinted at moves to boost savings in the budget as the Reserve Bank has moved to push up interest rates for the second time in four weeks.

The latest rate hike of 0.25 per cent, an unusual back-to-back move following a 0.25 per cent hike in February, is the forth such hike in eight months and the twelfth since the Reserve Bank began pushing up rates in 2002.

It will push rate up to their highest point since January 1992.

It should increase the monthly repayment on a $400,000 mortgage by a further $68.77, or by more if banks and other lenders take the opportunity to widen their margins as they did in January and in February.

A borrower owing $400,000 would be paying $325 a month more than before rates began climbing quickly in August.

Opinion is divided about how soon the Bank will increase again. A statement issued by the Reserve Bank Governor after yesterday's board meeting said he would “continue to evaluate prospects for economic activity and inflation” in the months ahead.

The Bank pointed to “tentative evidence” that household spending was slowing but said that “a significant slowing in demand” was needed in order to reduce inflation.

As the Reserve Bank board met, the Bureau of Statistics released retail trade figures that appeared to show that spending stalled in January after climbing for seven months.

The Bank noted that global financial markets were “fragile” but said that labour market conditions remained strong amid reports of high capacity usage and labour shortages.

It said it had made the move in order to “contain and reduce inflation over the medium term”.

The Bank's two Assistant Governors will explain the decision in two speeches to business audiences later today.

Declaring that it was “a difficult day for working families”, Mr Rudd said he understood that the Reserve Bank's decision would make life tough for many people.

But he said he had a responsibility to manage the economy.

“I am Prime Minister of the country, I take responsibility for the good news and the bad news and this is bad news,” he said.

The Opposition Treasury Spokesman Mr Turnbull said he was appalled that the Prime Minister and Treasurer endorsed an economic policy which is designed to slow growth.

“They have been egging the Reserve Bank on to put up rates. Remember it was Wayne Swan, who just before the last Reserve Bank meeting said ‘the inflation genie is out of the bottle,’ Now they are doing that because they want to put Australians out of work.”

“Kevin Rudd and Wayne Swan think unemployment is too low, they think it has got to go back up again to slow economic growth, but they are not prepared to admit that, they are trying to fool people into thinking that you can put up interest rates, slash government spending, but it isn’t going to have any impact on jobs,” he said.

“What I want to know about Kevin Rudd’s working families is how many of them will still be working by the time he is finished?”

Mr Rudd said he was considering budget measures to boost national savings in order to put downward pressure on inflation and interest rates.

“We’re the party of superannuation and we have always supported ways and means by which you can boost private savings and encourage that,’’ he said.

The bank will next consider pushing up rates at its board meeting in May after the release of the next official inflation figures on April 23.

Read more >>

How much more per month?

Here's my table for this morning's Canberra Times:

Read more >>

Tuesday Column: Are we about to abandon the quest for full employment?

If you are thinking about changing jobs, do it now.

The Reserve Bank is going to push up interest rates and keep pushing them up until it pushes Australians out of work.

Wayne Swan, Malcolm Turnbull, and enough economists to fill the Sydney Harbour agree - our golden days of a 4.1 per cent rate of unemployment are behind us.

Here's the brutal assessment of Australia's most astute Reserve Bank watcher, Rory Robertson of the Macquarie Bank:

"The Reserve Bank's concern about medium-term inflation boils down to a particular worry that unemployment has fallen too far and wages growth is accelerating in an unsustainable way."

"Accordingly, the purpose of any further interest rate hike in March will be to dampen domestic demand and push unemployment back towards 5 per cent"...

That's the way the Opposition's Malcolm Turnbull sees it. He famously
introduced the concept of NAIRU into question time last month. It
isn't a Pacific island, it's the Non-Accelerating Inflation Rate of
Unemployment – the rate below which inflation is said to climb.

It is also called the "natural rate of unemployment", because if
unemployment falls below it, it is said to spark wage claims that will
force up inflation and force the Bank to jack up interest rates to
push unemployment back up.

In parliament Turnbull asked Swan where he thought the NAIRU was, and
if it was higher than 4.1 per cent "how many Australian jobs would
have to be sacrificed in order to achieve it."

By the way, a senior Treasury economist confirmed in a speech last
year that he thought the answer was "currently around 4.7 per cent,
although there is a considerable band of uncertainty."

If the NAIRU is 4.7 per cent then around 66,500 jobs will need to be
sacrificed to achieve it. 4.1 per cent will have been as good as our
rate of unemployment got.

Swan dodged the question in parliament, but two days ago on the Sunday
program confirmed that the fight against inflation would cost jobs,
saying that "the economy may slow a lot but I have no advice from the
Treasury that suggests that unemployment will increase substantially".
Note the use of the word "substantially". Swan accepted the premise
that unemployment was about to stop falling and begin to climb.

If Turnbull, Swan and the harbour full of economists are right, our
dole queues are about to grow again after shrinking more or less
continuously for 15 years.

But not everyone agrees.

Dr Barry Hughes is the doyen of Australian labour market
specialists. A former professor of economics and an advisor to Paul
Keating and several state premiers he knows his way around the
employment stats better than anyone else.

In a study released this week by the Australian Industry Group he
has dared to challenge the conventional wisdom by asking "how natural
is the Australian natural rate?

He has a number of problems with the idea. One is that Australia
appears to have two rates of unemployment at the moment – a low one in
the mining-rich states "where wage and price inflation has been
increasing and is almost completely outside the control of the
authorities" and a higher one in the rest of the country where "the
natural rate of unemployment seems to have gone missing in action".

NAIRU turns out to be elusive. Like the Loch Ness Monster, whenever it
is sited, it moves.

Back at the start of the decade NAIRU was believed to be 6 per cent.
If unemployment fell lower than that, it was thought that inflation
would rise. Unemployment did fall lower, inflation didn't rise and so
the estimate of NAIRU was cut. It's a continually moving constant.

Dr Hughes has dared to suggest that the conventional view about NAIRU
"might be incomplete, if not wrong".

Professor Ian McDonald of the University of Melbourne has calculated
an alternative lower-bound to sustainable unemployment using a
different method popular in Europe.

It abandons the traditional assumption that a low rate of unemployment
will automatically spark inflation by pointing out that that depends
on a number of things including trade union power. Australia's trade
unions are weaker than they used to be, partly as a result of
WorkChoices. As a result it might now be possible for unemployment to
fall very low without sparking wage-price inflation.

His estimate of the lowest sustainable rate of unemployment in
Australia right now is 2.5 per cent - a rate that seems low only to
Australians with short memories. It is where the rate was in the late
1960s and early 1970s.

Professor McDonald says only at that level should wages now pose a
threat to inflation. Only at an unemployment rate of 2.5 per cent
would it be literally true to say that Australians were fully
employed.

But surely the Reserve Bank needs to push up interest rates when its
board meets today in order to contain the inflation we've got right
now, I asked him on the phone last night.

It doesn't, because interest rate hikes are designed to tackle wage
inflation, which we don't have in most of the country, he replied.

The inflation we do have right now is fueled by climate change (higher
energy and water prices), a worldwide food shortage (higher grocery
prices), higher oil prices, higher rents and the mining boom.

Higher interest rates will dent none of these.

But they will crunch the economy and push people out of work.

For no reason, in Professor McDonald's view.

We will have abandoned the quest for a 2.5 per cent national rate of
unemployment just when it was within our reach.

As it happens the ACT's unemployment rate has already fallen to 2.5
per cent. Inflation here is no worse than it is in Melbourne where
the unemployment rate is 4.5 per cent.

Professor McDonald might be right.

If he is, our Reserve Bank is about to make a tragic mistake.

Read more >>

Inflation soars, so... a rate rise is a done deal

An offer by the Prime Minister of investor tax credits to boost the supply of low-income housing has been overshadowed by news on inflation considered certain to force the Reserve Bank board to push up interest rates when it meets this morning.

The TD Securities Melbourne Institute monthly inflation gauge which closely tracks the official measure climbed 4.0 per cent in the year to February in headline terms and 4.1 per cent in underlying terms.

The result is sharply higher than the 3.0 and 3.6 per cent most recently reported by the Bureau of Statistics and well above the Reserve Bank's target of 2 to 3 per cent...

On releasing the data the senior strategist at TD Securities Joshua
Williamson said that the Reserve Bank would increase the general level
of interest rates by at least 0.25 per cent today and, unless
inflation pressures eased in the very near future, "further increases
beyond that" were likely.

Mr Rudd yesterday announced a National Rental Affordability Scheme
under under which the Commonwealth would provide private investors
with tax credits of $6,000 per year for ten years for building new
properties that were rented out at 20 per cent below the market rate.

The aim would be to cut rent on a new average three bedroom unit from
the current $350 per week to $280 a week.

The scheme should encourage the construction of 3,500 affordable
rental houses in the coming financial year and eventually up to
100,000; double the number promised during the election campaign.

The Prime Minister also announced a $500 million housing affordability
fund to tackle rising infrastructure charges and local government
planning delays.

It would invest $30 million to upgrade information systems within
local authorities to speed up planning approvals

Mr Rudd also released a study conducted by the National Centre for
Social and Economic Research which found that 1.1 million low and
middle-income households were now in housing stress, spending more
than 30 per cent of their gross income on either rent or mortgages.

The number represents an increase of 220,000 since 2004.

The modeling showed that while in 1996 the mortgage repayments on an
average loan soaked up 17.9 per cent of average household income, by
the end of 2007 they were soaking up 32.3 per cent – roughly twice as
much - suggesting that the typical borrower was in mortgage stress.

The Prime Minister held out no hope of things improving quickly saying
that rents had almost doubled since 1996 and that on current estimates
they would climb another 28.5 per cent before the end of the decade.

Speaking on Brisbane radio he urged mortgage lenders to do no more
than pass on the interest rate hike of 0.25 per cent expected from the
Reserve Bank today saying that if they went further the government
would "not be restrained from making appropriate comment".

"Banks experiencing record profitability should be very, very mindful
of their corporate and community standing before leaning on people who
borrow from those banks any further," he said.

"I think everyone out there who obtains a home mortgage has to go into
it with their eyes wide open and look at the fine print of what banks
are offering."

Serval banks are keen to increase their mortgage rates by more than
the 0.25 per cent increase to be initiated by the Reserve Bank today.

An increase of 0.4 per cent, expected from some lenders, would add a
further $100 to the monthly cost of servicing a $400,000 loan.

Read more >>

Consider yourself lucky if your mortgage rate only goes up 0.25 per cent

Australia’s big banks are weighing up whether to lift their variable mortgage rates by more than the 0.25 per cent increase expected to be delivered by the Reserve Bank on Tuesday.

The Reserve Bank board will meet from 9.30am Tuesday and announce its decision about interest rates at 2.30pm.

It is expected to lift its so-called cash rate by a further 0.25 per cent - the fourth such increase in eight months - taking the rate to 7.25 per cent, a 13-year high.

But private banks including the Commonwealth, ANZ and Westpac are considering adding an extra increase on top of the 0.25 per cent, taking the total hike to perhaps as much as 0.4 per cent.

Such a hike would add a further $100 per month to the cost of repaying a $400,000 loan...

That would be on top of increases so far totaling $225 per month in the past
year.

The private banks need to boost their rates by more than the 0.25 per cent
to be mandated by the Reserve because their costs have soared in recent
weeks.

Just three weeks ago Australia’s major banks were paying wholesale rates of
7.25 per cent for the money they lend for housing. Those rates have now
exploded to around 8.0 per cent, meaning that the banks are now losing
money on each new home loan they write.

An analyst employed by one of the major banks told the Canberra Times that
in order to be sure of returning to profit the banks should lift their
mortgage rates by as much as 0.8 percentage points.

But he said none of the banks were game to announce such a big increase and
all hoped the wholesale rates retreated.

“If the banks think these high wholesale rates are going to hang around
rather than be just a short-term blip they will be more inclined to raise
their mortgage rates, but all of them expect wholesale rates to come back at
some point. It’s a question of the timing,” he said.

The Treasurer Wayne Swan yesterday expressed sympathy for the Australians
about to be hit by the next rate rise but said he could not prevent it.

“I don't comment on possible decisions of the Reserve Bank. My job as
Treasurer is to support the Bank by putting as much downward pressure on
inflation as I possibly can and unfortunately at the moment underlying
inflation is at a 16 year high. That was the parting gift of the Liberal
Party of Australia to the people of Australia,” he said.

Asked whether unemployment would climb substantially as a result of the
coming interest rate hikes and spending cuts he had planned for the May
budget the Treasurer said it would not.

“The economy may slow a lot but I have no advice from the Treasury that
suggests that unemployment will increase substantially,” Mr Swan said.

The analyst who spoke to the Canberra Times said none of the big banks
wanted to be the first to lift its rates in excess of what the Reserve Bank
mandated, but each wanted another bank to go first.

“Look at the backlash the Commonwealth Bank had. It had the lowest increase
when it widened its rates in January, so in February had another go to catch
up.”

“It copped a huge amount of flack on talkback radio and the Treasurer Wayne
Swan attacked it.”

“It’s a big brand issue for the banks. There will be a lot of game theory
at work with each trying to call each other’s bluff on who moves first."

Read more >>

Razor gang angst

It's only just begun.

The Finance Minister Mr Tanner has been accused of breaking a commitment not to take the axe to defence spending, previously believed to be off limits to his razor gang which is attempting to find budget savings of $4 billion.

In an interview on the Ten Network’s Meet the Press yesterday Mr Tanner said that defence spending was under review by his committee which wanted to make sure that it did not grow by more than 3 per cent per annum in real terms.

“The pressures in defence spending with the very widespread commitments we've got overseas, whether it's Afghanistan in our region or wherever else, are considerable. So even getting savings to ensure we don't go beyond that 3 per cent real is a very important exercise,” the Minister said.

But Labor’s election promised released late last year promised that defence spending would grow by a minimum of 3 per cent per annum rather than a maximum...

The Opposition defence spokesman Senator Minchin accused Mr Tanner of breaking an election promise.

“The difference for defence in being restricted to 3 per cent growth rather being assured this as a guaranteed minimum could be substantial,” he said.

The Coalition had promised to allow defence spending to grow by 3.5 per cent per annum.

Senator Minchin said the cut would come on top of Labor’s extra 2 per cent efficiency dividend, which he said would cut $500 million from the defence budget over the coming decade.

This was disputed by a spokesman for Mr Tanner who said the extra 2 per cent efficiency dividend applied only to the “non-operational” parts of the defence budget – about 14 per cent of the total. It would be imposed for one year only.

But Senator Minchin responded by pointing to the forward estimates available on the Department of Defence website which identify the cost of the 2 per cent one-off dividend as $490.5 million over ten years.

“It’s called one-off, but it is a permanent reduction in their base,” Senator Minchin told the Canberra Times.

Asked in the interview whether anything would be off limits to his Expenditure Review Committee the Finance Minister replied that he was “not regarding anything as immune”.

“We are not setting anything aside that hasn't in some way been the subject of an election commitment, and saying, well, that's off limits,” he said.

Read more >>

Sunday dollars+sense: Are we really that suggestible?

Try this if you dare. Get out a piece of paper, take out your driver's licence, and write down the last two digits of its number at the top of the page.

Then make a guess about the value of a particular bottle of very good red wine. Its label says it was created for the 2000 Olympics bid – it might be a collectors item.

Write your valuation – anything between 00 dollars and 99 dollars - at the bottom of the bottom of the page.

Then compare the two figures - the two digits at the end of your drivers' licence number and your estimate of the value of the bottle of wine. Are they are in any way related? If you think they are not you are just like me when I took part in the experiment in a lecture hall in the University of NSW in 2003.

Conducting the lecture was Daniel Kahneman, who had just won the Nobel Prize for economics.

He then asked each of us to compare our pages with those of our neighbours...

And sure enough, those of us with licences whose last two digits made up a low number thought the wine was cheap. Those us with high numbers at the end of our licences had thought the wine was expensive.

Daniel Kahneman's collaborator, Dan Ariely from the Massachusetts Institute of Technology has just published a book about this line of research entitled Predictably Irrational: The Hidden Forces That Shape Our Decisions.

His point is not just that human beings are often irrational. We know that, but it is an insight that does not give us much useful information. His point is that “our irrational behaviours are neither random nor senseless – they are systematic.”

He has performed the anchoring experiment dozens of times on his own students and he says he sees it in Starbucks.

The prices written on the board are supposed to have been determined by the supply and demand of Double Chocolate Frappuccinos and so on. But what if the numbers on the board are really there to influence your view of what is a reasonable amount to pay for a long black?

Have you ever noticed how the expensive flat screen televisions that you don't want are displayed right next to the modest ones you are thinking of buying. It might be not in order to get you to buy the more expensive models but in order to “anchor” your estimate of what the mid-priced TV should be worth.

Dan has more to say as well. You can buy the book, or wait until next week.

Read more >>

Saturday Forum: Deregulation, the Spice Girls way

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

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

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

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

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

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

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

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

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

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

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

Why didn’t Australia go the next step?

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

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

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

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

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

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

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

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

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

He is proposing deregulation in the most literal sense.

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

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

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

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

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

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

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

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

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

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

But to Gruen himself these promises are beside the point.

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

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

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

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

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

He admits that it’s a big ask.

For one thing businesses themselves might not be keen.

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

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

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

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

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

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

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

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

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

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

His son has set his sights about as high.


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

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2020: Want to be in it?

The deadline is 5.00pm tomorrow, Friday.

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Prepare for a Gruen world

Dr Nicholas Gruen has lots of good ideas. Ross Gittins wrote about several of them this week.

Ross, and me as well, think he would he great at the 2020 Summit.

But bigger, more important things are already happening. Nicholas has thought a lot about the scourge of regulation and how to smartly tame it. A Gruen world would be different to the one we are in. The default would be no regulation.

Last night, in a speech on deregulation, Australia's first Minister for Finance and Deregulation Lindsay Tanner said:

"A key to our success in advancing this deregulation agenda will be our capacity to be open with the community and facilitate compliance rather than just waiting to punish breaches.

Even small changes to practices can make a big difference. Regulators should work with industry to identify improvements to regulatory practices.

I want to encourage a culture of continuous regulatory improvement in the same way manufacturers seek to continuously refine production processes.

As US diplomat and economist Chester Bowles once remarked “government is too big and too important to be left to the politicians”.

I have asked leading economist, Nicholas Gruen, to work with me on this. Nicholas has championed the application of continuous improvement and total quality management processes to regulation."

Congratulations, Nicholas Gruen.

Below the fold is my story for this morning's CT:


The Treasurer Wayne Swan has signaled that his first budget due in eleven weeks time will cut entire government programs rather than just shave the cost of administration.

Addressing the Business Council of Australia in Melbourne last night Mr Swan said that in order to deliver high quality programs he was prepared “to cut or reprioritise” poor quality ones.

It is the first time that the Treasurer has confirmed that entire government programs are under the axe.

Declining to identify any particular government programs Mr Swan said that he was determined to ease the burden that had been placed on interest rates by undisciplined government spending.

“Let’s be honest – the previous government’s lax fiscal policy made the Reserve Bank’s job harder,” he said.

“We want to make it easier, with a new era of fiscal discipline.”

The already-promised surplus of $18 billion or 1.5 per cent of GDP was just the beginning. In addition ,Mr Swan would “let the automatic stabilisers that are built into the budget do their job”. That meant that any upward surprises in revenue would be banked, rather than spent as the previous government had done.

Previous upward surprises in revenue have been in the order to $8 billion to $12 billion, suggesting that the surplus unveiled on budget night could be as big as $30 billion.

The Treasurer stressed that the tax cuts promised during the election would be delivered despite continuing criticism from economists, most recently a former Reserve Bank board member and ANU economist Bob Gregory who claimed on Monday the cuts were “bad news”.

“Nobody in their right mind would be having these tax cuts,” he told Dow Jones Newswires.

Mr Swan said the tax cuts would add an extra 2.5 million hours of work to the economy each week as a result of the 64,000 people they would entice into the workforce.

Professor Gregory told Dow Jones that “the idea that the tax cuts will boost participation, and therefore you don't have to worry, is a story that doesn't have any serious credibility.”

He said the best way to boost labour supply was to keep economic growth strong by containing inflation, which meant canceling the tax cuts.

In Sydney last night the Minister for Finance Lindsay Tanner indicated that the budget would include an attack on red tape.

He said that every new measure that was presented to Cabinet would have to come with a Regulatory Impact Statement and satisfy a “one-in one-out” rule.

Ministers proposing new a regulations would have to specify which existing regulations they would remove.

Among the results of excessive regulation were 50 and 80 page financial product disclosure statements and a requirement that pesticide manufacturers lodge an application to change the colour of their product labels.

Mr Tanner announced the appointment of a private-sector economist Dr Nicholas Gruen to work with him on changing the nature of regulation. Dr Gruen is an advocate of contestable regulation, whereby businesses have the ability to object to regulations they can demonstrate have no point.

The government also announced the appointment of the former head of Ansett and British Airways Sir Rod Eddington as the first head of Infrastructure Australia, the new body that would prioritise infrastructure needs.

Mr Swan told the Business Council that Australia's ports, roads and railways were straining under the weight of the commodities boom.

“You see this lack of foresight in the ships sitting off our ports or the job ads that fill our papers,” he said.

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