The next thing on Albanese's to-do list: fix competition

In a capitalist economy, every capitalist professes to believe in stiff competition. In truth, it’s their biggest hate. Why? Because it limits their ability to put up prices and makes them work harder for their money.

Just this week, big business has been saying that, if only we could get proper tax reform – by which they mean lower taxes on companies and the highly paid – we’d get more productivity and more innovation.

In truth, what’s far more likely to improve innovation and productivity is stiffer competition, particularly in those many industries dominated by just a few giant corporations.

The federal government doesn’t have a minister for competition, but it does have an assistant minister: Dr Andrew Leigh, a former economics professor.

Last year, the Albanese government announced a rolling two-year review of competition and set up a taskforce within Treasury. It’s supported by an expert advisory panel with some big names: Dr Kerry Schott as chair, David Gonski, the former boss of the Australian Competition and Consumer Commission, Rod Sims, and the new boss of the Productivity Commission, Danielle Wood.

This week Leigh gave us an update on what the taskforce had been doing and discovering. But he started with a locker room pep talk on why competition is the key to making capitalism – or “the market system” as economists prefer to call it – benefit the customers more than the capitalists.

“Competition provides a check on unbridled profit-seeking by business. In a competitive market, innovators can bring new products and services to market, without fear of being shut down by entrenched monopolists,” he says.

Competition limits unearned privilege and seeks to treat everyone fairly. Competition guides labour and capital to their most valuable uses and combinations, driving the productivity improvement that underpins sustainable wages growth.

“For workers, genuine competition between businesses provides greater opportunities to switch jobs, allowing workers to make the most of their skills and secure better pay and conditions.”

“For consumers, competition provides more choices, allowing people to shop around and find better value products and services. Indeed, the most obvious benefit of competition is in delivering cheaper prices. There is no better tool than competition policy for keeping real prices down.”

And, Leigh adds, competition is also crucial if Australia is to make the most of the big shifts involved in digitisation, growth in the care economy and the transition to net zero carbon emissions.

But Leigh warns of “worrying signs the intensity of competition has weakened over recent decades, with evidence of increased market concentration and [profit margins] in several industries.”

“Other countries find themselves at similar crossroads and many are – like us – reviewing their competition policy settings,” he says.

Our taskforce is taking a fresh approach to competition policy: digging out and analysing large sets of data to understand what the problems are and help craft solutions to them.

The digital revolution is producing masses of “microdata” on what businesses are doing, while making it easier for statisticians to measure the growth in the economy earlier and more accurately.

It gives academic economists great ability to analyse what’s happening in particular industries, and gives the econocrats a better understanding of what and how to regulate the things business gets up to.

For the first time, the taskforce has developed a database that tracks company mergers throughout the whole economy. Believe it or not, it does this by looking at the flows of workers moving to different employers.

This will allow it to track the effects of mergers on the performance of businesses, on employment and on industry concentration – that is, fewer firms controlling more of a particular market.

The new database has already revealed three worrying things. First, because notifying the competition regulator the ACCC of an intended merger is voluntary, it hears of about 330 mergers a year, whereas there are between 1000 and 1500 mergers occurring annually.

Second, for the most part, it’s huge firms swallowing smaller firms, rather than medium and small firms joining. Get this: the largest 1 per cent of firms account for about half the acquisitions.

Larger companies made more acquisitions over the course of the 2010s. And mergers were most common in manufacturing, retail, professional services, and health and social services.

Third, the firms that are the targets of takeovers are more than twice as likely to own a patent and almost twice as likely to own a trademark.

Remember that patents give inventors a long-term legal monopoly over the use of some invention. So this finding raises the fear that at least some takeovers are motivated by a desire to gobble up an effective competitor, or may even be “killer acquisitions” aimed at killing inventions that threaten the profits of some big player.

Leigh says we can expect to hear more from the government this year on mergers and how they should be regulated. The taskforce issued a consultation paper in November asking for opinions on whether the present arrangements remain fit for purpose.

The ACCC has already proposed a significant increase in its power to block mergers considered likely to substantially lessen competition.

And, last December, the federal government secured agreement from the state treasurers to revitalise national competition policy and commit to developing an agenda for pro-competitive reforms.

Meanwhile, Leigh points to findings by British academics Geoff and Gay Meeks that reveal only one in five research papers find that the typical merger boosts the profits or the sharemarket value of the merged business.

They point out that mergers often boost the remuneration of the company’s managers, while leading to layoffs among workers.

Leigh acknowledges that mergers aren’t necessarily a bad thing, but the small number of proposed mergers that do raise competition concerns warrant close scrutiny.

He says that “for the sake of shareholders, workers and citizens, it is important to ensure that Australia’s regulatory system is not facilitating value-destroying mergers”.

Many of the nation’s chief executives may not agree with that, but most of the rest of us would.

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The two big parties have wedged themselves into a corner on tax

Politicians want us to think things like the stage 3 tax cuts are matters of high principle: keeping solemn promises or redirecting tax relief to those who’ve been doing it toughest. But the sad truth is, it’s just as much about the two big parties using tax promises and tax scares to damage the other side and win elections.

The great lament coming from the big end of town is that the latest squabbles just go to show how, between them, the two sides have no interest in achieving the major tax reform the country so desperately needs.

And big business is right. The pollies have no interest in proposing any needed but controversial change that would leave them open to cheap shots from the other side. In consequence, our tax system is deteriorating. It’s neither as fair as it should be, nor as effective in raising the money needed to pay for the ever-growing list of services we demand of government.

But before I elaborate, note this: business people, like many of us, use the word “reform” to mean changing the system in a way that leaves them paying less tax while others pay more. Specifically, they want to increase the goods and services tax so that we can afford to reduce the rate of company tax and the income tax paid by people at the top. When they call for “genuine reform” after Labor has halved the intended tax cuts for top earners, that’s what the bosses are on about.

But don’t forget this: Anthony Albanese has gone for the best part of two years happy to let these greatly unfair tax cuts proceed rather than be condemned as a promise-breaker. Only in the past week or three has he changed his tune.

Why? Because party polling and focus group feedback told him all the cost-of-living pain had finally caught up with him. His popularity had slumped, and he was in danger of losing next year’s election, with the rot starting at a Victorian byelection in a month or so’s time.

But while I’m casting aspersions, I have little doubt that, had Albanese allowed the stage 3 cuts to proceed as already legislated, the first person to point to how badly low- and middle-income earners had been treated would have been Peter Dutton.

These days, tricky politics trumps good policy. And neither side has a monopoly on hypocrisy.

It’s been almost a quarter of a century since our last large-scale, controversial tax reform: John Howard’s introduction of the GST. And that brought him within a whisker of being tossed out. Since then, talk about tax has become the biggest and best political football for the two parties to kick back and forth as they try to gain the advantage in election campaigns.

The Liberals portray themselves as what Dutton called “the party of lower taxes”, while damning Labor as “the party of tax and spend”. Many voters find this easy to believe, and it does have a degree of truth, even though taxes were at their highest as a proportion of gross domestic product in the early noughties under Howard.

The main thing that pushes tax collections up is bracket creep, “the secret tax of inflation”, according to Malcolm Fraser, and collections hit the heights whenever a government, of whatever colour, leaves it too long before giving some of it back in a tax cut.

What’s true is that Labor is more inclined to spend on health and education and all the rest, leaving it under greater pressure to let taxes rise. But, as we saw particularly under Scott Morrison, the Libs are more inclined to underspend on things such as aged care, while allowing waiting lists for non-urgent surgery and at-home aged care packages to build up. You hope the dam doesn’t burst until the others are back in power.

The Libs never propose explicit tax increases before elections but whenever Labor wants to pay for something by cutting back concessions to the better-off, the Libs make a meal of it. When, next time, Labor reacts by promising not to make any tax changes, you give credibility to some groundless rumour that it intends to bring back death duties.

What makes unpopular tax reform even more unlikely is the game of chicken the parties play, which they call “wedging”. I propose some extreme tax change I know the other side won’t like, hoping they’ll oppose it. If they do, I accuse them of being opposed to tax cuts. But they invariably see the trap and refuse to oppose my change. Meaning we often end up with a bad policy going ahead unchallenged.

The original stage 3 was partly intended to swing one for the Liberals’ well-off supporters. But also, to tempt Labor to oppose it, proof positive it was the high-tax party.

But get this: now Labor has broken its promise and made the tax cuts far more politically attractive, the wedge is on the other foot. Should Dutton vote against Labor’s broken promise, he’ll be accused of raising the taxes on “middle Australia”.

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Why all politicians want to use bracket creep to mislead you

Another round of tax cuts; another round of politicians saying tricky things about bracket creep. Whether they’re giving some of it back or letting it rip, our pollies on both sides hope bracket creep remains, as it has long been, their dirty little secret.

The latest is the claim that Anthony Albanese’s changes to the legislated stage 3 tax cuts will, over the next 10 years, cause income tax collections to be $28 billion higher than they would have been.

Anthony Albanese’s tax cut rejig will make them fairer. But we’ll have more bracket creep under Labor than we would had under Scott Morrison.

This figure is from Treasury’s published advice to Treasurer Jim Chalmers. What Treasury hasn’t been honest enough to do, however, is to warn us that its projection is based on a quite unrealistic assumption.

So let me tell you how bracket creep works, in a way the pollies never would.

First, understand that the income tax scale assumes there’s no such thing as inflation. It assumes that every pay rise you get results from a promotion or from moving to a better-paid job.

In which case, it would be fair enough to make you pay a higher proportion of your income in tax. It ignores that most of the pay rises we get merely cover the rise in consumer prices, leaving us no better off in “real” terms.

This would be true even if all of us paid the same flat tax rate of, say, 30 per cent. But it’s even more the case because the tax scale is “progressive”: our income is taxed in slices, with the tax rate on each slice getting progressively higher.

That is, the proportion of our total income paid in tax – our overall average rate of tax – increases as our income increases, for whatever reason.

The justification for having a progressive tax scale is to ensure that those who can afford to cover a higher share of the cost of government pay a lot more than those who can’t. Fair enough.

It’s easy to see how a rise in our income that pushed the last part of that income into a higher tax bracket would increase our average rate of tax. That’s how this phenomenon got the name “bracket creep”.

What’s harder to see is that, though moving to what economists call a higher marginal tax rate is the fastest way to increase your average rate of tax, the mere fact that every pay rise means a greater proportion of your total income is taxed at your (higher) marginal rate will still drag up your average rate. That’s even if you’re not pushed into a higher bracket – say, because you’re already on the top marginal rate.

What all this means is that, for as long as the pollies sit back and do nothing, the presence of any degree of inflation means everyone’s average tax rate keeps rising forever.

The dirty secret is, all pollies like bracket creep because it’s a way of increasing taxes without having to announce it, meaning many people don’t notice.

But obviously, the pollies know they can’t get away with that forever. The standard solution to bracket creep – practised by the US, Canada, Denmark, Sweden and other European countries – is to automatically index all the tax brackets each year, raising them by the rate of inflation.

The Fraser government did this for a couple of years in the 1970s before deciding it wasn’t worth it politically. Because the annual tax cuts it produced were small and automatic, the media and the taxpayers took too little notice of them.

So Malcolm Fraser decided it was smarter politics to delay having tax cuts until you could afford to have a big one. Say, every three years or so. And what about having it before an election – or maybe just after an election?

And, what’s more, why give everyone the same percentage cut in taxes when you could play favourites by cutting tax rates on some slices more that on others?

Why not cut the rates for higher brackets by more than you cut them for lower brackets? This would make the tax scale less progressive, which the better-off would love.

This is the way both sides have played the tax-cut game until then-treasurer Scott Morrison came along in the 2018 budget with his tricky plan to cut tax in three stages over seven years.

Note that having tax cuts only every three years or so means the taxman gets to keep a lot of the proceeds of bracket creep. Your eventual tax cut gives back only some of the extra that bracket creep has taken.

What a tax cut does is lower your average tax rate to somewhere closer to what it was at the time of the previous tax cut. And, of course, the day after your latest tax cut, the bracket-creep machine starts pushing your average tax rate back up again.

Note too, that if, rather than raising each of the tax brackets by the same percentage, the pollies start fiddling with the size of the rates applying to some of the brackets, there’s no guarantee that the bracket creep you lost is related to what you get back.

And the truth is, bracket creep doesn’t hit taxpayers towards the top of the scale proportionately to those towards the bottom. Average tax rates towards the bottom rise more than those at or near the top.

That’s because the brackets are closer together – the tax slices are thinner – near the bottom than they are near the top. And, of course, someone already on the top marginal tax rate can’t ever move to a higher rate.

Got all that? Now we can look at the strange design of the three-stage tax cut treasurer Morrison announced in the budget of May 2018, and at Albanese’s broken promise last week not to change stage 3 of the cuts.

As I’ve written several times, stage 1 – the low- and middle-income tax offset – was terminated, without announcement, in the Morrison government’s last budget before the 2022 election. Labor could have made sure everyone knew this, but chose to stay silent.

The stage 2 tax cuts were small and did little for taxpayers in the bottom half. The stage 3 tax cuts, long planned to start this July, centred on moving to put everyone earning between $45,000 a year and $200,000 a year – about 94 per cent of taxpayers – on a marginal tax rate of 30¢ in the dollar.

This, we were assured, would end bracket creep for good and all. Not true – because, as I’ve explained, there’s more to bracket creep than moving into a higher tax bracket. What is true, however, is that this move would have greatly reduced the extent of bracket creep in future.

Trouble is, moving to this radically less progressive tax scale involved no tax cuts for people at the bottom, and only modest cuts for those in the middle, but massive cuts for people on $180,000 a year and above.

Get it? The bottom half, who have contributed most to the bracket creep now being returned, would get precious little of it back, while the top half would clean up. As we know, Albanese’s rejig will make the tax cuts much less unfair.

However, the drawback is that, in future, we’ll have more bracket creep under Labor’s plan than we would have under Morrison’s. That’s the main reason Treasury projects that, over the next 10 years, the taxman will now collect about $28 billion more than he would have without the latest changes.

Just one problem with this arithmetic. It assumes that future governments could get away with letting bracket creep rip for a whole decade without ever having a tax cut to give some of it back. Yeah, sure.

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Albanese uses tax cuts to ease cost of living pressure - a little

 Having trouble deciding the rights and wrongs of Anthony Albanese’s claim to be changing the stage 3 tax cuts in a way that helps ease cost of living pressure without adding to inflation? The air’s been thick with economists making confusing statements on the topic.

For instance, economists at one bank say any tax cut will add to inflation pressure, but canning the cut would allow the Reserve Bank to lower interest rates by 0.5 per cent. Those at another outfit say Albo’s changes will be inflationary because they involve reducing the tax cuts going to high-income earners (who would have saved more of it) and increasing the tax cuts going to low and middle-income earners (who, being harder up, will spend more of it).

Well, let’s see if I can help you decide what to think of the government’s changes. There are three main ways to decide.

The first is a very popular method: let your preferred party do your thinking for you. If you vote Labor, conclude the change must be a good idea. If you vote Liberal, conclude it must be a terrible betrayal of the nation’s trust.

Second, just as popular method: look yourself up in the government’s “what you save” tax table and see how the change will affect you. If you’ll be better off under Albo’s changes, conclude they’re just what the economy needs. If you’ll be worse off than you would have been under former prime minister Scott Morrison’s original stage 3, conclude it will be an economic disaster.

Third, a rarely used method: try to work out which version would, in all the circumstances, have been best for the nation as a whole, regardless of how you personally would be affected.

Adding to this week’s confusion is that, in principle, Albanese’s goal of reducing cost of living pressures without adding to inflation pressure is a contradiction in terms.

Why? Because increasing the cost of living pressure on households is the very stick the managers of the economy are using to get inflation down. It’s deliberate.

When the economy is growing so strongly that the demand for goods and services is running faster the economy’s ability to supply them, prices keep rising.

So the only quick way economists can think of to stop prices rising so rapidly is to slow demand by throttling people’s ability to keep spending. This makes it harder for businesses to keep whacking up their prices.

This is precisely the reason the Reserve has increased interest rates so greatly: to leave people with mortgages with less money to spend on other things.

The government’s been helping with the squeeze by hanging on to almost all the extra income tax we’ve been paying – including because of bracket creep – and getting the budget into surplus.

A budget surplus means the government is using its taxes to take more spending potential out of the economy than it’s putting back in with its own spending.

Get it? The plan is to fix inflation by making the cost of living squeeze worse, to eventually make it better. Sounds crazy, but it’s true.

Albanese and his Treasurer, Jim Chalmers, know this full well. But so many people are feeling so much pain that they’re threatening to vote against the government, so they had to find a way to ease the pain.

This is a major rejig of the planned tax cuts, to ensure much more of the money goes to low- and middle-income earners – who’ve been hurting most – and much less to the top earners.

But hang on. Treasury expects the budget to return to big deficits in the coming financial year. Why? Because the government long ago legislated for the stage 3 tax cuts, costing a massive $21 billion a year.

Clearly, by easing the cost of living pressure on households, the tax cuts will reduce the downward pressure on prices. So those economists saying the fastest way to get the rate of inflation down would be to abandon the tax cuts are right.

But the cuts have been on the books for so long that this easing of pain coming from the budget has already been taken into account by the Reserve in deciding how much interest rates needed to rise. The tax cuts have also been taken into account in the econocrats’ forecasts of how long it will take to get inflation down.

What hasn’t been accounted for is that so much more of the $21 billion a year will now be going to people far more likely to need to rush out and spend it.

In Treasury’s published advice to the government, it acknowledges that these people have a higher “marginal propensity to consume”, but then asserts that this “will not add to inflationary pressures”.

Sorry, not convinced. What I would accept is that the effect on consumer spending isn’t so big it outweighs the other reasons for Albanese’s changes: the need for greater fairness and to keep a “progressive” income tax scale.

The defenders of the original stage 3 cuts claim that, by putting almost everyone on the same, 30¢-in-the-dollar marginal rate of tax, it would put an end to bracket creep.

Sorry, not true. Despite the name, you don’t literally have to move into a higher bracket to suffer from inflation causing your overall, average rate of tax to creep ever higher over time.

That’s why we can’t just go year after year allowing bracket creep to roll on. That’s why we do need to have a decent tax cut this year.

The original version of stage 3 wouldn’t have ended bracket creep, but would have greatly reduced it. Trouble is, it would have done so in a way that favoured high-income earners at the expense of everyone else. This even though bracket creep hits people lower down harder than those higher up.

On page 8 of its advice to the government, Treasury does a good job of demonstrating that Albanese’s way of returning (some of) the proceeds of bracket creep is much fairer.

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Good policy, values and politics all agree: change the tax cuts

I have no inside info on whether Anthony Albanese will stick to his oft-repeated promise to deliver the stage 3 tax cuts intact on July 1, or change them in some way because the cost-of-living crisis means all bets are off.

 I don’t even know that the measures he’ll discuss at the meeting of Labor’s caucus on Wednesday will be the last word on what we’ll see in the May budget, or on our payslips after July 1.

 I’m paid to say what I think should happen, not to predict what will. So I can tell you this: if Albanese doesn’t initiate belated changes to make the tax cuts fairer and of greater benefit to those who’ve suffered most from the cost of living, it will show he’s lost touch with good policy, Labor’s professed values and even what’s needed to protect his political hide.

 Let’s start from first principles. The longstanding view that our system of taxes and benefits should require those who can best afford it to bear more of the cost of government than those who can least afford it rests on two key policies: a largely means-tested system of government pensions and benefits, and a “progressive” scale of income tax.

 Your income is taxed in slices. The first slice is untaxed, then the rate of tax on subsequent slices gets progressively higher. When you add the slices together, the average rate of tax you pay on the whole of your income is far higher for people on very high incomes than for those on modest incomes.

 As legislated, the stage 3 tax cut would make three changes to the tax scale. It would reduce the rate of tax on the slice of income running from $45,000 a year to $120,000 a year from 32.5c in the dollar to 30c.

 Then it would reduce the rate of tax on the slice running from $120,000 to $180,000 from 37c in the dollar to 30c.

 Finally, it would cut the rate of tax on the slice of income running from $180,000 to $200,000 from 45c in the dollar to 30c. Only the last slice of income, anything above $200,000 a year, would continue to be taxed at the top rate, unchanged at 45c in the dollar.

 Do you see how this would significantly reduce the progressivity of the tax scale? That’s just what Scott Morrison, as treasurer and then prime minister, wanted: to shift the burden of taxation away from high-income earners and on to everyone lower down.

 It’s the sort of policy you might expect from a Liberal government, but one Labor has always claimed to oppose. It initially opposed stage 3, but later changed to quietly supporting it, for fear of being branded as high-taxing by its opponents.

 If Albanese doesn’t seize this chance to make the tax cuts fairer, he’ll be remembered as the prime minister who struck the greatest blow in cutting taxes for the rich. The man who did what ScoMo couldn’t.

 Albanese has claimed that stage 3 will deliver tax cuts for everyone earning more than $45,000 a year. That’s true. Someone on $50,000 will have their average rate of tax reduced by 0.25c in the dollar, yielding a saving of $2.40 a week. Wow.

 To get a weekly saving of more than $20 a week – not a lot if you’re struggling with much higher rent or mortgage interest rates – you have to be earning more than $90,000.

 Only if your income is $120,000 will your average rate of tax be cut by 1.6c in the dollar, saving you $36 a week. At $180,000 your average rate falls by 3.4c in the dollar, saving you $117 a week. Not bad.

 But if you’re struggling on $200,000, your average tax rate falls by 4.5c in the dollar, and you save almost $175 a week. 

 According to calculations prepared by the Parliamentary Budget Office for the Greens, as they stand, the stage 3 cuts will cost the budget almost $21 billion a year. Of that, people earning less than $45,000 a year get nothing, and those earning between $45,000 and $60,000 would get less than 2 per cent of the benefit.

 The large number of people earning between $120,000 and $180,000 would get about 30 per cent of the benefit, while the relatively small number earning more than $180,000 get 44 per cent.

 It’s been said by some that rejigging the tax cuts so that more of the money went to the low- and middle-income earners who’ve been hit the hardest by the cost of living – and bracket creep – would be inflationary because they’d spend more of any tax cut than would the well-off.

 True, but not a good enough reason to distort the tax system and keep beating ordinary families into the ground.

 As it stands, stage 3 hugely benefits a minority of voters, most of whom are unlikely to vote Labor. If Albo can’t convince most voters he broke his promise because they needed a break, he ought to get out of politics.

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Albo's economic report card: Must try harder on energy transition

Can Anthony Albanese’s government walk and chew gum at the same time? Should be able to, provided it stops trying to work both sides of the street.

As I wrote on Wednesday, the most urgent economic and political issue facing the government is the cost-of-living crisis.

But let’s get real. Everyone may be up in arms about the cost of living, but fixing it is standard stuff for the managers of the economy. We can be sure it will be fixed soon enough.

As we know from our own lives, we often let the urgent take priority over the more important, and that’s what this government has been doing.

What could be more important than easing my cost-of-living pain? All the different kinds of pain – the heatwaves, droughts, bushfires, floods and cyclones – that are coming our way unless the world does what’s needed to stop further global warming.

A big achievement at last year’s federal election was to get rid of a government of closet climate-change deniers only pretending to want to do something, and replace it with a government that did accept the scientists’ advice and did want to act on it.

But although Climate Change and Energy Minister Chris Bowen has been busy setting up the frameworks for reducing greenhouse gas emissions – fixing the “safeguard mechanism”, producing a hydrogen strategy and developing a critical minerals strategy, and, last month, announcing a scheme to underwrite the risk of investing in new renewable energy generation and storage – few new projects have begun or are in the offing.

That’s the trouble: actual progress is happening too slowly. Albanese’s game plan for this term seems to be softly, softly catchee monkey. Make sure you don’t offend any powerful interests, get comfortably re-elected and then think about getting tough.

There’s not enough sense of urgency. The longer it takes us to make the transition to renewable energy the more pain we’ll suffer in the process.

The Grattan Institute’s energy and climate change expert, Tony Wood, wants us to realise that this transition will be harder than anything we’ve had to achieve outside of wartime.

“We must manage the decline of the fossil fuel extractive sectors, transform every aspect of our energy and transport sectors, re-industrialise much of manufacturing, and find solutions to difficult problems in agriculture,” Wood says.

Note that the challenge comes in two parts. First, make the domestic shift from fossil fuels to renewables. Second – since the world will soon enough no longer want to buy our massive exports of coal and gas – find something else we can sell abroad.

Get it? If we don’t want to become a lot poorer, we’ve got to get weaving. Labor does get that to secure our future we must seize this limited-time opportunity to turn Australia into a renewable energy superpower.

Treasurer Jim Chalmers will tell you the government has already invested about $3 billion in the superpower project. But, again, we’re being too slow in getting on with it.

Nothing Australia can do by itself will halt climate change. That will take concerted, decisive action by all the big carbon-emitting nations. That will happen eventually, even if happens too late to prevent a lot more warming.

So, if we don’t mind being lasting losers from the eventual transition – the country that used to make a good living as an energy exporter – we can stay as laggards, waiting for America, China and Europe to do the heavy lifting.

If we want to stay winners, however, we have to get ahead of the others. We have to get to net-zero emissions before everyone else. We have to build a renewables industry so big it can meet our domestic needs, with at least as much energy to spare for export to countries less well-placed than us.

Most of our exported renewable energy would be “embodied” in green steel, green aluminium and other resources. This would be all to the good, allowing us to set up new manufacturing industries to further process our resources before selling them.

To achieve this unprecedented transformation will involve the government leading the way, funding research on how basic science can be commercialised, funding pilot projects, and reducing the risks for investors in renewables and storage.

This is challenging stuff for conventionally trained economists. They’re used to telling governments to let private firms pursue our “comparative advantage” by exploiting the nation’s “natural endowment”. They tell politicians never to try to “pick winners”.

But these are unprecedented times. Global warming has just torn up our comparative advantage in mining, rendering our natural endowment of huge remaining stocks of fossil fuels of little future value.

As Professor Ross Garnaut was the first to point out, however, in the new world where renewable energy is king, part of our natural endowment we formerly thought to be of little value is now our comparative advantage: relative to other countries, we have abundant supplies of sun and wind.

But waiting for private enterprise to turn our industrial structure on its head without government leadership is delusional. And, as we ought to have learnt by now, if you dissuade governments from picking winners, they end up backing losers: helping firms and workers who did well in the old world try to stop the clock.

That’s what’s wrong with the government’s softly, softly, all-things-to-all-persons approach to climate change. It’s working both sides of the street, taking an each-way bet: encouraging the move to renewables while retaining fossil fuel subsidies and allowing investment in new coal mines and gas projects.

It says a lot about the discombobulation of conventional economists that none of them beat the Australia Institute’s Dr Richard Denniss to pointing out the obvious: taking an each-way bet flies in the face of opportunity cost.

Allowing the established players to continue investing in fossil fuels deters them from investing in renewables. It also allows them to bid scarce skilled labour away from renewables and from rejigging the electricity grid. Sorry, the government must try harder.

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With luck, we’ll escape recession next year, but it will feel like one

What we’ve come to call the “cost-of-living crisis” has made this an unusually tough year for many people as they struggle to make ends meet. It’s likely to get worse rather than better next year. Which won’t help Anthony Albanese’s chances of being comfortably returned to government in early 2025.

Everyone hates rapidly rising prices and demands the government do something. But I’m not sure everyone understands the paradoxical nature of the usual ways central banks and governments go about fixing the problem. They make it worse to make it make better.

In a market economy, when our demand for goods and services exceeds the economy’s ability to supply them, businesses solve the problem by putting up their prices. The economic managers then seek to weaken our demand by squeezing households’ finances so that they can’t spend as much.

As our spending weakens, firms are less able to keep raising their prices without losing sales.

The main way the Reserve Bank puts the squeeze on household spending is by engineering a rise in mortgage interest payments, leaving people with less money to spend on everything else.

A shortage of rental housing has allowed landlords to make big rent increases. Employers have helped the squeeze by ensuring they raise wages by less than they’ve raised their prices. And Treasurer Jim Chalmers has helped by allowing bracket creep to take a bigger tax bite out of wage increases.

All this is why so many people have been feeling the financial heat this year. But even if there are no more interest rate rises to come, the existing pressures are still working their way through the economy, with little sign of relief.

Consumer prices rose by 7.8 per cent over the year to last December, but the annual rate of increase slowed to 5.4 per cent in September. That’s still well above the Reserve’s target of 2 per cent to 3 per cent.

If the Reserve has accidentally hit the economy harder than intended, we could slip into recession next year, causing a big jump in the number of people out of a job, and thus hitting them much harder.

But with any luck, it won’t come to that. And the crazy-lazy way the media define recession – a fall in real gross domestic product in two successive quarters – means that growth in the population may conceal the hip-pocket pain many people are feeling.

Consider the case of someone on the very modest wage of $45,000 a year in September 2021. If their wage rose in line with the wage price index, it would have risen by $3300 to $48,300 in September this year.

However, bracket creep, plus the discontinuation of the low and middle income tax offset, raised the average rate of income tax they pay from 9.8¢ in the dollar to 14.2¢. So their tax bill would have grown by $2460.

Now allow for the rise in consumer prices over the two years, and the purchasing power of their disposable income has fallen by about $5290, meaning their “real” disposable income is $4450 a year less than it used to be.

Can you imagine that person being terribly happy with the way their finances have fared under the Albanese government? My guess is, there’ll be growing disaffection with Labor as next year progresses.

To help him win last year’s federal election, Albanese made Labor a “small target” by promising very little change, including no change to the stage three income tax cuts, legislated long before the pandemic, to start in July next year.

His game plan had been to spend his first term being steady and sensible, keeping his promises and being an “economically responsible” government. This would get him re-elected with an increased majority and able to implement needed but controversial reforms.

But, through no great fault of his own, he’s had to grapple with the worst surge in the cost of living in decades. If there’s a low-pain way to get inflation back under control, I’ve yet to hear about it.

The trouble set in well before the change of government, and the Reserve Bank began its long series of interest rate rises during the election campaign.

My guess is that Albanese’s hopes of storming back to power at an election due by May 2025 are dashed. But it’s hard to see Peter Dutton winning the election unless he can win back the Liberal heartland seats that went to the teals, which seems doubtful.

So, it’s not hard to see Albanese losing seats and reduced to minority government, dependent on the support of the Greens and teals.

There is, however, one thing he could do to cheer up many voters: rejig the coming tax cuts so the lion’s share of the $25 billion they’ll cost the budget goes not to the high-income taxpayers who’ve had the least trouble coping with living costs, but to those on lower incomes who’ve the most.

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How full employment has changed the economy

This may be the first time you’ve watched the managers of the economy using high interest rates and a tighter budget to throttle demand to get inflation down. But if it isn’t your first, have you noticed how much harder they’re finding it to catch the raging bull?

It explains why both the previous and the new Reserve Bank governor have been so twitchy. How, after they seem to have made as many interest rate rises as they thought they needed, they keep coming back for another one.

The economy isn’t working the way it used to. Have you noticed that, although consumer spending stopped dead in the September quarter, and overall growth in the economy slowed to a microscopic 0.2 per cent, there’s been so little weakness in the jobs market?

Although there’s no doubt about how hard most households have been squeezed over the course of this year, how come the rate of unemployment has risen only marginally from 3.5 per cent to a still-far-below-average 3.9 per cent in November?

And if the economy’s been slowing for the whole of this year, how come the budget balance is getting better rather than worse, with Treasurer Jim Chalmers achieving a surplus last financial year and hoping for another in the year to next June?

There are lots of particular things that help explain these surprising results – world commodity prices have stayed high; some parts of the economy change earlier than others – but there’s one, more fundamental factor that towers over all the others: this is the first time in 50 years that we’ve been trying to slow a runaway economy that’s reached anything like full employment.

It turns out that throttling an economy that’s fully employed is much harder to do. Households are more resilient and, after a period when it’s been hard to get hold of all the workers they need, businesses have been far less inclined to add to the slowdown by shedding staff.

Remember that we reached full employment by happy accident. Between the unco-ordinated stimulus of state as well as federal governments, plus the Reserve cutting rates to near-zero, we (like many other rich economies) hit the accelerator far too hard during the pandemic.

This was apparent after the pandemic had eased and before the Morrison government’s final budget in March last year. But there was no way Scott Morrison was going to hit the budget brakes just before an election.

So the econocrats in the Reserve and Treasury resigned themselves to second prize: an unemployment rate much lower than what they were used to and felt comfortable with.

Because the pandemic had also caused us to close our borders and thus block employers’ access to skilled and unskilled immigrant labour, the econocrats got far more than they expected: unemployment so low we hit full employment.

The jobs market is getting less tight, with the number of job vacancies having fallen a long way, but last week’s figures for November showed how strong the labour market remains.

Sure, unemployment rose a fraction to 3.9 per cent, but this is no higher than it was in May last year. And the month saw total employment actually grow, by more than a remarkable 61,000 jobs during the month.

After all this slowing and all this pain, the rate at which people of working age are participating in the labour force by either having a job or actively seeking one has reached a record high.

And almost 65 per cent of the working-age population has a job – a proportion that’s never been higher in Australia’s history.

Employment is still growing strongly, partly because of the rebound in immigration, with foreign students in particular filling part-time job vacancies.

But also, it seems, because more hard-pressed families are trying to make ends meet by taking second jobs. In past downturns, those jobs wouldn’t have been there to be taken.

To force households to spend less, they’re being hit with three sticks. Obviously, by raising mortgage interest rates. Also by employers, taken as a group, raising the wages they pay by less than they’ve raised their prices (have you noticed how Chalmers avoids referring to the cut in real wages by just blaming “inflation”?).

And, third, by the government allowing bracket creep to take a bigger bite out of what pay rises the workers do manage to get.

But there’s another factor that’s been working in the opposite direction, adding to households’ ability to keep spending: over the year to November, the number of people with jobs rose by more than 440,000. That’s a full-employment economy.

All the extra people with jobs pay income tax. All the part-time workers able to get more hours pay more tax. All the people getting second jobs pay more tax. Add the bigger bite out of pay rises, and you see why Chalmers’ budget’s so flush.

But note this: the many benefits of full employment come at a cost – “opportunity cost”. As a coming paper by Matt Saunders and Dr Richard Denniss of the Australia Institute will remind us, “opportunity cost makes it clear that when resources are used for one purpose, they become unavailable for other purposes”.

So when we’re at or close to full employment, any developer, business executive or politician seeking our support for any project because “it will create jobs” should be laughed at. Where will the workers come from to fill the jobs? You’ll have to pinch them from some other employer.

This is especially true when the jobs you want to create are for workers with specialist skills.

According to a federal government report, in October last year there were 83 major resource and energy projects at the committed stage, worth $83 billion. But about two thirds of these were for the development of fossil fuels, including the expansion of nearby ports.

Really? And this at a time when the electricity grid needs urgent reconfiguration as part of our move to a low-carbon economy, but projects are being deferred because you can’t get the workers?

As Saunders and Denniss conclude, “With rapid population growth and the stated need to transform our energy system, the real cost of spending tens of billions of dollars building new gas and coal projects is the lost opportunity to invest in the infrastructure and energy transformation the Australian economy needs.”

I think Jim Chalmers needs to explain the iron law of opportunity cost to his boss. And make sure Climate Change and Energy Minister Chris Bowen’s in the meeting.

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Chalmers finds a better way to get inflation down: fix the budget

There’s an important point to learn from this week’s mid-(financial)-year’s budget update: in the economy, as in life, there’s more than one way to skin a cat.

The big news is that, after turning last year’s previously expected budget deficit into a surplus of $22 billion – our first surplus in 15 years – Treasurer Jim Chalmers is now expecting this financial year’s budget deficit to be $1.1 billion, not the $13.9 billion he was expecting at budget time seven months’ ago.

Now, though $1.1 billion is an unimaginably huge sum to you and me, in an economy of our size it’s a drop in the ocean. Compared with gross domestic product – the nominal value of all the goods and services we expect to produce in 2023-24 – it rounds to 0.0 per cent.

So, for practical purposes, it would be a balanced budget. And as Chalmers says, it’s “within striking distance” of another budget surplus.

This means that, compared with the prospects for the budget we were told about before the federal election in May last year, Chalmers and Finance Minister Katy Gallagher have made huge strides in reducing the government’s “debt and deficit”. Yay!

But here’s the point. We live in the age of “central bankism”, where we’ve convinced ourselves that pretty much the only way to steer the economy between the Scylla of high inflation and the Charybdis of high unemployment is to whack interest rates up or down, AKA monetary policy.

It ain’t true. Which means Chalmers may be right to avoid including in the budget update any further measures to relieve cost-of-living pressures and, rather, give top priority to improving the budget balance, thereby increasing the downward pressure on inflation.

The fact is, we’ve always had two tools or instruments the managers of the economy can use to smooth its path through the ups and downs of the business cycle, avoiding both high unemployment and high inflation. One is monetary policy – the manipulation of interest rates – but the other is fiscal policy, the manipulation of government spending and taxation via the budget.

This year we’ve been reminded how unsatisfactory interest rates are as a way of trying to slow inflation. Monetary policy puts people with big mortgages through the wringer, but lets the rest of us off lightly. This is both unfair and inefficient.

Which is why we should make much more use of the budget to fight inflation. That’s what Chalmers is doing. The more we use the budget, the less the Reserve Bank needs to raise interest rates. This spreads the pain more evenly – to the two-thirds of households that don’t have mortgages – which should be both fairer and more effective.

Starting at the beginning, in a market economy prices are set by the interaction of supply and demand: how much producers and distributors want to be paid to sell you their goods and services, versus how much consumers are willing and able to pay for them.

The rapid rise in consumer prices we saw last year came partly from disruptions to supply caused by the pandemic and the Ukraine war. There’s nothing higher interest rates can do to fix supply problems and, in any case, they’re gradually going away.

But another cause of the jump in prices was strong demand for goods and services, arising from all the stimulus the federal and state governments applied during the pandemic, not to mention the Reserve’s near-zero interest rates.

Since few people were out of job for long, this excessive stimulus left many workers and small business people with lots to spend. And when demand exceeded supply, businesses did what came naturally and raised their prices.

How do you counter demand-driven inflation? By making it much harder for people to keep spending so strongly. Greatly increasing how much people have to pay on their mortgages each month leaves them with much less to spend on other things.

Then, as demand for their products falls back, businesses stop increasing their prices and may even start offering discounts.

But governments can achieve the same squeeze on households by stopping their budgets putting more money into the economy than they’re taking out in taxes. When they run budget surpluses by taking more tax out of the economy than they put back in government spending, they squeeze households even tighter.

So that’s the logic Chalmers is following in eliminating the budget deficit and aiming for surpluses to keep downward pressure on prices. This has the secondary benefit of getting the government’s finances back in shape.

But how has the budget balance improved so much while Chalmers has been in charge? Not so much by anything he’s done as by what he hasn’t.

The government’s tax collections have grown much more strongly than anyone expected. Chalmers and his boss, Anthony Albanese, have resisted the temptation to spend much of this extra moolah.

The prices of our commodity exports have stayed high, causing mining companies to pay more tax. And the economy has grown more strongly than expected, allowing other businesses to raise their prices, increase their profits and pay more tax.

More people have got jobs and paid tax on their wages, while higher consumer prices have meant bigger wage rises for existing workers, pushing them into higher tax brackets.

This is the budget’s “automatic stabilisers” responding to strong growth in the economy by increasing tax collections and improving the budget balance, which acts as a brake on strong demand for goods and services.

There’s just one problem. Chalmers has joined the anti-inflation drive very late in the piece. The Reserve has already raised interest rates a long way, with much of the dampening effect still to flow through and weaken demand to the point where inflation pressure falls back to the 2 per cent to 3 per cent target.

We just have to hope that, between Reserve governor Michele Bullock’s monetary tightening and Chalmers’ fiscal tightening, they haven’t hit the economy much harder than they needed to.

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Why populism hasn't taken off in Australia

One good thing about taking a break from work is that it gives you time to let your mind wander from all the pressing concerns of our fast-moving world – the preoccupation with this “crisis” and that “crisis” – to less immediate but more important problems. And it helps if you’ve used the time to read a good book or two.

On my recent long break – soon to be followed, I fear, by my summer holiday – I read The Crisis of Democratic Capitalism, by Martin Wolf. Wolf is the chief economics commentator of the Financial Times in London, and the global doyen of my tiny profession of economics editors.

Wolf has two worries. Democracy isn’t working well and neither is capitalism.

He sees many signs that faith in democracy is declining and voters are turning to authoritarian demagogues peddling populist solutions to difficult problems.

You can see that in the election of Donald Trump and the even more remarkable possibility that this self-serving con man could be given another turn at the wheel. You see it in Britain’s self-harming decision to leave the European Union.

And you see the rise of right-wing populism in an ever-growing number of European countries – from Hungary to the Netherlands, not to mention in South America – much of it involving resentment of immigrants, particularly Muslims, and the search for scapegoats.

Turning to capitalism, there is much dissatisfaction with the evident failure of “neoliberalism” – the doctrine that less government and more freedom for business is the path to prosperity.

The privatisation of government-owned businesses has often made things worse rather than better. The contracting of private businesses to provide government services hasn’t helped. Nor has the use of private consultants rather than the public service.

Wolf argues that the poor performance of the economy is the main explanation for the rise of populism in the rich democracies.

The global financial crisis of 2008 led to much disillusionment. Particularly in America, deregulation of the banks left them free to make many bad loans, but when the house of cards collapsed and plunged the advanced economies into the Great Recession, billions of taxpayers’ dollars had to be used to bail out the banks, but the bankers escaped unpunished.

Leaving aside the temporary disruption of the pandemic, the advanced economies have never since returned to healthy growth and rising living standards.

Then there’s globalisation. It has moved much manufacturing activity from America and Europe to China and other Asian countries, to the great benefit of consumers of manufactured goods throughout the rich world.

It lifted many millions of workers out of poverty in Asia, while robbing many American workers of their well-paid jobs in manufacturing.

Governments could easily have used their budgets to require those of us who benefited from cheaper cars, clothing and all the rest to compensate and help those who lost their jobs but, in the era of neoliberalism, they didn’t bother.

It was the decisions of the former blue-collar workers of the rust belt states to move their votes from Democrat to Trump that pushed him across the line in 2016.

Wolf says, “people expect the economy to deliver reasonable levels of prosperity and opportunity to themselves and their children”. When it doesn’t fulfil those expectations “they become frustrated and resentful”.

“Instead ... it has generated soaring inequality, dead-end jobs and [economic] instability.”

Whether you look at politics or the economy you see we’re moving to a plutocracy – government by the rich and powerful. You see powerful – but often harmful – industries buying favourable treatment with generous donations to political parties.

And you see the way our chief executive class has increased its remuneration out of all comparison, while holding down the wages of their fellow employees.

But Wolf’s story applies more fully to America, Britain and Europe than it does to us. While it’s true that living standards in Australia have hardly risen for the past decade, things here haven’t been as bad.

Our one great would-be populist saviour, Pauline Hanson, hasn’t got far. Our two big parties’ problems have been with the Greens and teals.

And while our incomes have become more unequal over the decades, they haven’t worsened much in the past two decades – except at the very top.

Part of that lack of deterioration is owed to our system of regularly – and fairly generously – increasing minimum award wages.

Another saviour has been the Labor governments’ umbilical cord to the union movement, something not matched by America’s Democrats.

Anthony Albanese hasn’t seemed terribly brave on many issues, but last week he pressed on with closing the legal loopholes employers have long been using to chisel their workers, against ferocious opposition from the (big) Business Council, the Mining Council and the employer groups.

According to them, Labor’s changes will destroy many jobs and kill the economy. Don’t stay up waiting for it to happen.

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Why it's doubtful we need another interest rate rise

There’s nothing the media likes more than an interest rate rise on Melbourne Cup day. It’s surprising how often it’s happened, and many in the financial markets have convinced themselves that’s what we’ll get next Tuesday. And the good news is that, despite the radical reform of moving to a mere eight board meetings a year, the Reserve Bank has ensured that meetings on cup day will continue.

What I’m not sure of is whether, if we do get a rate rise next week, it will be happening by accident or design. In central banking, getting your timing right is just as important as it is in a comedy routine.

It was no surprise last week when new Reserve Bank governor Michele Bullock used her first big speech to make sure everyone noticed her bulging anti-inflation muscles. “There are risks that could see inflation return to target more slowly than currently forecast,” she warned.

“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” she said. She added some qualifications but, predictably, neither the markets nor the media took much notice of them.

Any new governor would have said the same in their first speech. Trouble is, her tough statement about not being willing to return to the 2 to 3 per cent inflation target “more slowly than currently forecast” came just the day before publication of the consumer price index for the September quarter.

And while it showed the annual rate of inflation continuing to fall from its peak of 7.8 per cent at the end of last year to 5.4 per cent nine months later, it also showed the quarterly inflation figure rising from 0.8 per cent to 1.2 per cent.

This was 0.2 percentage points or so higher than the markets – and, they calculate, the Reserve – were expecting. Bingo! Rate rise a dead cert. All the big four banks are laying their bets accordingly.

But the main reason for the slightly higher number was a rise in petrol prices, which contributed 0.25 percentage points of the 1.2 per cent. This rise comes from insufficient supply: the higher world price of oil, forced up the OPEC oil cartel and others trying to increase the price by restricting their supply.

It does not come from excessive Australian demand – which is the one factor the Reserve can moderate by increasing interest rates. Similarly, the next-biggest price increases, for newly-built homes (imported building materials), rents (surge in immigration) and electricity (Ukraine war) aren’t caused by anything a rate rise can fix.

So I think the case for yet another rate rise is weak. As Bullock clearly demonstrated elsewhere in her speech, the Reserve’s single, crude instrument, raising interest rates, delivers most of its punishment to the quarter or so of households with big mortgages.

Too many of these people are really hurting, and the full hurt from rate rises already made has yet to be felt. The economy is slowing, consumer spending is hardly growing, real income per person is falling.

And, as Treasury secretary Dr Steven Kennedy noted in a speech last week, last financial year’s budget surplus of $22 billion shows the budget’s “automatic stabilisers” are working hard to help the Reserve restrain demand – a truth that’s been completely missing from the Reserve’s commentary. That’s gratitude for you.

But if, having thought hard about such a small change to the “outlook for inflation”, Bullock decides a further rate rise isn’t warranted, what are the money market punters (and I do mean people making bets) going to think, considering all her chest-beating? That she speaks big but carries a soft stick?

There are a few things she – and her urgers in the financial markets (most of whom have never in their lives had reason to worry about the cost of living) – need to remember.

First, at this late stage in the game, we really are into fine-tuning. And acting because a revised forecast means we’ll return to target later than we had expected suggests you’ve forgotten what every governor needs always to remember: as with all economists, the Reserve’s forecasts are more likely to be wrong than right.

They can be wrong by a lot or wrong by a little. Worst, they can prove too optimistic or too pessimistic. If your previous forecast was wrong, what makes you so sure your next one will be right? When it comes to forecasts, the person making the actual decisions needs to be the biggest sceptic.

Second, the Reserve’s previous forecast was for inflation to be back to the top of the target range by the first half of 2025. If its latest forecast pushes that out to the second half, what’s so terrible about that? How much extra pain for young people with huge mortgages does that justify?

Ah, says the Reserve, the reason we can’t wait too long to get inflation back to target is that, the longer we leave it, the greater the risk that business’ and workers’ expected rate of inflation rises above the target range.

If that happened, we’d need much higher interest rates and much more pain to get expectations back down to the only range we’ve decided is acceptable.

This is true in principle but, in practice, it’s mere speculation. The fact is, the world’s central bankers have no hard evidence on how long it takes for inflation expectations to adjust – a few years or a few decades.

I’m old enough to remember that when inflation returned, in the late-1960s and early-’70s, it took a decade or two for expectations to adjust. The smarties used to advise youngsters to borrow as much as anyone would lend them. Why? Because real interest rates were negative.

But when a decade or two of tough inflation fighting eventually got expectations down to what became the target range, after the recession of the early ’90s, they’ve shown zero sign of moving for 30 years. Not even during the present inflation surge.

So when nervous-nelly governors decide to err on the safe side, they’re deciding to beat young home buyers even further into the ground. Either sell your house or starve your kids.

Finally, in her answers to questions last week, Bullock implied that the risk of rising inflation expectations was now so great that the Reserve could no longer afford the nicety of distinguishing between supply-side shocks and price rises driven by excessive demand.

Whatever the cause, continuing delay in getting inflation back to target presented such a threat to expectations that rates would have to keep rising regardless.

This means that if our return to target is delayed by supply-side problems – mismatches in the transition to renewable energy, leaps in meat and veg prices caused by extreme weather, or higher oil prices caused by worsening conflict in the Middle East – the home buyers cop it.

In this era of continuing supply shocks, failure to distinguish between the causes of price rises would be a recipe for deep recession. The Reserve’s professed “dual mandate” – full employment – would be out the window.

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Paying tax is good and, for better government, we should pay more

On Friday, a former top econocrat did something no serving econocrat is allowed to do, and no politician is game to do: he set out the case for us to pay higher, not lower, taxes.

For years, politicians have sought our votes by promising smaller government and lower taxes. This often helped get them elected, but it hasn’t worked as promised.

They’ve reduced the size of government by privatising government-owned businesses and outsourcing the provision of many government-funded services. But though they’re always announcing tax cuts, the hidden tax of bracket creep means there’s been no real reduction in the tax we pay. Great.

The man advocating a radically different approach is Dr Mike Keating. He laid out the case for bigger government and higher taxes in a speech to the Australia Institute’s revenue summit at Parliament House in Canberra.

The pollies seeking election by promising lower taxes take it as obvious that taxation is a bad thing – a “burden” which, like all burdens, needs to be minimised.

But Keating says we should remember the purpose of taxation. It’s to pay for a wide range of services that governments provide to us either directly (education, healthcare, child care, aged care, pensions and payments) or collectively (defence, law and order, roads). Some services we get while we’re young, some when we’re middle-aged, and many when we’re old.

Keating says there’s a wide consensus among Australians about the things we expect the government to do for us. “We recognise that all Australians are entitled to basic levels of education, healthcare, income support and shelter, and that governments have a responsibility to ensure the provision of these essential services,” he says.

Recent Coalition governments promising us lower taxes always added the promise that this could be done without reducing “essential services”.

Keating says there’s now widespread acknowledgement that these services that we pay for collectively are critical to building our community and to our sense of community.

So taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that are consumed collectively. Many of the services paid for by taxation add to our quality of life.

Indeed, he says, history suggests that our demand for these services, such as education and health, tends to rise rapidly as economic growth causes our incomes to grow. They’re what economists call “superior goods”. The better off we get, the more of our income we devote to them.

The problem for governments – which politicians themselves have worsened – is the disconnect in people’s minds between our demand for government services and the taxation needed to pay for them. We refuse to join the dots.

“We want increased access to more and better services on the one hand, and less taxation on the other,” Keating says.

So, let’s stop kidding ourselves. If we want more and better services from government, we’ll have to pay for them with higher taxes, just as when we want more or better in a shop or a restaurant, we know we’ll have to pay more.

But assuming we accept that truth, why do we already want the government to be bigger and better?

One way the previous government sought to square the circle of maintaining “essential services” while cutting taxes – including next July’s stage-three tax cuts – is by underspending on those services and hoping no one would notice.

Keating has thought of no less than seven areas where there’s little doubt that we need to spend more.

First, although the previous government acted on the scandals exposed by the royal commission into aged care, and governments have spent more on childcare, both remain underfunded. What’s more, increases in the availability and quality of care services are likely to lead to higher costs because higher wages will be needed to attract the extra workers.

Second, the Albanese government’s increased spending on “social housing” (what in the olden days was called the housing commission) is widely considered to be much less than needed.

Third, federal government grants for public hospitals will probably have to grow a lot faster than presently expected to reduce excessive waiting times. And the Medicare payments to GPs are still too low, risking shortages of doctors, particularly in the country.

Fourth, federal funding for universities hardly grew in real terms over the nine years of the Coalition government, and actually fell per student. Labor will be pressured to make this up. As for vocational education and training – TAFE – the new National Skills Agreement requires the feds to cough up more.

Fifth, unemployment benefits – this week labelled JobSeeker, maybe something else next week – are very low compared with most other rich economies. And the recent leap in rents means the rent assistance paid to pensioners and others on benefits is now far too mean.

Sixth, it’s clear we’ll need to spend a lot more on the AUKUS nuclear submarines and other defence capabilities. This could increase annual defence spending by at least 1 per cent of gross domestic product over the next decade.

Finally, measures to reduce carbon emissions and to fully develop Australia’s potential as an exporter of renewable energy will almost certainly require greater funding than the government is presently planning.

The Grattan Institute estimates that if present tax arrangements aren’t changed to cover the expected additional growth in government spending, the “structural” (underlying) budget deficit will be close to 3 per cent of GDP in 10 years. Keating thinks it’s more likely to be 4 per cent – or $100 billion a year in today’s dollars.

Continuing deficits of this size would be quite unrealistic, he says. He suggests not another review of the tax system, but a major, authoritative inquiry to assess how much revenue is needed to adequately fund all government services.

When the public has a better understanding of what we’d get for our money, then maybe we’ll be more prepared to accept the need for higher taxes.

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Identity politics is destroying our public schools

When one of the most privileged and oldest private schools in Australia, The King’s School – home to the scions of the squattocracy – has to be ordered by the NSW government not to spend public money on a plunge pool at its headmaster’s residence, that’s when you know there’s something very wrong with the way federal and state governments are dividing their funding between public and private schools.

It’s a system where the less government help a school needs, the more it’s given, and the more a school needs the more likely it won’t be given enough.

Although the famous Gonski report of 2011 recommended that government funding of schools be based on the assessed needs of their mix of students, more than a decade later that hasn’t happened.

Why not? Partly because, unlike most other English-speaking countries, Australia has allowed the mainstream Christian churches to play a big role in the provision of primary and secondary education.

They had schools before the government decided to introduce compulsory public schooling, and were allowed to keep running them. To this day, they’re allowed to provide religious instruction in public schools where – despite our growing lack of religiosity – the churches fight against ethics classes being offered as an alternative.

Led by the Catholics, the private schools fought to stop the Gonski reforms reducing their funding and control over how it was spent. Anachronistically, our politicians remain wary of getting off side with the church vote.

But the other reason for the backsliding on Gonski is the much earlier decision of the Howard government to make parents’ choice of school – not student need – the highest priority for government funding.

John Howard got the states to licence many new private schools, most of them with some religious affiliation. This has changed the nature of Australian schooling in a way few people have noticed.

Have you heard of “identity politics”? It’s the modern tendency for voters to think of themselves not just as Australians, or even Labor or Liberal, but as part of an ethnic, religious or gender-preference group.

There was a time when almost everyone was educated at the local public or parish school. At school, you learnt to get along with people from many different social classes and backgrounds. These days, only a small majority of students go to public schools, and it’s now common for Jewish kids to go to Jewish schools, Muslims to Muslim schools, evangelical Protestants to “Christian schools” and so forth.

Sorry, this may be what many parents choose for their offspring, but I’m not sure if it will be good for national tolerance and social cohesion. Just as bad, it’s happening at the expense of public schools, left with too few resources to do justice to the more than 80 per cent of the nation's disadvantaged students – those of the lowest socio-economic status, Indigenous and the outback (not to mention misbehaving kids expelled from private schools).

Private schools can – and do – say no to kids with problems, but public schools can’t.

According to official figures collated by Trevor Cobbold, of Save our [public] Schools, combined annual federal and state funding grew by more than $2800 per independent school student over the nine years to 2020, after allowing for inflation. That compares with increases of almost $2500 per Catholic school student and just $830 a year per public school student.

Across Australia this year, combined government funding is estimated to have provided private schools (Catholic plus independent) with 106 per cent of the Gonski-inspired, officially calculated “schooling resource standard” needed to meet the particular needs of their students. Public schools will get just 87 per cent of what they need.

Add huge tuition fees, and you see why long-established independent schools have far more income than they need just to run the school. Many have never-ending construction programs moving round and round the cramped school campus, tearing things down and building new indoor swimming centres, music and drama centres, auditoriums and sporting facilities.

Casual observation suggests that independent schools get better academic results than Catholic schools and, particularly, public schools. But many studies show that, once you allow for the socio-economic status of the students’ parents, independent and Catholic schools do no better than public schools.

If governments keep over-funding private schools and underfunding public schools, however, a lot more parents will feel they need to pay up, so they can move their kids to private, leaving public schools with a much higher proportion of disadvantaged students that they’re inadequately resourced to help.

Doesn’t sound like a road we should want to travel.

After coming to office last year, the Albanese government postponed any changes to federal funding of schools for a year, so an expert panel could report on the National Schools Reform Agreement, the agreement between the feds and states on school funding.

The panel’s report is due this month. But even if it recommends big reforms, you wouldn’t be sure this bruised and battered government would be up for the fight with privileged schools and their parents.

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Want better productivity? Cut population growth

A simple reading of orthodox economics tells you that the urge to maximise profits leads businesses to continuously improve the productivity of their activities. But, as former competition tzar Rod Sims has often reminded us, improving productivity is just one way to increase profits, and there are other ways to do it that are a lot easier.

One other way is to increase your share of the market by having a better product. Or better, coming up with a marketing campaign that merely cons people into believing your product is better.

Another way to increase market share is to undercut your competitors’ prices. But in oligopolies dominated by only a few big players, which many of our markets are, the threat of mutually damaging retaliation is so great that price wars are rare.

(This why the big four banks were so shocked and offended when the Macquarie group, a huge financial group with deep pockets and a small bank, decided recently to get itself a slice of the lucrative home loan market by offering below-market interest rates.)

Another way to increase profits is to take over a competitor. This may or may not increase profitability – percentage return on the share capital invested in the business – to the benefit of shareholders. But the managers of the now-bigger business will have to be paid commensurately higher wages and bonuses.

But the simplest, easiest way to increase profits? Sell into an ever-growing market. And how do you do that? Persuade the government to maintain a high rate of immigration. This is a mission on which big business has had great success in recent decades.

Polling shows the public does not approve of high immigration. With some justification, the punters tend to blame it for road congestion and rising housing costs.

But the Howard government and its Coalition successors did a roaring trade in keeping the punters’ disapproval focused on poor people who arrived uninvited on leaky boats, while they were quietly ushering in all the immigrants that business was demanding. These people arrived by plane, and so drew no media attention.

Is it mere coincidence that productivity improvement has been weak during the period in which immigration-driven population growth has been so strong? I doubt it, though of course, I’m not claiming this is the only factor contributing to weak productivity improvement.

While it makes self-interested, short-sighted sense for businesspeople to be so untiring in their clamour for ever more immigration, the strange thing is that the virtue of rapid population growth goes almost wholly unquestioned by the nation’s economists.

Population growth is an article of faith for almost every economist. For a profession that prides itself on being so “rational”, it’s surprising how little thinking economists do about the pros and cons of immigration. There’s little empirical evidence to support their unwavering commitment to high immigration, but they don’t need any evidence to keep believing what almost all of them have always believed.

Before we get to the narrowly economic arguments, let’s start with the bigger picture. The primary reason for doubting the sense of rapid population growth is the further damage every extra person does to the natural environment.

As the sustainable population advocates put it: too many people demanding too much of our natural environment.

Economists have gone from the beginning of their discipline assuming that the economy and the environment can be analysed in separate boxes. This further assumes that any adverse interaction between the two is so minor it can be safely ignored.

In an era of climate change and growing loss of species, this is clearly untenable. The economy and the natural environment that sustains it have to be joined up. But when it comes to population growth, these are dots the profession hasn’t yet joined.

Even on narrowly economic considerations, however, economists long ago stopped checking their calculations. It’s obvious that a bigger population means a bigger economy, and since economists are the salespersons of economic growth, what more do you need to know?

Well, you need to know that economic growth achieved merely through population growth leads to what the salespersons are promising the punters: a higher material standard of living. Simply, higher income per person.

If there is evidence higher population growth leads to higher income per person, I’ve yet to see it. I have seen a study by the Productivity Commission that couldn’t find any. And I have seen a study showing that the higher a country’s population growth, the lower its growth in gross domestic product per person.

But it doesn’t surprise me that the committed advocates of population growth don’t wave around any evidence they have to support their faith. What is well understood, though the advocates seem to have forgotten it, is that, whatever economic benefits immigration may or may not bring, it comes with inescapable economic costs.

Which are? That every extra person dilutes our existing per-person investment in business equipment and structures, housing stock and public infrastructure: schools, hospitals, police stations, roads and bridges, and much else.

In other words, every extra person requires us to spend many resources on preventing this population growth from diminishing our economic and social capital per head, and thereby making us worse off.

Economists call this “capital widening”, as opposed to “capital deepening”, which means providing the population with more capital equipment and infrastructure per person.

Trouble is, there’s a limit to how much the nation can save – or borrow from overseas – to finance our investment in housing, business equipment and structures, and public infrastructure. So resources we have to devote to capital widening, thanks to population growth, are resources we can’t devote to the capital deepening that would increase our standard of living.

Using immigration to raise our living standards is like trying to go up a down escalator. You have to run just to stop yourself going backwards. This is smart?

In practice, it’s worse than that. There’s a big government co-ordination problem. It’s the federal government that’s responsible for immigration levels, and that collects most of the taxes the immigrants pay, but it’s mainly the state governments that are lumbered with organising the extra housing and building the extra sewers, roads, transport, schools, hospitals and other facilities needed to avoid congestion and overcrowding.

Another thing to remember is that the easier you make it for businesses to get the skilled workers they need by bringing them in from abroad, the more you tempt them not to go to the expense and inconvenience of bothering with apprentices and trainees.

This is why so many businesses were caught short when, during the pandemic, their access to imported skilled labour was suddenly cut off. No wonder they were shouting to high heaven about the need to reopen their access to cheap labour. A lot of it was actually unskilled labour from overseas students, backpackers and others on temporary visas, who are easy to take advantage of.

Have you joined the dots? If giving business what it wants – high immigration to grow the market and provide ready access to skilled and unskilled workers – hasn’t induced business to increase the productivity of its labour, why don’t we try the opposite?

Make it harder for business to increase profits without improving productivity and investing in training our local workforce. Of course, this would require us to value productivity improvement more highly than population growth.

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How much government spending is wasted? Sorry, don't know yet

Hands up if you think a lot of the money the government spends is wasted. I think a lot of people would agree. But the question’s not as easily answered as you may think.

My guess is that many people’s impression of the amount of waste is exaggerated. When they see what they believe is wasteful spending they notice and remember it, whereas when everything seems to be going as it should, they don’t take note.

And what’s wasteful can be in the eye of the beholder. All the government money that comes my way is well spent, but the money it’s giving to people I don’t know or don’t like – or to causes I don’t care about – that’s waste. Well, maybe, maybe not.

Many people convince themselves governments waste massive amounts, in order to justify their objection to paying more tax, or their resentment of what they already pay.

Remember, no one in government just stands there tearing up banknotes. Some of the money can be spent on, say, fighter planes than don’t work properly, or roads that are rarely used, but almost all the money spent ends up in someone’s hands, not just as a pension or benefit, but as a payment for work they did for the government, either as its employee or the employee of a company that did something for, or sold something to, the government.

The people who get money from the government in this way don’t regard it as a waste. What do they do with it? They spend most of it. And when they do, this generates income for other people. The money goes round and round. It’s rare for government spending to benefit no one.

But that doesn’t mean the money was well spent. That it benefited the people it was supposed to benefit, or that they got as much benefit from it as intended. That can be particularly so when governments don’t just give people cash, but do things for them that are supposed to help them.

When you think of it like that, my guess is that a fair bit of the government’s spending is wasteful. But I can’t tell you how much. Why not? Because even the government doesn’t know.

Why not? Because governments don’t do nearly as much evaluation of their spending as they should. Australian governments have no culture of regularly and rigorously checking to see spending programs are achieving their stated objectives.

But here’s the news. The Albanese government has vowed to change this. In fulfillment of an election promise, it has allocated spending of $10 million over four years to set up the Australian Centre for Evaluation as a unit within Treasury. It’s the baby of assistant treasurer Dr Andrew Leigh.

The centre will improve the number, quality and impact of evaluations across the Australian public service, working together with evaluation units in other departments and agencies. “It will save taxpayers money and make government better,” Leigh says.

It will partner with other departments to conduct evaluations on mutually agreed priority programs. These evaluations will build momentum by helping to build departments’ capabilities and demonstrating the value of better evaluation across the government.

“Building the … public service’s evaluation capability is also an important step towards reducing the over-reliance on [outside] consultants” and cutting spending on them. Using consultants “is expensive and delivers inconsistent results”, Leigh said.

Last week, Leigh announced that the centre’s first evaluation, with the Department of Employment and Workplace Relations, would be of Workplace Australia, the latest name for the network of community and for-profit outfits contracted to provide “employment services” to people having a hard time finding a job.

Leigh says that making sure the Workplace Australia network’s employment services are achieving their stated objective – which is to reduce long-term and “structural” unemployment – is a key part of achieving the government’s commitment to full employment, as outlined in its recent white paper on employment.

Good. Because I’ll be amazed if the evaluation doesn’t find the Workplace Australia program has been a huge waste of money, doing amazingly little to help unemployed people with problems on their way to a decent job.

On one side, bureaucrats have used the tendering system to pay as little as possible for the services the government says it wants to be provided. On the other, the “providers” – even some of the community organisations that seem only in it for the money – have learnt all the ways to tick the boxes and be paid, while doing precious little to help people with problems.

In the era of robo-debt, it didn’t take the providers long to twig that the previous government was happy to pay them for punishing the jobless for minor or manufactured misdemeanours, rather than helping them.

The telltale sign that Workplace Australia was yet another example of the failure of outsourcing – looked good on paper; didn’t work in practice – is the number of times the bureaucrats have tried to fix it by giving it a new name. The old Commonwealth Employment Service became Jobs Services Australia, then the Job Network, then the one-word, lower-case jobactive, then Workforce Australia.

Leigh, a former economics professor, is a great believer in the wider use of the “randomised controlled trials” that the medicos have used so successfully to ensure the procedures and pills they prescribe are “evidence-based”.

This, he hopes, will make the evaluations more accurate in determining what works and what doesn’t.

I have to say there’s a reason that, to date, the evaluation and improvement of spending programs has been half-hearted to non-existent. It’s because ministers and their department heads aren’t keen to have people producing documentary evidence that they aren’t doing their job properly. And the last thing they’d want is for such a report to find its way to the public’s attention.

So Leigh’s is a worthy crusade. Let’s hope he gets somewhere. Actually, if evaluations became a regular thing, and led to regular improvements, ministers and mandarins would have a lot less to fear.

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Why your income tax refund is so much less than last year's

The political hardheads in Canberra are convinced much of the resounding No vote in the Voice referendum is a message from voters that they want the Albanese government fully focused on the cost of living crisis – which is really hurting – not wasting time on lesser issues.

I suspect they’re right. But if so, it’s the consequence of years of training by politicians on both sides that we should vote out of naked self-interest, not for what would be best for the country.

So, as the government switches to moving-right-along mode, expect to hear a lot from Anthony Albanese and Treasurer Jim Chalmers on how much they feel our pain and the (not so) many things they’ve done to ease the pain.

If that pain gets a lot worse – or just if the cries of anguish get a lot louder – expect to see the government doing more. If the Reserve Bank has miscalculated and, rather than just slowing to a crawl, the economy starts going backwards, expect to see the two of them spending, big time.

There’s no denying that, for most of us – though by no means everyone (see footnote) – it’s become a weekly struggle to make ends meet. Paradoxically, this is partly because of the post-lockdowns surge in many prices and partly because of the Reserve Bank’s efforts to stop prices rising so fast by ramping up interest rates.

Mortgage interest rates at present are not high by past standards. Two factors explain the pain from mortgages. First, thanks to higher house prices, the size of loans is much bigger than it used to be.

Second, after lowering interest rates to rock bottom during the lockdowns, the Reserve unexpectedly raised them by a huge 4 percentage points within just 13 months.

Households with big home loans, roughly a quarter of all households, have had their belts tightened unmercifully. Less usually, the third of households that rent have seen their rents rise by 10 per cent in the past 18 months; more than that in Sydney and some other capital cities (but not Melbourne, according to Australian Bureau of Statistics figures).

To this, add the big rises in the cost of petrol, electricity and gas, home insurance, overseas travel and various other things. Most people’s wages have not kept up with the rise in prices.

So yes, the cost of living crisis is no media exaggeration. And Albanese and Chalmers are full of empathy on all the elements I’ve listed. But there’s one other contribution to the crisis that many people will have stumbled across without understanding what was hitting them.

It’s below the radar because Albanese and Chalmers do not want to talk about it. Nor does the ever-critical opposition. As a consequence, most of the media have not woken up to it – with the notable exception of this august organ.

But according to Dr Ann Kayis-Kumar, a tax lawyer at the University of NSW, one of the most Googled questions in Australia in recent times is “Why do I suddenly owe tax this year?” A related question would be, why is my tax refund so much smaller than last year’s?

I’ll tell you (and not for the first time). Preparing for former treasurer Josh Frydenberg’s last budget, just before the election in May 2022, the Morrison government decided to increase the “low and middle income tax offset” (dubbed the LAMIngTOn) from $1080 to $1500, but not to continue it in the 2022-23 financial year.

Frydenberg made much of the increase, but governments that decide not to do things aren’t required to announce the fact. So Frydenberg didn’t. And Chalmers, watching on, said nothing.

The tax offset was a badly designed measure and all the insiders were pleased to see the end of it. I was too but, as a journalist, felt it was my job to tell the people affected what the politicians didn’t want them to know: that, in effect, their income tax in 2022-23 would be increased by up to $1500 for the year.

The 10 million taxpayers affected have been getting the unexpected news in just the past three months or so, after submitting their tax returns and discovering their refund was much less than last year’s, or had even turned into a small debt to the Tax Office.

The full tax offset went to those earning between $48,000 and $90,000 a year, which was most of the 10 million. Our friendly tax lawyer notes that the median taxable income in 2020-21 was $62,600, leaving $90,000 well above the middle.

Disclosure: Having paid off my house decades ago, and being highly paid (as are politicians), I haven’t felt any cost of living pain. Which makes me think that, when the people who are feeling much pain see Albo and Jimbo giving people like me a long-planned $9000-a-year tax cut next July, while they get chicken-feed, they might be just a teensy weensy bit angry.

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Chalmers should give the RBA an employment target

My trouble is I’m too nice. I’m too reluctant to tell people when I think they’re not trying hard enough. If I had time over again, I’d be tougher on nice young Treasurer Jim Chalmers and his white paper on employment.

The Albanese government wants to revitalise our resolve to achieve full employment, but didn’t have the courage to put a number where its mouth is and nominate a numerical target for employment.

I’ve been convinced of this by my former colleague, friend and most worrying competitor, Peter Martin, now of the universities’ The Conversation website.

Chalmers says the white paper is “ambitious”, but Martin isn’t convinced. “A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch,” Martin says.

He notes that the Keating government’s Working Nation statement did that in 1994. Released at a time when unemployment was almost 10 per cent, it specified a target unemployment rate of 5 per cent – an ambition that served as a beacon for decades.

With all the progress we’ve made in recent times, getting unemployment down to about 3.5 per cent for more than a year, Martin proposes setting a stretch target of 3 per cent, or even 4 per cent, as an aspiration.

Essentially, his argument for setting a target is that “what gets measured gets done”. And he’s dead right. This is not about economic theory, it’s about the practicalities of not just having ambitions, but making sure you have your best shot at achieving them.

In an ideal world, it would be enough to merely state your ambitions. But in a world of human fallibility, we need to impose on ourselves rules and targets to help us stick to our guns.

The target we’ve had for the rate of inflation – of 2 to 3 per cent, achieved on average over time – which we’ve had since 1996, has been no magic answer, but has been highly effective in leaving everyone in no doubt about whether we were on track or off track, and by how much.

But, as is widely agreed, in the day-to-day management of the economy, we have two objectives, not one: price stability (as measured by the inflation target) and full employment (as not measured by any target).

This lopsidedness leaves us constantly tempted to err on the side of low inflation at the expense of low unemployment. That’s the unspoken message the lack of a numerical target is sending the economic managers, particularly the Reserve Bank. As I’ve written before, this omission may secretly suit the interests of business.

So if the Albanese government’s professed determination to get full employment back up on its pedestal alongside price stability is to be meaningful, it must involve setting two targets, not one.

Last week, one of the nation’s leading labour market economists, Professor Jeff Borland of Melbourne University, joined this debate. He doesn’t agree that the white paper was the right place for the government to nominate a specific numerical target.

But he does believe the managers of the macroeconomy require a numerical target. To achieve what the white paper calls the “maximum sustainable level of employment”, he says, “you need to know what it is”.

Borland accepts the white paper’s criticism of the present way of estimating full employment, the NAIRU, or non-accelerating-inflation rate of unemployment, which “evolves over time, is difficult to measure, and does not capture the full potential of the workforce” – a reference to underemployment and “potential workers”, who want to work but aren’t actively seeking a job, and so aren’t counted in the labour force.

Borland adds another criticism, that “estimation of the NAIRU has become a ‘black box’, making it almost impossible to understand why it is at a particular level at any time.”

So Borland accepts the government’s argument that, rather than relying solely on estimates of the NAIRU, “policymakers need a broad suite of measures to gauge the extent of current underutilisation [of labour]” and whether the labour market is close to the current maximum sustainable level of employment.

This means Borland rejects Martin’s argument that unemployment can stay the measure of full employment because it moves in line with underemployment (having a part-time job, but not as many hours as you want).

“The rate of unemployment is no longer sufficiently informative about labour underutilisation – and labour underutilisation is what we should care about for policymaking,” Borland says.

However, he dismisses the claims of other critics that the new full-employment objective is bad news for keeping inflation under control.

He quotes what the white paper says on the matter. The objective is to “keep employment as close as possible to the current maximum sustainable level of employment that is consistent with low and stable inflation”.

The plain truth is that there has always been much potential for conflict between the goal of price stability and the goal of full employment. Life is full of such conflicts.

And a key teaching of economics is that when you encounter two conflicting but highly desirable objectives, the answer is never to fly to one extreme or the other, as humans are so often tempted to do.

No, economics teaches that what you should do is seek out the best available “trade-off” (combination) between the two, so you end up with as much of each as the circumstances allow.

The point is that making sure we have explicit targets for both is the best way to motivate the economic managers to find the best trade-off available. Both the white paper and the recent independent review of the Reserve Bank’s performance imply that, in recent years, we haven’t been finding the best trade-off between the two.

But there’s still time for Chalmers to nominate a numerical employment target. Although the Reserve’s act requires it to achieve full employment, the review recommended that, in the setting of interest rates, the full-employment objective be raised to the same status as the inflation target.

The place for this to happen is in the imminent “statement on the conduct of monetary policy”, the agreement between the treasurer of the day and the governor that the treasurer has newly appointed.

It was in the first of these agreements, in 1996, between Peter Costello and Ian Macfarlane, that the Howard government accepted the inflation target the Reserve had formulated as the government’s target.

In the upcoming agreement between Chalmers and new governor Michele Bullock, he could ask the Reserve to go away and come up with its own employment target.

But if he wants to be seen by the public as doing his job with diligence and the courage of his convictions, he will ask the new governor to accept an employment target the government has determined as the embodiment of the fine ambitions expressed in its white paper.

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