Blame pollies and media for low political standards

As intensified personal ambition has heightened competition between the parties, unwritten rules that certain subjects were off limits to the political contest have gone by the board.

The obvious example is immigration, Asian immigration in particular, and boat people.

For many years, both sides knew there was an ugly, xenophobic side of the Australian character and tacitly agreed not to do or say anything that would give it air.

Howard was part of the breakdown of that taboo, but perhaps a bigger cause was the arrival of radio shock-jocks who didn't care what demons they unleashed.

As politics has become more of a job for life, it's also become more of a science and less of an art, as parties have made more use of sample-based polling and the techniques of marketing, including sophisticated advertising and focus groups.

There was a time when politicians relied on their own contact with voters and their gut feelings to assess how their policies and performance were being received by the electorate.

These days, their polling and reports of focus group discussions leave them in no doubt about what voters are thinking on all topics.

Or, at least, leave them imagining there's no doubt. In truth, even quantitative polling can be misunderstood and qualitative  research from focus groups is so subjective it's notorious for the bum steers it can give.

Even so, it does seem the parties get very similar messages from their rival efforts.

When focus groups were introduced, the rationale was they would inform the parties on how to frame the policies they wanted to pursue in ways that made them more attractive to voters.

But when you are – or imagine yourself to be – fully informed on what the punters like and dislike, the temptation to let those preferences determine what policies you pursue must be almost irresistible.

What this seemingly less amateur and more scientific approach to politicking overlooks is the often paradoxical quality of human nature.

Tell me only what I want to hear and I begin to wonder whether I can trust you.

What exactly do you believe? Keep it wishy-washy and I wonder if you really believe anything.

Only ever tell me nice stuff and I wonder whether you're tough enough for the job.

Become a slave of focus group approval and you risk forgetting that, though I don't like the sound of your plan, I could be persuaded it's what the country needs.

In the old days, a politician like Fraser won elections because he was seen as a stern father the times called for, not because he was popular.

Another drawback of the more calculated approach to politics is governments' ever-increasing superficiality.

If, as all politicians believe, "the perception is the reality", why not focus on perceptions and appearances and let reality slide?

If the trains aren't running on time or people are waiting too long for elective surgery, why not measure these things in ways that are more favourable?

Why not favour responses to problems that are flashy or emotionally gratifying rather than boring but effective?

Why waste scarce resources on repairs and maintenance or renovation when you can build something new and be seen cutting the ribbon and making great progress?

When the number of problems or worthy causes far exceeds the revenue you've got to spend, why concentrate on those where your spending is likely to be most effective rather than slinging an inadequate sum to as many as possible and so mollify as many potential critics as possible?

Why give much to people such as the unemployed or single mothers for whom there's so little public sympathy?

When the public takes an irrational set against outsiders such as boat people, why not gratify their prejudices rather than defend the needy?

When people convince themselves they're struggling to keep up with the cost of living but the objective indicators say wages are rising faster than prices, why try to set them straight when it's so much easier to pretend to be sympathetic?

In short, why not reinforce prejudices and misperceptions rather than educate?

Why not follow the voters rather than lead them?

"There go the people. I must follow them for I am their leader." When memories and political terms are so short and punters so ungrateful, why not be short-sighted and risk averse?

All those temptations are reinforced by the media. It's the media that are overly preoccupied with and impressed by the new rather than the old, by the flashy and the emotionally gratifying, by what's on the surface rather than what's underneath, by the immediate rather than the prospective, by the irrational rather than the rational, by the sympathy-rousing case study rather than the systemic failure.

Politics has changed over the years but so, too, have the media. And they've both changed in ways that are mutually supportive. The two institutions have become more symbiotic.

There's no doubt the speeding up of the 24-hour news cycle is essentially the product of the media's ever-shortening attention span as part of the intensifying competition between the media's ever-proliferating mediums, including the advent of 24-hour news radio and TV channels.

But a lot of the dumbing down has been initiated by the politicians and their party machines for their own reasons. There is plenty of blame to be shared between the two institutions.

This edited extract from Gittins by Ross Gittins, published by Allen & Unwin, is out this week.

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GITTINS the book: sneak preview II

Why did an accountant who'd forgotten most of the economics he was supposed to have learnt at uni and never really learnt to be a reporter, go from cadet journalist to economics editor in four years?

Because he had the immense good fortune to be in the right place at the right time.

I joined the Herald just as the startling policies of the Whitlam government and the global economic disruption of the first OPEC oil price shock were convincing the nation's editors that the biggest part of politics was economics, and that they needed to run a lot more stories about the economy and needed more journalists proficient in economics to do it.

The oil price shock of December 1973 happened to make my first year at the Herald, 1974, a watershed in the global economic history of the 20th century.

It proved to be the last year of the almost 30-year postwar Golden Age of strong and steady growth in all the developed countries, with low inflation, full employment and ever-rising living standards and a narrowing gap between rich and poor.

The oil shock wrong-footed Western governments and brought to light the hitherto unknown problem of "stagflation" – simultaneously high unemployment and inflation.

The advent of stagflation caused a loss of confidence in traditional Keynesian macro-economic management, which could deal with either high inflation or high unemployment, but not both at the same time. In the search for an alternative, many turned to "monetarism" - controlling the growth in the supply of money.

I became an economic journalist when the battle between Keynesians and monetarists was at its height. It turned out that through much of the monetarist criticism of Keynesianism had merit – money did matter, as the monetarists had argued – the rest was mumbo jumbo.

Money-supply targeting wasn't the magic answer promised. It didn't even work. Even so, the main instrument for managing the ups and downs of the economy was switched from fiscal policy (the budget) to monetary policy (interest rates).

Another solution to stagflation was "incomes policy" – direct control over wages, other incomes and prices. Its Australian version came late in the form of the Hawke-Keating government's "accord" with the union movement.

It took until the mid-1990s to get inflation down to the 2 or 3 per cent that had pertained during the Golden Age.

Dr Don Stammer, a veteran business economist, says you need to have seen four recessions before you're fully qualified. I thought the global financial crisis of 2008-09 would bring my fourth, but if you don't count that – I count it as a potentially severe recession turned into a mild one by remarkably skilful management – I've seen three big ones.

The recession of 1974-5 would by the itself have caused the Whitlam government's defeat had there not been more than enough other reasons.

The severe recession of the early 1980s brought the Fraser government's reign to an end after just seven years and the severe recession we didn't have to have in the early 1990s – in the sense that all recessions happen by accident rather than design – finally did for the perpetrator of that bravado in 1996, although Paul Keating's execution was delayed three years by the inexperience of a former economics professor, Dr John Hewson.

Feel free to write this on my tombstone: "he never fell for the line that economists had finally conquered the business cycle". You only had to live through the Keynesians' humiliation in the world recession of 1974-75 to be permanently cured of such hubris. I soon formed the view that recessions occurred roughly every seven years.

I know from the three recessions that have occurred so far "on my watch" – each of them accurately branded "the worst since the Great Depression" - how terrible recessions are: the fear and pain they cause to small business people, workers who lose their jobs and young people who have the misfortune to be leaving school or university at the time.

In 40 years I've been around for 13 federal treasurers. The Whitlam government's Frank Crean was my first. I was too junior to get to know him, which was a pity. I liked him because he reminded me of my father. I had little to do with Dr Jim Cairns and didn't get to know Bill Hayden until he was in opposition.

After the Fraser government arrived I didn't get to know rubbery Phil Lynch, but John Howard was a different matter.

Keating was an assiduous worker of gallery journalists, who learnt much of his economics from [former Australian Financial Review editor] Max Walsh until Treasury took over. I was seen as to partial to him and his policies, but that was because I invariably agreed with them – rationalism with a human face. Our greatest treasurer, with daylight second.

His successor, John Kerin, did a more-Keating-than-Keating impression. With a degree in agricultural economics, Kerin was far better qualified than most treasurers, so I thought it terribly unjust when the TV news bulletins hounded him from office by repeatedly playing a clip of him forgetting that GOS stood for gross operating surplus. None of his righteous accusers would have known that.

John Dawkins was competent but tetchy. Ralph Willis was well qualified academically, but terribly reserved.

Peter Costello had two counts against me: I was from Sydney and, like virtually all journos, I was biased against him politically. It's true I criticised him on more issues than I supported him.

But though I backed him vigorously on some unpopular measures, it would never have crossed his mind that my criticism arose from our differing values, not from partisanship.

Once, his press secretary decided to give me the treatment regularly dished out to gallery reporters who'd incurred his displeasure by inviting all economic journalists to some function except me.

I couldn't believe he could be so incompetent. Gallery reporters had no choice but to cop such treatment in silence, but as a columnist in Sydney, I had nothing to lose and everything to gain by making it public. Normally I resist the temptation to go for cheap cheers, but this time I opted for a little self-publicity.

I kept it up for two weeks until the call came through from Costello. "I'm sorry to shock you, Ross, but I didn't actually read the column you say I took offence at." Etcetera. It was as close to a conciliatory call as Costello could get, so I too was conciliatory.

People kept telling me Costello was bright but lazy, but a treasurer who didn't read my columns? I believed him.

Costello's greatest achievements were his carriage of the goods and services tax and his reform of the prudential supervision of the financial system, which kept our banks out of trouble in the GFC. The notion that he's up there with Keating as a reformer is partisan propaganda.

Wayne Swan fell short of either of them. The truth is I feel a bit guilty about Swan. I let my liking for the man stop me from writing what I thought: that he was too weak to be treasurer. He wasn't brave enough on the reform front nor tough enough in controlling government spending and he couldn't sell ice-creams on a hot day at the beach.

When he was succeeded by Chris Bowen my first thought was regret that I'd neglected to take up opportunities to get to know Bowen better. But thinking about my problem with Swan I decided I was better off not getting to like these guys and so being freer to judge them on their merits.

I know Joe Hockey well enough to know he's a likable guy – and to expect him to see more easily than Costello that, with me, he'll win some and lose some – so that's close enough.

My experience watching the bad, indifferent and good management of our economy over the past 40 years has left me sure of one thing: Malcolm Fraser may have lacked the resolve to live up to it, but his slogan "Fight Inflation First" is dead right.

Part of the policy debate between Keynesians and their opponents rested on the belief that Keynesians cared most about unemployment because they worried about people at the bottom, whereas conservatives carried most about inflation because it diminished the wealth of the rich.

In one of his first speeches as [Reserve Bank] governor Bernie Fraser demolished that neat dichotomy by pointing out inflation actually hurt the poor more than the rich because the poor were unable to afford the expert advice needed to protect themselves from – even benefit from – the effects of inflation. Negatively geared investment in property or shares is a classic instance of benefiting from inflation.

If you force me to choose which is the greater evil, inflation or unemployment, there's no shadow of doubt in my mind: unemployment wins. But the choice we have to make – and the relationship between those two evils – is more subtle than that.

To me, if you care about achieving low unemployment in anything but the short term, you start by fixing inflation and keep it fixed, so you can then grow the economy at a steady but healthy rate and thus grind down unemployment and keep it low for as long as possible.

That describes how we've managed our economy over the past 20 years. In the preceding 20 years governments pursuing the alternative strategy of fighting unemployment first would rev up the economy after ever recession, soon bringing inflation back up and thus sowing the seeds of the next bust.

Edited extract from Gittins, by Ross Gittins (Allen & Unwin), out this week.

Ten reforms that transformed Australia

1. Floating the dollar

2. Deregulating the banks

3. New taxes on capital gains and fringe benefits

4. Removing import protection

5. Privatising government businesses

6. Enterprise bargaining

7. National competition policy

8. Central bank independence

9. Goods and services tax

10. Taxes on mining and carbon


My five worst predictions

1. Expecting the severe recession of the early 1990s to be a "soft landing".

2. Doubting the move from centralised wage-fixing to enterprise bargaining would be an improvement

3. Saying the US authorities were right to allow Lehman Brothers to fail in September 2008

4. Expecting Australia to be caught up in the subsequent Great Recession

5. Failing to foresee the adverse social effects of micro-economic reform


The best of 13 treasurers

1. Paul Keating. By a country mile. He instigated the sweeping reforms that transformed the economy and laid the groundwork for better day-to-day management of it. He made the economy less inflation-prone and more flexible, thus able to reduce unemployment faster.

2. Peter Costello. Greatest achievement was to free the Reserve Bank to change interest rates as it saw necessary, meaning the economy is now  managed more by econocrats than politicians. He also ensured our banks were tightly supervised while the Americans were letting theirs create so much havoc.

3. Wayne Swan. Despite his failings he deserves a spot on the treasurers' honour board purely for his surprisingly deft handling of stimulus spending and human confidence in the wake of the global financial crisis, ensuring we suffered only the mildest of recessions.

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GITTINS the Book: Sneak preview I

I was an "OK" - an officers' kid. Both my father and my mother were officers (ministers) in the Salvation Army and, until I left home at 21, the Army and its strange way of life dominated mine.

For 45 years my father was in charge of a succession of small corps, or churches, around Queensland and NSW. This meant our family moved every two years, sometimes every year.

I ended up attending five primary schools and three high schools. All that moving meant I have few friends from school days, but it was the only life I knew and I've yet to meet an OK who felt it did them any harm.

Especially for a corps officers' kid, the Army was an all-consuming religion. The whole of every Sunday was taken up attending prayer meetings ("knee drill"), open-air meetings on street corners, holiness meetings in the morning and salvation meetings in the evening, plus, for "junior soldiers", directory meetings in the morning and company meetings (Sunday school) in the afternoon.

At all of these meetings I'd wear the appropriate uniform, of course. On week nights there'd be "legion", a bit like Boys' Brigade, and as I grew older, band practice and choir practice.

The Gittinses are an Army family. Of my father's 13 siblings, three of his brothers and three of his sisters also became officers. An aunt and an uncle of my father's were officers, and six of my cousins are officers, plus a couple of their kids, making four generations in all.

My parents were strict, but never stern or preachy. They did their duty to God faithfully (my father's favourite word and highest ambition) and cheerfully, never questioning their superiors' arbitrary decisions to shift them hither and yon.

But they lived for their children and though, as products of their age, they were undemonstrative, I was never in any doubt that I was loved. I was, in any case, the baby of the family.

Even among other Salvationists, my parents were rather old-fashioned in their disapproval of "worldliness". Like all Sallies, they disapproved of drinking, smoking and any form of gambling (we were allowed to play Happy Families or snap, but never with ordinary playing cards for fear people might think we were betting), but they also disapproved of make-up, jewellery, dancing and doing anything much on Sundays bar attending meetings. Even going to the pictures was frowned upon.

This last one pinched a little with me. I remember wandering the streets alone on Saturday afternoons while my mates were at the matinee, rolling Jaffas down the aisle and watching serials and such exciting flicks as Smiley.

But no one in my family was rebellious, and nor was I. It wasn't until I was a full-time student at Newcastle University in 1967 that I began sneaking off on Wednesday afternoons to see a movie in Hunter Street.

I suspect the experience has left me with an addiction to cinema-going. People will tell you little has changed except the day: I now sneak off to the movies on Tuesday afternoons, and I usually see three films in a row.

My parents' objection to worldliness had as much to do with conservatism as spirituality. Their views had been formed long before the advent of television, so it escaped their strictures.

When TV arrived in 1956, their problem with it was purely the prohibitive cost of buying a set. I was never discouraged from joining the throng on the footpath watching telly in the windows of department stores and often went down to see the latest episode of Robin Hood outside the electrical store near our house in the inner-west Sydney suburb of Leichhardt.

When my parents retired, my sisters bought them their first telly, on which they happily watched reruns of all the movies they had disapproved of for so long.

All this may help explain why my own kids were deprived of television throughout their school years. My wife, Claudia, rang me at work one day when our first child was still very young to say our house in Redfern had been broken into and our TV stolen. Don't worry, I said, I'll pick up another set on my way home. Don't bother, she said, let's try life without it.

I explained to my son, Sandy, that we no longer had a television because someone had stolen it, and he accepted that.

We let our kids watch TV at their friends' houses, I took care to buy them the books or toys associated with TV crazes, gave them an unlimited book-buying budget and occasionally rented a telly so Sandy could watch the Rugby World Cup, but we didn't buy another set until the day our second child, Katie, finished her last Higher School Certificate exam.

Our lack of TV was something I kept dark during the two years I was on a huge, part-time retainer to the Ten Network, but I never felt my inability to watch current affairs TV left me at any disadvantage professionally. I got on with my work most nights. As for Claudia, it was her idea. And I doubt it did the kids any harm and may have meant they read and studied more.

At this late stage I'm proud of my Army heritage, proud of my father's contribution, proud of the mark the Army and my parents have left on my values and happy to talk about it - though when I do I quickly become emotional, a trait I inherited from my dad.

But growing up as an officers' kid in such a small, strangely behaved and attired sect does make you feel a bit of an oddity and an outsider - not one of the gang. Whenever my kids were embarrassed by the doings of their parents, I'd say, "Until your father turns up at your school wearing a uniform from the Crimean War, you don't have anything to complain about."

Leaving aside the "social work" of the Army that so many people know and admire, as a church it's just another Protestant denomination, formed when William Booth broke away from the Methodists in London in 1865.

The Army is very musical. I was taught to play a brass instrument at the late age of 13 and I played in successive small Army bands until not long before I became a journalist.

Although I've long been what the Army would call a backslider, all those tunes, songs and choruses have stayed part of me. I often listen to Army music as I sit writing at night and the words can move me almost to tears. On the census I still put myself down as Army.

Like my father, my mother left school at 12. She worked for a tailoress and for the rest of her life was an accomplished dressmaker, making all our uniforms, with their intricate braid and piping.

Her aunt was a Salvationist and it was at an Army meeting that my mother met young Lieutenant Gittins. She, too, travelled to the Army's training college at Petersham and in due course was commissioned as an officer.

My mother was highly intelligent but painfully shy, with no sense of direction. She left all the grocery shopping to my father (which suited him because he wanted to patronise the shopkeepers who made weekly contributions to the Army's "shop league"), and when she needed to shop for clothes, or more likely clothing material, he'd take her.

My father was a simple, trusting, hard-working, gentle man. He was the most saintly man I ever expect to meet simply because, unlike the rest of us, he never harboured an uncharitable thought about anyone.

And despite his limited schooling, my father never used bad grammar. My mother had long ago beaten it out of him.

When we were appointed back to the Newcastle area, my father's name would occasionally appear on a roster of ministers whose sermon the previous day would be reported in the Newcastle Herald's Monday morning "From the Pulpit" column. The minister was required to submit his sermon notes, which (presumably) the most junior cadet reporter would cut down for the column.

The first time my father submitted his sermon, what appeared in the Herald bore no resemblance to anything he had said, nor to anything any minister would have thought made sense. So my mother stepped in and, on future occasions, she would write out a sermon, giving one copy to the paper and another to my father.

He would preach an approximate version of it, but what appeared in the Herald would be virtually unchanged. That's how I know any skill of mine as a journalist comes from my mother.

Edited extract from Gittins by Ross Gittins (Allen & Unwin), out next week.

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Very low rates are more worrying than you think

Never thought I'd see the day when Treasury willingly surrendered the leadership of the nation's economists to the Reserve Bank, but it happened this week.

The new Treasury secretary, John Fraser, has broken a tradition lasting more than two decades to speak about the budget at a luncheon of the Australian Business Economists on the following Tuesday.

This follows the absence of Budget Statement No. 4 from last week's budget papers. It's the statement I call Treasury's sermon, but a disappointed Saul Eslake, of Bank of America Merrill Lynch, calls Treasury's "thought leadership essay".

But Dr Philip Lowe, deputy governor of the Reserve Bank, personfully stepped into the breach with a ground-breaking speech about "what seems to be a transition to a world in which global interest rates are lower, at least for an extended period, than we had previously become used to".

Does that sound like a good problem to have? Don't be so sure. Interest rates are two-edged: a cost to borrowers, but income to lenders. No one enjoys suffering a drop in their income, as many oldies have been reminding us lately.

The central banks of the US, the euro zone and Japan have for some years had their official (overnight) interest rates set at or near zero. At the other extreme, the yields (interest rates) on 10-year government bonds in these countries are at "extraordinary low levels".

These very low nominal rates mean savers investing in risk-free assets (government bonds) are earning negative real rates of return – because nominal rates are lower than the rate of inflation. "They also mean the time value of money is negative," Lowe says.

Huh? Say you win $10,000 in a lottery, but are offered the choice of receiving the money now or in three years time. Which would you pick?

Most people would want the money now. If you've got it now you can either use it to buy something and enjoy what you've bought for three years, or you can lend the money to someone else for three years and be rewarded by the interest you charge them.

When you think about all that, you realise the truth of the economists' saying that "a dollar today is worth more than a dollar tomorrow". That's the time value of money. The actual amount of that value is determined by the interest rate you could earn if you had the dollar today, or the rate you'd avoid having to pay to be able to spend today a dollar you didn't have.

This analysis isn't about the effects of inflation, but about the value of the use of money over time. So the time value of money is the real interest rate (the nominal interest rate minus the expected inflation rate).

Time value means that if I had to pay you $10,000 in three years time, the amount I'd have to set aside today would be less than that because the money I set aside could be earning interest between now and then.

If I knew the interest rate was, say, 4.5 per cent, I could work out how much I had to set aside today to have $10,000 in three years time. The process of working this out is called "discounting". It's compound interest in reverse.

The initial amount you'd need turns out to be $8763, which is called the "present value" of $10,000 in three years.

All this is standard stuff for economists and business people evaluating investment projects or managing invested funds. It's deeply ingrained in the way they've been taught to think.

That's why it's quite shocking for Lowe to say the time value of money is now negative. He's saying that, for goodness knows how long, a dollar today is worth less than a dollar tomorrow.

Another implication is that there's now no compensation for postponing consumption to tomorrow – which, of course, is what savers are doing.

How do we find ourselves in this remarkable situation? The "proximate" (most obvious) cause is the actions of the big central banks and their "quantitative easing" (creation of money). But, Lowe says, central banks don't act in a vacuum, they respond to the world they find themselves in.

That world is one where more people want to save, but fewer people want to invest in new physical assets. In such a world, the interest rate, which is what "equilibrates" saving and investment, falls.

If this situation is long-lasting, Lowe says, it poses "new questions and challenges". It changes a lot of our unconscious rules about how the world works.

For a start, for people seeking to fund future liabilities – such as employers with defined-benefit pension schemes, or even just people saving to amass an adequate lump sum to retire on – it just got a lot harder. The present value of future liabilities is now higher, meaning you have to put more in to reach your target.

Second, lower rates mean the present (that is, discounted) value of a stream of future income from an asset is now higher. This, in turn, means the asset is worth more and so will now have a higher price.

This is brought about by savers, dissatisfied with the low returns on risk-free assets (government bonds), seeking the higher returns from riskier assets (say, shares of companies with high dividend rates) and thereby pushing up their prices.

Third, if the cost of (financial) capital has fallen but firms don't lower their "hurdle rates" – the expected rate of return required before potential physical investment projects get the go-ahead – then we don't get the growth in business investment spending needed to get the economy moving (and don't have increased demand for the use of savings working to get interest rates back up).

We just have to hope businesses eventually learn how the rules have changed and adjust accordingly.

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Lower taxes both a delusion and an illusion

I wish I'd been the first to say that last week's was the Don't Worry, Be Happy budget. Last year it was unrelieved cuts in government spending and earnest talk about facing up to the "budget emergency" and "debt crisis".

This year it's all good news for families and small businesspeople, with hardly a mention of deficits and debt – even though the outlook for both has worsened in the intervening period.

But if you always felt that Don't Worry, Be Happy was a slightly unreal attitude to take towards life, the same applies to the government's budgeting.

I fear the voters' much warmer response to this year's budget means we'll never see another tough budget from the Abbott government, no matter how long it survives. Which probably means the man who told us he could return the budget to surplus no sweat and vowed to "repay the debt" will never get it out of deficit.

Think of it from Tony Abbott's perspective: you try to do the right thing by making painful cuts and you get kicked in the teeth by the voters and almost lose your job. But throw the punters a few lollies at the expense of your spending restraint and avoid any noticeable nasties and suddenly you're back to being a good guy.

What conclusion would you draw? (As with all pollies, this reasoning is just a little self-serving, though we'll let it pass.)

But if that's bad, there's worse. This budget and last year's are built on a delusion. And if, between us – between the voters and the two sides that take turns to govern us – we really do end up with an uncontrollable budget and ever-growing public debt, it will be this delusion that's at the heart of the problem.

It's that an increase in taxes is unthinkable, because the Coalition stands for lower taxes, not higher. What makes this delusion so destructive is the way it strikes fear into the heart of Labor, the party that doesn't believe in lower taxes, but lacks the courage to say so.

There is an obvious and sensible conclusion to be drawn from our radically different reactions to Joe Hockey's two budgets. It's that voters' willingness to tolerate cuts in government spending is strictly limited.

That spending goes on plenty of particular programs, from which particular voters (and sometimes, powerful business interest groups) benefit. The really expensive programs benefit literally millions of voters: the Medicare subsidy on visits to doctors, the subsidies on prescription drugs, the provision of public hospitals and schools (including heavy subsidies to private schools), the pensions for the aged and invalids, and the pittances going to hundreds of thousands of unemployed and sole parents.

Seen in this light, it's hardly surprising the voters' tolerance of spending cuts is limited. And get this: there's no good reason it shouldn't be.

What is objectionable and ought to be condemned from every political pulpit in the country is the voter attitude that says don't stop government spending from growing, but don't ask us to pay more tax.

(Remember that when the media talk of spending "cuts" they rarely mean this year's spending will be less than last year's, just that spending will grow more slowly than it would have, being driven by inflation, population growth and promises to make programs more generous.)

If our politicians were honest, that's what they'd keep telling us: if you want it, sure, you can have it – but you'll have to pay for it. But our politics – particularly our election campaigns – have long been utterly dishonest, with pollies on both sides pretending to be able do the arithmetically impossible.

The main reason Abbott's efforts last year to get the budget heading back to surplus were so unfair was his insistence that all savings come from reduced spending, not increased tax collections (with the exception of the return to indexing the excise on petrol).

This is because most low and middle income-earners get their benefit from the government via the budget's spending side, whereas most high income-earners get their benefit via tax breaks on such things as superannuation, capital gains, negative gearing and family trusts.

Before last week, it seemed the government was learning the hard way what every expert had tried to tell it: that successful efforts to restore the budget in the past have always involved both spending cuts and tax increases.

In the context of the nation's "conversation" about tax reform, Hockey appealed for a bipartisan approach to the reform of super tax concessions, saying he had measures under active consideration. Labor responded by putting some modest reforms on the table.

But last week Abbott rejected any possibility of adverse super changes, preparing the way for an election fought on the claim that Labor stood for higher taxes while the Coalition stood for lower taxes. Caught with his guard down, Bill Shorten hit back by claiming Labor would cut the company tax rate for small businesses by 5 percentage points, not the government's 1.5 points.

Great. Tax as a political football. That will fix the deficit.

But for Abbott, lower taxes aren't just a delusion, they're an illusion. This budget and its claim to be heading back towards surplus are based on a huge unannounced increase in income tax caused by unabated bracket creep between now and 2020.

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Don't trust the knockers of Treasury forecasts

People keep asking me whether the budget's forecasts for the economy are "credible". Of course they are. But that's not saying much. And here's a tip: don't believe those saying that Treasury's forecasts are way too optimistic or way too pessimistic. They wouldn't know.

Treasury and the Reserve Bank – whose forecasts are essentially a joint exercise – put an enormous amount of time and expertise into their forecasts, far more than any other outfit you could name.

That doesn't mean their forecasts are likely to be right, of course. Far from it. But it does mean that, on average over time, they're likely to be less wrong than their critics.

On any particular forecast, any individual has a chance of being right while the official forecasters are wrong, just by luck. You can only remove the luck factor by comparing people's forecasting record over time.

And yet at this time every year we have smarties popping up to confidently assert that the budget forecasts are wildly optimistic or "built on artificial assumptions". They do so knowing no one will check how right their prediction proved to be.

They're entitled to their opinion. But you're entitled to say to yourself, what would they know? Some of these people have done no more than run their eye over a row of forecasts and thought, I don't believe it.

Some are sceptical because they don't know as much as they should about the standard dynamics as the economy moves through the ups and downs of the business cycle.

They forget that, when finally the economy picks up after growing below "trend" (the medium-term average rate of growth) for a number of years, it's likely to grow at rates well above trend for a year or two as it takes advantage of all the accumulated idle capacity. The hard part is picking the timing of the turning point.

The I-know-better brigade rarely claim the forecasts are wildly pessimistic – which they sometime prove to be – because they're pessimists and knockers, often with their own axe to grind.

The smarties never preface their pronouncements by admitting that their own forecasting record is just as bad as Treasury's, probably worse. No, they just assert that Treasury's wrong and they're right.

That's why I'll always fly to the defence of the official forecasters. They're the only honest players in this game. They regularly measure the accuracy of their forecasts and publish the results. They regularly remind users that, given their poor record, their forecasts are little more than an educated guess.

To make the point even clearer, in this year's budget papers Treasury has collected its usual warnings, qualifications, disclosures and "sensitivity analysis" into a single new section of the budget papers. It starts by admitting that "the forecasts are subject to considerable uncertainty".

For these purposes, Treasury has combined its forecasts for the financial year just ending and the coming year to give a forecast average annual growth rate of "around 2.5 per cent". On the basis of its record of forecasting errors, it says there's a 70 per cent probability that the actual growth rate will be somewhere between 1.75 per cent and 3.5 per cent. Wow.

The critics tell us that Treasury's forecasts are based on many assumptions. That's true. But it's always true and is just as true of its critics' forecasting models (assuming they bothered to do any modelling before shooting from lip). Assumptions are inescapable.

Some key assumptions are for the exchange rate, interest rates and world oil prices. Treasury takes their average in the period before its forecasts were finalised in April, and assumes this will be their average over the forecast year.

Last week the smarties noted that some of those prices had already moved away from the assumption and concluded that the budget's forecasts had been invalidated already. Nonsense. Who can be sure how those prices will have moved – and thus averaged – by this time next year?

In any case, just because some assumptions prove lower than expected doesn't mean others won't prove higher than expected and thus cancel them out.

Though it's human nature to pretend otherwise, the simple truth is that no one knows what the future holds for the economy: it may be about to take off, about to collapse or about to stay as it has been. We can all have our opinions, but no one can say I'm right and you're wrong.

Point is, we can't be sure Treasury's forecasts will be right, but nor can we be sure they'll be wrong. They may be no more than educated guesses, but they're as plausible as anyone else's.

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Media get budget wrong

As an exercise in media manipulation, this week's budget scores top marks. The government's spin doctors managed to convince the media it was a "stimulatory budget" when it was actually mildly contractionary.

With financial markets trading virtually continuously, the old need to lock the media up on budget day until the markets had closed disappeared decades ago. The only reason for continuing the practice is to maximise the government's ability to influence the media's initial reaction to its budget.

It does this by keeping journalists locked up for six hours, during which time the only experts they can approach for opinion and clarification are Treasury and Finance officers. Then you let the journos out just before deadline, when it's too late to contact independent experts.

The theory is that influencing the media's initial reaction is half the battle in influencing the electorate's ultimate reaction. Didn't work last year, of course.

If you wonder why governments habitually leak or announce so many of the budget's measures ahead of time, it's all part of the media manipulation. You announce measures you know will be popular so they get more attention than they would if you announced them all together on budget night.

You announce unpopular measures ahead of time to soften voters up and also so the media will regard them as old news on budget night and thus won't say much about them.

This year, the good news announced early was the changes to childcare subsidies, plus the decisions to make savings in the cost of pensions and Medicare in much less painful ways than had been proposed in last year's budget.

But you always save a bit of good news to act as the "cherry", taking care not to breathe a word of it in advance. Making this the only measure the media regards as "new" ensures they make it the centrepiece of their coverage. And, of course, you've made sure it's good news.

This week the cherry was the "Growing Jobs and Small Business package". And, boy, didn't the media go to town. The cut in the rate of tax imposed on small business was terrific, but the plan to allow multiple asset purchases of up to $20,000 each to be "written off against tax" was mind-blowing.

The next day's headlines showed how easily the media were manipulated: Joe's Jumpstart, Kickstarter, and Road to Recovery?

Don't be misled. The 1.5 percentage-point cut in the company tax rate for small businesses is itself small. The equivalent cut for unincorporated businesses will yield a maximum saving of less than $20 a week.

And the two-year offer of an immediate 100 per cent write-off for newly purchased business assets costing less than $20,000 each is nothing like the rort-inducing "bonanza" imagined by innumerate journos and economists who don't know as much accounting as they should.

You don't get up to $20,000 a pop taken off your tax bill - making the asset essentially free - you get it taken off your taxable income, meaning the taxman picks up 30 or 40 per cent of the cost, leaving you to pay the rest.

In any case, the cost of assets purchased for business purposes has always been 100 per cent deductible. The difference is that usually this "depreciation allowance" is spread over five years or so, whereas this special deal accelerates the full deduction to the end of the first year.

So it will probably induce a noticeable increase in small business investment spending, but that's unlikely to be big enough to make much difference to the economy's rate of growth.

It's a classic example of the things governments do when they're trying to apply fiscal stimulus, being similar to a measure in Kevin Rudd's stimulus package of 2009 after the global financial crisis.

But note the measure's downside: because it's temporary, its main effect will be to draw forward into the next two financial years spending that would otherwise have occurred in subsequent years, leaving a vacuum in those years. And because most motor vehicles and business equipment are imported, much of the increased investment spending will "leak" into imports.

Another part of the hype is the government's claim that small businesses are "the engine room of the economy". Nonsense. Big business is. As the budget's fine print admits, small business accounts for only about 38 per cent of the workforce and about a third of production.

The most important point, however, is that just because a budget contains a few small but sexy measures doesn't make it a "stimulatory budget" to anyone but a journo after a good headline.

To an economist, you have to put the few stimulatory measures into the context of the net effect of all the new measures taken in the budget.

When you do that you find they are expected to add $2.2 billion (or 0.13 per cent of gross domestic product) to the budget deficit in the coming financial year, but subtract $1.6 billion from the deficit over the five years to 2018-19.

Either way, the expected net effect of the budget's measures is too tiny to matter. That's the old, strict Keynesian way to determine the "stance" of fiscal policy adopted in the budget.

The Reserve Bank's way of determining the budget's overall effect on the economy (which adds to the above change in the discretionary or "structural" component of the deficit the expected change in the "cyclical" component caused by the operation of the budget's "automatic stabilisers") shows that, measured as a proportion of GPD, the coming year's deficit is expected to be 0.5 percentage points lower than for the financial year just ending, with expected falls of 0.6 points, 0.7 points and 0.4 points in the following years.

In my book, a change of 0.5 percentage points is right on the border between insignificant and significant. That makes the budget only mildly contractionary.

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Budget has reverse weaknesses, strengths to last year's

This is the budget of a badly rattled government that has put self-preservation ahead of economic responsibility. It will do much to restore Tony Abbott's political fortunes, but next to nothing to return the budget to surplus or hasten the economy's return to strong growth.

What it's not is "dull". Turns out, when Abbott promised a dull budget what he meant was one that was the opposite of last year's.

This budget will be incessantly compared with Joe Hockey's first attempt because that is its almost sole objective: to have the reverse effect of last year's.

Last year, the budget's overriding goal was to chart a path back to eventual budget surplus. By delaying the cuts in the deficit until after the economy was expected to have recovered, it won high marks for its management of the economy.

It was a budget designed to please the (big) Business Council.

Its big problem was that most of the measures taken to effect that objective were judged by voters to be blatantly unfair, hitting low and middle income-earners but not the well-off. And it broke a host of election promises.

This was why so much of it failed to get through the Senate.

Another problem was the crudeness of its measures. They did little to make government spending more efficient, but simply shifted a lot of the cost off onto pensioners, the unemployed, patients, university students and state governments.

Last year's budget had no giveaways. Its only "winners" were people who weren't hit. This budget will leave many low and middle-income families better off - although most of its key measures won't take effect until 2017.

Its big measures are reworkings of cuts proposed last year. The planned GP co-payment has been replaced by savings to be imposed on drug companies and chemists, with reform of overgenerous fees to doctors to follow.

The planned move to less-generous indexing of the age pension has been replaced by a tighter assets test, which will leave some pensioners better off, but prevent others from receiving a part-pension.

The promised more generous paid parental leave scheme has been abandoned, with the savings used to pay part of the cost of a reform of childcare subsidies, which leaves low and middle-income families better off. Some high-income parents will get less.

Despite some serious flaws in the parental leave and childcare arrangements, the various reworked measures are not only fairer, but of much higher quality and careful design. This is a big improvement on last year.

But the reworked measures will do a lot less to reduce the budget deficit over time. Overall, the budget's measures actually slow the return to surplus by more than $9 billion over four years..

More seriously, this budget does far too little to bolster spending on infrastructure while tightening up on recurrent spending.

Last year's timid "asset recycling initiative" has not been supplemented adequately at a time when the Reserve Bank's ever-more ineffective efforts to use cuts in interest rates to resuscitate the economy need all the help they can get.

The increased money for infrastructure in Western Australia and Northern Australia and other bits and pieces won't make a big enough difference.

The announced crackdown on profit-shifting by foreign multinational companies sounds impressive, but how much tax it actually raises remains to be seen.

If last year's budget was intended to please big business, this one purports to do wonders for small business. But its various new concessions are likely to do more to please small businesses than to transform their investment spending.

Don't be misled by all the happy talk of an improving economy and all the jobs to be created. We can always hope, but there is little reason to believe the budget will do much to improve business confidence.

From the perspective of economic management, this budget represents dereliction of duty.

And there's one respect in which nothing has changed: the tax perks of the well-off - superannuation concessions, negative gearing, discounted tax on capital gains, family trusts - remain untouched.

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How Hockey can do the impossible in the budget

I wouldn't like to be in Joe Hockey shoes as he prepares to deliver the budget on Tuesday night. Which is not to say I or any other commentator will be going easy on him. It's too important a job for that and, after all, he volunteered for it.

To be bringing down our eighth budget in a row with a substantial deficit when, according to popular opinion, we didn't even have a recession, is pretty hard to explain.

Our problem is that a monumental resources bonanza is harder to handle than simple recession. In the early stages we were spending and cutting taxes as though the budget would never be a problem again.

Now, on the other side of that boom the transition to normal growth is proving excruciating. With commodity prices still falling and weak growth in wages and employment, tax collections just aren't recovering in the way we could have expected.

Hockey inherits the adverse budgetary consequences not just of Labor's reluctance to find ways to pay for its big spending plans, but also all the profligacy of his sainted Liberal predecessors.

John Howard used the cover of the temporary boom to spend big on middle class welfare for the supposedly self-funded retirees, while Peter Costello initiated an irresponsible eight tax cuts in a row (the last three of which were delivered by Labor) and an unsustainable superannuation tax regime, linked with liberalisation of the pension assets test that Scott Morrison is now reversing.

Hockey also inherits all the crazy things said by someone called J. Hockey while in opposition. Almost every sensible thing he says today can be countered by a clip of him saying the opposite a year or two ago.

Leaving aside whether a cut in interest rates should be seen as good news or bad — it's both — there's all his scaremongering about the rapidly growing mountain of deficits and debt, all his exploitation of the punters' incomprehension that the rules for countries aren't the same as those for households, and all his claims about how simply, quickly and painlessly the budget could be returned to surplus by the Coalition, with good government in its DNA.

And, of course, Hockey also "inherits" all the government's loss of voter goodwill and now-blocked-off options from last year's ill-judged and ill-prepared budget. How any, even a Coalition government imagined it could get away with a delivering a budget designed to gratify the Business Council is beyond comprehension. I thought you guys were professional politicians?

So now Hockey finds himself delivering a budget that's "dull" and "fair" but still has the deficit and its successors heading slowly down rather than up. With all the headwinds Hockey's facing, even that short order will be hard enough.

But even if he pulls it off without resort to creative accounting — and I'll be watching — it won't be enough.

The strangeness of our circumstances is that for Tuesday's budget to win a high mark it has to initiate plans for major improvements in the budget deficit, building up in the "out years" and introduce budgetary stimulus ASAP to rescue the flailing and failing efforts of monetary policy (bargain-basement interest rates) to get the economy moving again.

The need for that second leg became painfully apparent on Friday, with the Reserve Bank revising down its growth forecasts for the second quarter in a row, notwithstanding its two rate cuts so far this year.

In February it cut its "year-average" forecast for the financial year just ending from 2.5 per cent to 2.25 per cent. On Friday it cut its forecast for the coming financial year from 3 per cent to 2.5 per cent.

But isn't a stimulatory, deficit-cutting budget a contradiction, an impossible combination? Only if you haven't​ thought much about how fiscal policy (budgets) works.

There's a simple, age-old distinction that makes the impossible possible: capital versus recurrent. We need faster progress in reducing the recurrent budget deficit, which can be achieved at the same time as you stimulate the economy by spending on needed, productivity-enhancing infrastructure projects.

The irony is that Hockey has already attempted to implement such strategy — last year. The structure of last year's budget was first rate — even before the economy's continuing weakness became so evident.

The problem last year was the unfairness and poor quality of the measures proposed to achieve the strategy. Then, Hockey didn't manage even to explain the concept.

This time, I fear, he may not try to meet the economy's needs while busy trying to repair the government's political standing.

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Two-speed economy has gone away

Remember the two-speed economy we used to hear so much about? Well, no one in the media has thought it worth mentioning, but it's gone away.

It's remarkable how the media can get so excited about some "problem" but then never mention it again.

The two-speed economy was caused by the first two stages of the resources boom, of course, with the high commodity prices and mining investment boom causing the resource-rich states to grow much faster than the other states. The others were held back partly by the boom-caused high dollar making life much harder for trade-exposed industries such as manufacturing and tourism.

According to an article by Sam Nicholls and Tom Rosewall in the latest Reserve Bank Bulletin, Western Australia's real gross state product grew at an average rate of almost 5 per cent a year after 2003-04, and Queensland's grew at 3.5 per cent, compared with 2.5 per cent or less in the other states.

But with commodity prices coming down (and state governments' mineral royalties falling) and construction projects winding up, the mining states' economies are now growing more slowly.

The boom is now in its increased production phase, but this is much less labour-intensive than building new mines and natural gas facilities, meaning less money stays in the state economy rather than going to foreign owners.

Meanwhile on the other side of the fence, the Reserve Bank's bargain-basement level of interest rates has helped consumption spending and home building to grow a bit more strongly in the other states, particularly NSW and Victoria.

With their tax receipts boosted by much higher conveyancing duty from their housing booms, the NSW and Victorian governments won't keep such a tight rein on budget spending.

The dollar has now fallen a long way (though its decline has been inhibited by the "quantitative easing" – money creation – in most of the major advanced economies) and this is starting to revive manufacturing and tourism.

Differences in each state's industrial composition, as well as differences in their rates of population growth, mean the states never grow in lock-step. Barring commodity booms, the nationwide growth rate is rarely far from the growth rates in NSW and Victoria, simply because these two states constitute more than half of national gross domestic product.

We're returning to that more usual state. Nicholls and Rosewall examine the "standard deviation" in GSP growth rates as a summary measure of the degree of variation in growth across the states. They find it has declined recently to be only a little above its long-run average.

Another way to compare the states' economic performance is to look at differences in their rates of employment growth and levels of unemployment, though you have to remember to allow for differing rates of population growth.

Doing this shows that "the variation in state unemployment rates has declined recently, to be well below its average level since 2000", the authors say.

Of course, although the states may now be growing at more similar rates, a decade of disparate growth can't help having a big effect on each state's share of the total Australian economy.

Are you sitting down? Over the 10 years to 2013-14, WA's share has increased from 11 per cent to 17 per cent. Amazing. And get this: WA now has by far the widest gap between its share of the economy and its share of the nation's population, just 11 per cent.

Queensland's economic share has increased by 1 percentage point to 19 per cent. (Mining accounts for a much smaller share of Queensland's economy than of WA's, and the Sunshine State is also more dependent on tourism, which was hard hit by the high dollar.)

The Northern Territory also benefited greatly from the mining boom, with its share of the national economy increasing by about a quarter. In absolute terms, however, it remains tiny.

But if the mining states' share has grown, the other states' shares must have shrunk. In round figures, NSW's share is down 4 points to 31 per cent and Victoria's is down 2 points to 22 per cent. South Australia's and Tasmania's shares are down a combined 1 point to 6 per cent and 2 per cent.

Now let's look at differences in the states' industrial structure. Although most industries' share of each state's economy is similar, there are some big differences, particularly in primary industry.

Mining accounts for a remarkable 30 per cent of WA's economy and 9 per cent of Queensland's, compared with about 2 per cent in the other states.

Agriculture accounts for 8 per cent of Tasmania's economy and 5 per cent of SA's, compared with a national average of 2 per cent.

Victorians see their state as heavily dependent on manufacturing but in truth it accounts for 7 per cent of their economy, the same as for NSW and not far from the national average of 6 per cent.

With NSW fancying itself as the nation's financial capital, it shouldn't surprise that "business services" – financial and insurance services; professional, scientific and technical services; media and telecommunications – make up 30 per cent of its economy.

What may surprise manufacturing-mesmerised Victorians is that they're not far behind at 27 per cent. This compares with shares ranging from 19 per cent down to 14 per cent in the other states.

A last startling statistic. Because our exports are dominated by minerals and energy, and because WA has such a large share of the nation's mining industry, the authors estimate that with just 17 per cent of the economy, WA supplies a stunning 43 per cent of our exports.

No wonder the Sandgropers like to imagine the rest of us are bludging off them.

But it's a mercantilist fallacy that nations make their living by selling things to other nations (and importing as little as possible). Selling goods and services to other Aussies is no less virtuous.

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Jobs matter more than balancing the budget

With the budget due next Tuesday, the media are about to revert to another period of obsession with government spending, taxation, deficits and debt. I'll probably be more obsessed than most. But before the circus starts, let me offer a little pre-match pep talk.

Don't take it all too literally. Try to put it in a wider context. The budget is worthy of the attention the media give it, but not for the reason many people imagine.

The budget matters most because its changes in taxes and spending programs have so much effect on our lives. How would those changes work? Are they sensible? Who benefits from them and who loses? Are they fair or unfair?

But the budget is not the economy. It's just the federal government's incomings and outgoings. The economy, by contrast, covers the federal and state government budgets, plus the whole of business, plus the market activities of Australia's 8.2 million households, making the economy just a bit bigger and more important.

Our problems with the budget don't necessarily mean we have a problem with the economy. And fixing the budget problem would go only a small way towards fixing any problems with the economy.

It's true the budget has an effect on the economy, making it grow faster or slower, but that effect isn't as important as the effect the Reserve Bank has with its manipulation of interest rates.

What's more, though we mustn't let the budget stay in deficit forever, racking up more debt, the debt isn't huge at present and it's best to wait until the economy's returned to an adequate rate of growth before any plans to get the deficit down start having big effects.

Something the sacked former secretary of the Treasury, Dr Martin Parkinson, said last week put the budget deficit into its right context.

"Australia has fantastic opportunities in front of it. The shift of economic weight toward our region, the technological changes. If we grasp it, it's an incredibly exciting time for us," he said.

"How do we go about grasping it? Well, first we've got to get our house in order. That means we've got to get our fiscal [budgetary] situation sorted out. Once you start to do that, you can focus on the real issues."

One of the real issues is jobs. We need the number of jobs to be growing in line with the number of people wanting to work. Everyone knows that, which is why Tony Abbott is already claiming the budget will be about creating more of them.

But the jobs question isn't that simple. We tend to think it's a terrible thing when someone loses their job, and that any politician or businessperson claiming to be able to create jobs must be a good guy.

I've never been sacked or made redundant, but I'm sure it's a terrible experience. However, I also know this: we didn't get to be among the richest countries in the world without a lot of people losing their jobs.

The point is, to stay prosperous we've had to keep changing, responding to the changes occurring in the rest of the world and, even more so, to advances in technology. There's nothing like new technology to destroy jobs in some industries while creating them in others.

That's what's happening with the "disruptive change" being unleashed on us by the digital revolution. The disruption is already well advanced in my industry, but it seems clear it will be just among the first of many industries to be turned upside down.

And though this will be unprecedented in one sense, in another it's nothing new. As a big report on Australian industry reminded us last year, "Australia's short economic history has been a story of constant change".

In the 19th century, agriculture contributed more than 30 per cent of gross domestic product; today it's just 3 per cent. In the 1960s, one in four jobs was in manufacturing; today the ratio is about one in 12.

"Like other developed countries, the majority of Australia's economic activity today occurs in services industries. These industries account for more than two-thirds of GDP and about 10 million jobs," the report says.

Far more change occurs than we realise. Every year, around a million Australian workers change jobs and a quarter of a million businesses enter and exit the market.

Over the decade to 2013-14, total employment grew by 2 million. This involved 52,000 jobs lost in agriculture and 92,000 jobs lost in manufacturing, but 462,000 jobs gained in healthcare alone. Apart from mining, all the other jobs gained were in the services sector. And note this: on the whole, the additional jobs were better paid than those lost.

"Employment growth has been stronger in higher skilled occupations, and for individuals with higher levels of education. As the transition towards a knowledge-based service economy continues, it is reasonable to expect that these trends will continue," the report says.

Government spending on healthcare and education in all its forms will be a big part of all the fuss about the budget. But both areas are far too important to our future for them to be viewed purely in terms of their costs to the budget.

Stuff up education, for instance, and our transition to a knowledge-based economy and continued prosperity will be off the rails.

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No more shortcuts to budget surplus

Maybe we're getting somewhere. The nation's almost unanimous rejection of the proposed Medicare co-payment has proved to be a blessing. It's obliged the replacement Health Minister, Sussan Ley, to go back to basics and find genuine savings.

It won't be long before we find out what effect the failure of last year's budget has had on this year's. Judging by most accounts, it won't a favourable one.

Badly burnt by the monumental misjudgments in his first attempt, Tony Abbott seems to have swung to the opposite extreme of doing little or nothing to tackle our medium-term budget deficit problem.

But Ley's more positive response – initiating a review of the Medicare benefits schedule, a review of primary health care, a focus on Medicare compliance and a tougher renegotiation of the government's contract with the chemists' union – is a more hopeful sign.

The nationwide rejection of last year's budget is a seminal event, not just in the potentially brief life of the Abbott government, but in the history of budget-making. The present generation of politicians will be making judgments and drawing conclusions that will affect their behaviour for years to come.

But there's just as much cause for the econocrats, economists and business lobby groups to be learning from this historic stuff-up.

The rule that bureaucrats' advice to their political masters remains confidential means we can never know how much that advice contributed to the budget's failure. It's possible all the dumb ideas and misjudgments came from the pollies and their private-office advisers – not forgetting the totally over-the-top advice from a commission of audit subcontracted to the Business Council – but I find it hard to believe the econocrats contributed nothing to the disaster.

With Abbott copying John Howard in making his first act the sacking of a range of department heads "to encourage the others", it's possible the econocrats' advice wasn't as fearless as it should have been.

If so, let's hope Coalition politicians have learnt their lesson. If you frighten the econocrats to the point where they say Yes, Minister then stand well back while you do yourself an injury, your bullyboy tactics have robbed you of the protection the public servants could have provided.

But I suspect part of the problem is that year upon year of departmental staff cuts perversely known as "efficiency dividends" have, in fact, rendered the public service less efficient by robbing it of the expertise needed to propose sensible, targeted, efficiency-enhancing cost savings.

Finance and Treasury no longer have the ability to identify those areas in a particular portfolio where savings could be made without loss of quality or unintended consequences, and nor does the department itself.

If so, governments and their advisers have got themselves into a vicious circle: successive efficiency dividends have removed their ability to come up with well-considered savings, so they're compelled to fall back on another round of efficiency-sapping efficiency dividends.

The most obvious lesson – one to be learnt not just by politicians but by all those who care about fiscal responsibility – is that if you manage to con the pollies into proposing blatantly unfair "reforms" you run a high risk of actually setting back the cause of reform.

If, for instance, you tell the punters a Medicare co-payment is unavoidable because health spending is growing "unsustainably", while forgetting to mention that you're paying too much for generic drugs and chemists' dispensing, as well as paying for medical procedures that are known not to work.

A corollary is that slugging the punters so as to avoid fights with powerful drug companies, chemists' unions and doctors' unions is dumb politics.

The less obvious lesson is that the 2014 budget failed partly because the savings measures it proposed were such poor quality. So primitive, short-sighted and otherwise ill-considered. They were kneejerk cuts to which little thought had been given or expertise applied.

Don't try to reduce the element of waste and rent-seeking in health spending, just shift some of the cost onto patients, rich and poor alike, using some pseudo-economic excuse about the need for a "price signal".

Don't ask how many of the patients you deter from visiting doctors should have sought early advice or whether they'll end up costing taxpayers more than they would have. Worry about that in another budget – and fix it by increasing the co-payment.

Too many of the measures in last year's budget seem to have been proposed by accountants who understood nothing but the budget arithmetic and didn't care what crazy things were done to get back to surplus.

Let's hope Ley's more intelligent approach is a sign these lessons are being learnt.

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Resources boom not done yet

If you think the resources boom is all over bar the shouting, someone who ought to know begs to differ. He thinks the last phase of the boom is just getting started. But even he thinks the boom leaves us with stuff to worry about.

In a speech this week, Mark Cully, the chief economist of the federal Department of Industry and Science, says the resources boom actually consisted of three booms.

The price boom lasted for about eight years and peaked in 2011. The overlapping investment boom lasted for about six years, with $400 billion worth of resources projects. Overall, business investment spending peaked in the last quarter of 2012 at an astonishing 19 per cent of gross domestic product.

By now we're in the early stages of the production boom, making the whole thing more of a "super-cycle" than a common or garden boom.

We're well aware that resource prices are still falling from their 2011 peak and that mining investment spending is rapidly coming to an end. But, according to Cully, the production boom is set to last far longer than the others did.

As always, it's a story of global prices being determined by the interaction of global demand with global supply. World prices shot up because demand grew faster than supply could keep up with.

Eventually, however, the world's producers of resources such as iron ore, coking and steaming coal, liquefied natural gas and petroleum responded to the high prices in textbook fashion, desperately expanding their production capacity so as to cash in on the bonanza.

It took a while for that extra capacity to come on line. But, as the textbook predicts, once supply started catching up with demand prices started falling back. And, adding to the pressure for lower prices, world demand started to fall off.

So, isn't that the same-old, same-old end to the story of the boom? And if we get to the point where world supply actually exceeds world demand, doesn't that mean prices could have a lot further to fall?

Not if it's turns out to be true – as I and others have believed – that this commodity cycle is being driven more by a longer-term change in the structure of the global economy than by the usual shorter-term cyclical mismatch between supply and demand.

Many people see the resources boom as caused by the rapid development of China, whose economy is now growing more slowly. But Cully sees China as just the first act, with other countries to follow.

"Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century," he says.

Per-person consumption of energy and materials in most countries in Asia lags the developed nations by a large margin and so is almost certain to grow. As incomes rise and they attract infrastructure and commercial investment, Asia's consumption of resources will grow by volumes that far outweigh whatever's happening in the rich countries.

Iron ore and coking coal are used to make steel, of course. Cully says China's steel production is estimated to have reached a record last year. He expects it to fall in the short term but, over the medium term, to reach a new peak almost 10 per cent higher by 2020.

"This will be required for China to continue expanding its infrastructure networks, especially rail, build more housing and grow its capital stock," he says.

Then there's India. Its Ministry of Steel wants present production to be four times higher by 2025. It may not achieve that target, but this still suggests rapid growth.

There've been highly publicised falls in the world price of iron ore in recent times, but Cully expects it to remain low this year and next before rebounding over the medium term as higher-cost producers exit the market and demand continues to grow. Australia has some high-cost producers, but most are in other countries, leaving Rio Tinto and BHP Billiton as the world's lowest-cost producers.

Turning to steaming coal, Cully questions the environmentalists' optimistic belief that world demand for it is on the way out. More than 300 gigawatt (one billion watts) of coal-fired electricity generation capacity is being constructed or has been approved in developing countries.

"Barring major policy adjustments," he expects coal-fired power to remain a primary source of generation in China and India. Japan, South Korea and Taiwan are increasing their use of steaming coal, while Indonesia, Malaysia, Vietnam and Thailand are increasing by even more.

Australia is likely to play an important role in meeting this increased demand because our coal's higher energy content makes it more suitable for use in advanced generators. Cully expects our exports to have increased by 15 per cent by 2020, making us the world's largest exporter of steaming coal.

Finally, natural gas. Cully's team projects that our exports of natural gas will increase more than threefold to about 75 million tonnes a year in 2019-20. By that time Australia would be the world's largest exporter of gas.

The increased volume of gas exports is likely to be the principal driver of growth in Australia's export revenue. Looking across all the mineral commodities, increases in the volume (quantity) of exports are expected to outweigh further decreases in prices, so that the value of these exports (price times quantity) increases by about a third through to 2019-20.

So what could there be to worry about? Well, it's worth remembering that, although we're exporting more thanks to the resources boom, our share of global exports is actually falling. Other countries' exports must be growing faster than ours.

More concerning, while we've been becoming global export leaders in iron ore, coal and natural gas, our range of exports has become even less diversified than it was before the boom.

Considering how dependent we are on exporting fossil fuels, that ought to worry us more than it does.

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FOREWORD TO MONOGRAPH BY CONNORS AND MCMORROW, PUBLISHED BY THE AUSTRALIAN EDUCATION REVIEW

May 2015

Many of those of us old enough to remember, pride ourselves that the sectarian bitterness of our youth is long gone. The debates over ‘state aid’ to Catholic and other non-government schools are now just a distant memory. Similarly, many of us like to believe that the class-based struggle of old is no longer part of modern political life.

But the continuing influence of both sources of conflict isn’t hard to find in federal and state arrangements for funding Australia’s schools. Although governments switched to their own systems of secular education in colonial times, Catholic systemic schools still receive considerable government funding on a separate basis to the public school systems, which are separate again from the greatly increased public funding going to ‘independent’ non-government schools.

If you’re tempted to think this no more than an artefact of ancient history, just try fiddling with it. Whereas religious schools have long been much more tightly absorbed into government school systems in most other developed countries, our Catholic systemic schools have retained a high degree of (heavily subsidised) independence. Few politicians have shown any desire to change these longstanding arrangements. Sectarian sympathies are too easily aroused.

And whereas in other advanced economies other non-government schools have retained their independence by swearing off public funding, in Australia they’ve been able to enjoy the best of both worlds. While you may think there is little media sympathy for what journalists almost invariably describe as ‘elite’ private schools, the authors of this review remind us that just twice in the past 40 years has one side of politics - Labor - dared to propose cuts in grants to prosperous private schools, before abandoning the policy and quietly vowing never to provoke such uproar again.

It’s commonly believed that politics has entered the post-ideological age, but schools funding is an exception. Whereas Labor governments have tended to emphasise equity and needs-based funding, Coalition governments have emphasised choice and competition. The result has been a degree of see-sawing over the decades as government has changed hands.

The authors trace the effects of these conflicting influences on schools funding by the federal government over the almost 40 years between the early days of the Whitlam government in 1973 and the later years of the Rudd-Gillard government in 2011. Using prices at December 2011, they find that federal grants for recurrent school funding grew in real terms from $900 million to $11.4 billion a year, a more than 12-fold increase.

Even remembering that the number of students grew by 24 per cent to 3.5 million over the period, this represents a significant real increase in schools funding. So, no evidence of unwillingness to increase spending by either side of politics. And international comparisons confirm that Australia’s total spending on schools is a little above the average for the OECD countries.

The authors’ figures reveal two outstanding trends over the period, however. First, whereas federal recurrent grants to government schools rose by a factor of about nine over the period, grants to non-government schools increased almost 16-fold. So whereas total federal grants were shared equally between government and non-government schools in 1973, by 2011 the non-government schools’ share had risen to 63 per cent. This represents the federal government supplanting the states as the main provider of funding to non-government schools.

Second, whereas total student numbers increased by 24 per cent over the period, the number of government-school students grew by just 3 per cent. This left the number of students in Catholic systemic schools growing by half and independent-school students growing by a factor of four. So government schools’ share of all students fell from 80 per cent to 65 per cent, with the Catholic schools’ share increasing by 5 percentage points to 19 per cent and independent schools’ share rising by 10 points to 16 per cent.

This raises an obvious question: has the balance of federal funding shifted in favour of non-government schools as parents have voted with their feet in leaving the government system, or has the shift in funding in favour of non-government schools encouraged parents to move?

No doubt there’s truth in both possibilities. With a growing proportion of two-income families, rising real incomes and smaller family sizes, it would be surprising if more parents weren’t attempting - wisely or otherwise - to advantage their children by sending them to fee-charging private schools. If it costs more, it must be better, right?

But equally, it would be surprising if the lower-than-otherwise fees or better-than-otherwise facilities at non-government schools permitted by greatly increased government funding hadn’t encouraged many families to send their children to non-government schools. And as often better-off, better-performing and better-behaved students have left or failed to join the public system, it has become that much harder for government schools to maintain their standards and attractiveness to parents able to afford other options.

What’s clear is the increased social stratification of Australian schools, with official estimates of socio-educational advantage in 2010 showing 36 per cent of government-school students in the bottom quarter of the distribution, compared with 21 per cent of students at Catholic schools and 13 per cent at independent schools. At the opposite end of the distribution, 47 per cent of students at independent schools were in the top quarter, compared with 29 per cent of Catholic systemic students and 22 per cent of government-school students.

So, we’ve spent a lot more money on schools, with much of the increase going to subsidise the growth of non-government schools, to the point where only about 5 per cent of all schools spend more on teachers’ salaries than they received in federal and state grants. What, then, have we achieved in terms of measured educational outcomes?

The authors quote research published in 2013 which found a small decline in reading and mathematics achievement among Australian students in the middle years of secondary school since 2000, stability in science and maths achievement among Year 8 students since 1994, a small improvement in maths achievement among students in Year 4 since 1994 and a small improvement in reading among students in Year 3 since 2008. So, as a general conclusion, little improvement.

Perhaps findings such as these account for those arguing that all the extra funds taxpayers have put into schools over recent decades have done little to improve educational outcomes. But it may not be that simple. It’s not just how much we spend, it’s also how we spend it. And, as we’ve seen, we’ve been directing more of our funds to non-government schools with higher proportions of socio-educationally advantaged students.

Results from the OECD’s PISA study in 2012 show that the lower a country’s overall level of schools’ educational resources, the greater the gap in resources between advantaged and disadvantaged schools. But we’ve managed to make ourselves an exception to that rule: despite our above-average level of school resources overall, we have the fifth largest resource gap between advantaged and disadvantaged schools. Why? Mainly, it seems, because successive federal governments have divided their recurrent grants to government and non-government schools in a way that favoured choice and competition over equity and needs-based funding.

It’s often argued in support of subsidised choice that, even so, parents who pay extra to send their children to a non-government school are doing other taxpayers a favour. Such arguments ignore the diseconomies of scale often involved when students move from public to private. According to rough figuring by the authors, federal and state recurrent spending on schools would have been somewhat less had the migration from government to non-government schools between 1973 and 2012 not occurred. As for the common contention that subsidised choice of schools would, by increasing the competition between government and non-government schools, serve to improve educational outcomes, little evidence has so far emerged to support it.

With its proposal for a ‘sector-blind’ reorientation of federal and state schools funding in favour of disadvantaged students regardless of their sector, The Gonski review panel offered the political parties and interest groups on all sides of the debate a rare opportunity to move to a fairer and more rational funding system in a spirit of compromise and co-operation rather than capitulation.

Regrettably, with the change of government in Canberra that opportunity has been forgone, partly because of the persistence of old partialities and partly because the compromise based on the Gillard government’s requirement that ‘no school would lose a dollar’ was judged too expensive by the Abbott government. Rather, after the first four years of Gonski funding the government proposes to subject its existing recurrent grants to government and non-government schools to a much less generous indexing regime.

This would save money while doing nothing to distribute federal funding in a way fairer to disadvantaged students. It would ignore the scope for savings by reducing grants to the most privileged schools. And it would pass up an opportunity to improve the labour force participation and productivity of young people near the bottom of distribution. As an Abbott minister might say, such an unsatisfactory outcome is surely ‘unsustainable’.

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Super: ignore it and miss seeing you're being bled

You know you're getting old when you attend the funeral of the man who hired you four decades earlier. Among all the rough-and-ready types in journalism, Alan Dobbyn, long-lasting news editor of the Herald - in the days when that meant he was really the editor - was a true gentleman.

When, as a chartered accountant, I applied for a job as a cadet journalist, Dobbyn told me he wasn't sure I'd last, but was prepared to give it a go. He didn't know how keen I was to escape the round eternal of the cash book and the journal. At the wake, I learnt from his family his concern was his inability to offer me a wage of more than $100 a week.

Not to worry. He got me a hefty pay rise four months later. And, in any case, being an accountant with an interest in such matters, I joined the Fairfax super scheme in my first week and this has served me more than well.

Just as it never crossed my mind I'd one day attend my boss's funeral, so most people under 50 can't bring themselves to think about superannuation. It is too complicated and too boring. It deals with contingencies so far into the unknowable future that they're inconceivable.

Why do bankers and other purveyors of "financial services" earn stratospheric incomes that chief executives have been quick to copy and medical specialists to envy? To a fair extent because so few people can bring themselves to keep a watchful eye on their super.

How do you get ripped off in a capitalist economy? By not paying enough attention to what the capitalists are doing to you via boring things like superannuation. By ignoring the watchwords of capitalism: caveat emptor - let the buyer beware.

Paul Keating is particularly proud of Labor's introduction of compulsory employee super in the 1990s. John Howard has always had his doubts, partly because of the compulsion, but mainly because it's meant so many unwashed union officials getting a hand in administering the billions that, by rights, should be the exclusive preserve of Liberal-voting business people.

I have no problem with the compulsion. It is an easily justified government intervention to help counter the very market failure we've been discussing: life-cycle myopia. But even if you regard our present arrangements as a great reform, it remains true they're also a great scandal. A remodelled house that's yet to have its tarpaulin replaced by a new roof to stop the rain getting in.

Lately, we've heard much about the way a mainly compulsory saving scheme is accompanied by tax inducements that cost the government about as much as the age pension, but are of little benefit to low-income earners, with most of the lolly going to high-income earners like me.

It's a scandal for the government to be proposing cuts to the age pension because its cost has become "unsustainable", while ignoring the super tax concessions going to the more than well-off.

But another scandal gets far less attention: the way the banks and life insurance companies and innumerable hangers-on are able to quietly overcharge all those mug punters who can't muster any interest in their super.

Think of it: the government compels employers to take 9.5 per cent of their workers' wages and hand this over to the "financial services" industry, then looks the other way while these fat cats rip off the mugs the government has delivered into their hands.

As Jim Minifie explains in his report, Super Savings, for the Grattan Institute, the previous government did do something to improve things, mainly by tightening requirements on the "default" super funds that workers are put into when, as usually happens, they don't exercise their right to nominate a fund.

But this just scrapes the surface of the potential reductions in the administrative and investment management fees imposed on people's accounts. The industry is inefficient because its customers' inattention means competition is inadequate.

To be fair to punters, it's just too hard to understand how super works and how different funds compare, and too time-consuming to complete the forms needed to move money around. Putting that into econospeak​, information and transaction costs are prohibitive, causing the market to fail.

Minifie finds there are too many super accounts - on average, about two per person - and too many super funds, which stops the exploitation of economies of scale. He says the government should encourage fund mergers and make it easier for people to consolidate their accounts.

But most of all, the government should inject more competition by calling tenders for the right to be a default fund, with those funds charging the lowest fees winning.

These reforms could cut the $21 billion in fees paid each year by people with super accounts by up to $6 billion a year. That's a decrease of almost 30 per cent.

Punters assume that, apart from the size of your wage, how much super you retire with depends on how well your investments do. Often, however, how much you're charged in fees can make a bigger difference.

Few realise they're paying about $1000 a year in fees. Minifie estimates that just introducing a tender for default funds would cause the average retirement payout of people in such funds to be 5 per cent higher.  That's about $40,000. Worth worrying about, I'd have thought.

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