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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Unthinking privatisation leaves much mess to be cleaned up

It’s been a week of facing up to the various troubles caused by the fad of governments trying to solve their problems with help from the private sector.

All governments have indulged in the fashion of privatising their businesses and outsourcing the provision of public services to a greater or lesser extent, with varying degrees of success. Victoria was first with the idea of selling off its electricity monopoly, and it’s had its own adventures with private toll roads.

But this week it was NSW’s turn to grapple with the almighty mess it’s made of its toll roads, guided by two visiting Victorians – Professor Allan Fels and Dr David Cousins. There is much for Victorians to learn from the northerners’ travails, as they struggle to keep the schadenfreude off their face.

First, how did this supposed “reform” push get started? Partly, it was ideological – many people believe private businesses are always efficient, whereas governments are always inefficient.

But mainly it was politicians trying to do the impossible – or look like they’d done it. How can the government do more without getting bigger? How can we respond to the voters’ unceasing demand for us to provide more without increasing taxes or adding to government debt?

I know, let’s use “public-private partnerships” to work their magic. This thinking has left Sydney ringed by 13 toll roads, 11 of which are majority-controlled by the ASX-listed giant tolling company Transurban, along with many minority partners.

Toll roads now make up almost half of Sydney’s motorway network. It has more toll roads than any other Australian capital city, which hasn’t stopped it from being the most congested. These toll roads have grown like Topsy, each with differing tolls and rules about how the toll is regularly increased.

Taken together, the toll road system is regarded as inefficient, unfair and lacking transparency.

This week’s final report of Fells’ and Cousins’ independent review found that tolls are higher than they need to be and higher than they should be. Unless something is done, they’ll increase too quickly in coming decades.

Tolls are too high in the sense that they probably encourage trucks to use less suitable roads, and lead to greater congestion on other roads as motorists try to save money. There is no provision for pricing rules set to run for decades to be reviewed to ensure they still make sense.

A toll road contract is a natural monopoly, but not all the contracts were awarded after competitive bidding. Where bidding did occur, contracts weren’t necessarily awarded to the firm offering to charge the lowest toll.

Often, the government set what the toll would be, with the contract awarded to the firm offering to take on the most of the government’s obligation. This was a way of shifting costs that should have been covered by the taxpayer onto motorists, thereby making budgets look better and taxes lower.

Sometimes the cost to motorists was disguised by contracts where the toll started low but rose excessively over time.

All the contracts involved the private firms borrowing the money to pay for the motorway, even though governments can borrow much more cheaply than businesses can. This made government debt look lower, but hid the higher interest costs in higher tolls.

All the contracts involved the company accepting “traffic risk”. When fewer cars use the road than had been predicted, the company’s out of pocket, but when there are more cars than predicted, the company makes a windfall gain.

By now, windfall gains are common, and the companies are cleaning up. But this is an unnecessary burden on motorists. Why? Because companies have to be paid to take on the risk, whereas governments are much better at bearing such risks. They can spread any costs over millions of taxpayers so that they become trivial.

The system of tolls is biased against motorists who live in the outer western suburbs, and biased in favour of those in better-off northern suburbs using long-established, government-owned toll roads crossing Sydney Harbour.

For some years NSW governments have sought to reduce this unfairness by paying subsidies to western suburbs motorists with excessive weekly toll bills. This makes the system less unfair by adding a cost to taxpayers with no loss to the toll companies. They actually benefit because more motorists can now afford to pay their high prices.

The Minns Labor government has vowed to bite the bullet and renegotiate the contracts. This week’s final report recommends that it replace the hodgepodge array of tolls with a uniform system where the price is based on distance travelled, with those travelling longer distances charged less per kilometre.

The Harbour Bridge and Harbour Tunnel tolls would be included in the pricing mechanism, so that northern suburbs motorists paid more, while western suburbs motorists paid less.

The government says it will compensate the toll companies for losses from changes to their contract arrangements, but would transfer “traffic risk” and its windfall gains to the government. This would help cover lower tolls in the west.

Transurban has belatedly agreed to renegotiate, but proposes setting the toll on a different basis, suggesting the negotiations may be long and hard. But getting agreement from all Transurban’s many minor partners could take an eternity. The government wants a deal by Christmas.

To this end, the report recommends that the NSW government take back control of tolls by setting up a state-owned entity, NSW Motorways. Its changes to tolling arrangements would be overseen by the NSW Independent Pricing and Regulatory Tribunal. The new entity should look for opportunities to add competition to the system, especially for any new roads.

The existence of the new tolling entity would allow the government to act should it take Transurban and its many partners too long to agree to a satisfactory deal.

The private companies have rights, but they don’t have the right to impose on the people of NSW and their government an unfair and unsustainable arrangement lasting forever and a day.

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Two-class school system a great way to entrench low productivity

In 2011, the Gonski report recommended that government funding of schools be needs-based and sector-blind. More than 12 years later, it still hasn’t happened. And it’s by no means certain it will happen any time soon.

The idea of sector-blind schooling – funding all students according to their needs, rather than their religion – fell at the first hurdle. Sectarianism has bedevilled attempts to ensure all our kids get a decent education since the introduction of compulsory schooling in 1880.

And so fearful of the religious vote are both major parties that this time’s been no different. Providing adequate funding for the more disadvantaged kids congregated in public schools could have been a simple matter of redistributing money from privileged private schools, but no.

Former prime minister Julia Gillard was straight out of the blocks, promising that private schools would be left no worse off. That is, disadvantaged kids would be helped only to the extent that extra money could be found for education, at the expense of all the government’s other responsibilities.

So the private schools – almost all of them professing some religious affiliation – have retained their funding priority. It used to be a matter of Catholics and Protestants but, thanks to the Howard government’s introduction of a new education priority – giving parents greater choice of which school to send their kids to – it’s now also a matter of Jewish schools, Muslim schools, “Christian” schools (code for the smaller non-conformist Protestant denominations) and soon, no doubt, Hindu schools and Buddhist schools.

If you wonder why the eternal enmities of the Middle East are echoed in faraway Australia, that’s part of the reason. “Choice” is a nice idea but, from the taxpayers’ perspective, it comes at a cost. Public schooling used to be part of the way we could be multicultural and still socially cohesive.

Now we’re paying more for it to be less so. Now, if you choose to have your kid grow up never having rubbed shoulders with people of other religions, that’s another service the taxpayer provides.

Except that it involves a monetary cost we’re reluctant to pay, and our politicians are reluctant to make us pay. How to square the circle? I know, let’s short-change the (majority of) kids still going to public schools.

But not to worry. The more things keep going the way they are, the fewer kids will be left going to public schools and the less the pollies will have to worry about the raw deal they’re getting.

We’ll have more kids leaving education with inadequate numeracy and literacy, of course, but who’ll notice that – or the extra cost to the budget – when we’ll all be so busy listening to the Business Council giving yet another sermon on the pressing need to reverse our declining productivity by cutting the company tax rate.

The beauty of a new plan to have most kids going to private schools – whether their parents can afford it or not – while only the kids of the rock-bottom poor are still going to public schools is that it’s self-reinforcing.

The more the better-paid and better-educated shift their children to private schools, the more those who are left will scrimp and save to join them.

And don’t forget this: public schooling is the default setting. One of the ways private schools maintain their reputation for greater discipline is to decline students with special needs, and expel students who cause too much trouble.

The public schools have no choice but to pick up the rejects. This wouldn’t be such a problem if they were given the extra funds needed to cope with the extra problems. But depend on it: they won’t be. This will give parents even greater incentive to get their kids out of there.

The plan does have a big drawback, however. No parent ever wants to admit it but, for many of them, a great attraction of private schooling is the greater social status it confers on the parents, as well as the old-school-tie benefits it confers on the kids.

Economists see education as a prime example of a “positional good” – a product that advertises to the world your high position in the pecking order. Trouble is, social status requires exclusivity. The more kids pile into private schooling, the less exclusive it becomes.

Economists say the demand for a good or service is “inelastic” if a rise in its price does little to deter people from buying it. As a positional good, the demand for private schooling is highly inelastic.

This explains why, not content with the big government subsidies they receive, the oldest and most famous private schools can charge parents huge fees on the top. Their fees rise faster than the inflation rate year after year, even in years of a cost-of-living crisis.

It may be that, the more parents pile into the cheaper Catholic systemic and other private schools, the more the elite private schools have to raise their fees to retain their exclusivity – their status as a positional good.

And, of course, the higher their fees, the more desirous status-seeking parents are to be seen paying them. Only the Reserve Bank’s ability to print its own money beats that. Remind me, why exactly is the taxpayer subsidising elite private schools?

Economists also say education is a “superior” good, meaning that the higher people’s real incomes rise, to more of that income they’re willing to spend on the product. In theory, people are buying more education or higher quality education.

But I have a theory that two-income families are more likely to choose private school education to prove to themselves their kids aren’t missing out. If so, they’re victims of a rarely remarked economic fallacy: anything that costs more must be of higher quality.

Fallacious though such thinking may be, the rise of the two-income family helps explain the shift to private schools and suggests it has further to run. Yet another reason to question why the federal government is propping up private schools at the expense of public schools.

Since Gonski, the feds have calculated the “schooling resource standard”, an estimate of how much total government funding a school needs to meet its students’ educational needs. The previous federal government’s agreement with the states required it to contribute 80 per cent of the private schools’ standard, with the states contributing the remaining 20 per cent.

For public schools, it was the reverse: the states pay 80 per cent, while the feds pay 20 per cent. Since the feds’ taxing powers are far greater than the states’, this deal had an inbuilt bias in favour of private schools.

As it’s worked out in practice, almost all private schools are fully funded, with many being overfunded, whereas almost all public schools are still underfunded, more than 12 years since Gonski.

The Albanese government’s Education Minister Jason Clare is renegotiating the funding agreement with the state education ministers, who met with him on Friday. They’re demanding that he hasten the public schools’ achievement of full funding by raising the feds’ contribution to 25 per cent.

You’d expect a Labor government to care about public school students getting a decent education. We’ll soon find out if it does.

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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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NSW budget: no horror, but Labor still had three dirty jobs to do

This is no horror budget, although it’s unlikely to be popular – except perhaps with the state’s public sector workers. For the rest of us, there are various minor cuts to be annoyed by.

Actually, it’s unrealistic to expect the first budget of a new government to be anything but sombre and penny-pinching. That’s the way the political cycle turns.

Indeed, had this budget been full of goodies, it would have been a worrying sign – that the Minns government didn’t know its business and was off to a start likely to help shorten its life.

It will be easy for critics to attack the big pay rises already delivered and planned for public sector workers.

Labor looking after its union mates. If they’re just public servants, why feed them? And how can such big pay rises possibly be afforded?

But the notion that we could go for year after year holding down the wages of nurses, teachers, ambos, firies and all the rest, simply because they weren’t working for the private sector, was always delusional.

When you look at it, almost everyone working for the state government is providing an essential service bar a few pen-pushers in offices near Macquarie Street.

And the inevitable has happened: the state can’t attract and keep workers when they can find better-paid jobs somewhere in business.

Where will the money come from? How about asking the people who benefit from those essential services – which is all of us – to pay slightly higher taxes?

But the states have little scope for raising taxes, so the $2.7 billion over four years to be raised from the (probably too small) increase in coal royalties is a good start.

Treasurer Daniel Mookhey had three dirty jobs to do in this budget. First, continue the slow return to the usual small operating surplus – used to help fund part of the state’s massive spending on infrastructure and other capital works – after the huge spending and borrowing necessitated by the pandemic.

Second, “repurpose” some of the government’s spending from his predecessors’ priorities to the Labor government’s priorities.

Third, reverse or correct some of the wrong-headed and damaging policies pursued by the previous government.

Mookhey is dismantling the designed-to-mislead Transport Asset Holding Entity (even the name tells you it’s some kind of fiddle), as well as the gimmicky NSW Generations Fund, as well as easing the costs of outer-suburb motorists hit hard by the ever-increasing tolls used to pay for the motorways now ringing Sydney.

You license Transurban and other developers to overcharge motorists then, when it starts really hurting, you transfer part of the cost back to state taxpayers more generally.

This makes sense? Fortunately, Mookhey says this arrangement is just until they get time to fix the problem properly.

Meanwhile, as the budget papers admit, the tricksy acronyms – TAHE and NGF – are “masking an ongoing underlying budget result deficit”.

Huh? Officially, this financial year’s expected operating deficit of $7.8 billion (well down on last year’s deficit of $10.1 billion) should turn into a surplus of more than $800 million next financial year.

Allow for the previous government’s fiddles, however, and this year’s expected deficit is actually $8.6 billion, and next year’s surplus becomes just a balanced budget.

It’s wonderful how honest pollies can be about their opponents’ misdemeanours.

On housing, the budget trumpets its help for first-home buyers and renters (renters have problems? Who knew?) with the “faster planning program” and the “essential housing package”.

Sounds good. But experience suggests we save the applause until we see results actually delivered.

On early childhood education and care, the budget continues the big improvements initiated by the Perrottet government, moving to universal preschool access and increasing the number of childcare places.

The budget does a little to remember what is so often forgotten when savings are needed: the state’s duty to look after kids without parental care.

With budgets, there’s always books to balance and money to worry about. But behind all those dollars are people, whose needs are real.

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Covid spending makes bread and circuses too costly for Andrews

These days it’s not unusual for cities to realise they prefer not to host major sporting events such as the Commonwealth Games and Olympic Games. What is unusual is that it’s taken so long for Premier Daniel Andrews to pull the plug.

The later the decision, the greater the disappointment and the ire of organisers, athletes and sport fans. And, no doubt, the greater the wasted spending.

Even so, it does take great political courage – and maybe overconfidence – to make such a decision, especially based on an undocumented claim of such a massive cost overrun – from $2.6 billion to as much as $7 billion.

If there isn’t a political price to be paid at the next Victorian election, it really will prove Andrews’ invincibility – with able assistance from a hopelessly divided opposition.

It isn’t hard to believe that the now-expected cost is far higher than the initial estimate. But the latest estimate of up to $7 billion does stretch credulity.

Overruns are a virtual inevitability in games hosting. This is shown by a table of overruns for the summer and winter Olympics, prepared by researchers at Oxford University.

It shows that Sydney’s stated overrun of 90 per cent in 2000 was on the high side, but nothing to compare with Atlanta in 1996, Barcelona in 1992 and the all-time winner, Montreal in 1976.

Even so, the table does suggest that the size of overruns has fallen in recent times as, presumably, host cities wise up. Perhaps now it’s cities with more experience – and good existing sporting facilities – that are more likely to seek and win the games, or perhaps these days cities know to take more care with their budgeting.

Initially understating the likely cost seems standard political practice for all public projects, let alone major sports events. “It’ll be great fun, bring us the international recognition we deserve, not to mention huge tourist dollars – and it won’t cost all that much.”

But it’s not just the pollies who mislead us. We’re all so keen to enjoy the games at home that we’re easily convinced they won’t cost much and will bring great benefits.

What gives hosting international games such a great risk of blowouts is partly the international sporting body’s demand for many new venues, but mainly the need for them to be completed by a specific, immovable date.

This leaves the games organisers hostage to greedy unions and private contractors.

But there’s rarely a shortage of “independent” consultants willing to take a highly optimistic view of what it all will cost, and what the (always greater) monetary benefits the games will bring in. Even to the extent of putting a dollar value on the supposed “social” benefits they will bring.

It’s all too easy to overestimate the benefit that all the spending by sport fans – local and visiting – will bring. Economists have put much thought into what they call “the economics of special events”, remembering, as most people don’t, to allow for the greatest insight of economics, “opportunity cost” – what your decision to do X means you now won’t be able to do.

Another pertinent concept is “intertemporal substitution” – decisions to move spending between time periods. Remember, too, that the amount of benefit varies with the perspective from which you view it.

Holding the Commonwealth Games in Melbourne, for instance, would attract many visitors from other states, spending on tickets, travel, accommodation, meals and so forth.

From the perspective of the Victorian economy, that’s a benefit. From the perspective of the Australian economy, however, the extra spending in Victoria is cancelled out by the reduced spending in other states.

From a national perspective, the only benefit is from overseas visitors, spending money in Oz that they otherwise wouldn’t have.

Most of the spending would come from Victorians themselves. But it’s likely most of this is money they otherwise would have spent in Victoria on other things, at other times in the year. So, little net benefit to the state’s economy, except for spending by overseas and interstate visitors.

It’s a different matter, however, for the mayors of the five regional cities that were planned to share the hosting of the games. Their cities would have benefited greatly from the spending by visitors from the rest of Victoria, other states and overseas.

Andrews’ decision to regionalise the games was intended to be their special feature, a new model for how the games could be run. But this dispersion seems to have added greatly to the games’ cost. Even at $2.6 billion, Victoria would have been spending much more than other state hosts of Commonwealth Games.

Andrews has promised that the regional cities will still get their planned new sporting venues, but it’s hard to see how this squares with his new view that the state has more pressing spending priorities.

So, just why has Andrews cancelled at this embarrassingly late stage?

He hasn’t said so, but it’s obvious. Because he spent so much coping with the pandemic, and the great debt this has left him with. He has no room left for spending on bread and circuses.

It’s now become common for cities to think twice about their plans to host Commonwealth or Olympic games – though not for them to leave it this late.

It’s noteworthy that Melbourne had no rivals in its bid for these games. And that no other Australia state is interested in filling the vacuum.

Why has hosting become less attractive? Because it’s finally dawning on cities that building so many new sporting venues – which will be little used after the games’ fortnight – is a waste of money that could have been spent on far more lasting and useful things.

But I doubt this means the days of these funfairs are numbered. The international controlling bodies will have to trim their demands for new facilities, and rotate the games between a few cities that have maintained adequate existing venues.

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If GPs want more money, they'll have to be less alergic to change

Who’d be Anthony Albanese? Everywhere he looks, another problem. Now it’s the GPs. They’ve become a lot harder to get to see, and more expensive. Even getting them to return your call can take days.

It’s become so bad even the premiers are complaining. What’s it got to do with them? When some people find it too hard or costly to see a GP, they take their problem to a public hospital’s emergency department, where waiting times are long, but there’s no charge.

Even the ambos are complaining that too many of their call-outs are to take someone with a minor problem to the emergency department.

The GP “crisis” was discussed at the national cabinet meeting on Friday, which received the final report of the Strengthening Medicare Taskforce. You can find the report on the internet but, although it’s mercifully short at 12 pages – with lots of lovely glossy photos of happy, good-looking Aussies, I doubt you’d find it very informative.

Remember the joke that a camel is a horse designed by a committee? The pictures suggest it’s intended for ordinary readers, but it’s written in bureaucratic code that would be crystal clear to any expert who already knew what it was saying.

You wade through guff about “access to equitable, affordable, person-centred primary care services” and “co-ordinated multidisciplinary teams” to find the odd bit you understand.

See if I do better. According to the doctors’ union, the AMA, the reason GPs have become so hard to find is that the federal government isn’t paying them enough. Whereas in the old days half of all medical graduates became GPs, now it’s down to about 15 per cent.

So, pay them more. Problem solved.

What the report’s saying is: sorry, not that simple. It’s true the Coalition government inherited a temporary freeze in Medicare rebates – the amount of a doctor’s bill that’s paid by the feds – in 2013, and continued it until 2018. And although the schedule of rebate payments has been increased annually since then, the increases have been much smaller than inflation.

Why? Partly because the Liberals were trying to prove they could cut taxes without damaging “essential services” such as Medicare.

But also because they knew something was wrong with the way general practice works. They needed to pay GPs differently to do different things. Rather than pay more and more the old way, they’d hold back until they – or some future government – worked up the courage to make changes.

Over the almost 40 years of Medicare, there’s been a big change in the problems people bring to their GPs. Because we’re living longer, healthier lives, much more of our problems are chronic – someone with heart trouble or diabetes has to wrestle with it for the rest of their lives – rather than acute: something that’s easily and quickly fixed.

But the present (subsidised) fee-for-service way of remunerating doctors is designed to suit acute problems, not chronic conditions. It involves waiting for problems to arise, not early diagnosis or stopping chronic conditions getting worse.

It encourages GPs to keep consultations short, avoiding long discussions of multiple problems.

A change no one wants to talk about is the way sole practitioners or partnerships of doctors are giving way to companies owning chains of practices staffed by doctors they employ.

When you separate the person delivering the care from the person watching the bottom line, you increase the likelihood doctors are pressured to keep consultations short and order many tests – a further reason to be cautious about reinforcing GPs’ dependence on fee-for-service.

The report wants to move to “blended” funding, with acute consultations continuing to be fee-for-service, but GPs paid lump sums for developing and managing “care plans” for particular patients with chronic conditions.

While it’s true fewer medical graduates are becoming GPs, it’s not the whole truth. As the Grattan Institute reveals, “Australia has more GPs per person than ever before, more GPs than most wealthy countries, and record numbers of GPs in training.”

How do other countries with good healthcare get by with fewer GPs? By making sure their GPs can’t insist on doing things that could be done by other health workers – nurses, nurse practitioners (nurses trained to do some of the more routine things doctors do), pharmacists and physios.

This is what “co-ordinated, multidisciplinary team-based care” means. Changing GPs’ surgeries into more wide-ranging “primary care clinics” is also about making it easier for patients to move between different kinds of care, with GPs taking more responsibility for the total package, and all the various doctors and paraprofessionals having access to a patient’s medical history.

There’s nothing new about this. Federal governments have been trying to improve the performance of primary care for decades – with little success. Why? Because they’ve had so little co-operation from the premiers and the GPs themselves.

The true message of the latest report is: Medicare reform must not just be about more money to do the same things the same way.

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Perrottet's bold re-election bid: the world's first teal budget

A budget can tell you a lot about the government that produced it, especially a pre-election budget.

This one reveals a reformist Premier anxious to persuade us his government has reformed itself. It’s your classic, all-singing, all-dancing pre-election affair, offering increased government spending on 101 different things.

In his effort to get re-elected, Dominic Perrottet has left no dollar unturned. Enjoy, enjoy.

But recent lamentations in Canberra remind me to remind you: whoever wins the state election in March, next year’s budget won’t be nearly so jolly. If there’s bad news in the offing, that’s when we’ll get it.

For a government going on 12 years old and up to its fourth premier, this budget should be the Coalition’s swansong. But Perrottet wants us to see him as new, young, energetic and reforming.

On the face of it, proof of his reforming zeal is his controversial plan to press on with replacing conveyancing duty with an annual property tax, despite Canberra’s lack of enthusiasm for helping to fund the loss of revenue during the transition.

Most economists would loudly applaud such reform. On close examination, however, the budget’s first stage doesn’t add up to much.

Even so, let’s not forget that the desire to make their people’s lives radically better has become almost non-existent among today’s self-interested politicians.

Perrottet wants a return to co-operative federalism, and will happily work with a Labor Victorian premier and Labor prime minister to achieve it.

And the reform doesn’t stop there. This pre-election budget is also the first post-election budget following the crushing defeat of the Morrison federal government. The NSW Liberal Party, with the least to learn from Scott Morrison’s many failings, is also the one that’s learnt most.

Genuine action on climate change, measures to improve the treatment of women in the workplace and the home, promoting co-operation rather than conflict and division, increased spending on early education, childcare and hospitals, the educated talking to the educated, Perrottet’s rejection of the pork barrelling condoned by his predecessor – this budget has everything.

I give you ... Australia’s first teal budget.

Much of the credit needs to be shared with the new Treasurer, Matt Kean. He is a reforming Treasurer – with many of his predecessors’ mistakes needing reform. This budget is mercifully free of the funny-money deals that blighted so many previous efforts.

The spirit of positivity that pervades the Treasurer’s fiscal rhetoric also infects his confidence that the budget will be back to surplus in a year or three, and the debt will one day stop growing. Should this optimism prove misplaced, there’s always scope for adjustment after the election.

The government is rightly proud of all it’s done building new metros, light rail and expressways. But the Coalition’s original desire to get on with a hugely expensive transport infrastructure program while limiting the state’s debt and preserving its triple-A credit rating, led it into crazy arrangements to hide much of the debt by, for example, paying businesses such as Transurban over-the-odds to do the borrowing for it.

Now Sydney, much more than any other city, is girdled by a maze of private tollways, most with a licence to whack up the tolls quarterly or annually by a minimum of 4 per cent a year. What was that about fighting inflation and the cost of living?

This was always a way of keeping official debt down by shifting the cost onto the motorists of present and future decades.

This ill-considered mess has proved so costly to people in outer-suburban electorates that the latest “reform” is for taxpayers to subsidise the worst-affected motorists – and thereby the excessive profits granted to the tollway companies.

Another false economy was to fatten the sale price of privatised ports and electricity companies by attaching to them the right for the new owner to increase prices and profitability. This has played a small part in all the trouble we’re having now making the National Electricity Market work for the benefit of users rather than big business.

In my home town, a formerly secret deal to enhance the sale price of Port Botany is effectively preventing the Port of Newcastle from responding to the looming decline of the coal export trade by setting up a container terminal.

And all that’s before you get to the creative accounting madness of transferring the state’s railways to the still-government owned Transport Asset Holding Entity.

Perrottet, who was up to his neck in that trickery, seems to be making a better fist of Premier than treasurer. And Kean seems a better Treasurer than his many Coalition predecessors. But will that be enough to cover all the missteps of the past?

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Why prime ministers do have to hold a hose (and much else)

If we don’t have another setback on the COVID front between now and May, it seems likely Scott Morrison will escape having his various fumbles in handling the pandemic loom large in the federal election campaign. Even so, the coronavirus was a stark reminder of how much the running of this nation is down to the premiers, not the Prime Minister.

The premiers took full advantage of this opportunity to raise their political profiles. And they’re likely to stay more assertive for years to come.

We’ve all lived all our lives with Australia’s federal system of government. We all know it doesn’t work so well. We long ago tired of the eternal bickering, buck-passing, duck-shoving and cost-shifting between the two levels of government. But just as we’re “learning to live with COVID”, so we long ago got used to living with a dysfunctional federation.

Does a nation of 25 million people really need one federal, six state and two territory governments? Well, if you were starting with a clean sheet of paper, you wouldn’t design it that way.

But we’ve never had a clean sheet. Back in the 1890s, we began with six self-governing colonies. They would never have agreed to dissolve themselves in to one national government. And, today, it’s not just that all those premiers and state parliamentarians wouldn’t want to give up their well-paid jobs.

The Australian mainland is such a big island, and its people are so widely spread around its coastal edge, I doubt if voters in any state would choose to be ruled henceforth solely from distant Canberra.

But the states being immovable, efforts by various prime ministers to make the system work better have had little success.

The pandemic has reminded us that our constitution grants to the states, not the feds, ultimate responsibility for most of the things we expect governments to do for us: healthcare, education, transport, law and order, housing, community services and the environment. Only the states and territories had the constitutional power to order lockdowns or close state borders.

But the problem isn’t just constitutional. It’s also economic. It’s what economists call “vertical fiscal imbalance”. Over the years – and with much help from rulings of the High Court – the feds have accreted to themselves most of the power to levy taxes.

See the problem? The feds raise most of the tax revenue, whereas the states have most of the responsibility for spending it.

Economists think the federation would work better if there was a closer alignment between each level’s spending responsibilities and its tax-raising capacity. But prime ministers haven’t been keen to hand over their taxing powers.

The bigger problem with VFI, as the aficionados call it, isn’t economic, it’s political: the feds cop the blame for levying nasty taxes; the states get the credit for lots of lovely spending. The states love it, the feds hate it.

Related to this is a truth that seems to come as a shock to prime ministers. The feds run defence and foreign affairs and customs and trade. Apart from that, they raise taxes and write cheques – to the premiers, universities, chemists and bulk-billing doctors, pensioners and people on unemployment benefits.

What the feds don’t do much of is deliver programs on the ground, whereas that’s the main thing the states do. Run hospitals and schools, build highways, fight bushfires and clean up after floods.

Turns out that when the feds do try to deliver programs on the ground – put pink batts in ceilings; roll out vaccines across the land – they stuff it up.

In all this you have the hidden explanation for some of Morrison’s coronafumbles.

Despite him setting up the national cabinet – and doing most of the on-camera talking after each meeting – it turned out that most of the credit for our success in handling the pandemic went to the premiers, not him. “What? Even though the feds were picking up almost all the tab?”

Apart from the feds’ failure to order enough vaccines early enough, it seems clear Morrison decided to deliver them through an essentially federal distribution chain of GPs and pharmacists, in the hope this would yield him more of the credit.

That’s how the rollout became a stroll out. It was slow and unfamiliar. Only when the feds admitted defeat and started distributing vaccines through the experts – the states’ public hospitals and mass-vaccination hubs – did things speed up.

I suspect other hold-ups – in replacing JobKeeper; in distributing rapid antigen test kits – came because the feds and states fell to arguing over how the bill should be divvied up. “Why am I paying when you’ll be getting all the credit?”

Morrison said what he did about hoses because bushfires are a state responsibility. Constitutionally, correct; politically, incorrect. He’s had to learn the hard way that if a state problem affects more than one state – or just gets too big for the state to cope with – it becomes a federal problem in the minds of voters.

If you can’t hold a hose, just bring your chequebook.

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Privatisation has done too much to perpetuate monopolies

It always disturbs me to see how few of our econocrats and economic rationalists – “neo-liberals” to their lefty critics – are willing to acknowledge the many cases where, what looked like perfectly sensible micro-economic reform on the drawing board, turned into a disastrous rort in the hands of the politicians.

But that’s not true of one of the great survivors from the reform era. Rod Sims, now chair of the Australian Competition and Consumer Commission, who’s an experienced econocrat and formerly a key advisor on the 1993 Hilmer report on national competition policy, which urged increased competition at state as well as federal level.

At the commission’s annual regulatory conference last week, Sims criticised the many privatisations of government-owned businesses that have simply bundled up a public monopoly and sold it to the highest bidder, without doing anything to get some competition into the industry, or even to adequately regulate the prices charged by a now-privately owned monopoly.

“Privatising assets without allowing for competition or regulation creates private monopolies that raise prices, reduce efficiency and harm the economy,” Sims said.

Why would governments do such a terrible thing? Because they put short-term budgetary pressures ahead of the best interests of their voters, as consumers and business-users of essential services. It’s actually part of a trick that buys the appearance of good management at the price of paying more than necessary for essential services from now on.

The pollies say: “Look at how much I got for that business, look at how I’ve got the budget back to surplus and reduced government debt, look at how I’ve kept our triple-A credit rating”. (Just don’t look at how much more you’re paying for electricity, for using the airport and for imported goods.)

Adding to these short-term budgetary temptations is the way politics and public policy have become more tribal, more public bad/private good. More “binary” as Prime Minister Scott Morrison would say. By definition, the public sector is inefficient and the private sector is efficient, people think.

It follows that merely by changing the ownership of a business from government to private you’ve made it more efficient. But that’s not economics, it’s just prejudice. Economists believe that whether a business should be privatised should be judged case-by-case, and by the way it’s proposed to be done.

Sims says “privatisation can generate important benefits to the economy, such as improved incentives for cost control, investment and innovation to meet the needs of consumers”.

“There have been many examples of privatisations that have been done well and that have benefited Australia. The privatisation of Qantas was done appropriately, for example, and the privatisation of Telstra was accompanied with measures to promote rather than constrain competition.”

Governments can be bad owners of businesses because – thanks to budgetary pressures – they’re usually hungry for big dividends, but reluctant to provide the extra capital needed to keep up with innovation and changing consumer needs.

But I’ve never understood people who lament the privatisation of the Commonwealth Bank. Its treatment of customers was never very different to that of its three big privately-owned competitors. On aviation, we’ve long had trouble keeping enough competition in our domestic market, but Qantas had plenty of international competitors.

“The problem is that, in more recent years, many of Australia’s key economic assets have been privatised without regulation, and often with rules designed to prevent them ever facing competition. This makes us all poorer,” Sims says.

“You regularly hear people calling for micro-economic reform these days. The best way to do that is to expose more of our economy to competition, and by dealing with excessive market power. Australia has on a number of occasions been doing the opposite.

“Many monopolies are subject to regulation, such as gas pipelines, electricity networks, railways and the NBN. In contrast, many ports and airports, which are essential gateways for our economy, are largely unregulated, mostly due to decisions made when they were privatised.”

In its search for a top-dollar selling price, the Keating government stuffed up the privatisation of capital-city airports, particularly Sydney’s. But nothing Victorian governments have done compares in infamy with the behaviour of the Baird and Berejiklian governments in NSW.

They took the state’s three vertically integrated electricity companies – each owning power stations and electricity retailers – and sold them to the people offering to buy them at the highest price. They became the three oligopolists dominating the national electricity market, Origin Energy, AGL and EnergyAustralia.

Then, when they privatised NSW ports, they promised the new owner of the Botany and Port Kembla ports it would be compensated should the Port of Newcastle start handling containers, not just coal.

Then they made the new owners of the Newcastle port agree to pay this compensation should they set up a container facility. They were so proud of this deal they tried to keep it a deep dark secret.

When its existence became known, the ACCC tied to get it struck down by the court as anti-competitive. But it failed to persuade the judge that trying to maximise the sale price by including monopoly rights in the deal was anti-competitive.

Which shows that it’s not just the ulterior motives of politicians that can turn good reform into a travesty. It’s also that many privatisation deals end up before the courts, where economic questions are decided by judges “learned in the law” but, in too many cases, not as well-versed in economics.

I understand that, in a recent case where one of the state’s public-sector unions sought to object to the NSW government’s wage freeze before the NSW Industrial Relations Commission, an economist brought as an expert witness by the union mentioned that wage increases were supposed to reflect productivity improvement.

He was chastised by the bench for introducing such a novel and controversial notion so late in the proceedings. Really?

My point is that would-be reformers need to be a lot warier of doing more harm than good.

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More to running the state than keeping a lid on wages and debt

You’d think that, when it came to assessing the performance of a government in power for 10 years, its handling of economic issues would be central. But, in truth, not as central as you’d think. Much that state governments say about their “state economy” is mere boosterism – or another word starting with b.

The present NSW Treasurer, Dominic Perrottet, is no slouch in telling us how well the state’s doing economically. Before the arrival of the coronacession changed his tune, he used to say we had the “fastest-growing state economy over the past five years” and were “leading the nation” in this or that.

He told us about the Coalition’s “strong financial management” which kept the government’s triple-A credit rating secure, had produced a string of budget surpluses and a “negative net debt”.

“The greatest threat to our future prosperity,” he told us, “would be a return to the budget deficits ... of the past”. Ask him about the present huge deficit and the return to positive net debt and he’ll tell you we’d be crazy not to be borrowing when interest rates are at rock bottom.

Several of the big banks regularly rank the eight states and territories according to their economic performance. This is like calling a horse race. At any point in the race, some horses will be ahead and some behind. At a different point in the race, the order will be different. What does this prove? Not much.

Time for some sense. The fact is, many silly claims are made about the “state economy” because there’s no such animal. The lack of hard economic borders between the states means there’s one, national economy, with eight corners.

The national economy is managed nationally from Canberra and Martin Place, not Macquarie Street (the Reserve Bank, not the NSW Parliament). Interest rates don’t vary by state, nor the rates of income tax, company tax or the GST.

With a few exceptions – mining and financial and professional services – the industry composition of the states is very similar. The feds carefully divide the proceeds from the GST between the states in a way intended to minimise difference in the quality of public services provided by them. The wealthier states subsidise the poorer ones.

The states have responsibility for public health and hospitals, schools, law and order, roads and transport, planning and local government. But they each deal with them in much the same way.

And, in any case, because NSW accounts for about a third of the nation’s population and economic activity, its performance is rarely far from the national average.

All this explains why talk that purports to be about the management of the state’s economy ends up being about the government’s management of its own finances, as shown by its budget and annual capital works program.

Perrottet and his predecessors are terribly proud of their success in limiting the growth in government spending but, since the wages of state government employees account for well over half that spending, they’ve achieved this mainly by keeping a tight 2.5 per cent cap on annual wage rises and using the excuse of the coronacession to freeze state workers’ wages.

Trouble is, this is a two-edged sword. Every dollar the government doesn’t pay its workers is pretty much a dollar they don’t spend on the products of the state’s businesses. What’s more, there’s evidence that keeping the lid on public sector wages encourages private sector employers to give smaller increases. Screwing down wages is the way to grow the economy?

The Coalition boasts it’s spending a lot more on infrastructure – particularly motorways and railways – than its penny-pinching predecessors. True. Much more. Labor allowed a bunch of discredited American rating agencies to dictate how much it could spend on infrastructure, for fear of what its political opponents would say if it lost its triple-A rating.

This government is no braver, but got the bright idea of “asset recycling”. You privatise government businesses – the electricity companies, ports, buses, ferries, the lottery office, whatever – then use the proceeds to build new stuff without upsetting the Yanks.

Trouble is, the government decided to “fatten the pig for market”. To maximise the sale price of the electricity businesses, it created arrangements that allowed the new owners to put up their prices. When it sold Port Botany and the Port of Newcastle, it did what was intended to be a secret deal where, if the new Newcastle owner decided to build a container terminal in competition with the new owners of Botany, it would have to pay compensation.

So the government got great sale prices at the expense of the state’s electricity users, people who hate all the container trucks rumbling through Sydney streets on their way north, and Novocastrians (including me) who worry about where the jobs will come from as the world stops buying our coal.

Sorry, I can’t say I’m wildly impressed by the Coalition’s decade of financial dealings. Too many bankers, not enough economists.

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Perrottet uses no-probs rhetoric to hide fiscal stimulus

If you’ve ever got a dodgy proposition you want spruiked, see if you can get NSW Treasurer Dominic Perrottet to do it.

His budget offers the most optimistic view of the next four years, leading our state to a new Golden Century (and here was me thinking the Golden Century was where Sussex Street Labor went for a Chinese meal).

Behind all Perrottet’s bravado, however, he has taken his lumps, using his budget to absorb some of the economic pain and keep stimulating the state’s slowing economy.

Which makes him much less in denial than his federal counterpart, Josh Frydenberg, who despite all the bad news we’ve had about the national economy since his budget in April, says he’s pressing on with returning the federal budget to surplus.

The stark truth, from which Perrottet was trying to distract attention, is that the NSW economy is well past its peak. It will be many years before yet another housing boom brings back such good times.

The real question is just how far the economy will deteriorate before it levels out. Perrottet sees it slowing only to annual growth of 2.25 per cent in the financial year just ending and going no slower in the coming year, before bouncing back to its average rate of 2.5 per cent in the following years.

In other words, the present sharp slowdown will prove to be just a blip in our inevitable progress onward and upward. Like Frydenberg, Perrottet is a member of the “back-to-normal-in-no-time” party.

Let’s hope their optimism is right. I doubt we’re that lucky.

Perrottet makes much of the unusually strong growth in employment – and unusually low rate of unemployment – we’ve seen in recent years, with NSW performing better than most other states.

What he doesn’t mention is that, according to his own forecasts, those days are past. Employment may have grown by 3.25 per cent in the financial year just ending, but in the coming year growth will slow to 1.5 per cent, and a fraction less in subsequent years.

On the other hand, while the labour market is weakening, we’re told, wage growth will be strengthening, growing 0.75 percentage points faster than consumer prices in the year just ending and pretty much for the next three or four years.

Why so confident of stronger wage growth? Because, if it doesn’t happen, consumer spending will fall in a heap and so will the economy overall.

It’s when you come to his budget that Perrottet’s actions speak louder than his happy words. Having achieved years of huge budget operating surpluses when the housing market was booming and collections of conveyancing duty were overflowing, he’s now repeatedly revised down his expected surpluses as the extent of the housing bust has become apparent.

Had he been as obsessed with budget surpluses as his federal colleagues, he could have sought to limit the fall by cutting expenses but, even in this post-election budget, cuts in government spending are minor.

And, unlike other state governments, he has resisted the temptation to lower the 2.5 per cent government-imposed cap on public sector wage rises. Rather, the government will press on with its election promises to hire more than 14,000 extra teachers, nurses, health professionals and police over the next four years.

State governments regularly run operating surpluses to help fund their annual investment in infrastructure and other capital works. Perrottet increased infrastructure spending by 47 per cent in the financial year just ending and plans to increase it by a further 25 per cent in the coming year. This will increase the state’s expected overall (not just operating) budget deficit (repeat, deficit) to $14.5 billion in 2019-20, up from $2.8 billion two years earlier.

Perrottet estimates that this investment spending will account for about 0.5 percentage points of the state’s expected economic growth of 2.25 per cent in each of this and the coming financial years.

He may talk the same see-no-evil talk as the federal treasurer, but he seems to know a lot more about how you keep the economy growing in tough times.

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Privatisation has been a disaster in many cases

If you’ve always doubted the sense of privatising government-owned businesses, vindication is now flowing thick and fast. In many – but not all - cases it’s turned out to be bad idea. One that’s costing consumers a pretty penny. Unscrambling the egg, however, is proving a frustrating and painful process.

Many people feared that if private businesses were allowed to buy government businesses, the first thing they’d do would be to jack up their prices. Politicians and supposed experts told them not to worry. Sorry, experts wrong, doubting punters right.

In some cases, the businesses privatised were natural monopolies – electricity transmission and distribution networks, and geographic monopolies, such as federally owned airports and state-owned ports.

It the case of the electricity networks, the experts told us not to worry. The prices the private owners are allowed to charge would be tightly regulated. Wrong. In no time the monopolists found ways to rort the system.

One of Scott Morrison’s biggest problems at the coming federal election is voter anger over the huge increase in electricity prices and his government’s limited progress in getting them back down.

Morrison was so rattled he made the most un-Liberal-like threat to use a “big stick” to force the three big companies that have come to dominate the national electricity market to be broken up if they didn’t cut their prices before the election.

He’s since had to replace his big stick with a small one – suggesting he won’t get far in lowering power prices.

The blowout in power prices is the direct result of a decision to take five state-owned electricity generation, transmission and retailing monopolies and turn them into a national electricity market of competing privatised businesses.

But although the feds are now carrying the can for this giant national stuff-up, it was all the doing of the state governments who did the privatising.

How did they get is so badly wrong? They sabotaged it. While you and I were being told not to worry – that vigorous competition would prevent the businesses from raising their prices unduly – the state governments were busy selling their businesses to the highest bidders.

The highest bidders turned out to be companies putting together a vertically integrated business of power stations at the bottom and power retailers at the top. In some cases, governments tightened reliability standards in a way they knew would make it easier for potential purchasers to game the price regulation rules.

If you wonder why parking is so expensive at airports – and catching a taxi home comes with an extra fee – it’s because the Keating government privatised these geographic monopolies without price controls.

With the state governments’ privatisation of their ports, some private lessees have been allowed to fatten their profits in ways too diffuse for us to see how we’re being got at.

For scheming behaviour by premiers and treasurers, there’s no case more appalling than the way the NSW government privatised its ports of Botany, Port Kembla and Newcastle.

Botany is the state’s one big container port, with Port Kembla specialising in bulk commodities and Newcastle the biggest coal port in the world.

In 2013, Botany and Kembla were leased to a single operator and the sale price was enhanced by a “confidential” agreement that the state government would compensate the operator for each additional container handled by the Newcastle port beyond a minimal level.

The Newcastle port was leased to a separate operator with a confidential agreement requiring it to compensate the government – to the tune of about $100 a box, it’s said - for any money it has to pay the other operator if Newcastle increases its handling of containers.

Trouble is, five years on, this deal the public wasn’t supposed to know about is a classic “seemed like a good idea at the time”. Newcastle’s future as a coal port is all decline (the more so if the Adani mine in Queensland goes ahead), but it’s well placed to diversify by building a big new, state-of-the art container terminal.

It has the land, it could build a single ship-rail-road interchange and its port is deep enough to take the next generation of much bigger container ships that will otherwise be accommodated by only one other Australian port, Brisbane.

But the confidential deal makes a container port in Newcastle uneconomic.

Meanwhile, routing all the state’s inward and outward container movements through Botany is a crazy idea. It’s a long way from the Moorebank intermodal terminal, meaning a huge amount of heavy trucks lumbering through Sydney.

New modelling by AlphaBeta economic consultants for the Port of Newcastle claims a new container terminal would allow businesses in the northern part of the state to divert about 16 per cent of the state’s two-way container traffic through Newcastle, cutting their freight distance by 40 per cent, putting competitive pressure on Botany’s container handling prices, taking many trucks off Sydney roads, boosting the NSW economy and cutting the freight costs hidden in the prices consumers pay.

On Monday the Australian Competition and Consumer Commission announced it was taking the Botany operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

Just another skirmish in what will be a long-running battle to undo the not-so-unintended consequences of privatisation.

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Budget Office finds the bigger picture is looking OK

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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How micro reform of electricity has failed

The soaring price of electricity is testament to the disastrous failure of a major item on the 1990s agenda of micro-economic reform – establishing a national electricity market.

In practice, nothing worked out the way the reformers' economic textbooks told them it would.

The failure occurred because the people charged with implementing the reforms – governments and their bureaucrats – did so in ways that defeated the object of the exercise.

They either had ulterior motives, or people charged with regulating the national market in the interests of consumers were "captured" by the big businesses they were regulating.

These are the conclusions I draw from the exposition of the market's many problems given by Rod Sims, chairman of the Australian Competition and Consumer Commission, in a speech this week.

Before reform began, the electricity industry consisted of separate state government-owned monopolies, each generating, distributing and selling electricity, with little trading of power between them.

The reformers' idea was to get a competitive market going, with individual power stations across the eastern states competing to sell electricity into a national grid, and competing electricity retailers at the other end buying the power and selling it to households and businesses.

There was no reason the power stations had to be government owned, so they could be privatised, as could the retailers. New retail firms could be allowed to compete with the big privatised retailers.

The transmission and distribution networks remained natural monopolies, of course, but there was no reason they too couldn't be privatised – provided there was regulation of the prices they could charge.

Victoria's Kennett government was the first to sell off everything in 1994, joined much later and more hesitantly by South Australia, NSW and Queensland.

The consumer price index shows retail electricity prices have doubled in real terms over the past decade, whereas the competition commission's calculations show the average retail consumer's bill has increased by "only" about 50 per cent in real terms.

Three main factors explain the difference. First, the price index is based on the retailers' "standing offer" price, whereas some households have taken advantage of cheaper offers.

Second, many households have responded to price increases by finding ways to reduce the amount of electricity they use, thus reducing the increase in their quarterly bills.

Third, many households with solar panels buy a lot less power from the grid and many get unrealistically high credits for the power they put into the grid.

Sims' people estimate that, of the total increase in household power bills, 41 per cent is explained by increased charges for the distribution network, 19 per cent by increased "wholesale" prices for power generation, 24 per cent by increased retail costs and profit margin, and 16 per cent by the increased cost of the renewable energy target and household solar power incentive schemes.

The excessive increases in charges by the natural monopoly distribution networks of poles and wires occurred because, about a decade ago, the state governments – which owned most of the network businesses and greatly profited from them – succeeded in weakening the rules for regulating their prices.

Some states also lifted their standards for avoiding blackouts to unrealistic levels, thus allowing their networks to increase the cost base on which they get a set rate of return.

When a regulator tried to stop the networks charging for "inefficient costs", the NSW and ACT governments took her to court and got her stopped. Although the NSW government was in the process of privatising its networks, it wanted to preserve their profitability so as to maximise their sale price.

For most of the past decade, the highly sophisticated wholesale market designed by the reformers worked well, keeping prices low while generating capacity exceeded demand.

But now that's changed as ageing coal-fired generators are closed and aren't sufficiently replaced by new generators because of the "regulatory uncertainty" created by the present federal government and its climate-change deniers.

Apart from the contribution the misregulation of the gas market is making to higher wholesale electricity prices, prices are also rising because two or three big companies – Origin, AGL and Energy Australia – have been allowed to dominate both the wholesale and retail ends of the market.

Reformers' models always envisage a market composed of a large number of firms competing vigorously on price, but it hasn't worked out that way. It's taken less than a decade for the national electricity market to become oligopolised, giving the few big firms greater pricing power and ability to induce regulators to "see it my way".

State governments have been happy to sell businesses to the aggrandising oligopolists because they offered higher prices than other buyers. The competition commission's efforts to block these takeovers were unsuccessful.

Meanwhile, the oligopolists were figuring out ways to game the wholesale bidding system.

Retail electricity prices were regulated for many years, but the reformers persuaded state governments to deregulate them since competition between the many electricity retailers could be relied on to keep prices in check.

It hasn't worked out that way. Oligopolistic firms are adept at non-price competition, and so it's proved.

The commission's estimate that 24 percentage points of the overall increase in real power costs have come from the retail level breaks up into 7 points for higher profit margins and a remarkable 17 points for higher costs – mainly, I presume, the costs of marketing, advertising and sales people to flog an essential service. Remarkable.

Being entirely a creation of government policy, the national electricity market is heavily regulated by at least three agencies.

But the regulators have been surprisingly slow to recognise that the market is falling far short of what the reformers promised, and also slow to implement their corrective actions.

They've been far more conscious of the need to avoid annoying the oligopolists than the need to stop consumers having to pay more than they should.

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How Treasury hides big infrastructure spending

One of the most significant, but least remarked upon, features of this year's budget is Malcolm Turnbull's decision to greatly expand the federal government's involvement in the construction of public infrastructure.

He did so under unprecedented and sustained public pressure from the Reserve Bank, seconded by the International Monetary Fund and the Organisation for Economic Co-operation and Development.

But how could the government be stimulating demand at a time when it still had a big budget deficit it needed to get back to surplus ASAP?

By distinguishing between the deficit arising from recurrent spending on its day-to-day operations, and the deficit arising from its investment in capital works, whose benefits to the community would flow for decades.

With the economy's downturn long past, the government should certainly be striving to get its recurrent finances – summarised by the budget's "net operating balance" – back to a healthy big surplus.

But no such stricture should apply to borrowing to improve the nation's infrastructure – always provided the money is well spent.

There's nothing new about this. The state governments have divided their budgets between operating expenses and investment in capital works for years. The national governments of New Zealand and Canada do the same.

So why haven't the feds been doing it? Because Treasury's never liked the idea. That's why, if you read the budget papers carefully, you find Treasury's found a way to do it and not do it at the same time.

The papers say they've always told us what the recurrent budget balance is, it's just that it's been buried somewhere up the back and called the net operating balance, or NOB.

But Treasury has had to admit that, for reasons that make sense only to accountants like me, the NOB regularly overstates recurrent spending by treating as an expense the cost of the feds' annual capital grants to the states to help with their infrastructure spending.

In the coming financial year, this overstatement is worth more than $12 billion, meaning the true recurrent deficit is actually quite small –  $7 billion – and expected to be back in balance in the following year, 2018-19.

So, no great worries there.

For the first time, Treasury has been obliged to reveal clearly exactly how much the feds have been, are, and expect to be, spending on capital works for the 14 years from 2007-08 to 2020-21 (see budget page 4.10).

In 2007-08, the last of Peter Costello's budgets, total federal capital spending was allowed to fall below $10 billion, but generally it's been between $30 billion and $40 billion a year. That's roughly 10 per cent of all the feds' spending.

But here's the big news: in the coming financial year, it's expected to rise to a (nominal) record of more than $50 billion, up from about $43 billion in the year just ending.

This will represent 12 per cent of total federal spending, and be equivalent to 2.8 per cent of gross domestic product.

Again for the first time, the budget papers give us the breakdown of the feds' total capital spending. First there's "direct capital investment" of $13.5 billion, which is mainly spending on defence equipment.

Next is "capital grants" of $14.2 billion. This is money given to other entities – predominantly, the state governments – to help them pay for their own capital works spending, mainly roads.

Last is an odd one, that Treasury usually prefers us not to notice: "financial asset investment (policy purposes)" worth $22.9 billion, up almost $6 billion on the year just ending, and the main cause of the coming big increase.

What's that financial asset investment thingy​? It goes back to 1996 and a loophole Treasury carefully built into the budget figuring at the time of the Charter of Budget Honesty (!) and the introduction of the "underlying cash balance" as the preferred measure of the budget's deficit or surplus.

Get this: if the government simply pays some private construction company to build some infrastructure for it, the cost is counted as part of the underlying cash deficit.

But if the government sets up its own company and gives it the same money, in the form of share capital or a loan, so the company builds the infrastructure (or pays another company to do it), the cost isn't counted in the underlying deficit.

Rather, it's tucked away in the "headline cash balance" that few people notice (see budget page 3.36). (The other big item stashed in the headline deficit is the net increase in the stock of HECS HELP student debt owed to the government, expected to be an extra $8 billion in the coming year.)

It's by this means that the Labor government was able to spend many billions constructing the national broadband network without a cent of it showing up in the underlying deficit.

In the coming year, the Turnbull government expects to buy $1.5 billion more in NBN shares and lend it $9.3 billion – all to finance further construction spending.

As well, it's setting up a company to own and build the second Sydney airport, and another to own and build the Melbourne to Brisbane inland freight railway.

Combined, these two new projects are expected to cost $1.8 billion in the coming year, rising to an annual $3.2 billion in 2020-21.

But if spending on infrastructure is now regarded as "good debt", why is Treasury still using this legal hair-splitting to conceal the cost of the new infrastructure spending push?

Because it's fighting a rear-guard action. Although it's agreed to give the NOB "increased prominence" in the budget papers, the underlying cash balance "will continue to be the primary fiscal aggregate".

And just to prove Treasury's lack of repentance, no modification has been made to the wording of the government's "medium-term fiscal strategy" to "achieve budget surpluses, on average, over the course of the economic cycle".

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Someone has to give if we’re to fix the budget

The nation's budget problem still won't be solved when, one day in the distant future, we get the federal budget back into surplus. Only a change in strategy is likely to produce a sustained solution.

As successive intergenerational reports demonstrate, on present policies government spending will just grow and grow, requiring ever-higher taxes.

If we don't like that idea – or politicians regard it as an impossible sell – we need to think a lot harder about what we're spending on, why it's growing so fast, what things we should stop spending on, and how we can make our spending more effective, in the process slowing the rate at which it's growing.

The five biggest areas of spending include welfare benefits, health, education and infrastructure. Infrastructure's too important to share a column, so we'll return to it.

But it, plus health and education, are even bigger when you remember how they dominate the states' budgets – a reminder that federal and state budgets need to be considered together, and that cutting federal grants to the states, and cost-shifting by the states back to the feds, aren't genuine solutions.

Of three categories – welfare benefits, health and education – the intergenerational reports make it clear health will be by far the fastest growing.

That's not so much because of ageing as because advances in medical technology are hugely expensive, and it's quite unrealistic to imagine that Australian voters will settle for anything less than gaining subsidised access to the latest and best technology ASAP.

Since this is the political reality, the problem (and much of the pressure on budgets) is easily solved.

Our politicians simply need to be brave and tell voters the truth: if they want ever more and better healthcare then, as with everything else, they'll have to pay more for it – in the form of, say, regular increases in the Medicare levy.

That's the fundamental solution, but we could also do more to slow the rate of growth in healthcare spending by removing at least some of the waste and inefficiency that everyone in the system tells us exists.

Much could be done to make education spending more effective. Instead, however, since the national knockback of the 2014 federal budget, the government's done little but crack down on the previous year's crackdown on the welfare cheats the Liberal hard right has convinced itself are ripping off billions every year.

Sorry, not nearly good enough. Nor is preaching the evils of tax increases while you wait for bracket creep to claw back the eight successive tax cuts we were awarded when Peter Costello thought the resources boom would run forever.

The trouble with many professed supporters of Smaller Government is that they want to have their cake and eat it.

They want to reduce government spending so they can pay less tax, but they don't want to give up the middle-class welfare they enjoy – much of it awarded to them by the great man who didn't believe in smaller government, John Howard.

Much of Howard's handouts to the comfortable came in the fifth big spending area, tax expenditures – which have the same cost to the budget as ordinary expenditures, but are hidden away on the tax side where they aren't noticed.

These include various new benefits for supposedly self-funded retirees, the private health insurance tax rebate, big increases in grants to non-government schools and Costello's unsustainably generous increase in superannuation tax concessions for high income earners.

To be fair, Malcolm Turnbull has made a good start to cutting back the super concessions – over the vociferous opposition of his hard right backbench.

More must be done to cut back rapidly growing tax expenditures.

But if we're genuine about achieving fiscal sustainability while restraining the rise in tax rates, we need to embrace a new principle to sit beside our heavily means-tested welfare system (which is the main reason Australia's overall level of taxation is so much lower than almost every other developed economy).

The companion principle should be: we're no longer prepared to subsidise positional goods in the name of encouraging "choice".

We'll put all our effort into providing a good public health system and a good public education system, and that's it.

Of course, it's a free country and if you think you can do better than the public system by making private arrangements, feel free.

But don't expect other taxpayers to subsidise your efforts to get better than they're getting.

In any case, the easier you make it for punters to enjoy positional goods, the less positional you make them, cheating the better-off of their feeling of superiority.

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Lord save us from being governed by bankers

With Our Glad Berejiklian – the archetypal girl who works harder than the boys – replacing pin-up boy Mike Baird as Premier of NSW, should the citizens of other states be envious? Don't be too sure.

True, Berejiklian, like Baird before her, came to public office from a job in banking, rather than a post-uni career as a political apparatchik, though she did spend time as a ministerial staffer. Baird didn't even have that.

Politics is becoming a priesthood – a lifetime calling, culminating in elected office – with ever fewer politicians having spent most of their lives working in a normal job with normal people.

I doubt we're better governed under this development.

One thing making NSW different from other states is that, until Baird's resignation, it was a state governed by former bankers: premier, treasurer and Treasury secretary Rob Whitfield, shipped in after a 29-year career as a deal maker at Westpac.

With Baird gone, NSW may seem one banker down. Except that Berejiklian's successor as Treasurer, Dominic Perrottet, was a solicitor specialising in "banking restructuring".

I suppose one good thing about having a government dominated by bankers is they can be relied on to keep the budget shipshape. They'd be the last pollies to send us bankrupt.

Indeed, Berejiklian's proudest boast is that the NSW government (narrowly defined) is now debt free.

But is that the highest achievement of a government? You'd expect bankers to know better than to regard an institution like NSW without any debt as a joy to behold.

What about all the infrastructure the state still needs? Why boast about having no debt at time when debt is exceptionally cheap and governments' size and taxing powers make them ideally placed to borrow?

Though the fashionable fatwa against debt is atypical of bankers, what it does reveal is a weak grasp on the tenets of economics.

It's a mistake to imagine bankers and economists think alike. That's been my greatest reservation about the financially virtuous Baird government and my greatest fear about its Berejiklian successor.

Its only leading light who can be counted on to have a better grasp on the ways the powers and obligations of governments differ from those of a business is the secretary of the Premier's Department, Blair Comley, a former top federal Treasury officer.

Historically, state governments have had responsibility for owning a lot of profitable businesses, which have been government-owned only because they're natural monopoly networks – electricity, gas and water – as well as managing huge service-delivery organisations: public transport, roads, hospitals, schools and prisons.

This has led to the common notion that running a state government is pretty much about running a collection of businesses. The main thing you need is efficiency.

Sorry, wrong.

First, where governments deliver services with "public good" characteristics – services whose supply would be insufficient if customers had to pay market prices – the quality of the service, reflecting the multiple objectives in supplying it, is just as important as the cost of supplying it.

Second, when you're owning – or selling – a profitable business, profit should never be maximised at the expense of the wider community. You have to take an "economy-wide" perspective.

I fear a banker-dominated government is too likely to adopt a simple, business approach towards an endeavour that that has much wider objectives and obligations; to see the state budget as akin to a business's profit and loss account – as an end in itself rather than just a means to an end; to imagine that maximum benefit to the state's finances equals maximum benefit to people of the state and their economy.

Every instinct of a deal-making banker tells them the object of the exercise is to privatise a business for the highest price possible, this being in the best interests of taxpayers.

You do this by packaging the business up with government-conferred competitive advantages.

But this comes at the disadvantage of taxpayers-as-customers of the business, any present or potential private competitors, and business customers of the privatised business.

Rod Sims, boss of the Australian Competition and Consumer Commission, has been highly critical of the NSW government's privatisation of its ports which, of course, enjoy a degree of geographic monopoly.

I supported privatisation of NSW's electricity "poles and wires" mainly because ownership of a key natural monopoly presented the government with too much temptation to look the other way while its trading enterprises fattened their profits by gouging their customers.

Damaging the state's economy in the interests of improving the state government's finances is something only an ill-educated banker could think was a good idea.

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