Oh no, not a credit rating downgrade

Sorry, but I've put Standard and Poor's and the two other big American credit rating agencies on a negative watch.

For me, the rating agencies' involvement in the global financial crisis has destroyed their credibility forever. I can no longer take their solemn pronouncements seriously, nor hear them with the reverence or contrition they imagine themselves entitled to.

The rating agencies were one of the private sector institutions charged with upholding standards of behaviour in America's financial markets, putting investors' interests ahead of their clients' and their own.

They were supposed to be a bastion against crisis and collapse, but they betrayed their trust.

The way their system works is that institutions wishing to borrow money by issuing bonds or other securities have to pay rating agencies to give those securities a rating of their credit worthiness.

The agencies' job pre-crisis was to be the hard-headed wise men who could see through the smoke and mirrors created by "innovators" on the make. They failed.

While everyone else in Wall Street was making money hand over fist, they didn't resist the temptation to get in for their cut.

They obliged their paying customers by awarding AAA credit ratings to securities subsequently exposed as "toxic debt".

In the process, they exposed the obvious conflict of interest involved in the common practice of governments attempting to protect the interests of investors and others by requiring businesses to buy "independent" certification from other businesses.

To an extent, governments around the world give the rating agencies a captive market by requiring certain organisations to hold only those securities certified as AAA.

This was how some Australian local councils got sucked into America's toxic debt crisis.

Trouble is, with this monumental blot on their record, we can no longer be sure what game the ratings agencies are playing and in whose interests they act.

In the case of government ("sovereign") borrowers, the agencies take it upon themselves to issue ratings. They then have the temerity to present the government with a bill for their services, though no self-respecting treasury pays up.

They seem to be pretty tough on government borrowers, though the lines they draw between safe and unsafe levels of debt seem pretty arbitrary.

What I wonder is if they have higher and holier standards for government than they have for their private sector fellows.

Why not? Everyone in business (and a lot of people in treasuries) know that governments, because their actions are not the product of market forces, are therefore non-rational and prone to being either mad or bad.

The agencies want us to believe their deliberations are highly scientific and sophisticated, applied consistently across the world.

But it's open to doubt how true that is.

After all, many of us believed the line that the whole towering edifice of ever-multiplying derivatives and synthetics built up before the financial crisis was the product of amazing advances in statistics and the science of finance, which had rendered us far smarter than we used to be at "managing risk".

When it comes to signalling changes in the riskiness of particular borrowers, the agencies purport to be the leaders: their vigilance causes them to be the first to see the problems looming, with the market following their lead.

But it's common for the market to turn against some borrower, leaving the agencies scrambling to adjust their ratings to fit. Are they just purveyors of conventional wisdom?

Whenever a downgrading of one of our governments is threatened, the media unfailingly assure us this would be a bad thing because the government would have to pay higher interest on its debt.

If this is still true, it's much less so than it used to be. And if there is still a premium to be paid, it's smaller than it's made to sound.

The rating agencies' loss of authority since the financial crisis is evident.

When, in 2011, in a rush of blood to the head – or maybe a touch of the megs​ – Standard and Poor's announced it had cut the US Government's credit rating to AA+, the other two did not follow suit and the market took not a blind bit of notice.

The yield (interest rate) on US Treasury bonds continued falling. Moral: don't try to get smart with the world's reserve currency.

But something similar happened when the three agencies downgraded Britain to AA- in the wake of the Brexit vote. Yields on British bonds have since fallen, along with those of other "sovereigns", including us.

Sometimes there are forces more powerful than a bunch of for-profit rating agencies.

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Workforce participation a key for Turnbull's new plan

Now it's likely the Turnbull government will scrape back to office, what's next? What will it do to improve our economic prospects?

Malcolm Turnbull went to the election offering a "national plan for jobs and growth" that was supposed to secure our future.

Trouble is, it now looks unlikely he'll be able to implement the centrepiece of that plan, the phased reduction over 10 years of the rate of company tax, from 30 per cent to 25 per cent.

Unsurprisingly, the proposed cut in company tax did not impress the voters, who think companies are paying too little tax, not too much.

Labor opposed the cut, save for the immediate reduction to 27.5 per cent for genuinely small business.

With the government now facing an even more hostile Senate, it's unlikely Turnbull will get any more than that.

This would be no great loss in the quest for jobs and growth. The government's own modelling suggested the tax cut would do virtually nothing to create jobs, and the boost to growth in Australians' incomes would be tiny and come only after a decade or three.

But what about the other parts of Turnbull's "five-point plan"? It's a muddle of things that will be done, things already done and a point saying what the plan will achieve.

Point one is "an innovation and science program bringing Australian ideas to market". Already done; benefits likely to be modest.

Point two is "a new defence industry plan that will secure an advanced defence manufacturing industry in Australia". Or a highly protectionist and costly way of buying votes in South Australia, of debatable defence value.

Point three is "export trade deals that will generate more than 19,000 export opportunities". This refers to preferential trade deals already made with Japan, Korea and China.

As my colleague Peter Martin has demonstrated, this is one of the big lies of the campaign. Such trade deals usually add more to our imports than our exports (which, of itself, is no bad thing).

Point four is the company tax cut and point five is "a strong new economy with more than 200,000 jobs to be created in 2016-17". This is just Treasury's budget forecast for growth in employment. Few of those extra jobs would have been "created" by anything the government did.

Get it? The "plan for jobs and growth" is a (now-thwarted) plan to cut company tax, plus a lot of packaging. That is, Malcolm Turnbull has no plan.

And, as we've been reminded by noises coming from one of the credit rating agencies, nor does he have a plan to get the government's budget back to surplus anytime soon.

His projection of that happening in 2020-21 relies heavily on a host of forecasts and assumptions.

Many people conflate the need for action to get the budget back to surplus with the need for "reform" to hasten our rate of productivity improvement and economic growth.

The two are related, of course, but they're not the same thing and we should consider them separately.

Remember that whereas productivity improvement is what you could call a "positive" objective, leaving us clearly better off materially, fixing the budget is a "negative" objective – it would just reduce the risk of problems down the track.

Obviously the longer we take to get back to balance, the more our interest bill grows. If this arises from borrowing to cover recurrent spending at a time when the economy is back to growing at about its trend rate, this is a bad thing.

However, if the borrowing is needed to cover spending on infrastructure (as you discover is largely the case when you study the information buried on page 6.17 of the budget papers) this is no cause for concern – provided the money hasn't been spent wastefully.

The cost of any credit rating downgrade is overrated, but it is true that, if we've got the budget back to surplus by the time we're hit by the next recession, we'll feel freer to respond as we should: allowing the downturn to push us back into deficit and adding temporary stimulus spending on the top.

Getting the budget back to surplus will do nothing to create "jobs and growth". Indeed, if you go about it the wrong way, it could come at the expense of jobs and growth.

A lesser-known point is that improvements in our productivity performance do little to improve the budget balance.

That's because it does about as much to increase government spending (directly and indirectly) on public sector wages and wage-indexed welfare payments, as it does to increase economy-wide wages and profits and, hence, tax collections.

As he casts about for a real plan to implement in the coming term, Turnbull should remember the thing that does help both the budget and Jobson Grothe: increased participation in the workforce.

This truth was lost when Turnbull was led astray by the rent-seeking of the Liberals' generous big business supporters and their obsession with cutting their own taxes in the name of "reform".

So one obvious place for Turnbull to start is with women. The Abbott government made a good start with the reform of childcare subsidies, but this has been blocked in the Senate because of the insistence on linking it with a crazy attempt to save money on paid parental leave in a way that would discourage employers from offering paid leave at their own expense.

The government should ensure that lack of available childcare isn't limiting young mothers' participation and continuing progress in their careers.

It could do much more to reduce the amazingly high effective marginal tax rates that discourage "secondary earners" (aka married mothers) from moving from part-time to full-time.

And then it could take a more careful run at winning public support for raising the age pension age to 70. We can get on with a slow phase-in, or wait until it's unavoidable.

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Who really wins from Mediscare

The success of Labor's "Mediscare" in this election is worrying - but not for the reason you may imagine. Its greatest effect may be to fatten the incomes of medical specialists and corporate medical suppliers.

Scare campaigns are often effective politically, but they can impose a high price on the country's good government.

Tony Abbott's highly successful scare about depredations of the carbon tax at the last election has left us bereft of an effective and relatively low-cost means of reducing our greenhouse gas emissions at a time when climate change is worsening and we've been obliged by international pressure to agree to a tighter target.

Bill Shorten's claim that the Coalition is bent on privatising Medicare could leave us with politicians of all colours lacking the courage to do anything to restrain the rapid growth in federal and state spending on healthcare by insisting on greater efficiency and more realistic charges for medical services.

The people who work in the House with the Flag on Top take just a few days after an election to reach agreement on why the winners won and the losers lost.

Right or wrong, this conventional wisdom sticks in the minds of pollies on both sides for many years.

Should the politicians conclude that the wrath of voters will descend on any government caught making any change that could, by any stretch, be described as privatising Medicare, the people making excessive incomes out of healthcare will be laughing and the rest of us will be paying.

Labor's Mediscare was more subtle than Abbott's crude claims that the carbon tax would wipe out Whyalla and lift the price of a lamb roast to $100.

Its distortion and exaggeration was based on the meaning attached that emotive word "privatisation". We know from repeated polling that voters overwhelmingly disapprove of all privatisation.

The righteous indignation with which ministers condemned Labor's claim as "extraordinarily dishonest", an "absolute lie" and "some of the most systematic, well-funded lies ever peddled" rest on a narrow interpretation of the word.

Privatisation means taking a profitable government-owned business and selling it off to private interests. Since Medicare isn't a profitable business, the claim is absurd.

Labor, however, was using the word more broadly to mean any change that involves reducing the role of government and increasing the participation of private businesses.

Its pretext for making its claim was the Turnbull government's intention to save a little money by shifting the processing of Medicare's many bank transfers from its giant cheque-writing agency, the Department of Human Services, to a private provider.

We wouldn't even have noticed this back-office switch, but Malcolm Turnbull felt obliged to swear the proposal would be abandoned.

But the effectiveness of this scare - and the vehemence of the Coalition's denials - rests on its large element of truth.

Labor was relying on voters remembering Abbott's broken promise to leave Medicare untouched with his first budget's plan to impose a $7 co-payment on pathology tests and GP visits.

The outcry forced him to abandon that plan. In subsequent budgets, however, the government has sought to achieve savings by ending the extra bulk-billing incentives paid to providers of pathology tests and by continuing from 2014 until 2020 the freeze on increases on the schedule fees doctors receive under bulk-billing.

Here the doctors' union has been doing Labor's work by scaring their patients with claims this would force them to abandon bulk-billing and charge big co-payments.

This is untrue in the case of path tests (where the schedule fee far exceeds the costs incurred by the two big public companies that bulk-process three-quarters of our tests) and greatly exaggerated in the case of the continuing freeze on schedule fees.

But what does the public take the word Medicare to mean? I think we're mainly referring to bulk-billing and the federal grants for state government public hospitals, which are conditional on hospital services being free of direct charge.

The public loves bulk-billing because it provides the illusion of something for nothing. But the Coalition has decades of hostility to bulk-billing. The $7 co-payment was an attempt to break it down immediately and the continuing freeze on schedule fees will break it down slowly.

This was the element of truth in Mediscare. What's more, the Coalition still plans to press on with most of Abbott's cuts in grants for public hospitals of $57 billion over 10 years.

The public's attachment to bulk-billing may be irrational, but health economists have two rational reasons for wanting it to survive.

First, it adds to the overall efficiency of the healthcare system by reducing the amount doctors need to spend on billing and collecting money. This is why doctors' initial opposition to bulk-billing turned to support.

Second, because its continuation is so valuable to doctors, bulk-billing gives the government of the day the ability to limit the annual increase in GPs' and pathologists' fees - provided it doesn't push the doctors too far.

Ever-rising healthcare costs are the biggest single threat to combined federal and state budgets. There is scope for the removal of inefficiencies that do more to line medical pockets than benefit patients.

In every case, doctors will resist the removal of those inefficiencies by telling their patients it's an attack on Medicare, not the doctors' wallets. That's why the success of Mediscare is a worry.

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Voters reject economics as usual

Assuming the government scrapes back in, this surprisingly poor election result for the Coalition carries hard lessons for politicians and those who seek to influence the policies they pursue: business people, economists and econocrats.

In this election economic issues dominated, and those hard lessons are about economic management and economic reform: what voters will let you do and what they won't.

It was a fight between a "national plan for jobs and growth", and health and education. Guess what? Spending cuts lost more votes than tax increases did, or than tax cuts won.

The temptation to explain the Coalition's disappointing result in terms of personalities ("I've never liked Malcolm and now I have proof") and poor political tactics, shouldn't be allowed to obscure the lessons for economic policy.

There are two. First, the strategy of trying to fix the budget deficit solely on the spending side has been a dismal failure. Only a more balanced approach is likely to be politically acceptable.

The Coalition will do itself a disservice if it believes its own bulldust that it did so poorly purely because of the success of Labor's big lie about privatising Medicare. More on that another day.

The strategy of the Abbott government's first budget was to return the budget to surplus by cutting government spending while avoiding tax increases or cuts in tax concessions almost completely.

The public's reaction was so hostile Tony Abbott was rendered unre-electable. But, though few of those measures went through, Scott Morrison has persisted with the strategy by repeatedly claiming the budget has a spending problem, not a revenue problem.

Such a strategy involves fixing the budget at the expense of low and middle income-earners, while largely shielding high income-earners and business.

The political arithmetic of this was always what Sir Humphrey would call "courageous" and so it proved on Saturday.

Remember, the Turnbull government's plans still included huge cuts in grants to the states for public hospitals and schools, plus measures doctors claimed would force them to stop bulk-billing. Plus an unspecified future increase in university fees.

Many voters would also remember the enormous stuff-up of the attempt to privatise technical and further education.

On the other side of the budget, the Coalition has acted as though fixing the deficit by increasing taxes or cutting tax concessions was economic and political anathema.

This is nonsense - as the election shows. The government actually went to the election with plans to increase taxes, on tobacco and on multinational companies, which drew no criticism.

Its plan to cut superannuation tax concessions drew noisy criticism from a few people who would never have not voted Liberal.

Its heavy past – and future – reliance on bracket creep drew no criticism. Nor did Labor's plan to continue the temporary "budget repair" levy on high income-earners.

Point is, the Coalition's willingness to propose tax increases came only to help pay for its planned phase-down in the rate of company tax, not as part of its efforts to return the budget to surplus.

It lost votes for wanting to cut company tax, thus reducing any political benefit from its plan for jobs and growth. In any case, the cuts are now unlikely to get far in the Senate.

Message: we won't achieve much in fixing the budget until we're prepared to increase tax as well as cut spending and, in the process, share the burden more fairly between the top, middle and bottom.

The election result's second lesson is that, in our efforts to make "reforms" that increase economic efficiency and improve our productivity, we should stop gratifying rent-seeking by big business and start listening to other advice, including the majority of recently polled economists saying the long-run growth dividend from spending on education is greater than an equivalent amount spent on business tax cuts.

We should abandon the voter-rejected experiment with reform via tax changes and shift to productivity-enhancing reform of education, infrastructure and, would you believe, health (because health is one of our biggest and fastest growing industries, but quite inefficient).

If you think this conflicts with all I've just said about repairing the budget in ways voters will accept, it's clear we – and, more particularly, our pollies and their econocrat advisers – have a lot more thinking to do.

Lifting our productivity via education, infrastructure and health doesn't have to involve spending a lot more on them, and may well involve achieving slower rates of spending growth.

That's because it mainly involves making spending in these areas more efficient and effective. That is, genuine reform, not just the mere cost-shifting we tried – and voters have rejected.

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ECONOMIC JUSTICE

Talk to Salvation Army Moral and Social Issues Council National Conference, Melbourne, July 2, 2016

I spent the first 25 years of my life imbibing the Christian beliefs and social values of Salvationists, and the rest of my life learning - and later critiquing - the principles of conventional, “neo-classical” economics, particularly as it is practiced in the Australian political debate. So I see my role this morning as acting as a sort of interpreter standing between Salvationists and economists, but also business people and politicians who are so heavily influenced by the “the economist’s way of thinking”. I’m certainly not here to try to convert you to the economic religion. I want to help you understand where they’re coming from and why they take the attitudes they do. In the little time available I want to make six points.

First, it’s appropriate to focus on “equality” in the case of social justice - the idea that everyone should be treated equally - but in the case of economic justice I think it’s more appropriate to use the less-precise concept of “equity” - fairness. Economics invariably ends up being about money or, to be more precise, income (how much we have to live on) and wealth (the value of what we own - home and investments, less our debts). And the trouble with income and wealth is that how much we each have can be measured and compared reasonable easily and precisely. We may believe that people should be treated equally regardless of their race, but few of us believe that everyone’s income or wealth should be identical. Rather, we believe the gap between the richest and poorest shouldn’t be too wide; that too big a gap isn’t “fair”; that more should be done to improve equality of opportunity. Everyone gets a decent education, then we see what use they make of it.

Second, mainstream economics isn’t about “economic justice”. Most economists don’t have much professional interest in economic justice and don’t see much place for it in their discipline. Conventional economics is the study of how we use markets to aid the production and consumption of goods and services and, in particular, how we can make our markets work more efficiently in producing the goods and services we most want and thereby increase the combined “utility” - satisfaction - we derive from that consumption. Economics, therefore, focuses almost exclusively on the material aspect of our lives, largely ignoring the other dimensions: the social aspect, the relational aspect, the cultural aspect, the spiritual aspect. I believe the much greater influence economists have come to enjoy over the past 30 years is both an effect and a cause of the community’s greater materialism in that time.

Christians - and certainly not those as practical as Salvationists are - don’t for a moment deny the importance of the material aspect of our lives. This, after all, explains their concern about economic justice; it explains much of the Army’s social work. But the Christian’s witness to the world must always be that there’s more to life than the material: that social aspects matter, the treatment of the poor matters, the spiritual matters.

Third, since economists specialise in promoting productivity and “efficiency” - efficiency in the allocation of material resources such as land, labour and capital - they tend to ignore and undervalue what you call economic justice and they call “equity”. They advocate “reforms” they believe would maximise the community’s overall satisfaction of mainly material wants but, for the most part, they have little interest in how the fruits of the economic growth they seek are distributed - shared - between individuals and families within the community. Is the increase shared reasonably fairly between the bottom, the middle and the top, or has a disproportionate share gone to the top, thus widening the gap between the bottom and the top? This is a question that’s rarely at the top of their minds. Many economists believe efficiency is an objective, scientific issue, whereas equity - fairness - is quite a subjective matter - one where opinions differ - which they leave to others, such as politicians.

Fourth, even so, some economists do specialise in measuring how income and wealth are distributed between rich and poor, and studying how and why that distribution changes over time. They are familiar with the institutions or instruments of economic justice that the community uses to re-distribute income from the richer to the poorer. The main instruments in Australia are the progressive income-tax scale and means-tested access to social welfare benefits.

Fifth, the conventional wisdom among economists is that the objectives of efficiency and equity are in conflict. That the things governments do to increase equity reduce efficiency and the things they do to increase efficiency reduce equity. For instance, the high tax rates at the top of the income-tax scale discourage people from working, saving and investing. But if they’re cut, the well-off will work harder and earn more and the gap between them and the less well-off will widen. A part of this is their belief that the bigger government is - the more it raises in taxes and redistributes to the less well-off - the more it reduces incentives to work and save, and so the less efficient the economy is.

My last point is the good news: very recent years have seen an increasing volume of empirical research - much of it produced by such prestigious authorities as the International Monetary Fund and the OECD - casting doubt on this conventional wisdom that equity and efficiency are always in conflict. It looks across the countries of the world and finds little correlation between how fast they grow and the size of their government. It finds evidence that the growing inequality in many developed countries over the past 30 or 40 years partly explains their slower economic growth. Best of all, the research points to various cases where particular policy measures can increase fairness and productivity and growth at the same time. Two obvious examples in the Australian context are the Gonski school reforms and the national disability insurance scheme. For instance, doing more to improve the education of disadvantaged students is not only fairer and better for them, it also increases the value of their labour and their rate of participation in the workforce, to the benefit of the rest of us.

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Infrastructure spending isn't good if it's just vote-buying

There's a great weakness in the (otherwise sound) argument that borrowing for infrastructure is a good thing, adding to demand in the short term and improving productivity and supply in the medium term. We should be doing a lot more of it, which would impose no unfair burden on our children.

That weakness has been exposed by the election campaign. Marion Terrill, of the Grattan Institute, has looked at the parties' promises to build new transport infrastructure and found that a lot of them would be a waste of money. If so, all bets are off.

The fancy arguments don't work if the projects are chosen for their ability to buy votes rather than for the value of their contribution to improving our transport.

On some measures, by the way, transport projects – including roads, rail, ports, public transport, airports and bicycle infrastructure – account for about 70 per cent of our total infrastructure effort. They leave out the national broadband network and state spending on water and power.

With the two big parties committed to returning the budget to surplus, to changing the mix of government spending in favour of capital rather than recurrent spending, and to using the expertise of Infrastructure Australia to improve the evaluation and selection of projects, you might expect – especially if you'd just arrived from Mars – to find all this influencing the promises they made at this election.

It will amaze you to learn that, come elections, the parties don't practise what they preach.

One of the biggest steps towards getting more economic benefit from our infrastructure spending was the establishment by Kevin Rudd in 2008 of the semi-independent Infrastructure Australia. The Coalition has fully supported it and various states have set up similar bodies.

As Terrill says, now we've got IA, the parties' selection of projects should be simple. It examines projects worth more than $100 million that are of national significance.

It assesses the "business case" – buzzword for a cost-benefit analysis – of such projects and sorts them into three categories.

Those that are fully assessed and pass the test are classed as a "project". Those that fail their full assessment – that are judged not worth doing – have their evaluation published on the IA website.

Those that are yet to be fully assessed are classed as an "initiative". A case in point is the Melbourne Metro Rail.

Terrill examined the Coalition's list of transport promises (worth $5.4 billion) the Greens' list ($6.5 billion) and Labor's ($6.7 billion).

The Greens have no projects that are IA-approved, and almost half the cost of their promises is for schemes that aren't even being assessed.

Only the tiniest part of Labor's spending is on IA-approved projects, with about a third going on schemes it isn't even looking at.

Of the three parties, the Coalition has the highest spending on IA-approved projects and the lowest on schemes it isn't assessing. Even so, most of its spending would go on initiatives still being assessed.

In other words, all three parties have selected their projects with little reference to the IA's evaluations. In fact, they make a mockery of the IA process and its efforts to ensure taxpayers get value for money, which they profess to support.

But why? In a word: politics. For a fuller answer, Terrill offers circumstantial evidence.

One clue is that both big parties have plenty of projects worth less than $100 million each, which thus can't be assessed by IA.

Whether it makes sense for the federal government to get involved with such small-beer projects when they can be handled by state and local government is a good question.

Another clue is that there are only six projects on the IA's list of things worth doing: the WestConnex motorway and the M4 motorway upgrade in NSW, the Ipswich motorway and the M1 Pacific motorway in Queensland, the Perth freight link in Western Australia and the Brisbane-to-Melbourne inland freight railway.

The Coalition has only four of these on its list of promises. Labor has just one. The Greens have none, having chosen to nominate one major public transport project in each capital city.

One of the six worthwhile projects – the Sydney M4 motorway upgrade – isn't supported any of the three.

Clue three is that Australia is a federation of states and territories. Clue four is that parties attain government by winning the most electorates.

Though it may be that some states don't have any projects of national economic significance while others have quite a few, it wouldn't be surprising to see projects being spread across the states in a way that roughly fits their shares of population.

Sorry, doesn't fit. Terrill divides the value of the three parties' promised projects between the states, ensuring no double-counting. Queensland gets the most and Victoria gets quite a bit more than the larger NSW. WA also gets a disproportionate share.

Actually, she says Queensland has been getting more than other states for a decade. Maybe it's the state where elections tend to be won or lost.

Whereas almost all of the projects IA approves are in capital cities – improving commuting and connections with ports and airports – the two main parties prefer to spend in the regions.

Perhaps the regions have more marginal seats (or National Party electorates needing to be squared away by the Coalition).

The Coalition is promising $185 million to duplicate the Princes Highway from Winchelsea to Colac in Victoria, which IA has found would yield benefits worth 8¢ for every $1 spent.

You don't have to be Einstein to conclude a lot of spending on capital works – federal and state – is used to buy votes, not to make worthwhile additions to our infrastructure than improve our productivity.

If so, such spending will leave a burden for our kids.

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Parties' similarities and differences on economics

I get criticised by rusted-on supporters of both sides of politics when I say this, but that doesn't stop it being true: there are differences between the two sides' policies, but they're not as great as they want us to believe (and their supporters do believe).

So let's identify the main points of agreement and disagreement. Most argument in election campaigns is about economic issues, with much less disagreement on other issues.

On economic management the parties are agreed on the issue which, though it's rarely acknowledged by either side, is by far the most significant: that the day-to-day management of the economy be left to the Reserve Bank, acting independently of the elected government.

That just leaves the government in control of its budget, which does have effects on the economy in the short and longer term but, because it's all the pollies have left to argue over, gets more attention than it deserves.

On getting the budget back into surplus – and so getting the level of public debt falling rather than continuing to rise – there's little to choose from. The Coalition isn't in any hurry, and nor is Labor.

Malcolm Turnbull says his policies won't have the budget back to surplus until 2020-21, after which the surplus will stay tiny.

Bill Shorten's plans say he will get back to surplus in the same year, though he'd spend an extra $16.5 billion over the four years, but then add an extra $27 billion to the surplus in the following years to 2026-27.

(You can say who knows what will happen in four years' time, let alone 10. True. But remember this applies equally to both sides' figuring. All we can do is focus on the estimated effects of the measures each side promises to take.)

The main differences between Labor and the Coalition occur because Labor would not proceed with the government's planned cuts to spending on education and health while, on the other hand, it would continue the 2 per cent "deficit levy" on income above $180,000 a year but wouldn't proceed with the government's planned cut in company tax.

It's because the cost of the company tax cut grows strongly in the later years, as do the savings from Labor's plan to "grandfather" its limits on negative gearing and the capital gains tax discount, that Labor's budget plan would take so long to improve the budget balance.

It's clear from this that when the Liberals accuse Labor of being into "spending and taxing" it is guilty as charged.

The harder question is whether government spending and taxes would be all that much lower under the Coalition. If so, it won't be by as much as it would have us believe.

It's not clear, for instance, that the Coalition will have the political courage to press on with the cuts in grants to the states for public hospitals and schools that are built into its budget figures.

The main difference is likely to be in the categories of spending that grow faster or slower under each side, and in the types of taxes and tax concessions that are cut or increased.

For instance, it's clear to me that the high cost of cutting the rate of company tax will have to be covered by more bracket creep and fewer income tax cuts.

On particular tax promises, though both sides are promising cuts to superannuation tax concessions, the Coalition's plans are clearly superior, whereas Labor's plan on negative gearing is far more attractive to young would-be home buyers.

The public's conviction that the Coalition is the better manager of the economy seems to roll on regardless of evidence. In truth, it's not supported by the record. Both sides have had their achievements and their stuff-ups.

Economic threats don't come bigger than climate change. Here, both sides' plans fall short. The Coalition has announced no credible plan to achieve the commitments it made in Paris which, in any event, were inadequate.

Labor is braver, but not by much. It plans a hugely ambitious target for growth in renewable energy, but doesn't show how it will be achieved. It plans a quite innocuous emissions trading scheme.

Both sides descend to dishonest scare campaigns. Both sides have previously supported policies they now vociferously oppose. Both may oppose policies simply because the other side supports them.

In some cases their disagreement is greater than they want to admit (penalty rates, for instance), whereas in others they disagree more in words than deeds (foreign aid; the national broadband network).

One rule-of-thumb that still works is that, in their decisions about spending and taxing, the Coalition will tend to favour business and higher income-earners, whereas Labor will tend to favour "middle-class and working-class Australians". Take your pick.

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Business lobbies sell out Aussie shareholders

One thing we've learnt from this election campaign: whoever's interests our business lobby groups represent, it's not Australian shareholders.

That's clear from their vociferous defence of Malcolm Turnbull's hugely costly promise to cut the company tax rate from 30 to 25 per cent, even though our system of dividend imputation means local shareholders have little to gain from the cut.

Local shareholders would have the present 30 per cent rate of their "franking credits" cut back in line with the fall in the company tax rate. Something similar would affect all Aussie workers with superannuation.

The business lobbies carry on about the company tax cut as if the loss of revenue to the budget had no opportunity cost. In truth, the gap would mean higher budget deficits (and a higher interest bill to taxpayers) unless it was covered by cuts in the provision of government benefits and services, or by higher taxes.

It would probably be some combination of the three, with most weight taken by higher income tax, brought about by further bracket creep in the absence of tax cuts.

The budget's tiny tax cut for income-earners on more than $80,000 a year was almost a tacit admission that this was the last tax cut any of us would be seeing for many a moon.

Point is, while local shareholders have little to gain from the company tax cut, they'll bear their share of its cost.

There could be no more convincing refutation of the eternal fiction that company executives represent the interests of their shareholders. Economists have recognised this conflict of interests since the work of American economists Berle and Means in 1932.

So what's motivating the business lobby groups in their enthusiasm for a company tax cut? Well, though Australian shareholders would be little better off, the company itself would be paying less tax, which its executives may regard as an improvement.

Of course, the shareholders who would benefit from a lower tax are the foreign owners of Australian shares, since they receive no imputation credits to be reduced.

Provided, however, their home country doesn't have a company tax rate higher than ours. This means American shareholders – who supply at least a quarter of our equity capital – ultimately have nothing to gain from the cut.

The Internal Revenue Service taxes US owners of foreign shares at the American company tax rate of 36 per cent, less whatever tax they've already paid to a foreign government.

So, in principle, cutting the tax we extract from them actually benefits the IRS, not our foreign shareholders.

Of course, many big American multinationals turn legal cartwheels so as to have their Australian profits taxed at a nominal rate in some tax haven. But they escape paying the US's higher tax rate on those profits only for as long as they keep them offshore (and thus unable to be passed on to their US shareholders).

It's not so surprising that the most untiring urger of the company tax rate cut, the Business Council, should be so uncaring about its lack of benefit to local shareholders.

It's a club of the chief executives of our biggest companies. Its conception of what's good for business is what's good for company executives.

What's more, many of the council's Australian chief executives would be answerable to head office executives in foreign countries. So they'd be pleased to see a tax change the primary beneficiaries of which were foreign shareholders.

Similarly, it's not surprising to see the Minerals Council so supportive of the proposed cut. It's dominated by the three foreign global mining giants that dominate our mining industry: BHP-Billiton, Rio Tinto and Xtrata-turned-Glencore.

To those guys, Oz is just a place to be exploited – in both senses of the word.

What's harder to comprehend is why the other business lobby groups – the Australian Chamber of Commerce and Industry and the Australian Industry Group – have been so enthusiastic about a cut that would bring so little benefit to local shareholders.

It's surprising because both groups purport to represent the interests of small business. Almost by definition, small business is Australian-owned.

And with a genuinely small business – where the owner-manager is also the chief shareholder – the business's profits (those not taken as salary and perks) will always ultimately be taxed in the owner's hands, meaning most of the benefit from the lower rate of company tax is lost through the equivalent cut in franking credits.

But so great was AiG boss Innes Willox's lust for a lower company tax rate that at one stage he proposed paying for it by abolishing dividend imputation. Not sure he'd thought that one through.

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Productivity and fairness should go together

They say we get the politicians we deserve but recent weeks convince me we also get the election campaigns we deserve. When we're moved more by scare campaigns than by policy debate, guess what the pollies give us?

To the extent that we have been debating policy choices, we've had economic policy but much less social policy.

That's pretty standard for elections. The Coalition's offering has been mainly about its "plan for jobs and growth".

What could be more important than that? Ignoring climate change, not much – provided we remember that the income from jobs and growth needs to be shared widely and fairly, including with people unable to work.

They haven't mentioned it much in the campaign, but our politicians and their economic advisers are worried that our prospects for economic growth are weak because our productivity – production per worker – isn't improving as much as it used to.

In its latest annual economic outlook, the Organisation for Economic Co-operation and Development – a club of mainly rich nations – very much shares that concern.

But here's the trick: unlike our economic managers, the OECD brackets weak productivity improvement with worsening inequality of incomes, describing them as "a twin challenge".

The two issues are interrelated. Although the report doesn't canvas the respects in which inequality may be contributing to weaker productivity improvement, it does emphasise that the policy measures we choose to improve productivity could come at the expense of worsening inequality, or could improve both productivity and income equality at the same time.

That's one of the big discoveries of the international economic agencies in recent years: whereas economists have long assumed that "efficiency" and "equity" (fairness) are conflicting objectives, there are various policy choices that can bring us more of both.

Part of this is their realisation that the size of a country's government – its level of taxes and government spending – has little bearing on its government efficiency and rate of growth.

The report notes that most advanced economies have experienced slower rates of productivity improvement since the early 2000s.

Income inequality – the gap between the highest and lowest incomes – has been widening for the past two or three decades.

"The productivity slowdown and the rise in inequality have impacted the wellbeing of many workers and their families. Low- and middle-income households have had to cope with slow-growing, and in some cases stagnant or falling, real incomes," the report says.

"These trends are threatening progress in living standards, fiscal sustainability and social cohesion."

(If you wonder why so many Americans have flirted with a clown like Donald Trump, I think it's their uncomprehending way of reacting against the fact that so many of them have gained so little extra real income from the United States' economic growth over the past 30 years.)

In a well-functioning economy, wages – real, not just nominal – should rise in line with the improvement in the productivity of labour.

So the report says lower rates of productivity growth have been bad news for workers, since this has reduced the room for productivity-driven growth in real labour income (wages).

But it's worse than that, for two reasons. First, average real labour income across the OECD's rich member countries has grown less than productivity has grown.

That's particularly true for the US but, according to the OECD's calculations at least, also for us.

Second, the inequality of labour income has increased, with some employees getting much bigger wage increases than others.

Over the period from 1990 to 2013, the rich members' labour productivity grew by 3.1 per cent a year until 2000, then by just 0.9 per cent a year for the past 13 years.

But whereas productivity improvement averaged 1.8 per cent a year for the full period, average real labour income improved by only 1.5 per cent a year.

And remember that, because of the presence of a relatively small number of very highly paid employees, the average (mean) income is always higher than the more-representative "median" (dead middle) income, which improved by just 1.3 per cent a year.

But it's worse even than that. Since 1990 the real disposable income of the top 10 per cent of households has increased by 30 per cent, whereas that of the bottom 10 per cent has increased by only 4 per cent.

(Note that "labour" income becomes "market" income when you add households' capital income – from profits, dividends, rent or interest earnings – and then becomes "disposable" income after you allow for taxes paid and welfare benefits received.)

So what can be done to tackle the "twin challenge" of weak productivity improvement and worsening inequality? You look for those policy changes that create "synergies" between the two.

The report says productivity growth has slowed partly because of weak demand since the global financial crisis. Governments need to stimulate demand (spending) by making more use of fiscal (budgetary) policy, it says, implicitly criticising the resort to policies of "austerity" by governments in Europe and elsewhere.

This would not only reduce inequality immediately by reducing unemployment, it would help reduce inequality more permanently because "long-term unemployment erodes the skills of workers and their earnings prospects".

In resorting to fiscal stimulus, the emphasis should be on increased public investment in infrastructure because this adds more to demand than do tax cuts or increased recurrent spending – it has a larger "multiplier" effect.

The report says government effectiveness in delivering high quality services – such as education, health and transport – is empirically associated with higher economic growth and productivity, plus lower income inequality.

"The empirical links of better and more education [particularly early childhood education] with higher growth, productivity and equality suggest long-term benefits from a greater share of education in public spending," it says.

If we were having a more adult election campaign, these are issues we'd be debating.

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Baird's budget is the model of conservatism, not reform

If, in these strange times, you have ever wondered what a genuinely conservative government would look like, consider the Baird government as revealed by its budget.

Premier Mike Baird and his Treasurer, Gladys Berejiklian, are cautious and responsible to a fault, putting retention of the government's AAA credit rating above all other objectives.

But, almost by definition, this makes them complacent, unimaginative and lacking in initiative. They are also claiming far too much of credit for the NSW economy's strong performance in recent years, especially relative to the other states.

It's true the state economy has been performing much better. But though the Coalition government has done more to help than to hinder, most of what happens in the economy is outside its puny control.

It's swings and roundabouts. Sometimes other states are growing more strongly than we are; at others - like now - it's our turn to lead the pack. In this our tendency to recurring property booms is a great help (though not to first home buyers).

Berejiklian tells us that "since coming to office in 2011, the NSW government has created 338,600 jobs". Really? Private enterprise played no part in it, eh?

Over the past year, we're told, NSW has created more jobs than any other state and now has the nation's lowest unemployment rate.

True. But what's equally true is that NSW has the lowest proportion of its population in employment - 60.7 per cent, against a national average of 61.1 per cent.

The economy's strong, property-fuelled growth, combined with the effects of privatising various government businesses, has led to rapidly rising budget revenue.

By maintaining fairly tight controls on government spending - particularly on the wages of government employees - Berejiklian has achieve ever-growing budget surpluses.

These surpluses have allowed a big increase in spending on infrastructure without much increase in government debt, thereby preserving our top credit rating.

With so much expansion and renewal of infrastructure needed, a government so well-placed financially and politically could afford to defy the strictures of the discredited American ratings agencies, but that's not the conservative way.

A truly conservative government is largely content with the world as it is and leaves "reform" to the radicals on the other side.

That's certainly been this government's approach. This budget only now honours an eight-year-old commitment to abolish three minor taxes on business transactions.

The government has done so because it has belatedly realised it could make up most of the lost revenue by imposing extra conveyancing duty and land tax on foreign purchasers of real estate.

Is this economically efficient? Does it fit with all the Coalition's talk about the need to encourage foreign investment?

Who cares? The government knows the impost on foreigners will be popular with voters, and is (rightly) confident it will do little to discourage investment - meaning, however, it will do little to make homes more affordable to locals.

Where did this bright idea come from? Although Berejiklian claims NSW is "leading the way in innovation" it came - as did other tax reforms adopted - from those hopeless Victorians. And Queenslanders.

This budget will keep us well away from financial bother. But it could have been much better.

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How not to cut government spending

The bloke who really runs the economy, Reserve Bank governor Glenn Stevens, has spoken: "There are quite some years of hard repair work ahead for whoever is the government over the period ahead."

He was endorsing the earlier warning of Treasury secretary John Fraser and Finance Department secretary Jane Halton that, given the Turnbull government's professed commitment to limiting the growth in tax collections, getting the budget back to surplus won't be possible "without considerable effort to reduce spending growth".

Trouble is, "reducing spending growth has proved difficult in practice", they said. Really?

This year's budget does little to reduce government spending and has trouble even in sticking to the Coalition's resolve to ensure all new spending (of which there's always a fair bit) is offset by spending cuts.

The practice of requiring spending departments to nominate equivalent cuts to cover their new spending programs may seem a healthy discipline.

But when you've been playing that game for years, the departments adapt, learning that their inefficiencies are valuable currency, not to be offered up except in return for some exciting new program.

It's a similar story with the ironically named "efficiency dividend" imposed on government departments and agencies, which is to be ramped up for a further three years, saving $1.4 billion on top of the normal "dividend".

Truth is that, contrary to popular impression, the cost of public sector wages, paperclips and so forth is such a tiny proportion of total federal (as opposed to state) spending that no amount of "efficiency dividends" could make a noticeable difference to the deficit.

But that's not to deny that yet further penny-pinching will worsen public service efficiency. The cuts have gone on for so long that "efficiency dividend" is now a euphemism for further compulsory redundancies.

The people who get the bullet tend to be those who could help their department and the government formulate better policies – not to mention the long-gone people in Treasury and Finance who knew where the real inefficiencies are still buried.

The point is that when you see a government resorting to yet another round of indiscriminate, no-brainer cost cutting you realise it isn't fair dinkum about "reducing spending growth".

Another sign of unthinking half-heartedness is when – as in this budget – you see the pollies taking the path of least resistance: picking on only those interest groups that lack political clout and public sympathy.

Such as? Well, public servants, for openers. We could cut the funding and staff of the Australian Securities and Investments Commission (until the opposition demands a royal commission into bank misbehaviour) and the Tax Office (until the punters get wind of how little tax the big multinationals are paying).

But also the unemployed, sole parents, overseas aid (with a budget deficit we can't afford to give money to poor foreigners, though we can afford to give tax cuts to rich foreign shareholders), legal aid and domestic violence (until Rosie Batty caught up with us).

Point is, if screwing the politically defenceless is the best you can do to control government spending you're never going to make it. They don't have enough to cut.

Until you're prepared to take on the powerful interest groups with their hands in the taxpayer's pocket – starting with the doctors, chemists, drug companies and private health funds, then moving on to the mining companies and even, dare I say it, the farmers and the self-seeking "self-funded retirees" – you won't make a dent.

Malcolm Turnbull does get big points for finally catching up with Costello's Battlers aka rich superannuants. The budget's superannuation reforms are a good example of expenditure control (in this case, tax expenditure) measures, carefully worked up by the econocrats over many weeks.

Treasury has had the reform of super high on its to-do list for yonks. My fear is that Finance – which has primary responsibility for the spending side – doesn't have any well-developed ambitions for genuine increases in the efficiency and effectiveness of major spending categories such as health, education and even defence.

There's been far too little championing of sophisticated measures invented by applied economists – such as income-contingent loans and case-mix funding of hospitals – and investing in later spending control, such as preventive healthcare.

When the econocrats aren't working up and pushing genuinely efficiency enhancing reforms, when they don't want to waste money on studies to determine what works and what doesn't, they and their political masters end up falling back on ad-hoc, end-justifies-the-means, no-brainer savings such as inefficiency dividends and cuts to grants to community groups that care more and try harder than any public servant would. Great Idea.

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Economists' faith in cutting company tax found wanting

Malcolm Turnbull and the many economists supporting his plan for a 10-year phased cut in the rate of company tax have failed to make the case that this expensive measure would deliver a significant increase in "growth and jobs".

Economists are meant to be too hard-headed to believe in the existence of a magic bullet – the single measure that will work wonders in solving our problems.

Yet economists throughout the world have come close to seeing a cut in company tax as almost magical in its ability to improve the economy's prospects. Ask them to name the one reform likely to do most good and this is what they'd pick.

A lot of studies have found that economies grow faster after they've cut their tax on companies' profits. It's a move that the International Monetary Fund and the Organisation for Economic Co-operation and Development have urged on us in successive reports on our economy.

It's a move recommended by the Henry tax review of 2010, and one high on Treasury's to-do list.

And now Turnbull has promised to do it, cutting the rate from 30 per cent to 25 per cent, with the phase-down starting this July and ending in 2026-27. For big companies, however, the phasing doesn't start until July 2024.

The phase-in will have a cumulative cost to the budget of $48.2 billion and, when completed, an ongoing annual cost of $8.3 billion (according to modelling by Independent Economics).

So the company tax cut is the centrepiece of this year's budget and the centrepiece of Scott Morrison's "economic plan for jobs and growth".

Trouble is, the more economists think about the plan and examine the Treasury modelling supporting it, the less enthusiastic they become. John Daley and Brendan Coates, of the Grattan Institute, are distinctly unimpressed.

The first reservation comes from a factor peculiar to Australia: our system of "dividend imputation", introduced by Paul Keating in 1987 to eliminate the "double taxation" of the dividends people receive from the companies in which they hold shares.

To match their dividends, shareholders receive a "franking credit" set at the same rate as the company tax rate – presently 30 per cent – which has the effect of returning to them the company tax paid on their dividend and so ensuring their dividend is taxed only at their marginal income tax rate, like any other income.

Imputation has encouraged Australian companies to pay out a high proportion of their after-tax profits as dividends, rather than retain them for re-investment in the business.

Reserve Bank research shows companies are paying out more than 80 per cent of their underlying earnings.

Trick is, only Australian shareholders in our companies receive franking credits; foreign shareholders don't. In consequence, Australian shareholders (who include everyone with superannuation savings) have little to gain from the cut in company tax. It gives them no reason to change their behaviour.

Imputation has turned our company tax into little more than a tax on foreign shareholders. Which means almost all the benefit from the company tax cut goes to foreigners.

This is intended to induce them to greatly increase their investment in Australia – which is where the jobs and growth are supposed to come from – though they'll pay less tax on their present Aussie share investments whether or not they decide to invest more.

In modelling the effects of that assumed increase in foreign investment, it's natural for Treasury and others to look at the effect on real gross domestic product. Natural, but misleading.

It seems to have taken rival modelling by econometricians at the Centre of Policy Studies at Victoria University to oblige Treasury and its allegedly independent consultants to acknowledge that, because so much of the benefit of the cut goes to foreigners, and because foreigners will own all the extra share investment (and consequent dividend income) the cut induces them to make, GDP significantly overstates the expected benefit to Australians.

That's because GDP measures the value of goods and services produced in Australia, not how the income generated by that production is shared between Australians and foreign investors. The right measure is thus gross national income.

A good feature of Treasury's modelling is that it didn't just model the tax cut in isolation. It acknowledged that the cut would leave the government short of revenue and thus needing to fill the gap somehow. Its least unrealistic scenario is that it would be filled by increasing income tax – say, by allowing years of bracket creep.

Treasury's modelling of this scenario finds that the cut in company tax would cause the level of real GDP to be 1 per cent higher than otherwise in the "long term" (taken to be about 20 years).

But the level of real GNI would be only 0.6 per cent higher than otherwise. Daley and Coates put that into context by noting that if GNI per person increases by 1.5 per cent a year (as the budget papers routinely assume), over 25 years it will have risen by 45.1 per cent.

Cut company tax (not in one go, as the modelling assumes, but over 10 years) and incomes rise over the period not by 45.1 per cent, but by 45.7 per cent. Wow.

For reasons only an economist would believe (because it comes from their theory, not from empirical evidence), most of this gain would go to wage earners. After 20 or 25 or 30 years, the level of real after-tax wages will be 0.4 per cent higher than otherwise.

And get this: although voters are encouraged to believe that "jobs and growth" is really about jobs, the Treasury modelling finds that the level of employment in 20 or 30 years' time will be just 0.1 per cent higher than otherwise.

If you wanted to create jobs, cutting the tax on foreign investors isn't the way to do it.

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Shorten gains tactical advantage over Turnbull

Various of the tax changes the Coalition government is taking to the election are things it earlier said it wouldn't do. And various of the tax changes it now says it wouldn't dream of doing are things it earlier dreamt of doing.

What's more, various of the tax increases it ended up copying from Labor – the further swingeing increases in the excise on tobacco, the crackdown on multinational tax shirkers and the cutbacks in superannuation tax concessions for the wealthy – it had earlier criticised Labor for doing.

Partly because of its change of leader, the Coalition has had trouble deciding what it will or won't do. But also, I suspect, Malcolm Turnbull is the kind of leader who tends to make up his mind in semi-public, weighing the pros and cons before deciding which way to jump.

Labor, on the other hand, made up its mind early about its key policies. That's partly in response to the public's reaction against Tony Abbott's extreme negativity while in opposition.

It's also because, lacking much to offer in the personality department – and anxious to counter memories of division and instability in the Rudd-Gillard-Rudd years – Labor decided to be the first Opposition since John Hewson and his phonebook-sized Fightback! program to make itself a large target not a small one.

It's been announcing policies for about a year and talking incessantly about its "positive policies" on 100 topics.

The broader point, however, is that the parties aren't nearly as far apart as it suits them to have us believe during election campaigns, when they're whipping up partisan feeling and trying to convince us the choice we make between them will determine whether the economy heads for heaven or hell.

What in recent months we've observed more clearly than usual is the parties manoeuvring for advantage in this year's election campaign.

Most of us have highly stereotypical, caricatured views of the parties' respective strengths and weaknesses.

The Liberals, being the party of the bosses, are better at running things, particularly the economy. They're better at keeping inflation and interest rates low (except that, at present, they're probably too low). They're better at keeping the budget on track, avoiding wasteful spending and excessive taxation.

Labor, being the party of the workers, is better at ensuring wages and working conditions are reasonable. It will do more to keep unemployment low. Being less of a monetary taskmaster, it will do more to ensure government spending on health and education is adequate.

Or so we imagine.

The goal of the parties' manoeuvring is to ensure the main issues over which the election is fought are those that suit their perceived strengths relative to their opponents'.

When an issue arises that favours your opponents, you neutralise it as quickly and quietly as possible – even if that involves going against your stated values.

When, for instance, Abbott tells us of his implacable opposition to higher taxes, so Julia Gillard tries to "wedge" him by proposing a 0.5 percentage-point increase in the Medicare levy to help pay for the national disability insurance scheme, hoping he'll oppose it, he quickly agrees to the increase.

Since the media know election campaigns are about conflict – not about making sure your audience understand what the pollies are doing to them – this two-party conspiracy to raise our taxes is never mentioned again.

Bill Shorten may not have Turnbull's good looks, but I suspect his long experience in the union movement makes him better at political tactics.

Turnbull's vulnerability is that he's easily portrayed as a rich man – Mr Harbourside Mansion – who's out of touch with ordinary Australians, and is in politics to deliver for the Libs' big business backers.

There's a spate of stories about the banks mistreating their customers, so Labor promises a royal commission into banking. Turnbull says that would be quite unnecessary, especially since we already have that ferocious attack dog the Australian Securities and Investments Commission on the job.

What's more, though he's been cutting the commission's funds until now, now he'll increase them.

Who do you think won that skirmish?

At a time when young people are being priced out of home ownership, Labor promises to act against negative gearing. Turnbull thinks of doing something similar, but decides against it. He's defending negative gearers, claiming Labor would cause house prices to collapse.

Who do you think won that skirmish?

There's a spate of stories about big foreign companies paying next to no tax in Australia. Labor promises new taxes to catch them. Turnbull follows suit. What's more, though he's been cutting the Tax Office's funds until now, now he'll increase them.

Because Labor is, as we're always being told, the tax-and-spend party, it has proposed some big tax increases to be paid by smokers, foreign companies and rich superannuants.

It proposes to use the proceeds mainly to restore the funding to health and education cut by the Coalition.

Turnbull copies Labor's three tax increases, but uses the proceeds to help pay for a tiny tax cut for the top quarter of income-earners and a 10-year phased cut in the rate of company tax which, he claims, will do wonders to generate "jobs and growth".

The public believes companies should be paying more tax, not less. Who you think jumped the right way on that one?

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Econocrats’ report card: Turnbull not really trying

Economically and fiscally, the Turnbull government is flying by the seat of its pants. It hasn't done enough to secure future "jobs and growth", nor to get the budget balance improving strongly and government debt falling in coming years.

That's the conclusion you draw from the econocrats' oh-so-politely worded commentary in their "pre-election economic and fiscal outlook" issued on Friday, independently of the elected government, as legally required.

Treasury secretary John Fraser and Finance Department secretary Jane Halton made virtually no changes to the budget estimates and economic forecasts and projections contained in the budget delivered less than three weeks earlier.

What they did was highlight the key vulnerabilities they had alluded to deep within the voluminous budget papers they had prepared for the government.

The 10-year budget projections out to 2026-27, they warned, were underpinned by an assumption that annual growth in productivity would be the same as the average of recent decades.

However, "continued economic reform would be required in order to achieve this growth," they said.
The "crucial importance" of increased productivity would require "renewed vigour in encouraging and delivering structural reform across all parts of the economy" – something they'd seen little sign of so far in the election campaign, they hinted without saying.

Doesn't sound to me like a ringing endorsement of the adequacy of the budget's "economic plan for jobs and growth".

They warned further that these "medium-term projections" showing the budget returning to surplus in 2020-21, then staying at 0.2 per cent of gross domestic product for the following six years, were "very sensitive to the underlying assumptions".

In other words, with such a wafer-thin surplus – equivalent to just $3.5 billion in today's dollars – the budget could easily fall back into deficit.

And "should Australia experience a significant negative economic shock, the fiscal [budgetary] position would be expected to deteriorate rapidly".

Since Australia had run current account deficits on the balance of payment for much of its history – the consequence of our heavy reliance on foreign investment to exploit our rich endowment of natural resources – it was "prudent for Australia to run a relatively conservative fiscal stance".

But the stance isn't looking too prudent at present, they implied.

The medium-term budget projections – the device successive governments have used to reassure us that everything in the budgetary garden is going fine, and thus a fit subject for the off-the-leash econocrats to zero in on – assume that tax receipts will be capped at 23.9 per cent of GDP (the average during the period from 2000 to the global financial crisis) from 2021-22, by means of annual tax cuts.

But that being the case, the econocrats warned, it wouldn't be possible to get the budget surplus rising to 1 per cent of GDP [and thus make big strides in paying off government debt] "without considerable effort to reduce spending growth".

"Reducing spending growth has proved difficult in practice", they said with monumental understatement.

Indeed, after the beating Tony Abbott took in the polls thanks to his one attempt to reduce government spending, both he and his successor have retreated to doing no more that ensuring they don't actually add to spending by finding sufficient cuts to offset their new spending programs (of which there are always plenty).

The econocrats said that, even if spending were reduced from the levels projected for 2026-27 in this year's budget to their long-term average of 24.9 per cent, achieving a surplus of 1 per cent of GDP by then would require tax receipts to be allowed to rise to 24.2 per cent. (Don't forget the government also receives non-tax revenue.)

See what they're saying? Let me say it more bluntly.

It's all very well for Scott Morrison to keep saying the budget has a spending problem, not a revenue problem, but if you're not actually game to cut spending – because you know full well the electorate won't let you – then your only remaining choice is between higher taxes or higher debt.

In the election campaign, it's all very well to say Labor is high spending and high taxing. It's true enough. But what reason do we have to believe it's not true of the Coalition?

Its plan to cut the rate of company tax will be hugely expensive. The budget shows that, over the first four years of the phase-down, the cost will be covered by increasing the tax on smokers, multinational tax shirkers and people with too much superannuation.

The medium-term projections imply that the remaining phase-in cost of $43 billion will be covered by allowing bracket creep to rip until 2022-23 and by running a wafer-thin surplus.

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Why wage growth is so weak

Are we waiting with ever-growing impatience for the economy to get back to normal, or has the economy shifted to a "new normal"?

I think that's the central question in macro-economics today – not just in Oz but throughout the developed world.

To put that question in econospeak, are the changes we see before us "cyclical" – just part of the normal ups and downs of the business cycle – or are they "structural", a lasting change in the way the economy works.

Trouble is, neither I nor anyone else can say with confidence what the answer is.

But further evidence that things in our economy are looking far from normal came this week with the news that wage growth over the year to March – as measured by the  Bureau of Statistics' wage price index – decelerated to 2.1 per cent, the slowest since this series began in 1997.

Why is wage growth so weak? Because the rise in consumer prices is so weak. Why are prices growing so slowly? Because the rise in wages is so weak.

Yes, there is a circular, chicken-and-egg relationship between wages and prices. When prices rise, workers need a pay rise of at least that much just to preserve the purchasing power of their wages.

But when they have to pay higher wages, firms pass their higher costs on to customers. That's why – in normal times, at least – we always have some degree of inflation.

So don't bother wishing prices were rising faster so wage growth would be higher – that wouldn't get you anywhere.

No, what matters to wage-earners is the difference between the rise in their wages and the rise in consumer prices – that is, the change in their "real" wages. In normal times, wages should be rising comfortably faster than consumer prices.

Why? Because increased business investment in more and better machines increases the productivity of workers' labour (output per hour of labour input), and competition for the services of workers should ensure they receive a share of the improved value of their labour.

Here the news is better, though not great. Although wage growth over the year to March slowed to 2.1 per cent, the rise in consumer prices over the same period slowed to 1.3 per cent, implying real wages grew by about 0.8 per cent.

This is better than for most of the past two years, but the "normal" rate of productivity improvement should be nearer 1.5 per cent a year, even 2 per cent.

So what's going on with wages? This is what Professor Jeff Borland, of the University of Melbourne, tried to discover in a recent paper. He used a different measure of wage growth – average weekly earnings for adult male full-time employees – because the series goes back much further to the early 1980s (when the stats were more sexist than they are today).

He found that the rate of growth in "nominal" wages – that is, before adjusting for the effect of price inflation – is lower than at any time in the past 30 years.

Real wage growth – after allowing for inflation – is also low, but real wage growth has been negative in several periods over the past 30 years.

Borland tests to see how much of the weaker growth in nominal wages over the two years to the end of 2015 can be explained by lower growth in consumer prices and labour productivity, which he does by comparing them with the figures for the five years to 2013.

He finds that weaker prices and productivity growth explain about 70 per cent of the weaker wages growth but, obviously, that leaves 30 per cent of it unexplained.

Next among the usual suspects is weaker growth in employers' demand for labour. It's well established that the strength of wages growth varies to some extent with the business cycle.

Wages should grow faster when demand for goods and services is strong and firms need to attract more workers, but grow more slowly when demand is weak. Indeed, it's common for employers to skip wage rises during recessions, when workers are more worried about hanging on to their jobs.

Economists use the "Phillips curve" (named after the Kiwi economist Bill Phillips) to study the relationship between wage inflation and the demand for labour, using the rate of unemployment as an inverted "proxy" (stand-in) for labour demand. Borland uses a broad definition of unemployment by adding to the official rate the rate of under-employment.

He finds, as expected, that wage growth is lower when unemployment is higher. But he also finds that a structural shift in the relationship between wage growth and broad unemployment occurred in the mid-1990s.

His figuring suggests that any level of demand for labour is now associated with a lower rate of wage growth than it used to be, and that an increase in labour demand now leads to a smaller increase in wages.

He lists various potential explanations for this structural shift, of which I think the most plausible is our move in the early 1990s from centralised wage-fixing to enterprise bargaining.

But a change so long ago can't explain why wage growth has been abnormally low in just the past two years or so – more than can be accounted for by lower inflation and productivity improvement.

Borland's best explanation for this is the weak growth in "output prices" – the prices charged to customers by employers, including the prices of exports. Slower growth in output prices will have constrained employers' capacity to pay higher wages.

So maybe wage growth will return to the post-1990s norm once coal and iron ore prices have stopped falling.

But my suspicion is that other global developments – including digitisation and the greater ability to move businesses to cheap-labour countries – has permanently weakened workers' bargaining power.

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