Budget deficit perfection would be nice, but among the best is fine

The independent economist and former Treasury officer Chris Richardson, the leader of Treasury-in-Exile and thus chief apostle of fiscal rectitude, does the country a favour with his eternal campaigning to keep budget deficits and public debt levels low.

It works like Defence, where the retired generals do the talking for the serving generals, whose opinions must be expressed only to their political masters in private.

But all those people who, only in recent times, have joined the protest march demanding an end to deficit and debt don’t want to do the country any favours. I’m no great admirer of the Albanese government, but that doesn’t make every criticism of its performance reasonable.

According to these partisans’ version of events, the budget was in surplus and doing fine until this terrible government started spending with abandon, plunging the budget into deficit, where it’s likely to stay for the next decade, leading to ever-rising public debt. So should some great global mishap come along, we’d be in deep doo-doo.

The first thing wrong with this narrative is its implication that the prospect of a decade of deficits is all Labor’s doing. There’s nothing new about budget deficits; the budget’s been in deficit for more than two in every three years in the past half-century.

What’s more, Treasury was projecting a decade of deficits in then-treasurer Josh Frydenberg’s budget before the last federal election in 2022. So why don’t I remember the people who profess to be so worried now, expressing much concern then? Surely not because debt and deficits only matter when you’ve got a Labor government?

Actually, and as Treasurer Jim Chalmers never tires of reminding us, the projected decade of deficits and rising debt we’re told about today isn’t nearly as bad as the one we were shown back then – the one that didn’t seem to worry anyone.

Why was the projection three years ago so much worse than this one? Because Treasury’s forecasts and projections soon became woefully wrong. The budget deficit of $78 billion it was expecting in 2022-23 turned out to be a surplus of $22 billion. For the following year, the expected deficit of $57 billion was a surplus of $16 billion.

That’s an improvement of more than $170 billion right there. And because this hugely better outcome came so early in the decade, it also meant a huge reduction in the feds’ projected annual interest bill.

But while Chalmers is wrong to claim so much credit for this astonishing turnaround, his critics are wrong to give him none. They dismiss this vast improvement in the debt outlook as nothing more than good luck.

Huh? Rather than falling, as Treasury always assumes they will, iron ore and coal prices took off, so mining company profits and company tax payments boomed.

That’s only half the story, however. Treasury failed to foresee that the economy would return to near full employment – and pretty much stay there to this day, despite the big increase in interest rates intended to get the inflation rate down.

This meant a record proportion of the working-age population in jobs, earning wages and paying income tax. As well, the inflation surge meant a lot more bracket creep than expected.

So, remembering the Albanese government and Reserve Bank’s joint policy of seeking to get inflation down without inducing a recession, you have to say there’s been an element of good management as well as good luck, for which Chalmers and Albanese deserve some credit.

Chalmers gets credit for saving rather than spending most of the government’s higher-than-expected tax collections – something that wouldn’t have happened if Labor had been spending as uncontrollably as the partisan critics claim.

Much effort has been put into demonstrating that government spending is “out of control” and will continue that way for a decade unless something’s done. But analysis by Dr Peter Davidson of the Australian Council of Social Service gives the lie to such claims.

Davidson measures budget spending by the average annual increase after adjusting for inflation and population growth – real spending per person. Over the 27 years to 2018, the long-term average increase was 1.7 per cent a year.

But under the Abbott and Turnbull governments from 2014 to 2018, there was a period of budget austerity when the spending increase averaged just 0.1 per cent a year, as backlogs were allowed to build up and deficiencies were ignored.

Then, during the Covid response period from 2018 to 2022, spending grew by an exceptional 2.6 per cent a year. Now, over the six years to 2028, spending growth is expected to average 1.3 per year.

So claims of Labor’s profligate spending are themselves on the profligate side. It’s here that the critics move from partisanship to self-interested ideology. Their obsession with government spending comes from their ideology that, while all tax cuts are good, all spending increases are bad.

Why are they bad? Because they increase the pressure for higher taxes and reduce the scope for tax cuts. A decade of deficits caused by excessive tax cuts would be OK, but one caused by trying to ensure the punters got decent education, healthcare and social security is utterly irresponsible.

The final respect in which decade-of-deficits bewailers are wrong is their claim that our government’s financial position has us sailing close to the wind. Rubbish.

As former top econocrat Dr Mike Keating advises, if you take the debt of all levels of government in 2024, our gross public debt is equivalent to just 58 per cent of our gross domestic product. This compares with the Euro area on 90 per cent, Britain on 103 per cent, Canada on 105 per cent and the US on 122 per cent.

Much of the credit for our relatively low level of debt and deficit should go to decades of preaching by Treasury and its alumni, including Chris Richardson. But though they sometimes imply we’re at risk of being dangerously overloaded with debt, what they’re really trying to do is maintain our longstanding record as only moderate drinkers.

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Budget to give the economy a push next financial year

By MILLIE MUROI, Economics Writer

If there’s only one thing you gleaned from the budget – and it is the new tax cuts – that’s exactly what the government wanted.

The clock is ticking for Prime Minister Anthony Albanese, who, at the time of writing, was expected to call an election as early as Friday. That means a sweetener – such as a promise to let you keep more of your pay – is perfectly timed to nudge voters its way.

But the move also doubled as a distraction from something Labor would rather not talk about: the fact the nation’s finances will be in the red for the next decade despite a turnaround in the economy’s health.

This isn’t the end of the world, but with most of its major policies already announced in preparation for the election, the government knew it needed to give the press something good to latch onto when it unveiled its budget on Tuesday.

The tiny tax cut – the equivalent of about $5 a week for most taxpayers – due to kick in next year, was a sure-fire way to make a good impression.

But the budget revealed a bit more than just a cute tax cut. It also painted a picture of the state of the economy and the government’s game plan.

“Fiscal policy” is the government’s way of steering the economy by changing how much it spends and collects in tax. When the government increases its tax collections by more than it increases its spending from year to year, it’s choosing a “contractionary” stance (one that slows down the economy by taking more money out of it than the government pumps in).

When the government increases its spending by more than it increases its tax collection, it is adopting an “expansionary” stance (stimulating the economy by pumping more money into it). That’s the position taken by the government this year.

Turning to a page in the budget papers many economists call the “table of truth” shows us how the budget position for this financial year (and expectations for future years) has changed from previous forecasts – and what the biggest drivers are.

The “parameter variations” in this table tell us how cyclical factors – things the government has little control over – affect the budget. For example, lower global interest rates over the next few years are expected to shrink the interest rate bill paid by the government despite its growing debt.

AMP chief economist Shane Oliver says higher commodity prices and employment were the kind of parameter variations that helped deliver the government two back-to-back surpluses in 2022-23 and 2023-24.

Then there’s the effect of government policy decisions that weighed down the budget this financial year (2024-25) by $137 million more than was expected back in December, mostly because of an increase in spending on things such as cheaper medicines. This affects what’s called the “structural” part of the budget.

Next financial year, 2025-26, the government’s decisions will drain roughly $7 billion more than previously expected. That’s because it has made new promises such as earmarking $8 billion to boost the amount of bulk-billing and a six-month extension of electricity bill relief at a cost of $1.8 billion.

But improved economic conditions next year should help top up the budget by $12 billion. That’s mostly because of what’s called “automatic stabilisers”, which affect how much money comes into – and leaves – the government’s coffers, adjusting automatically to changes in the speed of the economy.

When business is booming and incomes are rising, for example, people pay more in tax, meaning more cash gets swept into the government’s hands. When the economy gets sluggish and people lose their jobs, the amount of tax flowing in falls.

As Betashares chief economist David Bassanese notes, the government is assuming (among other things) that there will be more people in jobs over the next few years, meaning there should be more income tax flowing in.

The government is also expecting economic growth to pick up and inflation to stay around the 2 per cent to 3 per cent target range, while slightly tweaking down its unemployment forecast to 4.25 per cent over the next four years.

Most of the savings, though, will be spent by the government, leaving the budget only a few billion dollars better off than expected back in December over the next four years – and still in deficit.

At the time of the mid-year budget update, the coming financial year was expected to have a $47 billion deficit – which is 1.6 per cent of GDP. Now, because of measures in the budget and changes in the government’s forecasts, it’s going to be $42 billion, or 1.5 per cent of GDP. The deficit is still a lot bigger than it was last financial year.

Now, it’s worth noting the Coalition, in 2022, also had deficits (that is, spending exceeding revenue) laid out for 10 years. As independent economist Saul Eslake points out, neither side of politics really wants to have the tough conversation of how to fix this problem when there’s growing demands for spending in areas such as healthcare and defence – and especially not before an election.

But the government isn’t the only major player when it comes to managing the economy. The Reserve Bank is also a heavyweight. It doesn’t have the same spending or tax powers, but it uses a tool called “monetary policy” – which you might know better as interest rates.

Like the government’s fiscal policy, monetary policy can be expansionary when interest rates are dropped (because it encourages spending and investment), or contractionary when interest rates are increased.

For the past few years, the bank has been cranking up interest rates in an effort to rein in inflation. For the first time since mid-2022, the bank in February notched down interest rates from 4.35 per cent to 4.1 per cent, moving towards an expansionary stance. Why?

Because it reckons, like the government, that prices are now rising slowly enough, and demand has softened enough relative to supply, to indicate the economy is no longer running too far ahead of its capacity.

The budget is unlikely to have much sway on the Reserve Bank’s forecasts or coming rate decisions. The spending changes were modest, the deficits have been flagged for months and the government’s forecasts aren’t drastically different to what the bank is expecting.

But if the outlook for the economy over the next few years is as rosy as the government is expecting, there’s a case for whoever is in charge in future years to ramp up efforts to return the budget to a surplus, or at least a neutral position, earlier.

That doesn’t have to mean drastic cuts to spending. It could mean changing the way the government collects revenue by introducing an inheritance tax or reducing the capital gains tax discount, and pursuing bolder productivity-boosting measures (Labor’s ban on non-compete agreements is a good start).

In the meantime, the budget for this financial year is expected to be nearly $28 billion in deficit. In the coming year, that deficit is expected to increase to $42 billion. This is an increase equivalent to 0.5 per cent of GDP, making the stance of fiscal policy adopted in the budget mildly expansionary.

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The government is timid and uninspired. This budget is a perfect fit

If you’re having trouble working up much interest in the budget, don’t feel bad. It’s not you, it’s the government. So much fuss is made about the annual federal budget that we expect it to be full of major announcements. Well, not this one, and not from a government that never wants to rock the boat.

It is, however, a budget we’ve wished on ourselves. We’ve made it clear that, while ever we’re feeling pain from the cost of living, we’re not much interested in anything else, and an unambitious government has been relieved to take us at our word.

Most of the measures in the budget are small cuts to various charges that affect households’ budgets. The government will be spending more to encourage GPs to bulk-bill their patients and to cut the maximum cost of a pharmaceutical prescription to $25 a pop.

It will extend the electricity bill rebate for the last half of this year, yielding households a saving of $150.

And not forgetting the big one that will make all the difference to the cost of living: indexation of the excise on draught beer will be paused for two years. Anyone who can see the saving per glass gets a prize for exceptional eyesight.

All this is to be done just as soon as we vote to re-elect the Albanese government – except that Peter Dutton has promised a Coalition government would do the same.

Of course, all these measures to ease the cost of living have already been announced, with one exception: a two-stage cut in income tax. Who knew? Surely, that’s something to get excited about?

Well, yes, until you examine the details. When Treasurer Jim Chalmers says the tax cuts are modest, he’s not exaggerating.

It boils down to this: in 15 months’ time, July next year, everyone earning more than $45,000 a year ($860 a week) will get a tax cut of a bit over $5 a week. A year later, they’ll get a further cut of $5, taking it up to $10.30 a week. Part-timers earning between $350 and $860 a week will get an initial saving of up to $5 a week.

Even with this last-minute addition, it’s not hard to believe that, until Cyclone Alfred intervened, Labor was hoping to hold the election in April and leave the budget until later. Why did the delayed election date prompt it to go ahead with a budget when it had nothing much to announce? Law and practice. It had to.

Still, budgets also tell us the government’s latest forecasts for the economy and for the budget bottom line: is the government expecting to spend more than it raises in taxes, or less? More. Every financial year for the next 10.

So the government foresees a decade of budget deficits and further borrowing to cover those deficits. Does it have any plan to correct this? Not that it’s telling us about. My guess is that its policy is to worry about that only after it has been re-elected. If it isn’t, good luck, Mr Dutton.

But since we can’t see further than the cost of living, how are we doing? On the face of it, we’re well over the worst. Over the year to December, consumer prices rose by a modest 2.4 per cent.

The rate of inflation is forecast to stay low, meaning the Reserve Bank is likely to keep cutting interest rates in coming months by a total of 1 percentage point or so, which will take a lot of pressure off people with big mortgages.

The government expects wages to rise a bit faster than consumer prices which, if it comes to pass, will ease the cost of living to a small extent. But if many people still feel it’s a struggle to pay their bills, I won’t be surprised.

Why not? Because, over the five years to last December, consumer prices rose by about 4.5 per cent more than wages did. Until that “wage deficit” is closed, many people will still be feeling the pinch.

This makes it all the more important to understand why the government’s move to continue its energy rebate for another six months isn’t as good as it sounds.

The rebate – which is temporary and paid directly to your electricity retailer – began from July 1 last year. It thus caused quarterly electricity bills to be $75 less than they otherwise would have been.

Its extension for the last two quarters of this year won’t stop your bills being higher than they were because your retailer has increased its prices. But it will stop your bill also being $75 a quarter higher than otherwise. Thanks to generous Anthony and Jim, that unpleasant surprise won’t come until you get your first quarterly bill in 2026. (Come to think of it, maybe the new tax cut is timed to ease the pain of higher power bills.)

As for Trump and his planned trade war, the T-word doesn’t get a mention. Rather, Chalmers worries about “heightened global uncertainty” and “escalating trade tensions”. Why the obfuscation? Maybe Chalmers wants us to see what a great job the government’s done fixing the cost of living and doesn’t want that terrible man raining on his parade.

Actually, it’s too early for concrete actions. We don’t yet know how stupid Trump intends to be, let alone whether the other big economies intend to worsen it by giving as good as they get (otherwise known as cutting off your nose to spite your face).

So right now is the time to think hard about our options, not announce a response. We do know our government won’t be tempted to retaliate, and Chalmers is right to say we must make our economy more resilient to shocks from overseas.

But spending on a new “buy Australian” campaign? It may make uninformed voters feel better, but I doubt it will fix the problem.

This government is timid, uninspired and uninspiring. This budget fits it perfectly.

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Argy-bargy on the way to next week's off-again, on-again budget

According to the business press, Anthony Albanese was desperately hoping for an early election so he could avoid next week’s budget and the drubbing he’ll get when Treasurer Jim Chalmers is forced to reveal projections of a decade of budget deficits.

If you think that, you don’t know much about budgets. But, more to the point, nor do I expect to believe the budget’s forecasts for the economy in 2025-26.

The first reason I don’t believe Albanese was living in fear of having to reveal a decade of deficits is that, although the business press may be shocked and appalled by budget deficits, the voters have never been. That will be particularly so at a time when all they care about is the cost of living.

The business press and the rest of the partisan media will make a great fuss, but the punters won’t care – just as they didn’t when, in the previous government’s last budget of March 2022, treasurer Josh Frydenberg revealed his own projections of a decade of deficits.

Funnily, I don’t remember the business press making a big fuss back then, perhaps because it only feels a need to worry about deficits when a government of the wrong colour is in power.

But if you’re wondering why, three years later, we still face a decade of deficits, I’ll give you a clue: what the two projections have in common is the stage 3 tax cuts. If all you care about is balancing the budget, the tax cuts were unaffordable then, and they’re still unaffordable now.

Of course, the “Trumpist” logic of big business is that tax cuts are always responsible, whereas increased government spending, for any purpose, is always irresponsible.

Another reason for doubting that Albanese thought having an economic statement rather than a full budget would allow him to avoid admitting to the prospect of a decade of deficits is the requirement under the Charter of Budget Honesty for the secretaries of Treasury and Finance to produce a PEFO – a pre-election economic and fiscal outlook statement. That statement would have revealed. . . the projected decade of deficits.

What the press gallery seems not to know is the reason for the modern practice of governments providing an economic statement immediately before announcing an election – unless, of course, the election is called immediately after a budget’s been delivered, as will happen next week for the third election in a row.

Why must the officials’ PEFO always be preceded by a government economic statement in some form? So an excitable media won’t leap to the conclusion that any deterioration in the budget balance since the previous government statement represents the econocrats revealing something their political masters were hiding.

Guess what? The politicians’ statement and the PEFO a week or two later are always almost identical. (And I bet it was the econocrats who suggested the idea to the pollies. The last thing the bureaucrats want is to embarrass the duly elected government of the day.)

But enough already on the politics of budgets. Better get to some actual economics. I don’t expect to believe the economic forecasts we see in next week’s budget. Why not? Because they’re highly likely to be wrong. Economists are hopeless at forecasting even just a year ahead because the models they rely on – whether mental or mathematical – are so woefully oversimplified.

That being so, the forecasters’ rule of thumb is to predict “reversion to the mean”. If last year was below average, this year growth will be up; if last year was above average, this year growth will be down.

As well, when times are tough, official forecasts tend to err on the optimistic side. (This is no bad thing when, to some extent, their forecasts tend to be self-fulfilling; the last thing we need is the government predicting death and destruction.)

But I’m under no such constraint. And I can’t see the economy getting out of second gear in the financial year ahead. The obvious reason for expecting further weak growth is the effect of all Trump’s antics. But this factor is easy to overestimate. Unlike some countries, we don’t do much trade with the US.

The media have tended to exaggerate the likely effect on us of all Trump’s off-again, on-again tariffs to make it a better story. The ultimate effect on us will come mainly via China, our biggest export destination, but the Chinese have their own ways of protecting themselves in the unending tussle with the Yanks for the title of top dog.

What’s likely to have a bigger effect on us is the uncertainty about how Trump’s craziness will play out. Uncertainty has real effects when it prompts businesses and even households to delay investment decisions until the prospects are clearer.

So there will be some adverse effect on our economic growth. Even without Trump, however, it’s too easy to sound wise by making a big thing of what’s happening in the rest of the world. Never forget that roughly three-quarters of all the goods and services we produce are bought by Australians, while roughly three-quarters of all the goods and services we buy are made by Australians.

On the positive side for economic growth, it can’t be long before the Reserve Bank cuts interest rates back to their normal or “neutral” level. But that suggests a total cut of only 1 percentage point or so. It won’t set the world on fire.

Similarly, the parties’ many election promises will add to government spending and act as a stimulus to the economy and private spending. But again, don’t let the modern practice of exaggerating the significance of government policy measures by quoting their expected cost “over four years” mislead you.

From the perspective of the budget’s immediate effect on economic growth, it’s only the cost of the measure in the first year that matters. And, because we’re measuring annual growth, it’s only any increase on the first year’s spending that matters.

The fancy mathematics economists indulge in is overrated, but simple arithmetic isn’t.

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How many more cyclones before our leaders finally do something?

Forgive me for being hard-headed while everyone’s feeling concerned and sympathetic towards those poor flooded Queenslanders and people on NSW’s northern rivers, but now’s the time to resolve to do something about it.

As the rain eases, the rivers go down, the prime minister flies back to Canberra and the TV news tires of showing us one more rooftop in a sea of rushing water, the temptation is to leave the locals to their days and even months of getting things back to normal, while we go back to feeling sorry for ourselves over the cost of living and waiting impatiently until the federal election is out of the way, and we stop hearing the politicians’ endless bickering.

But speaking of politics, let’s start with Anthony Albanese. He’s been forced to abandon his plan for an April 12 election because calling an election in the middle of a cyclone would have been a very bad look.

“I have no intention of doing anything that distracts from what we need to do,” he told the ABC. “This is not a time for looking at politics. My sole focus is not calling an election, my sole focus is on the needs of Australians – that is my sole focus.”

Ah, what a nice bloke Albo is. Convinced? I’m not. You don’t get to be as successful a politician as Albanese unless your sole focus is, always and everywhere, politics. It’s because his sole focus is politics that he knows now’s not the time to look political. “Election? Election? If I don’t make out I don’t care about the election at a time like this – I could lose it.”

One thing I’ve learnt from watching prime ministers is that, though they all make mistakes – buying a holiday beach house during a cost-of-living crisis, for instance – they never make the same mistake that helped bring down their predecessor.

Every pollie knows Scott “I don’t hold a hose” Morrison’s greatest mistake was to persist with his Hawaii holiday during the Black Summer bushfires of 2019-20. The ABC has helpfully dug up footage of people in the affected area refusing to shake Morrison’s hand after he turned up late.

Now do you get why Albanese’s been doing so much glad-handing up in the cyclone area?

The election campaign that’s already begun is between two uninspiring men, neither of whom seem to have anything much they want to get on and do. You’re going to fix bulk-billing, are you? Wow. Anything else?

But, perhaps in an unguarded moment, Albanese did say something impressive. He seemed to elevate climate change as a major election issue, saying all leaders must take decisive action to respond to global warming because it is making natural disasters such Cyclone Alfred worse and more expensive to recover from.

Actually, this is the perfect opportunity to make this an election worth caring about. You’ve got a Labor Party that cares about climate change but is hastening slowly, versus a Liberal Party that only pretends to care and whose latest excuse for doing nothing is switching to nuclear power. This would take only a decade or two to organise so, meanwhile, we can give up on renewable energy and abandon Labor’s commitment to cut emissions by (an inadequate) 43 per cent by 2030.

Both sides are likely to lose more votes to the two groups that do care about climate change – the Greens and the teal independents. Labor is delaying announcing its reduction target for 2035 until after the election. If Albanese had the courage, he’d promise a much more ambitious target and make it a central issue in the election.

The point is, Alfred is hardly the last cyclone we’ll see. Extreme weather events – including heatwaves, droughts and floods - have become more frequent and more intense. How many more of them will it take to convince us we need to do more to reduce our own emissions, as well as taking responsibility for the emissions from the coal and gas we export to other countries?

What’s different about Alfred is it hit land much further down the coast than usual. Reckon that’s the last time this will happen? Modelling by scientists at UNSW’s Climate Change Research Centre suggests that weakening currents may lead to wetter summers in northern Australia.

Other researchers from the centre tell us “our climate has changed dramatically over the past 20 years. More rapid melting of the ice sheets will accelerate further disruption of the climate system.”

A big part of our problem is the longstanding human practice of building towns near a good source of water, such as a river. Rebecca McNaught, of Sydney University, tells us Lismore is one of the most flood-prone urban centres in Australia.

Dr Margaret Cook, of Griffith University’s Australian Rivers Institute, reminds us that, until recently, 97 per cent of our disaster funding was spent on recovery, compared with 3 per cent invested in mitigating risk and building resilience.

That’s all wrong and must be reversed. Armies of volunteers – plus defence forces – emerge after disasters to help mop up. But Cook argues for an advance party that arrives before a disaster to help prepare by moving possessions, cleaning gutters and drains and pruning trees.

She advocates advanced evacuation, permanently relocating flood-prone residents, raising homes and rezoning to prevent further development in flood-prone areas.

“We must improve stormwater management, adopt new building designs and materials, and educate the public about coping with floods,” she says.

As we saw at the weekend, the defence forces have become a key part of the response to natural disasters. Great. Except that, according to a review in 2023, the Australian Defence Force is not structured or equipped to act as a domestic disaster recovery agency in any sustainable way.

It could be so structured, of course, though it might take a bob or two. And that’s before you get to the problem of houses that are uninsurable and insurance policies that are merely unaffordable.

The more you think about climate change, the more you realise it’s going to cost taxpayers a bundle.

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To make Medicare healthy again, the pollies must fix its symptoms

I don’t know if you noticed, but the federal election campaign began on Sunday. The date of the election has yet to be announced – it may be mid-April or mid-May – but hostilities have begun. And they began with an issue that’s been big in election campaigns for 50 years: Medicare.

On Sunday, Anthony Albanese revealed his election masterpiece, the knockout punch that would send Peter Dutton reeling, something Albo has had up his sleeve since December. You know how hard it’s getting to find a doctor who bulk-bills?

Well, Labor will fix that. Remember Bob Hawke’s famous election promise that “by 1990, no Australian child will be living in poverty”? Albo’s topped that. He’s promising that, by 2030, nine out of 10 GP visits will be bulk-billed. And all that for a mere $8.5 billion over four years in extra spending.

Politically, it was brilliant. Health is important to Australians, and they love being able to see a doctor without coughing up, so to speak. Poll after poll shows that when in comes to healthcare, Labor’s the party voters trust. And fixing bulk-billing ticks another box: cost of living.

It gets better. Dutton has form on bulk-billing. Do you remember when Tony Abbott won government in 2013? He’d promised not to cut various classes of government spending, but in his first budget he was making savings everywhere. He was going to introduce a “patient co-payment” of $7 a pop on visits to GPs.

There was so much public uproar and opposition in the Senate that most of the planned nasties were dropped. Guess who was minister for health at the time?

What a fabulous political tactician Albo is. A whole election campaign discussing the need to restore bulk-billing. Sorry, great move – not gonna fly. Within a few hours, Dutton had matched Labor’s offer “dollar for dollar”. The man who told us the Albanese government was “spending like a drunken sailor” said “see you, and raise you”. He’d be spending $9 billion over four years, thanks to $500 million for an already announced improvement in mental health.

Dutton had no time to consider the detail of Labor’s proposal, nor how he’d pay for it. By the way, how would he pay for it? Don’t worry, he’ll tell you later. How much later? Didn’t say.

Remember all those election campaigns when we agonised over debt and deficit? Where the media kept count of the cost of all the promises, and parties struggled to find ways to pay for it all?

Not this time. Neither man has an accountant’s streak. If Albanese keeps producing measures to help with the cost of living, and Dutton keeps matching him, this will be a costly campaign.

And now that the question of Medicare and bulk-billing has been neutralised, I doubt we’ll hear much about them again. So, since they matter far more to our lives than the incessant politicking, let’s take a closer look while we can.

Medicare – first introduced as Medibank by the Whitlam government in 1975 – is Australia’s first system of universal health care, in which everyone who needs help gets it, regardless of their ability to pay. Every rich country has a universal system, except the United States.

Under Medicare, the federal government pays about half the cost of the states’ public hospitals. In principle, bulk-billing ensures everyone can see a doctor when they need one. If in practice that’s too expensive, you can always wait in a public hospital’s emergency department.

Trouble is, universal health care is expensive and getting more so, which is a problem when politicians like appearing to cut taxes, and never increase them or introduce new ones. However, the government’s accountants know there’s more than one way to skin a budget.

When the $7 patient co-payment got rejected, the feds solved the problem by freezing the Medicare rebates to GPs rather than adjusting them for inflation. As Australia’s leading health economist Professor Stephen Duckett explains, this slowly forced GPs to abandon bulk-billing and introduce their own patient co-payments as their practice costs increased but their rebates didn’t.

It’s said that by the time Labor returned to office in 2022, bulk-billing was in freefall. Labor restored the indexation of Medicare rebates, then tripled the special incentive for GPs to bulk-bill pensioners and holders of healthcare cards, children and people in rural and remote areas.

This helped, but the increased payments weren’t enough to eliminate the gap between the rebate and the fees GPs were charging in metropolitan areas. The present average out-of-pocket payment is $46 a pop. (Bit more than $7, eh?)

At present, less than half of people are “always” bulk-billed when they see a GP. A further quarter of patients are “usually” bulk-billed.

Co-payments hit poor people harder than the rest of us, and I think they can be a false economy. The medical problems of people who don’t see the doctor because they can’t afford it can get a lot worse, which is both tough on them and tough on the taxpayer when they have to be rushed to hospital for operations and a long stay.

Albanese’s new promise is to further increase the incentives for GPs to bulk-bill, as well as to extend those incentive payments to cover all patients, not just pensioners, children and the others. His third change is to introduce an additional 12.5 per cent “practice payment” to those medical practices that bulk-bill all their patients. The changes would take effect from November 1.

Of course, Medicare has more problems than just out-of-pocket payments. The standard fee-for-service way of paying GPs makes sense for people with acute problems, but not the growing number with multiple chronic conditions (like a certain ageing journo).

Fortunately, Duckett thinks the promised changes could “start the necessary transition” away from fee-for-service in general practice.

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We may be short of leaders, but we're not short of false prophets

With this year’s federal budget supposedly brought forward to March 25, the seasonal peak in business bulldust has come early. Last week Canberra kicked off an annual ritual little noticed in real-world Australia, the call for “pre-budget” submissions on what the government should do in its budget.

I’ve never known any of that free advice to be acted on but, as all the participants in the ritual understand, that’s not the point. The point is that it’s a day out for Canberra’s second-biggest industry, the small army of business and industry lobby groups.

It’s an opportunity for them to send a signal to their fee-paying members back in the real world of Melbourne, Sydney and the other state capitals that they’re working their butt off, representing the industry’s interests, whispering in the politicians’ and econocrats’ ears trying to tone down any measures the industry doesn’t like, and rent-seeking as hard as they can go.

In their pre-budget submissions, you see the lobbyists demonstrating their greatest skill: taking their clients’ rent-seeking and repackaging it to make it look as though they want to fix the economy for us all. Consider last week’s first cab off the rank, from the Business Council.

It made five key points, the first of which was that the budget should “get government spending under control”. “High spending levels are contributing to higher inflation, including business costs, and the spending is unsustainable,” we’re told.

Translation: stop wasting money on the “care economy” – care of the disabled, aged care and childcare – including stopping the wages paid to the women who work in these mainly privately owned businesses being so low they can’t get enough workers. Why stop? So you can afford to cut business taxes.

Second, the budget must “cut red tape”. “We must be more aggressive in pursuing a deregulation agenda” like Donald Trump is doing.

Translation: business wants to be free to maximise its profits in any way it sees fit. Any government measures intended to stop business harming its workers, customers or bystanders is “red tape” which can be blamed for business’ failure to do all the wonderful things it keeps claiming it does.

And remember, any time the absence of regulation allows business to blow itself up – as in the global financial crisis – big business wants governments immediately on the job bailing us out at taxpayer expense. We must be allowed to be too big to fail. That is, we must be given a bet we can’t lose.

Third, the budget must “end the energy wars” caused by the “ongoing politicisation of energy”.

Translation: please forget the way business cheered when prime minister Tony Abbott abolished Labor’s carbon tax in 2014 and kicked off a decade of inaction. Similarly, please don’t mention how muted has been our criticism of Peter Dutton’s plan to abandon renewables and switch to Plan B, a government-owned nuclear system, which will take only a decade or two to get going.

Fourth, the budget should “fix our broken industrial relations system” which has “shifted the pendulum too far against employers, making it far less attractive to hire and grow”.

Translation: business liked it much better when the pendulum was too far against the workers and their unions. Everything was going fine in the economy until 2022, when Anthony Albanese began trying to even things up. This is why real wages began falling from June 2020 and the productivity of labour hasn’t improved for a decade.

Finally, the budget should “address our uncompetitive tax system” which is uncompetitive internationally and likely to become more so. This is “a major deterrent to attracting new investment”. We must have a tax system that “helps us rather than hinders us in bringing investment to our shores”.

Did I mention that a lot of the Business Council’s member companies are big foreign multinationals, including producers of fossil fuels? Our mining industry is about three-quarters foreign-owned.

So their local chief executives may speak with an Aussie accent but, on foreign investment and the wonders it will do for our economy, they’re batting for the other side.

The main reform the Business Council has long wanted is a cut in the rate of company tax, paid for by a hike in the rate of the goods and services tax. This, we’re told, would do wonders for the wellbeing of Australia’s punters.

The Business Council would never admit it, but the thing its members hate is our uncommon system of “dividend imputation and franking credits” designed to ensure that company shareholders don’t pay company tax.

Why do the chief executives hate it? Because only local shareholders get franking credits. Foreign shareholders don’t. Why not? Because we want to make sure that, when we allow foreign multinationals to make big profits from mining our minerals or whatever, we Aussies get our fair share of the spoils, including via the company tax they pay.

(That’s assuming they don’t use profit-shifting and other accounting tricks to minimise the company tax they pay. I remember when BHP’s marketing people kept reminding us it was The Big Australian. Their accountants told the Australian taxman it was The Big Singaporean. In truth, BHP is roughly three-quarters foreign-owned, mainly by Americans.)

When Paul Keating introduced dividend imputation in 1987 it was all the rage in other rich economies. But it fell out of fashion, allowing the big economies to follow a different fashion: cutting the rate of company tax to gain an advantage over the others.

The Business Council has gone on for years trying to con our government into joining this race to the bottom. It’s had no success, however, and isn’t likely to. Why? Because our Treasury isn’t that dumb. And because franking credits mean local shareholders (and voters) have nothing to gain from cutting the company tax rate.

And I can tell you this: should some future government be mad enough to do it, no one would ever bother to come back a few years later to see if, as promised, foreign investment had surged. No one’s ever game to audit the arguments for this or that tax “reform”. Why not? The letters BS come to mind.

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Everyone hates government spending - until someone tries to cut it

It seems government spending will be an issue we hear a lot of in this year’s federal election campaign. But remember this: much of what’s said will be influenced by partisanship, ideology, self-interest and populism.

Peter Dutton is making wild claims that need fact-checking. The business press is saying things that aren’t a lot better. And the debate will proceed according to an eternal political truth: while voters never mind you bad-mouthing government spending in general, as soon as you get specific, they start fighting back.

“I’ve always thought the money the government’s giving you was a great waste, but the money – and the tax breaks – I’m getting are vital to the economy.”

It’s obvious that some part of the $730 billion the federal government spends each year must be wasteful, just as some of the 365,000 people it employs must be in excess. But how much is some – at lot or a little? No one’s ever bothered to find out. Much easier to stick to unsubstantiated claims and exploiting voters’ prejudices.

Dutton has been laying it on thick. When he made Senator Jacinta Nampijinpa Price shadow minister for “government efficiency”, he claimed the Albanese government “has spent money like drunken sailors”.

So what spending would he cut? He’ll tell us later. We do know, however, that Albanese & Co have increased the number of federal public servants (not the same thing as total federal employees) by 36,000.

This addition of “Canberra public servants”, Dutton has said, was “wasteful” and meant the public service was now “bloated and inefficient”. It’s an example of “wasteful spending that is out of control”. “We’re not having 36,000 additional public servants in Canberra”.

So is he going to sack them all? He’d be happy for you to think so, but he hasn’t actually promised he would. What he has said is he’d get rid of diversity and inclusion positions, along with “change managers” and “internal communication specialists”.

Whether that would be a good or bad thing, the saving would be chicken feed.

Dutton has tried hard to give the impression all the extra workers are in Canberra. Not true. The proportion of all federal public servants in Canberra has actually fallen to 37 per cent. Most of the extra people are working in frontline services around the states, helping people using the national disability scheme, visiting Centrelink and so forth.

Andrew Podger, a former top Canberra bureaucrat, notes that, at less than 0.7 per cent, the federal public service is now smaller than it was in 2008 as a proportion of the population, with its share of the total Australian workforce having fallen to less than 1.4 per cent.

Dr Michael Keating, a former topmost bureaucrat, says there’s plenty of evidence that the previous Coalition government was underfunding many services. Hospital waiting lists blew out, public schools didn’t get the resources needed to do their job adequately according to the Gonski standards, waiting times for welfare payments and for veterans’ compensation were far too long, and delays in processing visa applications led to more unauthorised immigrants.

Ending or reducing these policy-caused delays explains most of Albanese’s increased government spending. Sound like waste to you?

Keating notes that, according to the latest official estimates, federal government spending this financial year will be almost the same as it was in the Morrison government’s last year, when measured as a proportion of gross domestic product. Sound profligate to you?

He further notes that, when you take total spending by all levels of government as proportion of GDP, Australia is actually the lowest among the 38 members of the Organisation for Economic Co-operation and Development, save for Ireland, South Korea and Switzerland.

And get this: as a proportion of national income (GDP), our spending by all levels of government is more than 4 percentage points lower than the average for all OECD countries. Remind you of a drunken sailor, does it?

According to the opposition’s shadow minister for the public service Jane Hume, “you don’t grow the economy by growing the size of government. Every public-sector job has to be paid for by a private-sector worker”.

I hope Hume is smart enough to know she’s talking nonsense and is just trying to mislead those people silly enough to believe her. This is a defence of private-good/public-bad ideology that makes no sense. Apart from her inference that people who work for the government don’t have to pay taxes, it’s as silly as saying Woolies and Coles don’t add to the economy because every cent they earn comes from their customers’ pockets.

If we left health, education, law and order and all the rest completely to the private sector, do you reckon we’d have an economy that was bigger or smaller than we have today?

Back to Dutton. He says “a major cause of homegrown inflation is rapid and unrestrained government spending”. If it’s the huge spending by federal and state governments during the pandemic he’s referring to, that’s no more than the economists’ conventional wisdom.

But I guess he’s referring to the more recent spending by Albanese & Co. And get this: ignore the wild exaggeration and the business press has been saying much the same thing for months.

Although the argument has been disavowed by Reserve Bank governor Michele Bullock, the business press has been arguing that the government’s spending, especially that intended to ease cost-of-living pressure by subsidising electricity prices and increasing rent assistance for pensioners, is causing consumer demand to be stronger than otherwise and keeping the jobs market stronger than otherwise, so has allowed businesses to keep increasing their prices.

Fundamentally, the business press is right. The way to get inflation down faster would have been to hit the economy harder, with higher interest rates and zero discretionary spending by the government. Instead, the Reserve and the government took the compromise position by aiming for a soft landing and a consequent slower return to low inflation.

I get why the press hasn’t wanted to spell out more clearly its preference for the tougher choice. What I don’t get is why it thinks its business customers would have preferred a full-blown recession.

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The secret to better health and less obesity is a tax

By MILLIE MUROI, Economics Writer

If you’re like me, chances are that during the silly season you indulged in a bit more of the guilty pleasures than usual. I would make a bet though (and hit bingo about 90 per cent of the time) that it wasn’t tobacco that you reached for, but sugary treats – and maybe a bit of alcohol.

The rates at which we tax tobacco might have you thinking that smoking is among the biggest health risks we face. But with the daily smoking rate down to about one in 10 people, it’s things like obesity and diabetes that have grown to become our biggest health problems.

Obesity has tripled in Australia since 1980, and so has diabetes over the past 25 years. In 2022, one in three Australian adults was obese and another one in three overweight, while about one in 20 had diabetes.

And as Grattan Institute health program director Peter Breadon and senior associate Jessica Geraghty have highlighted, one of the heftiest reasons we have such high rates of obesity and type 2 diabetes – which makes up more than 85 per cent of diabetes cases – is that we consume far too much sugar.

You might not realise it, but on average, Australians consume half a kilogram of sugar each week – much of it invisible. That lolly snake or biscuit you reach for in the afternoon might be obvious culprits, but large quantities of sugar also swim around in soft drinks and even savoury products such as pasta sauces and pre-made soups. “Popular drinks such as Solo and Coke have as much as 10 teaspoons of sugar in just one 375-millilitre can,” Breadon says.

Our high sugar consumption puts us at higher risk of diabetes: a disease that contributes to one in 10 Australian deaths, leaves thousands of us sick or with a disability, and costs billions of dollars a year to taxpayers. In 2018, obesity alone was estimated to cost nearly $12 billion in direct health and indirect community costs.

So, what can we do to curb our sweet tooth? Make it more costly. In an ideal world, we could factor in all the health risks and cut back our consumption without the need for additional incentives – or disincentives.

But sugar sneaks around under a bunch of aliases – high fructose corn syrup, glucose or molasses to name a few – making it hard to spot for those hoping to squeeze some of it out of their diet. And it’s easy for us to reach for a sugar hit, sometimes without realising it, kicking the can down the road when it comes to considering the longer-term consequences.

That’s unless we put an upfront price on the damage – a tax on sugary drinks would be a good start. Why? Because sugary drinks make up nearly one-quarter of our daily added-sugar intake – more than any other major types of food. Sugary drinks are also especially harmful because they’re often sunk quickly, cause rapid spikes in blood glucose and insulin, and don’t do much to make people feel full.

Breadon suggests a tiered tax in which drinks with the most sugar would be slugged 60¢ per litre, while low-sugar drinks would face no tax – along with one year’s notice to give manufacturers time to change their recipes.

It’s not an immediate fix for our health problems, but there are promising signs already. More than 100 countries, including Britain, France and Portugal, have sugary drink taxes in place – and they are working.

They make people less thirsty for sugary drinks and they prod manufacturers to pour less sugar into their drinks. Four years after Britain introduced a sugary drinks tax, just one in 12 products had more than eight grams of sugar in every 100 millilitres of liquid – down from one in three before the tax. There have also been studies that show sugary drinks taxes have trimmed obesity among girls, reduced dental decay and cut the number of children having teeth taken out in hospital.

Breadon and his colleagues at Grattan estimate their proposed tax for Australia would reduce the amount of sugary drinks we consume by about 275 million litres a year – enough to fill 110 Olympic swimming pools.

It would mean Australians would ingest nearly three-quarters of a kilogram less sugar each year thanks to manufacturers cutting down their sugar use and consumers opting for the cheaper option: low or no sugar drinks.

Disadvantaged Australians, who are the hardest hit by obesity, would be the biggest winners, Breadon says. And the financial drain on households and the wider industry, including sugar farmers, would be fairly small given about 85 per cent of Australia’s raw sugar is exported.

While the main goal of a sugary drinks tax would be to improve our health, it would also benefit the government’s bottom line (which has suffered in recent years as tax revenue from tobacco has plummeted). If introduced today, Grattan estimates, the sugary drinks tax would raise nearly $500 million in the first year, while also generating savings by reducing the demand for healthcare.

While the government has been helping Australians living with diabetes, including through listing new insulin injections, such as Fiasp, on the Pharmaceutical Benefits Scheme, Health Minister Mark Butler has no plans for a sugar tax.

Shadow Health Minister Anne Ruston has said the Coalition also doesn’t support a sugar tax, saying there were better ways to encourage healthy eating and preventive health, without hurting the hip pockets of families.

While there needs to be other preventive measures in place, such as stronger labelling regulations, a tax on sugary drinks is the cheapest and easiest to implement. The government’s new year resolutions should include the boldness to consider a sugar tax, rather than kicking the drink can down the road.

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How Albanese is tighten up on tax-dodging multinational companies

By MILLIE MUROI, Economics Writer

Earlier this week, a crucial piece of legislation made its way through parliament. It didn’t receive a lot of fanfare, but it’s a long-overdue tweak to our tax system.

You probably know companies such as Amazon, Apple and Microsoft. They’re multinational corporations that make hundreds of billions of dollars in profit every year, some of it right here in Australia – and probably from you as a customer.

Yet, the taxes they pay are not always proportional to the profit they’re pocketing. That’s something laws passed earlier this week seek to change.

Apple raked in an income of more than $12 billion in the 2022-23 period, according to the government’s transparency report. But it only paid 1 per cent tax on that income. How is that possible?

While the company tax rate in Australia is 30 per cent for most businesses with a turnover of $50 million or more, firms can reduce their taxable income and, therefore, the amount of tax they pay.

Some deductions are fair and reasonable: for example, claiming deductions for day-to-day business expenses including materials you need to supply a good or service. Other strategies are … questionable.

A business like Apple may not be breaking the law, but it can take advantage of different tax rates across the world.

Australia’s company tax is among the highest in the world. According to the Organisation for Economic Co-operation and Development, we were only trumped by one country: Colombia, where companies paid about one-third of their income in tax.

By contrast, countries such as Hong Kong, Singapore and the United Arab Emirates have much smaller company tax rates, making them attractive tax havens. Companies can sneakily shift their income to these countries or use cunning tactics to play the system to their favour.

Former economics professor turned Assistant Minister for Competition, Charities and Treasury Dr Andrew Leigh says the share of multinational companies’ profits passing through tax havens has soared. Back in the 1970s, virtually no multinational profits went through tax havens, he says. “Now it’s up to about 40 per cent.”

Stronger reporting requirements and wider availability of data have made it easier to spot when a company is skirting the rules, acting as a deterrent for businesses hoping to fly under the radar with sneaky tactics.

And in 2017, the Australian Taxation Office found itself in a legal battle in the ongoing crusade against companies paying less tax through loopholes in the system, coming out on top against resource giant Chevron.

The Federal Court ruled against Chevron’s use of an arrangement called related-party finance – commonly used by multinationals to reduce the tax they have to pay in Australia.

It’s where the local entity of a multinational firm borrows funds from its offshore counterpart, which sets much higher interest rates than would usually be reasonable. That interest flows back to the offshore part of that company and allows the Australian branch to claim higher tax deductions because interest payments can be a tax-deductible expense.

Chevron’s Australian subsidiary had taken a $4 billion loan from its US parent company to develop Western Australian gas reserves. This added to the local subsidiary’s debt pile, but allowed it to sidestep Australia’s 30 per cent company tax rate, with those interest payments instead being taxed in the US where the corporate tax rate was lower. In 2017, Chevron had paid no company tax in five of the previous seven financial years.

The Federal Court eventually ruled Chevron’s Australian subsidiary should not be allowed to claim interest on its borrowings from the rest of Chevron Group as if they were two standalone companies. In the 2022-23 period, Chevron paid more than $4 billion in tax.

However, Mark Zirnsak, secretariat for the Tax Justice Network, says that ruling has not closed the loophole entirely. Instead, he says Chevron got too greedy. “It’s still legal to claim the interest rate payment to yourself like Chevron did,” he says. “What the ATO contested was the rate of interest.”

Get it? If Chevron had just charged itself a standard rate of interest – similar to a bank – there would have been no issues.

Related party finance is just one of the many tricks multinationals use to dodge the Aussie taxman.

There’s also something called “transfer pricing” which companies such as mining giant BHP have been penalised for. For years, BHP was selling Australian iron ore and coal to its Singapore operation. Now, there’s nothing wrong with that – except that BHP was then selling these commodities for much more from its Singapore marketing hub to other nations.

Since Singapore has a much lower corporate tax rate, BHP was reducing its tax bill despite the coal and iron ore originally coming from Australia.

This week, the Australian government finally joined the growing army of countries – more than 135 so far – that have agreed to a global minimum tax of 15 per cent: A company with more than $1.2 billion in global revenue must pay at least 15 per cent tax across its global operations. Otherwise, the countries they’re doing business in can now get a bite of its untaxed profits.

This is supposed to deter companies from creating artificial structures in low or no-tax territories, such as the Cayman Islands, in a bid to avoid paying taxes in places where they actually do their business.

It’s also supposed to prevent a “race to the bottom” where countries compete for the lowest company tax rates to attract businesses. How? Because if countries charge company tax rates below 15 per cent, then other countries can impose “top-up” taxes.

Australia, for example, can now apply a “top-up tax” on a multinational operating in Australia if that multinational pays less than a 15 per cent tax rate wherever it does business globally.

Zirnsak says the 15 per cent rate is too low, but a positive change for now.

“The Biden administration would have liked to push it higher, and the Europeans were pushing for it to be lower, so at the end of the day, 15 per cent was a compromise,” he says.

“It’s no longer going to be a game where you can simply try and cheat the governments of the countries you’re actually doing business in through your artificial legal structures and working with governments that are happy to assist you in tax avoidance and profit.”

Leigh says the next step for the government is to crack down on tech giants, which have been more difficult to pin down. That’s partly because of the virtual nature of their services which has made taxing them properly an elusive exercise globally.

Of course, it’s a long-overdue change, and there’s lots left to do. But shifty multinational taxation tactics are being squeezed out.

It’s not just the big guys playing sneaky games. But as Leigh says, the local cafe you bought your coffee from today probably doesn’t pay an accountant exorbitant amounts to figure out how to minimise their tax.

“They don’t sit down at their weekly planning meeting and decide which country they want to pay tax in to minimise their tax.”

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The best thing our pollies have done in decades is also the worst

With the coming departure from politics of Bill Shorten, it’s time to talk about his former bouncing baby, and now obese adult, the National Disability Insurance Scheme. To his credit, his final act has been to put it on a strict diet.

The NDIS is one huge contradiction. Its introduction, in 2013, is Julia Gillard’s short-lived government’s greatest achievement, and Labor’s biggest extension of our welfare state since the introduction of Medicare in 1984.

Before the scheme began, the physically and mentally disabled received some help from state governments, but not a lot. To a great extent, the day-to-day care of the disabled was left to their families.

Under the NDIS, however, the lives of hundreds of thousands of Australians living with a disability have been transformed. They’ve been given greater choice and control over the services and supports they receive. More of their needs are being met, with more of their care being provided by paid workers and less left to family members.

People with a disability are given a personalised “package” – a budget to cover the cost of specified goods and services they need. It sounds like a great improvement, and for many thousands of people it has been.

So, what’s the problem? It’s costing taxpayers far more than ever expected. It’s supporting more people than were expected to need help – more than 600,000 – and covering more forms of disability than intended.

The scheme’s cost is rising far faster than expected. It’s become the second-biggest item of spending in the federal budget, after the age pension. It’s expected to cost $49 billion this financial year, rising to $61 billion in three years’ time.

In 2014, the Medicare levy was increased from 1.5 per cent to 2 per cent of individuals’ taxable income to cover the cost of the scheme. This has proved wildly inadequate. The scheme’s cost has been rising by an astonishing 11 per cent a year.

This was clearly unsustainable. Since Labor returned to power in 2022, Shorten – the man who championed and initiated the scheme – has been struggling to control its ever-mounting cost, and thereby secure its future.

Last month, after reaching agreement with the states and gaining the support of the opposition, Shorten put through the Senate changes in the scheme’s rules intended to reduce the growth in its cost to a mere 8 per cent a year. The scheme will support fewer forms of disability and do more to limit overcharging by service providers. The states will be required to accept more responsibility.

As proof that costs are coming under control, Shorten has said the scheme ended last financial year about $600 million under budget.

But how has such a well-intentioned scheme been such a disaster financially? It’s been a victim of the misguided crusade for smaller government – also known as neoliberalism – and its ideology that the public sector is always inefficient, whereas the private sector is always efficient.

The great misstep of our age has been the privatisation of many government-owned businesses and the “outsourcing” of taxpayer-funded services to private providers.

The proposal for a disability scheme was given a big tick by the Productivity Commission because a market could be established where private businesses competed to provide the goods and services to individuals using government money. This was ideology-based delusion. Governments can’t wave around the cash and create out of thin air a “market” that has any of the self-controlling properties described in economics textbooks.

Many people with disabilities can act like an ordinary consumer, making sure they get the good or service they need at a fair price, but many can’t, or don’t. Even where they have the understanding, they don’t have the same motivation to spend taxpayers’ money with the care they spend their own.

Where people’s disability means they’re unable to pick and choose, the government can pay someone to help them make their choices. But that adds to the cost. And who can be sure that person’s own interests don’t get in the way of them doing the best by their customer?

Even when most of these helpers do the right thing, are they highly motivated to ensure no more taxpayers’ money is spent than necessary? And that’s before you get to the actual providers of goods and services to the disabled. Since their prices are being paid from the bottomless pit of the government’s coffers, what’s to stop them providing more services than are strictly required, or padding out their prices, or even charging the government for services they didn’t provide?

When the feds took over responsibility for the disabled, the states happily stopped providing those limited services they were providing. So where they had, for example, employed providers in regional centres, they ceased to. Did a market of self-employed providers spring up to fill the vacuum? No, it didn’t.

The other hard lesson we’ve learnt is that the bureaucrats administering the scheme aren’t much good at detecting and preventing overservicing, overcharging and outright fraud.

Let’s hope that changes.

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Albo’s quiet quest: stop wasting so much taxpayers’ money

If you’ve gained the impression that Anthony Albanese’s government is one that knows what it should be doing to fix our various problems, but lacks the courage to do anything that might be controversial – even just including questions in the census about people’s sexual orientation – I can’t tell you you’ve got the wrong idea.

What people outside Canberra often don’t realise is how obsessed governments, of either colour, become with how their opponents will react to anything they do or say. Albo seems to have a bad case of this.

It’s something economists understand from their study of the behaviour of duopolies. Albanese has forgotten the golden rule of competition laid down by the social psychologist Hugh Mackay: to compete successfully, focus on your customers, not your competitors.

But while Albo’s lack of courage keeps hitting the headlines, it’s not the whole story of this government. Behind the scenes, it’s gearing up to do a better job of ensuring that the many billions of taxpayers’ money it spends each year are more effective in improving our lives.

Governments don’t deliberately waste our money. Almost all of it is spent with the intention of making us safer, improving our health, adding to our education, ensuring we don’t starve because we can’t find a job or are too old to work, or just to help us travel from A to B more easily.

But while almost all government spending is done with good intentions, a surprising amount of it does little to achieve its stated objectives. Why? Because we’re spending on things we’ve always spent on, doing things the way we’ve always done them. Because we’re spending on new things just in the fond hope this will make things better. And because our spending choices are guided by ideology, anecdotes or – and this one’s a favourite – because it’s spending you know will give voters the impression things are improving.

After decades of pursuing the quest of making government smaller – by privatising government-owned businesses and paying private businesses to deliver government-funded services – Albanese and Treasurer Jim Chalmers are on a quest to make government better.

They’ve set up within the Treasury the Australian Centre for Evaluation, which will co-operate with other departments in assessing government spending programs to see how well they are achieving their objectives. The goal is to build a body of evidence of what spending works and what doesn’t. Spending programs should be based on such evidence, not on hunches and hopes.

Last week, Treasury secretary Dr Steven Kennedy gave a long speech outlining his department’s commitment to “evidence-informed policymaking”.

For many years, the medical profession has been committed to using “randomised controlled trials” to evaluate the effectiveness of medicines and medical procedures. These involve experiments where subjects are divided into two groups selected at random. One group is given the pill or the procedure, then compared with the “control” group to see what difference it made.

Now the econocrats want to use this technique to evaluate government spending. And on Tuesday Dr Andrew Leigh, the assistant minister for competition, charities and treasury, gave a speech on evidence-based policing.

Controlled experiments have been used to study the effectiveness of police behaviour in America for many years. For instance, it’s widely believed that the use of body cameras will improve the way police treat members of the public.

But a study involving more than 2000 police officers in Washington DC found that wearing cameras had an insignificant effect on police use of force and on civilian complaints. Their benefit was in providing better evidence in court.

In Australia, the Queensland community engagement trial tested the effect of training in “procedural justice” on citizens’ views of the police. Traffic police were taught to use a script when speaking to drivers stopped for random breath testing.

The study found it improved drivers’ views of the police, though they were no more likely to obey officers’ directions. (But I doubt if many people disobey the coppers, no matter how impolite they are.)

Many randomised trials involving the police are being conducted in Victoria. One seeks to reduce the number of people who fail to appear in court after being summonsed.

It tests the effect of providing simpler information, replacing a 2200-word, seven-page document with a 60-word statement and links to support services from Victoria Legal Aid and the Victorian Aboriginal Legal Service.

The initial results show that the shorter document leads to better court attendance, and thus fewer arrests and incarcerations of people who don’t turn up. The results of many more experiments are on the way.

Meanwhile, the Brits have set up a What Works Centre for Crime Reduction, and Leigh hints that we may do something similar in Australia.

Policing is just one example, of course. It all seems pretty laborious, but if it leads to less ineffective spending and better government it’s a worthwhile endeavour. And not before time.

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Forget smaller government, let's shoot for better government

We pay our taxes, then governments spend them. But where does all that money go? And how much of it is wasted? Well, where it goes is no secret, but how much of it does little to benefit us is something we don’t really know. Why not? Because we put so little effort into finding out.

In 2022-23, the federal and state governments spent almost $890 billion. Nearly 33 per cent of that went on social security payments; 21 per cent on healthcare (hospitals, doctors, medicines); 15 per cent on education (from pre-primary to university); 5 per cent each on defence and law and order; plus transport, the environment, housing, recreation and culture, and much else.

People who resent the taxes they pay like to think it goes to council workers leaning on shovels and public servants sitting around drinking tea, but really, they should be thinking of doctors, nurses and ambos; teachers and lecturers; soldiers, sailors and fliers, coppers, firies and garbos.

Those people are busy almost all the time doing what they’re paid to do. If some government departments once were overstaffed, years of cost-cutting should have fixed that.

No, the trouble isn’t that workers in the public sector aren’t working hard. It’s that they can be working away on programs that seem like they should be delivering for taxpayers, but aren’t.

Consider these four plausible propositions. First, parents are more likely to get their kids to school if threatened with the loss of government payments. Second, testing students’ literacy is an accurate way to assess their ability.

Third, early childhood staff have all the skills they need. Fourth, a health program designed by both educators and their students will be more likely to discourage risky behaviours.

Sorry, turns out none of those programs worked.

In 2016, researchers discovered that the Northern Territory’s efforts to improve school attendance by making welfare payments conditional on getting kids to show up had no effect on attendance.

In Dubbo, other researchers found that if you made a literacy test more culturally relevant by changing a story about lighthouses to one about the dish-shaped telescope in Parkes, you halved the gap between the scores of Indigenous and non-Indigenous kids.

In NSW, researchers found that giving early childhood staff a half-year professional development program boosted the achievement of their kids, especially their literacy.

Yet more researchers – in Brisbane, Perth and Sydney – found that, despite the students’ involvement in designing the Health4Life program, it had no effect on alcohol use, smoking, screen time, physical inactivity, poor diet or poor sleep.

What all these research efforts had in common was that they evaluated these programs using RCTs – randomised controlled trials. This involves using the toss of a coin to divide similar participants in the trial into two groups. One group gets the treatment and the other “control” group doesn’t. You then compare the two, confident that any differences between them have been caused by your intervention.

Point is, this is a far more rigorous way of judging whether government spending programs achieve the benefits you were hoping for, rather than just doing a pilot program and deciding whether it seems to have worked.

But these four careful trials are the exception, not the rule. A study by the Committee for Economic Development of Australia examined a sample of 20 federal government programs worth more than $200 billion. It found that 95 per cent of them hadn’t been properly evaluated. The committee’s examination of state and territory government evaluations reported similar results.

“The problems with evaluation start from the outset of program and policy design,” it said. Across the board, the committee estimated that fewer than 1.5 per cent of government evaluations use a randomised design.

Similarly, a Productivity Commission report in 2020 into the evaluation of Indigenous programs concluded that “both the quality and usefulness of evaluations of policies and programs … are lacking”.

This is in marked contrast to the medical profession, where controlled trials are standard in the evaluation of medical operations. These have demonstrated that the treatments preferred by experts were often worse for patients.

For instance, radical mastectomies for breast cancer disfigured 500,000 women while doing nothing to increase their odds of survival. Many treatments found to be harmful had been supported by expert opinion and low-quality before-and-after studies.

If you can feel a commercial message coming on, you’re right. Dr Andrew Leigh, former economics professor and now Assistant Minister for Treasury and many other bits and bobs, has been championing the use of randomised controlled trials in government program evaluation for years.

And last year the Albanese government set up within Treasury the Australian Centre for Evaluation, with Leigh responsible. It aims to expand the quality and quantity of program evaluation in co-operation with other government departments. Its leader, Eleanor Williams, has a modest budget and a staff of more than a dozen. A key principle is that high-quality evaluation of a program’s impact needs to be built into the design of the program from the get-go. The centre will also collaborate with evaluation researchers outside government.

And now the Paul Ramsay Foundation, Australia’s largest charitable foundation, is providing a $2.1 million round of grants for people to run randomised trials on important social problems. The centre, which has been given access to a wealth of “administrative data” – statistical information collected by government departments – will make this available to academics and others receiving grants.

I think this is all to the good. And about time. Econocrats went for decades supporting the push for smaller government, which led to the privatising of many government-owned businesses (including a national electricity market now dominated by three big companies) and much outsourcing of government services to private businesses – which, as should have been expected, have proved highly efficient at increasing their profits.

Great. What we could use now is a lot more attention to achieving better government.

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Despite what we're led to believe, tax cuts are no free lunch

Isn’t it wonderful that the Albanese government – like all its predecessors – has been willing to spend so many of our taxpayers’ dollars on advertising intended to ensure no adult in the land hasn’t been reminded, repeatedly, about the income tax cuts that took effect on Monday, first day of the new financial year?

But believe me, if you rely only on advertising to tell you what the government’s up to with the taxes you pay – or anything else, for that matter – you won’t be terribly well-informed. The sad truth is there’s a lot of illusion in the impressions the pollies want to leave us with when it comes to tax and tax cuts.

For instance, none of those ads mentioned the eternal truth that, when we have income tax scales that aren’t indexed annually to take account of inflation, the taxman gradually claws back any and every tax cut the pollies deign to give us. And this slow clawback process – known somewhat misleadingly as “bracket creep” – begins on the same day the tax cuts begin.

So readers of this august organ are indebted to my eagle-eyed colleague Shane Wright, who asked economists at the Australian National University to estimate how long it would take these tax cuts to be fully clawed back, using plausible assumptions about future increases in prices and wages.

A tax cut reduces the average rate of income tax we pay on the whole of our taxable income. A middle-income earner’s average tax rate will fall from 16.9 cents in every dollar to 15.5¢. The economists calculate it will take only two or three years for inflation to have lifted most taxpayers’ average tax rate back up to where it was last Sunday.

So that’s the terrible truth the pollies rarely mention. But don’t let that make you too cynical about the tax-cut game. Just because this week’s tax cut will have evaporated in a few years’ time doesn’t mean it’s worthless today. Actually, as tax cuts go, this is quite a big one. Someone earning $50,000 a year is getting a cut worth almost $18 a week. At $100,000 a year, it’s worth almost $42 a week. And on $190,000 and above, it’s worth $72 a week.

Is that enough to completely fix your cost-of-living problem? No, of course not. But if you think it’s hardly worth having, please feel free to send your saving my way. I’m not too proud to take another $18 no one wants.

Remember, too, that had Anthony Albanese not broken his promise in January and fiddled with the stage 3 tax cuts he inherited from Scott Morrison, most people’s saving would have been a lot smaller, even non-existent.

Everyone earning less than $150,000 a year got more, while those of us struggling to make ends meet on incomes above that got a lot less. In my case, about half what I’d been led to expect.

But the politicians’ illusions are built on our self-delusions. Our biggest delusion is that government works quite differently to normal commercial life. We know that when you walk into a shop you have to pay for anything you want. If you want the better model, you pay more.

Somehow, however, we delude ourselves that governments work completely differently. That the cost of the services we demand from the government need to bear no relationship to the tax we have to pay.

The politicians actively encourage this delusion in every election campaign by promising us this or that new or better service without any mention that we might have to pay more tax to cover the cost of the improvement.

Any party foolish enough to mention higher taxes gets monstered – first by the other side and then by the voters. No one wants to admit that what we get can never be too far away from what we pay.

For the near-decade of the Liberals’ time in government, they drew many votes by branding Labor as “the party of tax and spend” while claiming they could deliver us the services we want while keeping taxes low.

This was always a delusion. So they squared the circle by using various tricks they hoped we wouldn’t notice, such as underspending on aged care, allowing waiting lists to build up and secretly ending the low- and middle-income tax offset, thus giving many people an invisible tax increase of up to $1500 a year.

But the main trick they relied on was the pollies’ old favourite: bracket creep.

Get it? When we delude ourselves that we can have the free lunch of new and better services without having to pay more tax, they resort to the illusion that income tax isn’t increasing by letting inflation imperceptibly increase our average tax rate.

This is the tax-cut game. As an economist would say, our “revealed preference” is for no explicit tax increases, but for tax to be increased in ways we don’t really notice and for tax cuts to be only temporary.

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The RBA has squeezed us like a lemon, but it's still not happy

Let me be the last to tell you the economy has almost ground to a halt and is teetering on the edge of recession. This has happened by design, not accident. But it doesn’t seem to be working properly. So, what happens now? Until we think of something better, more of the same.

Since May 2022, the Reserve Bank has been hard at work “squeezing inflation out of the system”. By increasing the official interest rate 4.25 percentage points in just 18 months, it has produced the sharpest tightening of the interest-rate screws on households with mortgages in at least 30 years.

To be fair, the Reserve’s had a lot of help with the squeezing. The nation’s landlords have used the shortage of rental accommodation to whack up rents.

And the federal government’s played its part. An unannounced decision by the Morrison government not to continue the low- and middle-income tax offset had the effect of increasing many people’s income tax by up to $1500 a year in about July last year. Bracket creep, as well, has been taking a bigger bite out of people’s pay rises.

With this week’s release of the latest “national accounts”, we learnt just how effective the squeeze on households’ budgets has been. The growth in the economy – real gross domestic product – slowed to a microscopic 0.1 per cent in the three months to the end of March, and just 1.1 per cent over the year to March. That compares with growth in a normal year of 2.4 per cent.

This weak growth has occurred at a time when the population has been growing strongly, by 0.5 per cent during the quarter and 2.5 per cent over the year. So, real GDP per person actually fell by 0.4 per cent during the quarter and by 1.3 per cent during the year.

As the Commonwealth Bank’s Gareth Aird puts it, the nation’s economic pie is still expanding modestly, but the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk.

But if we return to looking at the whole pie – real GDP – the quarterly changes over the past five quarters show a clear picture of an economy slowing almost to a stop: 0.6 per cent, 0.4 per cent, 0.2 per cent, 0.3 per cent and now 0.1 per cent.

It’s not hard to determine what part of GDP has done the most to cause that slowdown. One component accounts for more than half of total GDP – household consumption spending. Here’s how it’s grown over the past six quarters: 0.8 per cent, 0.2 per cent, 0.5 per cent, 0.0 per cent, 0.3 per cent and 0.4 per cent.

A further sign of how tough households are doing: the part of their disposable income they’ve been able to save each quarter has fallen from 10.8 per cent to 0.9 per cent over the past two years.

So, if the object of the squeeze has been to leave households with a lot less disposable income to spend on other things, it’s been a great success.

The point is, when our demand for goods and services grows faster than the economy’s ability to supply them, businesses take the opportunity to increase their prices – something we hate.

But if we want the authorities to stop prices rising so quickly, they have only one crude way to do so: by raising mortgage interest rates and income tax to limit our ability to keep spending so strongly.

When the demand for their products is much weaker, businesses won’t be game to raise their prices much.

So, is it working? Yes, it is. Over the year to December 2022, consumer prices rose by 7.8 per cent. Since then, however, the rate of inflation has fallen to 3.6 per cent over the year to March.

Now, you may think that 3.6 per cent isn’t all that far above the Reserve’s inflation target of 2 per cent to 3 per cent, so we surely must be close to the point where, with households flat on the floor with their arms twisted up their back, the Reserve is preparing to ease the pain.

But apparently not. It seems to be worried inflation’s got stuck at 3.6 per cent and may not fall much further. In her appearance before a Senate committee this week, Reserve governor Michele Bullock said nothing to encourage the idea that a cut in interest rates was imminent. She even said she’d be willing to raise rates if needed to keep inflation slowing.

It’s suggested the Reserve is worried that we have what economists call a “positive output gap”. That is, the economy’s still supplying more goods and services than it’s capable of continuing to supply, creating a risk that inflation will stay above the target range or even start going back up.

With demand so weak, and so many people writhing in pain, I find this hard to believe. I think it’s just a fancy way of saying the Reserve is worried that employment is still growing and unemployment has risen only a little. Maybe it needs to see more blood on the street before it will believe we’re getting inflation back under control.

If so, we’re running a bigger risk of recession than the Reserve cares to admit. And if interest rates stay high for much longer, I doubt next month’s tax cuts will be sufficient to save us.

Another possibility is that what’s stopping inflation’s return to the target is not continuing strong demand, but problems on the supply side of the economy – problems we’ve neglected to identify, and problems that high interest rates can do nothing to correct.

Problems such as higher world petrol prices and higher insurance premiums caused by increased extreme weather events.

I’d like to see Bullock put up a big sign in the Reserve’s office: “If it’s not coming from demand, interest rates won’t fix it.”

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It's slowing the spin doctors' spin that keeps me busy

Do you remember former prime minister John Howard’s ringing declaration that “we will decide who comes to this country and the circumstances in which they come”? It played a big part in helping him win the 2001 federal election. But it’s only true in part.

The job of economic commentators like me is supposed to be telling people about what’s happening in the economy and adding to readers’ understanding of how the economy works.

But the more our politicians rely on spin doctors to manipulate the media and give voters a version of the truth designed always to portray the boss in the most favourable light, the more time I have to spend making sure our readers aren’t being misled by some pollie’s silken words.

These days, I even have to make sure our readers aren’t being led astray by the economics profession. For the first time in many years, I’ve found myself explaining to critical academic economists that I’m a member of the journos’ union, not the economists’ union.

Like many professions, economists are hugely defensive. And they like to imagine my job is to help defend the profession against its many critics. Sorry, I’m one of the critics.

My job is to advise this masthead’s readers on how much of what economists say they should believe, and how much they should question.

It’s not that economists are deliberately misleading, more that they like to skirt around the parts of their belief system that ordinary people find hard to swallow.

And then there’s the increasing tendency for news outlets to pick sides between the two big parties, and adjust their reporting accordingly. My job is to live up this masthead’s motto: Independent. Always.

So, back to Howard’s heroic pronouncement. It’s certainly true that “we” – the federal government – decide the circumstances in which people may come to Australia. If you turn up without a visa, you’ll be turned away no matter how desperate your circumstances. If you come by boat, your chances of being let in are low.

But if you come by plane, with a visa that says you’ll be studying something at some dodgy private college when, in truth, you’re just after a job in a rich country, in you come. If we’ve known about this dodge, it’s only in the past few weeks that we’ve decided to stop it.

No, the problem is, if you take Howard’s defiant statement to mean that we control how many people come to this country, then that’s not true. We decide the kinds of people we’ll accept, but not how many.

There are no caps because, for many years, both parties have believed in taking as many suitable immigrants as possible. It’s just because the post-COVID surge in immigration – particularly overseas students – has coincided with the coming federal election that the pollies are suddenly talking about limiting student visas.

But remember, the politicians have form. Knowing many voters have reservations about immigration, they talk tough on immigration during election campaigns, but go soft once our attention has moved on, and it’s all got too hard.

It’s a similar thing with Anthony Albanese’s Future Made in Australia plan. Polling shows it’s been hugely popular with voters. But that’s because they’ve been misled by a clever slogan. It was designed to imply a return to the days when we tried to make for ourselves all the manufactured goods we needed.

But, as I’ve written, deep in last month’s budget papers was the news that we’d be doing a bit of that, but not much. It’s just a great slogan.

On another matter, have you noticed Treasurer Jim Chalmers’ dissembling on how he feels our pain from the cost-of-living crisis, which is why he’s trying so hard to get inflation down?

What he doesn’t want us thinking about is that, at this stage, most of the pain people are feeling is coming not from higher prices, but from the Reserve Bank’s 4.25 percentage-point increase in interest rates.

Get it? The pain’s coming from the cure, not the disease. The rise in interest rates has been brought about by the independent central bank, not the elected government, of course. But when Chalmers boasts about achieving two successive years of budget surplus, he’s hoping you won’t realise that those surpluses are adding to the pain households are suffering, particularly from the increase in bracket creep.

And, while I’m at it, many people object to businesses raising their prices simply because they can, not because their costs have increased. This they refer to disapprovingly as “gouging”.

But few economists would use that word. Why not? Because they believe it’s right and proper for businesses to charge as much as they can get away with.

Why? Because they think it’s part of the way that market forces automatically correct a situation where the demand for some item exceeds its supply. In textbooks, it’s called “rationing by price”.

Rather than the seller allowing themselves to run out of an item, they sell what’s left to the highest bidders. What could be better than that?

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Australia's future to be made under Treasury's watchful eye

The Albanese government’s Future Made in Australia has had a rapturous reception from some, but a suspicious reception from others (including me). In a little-noticed speech last week, however, one of our former top econocrats gave the plan a tick.

Rod Sims, former chair of the Australian Competition and Consumer Commission, and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute, has been reassured by the plan’s “national interest framework”, prepared by Treasury and issued with the budget.

But first, the budget announced that the government would “invest” – largely by way of tax concessions – $22.7 billion in the plan over the next decade.

Treasury’s framework will be included in the planned Future Made in Australia Act. It will “clearly articulate” how the government will identify those industries that will get help under the act, to “impose rigour on government’s decision-making on significant public investments, particularly those used to incentivise private investment at scale,” according to Treasury.

So, Sims is reassured by the knowledge that the framework – and Treasury – will ensure that “sound economics has been applied”. “In my view, [the plan] represents a growth and productivity opportunity every bit as bold as seen under previous governments,” he says.

Some of those giving the plan a rapturous reception believed it was “a welcome return to activist industry policy and making more things and value-adding in Australia,” Sims says. But “despite what has been said for political reasons, this is not the logic driving [the plan] as described by Treasury”.

Sims says we don’t need to revisit old and tired debates about protectionism. But as it happens, he notes, making more things in Australia will be an outcome of the plan.

Some said the plan represented the end of “neoliberalism” and a return to interventionist thinking. “It is not that either,” he says. “[The plan] relies on sound economics, and any change in economic thinking is a return to the application of sound economics.”

The way I’d put it is that to intervene or not to intervene is not the question. A moment’s thought reveals that governments have always intervened in the economy. (One of the most incorrigible interveners is a crowd called the Reserve Bank, which keeps fiddling with the interest rates paid and received in the private sector.)

No, as we’ll see, the right question is usually whether the intervention is adequately justified by “market failure” – whether, left to its own devices, the market will deliver the ideal outcomes that economic theory promises.

Others have approved of the plan because it’s about encouraging some local production in necessary supply chains. Sims admits there’s an element of this, as local battery and solar panel manufacture are mentioned, but they are a small part of the program.

Similarly, some move to make supply chains less at risk of disruption may be involved, but it’s not the driving logic of the plan.

Yet others have said the plan is copying the United States and its (misleadingly named) Inflation Reduction Act. “This is incorrect,” Sims says. The Americans’ act “spreads money widely, whereas [the plan] is targeted to Australia’s circumstances”.

The US act “also has many destructive features that we will not copy, such as its protectionist approach.”

But, to be fair to the sceptics, he adds, “the policy’s introduction was poorly handled. It was linked to making solar panel modules, when they can be purchased much more cheaply from China, and then there was the announcement of $1 billion for quantum computing.”

“It helps neither global mitigation [of climate change] nor Australian development to force manufacture here, if the final products are produced most cost-effectively elsewhere.”

So, if the plan isn’t mainly about protectionism, what’s its main purpose? Achieving the net zero transition and turning Australia into a renewable energy superpower.

Treasury’s national interest framework says the net zero transition and “heightened geostrategic competition” (code for the rivalry between the US and China) are transforming the global economy.

“These factors are changing the value of countries’ natural endowments, disrupting trade patterns, creating new markets, requiring heightened adaptability and rewarding innovation,” the framework says.

“Australia’s comparative advantages, capabilities and trade partnerships mean that these global shifts present profound opportunity for Australian workers and businesses.” We can foster new, globally competitive industries that will boost our economic prosperity and resilience, while supporting decarbonisation.

In considering the prudent basis for government investment in new industries, the framework will consider the following factors: Australia’s grounds for expecting lasting competitiveness in the global market; the role the new industry will play in securing an orderly path to net zero and building our economic resilience and security; whether the industry will build key capabilities; and whether the barriers to private investment can be resolved through public investment in a way that delivers “compelling public value”.

So, that’s quite a few hurdles you have to jump before the government starts giving you tax breaks. And proposals will be divided between two streams: the net zero transformation stream and the economic resilience and security stream. We can only hope that a lot more of the money goes to the former stream than the latter.

To justify government intervention, the framework requires evidence of “market failure” such as “negative externalities” that arise because the new clean industry is competing against fossil fuel-powered industries which, in the absence of a price on carbon, haven’t been required to bear the cost to the community of the greenhouse gases they emit.

Another case of market failure are the “positive externalities” that arise when the first firms in a new industry aren’t rewarded for the losses they incur while learning how the new technology works, to the benefit of all the firms that follow them.

Politicians being politicians, I doubt whether Treasury’s policing of its national interest framework will ensure none of the $22.7 billion is wasted. But we now have stronger grounds for hoping that Treasury’s oversight will keep the crazy decisions to a minimum.

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