We owe more than we realise to our best econocrats

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Gilding the budget lily: Labor brings in the creative accountants

This month’s budget is not as profligate as its critics claim, but nor is it the deficit-disappearing, penny-pinching budget it was tricked up to be.

When ministerial staffers use words to gild the fiscal lily, it’s called spin doctoring. When the government’s bureaucrats show the treasurer and, more particularly, the finance minister how to do it with numbers, it’s called creative accounting.

So, never fear, Jim Chalmers and Katy Gallagher didn’t need to pay PwC a motza to explain how to make the budget seem better than it was.

No, not the way the former NSW Coalition government paid KPMG to show it how to make its budget balance look better by moving the state’s trains off-budget. Nor has the same firm been paid by another part of the state government to write a report on why it was a bad idea.

There was something a bit odd about the media’s treatment of Chalmers’ second budget. Because the budget’s purpose is to reveal the government’s plans for taxing and spending in the coming financial year, the media give all their attention to the budget balance for the coming year.

Which, this time, is expected to be a deficit of $14 billion, rising to $35 billion the following year, with the budget projected to stay in deficit through to at least 2033-34.

Usually, the media ignore the estimated budget balance in the present financial year, which will end on June 30. It’s “old”. But not this year. This time, a surplus of $4 billion is expected.

Once the media got wind of a surplus, they lost interest in anything else. A surplus! First surplus in 15 years! What an achievement. And after being in power for only a year. How could you get more convincing proof of Labor’s skill as a manager of government finances?

Now, let’s be clear. The expected surplus is perfectly believable, and not the product of creative accounting. But it is the media displaying their economic ignorance.

For a start, in a budget of $630 billion a year, in an economy of $2600 billion a year, a surplus of a mere $4 billion is nothing to get excited about. It’s really a balanced budget, just as much as a deficit of $4 billion would be near enough to a balanced budget.

More significantly, the notion that any treasurer, no matter how wonderful, could turn an expected deficit of $78 billion into a surplus of $4 billion in the space of a year is fanciful. If any pollie should get the credit for it, it would have to be Chalmers’ Liberal predecessor, Josh Frydenberg.

Only he had enough time to do the things capable of helping produce such a result. With the benefit of hindsight, what Frydenberg did was greatly overstimulate the economy, adding to a surge in inflation as well as causing the unemployment rate to fall to 3.5 per cent so workers and businesses paid a lot more income tax.

Another way to look at it is that, had Treasury been better at forecasting, Frydenberg could have forecast a return to budget balance in his last budget.

But this didn’t stop Chalmers and his spin doctors from claiming the credit for himself. Consider this from the budget papers: “The improved fiscal outlook since October largely reflects government decisions to return tax upgrades to budget.”

Talk about twisting the truth. Chalmers wants to take all the credit because, confronted with an unexpected surge in tax collections of $88 billion, he only spent a bit of it.

But, surely, it was the silly media that made all the fuss about the surplus, not that nice young Mr Chalmers. Well, that’s certainly what his spin doctors want you to think – all the adulation came from the crowd.

But they were subtly pushing an easily distracted media in a favourable direction. Consider this. The usual practice in the construction of budget tables is to highlight the coming “budget year”. Not this time. This time it was the old year that got highlighted. So, the $4 billion surplus was shown in bold type, not the $14 billion deficit.

(By the way, as The Australian Financial Review has reported, had Frydenberg’s $690 million [yes, million] deficit in 2018-19 – the one that presaged all the Libs’ happy election talk about “back in black” – been calculated using the same accounting rules under which Chalmers’ surplus was calculated, it would have been a surplus of $7 billion. But no, this isn’t a fiddle, either. The decision to change the rules was made, in prospect, many years earlier by some finance minister named Penny Wong.)

Now we get to the creative accounting, which the Centre for Independent Studies’ Robert Carling, a former NSW Treasury officer, has pointed out. The budget papers make much of the claim that “the government’s spending restraint has limited real [note the real] payments growth to an average 0.6 per cent over five years from 2022-23 to 2026-27”.

Wow. Now that’s what I call restraint. What an achievement. Elsewhere in the papers we’re told that this compares with real average spending growth of about 4 per cent in the eight years before the global financial crisis, and 2.2 per cent over the eight years before the pandemic.

Wow. What restraint the Albanese government is showing. Except that pollies usually quote budget figures over the four years of the budget year plus three years of “forward estimates”. So, why is the 0.6 per cent an average over five years?

Because the extra year includes in the sum the pre-budget year ending in a month. And, purely by chance, real government spending in 2022-23 is expected to fall by 4.3 per cent.

By contrast, real spending in the coming year will grow by 3.7 per cent. Then comes projected annual real growth of 0.6 per cent, 1.9 per cent and 1 per cent.

Why the huge fall this year? Partly, I suspect, because of the effect of temporary pandemic spending programs coming to an end. But also because the indexation of various spending programs was lagging the huge rise in the consumer price index, which is the inflation measure used to calculate the “real” change.

What’s worth remembering from this little fiddle is: never trust calculations of average spending growth into the future. The first year will be close to the truth, but the projections for subsequent years will always be way too low because they’re based on the assumption of unchanged policies, whereas it’s certain that spending plans will have grown by the time we get there.

The first treasurer to con me with this averaging trick was Chalmers’ former boss, Wayne Swan. But Swan got his comeuppance by making himself a laughing-stock when he treated Treasury’s forecasts of future budget surpluses as in the bag. Turned out they weren’t.

The assumptions that policies won’t change and that targets will always be achieved are the reason the budget papers’ “medium-term” projections of deficits and debt 10 years into an unknowable future shouldn’t be taken seriously.

In both sense of the word, they are calculated to mislead.

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The taxman's sneaky trick that will quietly pick our pocket

I’ve seen some sneaky tax tricks in my time, but nothing that compares with this. It could go down in history as the perfect fiscal crime – except that many people won’t notice that some politician has taken money out of their pocket. Which, of course, is what makes it the perfect crime.

All most people may notice is that the cost of living’s got even worse, but they won’t quite realise why. That’s partly because most of the media won’t be making a song and dance about it.

Why not? Because nothing’s been announced. Because you have to know a fair bit about the tax system to understand what’s happening. Because neither side of politics wants to talk about it. There’s no controversy. And neither side’s spin doctors are keen to confirm to inquiring journalists that the strange story they read in this august organ is right.

Since the trick first became apparent to the experienced eye, in Scott Morrison and Josh Frydenberg’s budget in March last year, just before the election, my colleague Shane Wright and I have been determined to make sure our readers were told.

Wright was at it again on Saturday, and now I’m making sure you got the message. Don’t say we didn’t tell you, even if others have been far less vocal about it.

It’s a complicated story, hard to get your head around and, particularly because it’s about something that isn’t happening now but will happen later, one that’s easily forgotten.

As you see, the move was initiated by the Coalition, but will have its effect under Labor. The opposition may try to blame it on the government, but it’s probably too complicated.

This is a story about the misleadingly named Low and Middle Income Tax Offset, known to tax aficionados as “the LAMIngTOn”. It began life as stage one of the three-stage income tax cuts announced in the budget of May 2018, to take effect over seven years.

The previous government kept changing the amount of the offset – a kind of tax refund – over the years. It started out as “up to” $530 a year, but was increased to $1080 a year just before the 2019 election.

It was to have been absorbed into the second stage of the tax cuts, but it was decided to keep it going. Then, in last year’s pre-election budget, it was decided to increase it by $420 to “up to” $1500 a year. Yippee, we said. Good old Liberals!

By then, people earning up to $37,000 a year got a refund of $675 a year. It then slowly increased to be the full $1500 for those earning between $48,000 and $90,000 a year. Then it started cutting out, reaching zero when income reached $126,000.

This meant more than 10 million taxpayers – almost 70 per cent of the total – got a rebate on top of any other refund they were entitled to.

But here’s the trick. Unlike a normal tax cut, which goes on forever, the lamington was a temporary measure. If it were to be continued for another financial year, a decision had to be made. Morrison and Frydenberg’s last budget contained no such decision.

Why not? Because, in the days leading up to the budget, cabinet decided to increase it, but not to continue it beyond June 2022. Decisions not to do things don’t have to be announced, and this one wasn’t. For obvious reasons.

You really had to be in the know to realise that this constituted a decision to increase the tax 10 million people would pay in 2022-23, by up to $1500 a throw.

Wright and I were at pains to point this out in our coverage of the budget. We thought that, especially with an election imminent, people might find it pretty interesting. But, with neither side of politics wanting to talk about it, few people took much notice. Perhaps they didn’t believe us.

The other strange thing about the lamington is that, whereas a normal tax cut flows through immediately to increase your fortnightly take-home pay, you don’t get a tax cut delivered in the form of a tax offset until after the relevant financial year has ended and you’ve submitted your tax return. The taxman just adds it to any other refund you’re entitled to.

This means the last-ever lamington, for 2021-22, was served up between July and October last year.

It also means that the only way many lamington eaters will get a hint that they paid a lot more tax in the year to June 2023 is when, some time after July, they notice that their refund cheque is a lot smaller than last year’s and wonder why.

Note, I don’t disagree with the two-party cartel’s decision to be rid of the lamington. It was a stupid way to cut tax, born of creative accounting. But when they tacitly collude to conceal what they’ve done, it’s supposed to be the media’s job to point it out. We’ve done our bit.

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Boring auditors-general our last defence against dodgy governments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How Morrison can claim emissions are falling when they aren’t really

Other world leaders have treated this week’s report by the UN Intergovernmental Panel on Climate Change as a “wake-up call,” whereas our leader, Scott Morrison, has mumbled something about how we’re on track to “meet and beat” our emissions reduction target, and gone back to sleep.

The report finds that whereas the world’s increase in average temperatures since the start of the industrial era is 1.1 degrees, our average land temperature has risen by 1.4 degrees over the past century – which does much to confirm the impression most of us have that droughts, floods, bushfires, heatwaves and cyclones are now bigger and more frequent than they used to be.

Climate change isn’t coming, it’s arrived.

At the UN climate change meeting in Paris in 2015, countries agreed to each reduce their emissions of greenhouse gases sufficiently to limit the rise in average temperatures to 2 degrees, and preferably no more than 1.5.

The report’s wake-up call was its revised prediction that warming of 1.5 degrees could be reached by the early 2030s, much sooner than formerly expected. So we’ve got even less time than we thought.

At the Paris meeting, each country announced its “nationally determined contribution” to the reduction in global emissions. It was agreed that each country would review and increase its contribution every five years.

The first round of increases will be announced at the next “conference of the parties” in Glasgow in November. In preparation for the conference, almost all of the world’s 20 biggest emitters – including the G7 countries, China and us – have committed to reach net zero emissions by 2050.

But 2050 is a long way off – perhaps too far off. What matters more is the increases countries make in their contribution targets in Glasgow. At their summit meeting in Cornwall in June, the G7 members agreed to increase their reduction targets to between 40 and 63 per cent over the same period.

It’s possible Morrison will decide to accept the net zero emissions target by 2050, and possible he’ll go to Glasgow promising an improvement on our original Paris contribution of a 26 to 28 per cent reduction on 2005 emission levels by 2030.

This week, however, he was promising nothing. Why not? Because we’re already set to “meet and beat” our original target. Indeed, the most recent figures show our emissions are already down 20 per cent on 2005, he said.

And, as he’s told us many times, we’re world-beaters when it comes to moving to renewable, wind and solar energy.

Now, you’ve probably heard there’s something sus about these wonderful don’t-you-worry-about-that figures Morrison and his ministers keep tossing around. The people who know and care about climate change say our emissions are getting worse, not better.

The doubters are right. But we’re indebted to the Australia Institute think tank for producing a careful report spelling out how the government’s figures are able to be so misleading. The Australian National University’s noted emissions analyst, Hugh Saddler, tests Morrison’s claims that, when it comes to reducing fossil fuels use and transitioning to renewable energy sources, we’re at the front of the pack.

Saddler compares our performance with 22 other decent-sized members of the Organisation for Economic Co-operation and Development, plus Russia, on a number of key indicators of energy transition.

Examining our performance relative to the others between 2005 and 2019, Saddler found that we started at the back of the pack in 2005, and either maintained that position or had slipped even further by 2019 on all the indicators.

Australia remains among the highest emitters on a per-person basis, and on the basis of emissions per dollar of gross domestic product. On those indicators where our performance has improved over the period, the others have improved just as much as we have, if not more.

The “emissions intensity” of our energy system – that is, emissions per unit of energy consumed – is the highest, except for Poland. Why? Because both countries were, and still are, heavily reliant on coal for generating electricity.

Despite all Morrison’s boasting about how much we’re spending on wind and solar power, the others are also spending more. Our share of electricity generated from renewables has slipped back relative to the others.

But here’s the killer punch: we were one of only three countries out of the 24 whose emissions from energy use actually increased between 2005 and 2019. By 18 million tonnes of carbon dioxide equivalent a year, according to Saddler.

How can this possibly be reconciled with Morrison’s claim that our emissions have fallen by 20 per cent? It’s simple when you know. Saddler is talking about emissions from energy use, whereas Morrison is also including emissions from what the UN calls LULUCF – land use, land use change and forestry. In short, land clearing and logging.

This source of emissions has been included in the official calculations since Australia insisted on it at the Kyoto conference in 1997. And be clear on this: so it should be. I have no patience with greenies who think taking account of what’s happening to “carbon sinks” is somehow immoral. Tell that to the people who worry about the deforestation of the Amazon.

No, the point is not that land clearing should be ignored, but that we wanted it counted solely because we knew it would make our figures look a lot better than they really were. Why in 2015 did we want to set 2005 as the starting point for our promised cut in emissions? Because we already knew the cessation of land clearing in Queensland would make our performance look good even if we didn’t do anything much to reduce our use of coal and gas.

Trouble is, this long-passed, once-only improvement in land use does nothing to transform our energy use away from fossil fuels and towards total reliance on renewables. It thus does nothing to get us to net zero emissions.

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Frydenberg's budget: if it looks too good to be true . . .

What a wonderful world we live in now our politicians have discovered the cure for opportunity cost. In his first budget, Josh Frydenberg is doing a Gladys: he wants us to believe “we can have it all”.

Over the next 10 years, he can give us: tax cuts worth $302 billion, new infrastructure worth $100 billion, sundry other goodies, and a budget that’s back in the black and stays there, so that the net debt falls to zero. Yeah? How?

But first, a flashback. Labor’s Wayne Swan ended up a laughing stock after he began his 2012 budget speech with the immortal words: “The four years of surpluses I announce tonight . . . this budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.”

Here's what Frydenberg said seven years later: “Tonight, I am pleased to announce a budget surplus of $7.1 billion . . . In 2020-21, a surplus of $11 billion. In 2021-22, a surplus of $17.8 billion. In 2012-23, a surplus of $9.2 billion. A total of $45 billion of surpluses over the next four years.”

Oh dear. This year even the media knew not to fall into their usual trap of treating the government’s estimate of next year’s budget balance as an already accomplished fact. Actually, we won’t know the “actual” for another 18 months.

But, as usual, the media took little notice of the expected budget balance for the year just ending – a truth the Finance Department’s creative accountants have long exploited to improve the new year’s expected balance at the expense of the old year’s.

Some have questioned why Frydenberg didn’t try harder to turn the old year’s small deficit into a small surplus so that, should the Coalition lose the election, it would have avoided going into the history books as a government that was in power for six years without ever recording a surplus.

Short answer: it couldn’t afford to. Reading the budget papers’ fine print makes it clear the creative department had to put in much furniture shifting to come up with the predicted surplus of $7.1 billion – an amount Frydenberg has been able to assert is “substantial” rather than “wafer thin”.

Think about this: in the old year, government spending is expected to leap by 4.9 per cent in real terms, whereas in the new year it will grow by just 0.1 per cent real. Do you reckon that discontinuity happened by chance?

My colleague Shane Wright has noted the government’s decision to bring forward to the old year $1.3 billion in grants to local councils due to be made in the new year. He could have added that two new one-off cash grants, one to help recipients of residential aged care and another to help pensioners with their energy bills, with a total cost approaching $700 million, will be paid in the old year rather than the new.

The government’s been promising to have the budget “back in the black” by 2019-20 since Joe Hockey’s time. And for some years has been “reprofiling” the timing of payments and receipts to ensure this target is met.

Wright reminds us that a change in the timing of tobacco excise collections announced in last year’s budget will, purely by chance, yield a one-off boost of several billions in the new financial year.

Why are we so anxious to get the budget back in black? Because we want to start reducing the government’s debt. Trouble is, since Peter Costello’s day, successive treasurers have drawn our attention to the underlying cash deficit and away from the ironically named “headline” cash deficit.

That’s a problem because it’s actually the higher headline deficit that has to be funded by borrowing – or, if it’s in surplus, can be used to pay off debt. Guess what? The budget estimates that we’ll still be in headline deficit of $4.4 billion in the coming year, and won’t be in surplus until 2021-22.

The discrepancy is explained mainly by successive governments using an accounting loophole to exclude their spending on the NBN, the second Sydney airport, the inland railway and other projects from the underlying deficit.

Even so, Frydenberg assures us the government’s net debt will have been fully repaid by June 2030 – and he has a lovely graph that proves it. How is our path to a debtless Nirvana achieved?

By assuming that government spending grows with almost unprecedented slowness despite the ageing of the population, that the economy grows strongly for another 10 years without missing a beat and with productivity improving each year at a rate faster than we’ve achieved in decades, and – get this – that the government’s financial assets will grow by almost 3 percentage points to 12.8 per cent of gross domestic product.

When it comes to creativity, Australia’s politicians are second to none.

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How we arrived at budgets we can't trust

After last week’s appalling effort, the resort to misleading practices in the budget is reaching the point where the public’s disrespect and distrust of politicians are spreading to the formerly authoritative budget papers.

We’re used to spin doctors with slippery words. Now it’s spin doctors with slippery numbers. They’re not just gilding the lily, they’re creating an unreal world where the truth is concealed.

It gives me no joy to be telling people not to believe what they read in the budget papers. I’d rather tell them that of course the budget figures can be trusted, and they should heed the advice of the nation’s most senior and respected economists.

I have great respect for most of our econocrats who, at base, care about our economic success, try hard to make their estimates realistic and are at pains to avoid saying things that could mislead.

The problem is that a politicised and demoralised public service is under continuous pressure to help their political masters mislead the public.

The truth about this budget is that a government that’s had surprisingly little success in reducing the budget deficit and halting the growth in its debt decided to ignore its solemn commitments to “bank” any improvement in its position and to achieve a surplus of 1 per cent of gross domestic product “as soon as possible”. Rather, it would have a big tax cut, largely for political reasons.

This should have led to a noticeable delay in the timing of the return to surplus and delay before the debt started going down rather than up.

Instead, we were presented with a budget purporting to show a faster return to surplus despite the tax cut. We could have our cake and eat it.

How was this miracle performed? By an unexpected actual surge in tax collections that was probably a one-off, but was taken to presage a continuing improvement.

Plus overly optimistic forecasts of economic growth, combined with the magic of medium-term projections assuming continuous strong economic growth out to 2028-29.

In the former Labor government’s last budget, of 2013, Wayne Swan introduced two hugely expensive “legacy” programs: the National Disability Insurance Scheme and the Gonski needs-based school funding.

Swan made the schemes seem affordable by phasing them in exceptionally slowly, with the bulk of the cost crowded into the two years immediately following the four years of the “forward estimates”, where they couldn’t be seen.

Even so, he provided “medium-term projections” out 10 years to 2023-24, which showed the budget deficit projected to return to balance in 2015-16, before soaring to a surplus way over 1 per cent of GDP just three years later. Net debt would peak at 11.4 per cent of GDP in 2014-15, then fall to zero in seven years.

The two graphs showing the budget balance soaring up to surplus and the net debt gliding down to zero are truly inspiring and worth looking up (page 3-32).

To Swan, these projections were proof positive that his expensive new spending programs were “fully funded”.

After Labor’d been thrown out, a senior econocrat reproached me for failing to detect that these fabulous projections relied for their magnificence on a “magic asterisk”. Huh? An assumption that real growth in spending would be held to 2 per cent a year, on average.

Swan claimed in successive budgets to be achieving the 2 per cent cap. He never did, in any year. But the “on average” allowed him to claim advanced credit for good intentions in future years.

This year’s is the Wayne Swan Memorial budget. It uses just the same tricks to create just the same illusions.

You promise tax cuts worth $140 billion over 10 years, but with only 10 per cent of that cost hitting the budget in the first four years of forward estimates, and the remaining 90 per cent hidden by a projection methodology that assumes smooth sailing and Scott Morrison’s claim to be able to achieve unprecedented restraint in spending.

Swan was a master of “reprofiling” – shifting receipts and payments around to keep the budget balance looking like it’s heading in the right direction and disguise the trouble you’re having paying for promises you can’t afford.

This budget’s full of reprofiling, including a one-off draw-forward of tobacco excise timed to help in a tough year and the temporary disinterment of the low-income tax offset so the tax cut can start seven weeks after budget night but not hit the budget until the following financial year.

But the more treasurers use the budget papers to mislead us, the more they foul their own nest, demeaning their great office, discrediting the documents they produce with such flourish, and disheartening the econocrats who used to be proud to work for Treasury.

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Whatever Tuesday’s budget holds, it’s sure to be fudged

It’s a sad truth that treasurers and finance ministers almost never avoid using creative accounting to make their budgets look better – or less worse – than they really are. But this fudging often costs taxpayers a lot more.

Governments of both colours, federal and state, have been doing this forever, after the bureaucrats show them how. It’s one of the less honourable services public servants provide their honourable masters.

The move from cash accounting to accrual accounting at the turn of the century should have made fudging harder, but federal Treasury solved that problem by sticking to cash while Finance moved to accrual.

Focusing public attention on the cash budget balance has kept alive the oldest and simplest form of fudge. You can make the new year’s budget deficit look smaller than it really is by taking a payment due sometime in the new year and paying it in the last days of the old year.

Pre-paying a bill of $1 billion in this way makes the comparison between years look $2 billion better than reality.

But such tricks are chicken feed. The most wasteful one is the way state governments have tried to retain their AAA credit ratings by using “public-private partnerships” to conceal the extent of their borrowing for infrastructure.

No one can borrow more cheaply that government, but paying a private developer a premium to do the borrowing at a higher interest rate ensures the government-initiated debt appears on the developer’s balance sheet, not the government’s.

The state “asset recycling programs” promoted and subsidised by the Abbott-Turnbull government are also a product of the states’ worries about their credit ratings. You sell off existing government businesses and use the proceeds to fund new infrastructure spending without having to borrow.

Sounds innocent enough, but in practice state governments haven’t resisted the temptation to maximise the sale price of their businesses by attaching to the sale the right to overcharge their state’s businesses and consumers.

This does much to explain the doubling in the retail price of electricity. The states allowed the private purchasers of their poles-and-wires businesses to abuse their natural monopoly, and let three big companies own generators as well as retailers.

Tuesday night’s budget will be affected by two relatively new forms of creative accounting. One is the way the Turnbull government exaggerates its success in reducing the size and cost of the public service by giving people redundancy payouts, then hiring them back as “consultants” on greatly inflated salaries.

Then there’s the Abbott government’s invention of “zombie measures”. You announce cuts in spending, fail repeatedly to get them legislated, but leave them in the budget’s forward estimates, thus making the projected budget balance look better than it is.

But the biggest zombie measure distorting the budget numbers we’ll see on Tuesday is the government’s repeatedly rejected plan to extend the cut in the company tax rate to big business. This one, however, makes the projected budget balance look worse than it is. The biter bit.

But by far the biggest budget fiddle – one we’ll see more of on Tuesday – is the loophole Treasury built into the budget at the time of the laughably named Charter of Budget Honesty in 1996, when the focus of attention was switched to the “underlying cash budget balance”.

The ostensible purpose was to stop wicked Labor governments understating their deficits by counting the proceeds from asset sales as a reduction in the deficit rather than an alternative way of funding the deficit. Rather than sell a government bond, you sell some of the family silver.

But Treasury defined “assets” narrowly to include physical assets (say, real estate) but exclude financial assets (such as shares in government-owned businesses).

What this means in practice is that spending on an infrastructure project doesn’t have to be counted in the budget deficit provided you set it up as a new business which, once it’s profitable, you intend to sell off.

Great trick, which the Rudd-Gillard government was happy to use to hide the then-expected $49 billion cost of its National Broadband Network.

Trouble is, the contortions NBN Co had to go through to sustain the pretence it would be profitable were sufficient to blight the project long before Malcolm Turnbull began fiddling with it, as my colleague Peter Martin has explained.

But this wasn’t sufficient to dissuade Scott Morrison from using the same trick in last year’s budget to hide the cost of the second Sydney airport and the inland railway by claiming that, in some imaginary world, they’ll be profitable businesses.

Trouble is, you can keep the spending out of your carefully fudged version of the budget deficit, but you can’t keep your additional borrowings out of the government’s accumulated debt. Watch out for more fudging on Tuesday night.

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How our budget repair problem has been exaggerated

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Hard-working Aussies help pay for company tax cut

I often think Scott Morrison does a remarkably good Joe Hockey impression, but in this budget he's performed a Wayne Swan sleight-of-hand that's better than Swanny ever did.

Consider this. Big business has been desperate for a higher goods and services tax. Why? Because this was the only way the government could afford to grant them their longed for cut in company tax.

So when Malcolm Turnbull balked at increasing the GST, it seemed he wouldn't be cutting company tax either.

When the budget was unveiled, however, we still saw the government committing itself to cutting the company tax rate from 30 to 25 per cent over 10 years, and making an immediate start by cutting the rate to 27.5 per cent for all companies with turnover of less than $10 million a year, from July 1.

For good measure, Turnbull and Morrison threw in a small personal tax cut for the top quarter of earners. How on earth did they afford this without a higher GST?

Over the four years of the forward estimates, the company tax phase-down will cost $5.3 billion. Add $4 billion for the personal tax cut and we have $9.3 billion to account for.

The measures in the "tax integrity package" – which include the Google tax – should raise a net $3.3 billion.

The reforms to superannuation tax concessions will save a net $3.2 billion over the period, and the further hikes in the tobacco excise should raise $5.2 billion, meaning the three big revenue-saving measures will raise a combined $11.7 billion.

This leaves the government – the one so committed to lowering taxation – $2.4 billion ahead on the deal.

Satisfied all is in order? I'm not. Once fooled by Swanny, twice shy.

This government has done nothing but complain about how Labor committed itself to two expensive new spending programs – the national disability insurance scheme and the Gonski school funding – which proved to be "uncosted and unfunded".

What Swan did was stagger the introduction of the two schemes so that they didn't cost all that much in the first four years (the ones shown in the forward estimates) but got a lot more expensive in the following years (which we couldn't see).

Get it? This is the same trick Turnbull is using to hide the unaffordability of his vastly more expensive plan to cut the company tax rate over the next 10 years.

Little wonder he was so reluctant to reveal that the cumulative cost of the company tax "glidepath" was a paltry $48.2 billion.

So we've been told how the first $5.3 billion will be funded, but not the remaining $42.9 billion.

A key figure we haven't been told is the annual cost of the tax cut once it's fully introduced. But Deloitte Access Economics' Chris Richardson's estimate is about $16 billion a year.

Clearly, this is far more than the budget's tobacco excise increase, super reforms and company tax "integrity package" are likely to be able to cover.

In the last year of the forward estimates, 2019-20, those three measures are expected to raise only about $5.1 billion.

So if Morrison can now claim that the 10-year company tax cut phase-in has been costed, can he also claim it's been funded?

He's making the same claim Swan used to make by producing the "medium-term projection" of the budget showing it returning to surplus (in 2020-21, no change from the mid-year update) and staying in surplus until 2026-27.

Trouble is, whereas in last year's budget the government's "budget repair strategy" required it to deliver surpluses "building to at least 1 per cent of gross domestic product by 2023-24", this year's projection shows the surplus plateauing at 0.2 per cent for the last six years to 2026-27.

Why? Because progress in increasing the surplus (so as to pay back more debt) has been sacrificed to covering the ever-growing cost of the cut in company tax.

The cut really becomes expensive in the last three years, when big businesses join the phase-in. You can bet this "glidepath" has been carefully structured to stop the medium-term budget projection looking too sick.

Note too that the medium-term projection assumes tax collections are capped at 23.9 per cent of GDP after 2021-22, with the possibility that any excess is used to fund bracket-creep-returning tax cuts for Morrison's "hard-working Australians".

So the projections purporting to show that the company tax cut can be funded by our settling for seven years of a budget surplus no higher than $3.5 billion in today's dollars, also rely on the assumption of no further personal tax cuts for another six years.

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Good reason to be angry about the banks

Are you angry about the banks? A lot of Australians are. And a lot of people in the United States and Europe are a lot angrier than we are, with good cause.

In Oz, we're annoyed mainly by the banks' very big profits and the way they never seem to miss a trick in keeping those profits high.

In other countries, people are angry about the way the banks and other financial institutions, having stuffed up their affairs to the point where they almost brought the global economy to its knees, were promptly bailed out at taxpayers' expense, so that few went bust, with almost no executives going to jail and many not even being fired.

By now, however, you're probably used to bankers and economists saying you don't understand and are quite unreasonable in your criticisms.

That's why you need to know about the book, Other People's Money, by John Kay. Kay, who's visiting Australia and this week spoke to a meeting organised by the Grattan Institute, says he wrote the book to help ordinary people understand "what it is they're angry about".

You want the dirt on the banks? No one's better qualified to spill the beans than Kay, an economics professor from Oxford and columnist for the Financial Times, who was commissioned to write a report on the sharemarket for the British government.

He starts by noting that over the past 30 or 40 years, each of the developed economies has experienced "financialisation" – huge growth in the size of what these days is called their "financial services sector" to the point where it's among their biggest industries.

For years, we've been told this is a wonderful thing, a sign of our economy's growing sophistication and ability to manage risk. Kay doesn't believe it.

We've always had a financial sector composed of banks, insurance companies and other institutions, and we've always needed one.

We've needed it to help us make payments to each other, to bring people wanting to save together with homeowners and businesses wanting to borrow, to help us save for retirement and to help individuals and businesses manage the risks associated with daily life and economic activity (insurance policies being the obvious example).

We need a financial sector to service the needs of the "real economy" of households and businesses producing and consuming goods and services. But none of this justifies the huge growth in the financial sector we've seen.

Most of that growth has come in the form of massively increased trading between the banks themselves in "financial claims", such as shares and bonds and foreign currencies and "derivatives" (claims on claims, and even – if you've seen The Big Short – claims on claims on claims).

If you add together all the financial assets ("claims") owned by all the banks and other financial outfits, they exceed by many times the value of the physical assets – such as houses and business buildings and equipment – which are the ultimate basis for all those claims.

The value of foreign currencies changing hands each day vastly exceeds the value of currencies needed by businesses and tourists paying for exports and imports. Similarly, the value of shares changing hands each day vastly exceeds companies' needs to raise new share capital and end-investors' needs to buy into the market or sell out.

Kay says that, in Britain, bank lending to firms and individuals in the real economy amounts to only about 3 per cent of their total lending.

All the rest is lending to other banks and institutions busy buying and selling bits of paper to each other – making bets with each other that the prices of those bits of paper will rise or fall in coming days.

Kay makes what, for an economist, is the very strong condemnation that almost all this speculative activity is "socially unproductive". It might or might not benefit the people doing the trading, but it's of no benefit to the rest of the economy.

He observes something I've noticed, too: economists have put little effort into explaining why all this trading in claims is so hugely profitable, allowing people near the top of the banks (but not their many foot soldiers) to be paid such amazing salaries.

If all they're doing is making bets with each other, why aren't the gains of the winners exactly cancelled out by the losses of the losers?

His answer is that the claims-trading parts of banks have found ways to exaggerate the profits they make by counting expected future profits they haven't actually captured – "paper profits" – but delaying recognition of expected "paper losses" until they're realised.

This game can continue for as long as everything's on the up and the bubble's getting bigger. Once it bursts, of course, former supposed profits become present, unavoidable losses. Many banks teeter on bankruptcy, but the government bails them out and they live to gamble another day.

Kay says the answer is to rigidly separate the old-fashioned parts of banking – the facilitation of payments, and lending to households and businesses; the bits that must be kept going through recessions – from all the speculative trading in claims.

It's a free country and "investment" banks should remain free to bet against each other, but there should be no taxpayer bailouts or other government protection for those that do their dough.

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Your charter of budget dishonesty

Thanks to abuses by both sides, it's hard to remember a time when standards of political behaviour have sunk to lower depths. The budget papers are no exception to that general decline.

Some of the tricks used to mislead us are so technically tricky it's hard to believe they could have been thought up by the politicians themselves or their youthful private advisers.

I suspect the econocrats are complicit in providing their masters with fancy tricks, though it's more likely to be the accountants in Finance than the economists in Treasury.

The worst example of that was the attempt in last year's budget to use a "medical research future fund" to allow the government to break its promise not to cut health spending while pretending it hadn't.

The Labor government's greatest offence was to conceal the pace at which its spending was growing - and its ever-growing inability to pay for its expensive new programs - by claiming it was sticking to its policy of limiting real spending growth to 2 per cent a year "on average over the forward estimates".

That proviso allowed it to claim spending was under control: every year the lack of restraint in the budget year would be made up for by super-human restraint in the later years. After Labor departed, the econocrats dubbed this the "magic asterisk" budgeting device.

The present government's greatest crime was to exaggerate the size of the budget deficit it inherited from Labor by claiming some of its own policy decisions were part of what Labor left it with. Its unrequested $8.8 billion transfer to the Reserve Bank - essentially a book entry - was only the worst of its fiddles.

In accordance with Peter Costello's charter of budget honesty act, the honest account of what Labor left for its successors was given in the pre-election fiscal outlook issued by the heads of Treasury and Finance.

But at the time of the Coalition's mid-year budget review months later, Joe Hockey claimed its figures to be the "line in the sand" separating Labor's legacy from his own efforts.

One small problem: the mid-year review incorporated the budgetary effects of all the Coalition's election promises, including its decisions to abolish the carbon and mining taxes.

Then we find this utterly dishonest claim formally incorporated into this year's intergenerational report, turning that document into grubby political propaganda.

One element of Costello's move to budget honesty - if you need an act of parliament imposing budget honesty, you clearly have an honesty problem - was to stop governments hiding the true extent of their deficits by including proceeds from the sale of assets, which he did by shifting the focus to the "underlying" cash budget balance.

Fine. But there was a loophole in the way the underlying deficit was defined, and successive governments have exploited that loophole so as to continue misleading us. Labor went for years refusing to disclose the items explaining the difference between the "headline" and underlying deficits.

But thanks to a deal the Greens did with this government, this information is now published each year in budget statement 3. Over the five years to 2018-19, the cumulative headline deficits are expected to exceed the underlying deficits by more than $68 billion, before allowing for future fund earnings of $18 billion.

The gap is explained mainly by the expected build-up in HECS debt of $49 billion, but also by $21 billion in further spending on the National Broadband Network, which is really infrastructure spending, but is excluded from the underlying deficit because it was set up as an equity investment in a business separate from the budget.

This trick - which, like all exploitation of loopholes, is technically in accordance with the rules - was initiated by Labor, as was the (reasonable) decision to switch future fund earnings back into the underlying budget balance from 2020. Just as well, since they're expected to make up such a high proportion the small surpluses projected from that time.

A final respect in which governments use the budget papers to mislead and conceal is the arbitrary exclusion of particular tables or graphs when they could prove embarrassing. Last year's unfair budget just happened to exclude the customary "cameos" showing how particular family types would be affected by the budget's welfare changes.

This year the graphs (and their underlying numbers) for revenue and spending were missing from the 10-year projection of the budget balance, which attempted to show that the budget's return to surplus hadn't been pushed back a year by all the backdowns in the budget.

All this dishonesty just adds to the political class' declining credibility in the eyes of voters.

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Hockey's return to surplus not credible

There's an obvious question mark over this year's budget that the media have yet to highlight: how could the Treasurer announce so many giveaways and backdowns but still claim that "our timetable back to a budget surplus is unchanged from last year"?

That's even harder to believe when you remember the $52 billion by which Joe Hockey has had to write down his expected tax collections, thanks to greater-than-forecast falls in commodity prices and slower-than-expected growth in wages.

The short answer is that Hockey is stretching the truth, creating illusions and padding his budget. And that's without questioning his forecasts and projections for the economy (as opposed to those for his budget).

In truth, his expected trajectory of the budget balance over the next decade is significantly inferior to the one he announced last year.

Last year the budget was expected to return to a surplus of about 1 per cent of gross domestic product (say, $20 billion) in 2019-20. This year the budget balance for that year is expected to be just the tiniest fraction on the positive side of zero. In reality, the projections show the budget returning  to a noticeable surplus a year later, in 2020-21.

Last year, the surplus in 2024-25 was projected to have grown to almost 1.5 per cent of GDP. This year, it's now projected to be less than 0.5 per cent.

Next, remember that the impression we were given of a bountiful, "stimulatory" budget was an illusion, the product of media manipulation. Study the budget figures and you see that when the small-business giveaways and more-generous childcare subsidies are seen in the context of all the policy changes made in the budget, the net effect on the budget balance is too small to matter.

That's mainly because of the saving of more than $10 billion over the forward estimates that the government will make by abandoning its earlier decision to introduce more-generous paid parental leave, plus its new decision to exclude big business from the cut in company tax.

The third factor that makes the revised projections for the budget balance look less bad than they actually are is that they've got a lot of padding in them.

For openers, there's what my colleague Peter Martin calls the "zombie measures" – measures announced in last year's budget that aren't alive because the Senate has rejected them, but aren't dead because they're still being counted in the forward estimates.

These include university fee deregulation, changes to family tax benefits and the discretionary increase in the pharmaceuticals co-payment.

Then there's the projected $80 billion saving  over 10 years from moving to stingier indexation of grants to the states for public schools and hospitals. These need no Senate approval, but are so tough on the states that the Feds are almost guaranteed to have to water them down.

John Daley, of the Grattan Institute, has pointed out that real growth in government spending is budgeted to average only 1.1 per cent a year until 2017-18.

"This would be remarkable restraint given long-term growth is more than 3 per cent each year," he says. "It would be particularly remarkable in a period that spans an election year."

Just a small part of this Herculean achievement would rest on the plan to claw back a grant of $1.5 billion from Victoria because the new government has refused to proceed with the East West Link. Good luck.

Another tiny part would come from the calculation that the "no jab, no pay" policy of denying benefits to parents who don't get their kids immunised would save $500 million over four years.

This is nonsense, based on the (usually sensible) rule that measures are costed without allowing for any change in behaviour they may prompt. But this measure is intended to change behaviour, forcing parents to get the jabs so they keep the pay.

To the extent it works, it will cost the government money (for more jabs) and save it nothing on benefit payments. The budget's costing assumes it will be a total failure, which is unlikely.

Saul Eslake, of Bank of America Merrill Lynch – who, along with former econocrat Dr Mike Keating, wins the prize for most diligent examination of budget entrails – has noted a change in the accounting rules so that, from 2020-21, the annual net earnings of the Future Fund will be counted as budget revenue, not as an increase in the balance in the fund.

More trivia? Not quite. Eslake estimates that this seemingly petty change will account for more than half of the budget surpluses projected for 2024-25 and 2026-26.

These books have been cooked.

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How the medical research fund is a trick

As an accountant turned journo, I try to ensure the creative accounting used to make the budget figures look better than they really are doesn't go unexposed. But I've never seen a con as audacious as the proposed medical research future fund.

I wrote at length about all the accounting tricks perpetrated by the Gillard government, but now it's the Abbott government's turn.

In their budget update during last year's election campaign, the heads of Treasury and Finance signed off on a deficit estimate for 2013-14 of $30 billion. But four months later Joe Hockey and Mathias Cormann popped up with their own mid-year review claiming the deficit they'd inherited would be closer to $47 billion.

Today you'll hear Hockey repeat that claim. But that higher number was largely the result of our heroes indulging in a little creative accounting of their own.

About $7 billion of the $17 billion increase since the election was explained by Treasury revising down its forecasts for employment and wage growth and, hence, tax collections. Fair enough. But most of the remaining $10 billion involved dubious transactions our heroes claimed to have been forced to make because Labor had left them hanging.

The biggest was a transfer of $8.8 billion to the Reserve Bank - an amount the Reserve hadn't asked for and Treasury had recommended against. Its effect was to make Labor's last deficit look bigger and to make it easier for the Reserve to pay higher dividends into Hockey's subsequent budgets.

When in this year's budget Hockey announced the GP co-payment and various other cuts in health spending, he explained that these savings would be put in a new medical research future fund.

Once the money in the fund had built up $20 billion, the annual interest on the money in the fund would be used to pay for medical research. But under the changes announced last week, these payments from the net interest earned would instead begin in 2015-16.

This is an accounting trick, but it seems only students of government accounting rules can see it. People think that since the savings are being spent building up the fund, there won't be any net saving to the budget until after the $20 billion target has been reached.

Not so. The saving to the budget bottom line is immediate, though the change means this saving will be reduced a fraction by the increased spending on research.

Like many budget fiddles, this one relies on exploiting loopholes in the definition of the bottom line, the "underlying cash deficit".

The best way of thinking of it is that transactions recorded "above the line" affect the size of the deficit, whereas those recorded "below the line" don't. Below-the-line transactions are regarded as affecting only the way the deficit is financed.

The Medicare spending cuts are recorded above the line, but the decision to put an amount of money equivalent to those savings into a special fund goes below the line. It is, after all, only a decision to move money around the government's balance sheet. It doesn't involve the government spending a cent, just moving money between its accounts.

Of course, since the government is in deficit, it doesn't actually have any money to put into its medical research future fund account. So to its normal borrowing to cover the deficit it will have to add borrowing to finance the money it puts into the research fund.

This extra will add to the size of its gross public debt, but not to its net debt, since the latter is the gross debt (everything the government owes other people) minus all the money in the various parts of the future fund, which has been used to buy shares and bonds, and so represents all the money other people owe the government.

However, when the government spends the interest on the medical fund on medical research, this spending will be recorded above the line and so will add to the deficit.

Once the dust has settled, however, I expect to see a second leg of the trick brought to fruition. In a subsequent budget the government may decide that, now it's spending more on medical research via the future fund, it's able to spend less on medical research via the National Health and Medical Research Council. This brilliant con job will be complete.

What's the point of it all? Partly it's an attempt to bamboozle doctors, but mainly it's designed to allow the government to break its election promise not to cut health spending while claiming it hasn't broken it, just "reprioritised" health spending.

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