We owe more than we realise to our best econocrats

If you believe, as all of us do, that governments need to be accountable to the voters who elect them, then someone has to care about the way those governments account for all the money they raise in taxes and charges, plus all the money they borrow. Governments spend this money on myriad services they provide and the huge array of infrastructure they build for us, ranging from police stations to grand spaghetti junctions.

Our politicians are meant to care about how – and how well – money is raised and spent, but the control of all that money and the recording of where it comes from and goes to is the responsibility of bureaucrats in federal and state treasuries and finance departments, not forgetting the central bank.

The budgets and financial statements they produce are intended to account publicly for all the money that passes through the governments’ hands, but the econocrats know that the system of accounting must also help ensure that governments and their departments and agencies are well managed. That the money they spend actually achieves its intended objectives, with little waste.

Whereas political journalists spend much of their time talking to the politicians we read about, as an economic journalist, I spend most time talking to the technocrats standing in the shadows behind them.

The pollies are never keen for the econocrats to take much of the media limelight, and that usually suits the bureaucrats fine. But while they all work hard in the voters’ interests, some of them do an outstanding job in protecting and advancing those interests.

One such person was Percy Allan, who died at 78 last month. He was secretary of the NSW Treasury for about 12 years under three premiers – Labor’s Neville Wran, the Liberals’ Nick Greiner and Labor’s Bob Carr. Allan was a contact of mine who later became a friend.

You may think of economists and accountants as being as boring as the work they do. But that’s not the way they think of themselves, and no one who knew Allan ever thought of him as dull.

As we were reminded during the pandemic, whereas the federal government raises most of the taxation, it’s the state governments that are responsible for delivering most of the government services we rely on.

The six states and two territories have much autonomy. They compete against and copy each other. But usually, it’s the biggest states, NSW and Victoria, that initiate change.

If you want boring, try this: Allan led the way in getting federal and state governments to adopt the accounting profession’s general accounting principles and also the public sector’s budget reporting and financial statistics standards.

It helps make governments’ budgets and financial statements more accountable and transparent if all governments follow the same set of rules, rather than them each doing things their own way. And for the rules to make sense.

Governments provide many figures for publication by the Australian Bureau of Statistics. It helps if those figures are calculated on the same, consistent basis, and if government figures fit with all the statistics provided to the bureau by the private sector.

Similarly, it helps if all the world’s governments use the same internationally agreed standards laid down by the International Monetary Fund and the United Nations Statistical Commission.

Private businesses have long been required to report their annual profit or loss, and their balance sheet of assets and liabilities on the last day of the year, on an “accrual” basis. That is, to make a great effort to ensure that the income reported for a particular period was earned during that period.

Likewise, to ensure the expenses reported for the period didn’t relate to other periods. Accountants call this making sure the income and expenses reported for a period actually “match”.

If that sounds obvious, it wasn’t the way federal and state government budgets and financial statements were prepared until Allan and others led the way in conforming to private sector and international accounting and statistical standards.

Until then, federal and state budgets and financial statements were calculated on a “cash” rather than accrual basis. Revenue was any money that hit the government’s bank account during the period, even if some of the money was people paying last year’s tax late or others paying next year’s early. Similarly, all money that left the government’s bank account during the year was counted regardless of the year to which it applied.

Has the penny dropped yet? Compared to the cash basis, the accrual basis makes it much harder for the company or the government to fudge their annual figures by switching incomings and outgoings between years.

Now get this. The federal government has used accrual accounting since the start of this century. But to this day, federal budget documents are written in a confusing mixture of the two accounting languages – cash and accrual. The budget deficit or surplus the treasurer tells us about is always the “underlying cash” balance.

Treasury will tell you cash is the more appropriate basis from a macroeconomic perspective. That is, when you want to judge the budget’s effect on the economy, or the economy’s effect on the budget.

Maybe. But what’s undeniably true is that, unlike the states, the feds’ retention of the cash basis makes it a lot easier for the government of the day to engage in creative accounting – which it often does.

Another reform Allan was proud of was the “corporatisation” of various businesses the state government owns: the railways, the buses, water and sewerage, electricity generation and distribution, the ports and so forth.

Allan wanted all government-owned businesses to run, and be accounted for, as though they were commercial undertakings. When so many of them are natural monopolies, this has its dangers.

But when state-owned businesses aren’t run like businesses, they’ll tend to be run for the convenience of employees rather than customers, with overstaffing and other wastefulness.

So, better to have transparent accounting, leading to greater efficiency and higher profits going back to the government, to be spent on additional services without the need for higher taxes.

Linked to this was Allan’s role, during the term of the reforming Greiner government, in setting up the NSW Independent Pricing and Regulatory Tribunal to ensure the prices charged by government-owned businesses rose by no more than could be justified.

But one of Allan’s greatest achievements was achieved long after he’d left NSW Treasury. He founded and ran the Evidence Based Policy Research Project, in which a right-leaning and a left-leaning think tank have been commissioned to examine more than 100 federal or state bills to assess whether they stack up.

Most have been found not to. Allan had a big win when the NSW upper house passed a standing order that all government bills answer a public interest questionnaire. The project has been taken over by the Susan McKinnon Foundation.

My mate Percy Allan devoted his life to trying to make the world work better. We all owe him thanks.

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Lest we forget the unknown public servant, working to inform us

Have you ever wondered how much taxpayers’ money is wasted by our politicians and public servants? Do you hope that every dollar governments spend is fully accounted for?

And would you like it to be made public not just how much was spent on public servants’ wages, rent, grants, paperclips and other administrative expenses, but how much was being spent on each of the individual programs within education, health, police, courts, roads and all the other government departments?

Better yet, would you like to see what were the outcomes of all that spending on this program and that? That is, hard evidence on whether they were achieving their stated purpose, and by how much things were getting better or worse.

You don’t have to be keen personally to spend hours poring over the books to believe that such information must be made available for others to study: the government’s auditor-general, of course, but also the opposition, the media, nosey investigative reporters, academic experts, and even the special interest groups.

I’m pleased to tell you that all those things you’ve just agreed we need are being provided. But I need to remind you that 40 years ago, they weren’t.

In those days, government financial reports – state and federal – were a dog’s breakfast of facts and figures. If you were able to form a conclusion from them, it would probably have been wrong.

The accounts concealed about as much as they revealed. This was partly because no one had made the effort to make them more reliable and informative. And partly because this laxity made it easier for bureaucrats and politicians to fudge the figures, making things look better than they were.

But we’ve had much improvement since those bad old days. Many people have played a part in this reform, and much has happened under pressure from professional accounting bodies, the International Monetary Fund and the UN Statistical Commission.

But if you were to single out one person who drove most of the many improvements over many years, it would be Don Nicholls.

Never heard of him? That’s the way he wanted it. He was a shy, self-effacing Treasury officer, who wore a cardigan in the office and always ate a long pink iced bun for lunch. He joined the NSW Treasury straight from school in 1948, he retired in 1990, and he has just died, at 93.

If he sounds boring, know this: when he told his first wife, a writer, that writing seemed easy, she challenged him to enter the SMH short story writing competition. He won it with a story about cricket.

Some people assume only second-class minds join the public service. They’re wrong, and never more so than in Nicholls’ case. He went to a selective school, Fort Street High (one of two I went to), gained an economics degree and an accounting qualification while working and, a year after he retired, he published the tome Managing State Finance, which became the Treasury bible.

Many public servants are intent on ensuring things are done the way they always have been, but Nicholls had a strategic mind and was always thinking of ways things could be improved.

These days, all the states produce multiple performance indicators for their many activities, on a uniform basis, collated and reported annually by the federal Productivity Commission.

Nicholls introduced “program budgeting” to Australian government accounting, and he also consolidated the NSW government’s accounts so they showed the “general government” sector separately from all the businesses it owned, plus a balance sheet outlining the state’s assets and liabilities. Money hidden from view in “special deposit accounts” was brought into the open.

Before Nicholls, the government didn’t even know the value of all the buildings, businesses and land it owned. Since the year dot, businesses have used “accrual” accounting to accurately match the amount they earned during a year with their expenses during that year.

It wasn’t introduced to state and federal government accounting until about 2000. Nicholls played a big part in this, insisting on uniform rules for the measurement of budget deficits and surpluses. (Federal Treasury, however, has stuck with the old “cash” accounting, so it can still fudge the figures.)

Nicholls’ influence spread throughout Australia because he was asked to conduct separate independent audits of the finances of the NSW, Victorian, Tasmanian and South Australian governments. He was, for a time, Victoria’s Treasury secretary.

A lot more Australians are indebted to his influence than they know.

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PwC: How are the haughty chartered accountants fallen

As we watch the Albanese government and the Senate crossbench getting to the bottom of what’s become “The PwC Scandal”, it’s important to join the dots. It’s not just a question of who did what and when, and how they’ll be held accountable for their actions. It’s more a question of how did a formerly highly respected firm of chartered accountants come to behave in such an unethical and possibly illegal way. And how did the federal government allow itself to get into such a compromised position?

It’s an issue that interests me on many levels. There’s a caste system among accountants, and the ones who call themselves “chartered” – acting under a charter from the King – regard themselves as the brahmins.

Before I became a journalist almost 50 years ago, I worked for one of the “big eight” firms of chartered accountants – Australian partnerships that had affiliated with one of the eight big, American-based international firms. (I’m still a fellow of the chartered accountants’ institute.)

The big eight coalesced into today’s big four, with their snappy, slimmed-down names: PwC, KPMG, Deloitte and EY. Historically, the main thing they did was audit publicly listed companies, certifying that their published accounts were “true and fair”. They also gave tax advice and did rich people’s tax returns.

But there’s not much money in auditing, so each of the big four has branched out into providing consulting services to big companies – in a big way. The consultants – few of whom would be accountants – have become the fat tail wagging the chartered dog.

There is much potential conflict of interest between these three activities, and it’s possible this scandal will hasten the separation of the auditors from the consultants – something that should have happened ages ago.

That’s enough about boring accountants, except to say that, if you wonder why PwC has been so slow to send the offending heavies packing, it’s because these businesses aren’t companies with the usual command structure, they’re unwieldy partnerships. “Why should I vote to get rid of one of my partners, when I might be next?” In Australia, PwC has about 900 partners and 8000 staff.

These days, much of the big four’s income is from consulting to federal and state governments. In 2021-22, the feds paid $21 billion for “external labour” – consultants, but also contractors and labour-hire companies. Senator Barbara Pocock, of the Greens, says this is equivalent to 54,000 full-time workers, and compares with 144,000 directly employed federal public servants.

Barrister Geoffrey Watson has asked “why is Australia outsourcing so much of its governing to private enterprise? Policy development and implementation are now routinely taken from the public service and turned over to private consultants.”

To leftie academics, the answer is that it’s part of the rise of “neoliberalism”. To me, its part of the quixotic quest for smaller government and lower taxes, via deregulation and privatisation in all its forms: not just the sale of government-owned businesses, but the provision of publicly funded services such as job search, childcare, aged care and disability care by church and community groups and profit-making businesses.

Plus, in the present case, getting rid of public servants in favour of advice from private consulting firms. At the beginning, the big four had no great understanding of public policy. But they set up offices in Canberra and hired many of the policy experts being let go by government. These people got paid a lot more, and their services sold back to the government at an even higher rate.

What’s not to like? It’s only taxpayers’ money.

Remember that PwC’s questionable behaviour occurred long before the arrival of the Albanese government. It was the Coalition government, particularly under Scott Morrison, that distrusted and disliked public servants.

One of the attractions of paying outside consultants for advice is that, to ensure repeat business, they tend to tell you what they think you want to hear. Whether in auditing or consulting, the notion that anyone can buy genuinely independent advice is a delusion.

According to Andrew Podger, a former senior public servant, the government’s imposition of ceilings on staff numbers and wage bills “led to the use of external labour even when departments knew it didn’t represent value for money”.

Consultants will always give their business’s profits priority over the public interest. When you join the dots, they go from the PwC affair to the problems we encountered years ago with privately owned childcare, the royal commission into aged care, and all the present problems with the cost of the National Disability Insurance Scheme.

The great experiment of finding out whether it’s better for public services to be delivered by the private sector than the tea-drinking public servants has been a resounding failure. And the suggestion that, by dishonouring its confidentiality agreements, PwC may have broken the law, provides a link to the royal commission on banking misconduct, and even to the epidemic of wage theft.

Somehow or other, the “smaller government” policies of recent decades have left many businesses believing they are no longer required to obey the law.

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Boring auditors-general our last defence against dodgy governments

You may be appalled by the ever-declining standards of propriety as the two main parties chase each other to the bottom of the barrel, putting career advancement ahead of their duty to voters. But recent events show our courageous auditors-general haven’t lost their commitment to upholding honest behaviour.

Which, particularly in the absence of a federal independent commission against corruption, is one thing to be thankful for.

Just last week in NSW, state Auditor-General Margaret Crawford issued a highly critical report on the Stronger Communities grants program established by the Berejiklian government before the 2019 state election.

The report said there was “little or no [defensible] basis” for the selection of grant recipients, with 95 per cent of all grant money flowing to 22 local councils belonging to Coalition electorates. These decisions were made by the former premier and her deputy, Gladys Berejiklian and John Barilaro.

This is reminiscent of federal Auditor-General Grant Hehir’s equally critical 2020 report on the “sports rorts” grants made by the Morrison government before the 2019 federal election. He found that the Australian Sports Commission’s carefully evaluated recommendations for grants were overridden by the minister’s office.

More than 61 per cent of the grants awarded failed to reach the commission’s merit cut-off. Rather, the grants went predominantly to sporting organisations in marginal electorates held by the Coalition.

When announcing tax cuts, Liberal politicians in particular love making speeches about how they’re only returning taxpayers’ own money. But in their attitude to pork-barrelling – it’s not illegal and everybody does it, in the immortal words of Saint Gladys – pollies on both sides act as though it’s really their money, to be spent as best suits their interests.

We’d know much less about their misuse of our money were it not for our auditors-general. The pollies want to keep it dark, but they can’t stop the auditors doing their duty. Scott Morrison was so grateful to the Australian National Audit Office he cut its funding. (More proof he regards taxpayers’ money as his own.)

As an accountant who was glad to escape auditing and become a journo, I’m pleased to acknowledge our debt to the auditors-general’s diligence. But I’m particularly impressed by the fearless Crawford’s blow against that great blight on budget honesty, “creative accounting” – using loopholes in the rules of public accounting to make the budget balance look better – or less worse – than it really is.

Some years ago, some bureaucrat in the NSW government (I doubt if any pollie could have come up with it) got the bright idea of making the budget look better by transferring the state’s railway assets to a new off-budget body, the Transport Asset Holding Entity.

This way, the cost of additional annual spending on rail infrastructure could be removed from the budget and treated “below the line” as an equity investment in a government-owned business. But this turned into an almighty and long-running battle between the state Treasury and the state Transport department.

Treasury prevailed and the Transport boss was dismissed without explanation. Enter the Auditor-General. Crawford declined to issue an audit report for the government’s 2020-21 accounts until she was satisfied all was in order.

In particular, she required evidence that the new holding entity was genuinely independent of the government and a genuinely profitable business. This would require higher annual payments from the budget for the use of the rail assets, thus reversing the engineered improvement.

Treasury delivered that evidence on December 23, allowing Crawford to issue an unqualified audit report about three months’ late. Soon after, Treasury secretary Mike Pratt, a former banker, announced his return to the private sector.

In another report last week, Crawford accused Treasury of obstructing her investigation into the holding entity by dragging its feet, withholding critical documents and overestimating the expected budget benefit from the transaction.

NSW Treasury’s reputation for probity has been damaged by evidence about the imbroglio given to a long-running parliamentary inquiry. Treasury regularly struggles to extract full and timely information from other departments. Now it has given them a master class in misbehaviour.

The parliamentary inquiry’s hearings have also damaged the reputation of KPMG – one of the big-four auditing firms moving into the more lucrative field of consultancy – which was revealed to have given opposing advice to Treasury on one side and Transport on the other.

The new NSW Treasury secretary is the highly experienced state and federal econocrat Dr Paul Grimes. Grimes has the distinction of having been sacked as head of the federal Agriculture department by Barnaby Joyce.

Joyce claims to have sacked him to show who was boss. It’s easier to believe that “a relationship of strong mutual confidence” between them wasn’t possible. In any case, the era of NSW Treasury being run by itinerant bankers seems to be over.

The holding-entity budget fiddle has its parallel federally. Both sides of politics have exploited a loophole in the definition of the budget balance introduced by Peter Costello’s Charter of Budget Honesty in the late 1990s.

The former Labor government used the loophole to stop its massive spending on the National Broadband Network from worsening the budget deficit by treating it “below the line” as an equity investment in a new for-profit business.

The present government is using the same trick to hide spending on its Nationals-inspired inland freight railway from Melbourne to Brisbane. A profitable business to be sold off at some future date? I think not.

There was a time when Yes, Minister was a reasonably accurate depiction of the relationship between a minister and his department head. But that was in Bob Menzies’ day. These days, the term “permanent head” is hardly apposite. Department heads have renewable fixed-term contracts, but it’s relatively common for prime ministers and premiers to lop off the heads of those who displease them.

When Tony Abbott sacked several department heads on coming to office in 2013, he was following the precedent set by John Howard in 1996. If the objective was to discourage unwelcome advice from bureaucrats – “Sorry, minister, that would be contrary to the Act” – it seems to have worked a treat.

So, how come our auditors-general are still so diligent in telling us when ministers have been playing ducks and drakes? Auditors-general are statutory officers appointed by the governor or governor general, and report to the parliament, not cabinet. They’re appointed for non-renewable eight or 10-year terms, and can’t move on to another government job. It’s a terminal appointment.

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Budget Office finds the bigger picture is looking OK

There’s a weakness in the way we think about the government and its effects on the economy that economists and politicians usually don’t see. We draw macro conclusions from micro data because we forget the need for what accountants call “consolidation”.

The problem arises because we keep forgetting that the responsibility for governing Australia is divided between the federal government and eight state and territory governments – not to mention any amount of local councils.

Yet most of us focus only on the federal government’s budget when we want to know what’s happening at the “macro” (national or economy-wide) level, and on our own state government’s budget when we when want to know what’s happening at the “micro” (individual component) level.

Because we think – correctly – that responsibility for managing the macro economy rests with the federal government, and also that the feds’ budget is one of their main instruments for influencing the economy, we study the federal budget in great detail and forget that the eight state budgets also have big economic effects.

It’s when you remember this that you realise the federal budget is micro (part of the total picture) not macro (the whole picture).

We’re bamboozled by the existence of different legal entities, each producing their own accounting statements, even though the economy – a common market between eight states and territories – recognises no legal barriers between its components.

Sometimes this causes us to mislead ourselves, other times it gives the politicians from each level of government much scope for misleading us.

For instance, a federal treasurer bent on showing that our public debt isn’t high by international standards, shows us a graph which compares our federal public debt with other countries’ total public debt.

Similarly, a premier whose state is growing faster than others will claim all the credit. If it’s growing more slowly than the national average, they’ll find some reason to blame it on the feds.

Although it’s true that each state has a different combination of industries, and some states are a bit better governed than others, because Australia is a common market the greatest influence on the economic performance of any state is usually the performance of all the other states.

And, at any point in time, the government whose policies are having the greatest influence on a particular “state economy” is usually the federal government.

It’s partly because we focus on bits of the national economy rather than the whole that politicians – federal and state – put so much effort into shifting costs to the other level of government. (The bigger reason, of course, is that it saves them money.)

Or appears to. A less-remarked flaw in Tony Abbott’s reviled first budget in 2014 was that much of its cost savings involved shifting unchanged costs to other budgets: massive cuts in grants to the states for public schools and hospitals. Abbott’s successors have been backpedalling on those supposed savings ever since.

By contrast, most big listed companies consist of a group of many (mainly wholly-owned) separate legal entities. This is why company law has long required them to publish their financial statements on a “consolidated” basis.


When you combine the accounts of, say, 20 companies into one, you have to eliminate the overlap between them, ensuring nothing’s counted more than once. Money transferred between subsidiaries “washes out”.

The closest we come to a consolidated financial statement for our nine governments – showing us the full picture - is the federal Parliamentary Budget Office’s recent innovation of an annual “national fiscal outlook” using the nine governments’ latest budgets. The report for 2018-19 was published last week.

It’s not a full consolidation because it doesn’t show us total government spending by function. So it doesn’t correct the misperception that spending is dominated by social security payments.

Combine federal and state spending and you see the big ones are health and education.

Because the states use accrual accounting, whereas the feds keep the focus on cash accounting, a federal budget balance can’t be compared with a state budget balance.

Putting them on the same accrual basis (but taking government projections at face value), the consolidated budget balance (the "net operating balance") reached zero last financial year and over this and the next four years is projected to reach a surplus of $46 billion.

Consolidated annual net capital investment is projected to peak at $32 billion this financial year and fall to $28 billion by 2021-22 (though this misses the feds' creative accounting on new airports and inland railways).

Consolidated net public debt is projected to grow by $51 billion to $414 billion in June 2022.

Even so, by then our consolidated net public debt should be about 20 per cent of gross domestic product, compared with Britain’s 75 per cent and America’s 80 per cent.

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How our budget repair problem has been exaggerated

Before the budget Scott Morrison promised us "good debt" and "bad debt". What we actually got was less radical but more sensible.

The government has come under increasing pressure from the Reserve Bank to draw a clear distinction between its borrowing to cover "recurrent" spending (on day-to-day operations) and borrowing to cover investment in capital works ("infrastructure").

It was wrong to lump them together and claim the combined deficit constituted the government "living beyond its means", as the Coalition often has.

Government borrowing to pay for infrastructure that will deliver a flow of services to the community for many decades to come is not in any way irresponsible.

The Reserve's reason for pressing the government was its desire for "fiscal policy" (the budget) to give its "monetary policy" (low interest rates) more help trying to stimulate faster economic growth.

Make the recurrent/capital distinction and the government can move to repair its budget and avoid unjustified borrowing, while still investing in new infrastructure projects that both add to demand in the short term, and later – provided the projects are well chosen – add to the economy's potential to supply more goods and services by improving our productivity.

In this budget Malcolm Turnbull finally capitulated to this pressure, overturning decades of Treasury dogma.

Sort of. Treasury's fought a rear-guard action, retaining the old world while seeming to move to the new.

In the process it's been obliged to make clear all the budgetary cupboards in which it hides the government's spending on capital works.

In so doing it has revealed that the line between budget accounting and creative accounting is thin.

Let's start with what in accounting passes as theory. There are two main ways you can measure the financial performance of an "entity" such as a business or a government: the rough-and-ready "cash" basis, or the more careful "accrual" basis.

The private sector has been using accrual accounting for more than a century, whereas Australia's public sector moved from cash to accrual only in 1999, after the United Nations Statistical Commission shifted the national accounts framework to an accrual basis in 1993 and the Australian Bureau of Statistics complied.

The cash basis measures the government's financial performance merely by comparing the cash it received during a period – usually a financial year – with the cash it paid out during the period.

By contrast, the accrual basis puts much effort into ensuring the incomings and outgoing are properly "matched", so they are allocated to the accounting period to which they rightly apply.

If, say, on the last day of the year you paid for an insurance policy to cover you for the following year, an adjustment would be made to shift that cost to the following year's accounts.

When the feds moved their accounts and budget onto an accrual basis at the turn of this century, however, Treasury declined to play ball.

It stuck with cash, making the debatable argument that recognising government transactions according to when the cash changed hands gives a better indication of those transactions' effect on the macro economy.

(It couldn't admit the real reason. The cash basis leaves much more scope for creative accounting: quietly moving receipts and payments between periods so as to make the books look better or hide something the government finds embarrassing.)

So, to this day, the budget papers are written in two different financial languages. The bit prepared by Treasury is written in cash, whereas the much bigger bit prepared by the Finance department is written in accrual – as it's supposed to be.

Get this: our bilingual budget means the budget papers offer us four different measures of the budget bottom line to pick from.

There's the "underlying cash" balance (the one Treasury wants us to focus on), the "headline cash" balance (please don't ask questions about this one), the "fiscal" balance (the close accrual equivalent of underlying cash) and, buried up the back, the accrual-based "net operating balance".

The news is that Treasury is sticking with underlying cash as "the primary fiscal aggregate" – the one it will make sure we focus on – but will ditch the fiscal balance (always just a face-saver cooked up by Treasury) and replace it with – give "increased prominence to" – the net operating balance, henceforth known as the NOB.

Bringing the NOB from the back up to the front will "assist in distinguishing between recurrent and capital spending" because, in accountingspeak​, "operating" and "recurrent" mean the same.

Point is, the biggest practical difference between cash and accrual is their treatment of spending on capital works. In cash, it's lumped in with recurrent spending, whereas in accrual it's not. Instead, accrual includes as a recurrent or operating expense an estimate of a year's worth of "depreciation" (wear and tear) of the feds' stock of physical capital – as it should if you believe in "matching" (which Treasury doesn't).

With this unprecedented casting of a spotlight on its accounting practices, Treasury has had to admit that the NOB actually overstates the recurrent balance because it includes as an expense the feds' capital grants to the states to help cover their spending on infrastructure.

Correcting for this reduces the coming financial year's NOB from a deficit of almost $20 billion to one of just over $7 billion (just 0.4 per cent of GDP). So we're already close to a balanced recurrent budget and should be there in 2018-19, after which (if Treasury's economic forecasts prove reliable) we'll be up to a recurrent surplus of $25 billion by 2020-21.

Turns out that, from the time the budget dropped into deficit in 2008-09 until the year just ending, focusing on the underlying cash deficit rather than the corrected NOB has exaggerated the extent of our budget repair problem by a cumulative $150 billion.

So how much have the feds been spending on infrastructure? Long story. Watch this space.

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Uni economics declines at hands of accountants

If you think economists have too much influence in the halls of power - or that Australia would be better off if its accountants and business people knew less about how the economy works - or that the political debate would be improved if fewer citizens were economically literate - I have good news: academically, the economists are being cut down to size.

And it's the accountants who are doing it.

While business and management courses and departments are booming, many universities are cutting back, even abandoning their teaching of economics. Faculties of economics are becoming business schools.

At the University of Sydney, the economists have been ejected from their own faculty and - along with the political economists - consigned to the outer darkness of the arts faculty (where, as it happens, they're getting more customers).

It may not be long before, to be able to study economics at uni, you'll need an ATAR (Australian tertiary admission rank) high enough to get into one of the "sandstone" universities, the Group of Eight (Go8): Australian National University, the universities of Sydney, Melbourne, Adelaide, Queensland and Western Australia, plus Monash and UNSW.

Trouble is, the sandstone unis don't rate as well on teaching as do the newer, smaller metropolitan and regional unis. Their top priority is research - and don't believe anyone who tells you researchers make the best teachers.

The story of the decline of academic economics in Australia has been told in several papers by Dr John Lodewijks, of the University of NSW, and Dr Tony Stokes and Dr Sarah Wright, of the Australian Catholic University.

At La Trobe University in Melbourne, the school of economics has had to greatly reduce its staff, with fewer professors. Its stand-alone economics degree is no longer offered. Similar changes began at the University of Western Sydney in 2012.

Victoria University's department of applied economics has been broken up, with staff now teaching finance and international business. Economics is being subsumed within business at the University of Newcastle, University of New England, University of Tasmania and James Cook University in far north Queensland.

Griffith uni on the Gold Coast has reduced its offering in economics. Edith Cowan uni in Perth has discontinued the economics major within its bachelor of business. Its economics teaching staff has been slashed, with most of those remaining now teaching finance and quantitative methods. Curtin uni in Perth has also got rid of many economists. Even at the uni of WA a bachelor of economics is no longer offered.

As with Sydney uni, at the multi-campus Australian Catholic University economics has  been ejected from the business faculty and transferred to arts.

When I did a commerce degree at the uni of Newcastle in the late 1960s, three years of economics were compulsory. These days in business courses it's down to one year - or less.

It's clear the accountants would like to be rid of economics completely. What holds them back is that their degree would lose accreditation with the professional accounting bodies.

Over the period from 2002 to 2011, Australia's total student load grew by 40 per cent. The economics students' load rose by just 28 per cent.

From 2012, but with transitional arrangements starting in 2010, universities' enrolments of domestic students were deregulated, meaning unis could enrol as many students as they liked and also that the federal government could no longer influence the number of students studying particular subjects. Enrolments became "demand determined".

The objective of this was to ensure a higher proportion of school-leavers went on to uni. So it has involved a general lowering of ATAR cut-offs for entry into particular courses.

Despite the growth in student numbers overall as a result of the uncapping of places, the number of students studying economics actually declined between 2008 and 2013.

The overall increase in domestic undergraduate commencements was 34 per cent. Business and management numbers rose 38 per cent, and marketing and sales courses rose 39 per cent. But economics commencements fell by 7 per cent to fewer than 5400.

Between 2007 and 2014, the average ATAR cut-off for "business/commerce" (which would include economics) at non-Go8 unis fell by 7.8 points to 65.1, while the average for the Go8 rose fractionally to 89.1.

It seems that the sandstone unis are now capturing more of the able students who formerly would have gone to the newer, lesser-status metropolitan and regional universities.

And it seems all this has allowed a turning away from economics. It's likely  the subject is perceived by students as more intellectually demanding, with less well-prepared students preferring business studies. Many people think business studies is more practical and more likely to lead to a job.

University managers want to shift resources to the subjects in greatest demand from students and probably think they're more likely to get funding from businesses.

So the teaching of economics is contracting and concentrating in the group-of-eight unis. But while these are well known for their high quality research, they're not particularly noted for high quality teaching of economics.

Research has shown a negative relationship between research quality and student satisfaction with teaching. And studies of course-experience questionnaires show that the elite unis perform worse in student satisfaction with teaching than the other unis, particularly the newest ones.

It was two of the lowest ATAR unis, Australian Catholic and Western Sydney, which achieved the highest scores - 86 and 80 respectively - in the good-teaching category.

It's easy to blame an intellectually lazy younger generation. But, to some extent, the academics have brought this on themselves.

There are plenty of hard subjects at uni, but for decades economists have taught economics as though it's only the cultivation of future PhDs that matters to them, making little attempt to capture young imaginations by demonstrating the practical relevance of their dry, ever-more mathematical theories.

Trouble is, it's not only they who'll pay the price of their neglect.

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This budget less dishonest than last year's

When it comes to forecasting the economy - and thereby the budget balance - the econocrats of the Reserve Bank and Treasury are on a hiding to nothing.

When they get it pretty right that's no better than it should be. But when they get it wrong - for whatever reason - they're fools and probably knaves as well.

The obvious truth is no economists are consistently good at forecasting the economy. It's those non-economists who forget this - including Wayne Swan and Julia Gillard - who are the fools, not the economists who cater to humankind's irrational but unquenchable desire to pretend the future can be known.

Budget week is open season for anyone who can find a microphone to claim Treasury's forecasts are wildly optimistic. But though the econocrats' record is pretty bad, I've yet to discover any non-official forecaster whose record is better.

And whereas the budget-time know-alls are rarely held to account, the econocrats are always accountable. Their forecasts are on the record for the whole world to judge after the event.

The proof of their high standard of accountability is that they often conduct systematic reviews of their forecasting accuracy, which they make public so as to keep themselves humble and to warn users of their forecasts' fallibility.

According to my quick squiz, the leading business economists' forecasts for real gross domestic product are only a fraction lower than Treasury's, but their forecasts for nominal GDP are significantly lower, mainly because they expect our terms of trade (export prices, essentially) to fall by a lot more than Treasury does.

If they are right, you'd expect Treasury's revenue forecasts again to prove too high. But to give the business economists their due, they haven't been trumpeting their differences with Treasury, either for cheap publicity or to prove what fools they are in Treasury.

No, this year the vociferous criticism of Treasury's forecasts and assumptions has come from the Opposition (they would say that), partisan economists and shock jocks who wouldn't know the difference between a forecast and a projection if it bit them on the backside.

The irony is, this is a less dishonest budget than the past few that Swan produced as he realised the long-promised return to surplus in 2012-13 would need help from performance-enhancing accounting.

One trick used extensively last year was to take spending planned for the early weeks of 2012-13 and switch it into the later weeks of the old year, thereby overstating spending in the old year and understating the budget year. Every $1 you switch increases the difference by $2.

This year Swan's creative accounting has been limited to bringing forward $1.1 billion in payments to local government - presumably to hide the fact that the budget year's deficit is actually a little higher than the previous year's.

As every accountant knows, the trouble with shifting expenses is that it comes back to bite you the following year. The government's strategy requires it to limit the real growth in its spending to 2 per cent a year, on average.

The games played in last year's budget caused real government spending to grow by 4.8 per cent the previous year, then fall by 3.2 per cent in 2012-13. But that year's fall means, despite this year's restraint, spending is expected to jump by 4.3 per cent. The comparison would be even worse without this year's fiddle.

Another trick last year was to use Swan's fiscal bulldozer to push spending commitments off into the future beyond the forward estimates, where they became invisible.

This year he's done something new, showing how the offsetting savings (including sinful tax increases) are more than sufficient to cover the growing cost of the disability scheme and the Gonski education reforms, not merely over the forward estimates but over the next 10 years.

Those who think politics but never economics saw this move as a cunning attempt to "wedge" Tony Abbott. If so, it didn't work. But I see it as a marked improvement in budget transparency, needed to prove the fiscal bulldozer had been left in its shed.

The transparency has, however, allowed Saul Eslake, of Merrill Lynch - who invariably produces the most penetrating analysis of the budget - to note that, though the disability scheme will cost only $1.9 billion over the four years to 2016-17, the linked increase in the Medicare levy will raise $11.6 billion in that time.

Eslake says about two-thirds of the net improvement in the budget balance attributable to policy decisions over the four years to 2015-16 comes from this discrepancy.

He further notes that, if you switch your focus from the "underlying" to the "headline" cash balance (thus taking account of the off-budget building of the national broadband network), the budget should still be in deficit in the last two years of the forward estimates.

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How spin doctors have taken control of budget papers

What if I told you the true expected budget balance for next financial year wasn't the much trumpeted surplus of $1.5 billion but a carefully buried deficit of $8.7 billion?

I'd be justified in making such a statement because that deficit figure is officially known as the "headline cash balance" and, as a journalist, I'm in the headline business.

I'd also be justified in drawing it to your attention because the government in its budget papers has made no effort to convince us the headline figure is of no macro-economic significance - rather, we should focus solely on the "underlying cash balance" of a $1.5 billion surplus.

Indeed, I'm not sure the headline figure is of no macro significance. Why not? Because I happen to know - no thanks to the government - that the difference between the two figures includes, among various things, the government's spending on the rollout of the national broadband network.

That's of no macro-economic significance? That has no effect on economic activity? Don't think so, chaps.

I'd really like to be able to tell you just what the transactions are that explain the difference between the headline and the underlying balances. But if there's a table anywhere in the voluminous budget papers spelling that out, I can't find it.

I'm sure if the econocrats had their way there'd be such a table, but the preference of the politicians and their private-office spin doctors is to conceal rather than explain. And even just the figure for the ironically titled headline balance has been carefully hidden to ensure it doesn't hit the headlines.

It didn't rate a mention in the Treasurer's budget speech; in the multicoloured Budget Overview document it was included as a "memo item" (that is, they don't tell you how it was arrived at) on page 36.

In the budget papers proper, it went unmentioned in budget statement 1 (also known as the budget overview) and got a single mention on page 9 of budget statement 3.

The hiding of the headline deficit is just one example of the way the budget papers are becoming less informative rather than more, and the way the government's spin doctors are turning them into an exercise in media management rather than transparency and accountability.

The budget speech used to be a thorough and trustworthy exposition of the new measures announced in the budget; these days it's a made-for-television rave about the budget's good points.

I suspect one reason the budget papers have become less rather than more user-friendly over the years is the spin doctors' desire to drive journalists away from the budget papers proper to the multicoloured Budget Overview, known to econocrats as "the glossy".

It's glossy by name and gloss by nature, putting the best gloss possible on the budget and focusing on whatever messages the government is trying to peddle.

It offers a seemingly useful list of the "major savings" announced in the budget, but you can't be sure all the "saves" you'd like to know about are listed. The single line for "other" savings accounts for almost a quarter of the total.

But that's honest compared with the list of "major initiatives" announced in the budget, otherwise known as "spends". It's a table without totals, meaning it doesn't even have a line for "other" spending. If it did, other would account for almost a third of the total.

Spin doctors work on the assumption journalists are both dumb and lazy, meaning they'll focus on whatever news you give them and not think to go looking for the things you conceal. They also assume journalists who benefit from background briefings and selective leaks won't be game to complain publicly about the way they're led around by the nose.

Journalists turn a blind eye to the rank hypocrisy of the Treasurer and Finance Minister piously refusing to comment on what may or may not be in the budget, while the Prime Minister's press office leaks much of its content to selected journalists, then quietly confirms the story's accuracy to those journos who missed the exclusive.

Unfortunately, there are head office-based journos who aren't part of the club and so feel no such inhibition. There are also, believe it or not, economists and even the odd private citizen who read the budget papers in the hope of enlightenment. They're getting the bum's rush.

This year AAP has accused the government of leaking budget information to selected media for broadcast during the budget lock-up. How's that for duplicity.

Budget paper No 1's coverage of revenue items is pretty thorough, but its statement on expenses leaves much to be desired. It's been stripped of its former graphs showing how spending categories have grown over the years and its tables showing the figures for major spending categories over many years. This paper used to have an index to help you follow a query through, but that was dropped long ago.

You have to delve as far as budget paper No 2 for reliable explanations of particular budget measures, but this information is listed by department rather than program or function, and little effort is made to help users find what they're looking for.

Federal bureaucrats are convinced they're superior to state bureaucrats in all respects, but the states' budget papers are generally superior to the feds' in their transparency, rigour and comprehensiveness. Federal budget papers are particularly inadequate on information about non-financial corporations, such as the NBN Co Ltd.

So tight is the spin doctors' hold on the federal budget process that some nameless operative in the "media liaison" section of the "communications unit" within Treasury's "ministerial and communications division" summarily declined, without explanation, a newspaper's request for budget tables to be supplied in spreadsheet format.

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Swan's innovation: the budget as bulldozer

A closer look at the budget papers reveals just how contrived the budget's return to surplus is. Wayne Swan is hardly the first treasurer to resort to "reprofiling" (a word his people invented), but he's the first to use it on such a massive scale, turning the budget into a bulldozer.

Reprofiling means changing the previously announced timing of budget spending or taxation measures. Deciding not to proceed with previously promised tax changes (the 1 percentage point cut in the company tax rate, the standard deduction, the limited 50 per cent discount of tax on interest income) is one thing. In contrast, deciding to defer by two years the increase in the cap on super contributions by older workers is an example of reprofiling.

Nothing demonstrates how contrived this budget is better than the expected real growth in government spending. In the financial year just finishing, 2011-12, spending is expected to have grown by a whopping 4.8 per cent. In the budget year, 2012-13, it's budgeted to fall by a whopping 4.3 per cent.

But the following year it resumes its rapid upward climb, growing by 3.7 per cent. The year after, up by a modest (!) 2 per cent, and in the last year of the forward estimates, 2015-16, up by 2.9 per cent.

The budget papers helpfully note that, if you roll together the old year and the budget year, the average rate of growth is just 0.3 per cent. This tells us, first, much of the real fall in spending in the budget year is achieved by the simple expedient of pushing spending back into the old year.

Second, to have real spending growing for two years in a row at an infinitesimal rate is quite unnatural. And since there have been no announcements of swingeing spending cuts, such a situation could only have been contrived.

In fact, Swan was moving the budgetary furniture around in at least the two previous budgets (and last November's midyear budget review) to make ready for the miraculous return to surplus in 2012-13.

But so extensive have been his labours to bring the planned surplus about that a more robust metaphor is called for. Swan has invented the fiscal bulldozer. The Treasurer always has a big pile of spending in his blade that he's pushing forward into later years.

And, because budgets occur in May, the dozer can always be turned around and used to push spending back into the few remaining weeks of the old financial year.

But let's focus on the measures announced last week. Swan announced "saves" worth $33.6 billion over five years (the old year, the budget year and the three "forward estimate" years) less "spends" worth $22.4 billion over five years. So for every $3 he saved, he gave away $2.

Note, however, that half his saves were tax measures rather than cuts in spending. Of the total value of tax saves, only 40 per cent represents actual tax increases, while 60 per cent represents decisions to abandon or defer tax reductions included in the mining tax package.

When the package was first announced, pretty much all the revenue expected to be raised by the new tax was used to pay for "reforms" of other aspects of the tax system. These alleged reforms were very roughly based on recommendations of the Henry report. But now, roughly $2.2 billion a year of the mining tax's annual proceeds is to be used to finance increased government spending rather than reductions in other taxes.

The budget papers link the changes to the mining tax package to the plans for an increase in the family benefit, the new (pitiful) allowance for people on the dole, the switch from the education tax refund to the "schoolkids bonus", the first stage of the national disability scheme and the increased spending on dental care.

In their efforts to make announcements sound momentous, it suits the pollies and the media to quote budget costs "over four years" (or five, if costs are being pushed back to the old year).

But we budget and think a year at a time, so this practice can mislead.

It's worth noting that, of the total saves of $33.6 billion, only 14 per cent apply to the budget year. This tells us Swan drew up this budget very much with an eye to the following years. Having orchestrated the planned return to surplus in 2012-13, he then had to make sure the budget stayed in surplus over the forward estimates.

Of his total spends of $22.4 billion, a mere 8 per cent apply to the budget year. This is another indicator of how contrived the budget is.

But it also helps explain how a supposedly tight budget could appear so generous, as well as revealing another modern trick: pre-announcement.

Rod Tiffen, of the University of Sydney, has beaten the economic commentators to making a significant point - increasingly, budgets are being used to announce measures that don't take effect for more than a year. Budget headlines are built on stuff that won't happen for ages.

In the case of new taxes, such delay is unavoidable. But that's rarely true of spending. Among the measures announced last week that don't start until July 2013 are the increase in the family benefit and the introduction of the national disability scheme. The dole increase doesn't start until March 2013.

Combine all this with the knowledge the government has never once honoured its grand pledge to increase defence spending each year by 3 per cent in real terms and you conclude Swan's fiscal bulldozer will be on the job again in next year's budget - and any to be delivered by his successors.

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Pre-budget primer: how pollies fudge the figures

When governments discover their self-imposed budget targets are harder to achieve than they expected, they face an almost irresistible temptation to cover the gap with a little creative accounting.

As we wait to see on Tuesday night the herculean efforts the Gillard government has made to keep its promise to achieve a budget surplus in 2012-13, let's review some of the tricks governments get up to when they find themselves in a tight fiscal corner.

We'll do so with help from an International Monetary Fund staff discussion note, Accounting Devices and Fiscal Illusions, written by Timothy Irwin.

"If history is a guide," Irwin says, "some of the efforts that should be dedicated to cutting spending or raising taxes may be diverted to the devices, that is, stratagems that reduce this year's reported deficit only by increasing subsequent deficits. As a result, fiscal adjustment may be partly an illusion."

That history is long. Irwin notes the term "fiscal illusion" was first used in 1897. He defines an "accounting device" as a manoeuvre that improves the headline fiscal indicator without actually improving public finances, or without improving it to the extent suggested by the headline indicator.

Irwin says fiscal illusions are a lot easier to produce when the budget balance is calculated on a "cash" basis rather than an "accrual" basis, though even the accrual basis isn't tamper-proof.

Under cash accounting, budget transactions are recorded at the time when cash is transferred; under accrual accounting, transactions are recorded at the time when economic value is transferred. Changing the timing of cash payments is relatively easy.

The private sector has used accrual accounting for eons but our governments switched from cash to accrual only in the late 1990s, at the behest of a new international convention for government financial statistics issued by the IMF.

State governments moved their budgets to an accrual basis, as required, and left it at that. The federal government moved to accrual in 1999, then had second thoughts and, while continuing to produce the bulk of its figures on an accrual basis, reverted to using the "underlying cash" budget balance as its headline fiscal indicator.

Treasury insists the cash balance is more meaningful as a measurement of the budget's effect on the macro economy but that's debatable. It wouldn't be lost on Treasury that cash accounting affords its political masters a lot more wriggle room.

Irwin says an accounting device aimed at the deficit reduces this year's deficit but increases future deficits by an amount that largely offsets the initial improvement.

"To do this, it must either increase reported revenue or decrease reported spending in the year (or years) of interest. And, in return, it either decreases reported revenue or increases reported spending in future years," he says.

This means accounting devices can be divided into four broad categories, the first of which is "hidden borrowing". This involves increasing reported revenue now but increasing reported spending later.

In Europe, governments have reduced their headline deficits by taking over the pension schemes of public enterprises. They receive a compensating payment for taking over the scheme, which they count as revenue, but the offsetting obligation to make future pension payments doesn't count as a liability.

In effect, they've borrowed money from the outfit selling the pension scheme but the debt doesn't appear in their books.

Another way of achieving the same effect is to sell government buildings, then lease them back. Ring a bell? The Howard government did this extensively in the late '90s. And it drove bad bargains with the lucky landlords on the other side of the sale-and-leaseback.

The second accounting device, "disinvestment", increases reported revenue now but reduces reported revenue in the future. The proceeds of privatisations are counted to reduce the deficit but, though these proceeds may reduce the government's debt and so reduce its interest bill, no account is taken of the future dividends the government will no longer receive.

In principle, the Howard government's introduction of the concept of the "underlying" cash balance brought an end to this disreputable accounting practice, much used by the Hawke-Keating government.

In practice, however, this applied only to the sale of financial assets (such as a whole enterprise), not to the sale of non-financial assets such as real estate (and hence, not to sale-and-leaseback deals).

The third accounting device, "deferred spending", reduces reported spending now but increases it later. In the US, the government once reduced its deficit by postponing a military pay day by a single day (shifting it from one year to the next) and, another time, by deferring Medicare payments that would have been made in the last week of the year.

"Less directly, governments sometimes defer maintenance of roads and other assets even though maintaining assets is ultimately cheaper than letting them deteriorate to the point at which they must be rebuilt," Irwin says.

Shifting payments between a bit before and a bit after June 30 is a favourite device of our federal governments, producing double the effect when people compare the new year's balance with the previous year's. Not quite so trickily, the Gillard government has been doing much "reprofiling" of its spending - bringing it forward or pushing it into the future in preparation for the promised return to surplus next financial year. But where spending is pushed back beyond the three years of the "forward estimates," it drops off the radar completely.

There are potentially legitimate reasons for governments to use "public-private partnerships" for the construction of things such as toll roads. "Yet often it is their illusory fiscal benefits that make them appealing," Irwin says. The construction costs and the consequent debt don't appear on the government's books, even though the government has assumed "debt-like obligations" for the future.

The fourth accounting device, "forgone investment", reduces reported spending now but reduces reported revenue later. You avoid building the infrastructure you should but this means you don't get the revenue you would have got from charging for the use of that infrastructure.

More seriously, inadequate public infrastructure may act as a drag on the economy's growth, thus causing general tax collections to grow more slowly than they would have.

This effect may be the dark side of Australia's apparent fiscal rectitude during Peter Costello's reign.

Yet another device is to have spending undertaken by a public entity that isn't counted as part of the budget for reporting purposes. Do the initials NBN mean anything to you?

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We're all paying a high price for hiding our debt

IT DOESN'T seem to have occurred to Julia Gillard that her resolve to make this the "decade of infrastructure" - with a gold-plated national broadband network as its centrepiece - doesn't fit with her core promise to return the budget to surplus in 2012-13 and eliminate government debt ASAP.

Indeed, the two policies laugh at each other. Both Gillard and Kevin Rudd succumbed to Costelloism - a brand of fiscal populism holding that all government debt is bad - as did various state Labor governments.

The upside of this abhorrence of budget deficits and obsession with the elimination of debt is it left the Rudd government perfectly placed when it needed to spend big to counter the impact of the global financial crisis.

The downside is it led to more than a decade of inadequate spending on infrastructure. Labor made much of the neglect of infrastructure while in opposition and this explains its resolve to give it a high priority. But Labor has also embraced the very mentality that caused the problem.

As Dr Nicholas Gruen, of Lateral Economics, has written in a report for Western Sydney councils, the obsession with debt may have got rid of the budget deficit, but it exchanged it for an infrastructure deficit. In truth, only some government debt is bad. It's not bad when it arises from deficits incurred during recessions. And it isn't bad when it arises from capital spending - provided those capital works are worthwhile. It is bad when it arises from the failure of governments to ensure their recurrent spending is covered by revenue during normal years.

I'm a great believer in the (Peter Costello-introduced) "medium-term fiscal strategy": to "maintain budget balance, on average, over the course of the economic cycle".

You'd never know it from the way Costello and his successors carry on, but that strategy is carefully worded to permit the budget's "automatic stabilisers" to push the budget into deficit during major downturns and also permit governments to use the budget to stimulate the economy during recessions.

So the addition of the words "on average over the cycle" makes the strategy - shock, horror - a Keynesian formulation. (Clearly, it was crafted by someone a lot wiser than Costello.) But the words "on average" make it a strictly symmetrical Keynesianism: once the recession passes you have to get the budget back to surplus and keep it there until the next recession.

There's just one weakness in this enlightened strategy: its failure to distinguish between capital and recurrent spending - that is, its failure to permit the federal government to borrow to fund infrastructure.

If Labor had a deeper understanding of economics and genuine belief in it, rather than a mere desire to portray itself as a "fiscal conservative", it would have had the courage to add that qualification to the strategy.

So how does Gillard expect to square the circle of tackling the infrastructure backlog without being able to borrow? I bet I know. She intends to use "public-private partnerships" to get the borrowing done by the private sector. Hey presto! Problem solved.

But hey presto is right. This is just creative accounting. The government initiates the need to borrow - and, directly or indirectly, guarantees the borrowing - but gets the debt put on someone else's balance sheet.

Unfortunately, the drawbacks of PPPs - which so far have been used mainly by state governments for all manner of infrastructure assets, from highways and railway stations to hospitals and desalination plants - are much greater than this.

As Gruen explains, these assets have been built at a higher cost to the public than would have been the case had they been built the way they used to be, as government-owned assets funded by borrowing.

The first cause of increased cost is the "artifice" needed to get private investors interested. They have to be reassured that some future action by the government - say, the building of a competing road or hospital - won't leave their asset stranded.

So the government has to tie its hands, promising not to do certain things and cutting off options for the future that may have been in the public's interest. And we've all seen how governments shore up private toll roads by "traffic calming" (making it harder for motorists to avoid the toll road).

But the bigger reason PPPs are so much more expensive is that government - being the government and thus having the power to raise taxes to cover its debts - can borrow a lot more cheaply than private businesses can. This is true even after you allow for the risks involved in specific infrastructure projects.

To illustrate the extra costs involved in PPPs, Gruen calculates that, had the NSW government chosen to fund the toll roads that now encircle Sydney, the state would have acquired ownership of a stream of revenue with a net present value of about $12.8 billion, at the cost of increasing its borrowings by $7 billion.

In other words, by taking on a little more risk, the state would have increased its net worth by about $5.8 billion. After allowing for that extra risk, its net worth would still be $4.6 billion higher.

By today, more than 60 per cent of the original borrowing would have been paid off, leaving a net cash flow to the budget of $380 million a year, after allowing for the interest payments on the extra debt and even after providing for further repayments of principal. And get this: in the unlikely event of the government's taking on of the extra debt prompting the ratings agencies to downgrade the state's AAA credit rating - which would increase the interest rates it had to pay on its borrowings - the budget would still be ahead on the deal.

Bottom line: the public is paying dearly for the efforts of governments to hide the debt they're responsible for.

Although we're not paying as much public debt interest as we would have been, we're paying inflated tolls on roads (as Gruen's calculations show). We're also paying heavy repayments on our mortgages partly because of governments' failure to release sufficient land and their loading of up-front infrastructure charges on the land they do release.

And we're paying with our time as we wait at peak hour in traffic that has slowed to a crawl or crowd into late trains and buses. All thanks to the demonising of government debt.

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Use your brain before joining the bank lynch mob

When the punters, the pollies and the media all get their knickers in a twist over rising mortgage interest rates, any argument - no matter how misconceived - is fair game.

We're being assured that the banks' huge and growing profits are obvious evidence of "gouging". And any increase in mortgage rates in excess of the rise in the official interest rate is obviously immoral and probably should be made illegal.

Sorry, but no matter how unlovely the banks are - and I'm no admirer or defender of them - those propositions don't make sense.

With Westpac this week being the last of the big four banks to announce its annual profit, much has been made of the 26 per cent increase in its underlying (or "cash") profit to $5.9 billion. Surely this is proof of profiteering?

Well, no, not when you look at it.

Turns out the main cause of the increase was not a rise in the bank's net interest income but a big fall in the amount of its annual provision for bad and doubtful debts.

The next supposed evidence that the big four banks are gouging is just the huge amount of their combined profits: $21.4 billion, as we were told many times this week.

But anyone who knows the first thing about business knows you can't tell much about how well a business is doing just by the size of its profit. You have to compare the size of the profit with the size of the business. A profit of $1 billion would be fantastic for a corner store, but pathetically poor for Telstra, for instance.

In other words, what matters is not the absolute size of the profit but the degree of profit-ability - profit as a proportion of the size the business, measured by the amount of its assets or the amount of its "equity" (the money invested by the owners of the business).

Our banks are very big - among the biggest companies in the country - so it's not surprising their profits seem huge. The big four earn a return on assets of a bit under 1 per cent a year, and that hasn't changed much. Their return on equity, however, is usually up at 16 or 17 per cent a year. (It's a lot higher than the return on assets because the banks are highly "geared" or "leveraged" - they have a high ratio of borrowed funds to shareholders' equity.

How does this return on equity compare? Right now it's high by the standards of banks in the United States and Europe - but that's because those banks have screwed up so badly. Compared with the banks in Canada - a country that, like us, escaped most of the conflagration - ours are in the same ballpark.

Compared with other industries, however, these rates of return are high. Most businesses would be delighted to earn as much. Of course, rates of return need to take account of the riskiness of the business you're in - the chances of making losses if difficulties arise.

In theory, banking is a fairly risky business, thus justifying higher rates of return than for less risky businesses. The idea is you need to do better in the good years to cover the one or two years every decade when you do really badly.

In practice, however, banking isn't all that risky because - as we were reminded during the global crisis - it's effectively guaranteed by the government. What's more, our banks haven't had a bad year since the early 1990s.

So our banks are doing very nicely. I regard their rates of return as higher than they need to be (as is probably also the case in Canada) and thus a sign that price competition among the banks, and between the banks and other lenders, is less vigorous than it should be.

Turning to the notion that there's something immoral or illegitimate about rises in mortgage interest rates in excess of rises in the official interest rate, it has no basis in law or economics.

Banks borrow on one hand and lend on the other. They are justified in raising the interest rates they charge if they suffer an increase in the cost of the funds they borrow. By far the biggest single influence over the banks' cost of funds is the official interest rate - the cost to the banks of borrowing "cash" from each other overnight.

But it's not the only influence over the banks' cost of funds. These days they get about half their funds from retail depositors, less than a fifth from the short-term wholesale market (bank bills) and about a quarter from the long-term wholesale market (three- to five-year corporate bonds issued by the banks), with most of the rest provided by the banks' shareholders ("equity"). More than half the wholesale funding comes from overseas.

The point is that each of these sources yields funds priced at some margin above the official cash rate. Provided those margins stay fairly steady in absolute size, movements in the cash rate will accurately reflect movements in the banks' cost of funds.

This was the position for some years before the global financial crisis and it explains why the public gained the impression that mortgage interest rates always do and should move in lock step with the official cash rate.

But that happy state was disrupted by the crisis, which caused many of those margins above the cash rate to blow out, thus justifying changes in mortgage rates different from changes in the cash rate. Most of those margins have fallen back a long way as the crisis has abated. But now the banks are under pressure to change the mix of their funding, getting more from retail and less from wholesale, as well as more long-term and less short-term.

Trouble is, the newly preferred sources have higher margins above the cash rate. It thus becomes an empirical question whether the banks are justified in raising their mortgage rates by more than the rise in the cash rate. And the judgment of the econocrats is that, as a group, the banks aren't justified, though the Commonwealth may have a better case than the others.

So if too many of the other banks use the cover of the Commonwealth's increase of 0.20 percentage points in excess of the rise in the cash rate to raise their own mortgage rates by more we can take this as a sign they're happily exploiting the inadequate competition in lending.

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