The Ruddspeak cloud

From The Stubborn Mule

Read more >>

Could baseload power demand be a myth?

In November 1993 I took my radio microphone into the control room at the Sydney utility Pacific Power.

It was Melbourne Cup day. I was there to see and record what happened during the few minutes the race was run.

I learned that providing power is a very difficult (and very wasteful) enterprise.

For the the alternating current to keep coming out of our sockets at 50 cycles per second supply needs to exactly equal demand (as the economists would say).

When power consumption goes down (as it does every year during the Melbourne Cup when factories stop their production lines) the supply has to shrink at the same time, otherwise the readout on the control room wall shows not 50, but 50.1 or 49.9 or even worse, and devices such as televisions that depend on the direction of current switching 50 times per second rate don't work properly.

So as the power demand eased off, the machinery began cutting the supply...

First it shut off the intake to hydro turbines under the water in the Snowy Mountains, then it would stop gas turning turbines in coal-fired plants in the Hunter.

"But how can you do that?" I asked, although probably not in exactly those words.

"If you stop burning coal to boil the water, you won't be able to quickly start again when the Melbourne Cup stops."

The answer - more or less in these words: "We just point the steam away from the turbine until its time to point it back."

Coal-fired power generators (and nuclear-fired ones) can only accommodate quick changes in power demand by wasting power.

Well that's okay, the advocates of coal and nuclear say, they're needed for "baseload".

I began to doubt that then, and to suspect the causality ran the other way - that baseload is created in order to accomodate the way coal (and nuclear) plants work.

We create baseload "demand" by giving people financial incentives to heat their water at night.

A few years later an engineer phoned me at the ABC to explain (and complain) about his suspicion that Victorian power suppliers were creating baseload "demand" by putting a higher voltage through the wires at night so that in order to run household meters more quickly. He said he had the measurements to prove it. He also said they stopped doing it when he complained.

Wind power and hydro have none of these problems - yet we are told they are not good for base load.

A few weeks back I had to write a story for The Age about a related matter - which they didn't publish (sometimes it happens). It's down below.

Then I remembered this piece from John Quiggin which puts a lot of my vague thoughts into ordered words.

I've reproduced it right here (but also read the original for the comments).

What do you think?

(By the way, the Pacific Power people told me that they have to adjust the power supply to fit around the commercial breaks of really popular TV programs. Not so much because everyone gets up and turns on their kitchen lights, but because they go to the toilet, and activate pumps that have to haul more water to the top of Sydney's water towers.)


The myth of baseload power demand

July 22nd, 2009 John Quiggin

Today’s Fin has a leader arguing that we should be laying the ground for a move to nuclear power. It’s commendably realistic about the long time lags involved, and argues we should get started on preparations now. My view is that it would be better to wait and see if the US makes progress on its (currently faltering) attempts to revive the industry there. But the thing that really got me going was the repetition of the claim that alternative energy sources are problematic because they can’t meet “baseload power demand”.

I’ve said before that this claim is wrong, but I think it’s time to sharpen my position, and state two claims:

*There is no relevant sense in which baseload power demand is a meaningful concept in our current electricity supply system.

*Any electricity supply system likely to exist in the next 40 years and capable of meeting peak power demand will have no problems meeting baseload demand.

The first point may seem paradoxical, but the reasoning is quite straightforward. Our current electricity system is based primarily on coal-fired power stations which cannot be turned on and off at short notice. So, generating power during times of peak demand (daytime) entails generating power during off-peak times, even if there is no demand for that power at a price that covers average costs. That is, we have a baseload supply, which easily exceeds the demand for off-peak power at average cost, and sometimes even at fuel cost. The result, as we observe, is that off-peak power must be heavily discounted, and even so, demand is barely enough to keep the turbines turning.

To consider any meaningful notion of baseload demand, we could do a bottom-up analysis, and consider how much of electricity demand corresponds to the notion of a continuous, stable 24/7 demand. In the average household, for example, this would include the fridge and those ‘vampire’ appliances that are left on standby all the time. In addition, of course, lots of households have off-peak hot water, but this is only because of the price incentives designed to get rid of the excess baseload supply. The same points apply to offices and a most industrial uses (including some that operate at night to take advantage of cheap power, even though other costs are higher). There are only a few continuous processes like aluminium smelting that really constitute baseload demand in the strict sense. Of course, there are off-peak demands that don’t constitute baseload in the strict sense, like people watching TV at 3am, but there’s no reason to think that such demands are large.

To get a quantitative handle, we can use the following analysis: currently off peak prices are about half of daytime prices, and offpeak demand is about half of daytime demand (illustrative numbers only, will fix). If we didn’t discount offpeak electricity, it seems likely that offpeak demand would be around a quarter of daytime demand.

So, as long as 25 per cent of supply is generated by baseload suppliers like coal, oil, geothermal and nuclear, our main problem will be one of excess baseload supply, as at present. We’re unlikely to reach that point for some decades. But even then, the offpeak demand could be met by reliable sources that are independent of time of day, most obviously gas and hydro. In that case, standard principles of marginal cost pricing would suggest that there should be no off-peak discount. In such a system, the baseload sources would be used optimally, rather than generating excess low-value electricity as at present.

A baseload demand problem would only emerge in a system reliant almost entirely (more than 75 per cent) on solar electricity. And, even if such a problem emerged, it could be dealt with exactly as we deal with our current problem of excess baseload supply, by changing relative prices.

I haven’t dealt with the separate problem of supply variability from solar and wind (hint: the answer has to do with prices, as before). But, in our current circumstances, and as regards marginal increments to the system, the far bigger problem is that of supply invariability. It is a positive disadvantage for nuclear that it generates power 24 hours a day rather than solely during the daytime. Much of that power, and the fuel used to generate it, is effectively wasted.


You're getting smart meters, whether you want them or not

August 3, 2009 Peter Martin

Expect an extra $53 per annum on your electricity bill from next year for a service you probably haven't asked for.

The Australian Energy Regulator has proposed a range of increases averaging $53 dollars per household to pay for new compulsory "smart meters" to be installed in all Victorian homes over four years from 2010.

The new fees set out in the draft declaration would apply to all homes from next year even though the introduction of the smart meters would be staged.

The annual fee will increase by a further $25 in 2012.

AER Chairman Steve Edwell concedes that the bulk of the benefit from the smart meters will go to the electricity distributors who will no longer need to send meter readers to each house.

But he says the regulator will be making sure that those eventual savings are passed back to customers in tariffs.

"There's a four-year roll out and everybody pays upfront. Once the meters are installed and we starting getting some cost savings, they will be passed back to consumers," he told The Age.

Asked why consumers had to pay the full cost of something designed to benefit the suppliers he said that the distributors had wanted certainty.

"They've effectively got to order all these metes upfront. They are incurring charges on day one that they want to know they'll get compensation for."

The new meters communicate with the distributors by a range of technologies including mobile phone signals and have a short life span, necessitating a continuing impost of electricity bills beyond their installation.

Victoria is alone in mandating the technology without extensive trials.

"Victoria is leading the charge," said Mr Edwell. "All the other states are following the decision of the Ministerial Council on Energy to trial them first to look at the costs and benefits."

Those benefits include allowing the suppliers to charge higher tariffs at times of peak power use, in theory allowing them to alter the price minute by minute.

"You'll see the result on your bill and you'll be able to alter your behaviour to cut your spending, for example by not using your washing machine in peak time or turning off your air conditioner."

"If it succeeds in cutting peak power use there will be less need for investment in the network and less need for power prices to keep rising."

But Professor Stephen King of the Melbourne Business School is unconvinced, describing the compulsory installation of and payment for the meters as "bad economics".

"If the benefits outweigh the costs then the market will sort it out - consumers and suppliers will come to an arrangement.

"There is no suggestion that the government needs to force everyone to have Pay-TV cables connected to our houses, we would view such compulsion as ludicrous," the former ACCC Commissioner writes on his blog.

"Yet smart meters are no more complex than Pay-TV infrastructure."

"But the government might be doing it because they do not think the private benefits outweigh the costs, in which case the roll out is just an expensive political stunt – expensive to every household in Victoria."

Photo: UK's Battersea power station, Guardian

Read more >>

The Reserve Bank really spells it out - in case you hadn't twigged

From the August board minutes, just released:

"Members noted that the cash rate had been reduced to the current very low level in anticipation of very weak economic outcomes. In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.

In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely. A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.

Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead."

Read more >>

Where I'll be tonight

Read more >>

Prepare for a "second shockwave"

It's a genuine fear within the Treasury, if not the Reserve Bank

TREASURY boss Ken Henry has called for an end to "premature" celebrations about surviving the global crisis, warning that a "second shockwave" could be around the corner.

In a public address that distanced Treasury from the optimistic stance adopted by the Reserve Bank Dr Henry told an industry forum in Canberra pundits should be careful "not to prematurely declare that the war is over".

"The Australian economy does look, certainly relative to the rest of the world, very resilient," he said.

"But the rest of the world is not out of the woods yet. It is possible that there will be a second shockwave. I have no reason to believe it will be anything like the first shockwave, but there could be a second shockwave"...

"That would have implications for future growth," he told the Australian Industry Group, "So I think we should be a little cautious about rushing to declare victory just yet."

Reserve Bank Governor Glenn Stevens Friday told parliamentarians the present downturn would probably be one of Australia's "shallower ones" and that unemployment would be unlikely to reach the 8.5 per cent budget forecast, adding that interest rates should soon move towards "more normal" levels.

Dr Henry who sits with Governor Stevens on the Reserve Bank board was more cautious saying that while "there are grounds for optimism, there's no doubt," he was "not rushing to judgment."

"I think it is fair to say that nobody fully understands the reasons for the somewhat better economic performance. We will update our forecasts later in the year and take stock, but we are spending this present period analysing in some depth the reasons."

Dr Henry spoke as Japan joined Germany and France in emerging from recession, returning to positive growth for the first time in more than a year.

However Japanese economists warned that its return to growth of 0.9 per cent in the June quarter might be short-lived, pointing out that spending was weak, wages were falling and layoffs in firms such as Toyota and Sony had pushed Japan's unemployment rate up towards Australia's at 5.4 per cent.

The Treasury head was optimistic about Australia's prospects once global growth returned, describing China and India as "only in the early stages of catching up with the developed world living standards", and saying the process "could have a very long way to run".

Australia would benefit more than most from the next phase of global growth, being "seen as possessing the best of the qualities - of governance and flexibility - of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world."

In the meantime the government's $21 billion cash splashes and other stimulus measures had preserved an estimated 210,000 jobs. Returning government spending to normal would be "challenging, necessary".

Dr Henry built up expectations for the Henry Tax Review due to report in December, describing it as a "once in a generation opportunity."

While appearing to rule out recommending applying capital gains tax to the family home he said some of the recommendations he was considering were so ambitious they relied on technologies that were "embryonic or did not yet exist". They might take at least a decade to implement.

Published in today's SMH and Age

Read more >>

Ken Henry believes there's a boom to come

"My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities — of governance and flexibility — of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds."

This morning's speeech to the Ai Group is below.

And here's his killer graph:


China and India's industrialisation has a long way to go.

Below the fold:

Negotiating the Downturn: Emerging Stronger

Address to the Australian Industry Group
Parliament House
Monday 17 August 2009

Dr Ken Henry
Secretary to the Treasury

Thank you for the opportunity to participate in this National Forum.

I have been asked to speak on negotiating the economic downturn and emerging stronger.

Fiscal stimulus: short-term support for the economy

The failure of Lehman Brothers in September 2008 sent shockwaves of uncertainty through financial markets around the world. There was initial uncertainty surrounding which financial firms were safe to lend to, even solvent. The consequence was an almost complete shut down of world debt markets.1 There was initial uncertainty surrounding which financial firms were safe to lend to, even solvent. The consequence was an almost complete shut down of world debt markets.

Given Australian banks' reliance on wholesale borrowing from offshore, we were not going to be well insulated from these sorts of shockwaves — notwithstanding that aggregate demand growth was still robust, if slowing, and the soundness of bank balance sheets in this country as the first of those shockwaves hit our shores.

The shockwaves had an immediate impact on Australian households as well, with concerns being raised about the security of retail deposits during the latter part of September and in the early days of October.

The Government judged that exceptional measures were required.

The time-limited guarantee of deposits and the price-limited guarantee of wholesale funding have promoted financial system stability; they have reassured Australian depositors and assisted Australian deposit-taking institutions to continue to access funding in domestic and international credit markets.

Back in October last year it was clear also that the financial crisis would have a significant impact on macroeconomic performance — on demand, growth, employment and inflation.

A rapid and large macroeconomic policy response was judged also to be required.

The monetary policy response was indeed rapid and large, with the target cash rate being reduced by 3¾ percentage points over four consecutive meetings from early October 2008 to early February this year. In contrast with the experience of some other countries, the monetary policy transmission mechanism remained highly effective here, with the majority of the cut in the cash rate passed onto households and businesses.

Economic slow downs — especially recessions — are costly: capital lies idle; unemployment increases; there is a loss of skills in the workforce; and living standards fall. Economic recessions can also have significant negative impacts on self-esteem and health, and increase the risk of poverty. The costs of recessions are exacerbated if the economy remains below potential for a significant period of time.

Back in October, the Government judged that the size and nature of the global financial crisis were such that it would not be appropriate to leave the policy response to monetary policy alone. A timely fiscal response was also needed to provide support to aggregate demand.

The response was rapid. Lehman Brothers failed on 15 September 2008. The Reserve Bank Board announced a cut in the target cash rate by 100 basis points on 7 October. On 12 October, the Government announced the bank guarantees. Two days later, on 14 October, the Economic Security Strategy — the first phase of stimulus funding — was announced, with delivery scheduled for December.

The impact of the first phase of fiscal stimulus

The first phase of the fiscal stimulus package comprised cash transfers, predominately to low-income households. These types of payments can be targeted and made quickly. Low-income households are usually more adversely affected by weak economic growth and they are also more likely to consume, rather than save, a supplementary transfer payment. Cash transfers to low-income households are therefore likely to support aggregate demand in the short-term.

While assessments of the impact of the stimulus necessarily depend on estimates of the counterfactual, it is reasonable to conclude now that the cash payments did indeed support the economy (Chart 1). Retail trade turnover was showing significant weakness prior to the first stimulus payments, having grown by only 1.8 per cent over the seven months to November last year. Retail sales recorded growth of 5.2 per cent from November 2008 to the end of June 2009. In contrast, the international experience shown here for several advanced economies has been a continuing decline in retail sales. The comparison is particularly stark at the beginning of the crisis. Between November and December 2008, retail sales fell significantly in many countries, while they rose strongly in Australia.

Additional phases of fiscal stimulus

The second phase of the Government's fiscal stimulus, announced in late November through the Council of Australian Governments' reforms, and in mid‑December through the Nation Building package, focused on infrastructure projects that could be implemented relatively quickly. The third phase of the Government's fiscal stimulus, announced at the beginning of February 2009, focused on major economic infrastructure projects. These second and third phases have been designed to provide medium-term macroeconomic support, with the infrastructure projects announced in the Budget designed to enhance supply capacity as the economy recovers.

The support to real GDP from the stimulus translates into support for employment; that is, lower unemployment than would otherwise have been the case (Chart 2). This chart shows the estimated impact of the stimulus measures on Australia's employment rate over the next two years. While the percentage of working‑age (aged fifteen plus) Australians in employment is forecast to fall, the effect of the stimulus is to reduce the extent of this fall, as shown by the upper line. The maximum gap between the two lines represents around 210,000 jobs. Another way of putting this is that the stimulus measures are forecast to reduce the estimated peak unemployment rate by about 1½ percentage points to 8½ per cent.

Emerging stronger: policies that deliver future growth by allowing structural change

The fiscal stimulus is a response to a short‑term deficiency in private spending. As important as short‑term demand management is at this time, especially in supporting employment, it is not what will drive growth over the medium to long‑term.

Over time, private demand will return, the need for fiscal stimulus will abate and the key drivers of economic growth will again be related to population, participation and productivity.

For that reason, it is important that we continue to support policies that embrace openness, flexibility and competition; policies that allow structural change to occur and facilitate the efficient allocation of resources.

Economic downturns often catalyse necessary structural change. These structural changes can be difficult for those affected. Short term fiscal stimulus helps. But its palliative effect is necessarily temporary.

This is why the stimulus measures and guarantees of banking system liabilities have exit strategies.

The Government has a deficit exit strategy to return the budget to surplus by containing growth in real federal government spending once economic growth is above trend and allowing tax receipts to recover naturally as the economy improves. The bank guarantee fees were set at a level designed to provide the basis for a natural price-induced exit, with the expectation that at some point investors will no longer be willing to accept the lower yields on guaranteed paper and banks will therefore no longer seek to insure their debt. Recent non-guaranteed bond issues by the major banks provide promising signs of some normalcy returning to markets.

In discussing structural change and the efficient allocation of resources, I should make mention of the role of tax reform in enhancing Australia's future growth prospects.

As you would be aware, Heather Ridout and I are members of the panel undertaking a review of Australia's tax and transfer system. Reforms to that system will have implications for the way in which Australia emerges from the downturn and, more obviously, for long-term participation and productivity growth.

Two matters among many that the review is considering are how Australia's tax system can be reformed to improve incentives to invest in Australia and to ensure that capital is invested in the most productive way.

Our present tax system produces very different effective tax rates for different types of investments financed in different ways (Chart 3). Consider the following bar chart. The green bars on the right represent the effective company tax rate in Australia on a variety of assets financed through equity where the return on the investment just breaks even with the cost of capital. The purple bars on the left do the same for debt financed investments.

The very different effective tax rates for different assets arise partly because of inherent difficulties in measuring and recognising gains and losses for tax purposes. But differences also arise from deliberate policy choices. Effective tax rates as different as these raise the real prospect of a sub-optimal allocation of resources.

But the chart brings out another issue. As you can see, the effective tax rates for debt financed investments are also much lower than for equity. This reflects the full deduction allowed for nominal interest expenses. Importantly, foreign sourced debt remains tax favoured relative to foreign sourced equity.

One consequence of the overall bias in favour of debt is that it encourages some firms to increase leverage, an outcome that may increase their risk exposure.

And, of course, at an economy‑wide level, this bias might be reflected in a relatively high share of debt finance in the capital account of the balance of payments.

It might, therefore, be tempting to conclude that taxation arrangements that favour debt over equity expose the capital account — that is, the financing of the current account excess of domestic investment over domestic saving — to higher risk. But this is far from clear. For an individual firm, debt financing can exacerbate vulnerability in the profit and loss statement when revenue falls, since — unlike dividend payments — the debt servicing costs are essentially unavoidable, short of default. The same is true for the country as a whole, of course. The increased vulnerability of firms would be expected to increase the impact of financial shocks and other sources of macroeconomic instability. But what matters for the stability of the financing of the current account is the reliability of future flows of foreign debt and equity capital combined. And, as the bursting of the 'dot.com' bubble in the United States in 2000-01 illustrated, there should be no assumption that cross-border portfolio equity flows are any less fickle than debt flows.

In my closing remarks I will have more to say about the financing of the current account.

The economic reform task goes beyond tax reform, of course, to include numerous reforms being pursued through the Council of Australian Governments, and many others.

As in the past, most such reforms will be about getting relative price signals right; especially to correct for externalities, both positive and negative. And to get the benefit of these reforms, we will need to allow the economy to reallocate resources — labour and capital — consistent with those better relative prices.

The task is to ensure not only that the Australian economy is delivering strong growth in living standards in the present global environment, but also that it is as well placed as it can be to meet the challenges of the future. There are some challenges we can prepare for, like the ageing of the population and climate change, but there will be others that are presently unforseen. And we cannot predict exactly which firms or industries will be the drivers of future growth.

On other occasions in meeting with this group I have spoken about the re‑emergence of China and India and the implications for the structure of the Australian economy of what will very probably turn out to be a structurally higher level of our terms of trade.

China and India are only in the early stages of catching up with the living standards of the developed world (Chart 4), and this process could have a very long way to run. That catch-up presents substantial opportunities for our economy.

To get a sense of China's importance to Australia, consider the proportion of Australian export income attributable to China (Chart 5). This rose to almost 15 per cent in 2008 from less than 5 per cent a decade ago. While China's growth and demand for resources have been impacted by the global downturn, it nevertheless seems likely that the Chinese economy will continue to play a key role in shaping Australia's economic prospects for some time to come.

Though our terms of trade have been negatively affected by the global downturn (Chart 6), they remain well above their longer‑run average. Indeed, based on the Budget forecasts, in 2012‑13 the terms of trade are expected to be around 35 per cent above their 50‑year average prior to the recent terms of trade boom. This represents a profound break with the pattern of earlier decades. And it is a shift that will continue to be reflected in structural change in the Australian economy in the next expansion phase.

Earlier, I referred to the balance between debt and equity flows in the financing of the current account. In my closing remarks I want to say something about a related matter that is getting some attention in analytical circles at the moment. This is the question of whether, in the post-crisis expansion, industrialised countries will enjoy the same level of access to capital that they enjoyed in the earlier part of this decade. The general consensus is that they will not. That consensus implies that, as a whole, industrialised countries will find it more expensive to finance current account deficits; that is to say, their businesses will face a higher cost of capital, implying a lower level of investment and growth. According to this emerging consensus, the next growth phase might not be as favourable for the industrialised world.

Supposing this consensus is right, what might be its implications for Australia? The first point to note is that it is quite probable that future capital flows will, indeed, be 'better balanced' as between the developed and developing world; the 15 year trend of capital from the developing world financing an ever-widening United States current account deficit certainly lacked balance. Secondly, that better balance may well be reflected in slower growth for the advanced economies taken as a whole. Third, the better balance may also be reflected in somewhat faster growth for the developing world. Fourth, the durability of that faster growth in the developing world might turn out to be dependent upon further progress in several economies on governance standards and regulatory reforms, and on their ability to realign their economic structures in favour of domestic sources of growth with less reliance on exports. And fifth, it is not at all clear that, in this rebalancing of global capital flows, the impact on the Australian economy will be characteristic of the advanced economies; that is, it seems quite likely — to me at least — that the Australian economy might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate.

This fifth observation might surprise you. My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities — of governance and flexibility — of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.

It follows from what I have just said that I do not think it likely that, relative to earlier growth periods, the future expansion of the Australian economy will be constrained by a reduced capacity to attract foreign capital.

Nevertheless, like the Asian Financial Crisis a decade earlier, the Global Financial Crisis is a timely reminder of a lesson learned the hard way in Australia in the 1980s — that no country, developed or developing, can take for granted a stable inflow of cheap foreign capital.

Our response to the turbulence on capital markets that we experienced in the 1980s was to embark on an essentially continuous program of microeconomic reform, supported by the development of robust, credible medium-term frameworks for both monetary and fiscal policies. That response served us well as we weathered the fallout of the Asian Financial Crisis, and it has meant that we have been well-placed to deal with the considerably larger challenges of the past year or so. But, as many people have noted, the task of economic reform is ongoing; and it must continue.

Read more >>

Like to run the Reserve Bank or the Fed?

Start Here

There's also Mankiw's 2005: A Game of Macroeconomics (warning - charged download)

Read more >>

How to kill a good idea

Get The Australian to report the government's considering it.

From Swan this afternoon:

STATEMENT FROM THE TREASURER

The story published on the front page of today’s Weekend Australian in relation to capital gains tax on family homes is factually incorrect.

There has been no request from the Government to the Australia’s Future Tax System review to model such proposals, we are advised that no such modelling is being carried out by the review, and therefore no recommendation of this sort will be made to us by the panel.

The Government is not considering and will not consider the policy outlined in that article today.

There will be thousands of stories between now and when the final report is released and unfortunately, like this one today, many of them will be incorrect.

The tax review is the most comprehensive in 50 years, and will recommend by year’s end ways to make our tax system simpler, fairer and more competitive.

Read more >>

Women's pay plummets (relative to mens')

You've come a long way baby?

Women are emerging as hidden victims of the downturn with female earnings falling to their lowest point relative to men's in two decades even as women outshine men in getting jobs.

Earnings figures for May put average female pay at $54,907; just 82 per cent of the $66,581 male average - the lowest proportion in 21 years.

Big jumps in earnings in the construction and mining industries lie behind the change along with much smaller increases or delinces in pay in the retail industry, accommodation cafes and restaurants, and the public service, finance, insurance and communications sectors.

Mining and construction earnings jumped 3.3 and 3.2 per cent in the 3 months to May. By contrast retail earnings climbed 1.2 per cent, and hospitality earnings went backwards 0.2 per cent...

Figures on hours worked also released yesterday show that while the total number of Australians in work remained little changed over the past year the number putting in 40 hours or more per week slid 304,200.

Women have gained 45,100 jobs as men have lost 44,900 jobs.

Earnings remain the highest in the male-dominated mining industry where the average has hit $107,723, and the lowest in the female-dominated accommodation, cafés and restaurants sector where the average has slumped to $33,543.

"It's the trend that deserves further study and explanation, not the actual level," said CommSec economist Craig James. "Women's earnings have been falling relative to mens for five years."

Total earnings climbed 3.8 per cent over the year to May, well above the 1.5 per cent inflation rate suggesting consumers have room to increase retail spending beyond its current record highs.

Westpac-Melbourne Institute research released yesterday showed fears about unemployment receding sharply with the number of Australians expecting unemployment to climb slipping 13.9 per cent in the month of August, the biggest fall on record.

"This is why consumer confidence is soaring. We're feeling more secure about our jobs," said Westpac economist Julie Doel. "There's now less risk that spending will ease off in the second half of the year."

Adding weight to forecasts of further record spending are indications that around $6 billion of the government's $21 billion bonus payments remain to be spent.

When the Melbourne Institute asked recipients how much of the payments they had spent 62 per cent said they'd spent the lot and a further 8 per cent said they had spent more than half. Some 9 per cent had spent less than half and 20 per cent none at all, leading Westpac to conclude that about one third, or $6 billion remains to be spent.

"While these estimates are rough, it is clear that there is a substantial proportion yet to be spent," said Westpac's Matthew Hassan. "What consumers will choose to do with it is unclear, but there is scope for them to keep spending at high levels as the direct effect of the stimulus drops out."

Published in today's SMH and Age

Graph: CommSec, ABS 6302.0

Read more >>

Governor Stevens so far

From Annette Beacher at TD Securites:

· The RBA Governor doesn’t seem to be discouraging the markets from pricing in higher cash rates.

· The emphasis of removing the “emergency” setting of the cash rate was emphasized and re-emphasized.

· Clearly the next move is up, and the Governor suggested that even if GDP falters, the “emergency” rate is increasingly no longer required.

· While coy about timing, there is no doubt that at this point in time the Governor is looking to withdraw the extraordinarily stimulus in the economy.


A few key answers from the Governor – excuse the shorthand (typing as he speaks):


· Australian economic growth could be patchy, cannot rule out “a negative quarter or two of GDP”. [Surprised some market participants, but the Governor clearly has considered all options].

· Will reduce the monetary accommodation “when the time is right”. Apologizes for being “coy” about answering exactly on the issue of “timing”.

· Not surprised Australian cash rates are higher given Australia’s economic outperformance compared with most other countries.

· Referred to better than expected labour market response to the slowdown, but acknowledged while there are reduced hours worked still means “debt can be serviced”.

· Economy is in “Better shape than would have feared”.

· If cash rates are “too low for too long” the imbalances generated will not help the economy; aiming for balanced growth.

· Not tightening monetary policy “right now”, but the time will come to “lift rates off the bottom”.

· Cash rates set at an “emergency setting, lowest in 40 years, placed to cushion real risks of sharp recession”.

· At some point “need to move away from the emergency setting” as “the emergency has passed”.

· The pace of removing the emergency accommodative cash rate is “yet to be decided”.

His opening statement is here.

I'm twittering on the answers here.

Read more >>

Live tweeting from Reserve Bank Governor's parliamentary grilling

Here, from 9.30am

I'm firing up by laptop!

Also webcast (audio only) here.

Read more >>

Fixing the sick joke that is NSW

My friend Geoff writes from Sydney:

"I am seriously considering setting up a cross-party organisation called 'NSW Centre Party' or somesuch to try and hold the balance of power in both houses with the following objectives:

1) Remove all retirement benefits other than statutory superannuation from Parliamentarians and Ministers both former and existing. Make all payments to Parliamentarians and Ministers available on the web, plus all their office accounts; all published on the web. No using stamp allowances for party political literature ever again.

2) Set up a Department of State Development modeled loosely on the Singapore Ministry of National Development and provide effective interdepartmental coordination for projects deemed to be significant. Close down the Departments of Small Business.

3) Encourage business by radically reducing Government red tape and making government information and services available on-line, if necessary by reconceptualising service provision across departments.

4) A policy framework to encourage Sydney to grow at a faster rate by reducing the fixed costs of developing land and by completely restructuring the current development control framework.

5) Forced amalgamation of Councils to achieve a minimum population base of 500,000 in Sydney with a firm division of responsibility between the State Government and Councils. (Four rather than about 16 Councils in Sydney and about another six for the rest of NSW) There are currently over 150 Councils in NSW; all overstaffed and overpaid.

6) Introduce a congestion charge for central Sydney and gradually introduce road use charges with the aim of raising sufficient cash over 30 to 50 years to pay off a giant upfront loan to extend the rail network, including the provision of a fast train from Williamtown to Kiama. This would open up a lot of cheap flat land to development which would provide housing for working families.

7) Fix DOCS by splitting off its child protection responsibilities and making this their highest priority.

8) Fix the Education department by focussing on outcomes and not class sizes, and by allowing private providers to contract to provide education to State students at open tender.

9) Fix the health system by providing a system of polyclinics to take the load off Emergency Departments.

10) Reestablish the Building Services Commission.

11) Spill all positions on government boards, quangos and stats and appoint based on merit using a transparent system."

I really, really like it! Pity I moved to Canberra and lost my vote.

Read more >>

Let's try something new - live tweeeting from Glenn Stevens parliamentary grilling

Here, from 9.30am - 12.30pm AET, Friday

Let's see how it goes.

It'll be webcast (audio only) here.

Read more >>

Two years on, even Coalition voters feel good

Consumer confidence is racing into territory normally associated with an economic boom as the fastest jump in confidence on record turns even Coalition voters into optimists.

The Westpac-Melbourne Institute confidence index soared 28 per cent in three months to August, a far bigger jump than the 23 per cent recorded as Australia climbed out of the early 1980s recession and the 20 per cent recorded as Australia climbed from the 1980s recession.

Significantly, optimists now outnumber or equal pessimists in every age group, every income range, every occupation type, and for the first time in almost 2 years every political persuasion.

"I am amazed," said the Melbourne Institute's Professor Guay Lim, who compiled the survey. "We asked the questions this weekend after a week of very good news on employment and the Reserve Bank's positive assessment of the economy. People seem to have come around to the view that the worst won't happen to them."

Coalition voters have been consistently negative in their views about the economy since just after the election of the Rudd Labor government in November 2007...

This month they jumped well into positive territory for the first time since early 2008 with optimists outweighing pessimists by a margin of 12 per cent.

Labor voters have been in positive territory for 3 months with optimists outweighing pessimists by 20 per cent.

Treasurer Wayne Swan described the turnaround in confidence as "staggering" and raised the prospect of it becoming self-fulfilling.

"Ultimately it is the confidence of Australian consumers and businesses that will provide the spark for the sustained economic recovery," he told parliament, adding that retail spending was up 5 per cent on November and the construction of new homes up 55 per cent on October.

The detail of the figures suggests that the retail boom will continue even after the government's stimulus payments have been spent with the Australians who agreed with the proposition that "now is a good time to buy a major household item" outnumbering those who did not by an exraordinary 2 to 1.

There were also big increases in the proportions of Australians agreeing that "now is a good time to buy a dwelling" and that "now is a good time to buy a car", with both well above long-run averages.

"This will encourage the Reserve Bank to begin the process of normalising interest rates, probably from early 2010," said Westpac economist Matthew Hassan. "It is clear that as far as consumers are concerned, the worst appears to have passed."

Absent from the Treasurer's language yesterday was the usual reference to Australia not being "out of the woods".

Instead Mr Swan spoke of "good news and bad news before this crisis is behind us," suggesting that the government's own views may be becoming more optimistic.

The Australian stock market edged 0.3 per cent higher Wednesday, closing at its highest point since October 2008.

Published in today's  Age

Read more >>

What does a recession look like?

Like this, according the UK Audit Office:



HT: Bill Mitchell

Read more >>

The top echelon of the public service has been rearranged!

From the PM:

"DEPARTMENTAL SECRETARIES AND STATUTORY OFFICE-HOLDERS

I am pleased to announce new arrangements for departmental secretaries and senior statutory office-holders which will take effect in the near future.

Ms Helen Williams AO, Secretary of the Department of Human Services, has indicated to me that she intends to retire from the Australian Public Service (APS). Ms Williams was the first woman appointed as Secretary of an Australian Government department. While she has held her current position since May 2007, she has been a Secretary or Secretary equivalent for over 20 years in such diverse portfolios as Communications and the Arts, Immigration, Prime Minister and Cabinet, Tourism, Transport and Education. She was Public Service Commissioner from 1998 to early 2002. Ms Williams rightly has a reputation as a highly committed and professional public servant who has made a significant contribution to public service in Australia. I am pleased that Ms Williams has indicated her willingness to accept part-time Government positions in the future. I pay tribute to her dedicated service and wish her well.

The position of Secretary of the Department of Human Services will be filled by Mr Finn Pratt PSM. Mr Pratt is currently the Chief Executive Officer of Centrelink and before that was an Associate Secretary in the Department of Education, Employment and Workplace Relations. He has spent much of his career in labour market related activity and has a strong understanding of the link between policy and delivery. This experience, coupled with his expertise in leading a major service delivery agency, will be invaluable in his new role. Centrelink’s Deputy Chief Executive Officer, Customer Service, Ms Carolyn Hogg, will act as Chief Executive Officer pending the appointment of Mr Pratt’s successor.

The Minister for Foreign Affairs, the Hon Stephen Smith MP, will recommend to the Governor-General the appointment of Mr Nick Warner PSM as Director-General of the Australian Secret Intelligence Service (ASIS). Mr Warner will leave his current position as Secretary of the Department of Defence. Mr Warner’s accomplishments during his time at Defence are significant and include the production of the recent Defence White Paper and accompanying force structure, a $20 billion savings program and a wide-ranging reform program. Prior to being appointed as Secretary of Defence, Mr Warner held a number of senior positions in Australia and overseas, including Special Coordinator of the Regional Assistance Mission to Solomon Islands. He brings a wealth of knowledge to the position of Director-General at a time when the Government is faced with a growing need for timely and accurate intelligence. I am confident that Mr Warner’s depth of experience will serve the Government well, not only in his role as Director-General of ASIS, but in other international roles as required by the Government from time to time.

Dr Ian Watt AO, currently the Secretary of the Department of Finance and Deregulation, will become the Secretary of the Department of Defence. Dr Watt was first appointed as a Secretary in 2001 in the Communications portfolio and moved to the Finance Department early in 2002. Since that time he has overseen a significant strengthening of the department’s capacity to support government, particularly in the preparation of the Budget. Dr Watt’s experience and achievements will see him well placed to tackle the challenges of his new role.

Mr David Tune PSM will become the Secretary of the Department of Finance and Deregulation. Mr Tune has worked in the APS for around 30 years and is currently an Associate Secretary in the Department of the Prime Minister and Cabinet with responsibility for the Domestic Policy Group. Mr Tune has previously held a number of senior positions in both central and line agencies with a social policy focus and brings extensive public sector experience and expertise to his new position...

The Treasurer, the Hon Wayne Swan MP, will recommend to the Governor-General the appointment of Ms Patricia Scott as a full time Commissioner in the Productivity Commission. Ms Scott will bring extensive experience in human services to the Commission, and her appointment will enhance the Commission’s capacity to advise the Government on ways to improve the efficiency and effectiveness of human services provision. In addition to her extensive policy experience in the Department of the Prime Minister and Cabinet, she was instrumental in the successful establishment of the Department of Human Services following her appointment as the first Secretary of that department in October 2004. Ms Scott has also acquired services related experience in her more recent role as Secretary of the Department of Broadband, Communications and the Digital Economy.

The new program of Productivity Commission work on human services will draw on COAG initiated research by the Productivity Commission demonstrating the significant potential benefits to the community of investment in education, health and related human services, while acknowledging the heightened need for cost-effective spending by all governments in the years ahead. It is envisaged that a series of projects spanning the life cycle of human services will be developed. With the imperatives of an ageing population, particular attention will focus on human services that promote participation and productivity of the labour force. The Government will also shortly provide a reference to the Productivity Commission to hold a public inquiry into aged care in Australia. This inquiry will examine the needs of Australia’s aged persons for the next 20 years and look at appropriate standards and funding arrangements to secure the best outcomes from aged care services. The Commission’s report will help the Government assess options for further advancing the long term agenda in human service areas vital to community wellbeing.

Mr Peter Harris will become the Secretary of the Department of Broadband, Communications and the Digital Economy. Mr Harris is currently the Secretary of the Victorian Department of Sustainability and the Environment where he is responsible for Victoria’s largest current public infrastructure project. He has extensive public policy experience, having held several executive Commonwealth roles including Deputy Secretary of the Commonwealth Department of Transport and Regional Services. Mr Harris has the requisite experience and skills to lead his new department in its dealings with complex policy issues, such as telecommunications reform, vital to Australia’s long-term national interest.

Mr Michael L’Estrange AO will be leaving the Department of Foreign Affairs and Trade after more than four and a half years as Secretary of the Department. During this period Mr L’Estrange has led the department with distinction under successive Governments. His leadership has guided the department through a period of significant complexity across Australia’s trade and foreign policy agenda, including in the areas of regional and global engagement, trade negotiations and consular crisis response. The Government wishes to retain Mr L’Estrange in another senior position. Discussions with Mr L’Estrange about this senior position in government to which he may wish to accept appointment are proceeding.

Mr Dennis Richardson AO will become the Secretary of the Department of Foreign Affairs and Trade. Currently Australia’s Ambassador to the United States, he has a public service career spanning forty years. Prior to his appointment as Ambassador he held the position of Director-General of the Australian Security Intelligence Organisation for almost nine years. He has served in various senior public service roles in the Departments of the Prime Minister and Cabinet, Foreign Affairs and Trade and Immigration. His depth of foreign policy experience, and understanding of international relations, will serve him well in his new appointment. The Government will announce in due course the appointment of a new Ambassador to the United States.

Mr Andrew Metcalfe has been reappointed as Secretary of the Department of Immigration and Citizenship. I appreciate Mr Metcalfe’s continuing contribution in this important role.

The Public Service Commissioner, Ms Lynelle Briggs, will be appointed as the Chief Executive Officer of Medicare Australia. Ms Briggs, who was a Deputy Secretary in the then Department of Transport and Regional Services prior to her appointment as Commissioner, has been a passionate advocate for the public service and has championed the role of the APS in a modern democracy. I am grateful for her contribution. I am considering who will be appointed as Public Service Commissioner. In the meantime, the Deputy Public Service Commissioner, Ms Carmel McGregor, will act as Public Service Commissioner.

Ms Philippa Godwin will take up the position of Head of the Child Support Agency at the Department of Human Services, as Deputy Secretary, Child Support and Planning. Ms Godwin brings significant service delivery and policy experience to her new role. She has been Acting Chief Executive Officer at Medicare Australia since November 2008, having joined that agency as Deputy Chief Executive Officer in August 2005. Prior to taking up her appointment at Medicare Australia, Ms Godwin was a Deputy Secretary at the Department of Immigration and Multicultural and Indigenous Affairs from 2002 to 2005, having commenced with that department in 1989. She also has extensive experience at the regional and State office level in Commonwealth and State Government departments.

In line with our election commitment, all appointments will be for a period of five years.

DEPARTMENTAL APPOINTMENTS

As a result of the Prime Minister’s recent announcement of appointments of Portfolio Secretaries and other senior roles, the Secretary of the Department of the Prime Minister and Cabinet announces several moves within senior ranks of the public service.

Dr Paul Grimes will take up the position of Associate Secretary, Domestic Policy Group in the Department of the Prime Minister and Cabinet, succeeding Mr David Tune who has been appointed Secretary, Department of Finance and Deregulation. Dr Grimes has been Deputy Secretary of the Department of Finance and Deregulation’s Budget Group since January 2007. He was previously Chief Executive of the ACT Department of Treasury and, earlier, Deputy Under Treasurer in the South Australian Department of Treasury and Finance. Dr Grimes has also held senior positions in the Department of Treasury. Dr Grimes holds a PhD in Economics from the Australian National University and is a graduate of the Flinders University of South Australia.

Ms Glenys Beauchamp will take up the position of Deputy Secretary, Governance in the Department of the Prime Minister and Cabinet. The role has been filled in an acting capacity by Mr Paul Tilley then Ms Liza Carroll following Mr Mike Mrdak’s appointment as Co-ordinator-General and then as Secretary of the Department of Infrastructure, Transport, Regional Development and Local Government. Ms Beauchamp has been Deputy Secretary in the Department of Families, Community Services and Indigenous Affairs since December 2005, in which time she has overseen development of the Government’s paid parental leave scheme, the Commonwealth’s input to assist the Victorian Government with the recovery process following the Victorian bushfires and the national framework for protecting children. Prior to joining FAHCSIA, Ms Beauchamp held senior positions in the ACT public service, including as Deputy Chief Executive of the Department of Disability, Housing and Community Services and Executive Director with the ACT Department of Health. In addition to an economics degree from the Australian National University, she has an MBA from the University of Canberra.

Ms Jennie Granger has recently commenced in the Department of the Prime Minister and Cabinet as Deputy Secretary, Office of the Co-ordinator General, on secondment from her role as Second Commissioner of Taxation. Ms Granger has extensive experience in implementation and service delivery from her distinguished career in the Australian Taxation Office, which will be invaluable in her role of oversight of implementation by the States and Territories of the Government’s nation building package.

Ms Philippa Lynch has been appointed First Assistant Secretary, Government Division in the Department of the Prime Minister and Cabinet. She has been a First Assistant Secretary in the Attorney-General’s Department since 2002, and has previously worked in Government Division (as Assistant Secretary of the then Legal and Culture Branch). She will commence at the Department of the Prime Minister and Cabinet on 17 August 2009.

Mr Patrick Suckling has been appointed First Assistant Secretary, International Division in the Department of the Prime Minister and Cabinet. Mr Suckling has been acting in this position since March 2009. He joined the Department of the Prime Minister and Cabinet as Assistant Secretary, Pacific, Middle East and Rest of World Branch in August 2008. Mr Suckling has extensive international experience, having commenced as an officer of the Department of Foreign Affairs and Trade in 1994. He has served with distinction at Australia’s Embassies in New Delhi and Washington, holds a Masters Degree in International Relations from Monash University, and is a graduate of the University of Sydney.

Read more >>

Consumer confidence is now so far back to normal...

Today's Westpac-Melbourne Institute Index:


Consumer Sentiment August 2009

Read more >>

Trying to get the government to take up a good idea

Gee it's hard!

Nicholas Gruen knows how hard.

The government might have changed but attitude of the bureaucracy has not.

Shortly after the government changed I and others put forward a whole range of no-brainer good ideas.

Nothing much happened.

Nick Gruen (speaking from experience I fear) has a theory about why:

The Theory of SPIN: Serial Professional Innovation Negation

"I’ll call it my theory of Serial Professional Innovation Negation or SPIN. Here’s how it works.

When you get something done in the public service – or in any large organisation – the work is done in stages and different professions have their input. For this example, let’s say there are lawyers, and IT guys and communications people involved in the establishment of some new initiative.

One of the important things each of these professions do is to control risk. They control risk in a complex environment which (the uncomfortable truth is) nobody understands particularly well. Nevertheless the relevant professionals are immersed in and generally understand the system better than most (or are taken to understand better than most). Because the systems are not fully understood, things go wrong in them, and professions spend a lot of their time trying to prevent them going wrong. They also gain a kind of force in and of themselves. Thus lawyers provide templates for agreements, IT guys platforms for IT and so on.

So they develop procedures, ways of doing things that have been done before and which seem not to go wrong....

A lawyer repeats a phrase in a test case in a contract he’s drafting, puts a copyright declaration on the Budget Papers which one would have thought the Government would want to see spread as far and as wide as possible.

Then people come along and say “why don’t we do something different”, or “why do we have that clause that says that the contractor can’t get any work done overseas? Since this government is supposed to be reducing red tape, can’t we take it out?” At this stage a virtually impossibly heavy burden of proof can descend on even slight novelty. The professional might be a bit miffed that their usual approach isn’t being followed. They might be irritated. What’s wrong with the way we normally do this? But the other thing that’s looming large is something like this “I can’t tell you exactly what might go wrong, I might not even be quite sure exactly why we do it the way we do. But even if it looks silly, there’s a chance that it’s not. I guess it went in there for some reason. And when we do it the normal way things don’t usually go wrong” and it’s my job to try to stop things going wrong.

The other thing about this is that it’s often extremely difficult for outsiders to gainsay the professionals. If one gets pages of legal analysis as to why something really shouldn’t be released in creative commons that will be enough for a lot of people just to do what the professionals recommend. And if they don’t, will the Secretary of the Department who is a busy person really want to delve into all the detail to satisfy themself that all of the four pages of contrary advice and warning can be dismissed?

I have personally experienced the way in which this works so that the smallest, seemingly most commonsensical change can be resisted. Then one might be pleased that some progress is made, but alas, that’s with the professionals in one agency. Say it’s a line department. Then professionals from some coordinating agency will come along and veto progress. I’ve heard similar stories from several Taskforce members.

And this happens not just in layers – as in this case there were layers of people from the same profession in different departments – but also in layers of different professionals. The Cutler Reportrecommended (Recommendation 7.8) that

Australian governments should adopt international standards of open publishing as far as possible. Material released for public information by Australian governments should be released under a creative commons licence.

Beacuse of that recommendation we spent considerable time seeking the blessing of officials of the Australian Government to release our report under such a licence. After considerable perseverence we persuaded one group of officials that this would be a sensible course only to have lawyers (I believe) from another agency object later on. With further perseverence after the report was published the report was ultimately released under a creative commons licence, together with a disclaimer that this was not a decision of the Australian Government but rather the accession to a request from our Chairman.

All this when all we thought we were trying to do was release a report and get out of the way of anyone who wanted to copy it and propagate it further.

When hearing this story, one Taskforce member said it was just like IT professionals. They don’t like to deviate from what they know either. And I can appreciate why. IT systems in my experience from my own personal computing are always a wing and a prayer from something nasty happening – will it be a crash, a corruption, a virus or some other security threat?

So though I’m not an IT coder, I can well imagine that if I were, I’d be pretty unenthusiastic about doing things in new ways, because who knows what could go wrong? And if I was a communications advisor, I could think of all the PR hazards produced by some new practice – like staff taking to official blogs to explain what they were doing and why and opening themselves up to challenge, debate and ridicule from anyone who cared to post a comment.

So there’s my theory of Serial Professional Innovation Negation or SPIN. Every profession is risk averse in its own often different way, and it’s risk averse in ways that it’s difficult for outsiders to really gainsay. And if one layer of one profession doesn’t stop you doing something new, then another layer of the same profession might. And if it doesn’t then a quite different profession might.

All of which takes me back to the quote from the first post I put up on this blog.

Working with front-line professionals in local government over the last couple of months, I’ve been coming to see that:

The big challenges are not about technology – they are about the content and the process of mobilisation and communication.

When it comes to technology we’ve not got one big challenge we’ve got 100s of small challenges – and we’ve got no systematic way of dealing with them.

When all these small challenges stack up – the chance of staff members or teams in local or national government organisations and agencies being able to effectively engage with online-enabled policy making shrinks and shrinks.

Care to help me out? Is my analysis wrong and if so how? If it’s right how do we counter SPIN?

Nick's chairing Lindsay Tanner's Government 2.0 Taskforce.

Image: Uncyclopedea

Read more >>

Let's divest BankWest, and St George

As official figures confirmed that Australia's banks have all but displaced other mortgage providers, a leading competition expert has told the Senate the competition regulator should take court action to force Commonwealth Bank to sell BankWest, and Westpac to sell St George.

Associate Professor Frank Zumbo, from the University of NSW, told the Senate economics committee that it was not too late for the Australian Competition and Consumer Commission to ask the Federal Court to order the sales.

He said the grounds were that each takeover had demonstrably lessened competition.

''In a very short space of time, just 18 months, we have lost two of the big banks' biggest competitors,'' he told the committee.

''The Commonwealth has taken out BankWest after previously taking stakes in Aussie Home Loans and Wizard, and Westpac has taken out St George, after previously taking over RAMS...

''The Commonwealth's share of the mortgage market alone and Westpac's share alone are now roughly equal to the share of the ANZ and NAB combined.

''My deepest concern is that there will be conversations or thought given to the ANZ and NAB merging.

''Yes, there's a four-pillars policy in place prohibiting further mergers, but it is only a policy.''

Professor Zumbo said the ACCC had a limited window of opportunity under section 81 of the Trade Practices Act to seek divestitures on the ground that it was a mistake to let the mergers through.

''I am not suggesting a fire sale. It could be orderly,'' he said. ''For example, BankWest could be listed as a separate venture and the CBA could pare back its shareholding over a period of time. I make it clear that such a divestiture would be premised on a finding by a court that there had been a substantial lessening of competition.

''I believe that if there was a finding that the merger had not substantially lessened competition, it would provide further evidence that the substantial lessening of competition test is too hard a test.

''Given the impact that the merger has had on the power of the CBA, on its pricing power, on its market power; when you take all those things into account, if a court allowed that merger, I would be very nervous from a public policy point of view about such a test.''

ACCC chairman Graeme Samuel was quoted recently as saying he regretted approving Commonwealth Bank's purchase of BankWest, saying Australia's banks now had ''workable competition but less than intense competition''.

ABS figures released yesterday showed the banks continuing to account for 92 per cent of all new mortgages, the highest proportion for decades.

Published in today's Age

Read more >>

We're scrambling for fixed-rate mortgages

And the ABC is being silly. It reported that the ANZ was putting up the fixed rates it was offering, but that "existing fixed-rate customers are not affected". Why would that be?

The fixed-rate mortgage, as good as dead six months ago, is roaring back to life as homeowners scramble to take advantage of current low interest rates before they disappear.

But many will have missed the boat. Commonwealth Bank joined Westpac Monday in pushing up its fixed rates by as much as 0.60 points.

As recently as December when variable rates were plummeting fixed-rate mortgages were all but unsaleable. Official figures released yesterday show that the proportion of new mortgages fixed for two years or more slid to 1.9 per cent, the lowest in the two decades since fixed rate products came to Australia.

But as the Reserve Bank slowed down its program of rate cuts in the new year the proportion began to rebound, passing 4 per cent in April, 6 per cent in May and 8 per cent in June. In that month 5,452 mortgages were fixed, the most in a year and five times as many as in December.

JP Morgan economist Helen Kevans believes the boom has further to run...

"On top of speculation that the official cash rate already has bottomed, there's widespread concern that the banks themselves will continue to raise their variable rates independent of the Reserve. With most economists, including us, expecting the next move in the official rate to be up, more and more borrowers will lock in their loans."

But loan broker Mortgage Choice believes the rebound may already be running out of steam.

"Lenders are pushing up fixed rates to the point where they are now much higher than variable rates," said corporate affairs manager Kristy Sheppard. "Our average rate for three-year fixed loans has hit 6.71%, which compares to 5.49% for a basic variable loans. The difference in repayments could be $200 per month."

The Commonwealth Bank yesterday matched Westpac in pushing up its rates on fixed loans by between 0.15 and 0.60 percentage points.

The biggest jump was in the cost of its two-year loans which climbed from from 5.94 per cent to 6.54 per cent. Its longer-term 10 year and 15 year fixed mortgages now cost 8.39 per cent and 8.44 per cent.

Australia's banks remain by far the biggest mortgage lenders writing an unprecedented 92 per cent of all new loans, with Westpac and the Commonwealth Bank writing the lion's share.

Associate Professor Frank Zumbo from the University of New South Wales told the Senate's Economics Committee that each now sells roughly as many mortgages as the ANZ and National Australia Banks combined.

"My deepest concern is that there will be conversations or thought given to the ANZ and NAB merging," he told the Committee. "Yes, there's a four-pillars policy in place prohibiting further mergers, but it is only a policy. I'd like to see it enshrined in regulation."

Professor Zumbo also called on the Competition and Consumer Commission to reopen its investiagiton into the Commonwealth Bank's takeover of BankWest, saying it was not too late for the Commission to ask a court to unwind the merger on the grounds that it had substantially lessened competition.


Published in today's SMH and Age

Read more >>

Question Time is starting now!

Annabel Crabb is tweeting live.

As she says:

"Start your engines! And then, very sadly, just turn em over for a bit. House hearing condolence motions."

A mixed feed of tweets here: #QT

Meanwhile:

"The Coalition Senate Party Room today unanimously agreed to oppose both the motions of Senator Chris Evans and Senator Steven Fielding for further references to the Senate Privileges Committee in relation to the inquiry of the Economics Legislation Committee into the OzCar legislation, Opposition Senate Leader Nick Minchin said."

Oh my.

Read more >>

More on the Coalition's climate change proposal

Joshau Gans: "In the end, the Government and Coalition are too close together to have politics block this. Do a deal and let us get on with it."

And the wonderful Greg Mankiw on Obama's plan in The NYT:

"Let’s start with the basics. The essential problem of climate change, scientists tell us, is that humans are emitting too much carbon into the atmosphere, which tends to raise world temperatures. Emitting carbon is what economists call a “negative externality”— an adverse side effect of certain market activities on bystanders.

The textbook solution for dealing with negative externalities is to use the tax system to align private incentives with social costs and benefits. Suppose the government imposed a tax on carbon-based products and used the proceeds to cut other taxes. People would have an incentive to shift their consumption toward less carbon-intensive products. A carbon tax is the remedy for climate change that wins overwhelming support among economists and policy wonks.

When he was still a candidate, Mr. Obama did not exactly endorse a carbon tax. He wanted to be elected, and embracing any tax that hits millions of middle-class voters is not a recipe for electoral success. But he did come tantalizingly close.

What Mr. Obama proposed was a cap-and-trade system for carbon, with all the allowances sold at auction. In short, the system would put a ceiling on the amount of carbon released, and companies would bid on the right to emit carbon into the atmosphere.

Such a system is tantamount to a carbon tax...

So far, so good. The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

The numbers involved are not trivial. From Congressional Budget Office estimates, one can calculate that if all the allowances were auctioned, the government could raise $989 billion in proceeds over 10 years. But in the bill as written, the auction proceeds are only $276 billion.

Mr. Obama understood these risks. When asked about a carbon tax in an interview in July 2007, he said: “I believe that, depending on how it is designed, a carbon tax accomplishes much of the same thing that a cap-and-trade program accomplishes. The danger in a cap-and-trade system is that the permits to emit greenhouse gases are given away for free as opposed to priced at auction”...

Congress is now in the process of sending President Obama a bill that makes exactly this mistake.

How much does it matter? For the purpose of efficiently allocating the carbon rights, it doesn’t...

But if most of those allowances are handed out rather than auctioned, the government won’t have the resources to cut other taxes and offset that price increase. The result is an increase in the effective tax rates facing most Americans, leading to lower real take-home wages, reduced work incentives and depressed economic activity.

What everyone should agree on is that the legislation making its way through Congress is a missed opportunity. President Obama knows what a good climate bill would look like. But despite his immense popularity and personal charisma, he appears unable to persuade Congress to go along."

Read more >>