Trans Pacific Partnership. Why we don't know what we are giving away

The US Senate has given the green light, and Australia is set to buckle. If you don't yet know what TPP stands for, listen up. Our government could sign it within weeks. Only then will we really know what's in it.

That's right. As with the China-Australia Free Trade Agreement and the Japan-Australia Free Trade Agreement, the content of the Trans-Pacific Partnership will remain secret right up until the day it is signed. Afterwards, our parliament will be able to look at it, but not to change it. Alice is inside the looking glass.

A Senate committee reported on the processes surrounding the TPP on Thursday. It said the parliament would be presented with an all-or-nothing choice. It could examine the TPP (after it had been signed) and either vote for or against it, but not change a word.

The Department of Foreign Affairs and Trade was a lone voice at the hearings supporting the present arrangement (even it relented afterwards, allowing members of Parliament to see a copy of the draft TPP in a locked room on the condition that they made no copies themselves, took no notes and breathed not a word to anyone outside the room).

It said anyone who had wanted an input into the agreement could have sent it a submission. But it missed the point. It's hard to know that you need to write a submission if you don't know what's being proposed...

Trish Hepworth of the Australian Digital Alliance said most people when they hear there is going to be a trade agreement don't think: "Oh my goodness,  I run a library; there is a trade agreement; this is going to mean I cannot digitise newspapers past 1955 anymore." Yet she said that is what happened as a result of Australia-US Free Trade Agreement.

The department runs consultation sessions with community groups, providing "over 1000 stakeholder briefings on the TPP alone since 2011", but they have been curiously bereft of information. Alan Kirkland from the consumer group Choice said the meetings take the form of "tell us your views". The Australian Industry group said attending them is like "voicing concerns blindfolded".

It matters because these days so-called trade agreements are about far more than trade. The Productivity Commission insists on calling them "preferential" rather than "free trade" agreements, arguing that they often impede trade. Australia's 1800 agreements overlap and interfere with each other in ways that are hard to see through. In order to get preferential entry to the United States under the US agreement, Australian firms are not allowed to use more than a certain percentage of materials that come from other countries such as New Zealand, even though New Zealand goods are allowed into Australia duty-free, and so on.

A study of the Australia-US free trade agreement 10 years on found it had most probably cut rather than boosted Australian trade. Beforehand we were told it would be worth billions.

Many businesses won't use them. "The paperwork to qualify was so enormous it wasn't worth the effort," said one of the respondents to a Chamber of Commerce survey.

Until four years ago the Stafford Group made Anthony Squires suits at Preston in Melbourne. It had suited up every Australian prime minister from Menzies to Rudd. It was happy to pay duty on the fabric it imported, knowing its New Zealand competitors had to pay it too. Then a changed interpretation of the rules meant New Zealand manufacturers were able to use duty-free cloth to make suits for Australians (although not for New Zealanders). Stafford appealed to prime minister Gillard, was turned down, and moved production to Fiji.

The Trans Pacific Partnership agreement being negotiated between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam holds out the promise of actually breaking down barriers. But the leaks suggest its provisions will be inconsistent with those of existing agreements, creating still more red tape. The Chamber of Commerce and Industry begged the Senate inquiry for a "one in, one out" rule under which obsolete agreements would be cancelled as soon as new ones came into force. It calls the mess we've got: "the noodle bowl".

Last week the US Senate gave President Obama fast-track authority to quickly conclude the Trans Pacific Partnership talks. Leaks published by Wikileaks suggest the big changes for Australia would relate not to trade, but to intellectual property and so-called investor-state dispute settlement. The Coalition's John Howard successfully resisted the incorporation of ISDS provisions into the Australia-US agreement in 2004. This time the US is more insistent. It says there will be no agreement without them.

ISDS clauses allow foreign firms (but not local firms) to sue the Australian government in foreign tribunals over decisions they don't like. A tobacco company is doing it now using the terms of an obscure Hong Kong Australia agreement. The Productivity Commission says the number of ISDS cases worldwide has grown from almost none in 20 years to around 600 today. The Chief Justice of the High Court says they are a threat to national sovereignty.

The Medical Journal says the leaked intellectual property changes seem designed to keep pharmaceutical prices high.

Trade minister Andrew Robb accuses critics of the as -yet-unseen agreement of being anti-trade. But they're not. There's no greater believer in free trade than the Productivity Commission, and few organisations more enthusiastic than the Chamber of Commerce and Industry. It's the new layers of red tape that worry them, and the add-ons – changes to Australian law that wouldn't stand a chance of making it through Parliament if they were proposed and debated in in their own right.

In The Age and Sydney Morning Herald

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Income tax. It's having a birthday

We are about to celebrate a birthday, a 100th anniversary perhaps even more important than the landing at Gallipoli. The Income Tax Assessment Act 1915 grew out of Gallipoli. It was a temporary measure designed to help us through a temporary emergency. It's been helping us ever since. This year's returns will double as birthday cards.

Before 1915 the Commonwealth didn't levy an income tax. It got by with customs duties. The states had such taxes, but they hadn't had them long. The dirt poor states tried them first – Tasmania in 1880 with a tax that applied only to income from dividends, and South Australia in 1884. South Australia's became the template for everything that followed.

These days we regard it as obvious that Australians on high incomes should face a higher tax rate than Australians on low incomes. South Australia did it first, by levying its tax on all income but offering a generous tax-free threshold. It taxed income from property at twice the rate of income from wages, crudely ensuring that the better-off faced higher rates.

And we regard it as obvious that individuals should face tax, not households. South Australia broke new ground in the British Commonwealth by taxing married women as if they were individuals rather than as part of their husband's household. In Britain they were lumped in with their husband's possessions along with "infants, lunatics, idiots and the insane".

The Commonwealth entered the field because it had to. Its spending had blown out from almost nothing to one fifth of Australia's national product. With ships not delivering goods, its revenue from customs duties had evaporated. And the war was going badly, requiring even more spending for an unknowable length of time. In the words of tax expert Julie Smith, who has written what may be the definitive history of Australian taxation, it needed to conscript capital as well as labour.

The Labor government of Andrew Fisher proposed the tax and the opposition led by Joseph Cook agreed, with reservations. "This measure is entirely novel and of far reaching importance," Cook told Parliament. "We are blazing a trail against time."

When introduced, the bill was only 22 pages long. But it wasn't easy to follow. Australian National University tax expert Miranda Stewart says almost no-one, perhaps only the man who designed it, truly understood it.

Instead of applying fixed marginal tax rates at different levels of income, the first Commonwealth income tax continuously varied the rate right up to an upper limit of 60 per cent.

"For personal exertion income it was it was three pence and three eight-hundredths of one penny, increasing uniformly with each increase of one pound sterling of taxable income by three eight-hundredths of one penny," Professor Stewart told a conference this year.

Attorney-General Billy Hughes told Parliament the formula for wages was simple compared to the one for property income.

"There is a difficulty in that formula which I am unable to express other than in terms of higher mathematics," he admitted. "I am credibly informed it has something to do with the perturbations of the curve."

The Commonwealth expanded the income tax in the Depression to fund welfare and took over its administration from the states, borrowing another idea from South Australia. Employment was pretty informal back then. It was hard to track down workers and get their money. So South Australia instead imposed a withholding tax on their wages. Employers were made to hand over money on behalf of groups of their employees. The "group scheme" was Australia's first pay as you go tax. The word survives in what until recently were called "group certificates" issued by employers to employees after the end of each financial year.

During the Second World War the Commonwealth grabbed all of the state income taxes for itself ("temporarily") and expanded their scope to provide welfare for soldiers, unemployment benefits, widows' pensions and child endowment. It labelled the extension a "social security contribution", a term that lingered until the Menzies government killed it off in the 1960s.

These days income tax accounts for more than half of the Commonwealth's revenue, and 40 per cent of the revenue amassed by all Australian governments. It pays for our entire social security system, for Medicare, and for the federal spending on hospitals, universities and schools and public order and safety.

We complain at times (although not when we get our refunds) but we couldn't live without it. It's 100 years young, and it's here to stay.

In The Age and Sydney Morning Herald

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Free trade agreements 'preferential' and dangerous, says Productivity Commission

The Productivity Commission has launched a scathing attack on Australia's latest series of free trade agreements, saying they grant legal rights to foreign investors not available to Australians, expose the government to potentially large unfunded liabilities and add extra costs on businesses attempting to comply with them.

The assessment comes after trade minister Andrew Robb successfully concluded agreements with Japan, Korea and China, and on the cusp of final negotiations to seal a so-called Trans Pacific Partnership with eleven Pacific-facing nations including the United States, Japan, New Zealand and Singapore.  

On Wednesday, the US Senate voted to give President Barack Obama special negotiating powers that will remove one of the last impediments to the partnership.

The Productivity Commission has devoted a special chapter of its Trade and Assistance Review released on Wednesday to the agreements, which it described as "preferential" rather than "free" trade agreements.

It claims that by favouring some countries over others and excluding firms sourcing substantial inputs from other countries from special treatment, they "add to the complexity of international trade and investment, are costly and time-consuming to negotiate and add to the compliance costs of firms and administrative costs of governments."

According to the Commission, the Japan and Korean agreements were concluded without a rigorous and independent assessment of whether costs would exceed benefits.  There was also no mechanism in place to monitor the outcomes of the agreements after they come into force, it said.

"Without such a detailed assessment it is not possible to form a view as to whether the aspirational goals typically ascribed to the formation of preferential agreements are commensurate with real-world impacts," the Productivity Commission said in its trade review. 

Leaks about the text of the Trans Pacific Partnership suggested it will "include obligations on pharmaceutical price determination arrangements in Australia and other TPP members of an uncertain character and intent".

"The history of intellectual property arrangements being addressed in preferential trade deals is not good." 

Also, investor-state dispute settlement clauses included in the Korean and Chinese agreements and planned for the Trans Pacific Partnership "depart from national treatment principles by affording substantive appeal rights to foreigners not available to domestic firms," the Commission warned, saying this could create the risk of "regulatory chill" where Australian governments will be cautious about enacting new laws for fear they are challenged in foreign tribunals.

The safeguards and carve-outs for environmental and health legislation included were of "uncertain effect, lack transparency and have inadequate parliamentary scrutiny", exposing the government to "potentially large unfunded contingent liabilities dependent on decisions by international arbitration tribunals", the Commission found. 

The cost to Australia of defending an action brought against it by Philip Morris Asia under an investor-state dispute settlement clause over its plain tobacco packaging legislation were "unknown, unfunded and likely to be substantial."  
In The Age and Sydney Morning Herald  

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The prodigal nation. Australia about to blow its carbon budget

Australia is about to make one of the most important and potentially costly decisions in its history. There are signs it'll stuff it up.

We have already promised to do our part to limit the rise in global temperatures to 2 degrees. It's a commitment we can't get out of, and nor have we tried. All the nations we compare   ourself to have signed up to it, including those with conservative governments such as Britain, Canada and New Zealand.

What's at issue in the next few weeks is how we do it. Australia is being asked to make a specific commitment ahead of the Paris climate summit later this year. The US has done so. It plans to cut carbon emissions by between 26 and 28 per cent relative to 2005 levels by 2025. Europe plans to cut emissions by 40 per cent on 1990 levels by 2030. China plans to stabilise emissions by 2030.

Australia faces a choice. It can either wind back its emissions quickly, meaning it'll need to do less in the future, or it can wind them back slowly, making the future task harder. Guess which way it is leaning.

It's giving every indication of wanting to place the burden of adjustment on the next generation. It's giving every indication of wanting to do little now so that its successors have to do more later. It's an odd response from a government that (most of the time) understands accounting. It quite rightly savaged Labor for always wanting to boost foreign aid to the UN millennium goal, but 'not yet'. And it savaged Labor for promising to spend awfully big on health and education, but in the future. Labor signed up to agreements that would have given the states big grants for hospitals and schools just beyond the budget horizon, at a time when it had no idea how to fund them.

Now the Coalition is preparing to be just as reckless...

The decision to keep the global temperature increase to 2 degrees gives the world a 'carbon budget'. The budget, calculated by the Intergovernmental Panel on Climate Change, is 1700 gigatonnes of carbon dioxide and equivalents. If any more than that is emitted between 2000 and 2050, global temperatures are likely to climb by more than 2 degrees. If less is emitted they will climb by less. Australia's share of that budget beyond 2013 is 10.1 gigatonnes, around 1 per cent of what's left.

We've got a choice. We can use up that budget quickly and then plan to emit next to nothing in future years, or we can wind back emissions now and use up our budget more slowly.

The Climate Change authority has recommended big action upfront and big action later. It says that's what we will need to keep within our budget. It wants a 30 per cent cut in emissions relative to 2000 levels by 2025. It says that's broadly compatible with what Australia's peers are pledging. Beyond that it wants a further cut of 10 to 30 per cent by 2030.

"If Australia were to pledge the recommended 30 per cent target at the Paris conference this would likely be considered the behaviour of a good global citizen, and go some way to answering those who have questioned Australia's commitment to climate change policy," it said in its report in April. "It would also give Australia the right to expect other countries to behave in like fashion."

Anything less would be the prodigal option. It would give Australia an easy life now in the knowledge that when its budget was spent, life would become tough. It would impose a burden on our children we are not prepared to wear ourselves. It would be the kind of behaviour the Coalition says it abhors when it comes to government debt.

As it happens, the actions we would need to undertake now aren't that scary (just as the actions needed to stop government debt climbing aren't that scary). What is scary is what will be needed if we wait. The Melbourne consultancy ClimateWorks has just launched a web-based calculator. You can visit it at 2050pathways.net.au/calculator and play with the sliders.

My own experiments on the website show that nuclear power would do little to keep us within our budget. That's because it wouldn't produce much electricity by 2050. Switching from coal to renewable energy would do a lot. In fact in my experiments I couldn't keep within the budget without doing it.

Australia's commitment at Paris will have to be credible. It won't be enough to say: "yes we have a plan to keep within our budget, but we are not going to wind back our use of coal, at least until we have to stop". The other nations attending the talks know about calculators. They know what's profligate and what's not.

Australia is expected to announce its decision in July at the major economies forum in the United States. It is still able to get it right. It is still able to show the rest of the world it governs responsibly.

In The Age and Sydney Morning Herald

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PM's audit chief Tony Shepherd says it's time to better tax super, capital gains

The head of Tony Abbott's Commission of Audit has broken ranks with the Prime Minister on the question of superannuation, saying it's time to ask whether the multi-billion dollar system of tax concessions is achieving its aim.

Tony Shepherd has also called for a doubling in the rate of capital gains to bring it into line with income tax and help bring negative gearing under control.

Mr Shepherd, a former president of the Business Council, was handpicked by Mr Abbott to lead the examination of government spending which recommended Medicare co-payments and tighter eligibility for the pension.

Speaking to the Committee for the Economic Development of Australia in Canberra, Mr Shepherd said the Commission of Audit had not been asked to examine tax, but he said if it had it would have recommended an increase in the rate and coverage of the goods and services tax, something he described as "a no-brainer".

Superannuation tax concessions "definitely" had to be reviewed, he said.

"The idea of these concessions was to lift the rate of self-funded retirees. But it's been stubbornly fixed at 20 per cent for a long time," Mr Shepherd said. "The incentives do not appear to be working to encourage growth in the number of self-funded retirees.

"It is definitely something that has to be reviewed, and I believe that some of those concessions should be modified."

Mr Abbott has promised no changes to superannuation tax concessions in this term of parliament or the next, accusing Labor of wanting to "trouser" superannuation money by winding back concessions.

"I agree that that it should be looked at, and it should be looked at in the context of the whole retirement income question, including age pension," Mr Shepherd said. "You would need to be careful on the incentives side that you didn't deplete the 20 per cent that you've already got."

On capital gains tax, the former head of the business council said the 50 per cent discount should go, pushing the capital gains tax rate up to the income tax rate.

"I'm personally in favour of putting the rate up to the income tax rate," he said. "I can't see any reason for treating it differently, and I think it probably leads in some respects to a greater emphasis on negative gearing. I can't see any reason for treating capital gains any different from income tax."

The headline rate of capital gains tax was cut to half the income tax rate by then prime minister John Howard in 1999. It made negative gearing much more attractive and sparked a climb in house prices.

Mr Shepherd said he thought the budget forecasts for revenue and economic growth were optimistic, adding: "I pray they are correct".

In The Age and Sydney Morning Herald

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One rule for super. The tax expenditures they dare not touch

It's the simple question that goes to the heart of what was wrong with the Coalition's first two budgets: Why was it OK to cut back Family Tax Benefits, but not superannuation tax concessions?

What was so different about them that meant a government concerned about the deficit targeted one but not the other?

An immediate answer is that the Coalition promised in the election not to touch super. But the promise only applied to its first term. It also promised not to touch pensions and got around that by announcing changes that would take place only after the next election.

The real answer, or at least the real justification, lies somewhere else. It is that Family Tax Benefits and super tax concessions are different. One costs the government cash. It can be seen in the budget and so it is ripe for cutting. The other is merely a "tax expenditure". It is money the government made sure it never got in the first place.

But the dividing line between the two is far less clear than you might think. The Family Tax Benefit was once a tax concession. Note the use of the word "tax" in its title. Embedded in the tax system as a concession for decades, it was taken out and made an explicit payment by the Fraser government in 1976. Instead of going to the breadwinner (usually the father) it was paid directly to the mother as an allowance - a worthwhile change but one that made it a budget line item, ripe for cutting when the time came.

There's an arbitrariness about which government programs are structured as expenditures and which are structured as tax concessions and turned invisible. In which column does the Private Health Insurance Rebate sit? Try to work it out. I'll tell you at the end of this column...

If the super tax concessions had been turned into explicit payments, doled out each year in the budget so it was obvious who they were going to and how they were increasing, how long would they have lasted? We don't need to guess. We know...

Part of the Gillard government's support for super was delivered as a payment. It was called the Low Income Super Contribution. The Coalition announced plans to axe it in its first budget in 2013 saying it couldn't be afforded. It left the tax breaks available to higher earners untouched. The contribution ends in 2019.

On coming to office in 2007, Labor's Wayne Swan announced plans to set up first home saver accounts that would operate in the same way as super except that instead of the support being delivered as a tax concessions it would be delivered as payments: more for high earners, less for low earners, the same as for super. The plan was ridiculed into oblivion.

"To whom it may concern. I would like to know why an income earner of $180,000+ will receive most contribution from the government while a low to middle-income earner receives the least," was one of the nicer emails the treasury received.

Classify a program as an expense and it'll be subject to rigorous and appropriate scrutiny. Classify another one as a concession and it'll remain off the books, largely unnoticed. Pensions are one of the government's biggest and fastest-growing expenses. But super tax concessions are almost as big and growing more quickly, without the angst.

Grants for public housing are quite rightly examined to see whether they are being put to the best use. But the negative gearing tax concession continues (with government support) even though it no longer funds houses the way it used to. At the turn of the century, 1 in every 6 new investor loans went to build a house. Now it's 1 in 14.

The Howard government's Commission of Audit was on to the double standard. It said tax expenditures were "usually uncapped, open-ended and their costs can rise rapidly". It asked Howard to "comprehensively review all existing tax expenditures". After the review he should "examine the scope to convert remaining tax concessions to outlay programs".

Howard did nothing. Towards the end of its life, his government jaw-droppingly made every dollar earned in the super accounts of retirees over 60 entirely tax-free, taking tax expenditures into new dimension.

Three elections later, the Abbott government's Commission of Audit didn't even examine tax expenditures. Its terms of reference limited it to examining "each dollar spent".

Australia's 25 biggest tax expenditures cost between them $122.2 billion, around one quarter of the Commonwealth budget. The International Monetary Fund says we spend more on them than the USA, more than Britain, more than Greece, more than Italy - more than any of the 16 nations it examined. The Treasury tots them up each year in a Tax Expenditures Statement few people read.

The biggest go to the family home, then to super, the GST and charities. A government genuinely concerned about getting value for money and balancing its budget would impose sunset clauses on the lot then review them portfolio by portfolio over a period of (say) five years. Those that aren't axed it should consider turning into visible grants.

Oh. The Private Health Insurance Rebate is classified as a direct payment. I bet you couldn't work it out and you had to guess.

 

The twenty-four biggest tax expenditures

1. Capital gains tax main residence exemption - discount component $25.5 billion

2. Capital gains tax main residence exemption $20.5 billion

3. Concessional taxation of employer superannuation contributions $16.3 billion

4. Concessional taxation of superannuation entity earnings $13.4 billion

5. GST exemption for certain foods $6.4 billion

6. Capital gains tax discount for individuals and trusts $5.8 billion

7. GST treatment of financial services $4.45 billion

8. GST treatment of education $3.95 billion

9. GST treatment medical and health goods and services $3.55

10. Concessional taxation of non-super termination benefits $2.7 billion

11. Tax exemption for Family Tax Benefit payments $2.22

12. Statutory effective life caps for writing off assets $1.945 billion

13. Exemption from interest withholding tax on certain securities $1.86

14. Medicare levy exemption for residents with low taxable incomes $1.71

15. Tax exemption of the Private Health Insurance Rebate $1.57

16. Exemption for public & not-for-profit ambulance and hospitals $1.4 billion

17. Exemption for other public benevolent institutions $1.36 billion

18. Concessional excise for aviation gasoline and turbine fuel $1.23 billion

19. GST exemption for residential and community care services $1.11 billion

20. Tax deduction for gifts to registered charities $1.1 billion

21. GST exemption for child care services $1.09 billion

22. Non-refundable research and development tax offset $1.07 billion

23. GST exemption for water, sewerage and drainage $1.05 tax billion

24. Tax deduction for capital works $960 million

Source: 2014 Tax Expenditures Statement, Commonwealth Treasury/p>

In The Age and Sydney Morning Herald

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So Abbott doesn't like power stations. Who does?

So Abbott doesn't like power stations. Who does?

Everything about the electricity industry is ugly, and dangerous; from the mega stations that spew out smoke and ash in the Hunter and La Trobe Valleys to the high voltage cables and substations that spark fires and ominously hum, to the poles and wires that interfere with trees on their way to our homes.

But windmills, near farms?

It takes a special kind of hysteria to get worked up over windmills. Or a special sense of entitlement. Here's Abbott on Thursday: "When I have been up close to these wind farms there's no doubt not only are they visually awful but they make a lot of noise."

Noise, appalling looks and danger are what those of us who live in cities have long gotten used to. Some of us live near railway lines, some under flight paths, some near substations. It's the price we pay for progress, the entry ticket for a seat in the 21st century.

But Abbott, and his mate Hockey, are delicate petals.

Here's Hockey, a few months back: "We get some beautiful landscapes in Australia and frankly putting up those towers is just, to me, quite appalling".

"I drive from Sydney to Canberra on Sundays to go to parliament and I just look at those wind farms around Lake George and I am just appalled at the beautiful landscape that has been ruined."

Ruined. By windmills. The treasurer adds that he would be "equally appalled" if the authorities put coal-fired power stations there, but I've never heard him or Abbott speak out against coal-fired power stations. And I've never heard his party back an inquiry into coal in the same way as it has backed 10 inquiries into wind in the past 5 years.

The latest, in the Australian Senate, has heard harrowing tales. Bill and Sandy Rogerson live at Glenthompson near the Grampians in Victoria. They live with "constant humming and vibration". Bill wakes up suddenly at night with palpitations and feels his "heart is going to jump out of his chest". One of their sheepdogs can't lift its head if it is housed in the woodshed near the turbines. When it does get up it "runs around madly like its brain is scrambled".

Their lambing rate has fallen. Some of their lambs are born "with flexural leg deformities similar to that found in foals raised near wind farms in Portugal".

From windmills. It's all there in their submission to the inquiry, along with 460 other submissions.

Never mind that the Association of Australian Acoustic Consultants told the inquiry there was no evidence people were affected by the so-called infrasound around windmills, unless they know it's there. "In every study conducted to date, that has been the case," it said.

Never mind that after years of study the National Health and Medical Research Council concluded there was "no consistent evidence that wind farms cause adverse health effects". Never mind that afterwards someone persuaded it to spend another $2.5 million of its budget on yet more studies.

Never mind that there are other forms of power generation that actually do damage health about which we do nothing.

Jacinta Morahan is a doctor. She lives at Anglesea on Victoria's Great Ocean Road. She wrote to the inquiry about the Alcoa open cut mine and coal-fired power station next door, detailing the amount of sulphur dioxide and carcinogenic particulates pumped into the lungs of residents and visitors. Her point was that wind farms aren't in the same league.

And as they open, coal plants will close.

On the very morning Abbott was telling broadcaster Alan Jones that windmills are "visually awful" the owner of South Australia's only two coal-fired power plants announced plans to close up shop. They can't compete with the cheaper power provided by wind. One of them hasn't been turned on for a year. Until last weekend there were concerns about how South Australia would cope without any coal-fired plants. They are much better than wind at the fine tuning the electricity system needs to ensure supply meets demand.

By coincidence there was a fire at the one operating Port Augusta plant on the Queen's birthday weekend and the state managed just fine with no local coal plants whatsoever. It has had its dress rehearsal.

Other coal plants are likely to close in NSW. Wind plants mightn't be perfect, and they mightn't be beautiful, but they are far less offensive than what they'll replace.

In The Age and Sydney Morning Herald

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Hockey is wrong, houses are becoming unaffordable

Residents have become a minority in a market they once dominated.

The latest figures released on Tuesday show would-be owner-occupiers accounted for just 48.4 per cent of the money borrowed for home loans in April - the lowest proportion on record.

Investors accounted for the other 51.6 per cent.

The figures were released as the Treasurer Joe Hockey told a Sydney media conference that housing was still affordable, saying if it wasn't, "no one would be buying it".

The figures suggest that housing is becoming increasingly unaffordable for would-be residents who find themselves outbid by investors armed with the tax advantages associated with negative gearing.

As recently as the early 1990s owner-occupiers accounted for 84 per cent of new home lending, leaving investors with less than 15 per cent.

When the Howard government halved the headline rate of capital gains tax in the late 1990s, investors accounted for 33 per cent of the money borrowed.

The tax change made negative gearing much more attractive and brought about a surge in investment which reignited after the global financial crisis. Investment lending overtook residential lending in August 2014.

In April intending residents borrowed $12.6 billion to buy homes while investors borrowed $13.5 billion. The figures exclude refinancing.

They show that it is indeed possible for house prices to climb beyond the level where would-be residents can buy them. And houses are being bought by investors who are betting that prices will climb higher still.

A "bubble" is what happens when prices are driven by speculation about what will happen to prices rather than by what genuine participants are prepared to pay.

The Treasury secretary thinks the Sydney housing market is already in a bubble, as is part of Melbourne.

"It's unequivocally the case in Sydney. Unequivocally," he told the Senate last week.

"Frankly, whatever the data says, just casual observation can tell you it's the case."

Bubbles usually burst. In exceptionally well-managed cases they deflate slowly. Hockey seems keener to deny there's a bubble than to deflate it slowly.

One of the safest ways to deflate the bubble would be adopt the Greens' proposal of denying negative gearing tax deductions to new investors. Existing investors wouldn't stampede for the doors and sell, but new investors would become more scarce, giving genuine residents a chance to get a foot in the door.

The parliamentary budget office says it would save the budget $4 billion a year. No-one who is presently negatively gearing would mind, and air would leave the bubble.

In The Age and Sydney Morning Herald

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On the road to $5 million. Abbott's love affair with high house prices

It's 2055 and you're searching for a house. Tony Abbott is still the prime minister. He has just turned 98 and is finally considering retirement. But for the past 40 years he has been as good as his word. "I do hope that our housing prices are increasing," he said back in 2015. "I do want housing to be affordable, but nevertheless, I also want house prices to be modestly increasing."

They have indeed been increasing modestly, in each and every year by the average of what they had increased in the previous 25 years.

The agent has found you a beauty. It's typical a Melbourne home, slap bang in the middle of the price distribution at the so-called median. It costs $5 million.

That's right: $5 million. Right now a typical Melbourne home costs $569,500. If prices climb for another 40 years as they have for the past 25, a typical Melbourne house will cost $5 million.

Of course we will be earning more by then. The intergenerational report assumes that wages will climb by 4 per cent per year all the way through until 2055. It's a heroic assumption. Wages have been increasing at nothing like that pace lately. If they do, the average Victorian on a full-time wage will earn $363,470, which sounds like a lot. But it won't be, compared to the cost of a house.

Right now the typical Melbourne home costs 7.5 times the average full-time wage. Back in 1990 it cost 5 times that average wage. By 2055 it would cost 13 times the average wage...

Rising prices mean sliding affordability. Beyond a certain point they have to. It's what made Abbott's claim that he wants both affordable housing and rising prices so silly.

It used to be said that house prices couldn't climb to the level where owner-occupiers couldn't afford to buy them. But it's no longer true. John Howard severed the link in September 1999. A simple change to the Tax Act created a whole new class of buyers for whom occupying the house wasn't the point. They could make big money by using houses as investments, getting someone else to live in them, and selling them later at a profit. From September 1999 only half of any profit they made was subject to tax.

This meant they could afford to pay more than the properties were worth, more than people could comfortably pay to live in them. If their interest payments exceeded their income from rent and they had to record a loss, so much the better. They could use the loss to write down other income and cut their tax. They would make it up later when they sold for a (largely untaxed) profit.

Before the change negative gearing wasn't that common. In 1999 only 650,000 landlords recorded losses. Within five years the number had passed 1 million. It's now 1.3 million, accounting for 1 in every 10 taxpayers. And their losses are no longer small. The average loss has jumped from $4000 to almost $10,000.

The flood of negative gearers has pushed prices to levels that once wouldn't have lacked support. In the decade before 1999 Melbourne prices rose by an average of 4.8 per cent per year. In the 15 years after they've climbed 7.6 per cent per year. They'll keep climbing for as long as negative gearers (who don't much care about prices) outbid owner-occupiers.

Although indifferent to high prices, negative gearers are very concerned about whether or not prices will continue to rise. Their business model depends on housing becoming less affordable. Without the assurance of future price rises, it collapses. Which is why the prime minister's remarks last week gave them comfort. He effectively committed the government to doing whatever it could to ensure that one type of investment always increased in price.

The governor of the Reserve Bank has repeatedly warned that asset prices can go down as well as up. Abbott has negated that warning, for one class of asset.

If investors believe him they'll switch out of risky assets such as shares and businesses into property. And those already in property will gear up further. Already, around 30,000 own five or more properties. Abbott has blown air into the bubble.

It's a furphy to suggest greater housing supply will allow Abbott to keep both of his promises: more affordable housing and modestly increasing prices. If greater supply does make housing more affordable it will do so by cutting prices. Abbott can't have both. And negative gearing is a particularly cumbersome means of increasing supply. Before Howard's tax change, one in every six new investor loans went to build houses. It's now one in 14. Negative gearers are keener to outbid owner-occupiers for existing homes than than they are to build new ones.

The more they succeed in pushing up prices the more Australians will rent. The latest census shows 29.6 of households renting. A decade earlier it showed 27.6 per cent.

What's odd about Abbott's support for negative gearing is that when it comes to foreign investors, he is cracking down hard. Most foreigners are prevented by law from competing with Australians to buy existing houses, and Abbott's determined to apply the law. Around 200 cases are under investigation, 40 coming from tip-offs from members of the public who have 'dobbed in' owners they think might be foreign. Foreign buyers do indeed help push up real estate prices and deny owner occupiers a chance, but that's exactly what negative gearers do. And since 1999 they've had a taxpayer subsidy to do it.

Never before have we had a prime minister who explicitly backs higher house prices. Never before have we had one who effectively promises less affordable housing in the decades ahead and a greater proportion of the population forced to rent. Never before have we had one prepared to make an election issue out of it. "Do not trust this man with your house price," he thundered against Bill Shorten last week. Shorten should respond in kind. Should we trust Abbott with house prices?
 

In The Age and Sydney Morning Herald

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The Parliamentary Budget Office is corrupting rather helping political debate

What happened on Q&A last week was just the tip of the iceberg. And I am not talking about tampons. I'm talking about real ambushes, the kind that are genuinely unfair.

Joe Hockey was asked to respond to modelling that said his budget would cost some families $21,000 over four years.

"Well, hang on. I haven't seen this modelling," he replied. Most of Australia hadn't. Bill Shorten's office had released results from the work it had commissioned from the National Centre for Social and Economic Modelling without releasing the work itself.

"You're asking me about something I haven't seen, the government hasn't seen and most of the media haven't seen," Hockey quite rightly pleaded. "I don't know what the assumptions were ... I have seen lots of economic modelling. What you put in and what comes out, you don't want to see. I want to see what's going into this sausage machine."

His point wasn't that there was anything wrong with the centre's modelling (as far as he knew), it was that without knowing which measures it had included, which measures it had excluded and what it had assumed about wages and so on, he was being asked to wrestle with a column of smoke.

And not only Hockey. The previous day Labor had asked journalists to report on what it said were the centre's findings, without showing them its report. They could ask questions of the centre, but weren't allowed to see what it had written.

Perfectly timed for the start of the parliamentary week, Labor's tactics gave it a weapon to use against the government while depriving the government of a weapon to use against it. That it later relented and released the report doesn't excuse its behaviour.

It's not the first time. In April, Labor announced a new policy on superannuation that it said had been "costed by the Parliamentary Budget Office" as saving $14.3 billion over 10 years. But it wouldn't release the costing. How the office arrived at it, or even if it had, was a matter of conjecture...

The Parliamentary Budget Office costs us $7 million a year. It employs 35 people. It was set up to give us confidence that the promises made by our politicians would cost what they said they would cost. But the rules governing it allow politicians to hang on to its work, even while they are quoting it, misrepresenting a cost that may have been arrived at by one means as if it had been arrived at by another.

Every costing concluded by the PBO is given a reliability rating ranging from "low" to "highly reliable". But Labor won't say what rating the costing of its super policy got or how the costing was arrived at. When asked, it says that the Coalition didn't release the costings it commissioned during the 2013 election. 

And it's right. The Coalition released 80 or so policies during the campaign, almost all of them costed by the PBO and to the best of my knowledge none of them publicly released.

At times the charade was farcical. The Coalition claimed that cutting the public service workforce by 12,000 would save $5.2 billion. It said the PBO had said so. But how was the figure arrived at? Which financial year did the savings start from? Did they include the savings on rent? Did they include superannuation savings? So heavy was the pressure on the Coalition to answer the question, and so keen was the Coalition to deny Labor the opportunity of seeing what its numbers meant, that it resorted to showing the document to selected journalists on the proviso that they could look at it for a few minutes, take only a few notes, and take no photos before it was whisked away.

Then at the death knell, on the Thursday before the poll, it released a few pages of numbers. No details, no clues as to how the numbers were arrived at.

Instead of allowing us to understand what our politicians had been promising us, our investment in the Parliamentary Budget Office allowed them to treat us like mugs.

After the election the full costings were published in accordance with a rule that requires the PBO to give a full accounting within 30 days. We did get to see them, but too late.

It can easily be fixed. And it's in the Coalition's interest to fix it so that Labor doesn't do next time what it did last time.

The rules should be changed to require the PBO to release a costing document as soon as the party that commissions it quotes it. Until then, it should be completely confidential. The PBO should also be able to continue to do confidential work for politicians right up until polling day, something it cannot do at the moment once the election is under way.

It's not only the Coalition that should listen. It's also Labor in Victoria. It is about to set up Victoria's Parliamentary Budget Office. It's too important to get wrong.

In The Age and Sydney Morning Herald

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More than vows. Why gay marriage matters

It's more than just marriage.

I held hands with my Dad as we walked to the polling booth at my primary school, 48 years ago. There were two questions that day. One dealt with the number of seats in the House of Representatives and the Senate. The booklet sent to households ahead of the referendum presented both arguments: "for" and "against". The other question dealt with discriminatory references to Aboriginal people in Australian Constitution. The booklet set out only one case: for removing them.

"Why?" I asked my Dad. "Why isn't there an argument against this one, as well as an argument for?" "Because there isn't an argument against," my Dad replied. "We want to count Aboriginal people in the census and we want to treat them like other people."

That day, 90 per cent of the electorate voted yes. While I have been proud of my small part in what happened that day, for much of my life I have thought of what happened as a mere administrative change. The Commonwealth became able to make laws with respect to Aborigines and was forced to include them in the census. But I've discovered more recently that for Aboriginal people it meant much more.

They'd previously not known what Anglos and others thought about them. Every bad encounter made them believe the worst. After the vote they realised that the overwhelming majority of Anglos liked them and wanted them included. Almost every Anglo they had seen in the street or on the bus or at the school had said yes.

That's what a vote for gay marriage will do if it happens this year. It'll be about more than marriage. It'll be about inclusion. It'll be the Australian Parliament saying, "Welcome to Australia".

Because despite laws that make discrimination illegal and despite all the talk about the pink dollar and enviable lifestyles, gay and lesbian and bisexual and transgender people aren't as included as the rest of us.

It shows up in the stats, if not in what hetro Australians like to believe about what they believe.

The Household, Income and Labour Dynamics survey is Australia's version of Seven Up. It has been tracking about 20,000 Australians each year since 2001. In 2012 for the first time the survey asked questions about their sexual identity.

Around 1.6 per cent said they were gay or lesbian, and 1.5 per cent bisexual. Around 0.8 per cent were "other" and 3 per cent preferred not to say.

The gay men earned much less than the straight men, about 20 per cent less, even when the figure were manipulated to adjust for education and other characteristics.

The gap is because those gay men who had jobs earned lower wages (about 11 per cent lower when adjusted) and because they were less likely to be employed at all, an astonishing 15 per cent less likely.

And it was all the worse when their sexual identity was obvious. Although 2012 was the first year in which the survey explicitly asked about sexual identity, it had been asking the gender of live-in partners since the beginning. The gay men who were (fairly openly) living with same-sex partners did much worse than the single gay men who were better able to keep their identities secret. And they did worse over time. While the earnings of all types of gay men had climbed more slowly than those of hetrosexual men since 2001, the earnings of those in relationships had climbed the slowest.

In contrast, lesbians were just as likely to be employed as straight women (although bisexual women and women who preferred to not to say were underemployed). And they took home more, about 33 per cent more. However, the extra pay was almost entirely due to the fact that they put in extra hours. Their hourly rates were little different to those of other women. It was the same whether or not they had partners. On average they got paid less than men (as all women do on average) and got extra pay only for extra work.

Joseph Sabia and Mark Wooden from the Melbourne Institute of Applied Economic and Social Research say their findings are consistent with discrimination against gay males. Gay females are taken advantage of rather than paid higher wages. Their lower likelihood of easing back on work to have children could be in part the result of discrimination against potential lesbian parents.

Allowing gay marriage, as the Parliament is set to do, will be wonderful for those wanting to get married. But it will also be good for those that don't. It'll show all of us that we want to include all of us. It'll make it harder to leave people out.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald

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Alright for the rich. Double standards in welfare crackdown

Where will the police turn up next? They are already mixing it with the department of immigration in Operation Sovereign Borders. They're smartening up the place as well. I am told departmental staff have been asked to dress sharply and get haircuts. They've even been directed not to wear their photo IDs when they leave the building. They have to be careful.

Now it's Human Services' turn. Essentially a call centre and payments organisation, the department that runs Centrelink is about to get a "tough cop on the beat". A "senior police officer" is to lead its crackdown on welfare fraud, or so a Sunday newspaper tells us. Never mind that the department's annual report shows it already has nine federal police working with it, apparently appointing an extra one to lead a taskforce could claw back an extra $1.5 billion in overpayments. The minister says so.

It got me wondering what other government departments the police could help. Communications came to mind, although that would have been in the days when the government collected radio and television licence fees. Anyone caught listening or watching without a licence was fined.

Education and Health offer few opportunities - the Commonwealth runs neither hospitals nor schools. And then it struck me. Police could be embedded in the tax office.

But although that does happen for serious financial crime (the tax office is on a joint taskforce with the Federal Police), there are no plans to get police to crack down on ordinary taxpayers claiming deductions.

Instead the tax office has lost 10 per cent of its staff. The Coalition used its first budget to bring forward staff cuts planned by Labor in order to bring about "the largest reduction to public service jobs over the forward estimates".

It makes its crackdown on fraud unbalanced. Australians who misreport their incomes for the purpose of claiming benefits are about to get further hammered but not Australians who misreport their incomes for the purpose of escaping tax.

Even within the department of human services the crackdown will be unbalanced. Minister Marise Payne says it will apply to the recipients of Newstart unemployment benefits and age and disability pensions, but not to the recipients of family tax benefits. That's because family tax benefits are "supplementary payments". They are middle-class rather than life-sustaining welfare.

It's a distinction that is running through everything the Abbott government does.

Within weeks of taking office it set up a Commission of Audit. Its terms of reference required it to "eliminate wasteful spending" but said nothing about tightening up wasteful tax concessions. The commission took the instruction to heart, saying nothing about the wasteful concessions on super but plenty about how to wind back spending on pensions.

When asked why it had examined only one sort of waste - the waste in payments intended to help people survive - the commission said tax concessions would be the subject of a separate tax white paper to be delivered in 2015.

The Coalition's first budget tightened spending on pensions and Newstart as foreshadowed but left superannuation alone. Its turn would come, we were assured.

There were reasons to believe it would. The government had told the authors of the tax white paper that nothing was off limits. They were free to point out waste wherever they found it.

The Murray financial system inquiry found that super tax breaks were not "well targeted to achieve provision of retirement incomes", which is another way of saying much of the money was wasted. The discussion paper released to set off the tax white paper process reached much the same conclusion, finding that despite the tens of billions of dollars offered annually in super tax concessions, the total effect of taxes on savings was "uncertain".

Treasury calculations prepared for this year's budget show the cost of the concession on employer contributions is set to climb from $16.3 billion to $20.15 billion by 2018-19. The cost of the concession on super fund earnings is set to climb from $13.4 billion to $30.4 billion. By way of reference, the cost of the age pension is set to climb from $41.6 billion to $50.4 billion, meaning that by then super tax concessions will cost as much as the age pension and will overtake it unless reined in.

And the bulk of the concession goes to extraordinarily high earners, the type who would be saving anyway. The treasury believes the top 1 per cent of Australian earners, a mere 132,000 people, take home between them 9 per cent of Australia's super tax concessions.

And so Joe Hockey and his departmental head John Fraser began speaking out. On Jon Faine's program on faABC radio the Treasurer called for "a bipartisan approach". Whoever was in government, "whether it's a Liberal government or Labor government, whoever it is, we're going to have the same problems", he said. Fraser told a gathering at the Australian National University it was time for a "fundamental rethink about the interaction between superannuation and tax and the whole welfare system".

And then Abbott decided it was off. Eyes fixed on the next election, be declared there would no changes to the super tax concessions, not now, not ever.

I am just one who's been taken for a ride. Welfare lobbyists who cautiously supported the winding back of pension access in return for action on super; the super industry itself, which offered up modest savings; the opposition, which drew up its own proposals, believing the offer of bipartisanship was genuine - all of us have been waiting for something we are now told won't happen.

Except that it will. After the election whoever wins will (re)discover that tax concessions skewed to Australia's highest earners exceeding the cost of the pension are not sustainable.

In the meantime, welfare cheats on far lower incomes should expect to hear from the police.

In The Age and Sydney Morning Herald

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How the East West Link cooked Abbott's budget numbers

Tony Abbott thinks we're mugs.

Deflecting attention from a budget that left Australia's second biggest state with only a fraction of Australia's infrastructure spending, he said he was so committed to the East West Link that he "gave Victoria $1.5 billion to actually get cracking".

It's true, he did give Victoria $1.5 billion for the East West Link in his first 2014-15 budget ($500 million of which was diverted from other Victorian projects). But in extraordinarily odd timing, he handed it over in 2013-14, just ahead of the year to which that budget referred.

Like all budgets these days the 2014-15 budget was handed down in May. The 2013-14 financial year had seven weeks to run. The budget shovelled out the money immediately, before 2014-15 began and well ahead of when it could possibly have been needed. The East West Link contract wasn't signed until September.

The immediate payment had nothing to do with enabling Victoria to get cracking. It had everything to do with cooking the books.

Labor's last budget covered 2013-14. By shovelling out the East West Link money before 2013-14 ended he loaded up Labor's last financial year with extra spending. The 2013-14 deficit climbed from a forecast $18 billion to $48.5 billion. A lot of the deterioration was due to the collapse in commodity prices. The iron ore price slid from $US124 to $US93.

The rest was due to higher spending, most of it tacked on to Labor's budget by the Coalition. It directed $8.8 billion to the Reserve Bank within weeks of taking office, pushing up "Labor's" deficit by $8.8 billion. Then it directed $1.5 billion to Victoria well before it was needed.

The manoeuvres not only made Labor's last budget look bad, they made the Coalition's first two look good...

Having funded the East West Link in 2013-14 the budget didn't need to fund it in 2014-15 (nor as it turned out in 2015-16) and it didn't need to find several billions in 2014-15 to top up the Reserve Bank's reserve fund. Indeed, with the reserve fund topped up the bank resumed paying dividends, giving Abbott $1.235 billion from its performance in 2013-14; half of which he directed to the 2014-15 budget, and half of which he held over until July in order to boost the 2015-16 budget.

And the early gift dressed up Denis Napthine's final Victorian budget. Taking it back will harm Daniel Andrews' first one.

It's particularly irksome that he gave Andrews no notice that he planned to take it back. Victoria's budget, delivered a week before the federal budget, is based on the assumption that the $1.5 billion can stay.

Abbott is using Victoria as a piggy bank. He paid it $1.5 billion at a time when it would hurt a Labor budget. He wants to take it back out at a time when it will help the Coalition's. He has already booked it in the budget as having been returned.

The billboards he is sending around Melbourne's eastern suburbs are a smokescreen. "Stuck in traffic! Blame Labor" they say. What they don't say is that the East West Link is such a bad project that a conventionally-constructed benefit cost analysis finds it returns just 45 cents for every dollar it costs. What they don't say is that the $1.5 billion could be better spent on projects whose returns exceed their costs. What they don't say is that Victoria voted against the East West Link in an election Abbott himself described as "a referendum on the East West Link".

Victorians voted for a rail project, one Abbott ought to be prepared to submit to Infrastructure Australia along with the East West Link. After all, that's what the policy he took to the federal election said he would do: "We will require all Commonwealth-funded projects worth more than $100 million to undergo a cost-benefit analysis by Infrastructure Australia to ensure the best use of available taxpayer monies," it said.

By refusing to do what he said he would do he is setting up a stand-off between Victoria and the Commonwealth, one that will enhance his budget's bottom line for as long as it goes on. If he can drag it out another year it will enhance the next budget's bottom line as well.

But he'll have to cave. Victoria has 25 per cent of Australia's population but is getting only 12 per cent of its infrastructure funds. Billboards and bluster can't obscure that forever.

And there are plenty of other sleights of hand in Abbott's second budget. He is advancing $5 billion over five years for non-commercial infrastructure facilities in Australia's north, the kind the banks won't touch. Because the $5 billion will be "lent" rather than spent, it won't add to the most widely quoted measure of the budget deficit. But loans for non-commercial ventures are (by definition) highly likely to never being repaid. Eventually some, maybe even most, of the $5 billion will find its way on the deficit. But not now. That's a problem for the longer term. Right now Abbott wants to us to think he's fixing the budget.

In The Age and Sydney Morning Herald

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Company tax cuts won't spark investment explosion says treasury chief John Fraser

The push to cut Australia's 30 per cent company tax rate in order to attract more investment has reached a roadblock in the form of John Fraser, the former investment manager who now runs Australia's treasury.

Mr Fraser told a budget forum in Melbourne on Friday that while he understood the argument about attracting more investment, his own experience told him that tax rates were a second or third order issue for corporates considering investments.

Mr Fraser headed UBS Global Asset Management in London for twelve years before returning to Australia in December to rejoin the treasury.

He told the Grattan Institute forum other factors were more important in making investment decisions.

"Generally the internal rates of return that are required - the hurdle rates - are so high it would be false to say the taxation rate, unless they were ridiculous, really large, make a big difference. Whether the tax rate is 30 per cent or 35 per cent frankly is not as important as other issues such as governance and dispute resolution," he said.

Exchange rate risk was also important.

"The rule of thumb for most big firms looking at acquisitions, I'll put a number on this: it's well above 20 per cent, because things go wrong."

For Australian firms, especially small and medium sized ones, the tax rate did matter, and he supported cutting the corporate tax rate to help them. But dividend imputation made the tax rate less important for bigger firms.

Dividend imputation refunds to Australian shareholders tax that companies have already paid creating their dividends.

A plea in the treasury's tax discussion paper for the government to consider removing dividend imputation appears to have fallen on deaf ears.

Asked his own view, Mr Fraser said the government had "made its views clear" and he wasn't going to stroll into the issue. But he added: "in the longer term it's something you've got to look at, it is something I would hope one day will be looked at holistically"

He had already had several sessions with big accounting firms seeking their input into the tax white paper due in December.

"What we need are real life experiences," he said. "The industry associations are very professional and very good, but often the circumstances of particular companies differ greatly. That's why we've got this big engagement process over the next few weeks."

"The tax system is designed for another era, it's a FJ Holden. We've got to have a good look at it because when reform does come I suspect we will be stuck with it for 30 years.

"We've got to have a few warriors out there."

In The Age and Sydney Morning Herald

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It's a Swan of a budget: Hockey channels Labor

Joe Hockey is turning into Wayne Swan and then some.

Whereas Swan allowed small businesses to write off spending on equipment up to $6500, Hockey is allowing them to instantly write off spending up to $20,000. And to do it again and again. There's no limit on the number of times small businesses can get the Tax Office to fund a big chunk of $20,000 right through until July 2017.

He is turning into Swan because that's what treasurers do when businesses aren't investing. Non-mining firms (as well as miners) have been telling the Bureau of Statistics they plan to actually cut investment spending in the year ahead.

And you forecast a pickup in the economy, which is doubly useful because it allows you to forecast steadily shrinking deficits.

If things turn out much worse than you forecast, you can always say you were blown off course. For both treasurers, it's true. The iron ore price dived far further than they could have reasonably expected. It has halved in the past year. Hockey is forecasting a further fall in the year ahead, but perhaps not enough of a fall. He is forecasting a quicker lift in the economy than is the Reserve Bank. The budget measure of economic growth is languishing at 2.5 per cent. The Reserve is picking an unchanged 2.5 per cent for the financial year ahead. Hockey and Treasury are picking 2.75 per cent. It's a small enough difference to be believable (honest estimates can reasonably differ) but big enough to make his budget numbers look better.

And you hope.

You talk about seeing the "glass half full" as Hockey did in the budget lockup, but you act as if it's nearly empty. This budget and the measures leading to it since December will push an extra $2.153 billion into the economy in 2015-16. They'll add $2.153 billion to the budget deficit. It's not what you do if you think the economy is going to be strong. In subsequent years the balance changes and they remove money from the economy, but not much. By 2018-19 they will have removed only $1.605 billion.

An attack on the deficit, delivering "a surplus for every year of our first term" as Hockey once promised in opposition, could drain the glass.

Several of the longer acting measures in last year's budget that were scheduled to bring about a surplus by the end of the decade are missing from this one. Pensions will now be indexed by the highest of wage increases or prices each six months rather than simply prices, meaning they won't steadily shrink the deficit. But remarkably Hockey still forecasts a return to surplus at about the same time.

The trick is lower interest rates. The government's borrowing rate has collapsed since the last budget, hitting an all-time low of 2.4 per cent last month, although it's been climbing since. Plug in that lower rate and the cost of the annual interest payments on debt scarcely climbs even while the debt balloons. That's why the Treasurer was able to claim that he is now paying just $96 million a day in interest on debt, down from $133 million under Labor. It isn't because he has shrunk the debt. It's because, like all of us, he is finding it easier to manage.

But the debt itself shows no sign of leaving. Whereas last year Hockey was able to claim his government would be free of net debt by 2024, this year he is unable to claim it'll ever be debt-free. The line on the graph remains high well into the 2030s, further than the eye can see.

There's one respect in which Hockey isn't Swan. For all the talk about spending big on infrastructure (which would certainly be a good thing) he is offering next to nothing new. The biggest spend is $142 million on offshore resettlement facilities for asylum seekers. It won't even be spent here.  

In The Age and Sydney Morning Herald

The Zombies that make the numbers look good

The coalition's second budget is propped up by "zombie measures" from its first. Announced in a year ago but not yet passed in the Senate, they are politically dead but not yet formally abandoned, meaning the income or savings they would have raised can be used to dress up the second lot of budget forecasts regardless of reality.

The biggest are the cuts the funding formulas for state hospitals and schools. Due in 2018-19 but unlikely to ever be legislated, they were to save the Commonwealth $80 billion over 10 years. There's not a mention of them in the second Hockey budget, but they are there nevertheless.

The budget totals for grants to states for hospitals and schools are noticeably lighter in 2018-19, the last year for which there are detailed forward projections, and the broad brush graph of the budget balance that goes beyond that gets a lift from then on.

It means that trying to come to grips with the deficit projections is like wrestling with ghosts. Even it dead, they live on in the projections until they are formally renounced.

One that has been renounced is the Medicare copayment and the associated cut in payments to doctors. It is indeed dead and no longer propping up the budget.

But others linger on. The Coaltion's first budget lifted co-payments on prescriptions and made it harder to take advantage of the pharmaceutical benefits safety net. It's politically dead, unlikely to ever be approved by the Senate, but it's dressing up the numbers.

University graduates will no longer be charged an above-inflation interest rate on student. The government has confirmed that, and it's not in this budget. But silently left in the budget is the requirement to start the repayments earlier and the 20 per cent cut to university funding, even though they'll most likely never happen. They are improving the budget forecasts without seeing the light of day.

Last budget the government tried to limit Family Tax Benefit B to families with children under 6. The Senate wouldn't let it do it, although now there's a least a chance it might as part of a trade off to get Scott Morrison's childcare package. It lives on in the numbers nevertheless.

And the big cuts to Newstart that would have made young people wait six months before getting the dole live on as well, although in a scaled-back form. They'll now only have to wait one month. It may never get through the Senate, but it's in the budget.

In The Age and Sydney Morning Herald

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The timid budget. Why they'll merely make do tonight

There's been something odd about the lead-up to tonight's budget.

Time and time again Joe Hockey has floated ideas only to have them knocked down. He suggested what he would soon be doing about negative gearing only to have Morrison and Abbott slap him down. He suggested he would look at super tax concessions, only to have just about the entire party slap him down.

Tony Abbott, not Hockey, chaired every one of the expenditure review committee meetings. The last time around he let Hockey deputise for him when he was away. Scott Morrison, not Hockey has been fronting budget press conferences. One of the cruelest photos on The Age's website shows Hockey posing for pre-budget photos in his inner office while in the outer one Scott Morrison is on the TV announcing the childcare package.

And the usual post-budget salesmen are ducking for cover. I know of two instances in which government MPs have turned down invitations to speak at post-budget functions, saying they would rather leave it to others to defend the budget.

The new Treasury boss John Fraser has abandoned a 20-year tradition in which his predecessors have fronted up to business economists in Sydney on the Tuesday after the budget.

Instead he will appear on Friday in Melbourne at the newspaper-unfriendly time of 6.30pm "in conversation" with John Daley✓ of the Grattan Institute. He'll face questions, but it won't be a grilling.

The nervousness may have to do with the impossibility of the task...

The government wants to cut the deficit. It has said so often enough. Abbott once declared a "budget emergency". Hockey held out the prospect of delivering surpluses "in each year of the first term of a Coalition government".

However, the deficit keeps rising. Labor forecast $18 billion for 2013-14, the Coalition forecast almost $30 billion for 2014-15, and tonight it'll forecast something north of $40 billion for 2015-16. That's because the price of the stuff Australia sells keeps sliding. When Labor drew up its last budget iron ore was $US124 ($157) a tonne. A year later it was $US102 a tonne. This morning it's about $US61 a tonne.

The Treasurer says every $US10 that the iron ore price falls adds about $2.8 billion to the deficit, a rule of thumb which would suggest that, all other things being equal, the government has lost $17 billion since the last budget as iron ore exporters pay it less tax. However, all other things are not equal. The dollar has slid from US93¢ to US79¢. Meanwhile, iron ore exporters churn out more product, and the net effect has been to drain the budget of revenue.

From the comfort of opposition it's easy to say that the right approach is to slash government spending or at least wind back its growth, and that's exactly what Hockey et al said. But in government it's wise to consider the consequences of taking money out of an economy that's already losing billions.

A year ago Hockey said he didn't want to do anything to dent confidence (which was actually climbing in the lead-up to the budget). Now confidence is genuinely weak. It's not only mining companies that are scaling back their investment plans, it's also non-mining companies, which were meant to take up where mining left off. Non-mining firms plan to invest 9 per cent less in the next financial year than in this one, mining companies 21 per cent less. The much talked about transition from mining investment to something else is "virtually non-existent" in the words a market analyst. The firms the Reserve Bank regularly talks to say they are reluctant to invest until they see a durable pickup in consumer spending. It has been picking up, but it isn't durable.

If last year was the wrong time to dent confidence, this year is worse. Both of Australia's leading private sector budget forecasters are talking quietly about the need to prepare a game plan to prevent the economy sliding into into recession.

The Reserve Bank reported on Friday that public spending was unchanged throughout 2014. That means the Australian government did nothing to boost the economy as unemployment climbed, but at least >the government didn't harm it.

Doing no harm is now the top priority.

The Treasurer says the budget will be only "mildly contractionary", although he said that some time ago and might have since been overruled.

The big themes of the budget will be families, taxation and jobs. Although many of the families and taxation measures are known, the jobs measures are not. What is known is that they cannot cost much money. Even if it has made a deliberate decision to go slow on cutting the deficit in order to protect the economy, the government most certainly won't have decided to allow the deficit to blow out in order to boost the economy.

Measures that would have helped the budget long-term such as more slowly lifting the age pension are now off the table. They were too unpopular and couldn't get through the Senate.

Measures such as attacking negative gearing and withdrawing superannuation tax concessions won't even make it to the table. They stand the best chance of winding back the budget deficit over time (the cost of the super contributions tax concession will climb from $16.3 billion to $19 billion over three years and the cost of the super earnings concession will climb from $13.4 billion to $26.8 billion) but the government has decided to retain them in order to create a point of difference with Labor.

Tonight we will get a budget that will do little in net terms, even though it could. Its authors are hoping it's enough.

In The Age and Sydney Morning Herald

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Budget preview. 'Tastes nothing like the old one'

A few years back Coca-Cola decided to enter the energy drink market. It launched a product called Mother that was so bad eight out of 10 consumers said they hated the taste. Instead of deleting it Coca-Cola completely reformulated it and printed on the top of every can: "New. Tastes nothing like the old one".

Tuesday's budget is genuinely new. Two of the six-member expenditure review committee that put it together weren't there before – the new Social Services Minister Scott Morrison and the new Assistant Treasurer Josh Frydenberg. The three top bureaucrats who put it together are new in their jobs – Michael Thawley in prime minister and cabinet, John Fraser in treasury and Jane Halton in finance. 

This time the Prime Minister Tony Abbott chaired almost every meeting. The nominal Treasurer and deputy chair Joe Hockey played less of a role.

On Tuesday Abbott and Hockey took part in a contrived photo opportunity pretending to go over drafts. Hockey didn't make eye contact. He looked deflated and upset. He didn't look like the budget's author.

At the heart of the budget are measures pushed by Morrison and Frydenberg rather than Hockey. In place of the indexation measure in the last budget that would have silently stolen pensioners' pay rises, Morrison's new package increases payments to pensioners of modest means and removes or cuts the part pension of only the wealthiest retirees.

Morrison's childcare package, to be unveiled on Sunday, will replace the confusing and overlapping system of childcare benefits and rebates with one simple payment linked to the number of hours in work. He'll also announce an $800 million a year safety net to ensure disadvantaged families get childcare. The money will come from the ditched paid parental leave scheme that in its original form would have paid the most to high earners.

Frydenberg has secured an extension of the GST to overseas-based online retailers such as Netflix. It'll be sold as a fairness measure, putting overseas and Australian retailers of web-based services on an even footing. He is also cracking down on the rort that allows the employees of not-for-profit organisations to pay food and entertainment expenses out of untaxed income without limit. The new limit will be $5000, after which their employers will face fringe benefits tax.

Fairness was a concept missing from the Coalition's first budget. It would have pushed young unemployed Australians onto a payment even lower than the dole and made them wait six months. It would have imposed co-payments on bulk billing, clipped future pension increases, ripped $80 billion out of schools and hospitals and lumbered university graduates with ever-increasing debt repayments. 

So unfair were the measures that the usual table that explained the kind of households it hurt and the kind it helped was missing. An attempt to replicate it by the Australian National University showed unemployed 23-year-olds would lose 18.3 per cent of their income. A childless couple on $360,000 would lose nothing.

Most of those measures have been blocked by the Senate, and in most cases rather than trying again the new budget will emphasise the point that it's "nothing like the old one".

On health, rather than pursuing co-payments the new minister Sussan Ley is going to extract greater value from the Pharmaceutical Benefits Scheme and the government's deal with pharmacists. She is considering allowing pharmacists to discount prescriptions, and may remove cheap drugs such as paracetamol from the scheme altogether.

Small businesses will be treated to a tax cut of 1.5 percentage points. They will be given back accelerated depreciation, scrapped in last year's budget, allowing them to write off up to $10,000 per year as well as the cost of setting up a business.

Some of the unpopular measures in last year's budget will remain, at least on paper. They are 'zombie measures' – not actually alive, but included in the budget to dress up the deficit forecasts. One is the much lower grants to schools and hospitals due in 2018 after the expiry of the Coalition's promise to match Labor's pledges for four years. Another is the savings that would flow from cutting grants to universities and allowing them to charge higher fees.

It isn't only fairness that will make the new budget different. The 2014 budget was meant to drive "the biggest investment program in Australia's history". It hasn't happened, in part because one of the projects the Commonwealth insisted on funding, Melbourne's East West Link, wasn't wanted by the Victorian voters.

This budget will try again, devoting money to infrastructure and opening up new possibilities for Victoria to get money in different ways.

What about the emergency?

Abbott declared a "budget emergency" back in 2013 after Labor forecast a deficit of $18 billion. On Tuesday Hockey will announce a deficit closer to $45 billion. But the emergency will have vanished.

In the lead-up to the budget Hockey pointedly redefined success. It is no longer getting the dollar value of the deficit down; it is now reducing it as a proportion of GDP. In a growing economy that's possible even if the dollar value of the deficit doesn't fall. Which is just as well – the latest projections from Deloitte Access Economics have it scarcely falling at all in 2015-16 although falling thereafter.

What's changed is that the government no longer has the political strength to make big inroads into the deficit. Bruised by the reaction to its first budget and behind in the polls it will face an election next year. 

The other thing that's changed is the economy. It is worse on almost every measure than it was a year ago. Post-budget the iron ore price collapsed from $US100 to $US60. Economic growth slid from 3.2 per cent to 2.3 per cent. Unemployment climbed above 6 per cent. Private businesses are telling the Reserve Bank they are reluctant to invest until they see a durable pick-up in consumer spending. But spending, and the confidence that drives it, are fragile. Talk of a second tough budget could dent it. Some of the economists most worried about Australia's outlook are reluctant to even talk about their fears. Like the government, they don't want to dent confidence and make their prophecy self-fulfilling.

This time there are good economic as well as good political reasons for producing a budget completely different to the last one. And turnarounds can work. After Coca-Cola reformulated Mother in 2007 its sales soared to take it within striking distance of Red Bull.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald

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Census saved. $250 million boost for ABS

EXCLUSIVE

The census has been saved and the Australian Bureau of Statistics will get a $250 million funding boost as part of the biggest technology upgrade in its 110-year history.

The five-year grant, which will be included in next week's federal budget, will be used to replace computer systems that are up to 30 years old, some of which fail to perform properly weekly and daily.

The government's expenditure review committee was told the bureau had 500 separate computer systems. One in three were unreliable and one in six were so outdated they were no longer supported by their vendors.

The bureau proposed releasing it from the obligation to conduct next year's census as a way of funding the upgrade but the budget committee rejected the request after sounding out Labor. The Census and Statistics Act requires the bureau to conduct the census every five years and ny change to that Act would have needed support in the Senate that Labor was unwilling to guarantee.

The $250 million boost is a win for the treasurer's parliamentary secretary Kelly O'Dwyer, who championed the bureau's cause before the expenditure review committee.

The committee was told the bureau's systems had become so run down they were calling into question the reliability of the monthly employment statistics which are compiled using components first commissioned in 1982.

Ms O'Dwyer said the previous Labor governments had ripped $45 million out of the ABS. "They treated it like a honey pot, they put it at risk. Critical infrastructure was left to deteriorate. The labour force figures were unreliable as a result."

The bureau's chief David Kalisch said the money would enable the ABS to perform an entire technology upgrade with most of its systems to be replaced with three common platforms; one for data collection, one for processing and one for statistical products.

The new systems would connect "computer to computer" to other parts of government taking in data such as births, deaths and marriages and immigration statistics. Over time the bureau would be able to expand to collect data automatically from organisations such as the Tax Office.

The system would also be able to deliver data direct to government departments and economic analysts.

Mr Kalisch said he was delighted and encouraged by the confidence that the government had shown.

The ABS will now deliver the full census on August 9, 2016 as originally planned with preparations well advanced. It will be Australia's first "digital first" census, with two-thirds of households expected to complete their forms online.

Martin Bell, a professor of human geography at the University of Queensland who has been campaigning to keep the census, said: "If the census had gone, or gone 10-yearly instead of five-yearly, it would have been a bloody disaster. It really is the only comprehensive source of information we have at the local level. There is no substitute."

"If we had lost it, we would have been at risk of making uninformed decisions about investments in infrastructure, in social services and urban planning. The government is to be congratulated."

In The Age and Sydney Morning Herald

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