How business lobbies to block tax reform

There are a lot of people moving office in Canberra, thanks to the election. But not all of them are politicians. There is a parallel changing of the guard among the lobbyists - a change that will have far more effect on what happens to us in the next three years than most people realise.

As has been well reported by Matthew Knott, of Crikey.com.au, Liberal-aligned lobbying firms - full of former politicians and staffers - are expanding their presence, while Labor-aligned firms are downsizing.

These people are selling access and influence with the side of politics that happens to be in power.

Since businesses pay big money for the assistance of these people - many of them seeking to cash in on their former lives in politics - we must assume it makes a difference, that businesses represented by someone of the same persuasion as the government get a more sympathetic hearing.

If so, the formal lobbying process plays a bigger part in our governance than it suits the politicians to admit or the media to keep us informed about. Lobbyists prefer to practise their dark art without the glare of publicity and, for the most part, the other players respect their privacy. Most obliging of them.

Of course, there are two classes of lobbyists in Canberra: the firms of influence-pedlars we've been discussing, but also the national peak bodies representing business in general, particular industries, small business and even many non-government organisations.

The peak bodies' lobbying efforts - while they no doubt have their private, let's-not-talk-about-it side - are a lot more overt, with the outfits issuing an unending stream of press releases and submissions, and their spokespeople seeking airtime for their reactions to a Reserve Bank decision to raise interest rates, the budget, the election of a new government, or an absolutely crippling rise in the minimum wage.

My guess is that, when the peak bodies are engaged in a major campaign, they quietly enlist additional assistance from the professional lobbyists.

Much of the time the peak bodies are lobbying for their own "reforms": a cut in the rate of company tax, changes to Labor's Fair Work Act, a cut in the top rate of income tax and increase in indirect taxes, and so forth.

But I think they're at their most effective - and most insistent - when they're trying to block or seriously modify some change initiated by the government. Consider the chequered history of the departed Labor government.

We could start with the business lobbyers' success in getting Labor's original emissions trading scheme watered down and, for all we know, the success of some in egging on the Coalition's climate-change deniers, who persuaded the parties to ignore the "mandate" Labor had to introduce such a scheme. So much for mandates.

But the most spectacular blocking effort must surely be the success of three of the world's most profitable mining companies - acting under the cover of the Minerals Council of Australia - in knocking off the original resource super profits tax and getting it replaced by the badly designed minerals resource rent tax, which the Coalition is about to abolish not long before it starts raising significant amounts of revenue.

Labor's handling of the mining tax was abysmal, but much of the big miners' success (which also came at the expense of the small miners) is owed to Tony Abbott's willingness to oppose the tax for reasons of short-term political gain.

Non-mining businesses have yet to twig that the miners' success will come at their expense. With the miners soon to be so undertaxed, the scope for a further cut in company tax has gone. It's called opportunity cost.

More recently, we have the success of the financial services lobby in winning a multi-year exemption from further reforms to superannuation (achieved, it's said, because of the lobby's threat to launch an election advertising campaign against whichever side of politics failed to give it the exemption it was demanding).

This is not to mention the success of the medicos in getting a delay in the clampdown on abuse of the self-education tax deduction and the success of the novated leasing industry in getting Abbott to preserve the company car tax rort.

If you saw this sorry saga as a testament to Labor's political ineptitude you wouldn't be wrong. But there's another lesson to be learnt: the more business looks the other way while particular industries frustrate governments' efforts to reform the tax system, the less likely it becomes that business in general will get the changes it's seeking.

Tax reform doesn't grow on trees.

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Death of man who inspired the emissions trading scheme

The man who first thought that governments should auction off rather give away the rights to such things as broadcast spectrum or taxi licences, and who started the thinking that led to the invention of emission trading schemes, died last week at the age of 102.

He also inspired the joke economists tell each other as a warning against reading too much into statistics: "If you torture the data long enough, it will confess."

He was British-American economist Ronald Coase (rhymes with rose), of the University of Chicago, who in 1991 was awarded the Nobel prize for his trouble.

The first of his discoveries came in 1937 and launched a whole sub-field of economics, but now seems pathetically obvious. He asked why firms exist. Why do capitalists employ people to make or do lots of things for them, when most of those things could be bought from the market?

Why are many of the things produced by a "market economy" actually produced inside firms - some of them employing many thousands of people - where employees have to do as they're told by the boss and the rules of the market don't apply?

His answer was that buying things from others in the marketplace involved hidden costs, which he dubbed "transaction costs" - the cost of finding the best deal, checking quality, negotiating a price, writing a watertight contract and then, if necessary, enforcing that contract.

Business people would do things "in house" whenever this was cheaper than incurring all the transaction costs involved in buying from the market. (But once you start thinking like that, it eventually occurs to you that there will be times when it's cheaper to "outsource" the provision of services you formerly provided in-house.)

In a paper on the US Federal Communications Commission, written in 1959, Coase argued that the transaction costs faced by the commission in deciding which of the many applicants for a broadcast licence would make the greatest contribution to the economy were impossibly high.

But this did not justify the commission continuing to give away licences to whomever it saw fit. It would be better to replicate market conditions by auctioning the licence to the highest bidder. This way, the licence would go to the firm most likely to put the licence to its "highest-valued use".

Do you see how this led to the invention of the tradeable permit? Say the government is trying to limit to a certain level the catching of a particular type of fish, or limit emissions that cause acid rain, or those that cause climate change.

It issues permits for firms to catch or emit up to that level. Because this level is lower than the market would otherwise produce, it has thereby increased the item's "scarcity value", allowing firms with permits to get away with charging a higher price.

If it gives the permits away to firms, it's effectively allowing them to levy a tax on their customers. If it auctions the permits, it's ensuring the proceeds of the disguised tax are collected by the taxman.

The firms that get the licences by bidding highest can be expected to pay no more than allows them to continue profitably producing whatever it is. They'll also have a monetary incentive to find ways to continue producing their product while generating fewer emissions.

And by allowing firms to trade their permits - say, to sell any they discover they don't need - you increase their incentive to find ways to reduce their emissions, as well as ensuring the burden of reducing emissions is shifted to those firms that can do so at the lowest cost.

But Coase's greatest claim to fame came from a paper he wrote in 1960, The Problem of Social Cost, which became the all-time most cited paper by other academic economists and made him the darling of libertarians and free-market conservatives.

Social costs - also known as "negative externalities" - are costs imposed on third parties by transactions between people in the marketplace. Say I run a factory that imposes a lot of noise on my neighbours, emits fumes and puts gunk into the local river. Since this polluting costs me nothing it represents costs borne by the community, not by me and my customers. It's a cost that's "external" to the market.

What should governments do about this problem? The traditional answer was for them to protect the victims of this action by imposing restrictions or obligations on the perpetrator.

But Coase argued that, simply by clarifying the property rights involved, governments could leave it to the affected parties to negotiate a satisfactory solution. Again, the solution could be left to the market.

What's more, this ability to reach a privately negotiated solution meant it didn't matter to which side the government awarded the property rights. The libertarians loved this so much they called it the "Coase theorem".

What they liked was that it appeared to justify a greatly reduced role for governments in solving environmental problems. That it would also favour the rich and powerful was, of course, purely coincidental.

Over the years, however, Coase made it clear the libertarians had taken him out of context. For one thing, he'd argued that to whom you awarded the property rights made no difference from the perspective of economic efficiency. Obviously, it made a big difference from an equity or fairness perspective.

And his theorem had been based on the explicit assumption that the transaction costs involved in negotiating a solution were negligible. Not surprisingly, the man who had discovered transaction costs thought that, in the real world, transaction costs would be significant and often prohibitive.

Is it easy for all the people affected by a factory's pollution to get together and negotiate a satisfactory solution with a rich factory owner? Sounds to me like a case for government intervention.

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MACRO MANAGEMENT AND THE SUPPLY SIDE

Management of the macro economy has moved to a more sophisticated and thus more medium-term approach, which has increased the focus on the supply side. I want to discuss some less familiar technical terms that have become part of the debate: ‘trend’ growth, the ‘potential’ growth rate, the ‘output gap’ and how macro policy and micro policy fit together.

The meaning of ‘trend’ growth

It has become common to hear the RBA or the treasurer saying the economy (or private consumption or some other key macro variable) is growing at, below or above ‘trend’ - and expecting people to know what this means.

It can be a bit confusing because the Bureau of Statistics uses the word ‘trend’ to mean something quite different. So let’s get that out of the way first. The bureau presents its estimates of key indicators on three bases: original, seasonally adjusted (which allows valid comparisons to be made between adjacent months or quarters) and ‘trend’, which would be better described as ‘smoothed seasonally adjusted’. To remove some of the ‘noise’ in the seasonally adjusted figures - and thus make their underlying direction more readily apparent - you subject the series of observations to an averaging process called a 5-term (for quarterly data) or 13-term (for monthly data) centred ‘Henderson’ moving average. The advantage of this statistical technique is that it makes the direction in which the variable is moving very clear without moving any turning-points. The disadvantage is that you don’t know the final value of an observation until two further quarters (or six further months) have passed. Until then, the estimate is subject to regular revision.

But as the term is used by macro economists (as opposed to the statisticians), ‘trend’ means an indicator’s medium-term to long-term average, with ‘medium-term’ meaning a period of more than two or three years, and long-term meaning maybe 10 or 20 years. For instance, the Rudd government’s economic statement before the 2013 election campaign showed the 30-year average growth rate for real GDP is 3.25 per cent a year.

But here’s where it gets a bit tricky. As well as using ‘trend’ to refer to this backward-looking historical average growth rate, the macro managers also use it to refer to the forward-looking average rate of growth over the future medium term. This forward-looking ‘trend’ is the same as the economy’s ‘potential’ rate of growth.

The meaning of the ‘potential’ growth rate

The potential rate of growth in production (output or real GDP) is the maximum average rate at which it can grow over the medium to longer term without worsening inflation. It thus has similarities to the non-accelerating-inflation rate of unemployment (NAIRU), which is the lowest rate to which unemployment can fall without worsening inflation. Both are measures of full employment or full capacity or the ‘sustainable’ rate of growth.

The three Ps of economic growth

A common way to examine economic growth is to decompose it into ‘the three Ps’: population, participation and the productivity of labour. It is, in fact, a labour-market oriented way of thinking about economic growth. Over the medium to longer term, the economy’s rate of growth can be seen as determined by the rate of growth in the population (in particular, the population of working age), any change in people’s participation in the workforce, and the rate at which the productivity of labour is growing.

Now, when economists treat the backward-looking medium-term ‘trend’ rate of growth as essentially the same as the forward-looking ‘potential’ growth rate they’re implicitly assuming there’s no reason to expect any of the three Ps to change in the coming decade or so from what they’ve been over the past few decades.

But that’s not a reasonable assumption, particularly at present. And this is why Treasury’s more forward-looking, potential-oriented approach to trend has led it to keep revising down its estimate for trend. We can make whatever guesses we like about whether the medium-term rate of improvement in labour productivity will be faster, slower or about the same as it’s been in the past. But the two other Ps - population of working age and the rate of participation - being demographic variables, can be projected with more confidence. And one thing that leaps out from the demography and the ageing of the population is that the great population bulge which is the baby-boomers (those born between 1946 and 1961) is rapidly entering an age cohort with a significantly lower rate of participation than the cohort they are leaving. (This remains true even if it’s also true that many baby-boomers are retiring later than had been expected). If you’ve noticed that Treasury has been revising down its estimate of trend growth, this is the main reason for it. Actually, this process has been occurring for some time. According to Treasury’s PEFO issued early in the 2013 election campaign, forward-looking trend growth was taken to be 3.5 per cent from 1998, then lowered to 3.25 per cent in 2005 and to 3 per cent in 2006. These downward revisions also reflected ‘lower projected productivity growth’. The trend rate is expected to be lowered further to 2.75 per cent some time ‘early next decade’.

The way to determine what Treasury’s estimates are for trend rates of growth in other key macro variables is to look at its annual mechanical ‘projections’ used for the last two years of the budget’s ‘forward estimates’. Trend growth in real GDP of 3 per cent is consistent with annual growth in total employment of 1.5 per cent and an unemployment rate steady at 5 per cent. This implies Treasury’s estimate of the NAIRU - full employment or unemployment’s ‘long-term sustainable level’ - is also 5 per cent. It further implies that, on average, employment needs to grow by 1.5 per cent just to hold the rate of unemployment steady. These estimates, in turn, fit with a CPI inflation rate of 2.5 per cent (ie the mid-point of the RBA’s medium-term target range) and annual growth in nominal GDP of 5.25 per cent (implying inflation as measured by the GDP deflator averages a fraction less than as measured by the CPI because, in the present environment, the terms of trade are assumed to trend down, which reduces growth in the GDP deflator but not the CPI).

While we’re on the three Ps, the charter of budget honesty requires Treasury to produce an ‘intergenerational report’ every five years. We’ve already seen three such reports. Treasury prepares projections of the major classes of government spending for the following 40 years (which always suggest massive growth in federal spending on health care), and estimates the size of the ‘fiscal gap’ if the growth in tax collections is to be capped as a percentage of GDP. But just as interesting are Treasury’s underlying estimates of the three Ps, past and future. In the 2010 IGR, the average annual rate of growth in real GDP over the past 40 years was 3.3 per cent, with growth in the population of working age contributing 1.7 percentage points, change in participation (broadly defined - see below) contributing minus 0.2 points and productivity improvement 1.8 points. Treasury projected that, over the coming 40 years, real GDP will grow at a slower average rate of 2.7 per cent a year, with growth in the working-age population contributing 1.3 percentage points, change in participation contributing minus 0.2 points and productivity improvement contributing 1.6 points. So most of the slowing in growth is explained by slower population growth and the rest by slower productivity growth. Of course, the reason we want to see the economy growing strongly is to increase our material standard of living, which is simply measured as growth in real GDP per person. Treasury estimates that the growth in GDP per person will slow by a smaller gap: 1.9 per cent over the past 40 years versus 1.5 per cent over the coming 40. In this case, the gap is explained equally by slower growth in the population of working age and slower growth in productivity.

Note that the expected slowdown in productivity improvement is no more than Treasury’s best guess. In both 40-year periods the working-age population grew a fraction faster than the population over all, but the difference between working-age and overall growth is expected to change sign in the coming 40 years because of the ageing of the population. It shouldn’t surprise you that participation is expected to fall and thus make a negative contribution to growth in the coming 40 years. But it may surprise you that participation also made a negative contribution in the past 40 years, at a time when we know the participation of women grew strongly. The explanation is that this improvement was more than offset by the higher rate of unemployment during the period and by a decline in average hours worked per worker as the proportion of part-time workers increased.

Speed limits and the ‘output gap’

One term you may be more familiar with is the ‘output gap’. This is the difference between the actual level (not the growth rate) of GDP and the level of potential GDP. In any particular year, actual growth is determined by the strength of aggregate demand, whereas the potential growth rate is the maximum sustainable rate of growth over the medium-term, set by the growth in aggregate supply.

So if in any particular year actual growth exceeds the trend (potential) growth rate this could be taken to mean that aggregate demand is growing faster than aggregate supply, and so is known as an ‘inflationary gap’. But it’s not that simple. Whether or not growth in excess of trend is inflationary depends on whether the economy is already operating at full employment (of all resources, not just labour) or full capacity. If it is then, yes, such growth will be inflationary (and will involve attempting to drive the unemployment rate below the NAIRU). If, however, the economy is operating well below full capacity (with factories and workers not fully employed) then short-term growth in excess of trend will not be inflationary. Indeed, the usual pattern in the first few years after a recession - in which, of course, actually capacity falls to levels way below full capacity - is for growth to far exceed trend. This is not a problem, it’s desirable.

So trend should be thought of as setting a ‘speed limit’ for the rate at which the economy should be growing only after the economy has returned to full capacity. Remember, too, that full capacity is not a fixed point. It grows every year. By how much? On average, by the trend rate of growth - this is what trend measures: the average rate at which the economy’s capacity to produce goods and services expands every year.

Factors leading to growth in the economy’s productive capacity

What factors cause the economy’s supply side - its capacity to produce goods and services - to grow each year? That’s easy: growth in the three Ps. Aggregate supply grows in line with the growth in the labour force, new business investment and public infrastructure, gains in the human capital of the workforce (education and training) and productivity gains arising from economies of scale and advances in technology.

Governments can exert some influence over the growth in the labour force by their policy on immigration and by reforming policies that have the effect of discouraging participation in the labour force. Government policies can also have an influence on the NAIRU. As well, governments can exert some influence over productivity improvement by the incentives and disincentives they create affecting primary research, research and development, and the tax and transfer system generally. They also exert influence by the size and effectiveness of their spending on education and training, as well as on economic infrastructure.

The Gillard government’s budget of May 2011 provided an interesting example of a government using its budget not just to influence aggregate demand but also to influence aggregate supply. It sought to add to supply, especially the supply of labour, particularly skilled labour. It involved a modest expansion of the immigration of skilled workers, the reform and expansion of vocational education and training (TAFE), and the use of sticks and carrots to encourage greater participation in the labour force by disadvantage workers (the long-term unemployed, sole parents and the disabled) and by wives in single-income couples who were under 40 and had no children to look after.

How macro and micro policy fit together

On the surface, the traditional instruments of macroeconomic management - monetary policy and fiscal policy - are very different to the relatively new idea of ‘microeconomic policy’. The traditional instruments are aimed at demand, whereas micro reform is aimed at supply; they work in the short term, whereas micro policies generally effect change only over the medium term. But despite appearances, microeconomic policy is actual an instrument of macro management.

Historically, the macro managers focused solely on managing demand, trying to get it up to the potential growth rate in the recovery phase after recessions, and trying to hold it down to the potential growth rate during booms. The era of micro-economic reform, however, represents the realisation by the economic managers that they can increase the economy’s rate of growth (rather than just keeping it as stable as possible) by improving the flexibility and efficiency of the supply side and also by actually increasing supply.

So the traditional macro instruments are aimed at achieving a stable rate of growth whereas micro policy aims at achieving a higher rate of growth over the medium term, at raising trend. Another way to think of it is this: if avoiding inflation means keeping demand and supply growing at the same rate, one solution (the traditional solution) is to ensure demand doesn’t grow too fast. But another, more creative solution is to do what you can to hasten the growth of supply. To the extent you can do this, you can get faster growth without inflation problems.

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A lot of politics is unconscious pre-judgment

At last. God's in his heaven and all's right with the world. The rightful rulers of this country are back in charge, so now things can only get better. You think I'm joking? I'm not.

There's an American psychological test called the implicit association test which asks people to divide nice words and nasty words, black faces and white faces, into two categories and do it as fast as they can.

When journalist Malcolm Gladwell, author of Blink, tried the test he was so dissatisfied with his score he did it over and over, trying to improve his results. Why? Because he's half Jamaican - with a fabulous afro haircut - but the test revealed him to be unconsciously prejudiced against black people.

It turns out more than 80 per cent of all those who have taken the test were found to have "pro-white associations".

Gladwell explains our attitudes towards race and gender operate on two levels. We have conscious attitudes, things we choose to believe, which we use to direct our behaviour consciously. But the test measures our unconscious attitudes, "the immediate, automatic associations that tumble out before we've even had time to think". Such unconscious attitudes affect our behaviour without us realising it.

I believe something similar operates in our unconscious attitudes towards the two main political parties. We see the Liberals - the party of the bosses - as the party best suited to run the country.

Sometimes enough of us feel sufficiently rebellious to install Labor - the party of the workers - but this leaves many of us uncomfortable and yearning for the return of the masters. And when, sooner or later, it becomes clear Labor isn't doing well, no one is terribly surprised and we rush back to the security of our pater familias.

You don't understand anything about the underlying forces of Australian politics until you understand that.

It applies particularly to the economy. For decades pollsters have asked people which side of politics is better suited at managing the economy. And for decades the almost invariable answer is the Coalition.

There was a time during the term of the Hawke-Keating government when the economy was doing well and Labor was ahead on this question. But such times are the exception. Normally, Labor judges its success just by the extent to which it has narrowed the gap with the Libs.

It follows that the more the economy is seen as the dominant issue of federal politics - as it has been since Gough Whitlam's day - the more the Libs are seen as the natural party of government.

No one believes this more fervently than business people, of course. Business is always uncomfortable with a Labor government, but the Rudd-Gillard-Rudd government proved much less adept at maintaining good relations with business than the Hawke-Keating government.

So much so that the economist Saul Eslake has noted "the extent and depth of antipathy among the business community towards the present [Labor] government - which goes way beyond the normal inclination of most business executives or owners towards centre-right governments".

A big part of the problem was Labor's resort to the language of class conflict, starting with its decision to rename the original mining resources rent tax as the resource "super profits" tax.

New governments always enjoy a honeymoon with the electorate and a lift in business and consumer confidence. But this time it's hoped the turnaround in business confidence will be big enough to lead to a recovery in non-mining business investment, which has been weak for several years.

The resources boom and its high dollar, the end of the housing credit boom and the return of the more prudent consumer, and the continuing digital revolution mean that, although the economy has been travelling well enough overall, various industries have been hard hit by "structural change".

Most of these structural pressures are beyond the influence of government policy. That's particularly true of retailing, which includes a lot of small businesses and has been doing it especially tough.

The temptation for hard-pressed business people to blame their troubles on a Labor government has been irresistible. The change of government will make them a lot happier. And the more confident business is about the future, the better it's likely to do. The test will come when businesses realise their underlying problems haven't gone away.

Business people are usually highly critical of anyone seen to be "talking down the economy". But, we've learnt, this ethic applies only when the Coalition is in government. Tony Abbott and Joe Hockey were talking the economy down for at least three years, and many business people were publicly agreeing with them.

Of course, the assumption that Liberal governments always manage the economy well - that, in Abbott's revealing phrase, it's in their DNA - is wrong, just as the assumption that Labor governments are always bad at it is wrong.

The hope that all our problems will evaporate now the good guys are back in charge is wishful thinking.

But that doesn't stop our deeply held assumption to the contrary - an assumption shared by both Liberal and Labor politicians - from having real effects on our behaviour. One of the surprising truths of economics is that, to some extent, our expectations are self-fulfilling.

And already the budget and boat-people crises are over.

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Big change in party, little in policy

Coalition supporters rejoice! The evil incompetents have been banished and the good guys are back in charge. But don't get too excited because by the time we reached polling day many illusions about the difference a change of government would make had been shattered.

A standard delusion of election campaigns is that the Coalition portrays itself as standing for lower taxes, higher spending and lower budget deficits.

And Tony Abbott seemed to be cutting taxes big time, abolishing the carbon tax and the mining tax and cutting the company tax rate to 28.5 per cent.

But now we finally have the Coalition's full costings we see how far the reality falls short of the headline.

Its tax cuts will cost about $20 billion over four years (in cash terms), but its offsetting levy on big companies and reversal of Labor tax breaks - mainly on superannuation and small business - will claw back about $14 billion over four years.

And that's before you count the unlegislated Labor tax increases Abbott will put into law - including the increases in the Medicare levy and cigarette duty, and the new tax on bank accounts - worth about $28 million over four years.

Don't sound like lower taxes to me.

But surely the most disillusioning thing for Liberal true believers is the way five years of railing against Labor's utterly wasteful spending, never-ending budget deficits and soaring debt levels was simply cast aside over the course of a five-week campaign.

When, just before the campaign began, Labor was forced to reveal the deficit would be worse before we returned to surplus in another four years' time, the Libs proclaimed this a ''budget emergency''.

But then, just two days before polling day, they revealed their response to this emergency, which turned out to involve a net reduction in the cash deficit of just $6 billion over four years. On Treasury's projections, cumulative future deficits of a further $55 billion will now be a mere $49 billion and the return to surplus not a day earlier. Yippee.

Let me be clear: I wholeheartedly agree with the Liberals' last minute pull-back from resort to fiscal austerity. But then I was never taken in by their five years of frightening the fiscally illiterate.

What's supposed to be next on the agenda of a new government is a first look at the books, the amazed discovery it's all much worse than their predecessors let on, and the regretful announcement that this fiscal crisis necessitates a huge round of cost-cutting and the breaking of ''non-core'' promises.

Sorry, this ain't gunna happen, either. Why not? Mainly because Peter Costello's charter of budget honesty and, in particular, his instigation of the econocrats' pre-election economic and fiscal outlook statement was specifically designed to ensure he was the last treasurer able to pull that stunt.

If you've read the PEFO you've already seen the books.

But Abbott is further locked in by his repeated resolutions not to break his promises. He's even promised to let the deficit blow out rather than break a spending promise.

Labor claimed the planned ''commission of audit'' will be used as the vehicle for big spending cuts, but this was just its retaliatory scare campaign.

All past Coalition audits have been performed by purist economic rationalists who make radical recommendations no government would dream of accepting.

These and other promised inquiries (44 in Abbott's case) are just a device to get party hard-liners off a Coalition leader's back before elections.

There are just three main respects in which Abbott's policies are significantly different to Labor's.

First, the redistribution of the burden of taxation and the benefit of government spending against the Labor (and, for that matter, National Party) heartland and in favour of the Liberal heartland.

Second, the move from a market-based response to climate change to a pretend response. The campaign revealed a cap on ''direct action'' spending that means Abbott's professed bipartisan commitment to a 5 per cent reduction in emissions by 2020 is a sham.

Third, a marked improvement in business confidence now the socialist hordes have been vanquished.

This is the one delusion that remains from the rubble of an election campaign by the Liberals' most populist and least rationalist leader in a generation.

Fortunately, its delusory nature shouldn't stop it giving the economy a genuine boost as business ends its three-year-long dummy spit.

Today's return to real life will end one more illusion that accompanies every campaign: that it's governments who do most to manage the economy not the unchanging econocrats of the Reserve Bank.

There could be no more powerful reason why the change of government will change surprisingly little.

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Little progress in economy's transition

With the election campaign supposedly fought mainly on economic management, it's surprising this week's figures for growth in the June quarter got so little attention. So what shape is the economy in as it looks like being handed over to a new government?


According to the Bureau of Statistics' national accounts, it's not doing well, but nor is it doing particularly badly. Real gross domestic product grew just 0.6 per cent in the quarter and 2.6 per cent over the year to June.

This is a touch better than many economists were expecting, but it's well short of our ''trend'' growth rate of 3 per cent a year. According to the figuring of Paul Bloxham, of the HSBC bank, we've slowed from an annualised rate of 3 per cent in the second half of last year to an annualised 2.3 per cent in the first half of this year.

This is too slow to generate sufficient additional jobs to employ the growing labour force and prevent unemployment from rising. Unemployment's gone from 5.4 per cent to 5.7 per cent of the labour force over the seven months to July.

The problem - as everyone must know by now - is that we're engaged in a difficult shift from growth led by mining to growth led by the rest of the economy as the resources boom goes through a ''phase shift''.

And, as Reserve Bank governor Glenn Stevens has reminded us, the transition is being made more difficult by the end of the long-running housing credit boom, which has prompted households to return to their relatively high rate of saving and therefore allow their consumption spending to grow no faster than their incomes.

This week's accounts show little sign we've got far with the transition, making it fortunate we're still getting some support from the resources boom as it moves from its investment phase to its production and export phase.

Investment spending by the mining sector looks to have fallen about 3 per cent in the quarter, but increased mineral exports do most to account for the 1.3 per cent growth in the volume of exports in the quarter.

With reducing mining investment also meaning fewer imports of mining equipment, this was sufficient to mean ''net exports'' (exports minus imports) had no net effect on growth during the quarter. (Over the financial year, export volume growth of 6.4 per cent and a fall of 1.8 per cent in import volumes meant net exports contributed a huge 1 percentage point to the overall growth of 2.6 per cent.)

Note that increased stockpiles of minerals did most to account for a rise in the levels of business inventories, which contributed 0.2 percentage points to growth during the quarter.

Note, too, that our terms of trade were steady in the quarter, implying no further fall in mining export prices.

The story on growth in the non-mining economy isn't as good. Consumer spending grew by 0.4 per cent for the quarter, which contributed 0.2 percentage points to overall growth. (Over the financial year, consumer spending grew 1.8 per cent, contributing 1 percentage point to overall growth.)

This growth is better than implied by the very weak monthly figures for retail sales (which account for only about a third of total consumer spending), mainly because of strong growth in purchases of services and, particularly, new cars.

Even so, its growth is well below trend consumption growth, which should be about 3 per cent a year.

With the household saving ratio roughly stable at a little more than 10 per cent of household disposable income, this tells us disposable income must also be growing at well below trend.

Why? Because its growth is not being bolstered by a lot more people getting jobs and because wage increases aren't as high as they were.

Is slower wage growth a bad thing? It may not sound wonderful, but it is giving the Reserve Bank confidence inflation will stay low notwithstanding the likely rise in import prices following the fall in the dollar. So it has permitted the Reserve to cut interest rates further.

Turning to the other main components of non-mining growth, home building and alterations fell by a surprising 0.6 per cent in the quarter.

But though the housing market is hardly rip-roaring in response to the present very low interest rates (another consequence of the prudence that's followed the end of the credit boom), it is recovering, and home building grew by a reasonably healthy 4 per cent over the year to June.

Non-mining business investment seems to have shown no growth during the quarter, which is a disappointment. We must hope the expected change of government will give business a bit more confidence to take advantage of low interest rates and the still-low cost of imported capital equipment.

Despite all the talk of cuts, Kieran Davies, of Barclays bank, calculates the public sector grew by 1.2 per cent in the quarter.

Though GDP per hour worked improved by just 0.2 per cent in the quarter, it's up by 1.8 per cent over the year. That's pretty much in line with trend - a far cry from the earlier talk of a productivity crisis.

Since much of the earlier apparent weakness was explained by the investment phase of the mining boom (many workers employed building new mines and facilities from which nothing was being produced), the more recent improvement is no doubt partly explained by more of the mines coming on line.

The trade-exposed sector's difficulty coping with the high dollar - which does much to explain the weak growth of the non-mining economy - probably helps explain a bit more of the improvement.

People have trouble understanding that productivity gains tend to come from pain rather than pleasure.

But let's not worry about that. Provided government changes hands this weekend, all our economic problems will evaporate within days.

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Why Abbott wouldn't be a great cost cutter

If Tony Abbott wins the election would he "cut, cut, cut" to fill the "$70 billion black hole" needed to cover the cost of his election promises, as Labor repeatedly claims? Would he follow the Europeans in adopting austerity policies, as others claim?

No. Why not? Because the man who'd be his treasurer, Joe Hockey, isn't that stupid and Abbott isn't that committed.

Let me make a fearless prediction: should the Coalition win the election, we'll hear precious little more about the evils of "debt and deficit".

While Labor was in power, Abbott and his colleagues exaggerated the significance of the size of the budget deficit and the level of the public debt because this was the only way to disparage the economic record of a government that had - with much help from the Reserve Bank - done surprisingly well.

But once the Coalition was back in power its need for fear-mongering about debt and deficit would disappear and it would face the same struggle to get the budget back to surplus that Labor faced.

Whenever it was challenged about its slow progress it would blame Labor but, apart from that, it would prefer to talk of other things.

How can I be sure? Mainly because Abbott's been backing off already. He used to say he'd get the budget back to surplus in "year one". Now his promise is merely that "by the end of a Coalition government's first term, the budget will be on track to a believable surplus" and "within a decade" the budget surplus will be 1 per cent of gross domestic product.

Only "on track" after three years? And "within a decade"? That's three elections away.

But also because the Libs have form on this sort of scare campaign. While John Howard and Peter Costello were in opposition in 1996, they drove a "debt truck" around Australia to ensure every "man, woman and child" knew how much they owed as their share of the nation's foreign debt. In government, however, they never mentioned the foreign debt again.

But can they get away with going cold after having made so much fuss? Well, the Republicans in America have been doing it for years. Their attitude is simple: budget deficits aren't a worry when they're being incurred by Ronald Reagan or the George Bushes, but they're a terrible worry when they're being racked up by Democrats like Barack Obama.

My guess is that, for the most part, those who've been most concerned about our supposedly soaring debt are those who'd naturally vote Liberal. They're really saying: "I'd feel a lot more comfortable about the budget if only the Libs were in charge of it."

Well, if Abbott wins, they would be. And that would be a signal to many people to stop worrying and leave everything to that nice Mr Hockey.

Hockey, by the way, has said several times that they wouldn't risk worsening unemployment at a time when the economy is fragile by pursuing policies of austerity - that is, by cutting spending or raising taxes by a lot more than is needed to cover the cost of their promises, in an attempt to reduce the budget deficit faster than would happen automatically as the economy strengthens.

As the Europeans have demonstrated, trying to force the pace while the economy is weak is counterproductive. It pushes the economy back into recession, actually making the deficit worse rather than better. So I don't have any trouble believing Hockey when he says he wouldn't be so foolish as to try it here.

Labor's claim that Abbott's election promises have created a $70 billion black hole he will need to fill with spending cuts is a wild exaggeration. It's been debunked by several fact-checking outfits.

But Kevin Rudd, Penny Wong and Chris Bowen haven't skipped a beat in repeating this false claim.

So don't for a minute imagine all the scare campaigns, dishonesty and dissembling is limited to one side. If you're tempted by such thoughts you've allowed partisanship to cloud your thinking.

The fact remains, however, that the Coalition is delaying until almost the last moment before revealing the full list of spending cuts needed to pay for its promises.

What's it got to hide? Well, maybe it has a few nasties it's hoping won't get too much attention before the poll, but it's just as likely it's worried about making some mistake in its figuring - in this area oppositions are at a huge disadvantage relative to governments - that Labor could use to damage its credibility.

An Abbott government would be looking for budget savings - just as Labor has been for several years - and would probably be more inclined to cut spending than end tax breaks.

Its first budget, in particular, would be a tough one, including various unpleasant measures that weren't contrary to its promises but many people weren't expecting. Its primary purpose would be to replace Labor's pet programs with the Coalition's pet programs.

But Abbott has made so much fuss about restoring our trust in politicians that I don't expect he'd follow Howard in using his first budget to break a lot of "non-core" promises.

He'd end up breaking many promises, of course - because "no surprises, no excuses" is a promise no honest politician would make - but not at first. And, like Howard, he doesn't have the stomach for genuinely smaller government.

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Why taxes would rise under Abbott

Election campaigns have become works of fantasy where, to enter the spirit of things, you have to suspend disbelief. And the greatest unreality this time is Tony Abbott's claim the budget can be returned to surplus in the coming decade while taxes go down, not up.

To most people the idea of permanently paying less tax is hugely attractive. And Abbott is promising to abolish the carbon tax and the mining tax, cut the company tax rate by 1.5 percentage points and abandon Labor's plan to end tax concessions for company cars. All this would cost about $28 billion over four years.

So what reason is there to doubt he would deliver a lasting reduction in taxes? Simply his promise to get the budget back to surplus - plus the knowledge government spending is set to grow strongly in the next decade.

To return to surplus and to do it while avoiding growth in tax collections would require a literally unbelievable degree of spending restraint.

Remember, though it gets little notice, Abbott is also promising to impose new taxes, increase taxes and eliminate tax breaks. These are partly to help cover the cost of the taxes he's getting rid of and partly to help pay for his new spending promises.

He's proposing a 1.5 per cent levy on big companies to cover the net additional cost of his paid parental leave scheme and a 0.5 percentage-point increase in all rates of income tax (aka the Medicare levy) to help cover the cost of the national disability insurance scheme (both raising $16 billion over four years).

To help cover the cost of abolishing the mining tax he's proposing to save $4.7 billion over four years by cutting business tax breaks: ending the instant asset write-off, removing accelerated depreciation for motor vehicles, ending the phase-down of interest withholding tax on financial institutions and ending the "tax loss carry-back".

Also to help cover the cost of abolishing the mining tax he proposes to save $3.7 billion in four years by effectively increasing the superannuation contributions tax for those earning up to $37,000 a year, and save $1.6 billion in four years on no-longer-forgone super tax breaks by delaying for two years phase-up in compulsory employer contributions.

And all this is before we get to Labor's as-yet-unlegislated tax rises, which Abbott has quietly indicated he would proceed with: extra revenue of almost $10 billion over four years from measures to "protect the corporate tax base", cut research tax breaks, increase cigarette tax and impose a levy on savings accounts.

When you see the list of tax hikes that accompany Abbott's grand tax-cutting gesture, it doesn't exactly inspire confidence he could keep taxes down in a way none of his predecessors has managed to.

And when you realise that - according to the earlier reckoning of Saul Eslake, of Bank of America Merrill Lynch - his election promises involve extra government spending of almost $15 billion over four years, it doesn't inspire confidence he could achieve the herculean spending restraint needed to get the budget back to surplus as well as keep taxes down.

The medium-term projections in Treasury's pre-election economic and fiscal outlook, about which I suspect we'll be hearing a lot more after the election, demonstrate how challenging the budget task will be in the coming decade.

According to the projections, if the government elected this Saturday sticks to Labor's strategy of limiting average real growth in spending to 2 per cent a year and not allowing tax collections to exceed 23.7 per cent of gross domestic product, the budget surplus will recover to 1 per cent of GDP by 2020-21.

But, since spending is projected to grow at an underlying real rate of 3.5 per cent a year, this would require an unprecedented restraint. And, even so, it would still require tax collections to grow 1.5 percentage points faster than the economy - equivalent to an ultimate $26 billion a year in today's dollars - over the decade.

Alternatively, were spending allowed to grow at its underlying rate, this could still leave us with a growing surplus, provided unrestrained bracket creep was allowed to cause tax collections to grow 3.3 percentage points (an ultimate $56 billion a year) faster than the economy.

And, get this. Were you to let spending grow at its "natural" rate, but limit growth in tax collections to a ceiling of 23.7 per cent of GDP - the level in the Howard government’s last year - the rest of the coming decade beyond 2018-19 would see an ever-rising budget deficit.

Whoever wins this election, I'll be amazed if taxes do anything but keep rising.

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Forest logging propped up by conservationists

Everyone knows the environment and the economy are in conflict; that any effort we make to protect the environment comes at the expense of profit and jobs.

So, for instance, everyone knows that if the community wants to see restrictions on the logging of native forests in Tasmania, it's only reasonable for the government to compensate the industry and its workers for their loss of livelihood.

And this is precisely what the federal government has been doing for years. As long ago as 1989, the Tasmanian forestry sector received $42 million under the Helsham agreement. Under the Tasmanian regional forestry agreement of 1997, it got $110 million and under the Tasmanian community forest agreement of 2005, it got $203 million.

Under the Tasmanian forestry agreement - negotiated by the industry, unions and conservation groups, and finalised earlier this year - it will get another $300 million. Two weeks ago, as the battle for Tasmanian votes hotted up, Labor announced that the release of some of this money would no longer be conditional on the preservation of certain forests.

The national native forest industry has been doing it tough in recent years. Over the period from 2009 to 2011, removals of "roundwood" (logs) were 30 per cent below the average of the previous 18 years. And woodchip exports fell by a third between 2008 and last year.

The fall in production and exports has bankrupted the native hardwood industry's largest producer, Gunns Limited, and led to the closure of numerous processing facilities around the country.

State forest authorities have also recorded substantial losses. Forestry Tasmania recorded a net loss before tax and other items of $64 million over the four years to last year, an average of $16 million a year. The Forests Corporation of NSW recorded a total loss of $85 million over the same period, an average of $21 million a year.

The way the industry likes to tell it, it was hit by the banning of logging in certain forest areas and the tightening up of forest management practices. But while it was recovering from this blow, it was hit first by the global financial crisis and then by the high dollar (which has reduced earnings from exports and reduced the price of the imported forest products it competes against).

Talk about bad luck. Clearly, the industry just needs a bit of government help to keep it on track until things get back to normal.

And, indeed, all of the parties to the latest Tasmanian forestry agreement believe it will deliver "an ongoing, vibrant forestry industry in Tasmania based on native forests and, increasingly in the future, plantation".

There's just one problem: this is wishful thinking. The industry's story uses the environment as a convenient whipping-boy to draw attention away from its long-term structural decline - and probably demise.

The chequered story of the native forest industry and the way it has sucked ever-growing subsidies from governments can be deduced (as I have done) from a report prepared earlier this year by Andrew Macintosh, of the Australian National University, for the Australia Institute, The Australian Native Forest Sector: Causes of the decline and prospects for the future.

It's true the industry has been adversely affected by conservation measures, the global financial crisis and the high dollar. But they're secondary to its underlying problem of declining demand for its products and increasing competition both from other products and other, overseas producers of its products.

When you look at it, you see that the logging of hardwood native forests is under pressure from every direction.

To the extent that people still want hardwood, they increasingly prefer it from plantations, not native forests. But demand for hardwood itself is declining in favour of softwood, most of which comes from plantations.

Demand for wood is being reduced by demand for other products such as steel, by engineered wood (where thin bits of wood are glued together in different ways) and by wood-saving innovations.

And all that's before you get to increased competition from wood producers in other countries - competing in our domestic market and competing in our export markets.

The supply and future supply of plantation wood has been greatly expanded by another government subsidy, managed investment schemes, in which misguided punters overinvested in crazy pursuit of tax breaks.

Where the native forest sector can't sell its logs for use in building construction - as increasingly it can't - it sells them to be chopped into woodchips for papermaking. Naturally, woodchips are worth less. But even the native forest woodchip market is facing reduced demand and increased competition.

Macintosh concludes that "with sluggish demand in many key markets, strong competition from Asian, South American and African producers, and a distinct market preference for plantation-sourced products" and "in the absence of additional government assistance, the sector is likely to continue to decline and, in some areas, it could collapse entirely".

See what's happening? Our perception that protecting the environment is always in conflict with the economy and jobs is being used by the industry, its unions and the politicians as a cover for continued handouts to the industry, handouts that will do nothing but delay the inevitable.

And the conservation groups, having been convinced the industry's problems are all their fault, are running cover for an industry that doesn't want to face the truth and politicians trying to buy Tasmanian votes.

The result is that taxpayers are paying to allow an industry that probably would have collapsed to continue doing damage to native forests. It's getting help other industries wouldn't get, partly because it's doing something most other industries don't do: destroying the environment.

This makes sense?

If the conservationists had more sense they'd joint the economic rationalists in urging governments to stop giving subsidies - explicit and hidden - to an industry trying to defy market realities.

Environmentalists would do more good if more of them knew a bit of economics.

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Parties' sameness hides a big difference

You could be forgiven for concluding there's little to pick from in this election; the age of ideology is long gone and the true difference between the parties is minor. The two sides have assiduously eliminated their differences to the point where we're asked to choose between the red management team and the blue management team.

You could be forgiven for thinking all this because there's much truth to it. The more "scientific" and calculated politics has become the further the sides have moved towards the centre.

But it's not the whole truth. The parties may not be terribly ideological and - with the notable exceptions of Julia Gillard and Wayne Swan - they may assiduously avoid the language of class conflict, but they do play favourites in the policies they espouse.

If you think the class war is over, you're not paying enough attention. The reason the well-off come down so hard on those who use class rhetoric is that they don't want anyone drawing attention to how the war's going.

All of them except Warren Buffett, the mega-rich American investor. "There's class warfare, all right," he once said, "but it's my class, the rich class, that's making war, and we're winning."

The reason the wiser heads in Labor don't want to talk about class conflict, either, is they know it gets them nowhere. It alienates people at the top without attracting many at the bottom.

This, of course, is why the well-off like me are winning. The workers are too busy watching telly to notice the ways they're being got at. It requires attention to boring things like superannuation when you could be up the club playing the pokies.

The significant thing about the looming change of government is not that the economy will be much better managed - it won't be; these days most of the key decisions are made by the econocrats - but that the Coalition will bring to its decisions about taxing and spending a different bias to Labor's.

How can I say that? By looking at Tony Abbott's promises. If you do pay attention it's as plain as a hundred dollar bill.

Let's start with that boring question of the concessional tax treatment of superannuation. It's by far the most expensive example of (upper) middle-class welfare.

Super has always been a scheme heavily favouring those on the highest rates of income tax, who also happen to be those most able to afford to save.

But towards the end of his time as treasurer, Peter Costello introduced "reforms" that made it far more favourable to the well-off by making super payouts tax free and opening the scheme wide to "salary sacrifice" by those able to afford it.

At the time, many economists said what they're saying now about Abbott's paid parental leave scheme, that it was so generous as to be fiscally unsustainable.

And so it has proved. In its unending search for budget savings the Labor government has chipped away at that generosity in almost every budget (as I know to my cost).

And as part of its mining tax package, Labor finally acted to remove one of the most iniquitous features of the scheme.

It introduced the "low-income super contribution rebate" to end a situation where everyone earning less than $37,000 a year gained nothing from the concessional treatment of super contributions (while people like me saved tax of 31.5? in the dollar).

Earlier this year, when Labor was making noises about doing more to make super less inequitable - and the big banks and insurance companies were putting up their usual furious fight - Abbott promised to avoid any further changes for three years. Labor later topped this by promising no further changes for five years. Who benefits most from this moratorium - aspirational families in the western suburbs?

And get this: to help pay for its promise to abolish the mining tax - paid on their super-profits by three of the biggest mining companies in the world - an Abbott government would abolish the low-income super contribution rebate.

Who would benefit most from Abbott's opposition to Labor's plan to remove the concessional tax treatment of company cars?

Abbott's paid parental leave scheme would introduce a major new example of middle-class welfare. Since even most on his own side disapprove of it, it's guaranteed to be chopped back in future.

Then there's his pledge to remove the means-testing from the private health insurance rebate.

To its unforgivable shame, Labor has repeatedly refused to increase the poverty-level rate of the dole. In March, however, it began paying dole recipients a twice-yearly supplement of up to $105. No doubt as part of its campaign against waste and extravagance, an Abbott government would abolish this supplement.

Early in its term, the Howard government rejigged its grants to schools so as to favour private schools. After doing nothing for six years, the Labor government accepted the Gonski report's plan to bias school funding in favour of disadvantaged students, most of whom are in public schools.

After roundly condemning the Gonski proposals, Abbott affected a deathbed conversion to them as the election loomed. Read his fine print, however, and the parents of children at private schools can rest easy. The disadvantaged will soon be back at the back of the queue where they belong.

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