Rise in living standard set to slow

It's a funny thing about the awful truth: people are much more inclined to talk about it after elections than before. And it seems as though, of late, our top economists have done little but tell us our economic future is a lot more "challenging" than was contemplated during the election campaign.

The first sobering message is that getting the budget back to balance won't be as easy as it suited both sides to pretend in the three-year campaign. Indeed, it could be a struggle that goes on for at least a decade - depending on how long it takes us to face up to some tough decisions.

The next soberer is that our material standard of living is likely to improve at a much slower rate in the coming decade than it did in the last one. We got that warning in a speech last week by Dr David Gruen, the top macro-economy manager in Treasury. And we got it again in a speech this week by Dr Philip Lowe, deputy governor of the Reserve Bank.

The simple way to see what's happening to our standard of living is just to take real gross national income and divide it by the population, to give real income per person.

According to Treasury's calculations, this grew at an average rate of about 2 per cent a year during the 1970s, '80s and '90s. Over the 13 years to this year, it grew by 2.3 per cent a year. But over the coming decade to 2023, Treasury's best guess is the rate of real improvement will slow to a bit less than 1 per cent a year.

That's more than a halving in our rate of material advance. What is it that's expected to cause this marked slowdown? Well, that's a long story. Settle back.

The greatest single factor causing our standard of living to rise almost continuously over the years is improvement in the productivity of labour - that is, increased output of goods and services per hour worked. Labour productivity improves when workers are given more machines to work with, when workers' skills improve because of education and training, when improvements in public infrastructure allow firms to operate more efficiently and, particularly, because of technological advance: the invention of new and improved products and production processes.

The next most important contributor to our material standard of living is "labour utilisation": the proportion of the population that's of the right age to be in the labour force (often taken as everyone aged 15 to 64), the proportion of people of working age who actually are in the labour force, the proportion of these who are employed rather than unemployed, and the average hours worked by people employed (many of whom will be only part-time).

The standard story from economists is that the nation's income increases when we produce more goods and services. But it's not quite that simple. It's not just how much we produce, it's also what that is worth when we sell it to foreigners so we can buy what we want from them.

About 10 years ago the world started paying us a lot more for our minerals and energy - we called it the resources boom - and this increased the income we derived from the stuff we were producing. As Lowe puts it, "over time we have been able to buy more and more flat-screen televisions for each tonne of iron ore that we have sold overseas".

Economists call this an improvement in our "terms of trade" - prices we receive for exports relative to the prices we pay for imports. And the main reason our standard of living rose by a high 2.3 per cent over the past 13 years is the big improvement in our terms of trade.

It contributed about 0.8 percentage points of that 2.3 per cent growth, more than making up for a weaker rate of improvement in the productivity of labour.

But, as we all know, the fabulous prices we were getting for our coal and iron ore started falling back a year or two ago, and Treasury expects them to fall a fair bit further. Indeed, it expects the deterioration in our terms of trade to subtract about 0.5 percentage points from the annual growth in real national income per person.

And there's a second factor we'll have going against us. Until recently, we've been enjoying a "demographic dividend" as the population of working age grew faster than the overall population (mainly because of the falling rate of fertility).

Over the 30 years to 2010, the proportion of the population aged 15 to 64 rose from a bit more than 64 per cent to a peak of about 67 per cent. But now, with the continuing retirement of the baby-boomers, it's projected to fall to about 62 per cent over the coming 30 years.

So whereas until now the demographic dividend has contributed to the rate of improvement in our standard of living, over the coming decade demography will subtract from that rate (we'll have fewer producers relative to consumers).

Now, there's nothing we can do to stop world minerals prices falling back and not a lot we can do to delay the retirement of the baby-boomers. So, ready for the commercial message from your friendly econocrats?

Lowe says that "over the next decade or so, if we are to achieve anything like the type of growth in real per capita income that we have become used to, then a substantial increase in productivity growth will be required.

"If this lift in productivity growth does not take place, then we will have to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services."

Read more >>

Election well over, now for the truth

For three years Tony Abbott and company told us all our political problems were caused by Labor, and if only we elected the Coalition our problems would be no more. For three years Labor told us the budget would be back to ever-growing surpluses in next to no time.

And for six years - which coincided with our biggest boom since the Gold Rush - both sides of politics told us Australian families were having terrible trouble coping with the rising cost of living.

They encouraged us to feel sorry for ourselves, accepted the blame for the heavy burdens we were labouring under, and implied they could do more to help.

What they didn't tell us was the truth: that for most of us, wages and pensions were rising faster than the cost of living - meaning our standard of living has actually been improving - but that this was due partly to the resources boom, which couldn't last, and partly to the government doing more for us in the budget than it could afford to go on doing unless we were prepared to pay a lot more tax.

In the recent election campaign both sides promised a much enhanced scheme to help the disabled and significantly increased funding for schools. To these Abbott added more generous paid parental leave, abolition of the mining tax and abolition of the carbon tax.

What they didn't tell us was that, when you go out beyond the next four years, they had no way of paying for their promises on top of all their existing commitments, which will get ever-more expensive.

So the stories we're hearing now of the federal and state governments' longer-term budget problems must be coming as an unpleasant surprise to a lot of people.

First we had a Productivity Commission report reminding us that increased spending on age pensions, age care and healthcare (for everyone, not just the increasing proportion of old people) - not to mention the cost of superannuation tax concessions - would put growing pressure on the budget, and do so at a time when a smaller proportion of the population was working and paying income tax.

The commission recommended that the age pension age be phased up to 70 and that old people who own their homes be required to borrow against them to help cover the cost of their aged care.

Then we had a report from Melbourne's Grattan Institute estimating that the combined federal and state government budget deficit is likely to grow to $60 billion a year over the coming 10 years.

The institute provided a menu of tax increases for the politicians to pick from: broadening the goods and services tax to cover food and private spending on health and education, removing the tax-free threshold for payroll tax, getting rid of the health insurance tax rebate, restoring the indexation of petrol excise, making the family home subject to capital gains tax, eliminating the 50 per cent discount on the gains tax, or getting rid of negative gearing.

On the spending side, the pollies could cut spending on transport infrastructure, halve industry support, increase university HECS fees, greatly increase school class sizes, cut defence spending or make savings on healthcare.

But Grattan zeroed in on retirement income support. It's already planned to phase up the age pension age to 67 by 2023, but the institute proposes lifting it to 70 by 2025. It's already planned to lift the minimum age for access to superannuation from 55 to 60 in 2024, but the institute proposes lifting it to 70 by 2035. These two measures would save about $12 billion a year.

It suggests including the family home in the assets test for the age pension (saving about $7 billion a year) and reducing the tax concession on super contributions for higher income-earners (saving $6 billion).

This story that the budget will come under pressure is nothing new. We've already had it from three reports prepared by Treasury, from previous Productivity Commission reports and many others.

So let me ask you: What sort of conclusions and recommendations do you expect the Abbott government's commission of audit to come up with? My guess is, not very different to what we've been hearing - though, since it has been contracted out to the Business Council, it may go out of its way to direct the pain away from big business and the well-off.

Since we have to make a lot of tough choices if we're to avoid the North Atlantic economies' record of racking up ever-growing budget deficits and debt for decade after decade, I think pushing back the retirement age makes a lot of sense - more sense than many of the other items on the list.

The already retired and all those not far off retirement wouldn't be affected. But the notion that, despite ever-greater longevity, better health and less physical work, we should remain free in perpetuity to live in taxpayer-funded retirement for 30 years or more is insupportable.

For at least the past six years self-centredness has reigned supreme, with everyone - from big business to alleged battlers - demanding the government do more for them, but insisting others pay for any improvements.

It can't go on. Let's hope Tony's got the ticker to turn things around - and do it fairly.

Read more >>

Budget will test Abbott's mettle

Will the Abbott government ultimately be judged a great reforming government or the worst money manager since Whitlam? In a delicious irony considering all the phoney outrage Abbott & Co expressed on the subject in opposition, this judgment will turn on how they respond to the budget's deep structural problems.

That conclusion leaps out from John Daley's latest budget report for the Grattan Institute. Normally, governments muddle through, taking some tough measures but not enough. In this case, however, Tony Abbott will need to take a lot of tough decisions or be judged a failure who ran a permanent budget deficit and incurred ever-mounting public debt because he lacked the guts to make us pay our way.

Daley finds that, on existing policies, federal and state governments face a decade of structural (operating) budget deficits, which by 2023 could reach 4 per cent of gross domestic product, or $60 billion a year in today's dollars.

About a quarter of this $60 billion arises from the Coalition's election promises. Some of these - the disability scheme and increased education spending - were common with Labor, but not the replacement of the carbon tax with "direct action" (which adds $5 billion a year), nor the more generous paid parental leave scheme.

Three-eighths of the $60 billion arises from the projected increase in spending on healthcare. This comes not so much from ageing as from the unceasing increase in both the supply of and the demand for ever-more-effective, but ever-more-expensive health technology.

One-eighth of the $60 billion arises from "welfare" - mainly, the sad fact that we won't be able to keep widening the income gap between sole parents and people on the dole, and the rest of us, including even people on the pension.

That leaves about a quarter of the $60 billion explained by the likelihood that our return to normal cyclical conditions will involve significantly lower prices for mineral exports and thus lower tax collections.

We can't grow our way out of this deficit. Being "structural", it already assumes the economy is back to growing normally. And above-average growth has much the same effect on both sides of the budget.

With one exception, the only way a structural deficit can be reduced is to make explicit decisions to cut spending or increase taxes. Worse, you have to resist the temptation to make any further unfunded spending or tax-cut decisions just to stop the structural deficit getting bigger.

The exception is bracket creep, which Daley estimates could contribute about $16 billion a year to closing the $60 billion gap. No doubt we'll get a lot of creep, though you can't avoid income-tax cuts for a decade.

Daley's report explodes some budget myths. One dear to the Coalition's heart is that the problem can largely be fixed by eliminating "waste and extravagance", including a bloated public service and (narrowly defined) middle-class welfare.

Sorry, there just aren't enough savings in anything you could do that is remotely feasible. You're talking chickenfeed.

Then there's business' dream that the solution is simple, if a little difficult politically: just cut government spending to fit (and cut company tax while you're at it). When last week's report card from the International Monetary Fund appeared to advocate "sizeable cuts in projected spending", the usual suspects raised a rousing cheer.

Sorry, leaving aside changes to the age pension, the best Daley can come up with on the spending side would produce savings of just $25 billion a year.

These would require reducing spending on infrastructure by a third, halving federal and state industry support, increasing university HECS fees, greatly increasing school class sizes and getting rid of the industry subsidies hidden in the pharmaceutical benefits scheme and defence spending (think subs).

The truth no one wants to know is that we won't get the budget back to structural balance without explicit tax increases. Daley shows, however, we could go a long way by getting rid of some inefficient and unfair tax expenditures, such as the capital gains tax exemption for the family home, the 50 per cent gains-tax discount and negative gearing (worth $22 billion a year in total).

But Daley's big one is retirement income support. Phase up eligibility for the pension or access to super to 70 and save $12 billion a year. Include the family home in the age pension assets test and save $7 billion. Make the super contributions tax fairer and save $6 billion a year.

What's that? You don't see Abbott and Joe Hockey doing anything much on that list? Well, stand by for endless budget deficits and ever-mounting government debt. No guts, no avoiding disgrace.

Read more >>

Outlook for us and the world is sombre

Australia and the world are experiencing a Micawber moment. The economic prospects aren't reassuring, but there's not a lot we can do except hope something will turn up. Wherever you turn, the outlook is for continuing sub-par growth.

According to Dr Min Zhu, a deputy managing director of the International Monetary Fund, in Australia this week, the post-global crisis growth cycle may be coming to an end. At the peak of the crisis in late 2008, most countries gave their economies enormous injections of fiscal (budgetary) and monetary (interest rate and liquidity) stimulus to get them moving.

It worked. After an unprecedented contraction of 0.4 per cent in 2009, gross world product grew by 5.2 per cent the follow year, by 3.9 per cent the year after, then 3.2 per cent last year. Notice it running out of steam? At this late stage it's expected to slow further to 2.9 per cent this year.

If 2.9 per cent doesn't sound too bad, remember the world economy's long-term average rate of grow is 3.5 per cent a year.

In last month's world economic outlook document, the fund warns that "the major economies must urgently adopt policies that improve their prospects; otherwise the global economy may well settle into a subdued medium-term growth trajectory".

Trouble is, Zhu says most countries - rich and poor - have little "space" left for further fiscal or monetary stimulus. Indeed, the policy action the fund is calling for is more structural than cyclical: "strong plans with concrete measures for medium-term fiscal adjustment and entitlement reform" in the case of the United States and Japan, while the euro area "must develop a stronger currency union and clean up its financial systems".

As for the emerging market economies, many of them "need a new round of structural reforms". China, for instance, "should provide a permanent boost to private consumption to rebalance the growth of demand away from exports and investment".

Well that's fine and dandy. But though structural reforms that improve the functioning of the economy may ultimately have a big payoff, it usually takes ages to come through. And often there are costs up-front.

In the meantime the world's left, like Mr Micawber, hoping we turn out to be luckier than the forecasters expect. And the outlook for our economy isn't all that different.

Reading from a graph in the presentation to the Australian Business Economists' annual conference this week by Dr David Gruen, at the time of the pre-election economic update Treasury was expecting growth of 2.6 per cent this year, improving to 2.7 per cent next year.

That compares with the economy's "potential" growth rate of about 3 per cent - the rate needed to hold unemployment steady. So we can expect a continuing rise in joblessness. And the boss of Treasury, Dr Martin Parkinson, said this week that the prospects for the economy had deteriorated a little since the election.

The pundits seem agreed that the economy could return 3 per cent growth in 2016. But that's just the nice way of saying we look like having to endure three years of sub-par growth. Beaudy.

In theory, we do retain "space" to further stimulate demand with either lower interest rates or increased government spending. But rates have already been cut a long way, and the Reserve Bank seems likely to avoid another cut while we see what difference those earlier cuts make.

As for the budget, it has been in deficit for four years already, so no one is keen to go any deeper. At this stage the Abbott government is following the Labor government's policy of avoiding taking measures to hasten the budget's return to surplus - which would, in any case, be counterproductive to some extent at a time when the economy's weak.

But some of the noises Joe Hockey has been making suggest he's preparing to step in with big spending on infrastructure should the end of the mining investment boom cause a much bigger hole in overall demand than we're expecting. Replacing heavy investment in mining with heavy investment in infrastructure would make a lot of sense.

The main thing we are hoping will "turn up" is a turn down in the dollar. Even the fund said this week it believed the dollar was overvalued by about 10 per cent. An exchange rate with the US dollar in the mid-80s would do a lot to stimulate our trade-exposed industries.

Gruen reminds us that, whereas through most of the noughties exports of resources made a contribution to annual growth in real gross domestic product of about 0.4 percentage points, over this year and the next two or three they will contribute well over 1 percentage point.

The decline in mining investment - which itself will make a big subtraction from growth - will also lead to a decline in imports, since mining investment involves a lot of spending on imported capital equipment. That's a saver.

And for those who worry we may be blowing up a housing bubble, Gruen advises that the median capital-city house price has been roughly steady at four times average household disposable income for the past decade and at present is a fraction below four.

If you look at the graph you don't find the ratio has been steadily climbing over the years. Rather, it was a bit less than three times during the 1990s, but then jumped to four times in the early noughties and has stabilised there.

What happened in the early noughties to bring about this change? The return to low inflation and, with it, low nominal interest rates for home loans. This fall greatly increased the amount banks were prepared to lend people on an unchanged income. Australians used this increase in borrowing power to bid up the prices of our housing.

Read more >>

How we lost our way on climate change - sorry, kids

I don't have grandchildren but I'm hoping for some, someday, so this column is for them. I want you to know that although, in the mid-teens of this century, Australians elected a government that wasn't genuine in its commitment to combating the effects of climate change, and that even abolished the main instrument economists invented for that purpose, I never accepted this complacency.

Partly because that government's predecessors had done such a poor job of introducing effective measures - and even a party known as the Greens played its cards all wrong - the nation lost its resolve and allowed its original bipartisan commitment to decisive action to be lost.

The minority of people who doubted the scientists' advice that the globe was warming combined with libertarians - who, as a matter of principle, oppose almost all arguments for intervention by government - to persuade the Liberals to break with bipartisanship.

If the Liberals under their new leader, Tony Abbott, had opposed action against climate change outright, Liberal voters who accepted the need for action would have been forced to choose between the party and their beliefs.

Instead, Abbott focused his opposition on the Labor government's main instrument for gradually bringing about a reduction in emissions of carbon dioxide and other greenhouse gasses, an emissions trading scheme whose price would be fixed by the government for the first year or two.

Abbott insisted the Coalition remained committed to Australia's international undertaking to reduce emissions by at least 5 per cent below 2000 levels by 2020, and by 15 per cent or 25 per cent provided other countries were taking comparable action.

The big difference was that, rather than using Labor's "carbon tax" to achieve the target, the Coalition would rely on "direct action", such as offering monetary incentives to farmers and others to reduce emissions.
This left Abbott free to run an almighty scare campaign about how Labor's "great big new tax on everything" would greatly increase the cost of living for ordinary Australian families and impose big costs on Australian businesses, which would impair their ability to compete.

Abbott associated with outright climate-change deniers and said things that seemed to brand him as one of them, while always adding, sotto voce, that he accepted human-caused climate change and the need to do something about it.

Apart from attracting voters away from Labor and its frightening carbon tax, the result of making climate change an issue of party dispute was to give Liberal supporters a licence to stop worrying about climate change - if the leaders of my party aren't worrying, why should I? - while providing a fig leaf for those Liberals who retained their concern.

The business lobby groups' initial position had been: if it's inevitable we do something, let's get on with it and make future arrangements as certain as possible. But with their side of politics inviting them to put their short-term interests ahead of the economy's long-term health, most business people found it too tempting to resist.

To be fair, some businesses stuck with their schemes to reduce their own emissions and some pressed on with repositioning their business for a world where the use of fossil fuels had become prohibitively expensive as well as socially disapproved of.

You will find this hard to believe, but in the mid-teens, it was still common to think about "the economy" in isolation from the natural environment which sustained it. Economists, business people and politicians had gone for two centuries largely ignoring the damage economic activity did to the environment.

The idea that, eventually, the environment would hit back and do great damage to the economy was one most people preferred not to think about. At the time, it was fashionable to bewail the lack of action to increase the economy's productivity. Few people joined dots to realise the climate was in the process of dealing a blow to our productivity, one that would significantly reduce the next generation's living standards.

At the time, we rationalised our selfishness - our willingness to avoid a tiny drop in our standard of living at the expense of a big drop in our offspring's - by telling ourselves half-truths and untruths about the global nature of climate change.

We told ourselves there was nothing Australia could do by itself to affect climate change (true), that at the Copenhagen conference in 2009, countries had failed to reach a binding agreement on action to reduce emissions (true) and that the world's two biggest polluters, China and the US, were doing nothing much to reduce their emissions.

We had no excuse for not knowing this was untrue because successive government reports told us the contrary. One we got just before the carbon tax was abolished, from the Climate Change Authority, said the two superpowers were stepping up their actions to reduce emissions. "These measures could have a significant impact on global emissions reductions," it concluded.

I recount this history to explain how my generation's dereliction occurred, not to defend or justify it. We knew what we should have done; we chose not to do it. I never fell for any of these spurious arguments.
Did I ever doubt that climate change represented by far the greatest threat to Australia's future economic prosperity? Never. Should I have said this more often, rather than chasing a thousand economic will-o'-the-wisps? Yes.

Read more >>

Rent-seeking stymies genuine reform

For most of the past decade I’ve defended Australia’s mining companies and their boom against unreasonable criticism. So I could hardly be said to be anti-mining. But one of my failings is that don’t get any fun out of telling people what they’d like to hear. So when I was asked to speak at the federal government’s annual conference on resources and energy last month I decided to tell the miners a few home truths. This is a shortened version of what I said.

With the change of government I'm sure you're a lot happier about the prospects for the economy and its management, and a lot more confident of a sympathetic hearing from the new government. I wouldn't be so sure.

I suspect the mining industry's lobbying success is reaching its zenith as we speak. It won't surprise me if, looking back on the life of the Abbott government, you come to realise the big gains the industry made actually occurred under the Labor government. They occurred no thanks to Labor, and all thanks to the Coalition, but they occurred in reaction to the policies of Labor as part of Tony Abbott's successful four-year campaign to fight his way back into office.

Why did Abbott immediately oppose the mining tax and promise to repeal it? Because he genuinely believed it would wreck the mining industry and do damage to the wider economy? I doubt it.

He did it primarily because he saw opposing the tax as a popular cause and was hoping for a lot of monetary support from the big miners in the 2010 election.

Why did Abbott set his face against the carbon pricing scheme? Because it was the price of getting the backing within the party that allowed him to wrest the Liberal leadership from Malcolm Turnbull and because he could see what a popular cause it would be to oppose this "great big new tax on everything".

Now, I have no doubt that keeping his promises to get rid of the mining tax and the carbon tax will be among his priorities. But my point is this: having delivered so handsomely for the mining industry, I doubt if he'll feel in any way indebted to the miners.

Indeed, he may well feel he's the one that's owed. Certainly, he'll feel the miners have had enough favours to be going on with.

And it won't surprise me if that's the attitude other industries take: that the miners have had their turn and it's time to give other industries a go.

Does this analysis seem cynical? Sorry, it's just being brutally realistic. We all pursue our self-interest, but we all cloak our self-interest in arguments about how this would be in the best interest of the economy. All I'm doing is stripping away the bulldust.

Most people in business are hoping that with a more enlightened government in power with a big majority in the lower house and a workable Senate after July, we'll see some major economic reform, if not in Abbott's first term then certainly in his second. I think this is an idle hope.

In a prophetic speech he delivered in May - and which he's in the process of expanding into a short book - Professor Ross Garnaut argued that our political culture has changed since the reform era of 1983 to 2000, in ways that make it much more difficult to pursue policy reform in the broad public interest.

"If we are to succeed, the political culture has to change again," he said. Policy change in the public interest seemed to have become more difficult over time as interest groups had become increasingly active and sophisticated in bringing financial weight to account in influencing policy decisions.

"Interest groups have come to feel less inhibition about investment in politics in pursuit of private interests.
"For a long time, these past dozen years, it has been rare for private interests of any kind to be asked to accept private losses in the interests of improved national economic performance.

"When asked, the response has been ferocious partisan reaction rather than contributions to reasoned discussion of the public interest in change and in the status quo," Garnaut said.

I would remind you that, though John Howard's introduction of the GST is a notable exception, many of the reforms of the Hawke-Keating era were achieved with bipartisan support - something that's unthinkable today.

Much of that reform, particularly in taxation, involved packages of measures in which particular interest groups suffered some losses, offset by other gains. As Garnaut argues, and I'm about to demonstrate, this kind of co-operative give-and-take between interest groups willing to accept reforms in the wider public good isn't conceivable today.

My way of making Garnaut's point is that since the reform era of the 1980s and '90s, we've regressed to a culture of rent-seeking. You can see this at the level of the political parties and at the level of the industry lobbies.

When Howard had the courage to propose introducing a GST, Labor saw its chance to regain office by running a populist scare campaign against it, and came within a whisker of winning the 1998 election. At the time it professed to be righteously opposed to such a regressive tax, but when it finally regained power seven years later, the idea of doing something about that supposedly abhorrent regressivity never crossed its mind.

When, in turn, the Rudd government attempted the risky reforms of installing the "economic instrument" most economists recommend for responding to climate change, and rebalancing the tax system by reforming the taxation of mineral deposits and using the proceeds to reduce taxes elsewhere, Abbott lost little time in deciding to take advantage of Labor's vulnerability.

Do you really think the events of the past three years will have no bearing on the Labor opposition's attitude to any controversial reforms Abbott might propose in the next six years, or that Abbott's foreknowledge of this attitude will have no bearing on his willingness to propose such reforms?

The truth is the nation has fought itself to an impasse on controversial reform - of the labour market as well as taxation - and, among the industry lobbies, the miners have played a more destructive role than the rest.

Now, you can respond that the miners did no more than what you'd expect them to do: oppose taxes they perceived to be contrary to their industry's interests. But this is making my point: the reason the outlook for reform is now so bleak isn't solely because the two sides of politics have regressed to short-sighted, self-interested advantage seeking, it's also because the industry lobby groups have done the same thing.

There's nothing new about industry lobbying but in the past dozen years it's become far more blatantly self-interested and far more willing to devote large sums to advertising campaigns to oppose whatever government reforms an industry sees as contrary to its interests. What hasn't yet occurred to many business people - but you can be sure is well understood by the politicians and their advisers - is that when industries lobby governments for favours, or in opposition to new imposts, the various industries are in competition.

It's easy to imagine the government's coffers are a bottomless pit but, in fact, there's only so much rent to go around. As an economist would say, all concessions have an opportunity cost. It's easy to believe all industries could pay less tax if the pollies would only make households pay more tax, but I wouldn't hold my breath waiting for it to happen. I doubt either side of politics would see that as consistent with their own self-interest.

The truth is, when one industry gets in for a big cut, there's less left in the pot for the others. That industries don't understand this simple point about opportunity cost - don't realise they're in competition with each other - is easily demonstrated by the demise of Labor's mining tax package.

Think about the original package: the big three miners were going to pay more tax on their resource rents, but most of the proceeds were going to be distributed to other industries.

In particular, all companies (including miners, big and small) were getting their company tax rate cut by 2 percentage points, small miners were getting a resource exploration rebate, small business was getting instant write-off of most assets, the banks were getting more concessional taxation of depositors' interest income, and the financial services industry was getting its dream of having compulsory super contributions jacked up from 9 per cent to 12 per cent, a one-third increase in contributions.

So three big miners had a lot to lose, but the rest of industry had a lot to gain. So what was the rest of industry's attitude to the resource super profits tax? Didn't like the sound of it.

And what did they do when the miners sought to scuttle the new tax? Precisely nothing.

What happened then? The exploration rebate was to first thing to disappear and, in several stages under Labor, the cut in the company tax rate got whipped off the table.

Now, with Abbott's plan to abolish the cut-down mining tax, the small business concessions are being withdrawn and the phase-up of compulsory super has been deferred for two years.

With all the pressure on the Abbott government's budget, and the super industry extracting a promise from Abbott not to make any further savings on the concessional taxation of super, I'm prepared to bet the two-year deferment will become permanent.

Thus did the rest of business allow the miners to screw them over. And thus did the miners destroy faith in one of the techniques tax reformers believed made major tax reform possible: put together a large package with a mixture of wins and losses and the various industry lobbies keep each other on board in the wider interest.

But it doesn't stop there. When the miners and the rest of business dream of further tax reform under the Abbott government what do they have in mind? Mainly, a big cut in the company tax rate. Do you really see the Abbott government daring to fund such a cut by increasing the GST?

Had the minerals resource rent tax survived and got past its accelerated depreciation phase, the fact that the most highly profitable part of the corporate sector (along with the banks) was paying a lot more tax on its profits would have greatly strengthened the argument for a general cut in the company tax rate. This is particularly so because mining is so heavily foreign-owned. So the absence of the resource rent tax makes a cut in the company tax rate a lot less likely.

One way a cut in the rate could still be afforded is if it was covered by a broadening of the base by the removal of sectional concessions. But the bitter experience of the demise of the mining tax package makes it less likely any government would risk proposing such a compromise.

We can continue going down the road of ever-more blatantly self-interested behaviour by political parties on the one hand and industry lobby groups on the other, but while we do so it's idle to dream of major reform.

What we can do - as the miners have shown - is veto any reform we don't fancy.

Read more >>