Lest we forget the unknown public servant, working to inform us

Have you ever wondered how much taxpayers’ money is wasted by our politicians and public servants? Do you hope that every dollar governments spend is fully accounted for?

And would you like it to be made public not just how much was spent on public servants’ wages, rent, grants, paperclips and other administrative expenses, but how much was being spent on each of the individual programs within education, health, police, courts, roads and all the other government departments?

Better yet, would you like to see what were the outcomes of all that spending on this program and that? That is, hard evidence on whether they were achieving their stated purpose, and by how much things were getting better or worse.

You don’t have to be keen personally to spend hours poring over the books to believe that such information must be made available for others to study: the government’s auditor-general, of course, but also the opposition, the media, nosey investigative reporters, academic experts, and even the special interest groups.

I’m pleased to tell you that all those things you’ve just agreed we need are being provided. But I need to remind you that 40 years ago, they weren’t.

In those days, government financial reports – state and federal – were a dog’s breakfast of facts and figures. If you were able to form a conclusion from them, it would probably have been wrong.

The accounts concealed about as much as they revealed. This was partly because no one had made the effort to make them more reliable and informative. And partly because this laxity made it easier for bureaucrats and politicians to fudge the figures, making things look better than they were.

But we’ve had much improvement since those bad old days. Many people have played a part in this reform, and much has happened under pressure from professional accounting bodies, the International Monetary Fund and the UN Statistical Commission.

But if you were to single out one person who drove most of the many improvements over many years, it would be Don Nicholls.

Never heard of him? That’s the way he wanted it. He was a shy, self-effacing Treasury officer, who wore a cardigan in the office and always ate a long pink iced bun for lunch. He joined the NSW Treasury straight from school in 1948, he retired in 1990, and he has just died, at 93.

If he sounds boring, know this: when he told his first wife, a writer, that writing seemed easy, she challenged him to enter the SMH short story writing competition. He won it with a story about cricket.

Some people assume only second-class minds join the public service. They’re wrong, and never more so than in Nicholls’ case. He went to a selective school, Fort Street High (one of two I went to), gained an economics degree and an accounting qualification while working and, a year after he retired, he published the tome Managing State Finance, which became the Treasury bible.

Many public servants are intent on ensuring things are done the way they always have been, but Nicholls had a strategic mind and was always thinking of ways things could be improved.

These days, all the states produce multiple performance indicators for their many activities, on a uniform basis, collated and reported annually by the federal Productivity Commission.

Nicholls introduced “program budgeting” to Australian government accounting, and he also consolidated the NSW government’s accounts so they showed the “general government” sector separately from all the businesses it owned, plus a balance sheet outlining the state’s assets and liabilities. Money hidden from view in “special deposit accounts” was brought into the open.

Before Nicholls, the government didn’t even know the value of all the buildings, businesses and land it owned. Since the year dot, businesses have used “accrual” accounting to accurately match the amount they earned during a year with their expenses during that year.

It wasn’t introduced to state and federal government accounting until about 2000. Nicholls played a big part in this, insisting on uniform rules for the measurement of budget deficits and surpluses. (Federal Treasury, however, has stuck with the old “cash” accounting, so it can still fudge the figures.)

Nicholls’ influence spread throughout Australia because he was asked to conduct separate independent audits of the finances of the NSW, Victorian, Tasmanian and South Australian governments. He was, for a time, Victoria’s Treasury secretary.

A lot more Australians are indebted to his influence than they know.

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We can't escape a carbon tax, which is good news, not bad

When economists are at their best, they speak truth to power. And that’s just what two of our best economists, Professor Ross Garnaut and Rod Sims, did this week. In their own polite way, they spoke out against the blatant self-interest of our (largely foreign-owned) fossil fuel industry.

They sought to counter the decade of damage done by the former federal Liberal government which, for short-sighted political gain, engaged in populist demonisation of Julia Gillard’s carbon tax.

And, by their willingness to call for a new “carbon solution levy”, they shamed the present Labor government, which dare not even mention a carbon price and isn’t game to take more than baby steps in the right direction, for fear of what Peter Dutton might say.

But the two men’s message is actually far more positive than that. In launching a new think tank, the Superpower Institute, they pursue Garnaut’s vision of how we can turn the threat of climate change into an opportunity to revitalise our economy, raising our productivity and our living standards.

Sims, former boss of the competition watchdog, says that, following a decade of stagnant production per person, real wages and living standards, Australia’s full participation in the world’s move to achieve net-zero global emissions is the only credible path to restoring productivity improvement and rising living standards.

Climate change is a threat to our climate, obviously. But it’s also a threat to our livelihood because Australia is one of the world’s largest exporters of fossil fuels. Garnaut points out that, as the rest of the world moves to renewables, two of our three largest export industries will phase out.

This will send our productivity backwards, he notes – as all the big-business people reading us lectures about productivity never do.

The good news, however, is that “putting Australia back on a path to rising productivity and living standards doesn’t mean going back to the way things were”. It’s now clear that “Australia’s advantages in the emerging zero-carbon world economy are so large that they define the most credible path to restoration of growth in Australian living standards.”

Garnaut says that “In designing policies to secure our own decarbonisation, we now have to give a large place to Australia’s opportunity to be the renewable energy superpower of the zero-carbon world economy.”

Other countries do not share our natural endowments of wind and solar energy resources, land to deploy them, as well as land to grow “biomass” – plant material – sustainably as an alternative to petroleum and coal for the manufacture of chemicals.

From a cost perspective, we are the natural location to produce a substantial proportion of the products presently made with large carbon emissions in North-East Asia and Europe.

The Superpower Institute champions a “market-based” solution to the climate challenge. We shouldn’t be following the Americans by funding the transition from budget deficits, nor become inward looking and protectionist.

Rather, everything that can be left to competitive markets should be, while everything that only governments can do – providing “public goods” and regulating natural monopolies – should be done by the government.

Sims notes a truth that, since Tony Abbott’s successful demonisation of the carbon tax, neither side of politics wants to acknowledge, that markets only work effectively if firms are required to pay the costs that their activities impose on others and, on the other hand, if firms are rewarded for the benefits their activities confer on others.

When the producers of fossil fuels don’t bear the cost of the damage their emissions of greenhouse gasses do to the climate, and the producers of renewable energy don’t enjoy the monetary benefit of not damaging the environment, these two “externalities” – one bad, the other good – constitute “market failure”.

And the way to make the market work as it should is for the government to use some kind of “price on carbon” – whether a literal tax on carbon, or its close cousin, an emissions trading scheme – to internalise those two externalities to the prices paid by fossil fuel producers and received by renewables producers.

The price on carbon that Garnaut and Sims want, their “carbon solution levy”, would be imposed on all emissions from Australian produced fossil fuel (whether those emissions occurred here or in the country that imported the fuel from us) and from any fossil fuel we imported.

Only about 100 businesses would pay the levy directly, though they would pass it on to their customers, of course. It would be levied at the rate of recent carbon emission permits in the European Union’s emissions trading scheme.

Imposing the levy on all our exports of fossil fuel, rather than just our own emissions, makes the scheme far bigger than the one Abbott scuttled in 2014. It would raise about $100 billion a year.

But it’s bigger to take account of the Europeans’ “carbon border adjustment mechanism” which, from 2026, will impose a tax on all fossil fuels imported from Australia that haven’t already been taxed.

Get it? If we don’t tax our fossil fuel exports, the Europeans or some other government will do it for us – and keep the proceeds.

What will we do with the proceeds of our levy? Most of them will go to a “superpower innovation scheme” that makes grants to support early investors in each of our new, green export industries. In this way it will lower the prices of carbon-free steel, aluminium and other products, helping them compete against the equivalent polluting products. The positive externality internalised.

Garnaut says we need to have the new levy introduced by 2031 at the latest. But the earlier it can be done, the more of the levy’s proceeds can be used to provide cost-of-living relief of, say $300 a year, to every household and business, as well as fully compensating for the levy’s effect on electricity prices.

Thank heavens some of our economists are working on smart ways to fix our problems while our politicians play political games.

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Want better productivity? Start by ensuring our kids can read

The trouble with our economy is that there are so many things needing to be fixed, it’s hard to know where to start. And so many of them are urgent we don’t have time to fix things one at a time. But since the economy consists simply of all the workers and all the consumers – that is, all the people – one of my guiding principles is that governments should manage the economy for the many, not the few.

This may seem obvious but, during the decades of “neoliberalism” from which we’re still emerging, it became far from obvious. Neoliberalism is the doctrine that what’s good for BHP is good for Australia. We got used to listening with rapt attention when the top 100 or so chief executives told us what needed to be done to improve productivity.

It took us too long to realise that their idea of a well-functioning economy was one where their incomes grew considerably faster than ours. They’re still at it, not having realised that we’ve stopped listening.

They’re arguing again that the most important thing we need is major tax reform – which, when you inquire, turns out to mean they’d pay less tax while we paid more.

No. I’m far more persuaded by this week’s report from Dr Jordana Hunter and Anika Stobart of the Grattan Institute, arguing we should start at the bottom, not the top, and make sure all our kids become confident readers as early as possible in their time at school.

If you’re building a house, you start by laying a firm foundation, and education should work the same way. Hunter says that in no area of education is improvement more urgent than reading. “Reading proficiency is a foundational skill that unlocks the broader curriculum and empowers young people to grasp opportunities for themselves,” she says.

Stobart says, “When children do not read fluently and efficiently in early primary school, it can undermine their future learning across all subject areas, harm their self-esteem, and limit their life chances.”

Students who struggle with reading are more likely to fall behind their classmates, become disruptive, and drop out of school. They are more likely to end up unemployed, or in poorly paid jobs, we’re told.

Why are they telling us this? Because last year’s NAPLAN testing results show that one in three Australian primary and secondary students cannot read proficiently. For Victorians, the news is better, sort of: a mere one in four.

But for Indigenous students, students from disadvantaged families, and students in regional and rural areas, it’s more than half. (Which makes you wonder why Barnaby Joyce and his National Party mates don’t have a lot more to say on public school funding.)

This appalling deficiency hasn’t just happened, it’s been going on for years without anyone making a fuss about it. Why is it happening? Hunter says the reason most of those students can’t read well enough is that we aren’t teaching them well enough.

“A key cause,” the report says, “is decades of disagreement about how to teach reading. But the evidence is now clear. The ‘whole-language’ approach, which became popular in the 1970s, doesn’t work for all students [including someone in my family years ago]. Its remnants should be banished from Australia’s schools.

“Instead, all schools should use the ‘structured literacy’ approach right through school, which includes a focus on phonics in the early years. Students should learn to sound out the letters of each word.”

Now, let’s be clear. I like teachers – especially those who tell students they must read my columns. So this is no attack on our hard-pressed teachers.

“The real issue here,” Hunter says, “is, are governments doing enough to set teachers up for success? The challenge is making sure best practice is common practice in every single classroom.”

But a key improvement is regular classroom testing, to ensure kids who are struggling get identified early and given extra help to catch up.

That, of course, takes extra money. But federal Education Minister Jason Clare is renegotiating the school funding agreement with the premiers. “The reading wars are over. We know what works,” he’s said. “The new agreement we strike this year needs to properly fund schools and tie that funding to the sort of things that work. The sort of things that will help children keep up, catch up and finish school.”

Economists often worry that the things you could do to make the economy fairer come at the expense of the economic efficiency that improves productivity. But ensuring our kids get off to a good start in life – including through early education, two years of pre-school and good literacy and numeracy – ticks both boxes.

It gives our kids better lives, it makes our workforce better skilled and more valuable, and it saves the budget a bundle in having fewer people who need special help.

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Let's stop using interest rates to throttle people with mortgages

What this country needs at a time like this is economists who can be objective, who’re willing to think outside the box, and who are disinterested – who think like they don’t have a dog in this fight.

On Friday, Reserve Bank governor Michele Bullock, with her lieutenants, made her first appearance as governor before the House of Reps economics committee.

See if you can find the logical flaw in this statement she made: “The [Reserve’s] board understands that the rise in interest rates has put additional pressure on the households that have mortgages. But the alternative of lower interest rates and high inflation for a prolonged period would be even worse for these households, as well as all the households without mortgages.”

Sorry, that’s just Bullock doing her Maggie TINA Thatcher impression, mindlessly repeating the assertion that “There Is No Alternative”. Nonsense. There are various alternatives, and if economists were doing their duty by the country, they’d be talking about them, evaluating them and proposing them.

What’s true is that the Reserve has no alternative to using interest rates to slow demand. Some economists can be forgiven for being too young to know that we didn’t always rely mainly on interest rates to fight inflation, just as we didn’t always allow the central bank to dominate the management of the economy.

These were policy changes we – and the rest of the rich world – made in the early 1980s because we thought they’d be an improvement. In principle, now we’re more aware of the drawbacks of giving the central bank dominion over macroeconomic management, there’s no reason we can’t decide to do something else.

In practice, however, don’t hold your breath waiting for the Reserve to advocate making it share its power with another authority. Nor expect the reform push to be led by economists working in industries such as banking and the financial markets, which benefit from their close relations with the central bank.

What those with eyes should have seen in recent years is that relying so heavily on an instrument as blunt as interest rates is both inequitable and inefficient. It squeezes the third of households with mortgages – or the even smaller proportion with big mortgages – while hitting the remaining two-thirds or more only indirectly.

It’s largely by chance that the Reserve’s need to jam on the demand brakes has coincided with the worst shortage of rental accommodation in ages, thereby spreading the squeeze to another third of households. Had this not happened, the Reserve would have needed to bash up home buyers even more brutally than it has.

Clearly, it would be both fairer – and thus more politically palatable – and more effective to use an instrument that directly affected a much higher proportion of households. This should mean the screws wouldn’t have to be tightened so much, another advantage.

One obvious alternative tool would be to temporarily move the rate of the goods and services tax up (or, at other times, down) a percentage point or two.

Another alternative, one I like, is to divide compulsory employer superannuation contributions into a part permanently set at 11 per cent, and a part that could be varied temporarily between plus several percentage points and minus several points.

This would leave workers less able to keep spending (or more able to spend), as the managers of demand required to stabilise both inflation and unemployment.

Its great attraction is that it involves the government temporarily fiddling with people’s ability to spend, without actually taking any money from them. Surely, this would be the least politically painful way to manage demand.

Experience with central-bank dominance has shown us one big advantage: the economic car has been driven markedly better when the brake and the accelerator are controlled by econocrats independent of the elected government.

But this simply means we’d have to set up an independent authority to control all the instruments of macro management, whether monetary or fiscal.

Not all our economists have been too stuck in the mud of orthodoxy to think these new thoughts. They were canvased by professors Ross Garnaut and David Vines in their submission to the Reserve Bank inquiry – which, predictably, was brushed aside by a panel of economists anxious to stay inside the box.

A century ago, Australians were proud of the way we showed the world better ways of doing things, such as the secret ballot and votes for women. These days, our economists are dedicated followers of international fashion.

This means the country that should be leading the way to better tools to manage demand will wait until it becomes fashionable overseas. Why should we be first? Because our unusual practice of having mainly variable-rate home loans means our use of the interest-rate tool bites a lot harder and faster, thus making our monetary policy a lot blunter than theirs.

Economists may not fret much about how badly some punters are hurting as the economic managers rapidly correct the consequences of their gross miscalculations – the Reserve played a big part in the excessive stimulus during the COVID lockdowns – but one day the politicians who carry the can politically for these miscalculations will revolt against the arrogance of their economic gurus.

Reserve Bank governors – and, in earlier times, Treasury secretaries – privately congratulate themselves for being the last backstop protecting the nation against inflation. When no one else cares, they do. When no one else will impose a cost of living crisis on spendthrift consumers, they will.

Don’t you believe it. If they cared as much as they think they do, they’d care a lot more about effective competition policy. But when the economists leading the Australian Competition and Consumer Commission – Allan Fels and later, Rod Sims – were battling to get more power to reject anticompetitive mergers, they got precious little support from their fellow economists.

While the (Big) Business Council was lobbying privately to retain the laxity, backed up on the other side by a few Labor-Party-powerful unions that had done sweetheart deals with their big employers, the Reserve and Treasury were missing in action.

The people at the bottom of the inflation cliff boast about the diligence of their ambulance service, while doing nothing to help the people at the top of the cliff trying to erect a better safety fence.

If you were looking for examples of oligopolies with pricing power, you could start with the big four banks. If you were looking for examples of “regulatory capture” – where the bureaucrats supposed to be regulating an industry in the public interest get sweet-talked into going easy – you could start with the Reserve and banking (with Treasury not far behind).

In the natural conflict between the goals of financial stability and effective competition, the Reserve long ago decided we’d worry about competition later.

But the more concentrated we allow our industries to become, the more often the Reserve will have to struggle to control inflation surges, and the harder it will need to bash home-buyers on the head.

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You can (partly) blame cost-of-living crisis on greedy businesses

The nation’s economists and economist-run authorities such as the Reserve Bank have not covered themselves in glory in the present inflationary episode. They’ve shown a lack of intellectual rigor, an unwillingness to re-examine their long-held views, and a lack of compassion for the many ordinary families who, in the Reserve’s zeal to fix inflation the blunt way, have been squeezed till their pips squeak.

There’s nothing new about surges of inflation. Often in the past they’ve been caused by excessive wage growth, where economists have been free with their condemnation of greedy workers. But this one came at a time when wage growth was weak and barely keeping up with prices.

What economists in other countries wondered was whether, this time, excessive growth in profits might be part of the story. Separate research by the Organisation for Economic Co-operation and Development, the International Monetary Fund, the Bank for International Settlements, the European Commission, the European Central Bank, the US Federal Reserve and the Bank of England suggested there was some truth to the idea.

But if the Reserve or our Treasury shared that curiosity, there’s been little sign of it. Rather, when the Australia Institute replicated the European Central Bank’s methodology with Australian data and found profit growth did help explain our inflation rate, the Reserve sought to refute it with a dodgy graph, while Treasury dismissed it as “misleading” and “flawed”.

One leading economist who has been on the ball, however, is Professor Allan Fels, a former chair of the Australian Competition and Consumer Commission, whose experience of competition and pricing issues goes back to the year before I became a journalist.

In his report this week on price gouging and unfair pricing practices, commissioned by the Australian Council of Trade Unions, he concluded that “business pricing has added significantly to inflation in recent times”.

Fels says his report is “fully independent” of the ACTU, which did not try to influence him. Considering his authority in this area, I have no trouble believing it.

“ ‘Profit push’ or ‘sellers’ inflation’ has occurred against a background of high corporate concentration and is reflected in the surge of corporate profits and the rise in the profit share of gross domestic product,” he finds.

“Claims that the rise in profit share in Australia is explained by mining do not hold up. The profit share excluding mining has risen and [in any case,] energy and other prices associated with mining have been a very significant contributor to Australian inflation,” he says.

Fels says there has been much discussion about inflation and its causes – including monetary policy and fiscal policy, international factors, wages, supply chain disruption and war, but “hardly any discussion that looks at actual prices charged to consumers, the processes by which they are set, the profit margins and their possible contribution to inflation”.

His underlying message is that there are too many industries in Australia which are dominated by just a few huge companies – too many “oligopolies” – which limits competition and gives those companies the ability to influence the prices they can charge.

“Not only are many consumers overcharged continuously, but ‘profit push’ pricing has added significantly to inflation in recent times,” he says, nominating specifically supermarkets, banks, airlines and providers of electricity.

Fels says, “some of Australia’s largest businesses, often [those selling such necessities that customers aren’t much deterred by price rises], are maintaining or increasing margins in response to the global inflationary episode”.

He identifies eight “exploitative business pricing practices” – tricks – that enable the extraction of extra dollars from consumers in a way that wouldn’t be possible in markets that were competitive, properly informed, and that enabled overcharged customers to switch easily from one business to another.

First, “loyalty taxes” set initial prices low and then sharply increase them in later years when customers can’t easily detect, question, or renegotiate them, and where the “transaction costs” of changing to another firm are high. This trick can be found in banking, insurance, electricity and gas.

Second, “loyalty schemes” are often low-cost means of retaining and exploiting consumers by providing them with low-value rewards of dubious benefit.

Third, “drip pricing” occurs when firms advertise only part of a product’s price and reveal other costs as the customer continues through the purchasing process. This trick is spreading in relation to airlines, accommodation, entertainment, pre-paid phone charges, credit cards and other things.

Fourth, “excuse-flation” occurs when general inflation provides camouflage for businesses to raise prices without justification. This has been more prevalent recently. As the inflation rate starts falling, excessive inflation expectations and further cost increases can be built in to prices.

Fifth, “confusion pricing” involves confusing customers with myriad complex price structures and plans, making it difficult to compare prices and so dulling price competition. This is occurring increasingly in mobile phone plans and financial or maintenance service contracts.

Sixth, asymmetric or “rockets and feathers” pricing is a big deal now the rate of inflation is falling. When a firm’s costs rise, prices go up like a rocket; when its costs fall, prices drift down slowly like a feather.

Fels says this trick can be very profitable for businesses. The banks have long been guilty of this stunt, yet I can’t remember a Reserve Bank governor ever calling it out.

Seventh, “algorithmic pricing” is where firms use algorithms to change prices automatically in response to what their competitors are doing. Fels wonders whether this reduces price competition and is analogous to the way now-illegal cartel pricing worked.

Finally, “price discrimination” involves charging different customers different prices for the same product, according to what the firm deduces a particular customer is “willing to pay”. The less competition firms face, the easier it is for them to play this game.

That so few economists and econocrats have been willing to think about these issues doesn’t speak well of their profession’s integrity. If they won’t speak out about businesses’ failings, why should we trust what they do tell us?

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Fifty years ago, I found my dream job – and I’m not done yet

If a genie ever sprang from a bottle and offered me one wish, it would be to have a job as a columnist on the biggest and best newspaper in the country, The Sydney Morning Herald. If he offered me a second wish, it would be to have my columns also published in the country’s other great newspaper, The Age.

For the first seven years after I left school, I worked to achieve my dream of becoming a chartered accountant. Not any old accountant, a chartered accountant. Unfortunately, by the time I achieved that exalted qualification, I’d realised I didn’t enjoy being an accountant and wasn’t particularly good at it.

I had a premature midlife crisis at the age of 24 and, after some casting around, on February 7, 1974, found myself as an over-aged cadet journalist on the Herald.

It took me only a few weeks to realise I’d stumbled into the only job I’d ever want. One I was good at and found greatly interesting and rewarding. I’d dropped a lot of money to become a mere cadet, but that didn’t matter. I was the square peg that had fallen into a square hole.

I wasn’t much good as a reporter, but the old boys who ran the Herald had the wit to steer me towards the feature and column writing I was good at. After three years, and having written many unsigned editorials, I got my first column. A year later, I was made economics editor, and by 1983, I had the three columns a week that I’m still writing, on the same day and in the same section of the Herald, 40 years later.

That’s all you need to know to see why I’ve stayed in my job at the Herald for 50 years, ignoring the usual retirement age when it flashed past 11 years ago. I’ve never been able to think of another paper I’d prefer to work for or another job I’d prefer to have.

Editor of the Herald? I have a lot more fun than he or she does, with much less responsibility.

Doing it my way

Perhaps because I was older and starting a second career, or perhaps because my upbringing in that strange uniformed Protestant sect, the Salvos, had made me a bit of a loner, I decided to join Frank Sinatra and do it my way.

I wouldn’t try to impress my peers, or even the editor, but would write a column that better met what I thought the readers were looking for. Later, I realised this could be my moral compass: Serve the Reader.

Because nature had intended me to be a teacher, I decided that, while all the others were off chasing scoops, I’d concentrate on explaining to the reader what on earth it all meant. I’d try to figure out how the economy worked, and when I’d got something figured, I’d tell all.

Because economics has so much potential to be boring, I’d pull every trick I could to make it simple and readable. I’d write in the first person, in an easy, conversational style. I’d even put myself and my doings in the story.

Because the world gets ever-more complex, I’d try to ensure the young people we hired to write about the economy had some formal education in the topic. Then I’d teach ’em the tricks of the trade. I’ve had the privilege to mentor a couple of dozen of the Herald’s ablest recruits.

An unrecognisable economy

Over 50 years, I’ve written well over 5000 columns, and worked for 16 editors – one of whom lasted for about 24 hours. I’ve covered 50 federal budgets, 19 federal elections, and seen 11 prime ministers and 16 treasurers come and go, starting with Gough Whitlam and Frank Crean, Simon’s dad.

In that time, I’ve seen huge changes in the economy, in politics and economic policy, not to mention – which I will – changes at the Herald. One of the latter is that, these days, newspapers prefer to refer to themselves as “mastheads”, in recognition that far more of our readers do so on our website than on dead trees.

I want to recall some of those changes, so let’s start with the shape of the economy. If a Rip Van Winkle fell asleep in 1974 and woke in 2024, I doubt he’d recognise our economy.

Every economy is changing continuously, partly because our customs and practices change and partly because government economic policies change. But the greatest source of change is advances in technology, and the past 50 years have seen the spread of computers, a revolution in telecommunications and the birth of the internet.

When I was first in the workforce, everyone was paid weekly, in notes and coins stuffed into little brown envelopes. Any money you didn’t want to spend immediately had to be taken to your particular branch of your bank, with your deposit recorded by hand in a little passbook.

City workers would go out in their lunch hours to pay their utility bills in cash at the company’s office. Bills came in the mail, and you’d write a cheque and post it back. In 1974, the banks combined to introduce the first credit card, Bankcard.

You had to beg your bank to lend you less than you really needed to buy a home. Until the Whitlam government’s Trade Practices Act of 1974, it was legal for businesses to collude in setting the prices they charged, or agree to carve up the territory between them, limiting competition.

The prices of bread, eggs and petrol were set by the state government. You bought your electricity from a government monopoly. Annual inflation of consumer prices averaged 10 per cent in the 1970s and 8 per cent in the ’80s.

People stay a lot longer in the education system than they used to, and emerge with higher qualifications. This is related to the much bigger role that women now play in the paid workforce. More girls are staying longer in education, doing better than boys academically, and getting a growing share of the good jobs.

Over the past 50 years, the size of Australia’s workforce has far more than doubled, to well over 14 million, while the industry structure of the economy has changed greatly. In round figures, agriculture’s share of total employment has fallen from 7 per cent to 2 per cent. Despite successive resource booms, mining’s share has risen only from 1 per cent to 2 per cent.

Manufacturing’s share has fallen markedly from 22 per cent to 6 per cent. With construction’s share unchanged at about 9 per cent, that means the services sector’s share has jumped from 61 per cent to 81 per cent – something that has favoured the increased employment of women.

The huge decline in the proportion of workers needed to grow, dig up or manufacture goods is explained by continuous advance in labour-saving technology. But where have the many additional jobs in the services sector come from? They’re mainly in health and aged care, education, and professional, scientific and technical services.

My career at the Herald has seen many major changes in government policies, though most of these presumed “reforms” occurred long ago under the Hawke and Keating governments. First came the decision in December 1983 to allow the Australian dollar to float, then the deregulation of the banks and, later, many other industries.

The removal of the high import duties protecting our manufacturing industries was begun under Bob Hawke, but completed under John Howard. But this does less to explain the declining employment in manufacturing than many imagine. Automation and the rise of China should get more of the blame – or, for consumers, the credit.

The privatisation of government-owned businesses began under Hawke-Keating, but continued under Howard and state governments of both colours. The outsourcing of government-provided services, a much more debatable “reform”, continues to this day.

For many of my early years as a commentator, our centralised wage-fixing system delivered pay rises of the same percentage and on the same day to virtually every worker in the country. People like me wrote unceasingly about the evils of excessive wage rises.

At the time, I thought Keating’s move to wage bargaining at the enterprise level a big improvement. Now, having seen the way employers have used the less regulated system to chisel workers’ wages, I’m less sure about that.

Do you realise that in 1974, all capital gains and employee fringe benefits were untaxed? Keating’s reforms in 1985 changed that. And Howard’s introduction of the goods and services tax in 2000 gave us the same sensible indirect-tax system most other rich countries had long had.

We had spent a quarter of a century trembling at the thought of such a tax since it was first proposed in the Asprey report of 1975. Today, it’s no big deal.

Labor gets the credit for introducing our first universal healthcare system, and compulsory employee superannuation which, more than 30 years later, ensures most couples will live more comfortably in retirement than they would under just the age pension.

Palace revolutions and digital disruption

But now, a remembrance of a topic no other people still working on the Herald can say they lived through at close quarters: the many changes at this august organ.

I’ve hung around long enough to see all the palace revolutions that have progressively turned this 193-year-old paper from being owned by the two branches of the Fairfax family – each led by cousins, Sir Warwick and Sir Vincent – to now making up about a third of the Nine Entertainment media conglomerate.

I wasn’t here long before, at the urging of management, the ageing Sir Warwick was replaced as company chairman by his elder son, James. James was far less interventionist, allowing the editors of the various papers to make their own decisions and leading, I believe, to Fairfax’s Golden Age.

But the retirement of a powerful general manager soon saw the Herald’s new editor-in-chief, David Bowman – who’d done most to advance my career – deposed and replaced by the former managing editor of The Australian Financial Review and The National Times, Vic Carroll.

Urged on by the new chief editorial executive, Max Suich, Carroll set about belatedly dragging the Herald into the modern age. I hate to admit it, but the great transformation of Australia’s broadsheet newspapers was spurred by the advent in 1964 of Rupert Murdoch’s startlingly clean, good-looking and energetic national broadsheet, The Australian, when I was still a schoolboy. Under its great reforming editor Graham Perkin, The Age was the first quality paper to take up the challenge.

When I joined in 1974, and until Carroll began his changes in 1980, the Herald’s failure to move with the times was reflected in its declining circulation. It saw its mission as ensuring news was reported the way it always had been.

Its language was very formal and its reporting largely devoid of explanation, context, interpretation or emotion. I concluded that the chief subeditor saw his job as taking a story and draining all the colour out of it, to make it fit for publication.

Most news stories were anonymous, being “by a staff correspondent”. We were committed to being “a paper of record”, which meant keeping stories short so as to cram in as many as possible. This produced a paper that was black and white in both senses and visually messy. It simply failed to match the competition coming from radio and, particularly, television.

Carroll changed all that. While he was at it, he reformed me – more with kicks than pats on the head. He freed me from my self-imposed duty to ensure my economics fitted with the proprietors’ commitment to endorsing conservative governments before elections.

Since Carroll, my opinion really is my opinion. He was, without doubt, the best of all the editors I’ve worked for.

Not many years later, we were hit by ructions within the Fairfaxes, as Sir Warwick’s other son by a different marriage, Young Warwick, sought to avenge his father and please his mother by borrowing heavily to buy up all the company’s shares, paying far more than they were worth.

His new managers closed our afternoon paper, The Sun, and sold off whatever assets they could, but it was no use and by 1991 the company was in receivership.

The business continued to trade as normal, and remained profitable, but not sufficiently profitable to cover all the money Young Warwick had borrowed to buy it.

Kerry Packer’s plans to buy the business failed to eventuate – thanks to the machinations of some financier called Malcolm Turnbull – and the Canadian media baron Conrad Black ended up with a minority but controlling interest.

Keating wouldn’t allow a foreigner to increase his interest in the company, so Black eventually sold out. Like so many Australian companies, Fairfax’s ownership ended up being shared between a host of superannuation funds and other “institutional investors”, making it a plaything of the stock exchange.

All this, however, was nothing compared with the challenge from the digital revolution. At first, the move from typewriters to screens, and from “hot metal” to digital offset printing was just a nice money-saver. We were able to greatly reduce the number of printers we employed, move our printing plant to the outer suburbs and escape all the “restrictive work practices” – lurks and perks – of the militant printers’ union.

But then we – like every newspaper – discovered that the rise of the internet had taken away most of our advertising revenue. Before the revolution, every big city had a broadsheet newspaper with a virtual monopoly over classified advertising. A monopoly it exploited to the full.

This “river of gold” kept Fairfax profitable, even though most of the money was used to employ more journalists and compete for the best journalists by paying them well.

But when it became obvious that people wanting to sell houses or cars, or fill job vacancies, could do much better by advertising on the net, the river of gold ran dry.

From the beginning, newspapers’ business plan had been strange but simple: use your news to gather an audience, then charge advertisers for access to your audience. To maximise the audience, keep the paper’s cover price nominal.

At first, we – and other newspapers around the world – just tried to move the same formula online. We put all our editorial content online and freely available, hoping to attract enough digital advertising. We tried using “clickbait” to get as many people momentarily clicking on our site as we could.

It didn’t work. Eventually, we realised that almost all the digital advertising revenue was being scooped up by Google and Facebook. Following the lead of The New York Times, we moved to putting much of our online content behind a paywall and charging readers a subscription for access to it.

Since the internet remains replete with free news, it’s a business model that works only if your news is different and better than the free stuff.

I was never confident a company as old as Fairfax could bring itself to make the radical changes necessary to survive in the strange new world of digital news. Without the classifieds’ river of gold, we had to lose a lot of journalists, cut a lot of costs and change a lot of practices.

I give much credit to former Fairfax chief executive Greg Hywood – a former editor-in-chief of the Herald, who I’ve known since we worked in adjoining offices in the Canberra press gallery in 1975 – for ensuring the survival of the Herald and other great mastheads.

Some other chief executive might have secured the company’s survival by ditching all those terrible old newspapers, but Fairfax without its mastheads was of no attraction to a life-long journo like Hywood.

Ably assisted by Antony Catalano, who belatedly established Domain to capture a large chunk of the online property classifieds market, Chris Janz, who devised the mastheads’ rescue plan, and Michael Stevens, whose one goal is to prolong the life of our print editions (and is the man to credit – or blame – for attracting all those Harvey Norman ads), Hywood secured the future of the Fairfax mastheads.

The digital subscription model is working – these days, the meaning of the word “subs” has changed from subeditors to subscriptions – and as we tighten our paywall, it works even better.

At one level, our valuable sources of non-news revenue, Domain, and our joint venture with Nine in the Stan streaming video business, helped ensure the company stayed profitable.

At another level, however, Hywood knew that, without a family with majority control, we were vulnerable to some sharemarket raider keen to buy our side assets and happy to dump our reason for being.

His last act was to find another, bigger company to which he could marry us off, and so protect us from hostile takeover. It needed to be another media company, one that was a good fit with the assets we brought to the marriage, and one that understood the need to preserve the independence and reputation of the classy dame it was acquiring.

Hywood chose well. It’s been a happy, respectful marriage. Our many media competitors have banished the word Fairfax and delight in demeaning us as “the Nine newspapers”.

Those more susceptible to conspiracy theories see us as controlled by daily talking points issued by the chairman of Nine Entertainment, Peter Costello.

Nothing of the sort. I guess I’ll have to retire some day, but I don’t expect unhappiness with our owners to be any part of my reason for hanging up my boots.

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Are the supermarket twins too keen to raise their prices?

The cost-of-living crisis has left many convinced the two big supermarket chains – known to some as Colesworth – have been “price gouging” – raising their prices without justification. “Gouging” is a rude, pejorative phrase that would never cross an economist’s lips (nor mine), but economic theory does say that, when an industry is dominated by just a few huge companies, this will give them the power to manipulate prices to their own advantage.

But anecdotes and even economic theory are one thing, hard evidence is another. And knowing what to do about it is a third. So it’s good that last Friday, Treasurer Jim Chalmers launched a full inquiry into supermarket prices by the Australian Competition and Consumer Commission. Chalmers said this was “about making our supermarkets as competitive as they can be so Australians get the best prices possible”.

The inquiry, which will take a year, will include an examination of online shopping, the effects of loyalty programs and how advances in technology are affecting competition.

The competition watchdog’s chair, Gina Cass-Gottlieb, said the commission will use its compulsory information-gathering powers to collect financial details from the supermarket giants.

The government has also commissioned a former Labor minister and economist, Dr Craig Emerson, to review the effectiveness of the “food and grocery code of conduct”, introduced in 2015 to stop the big supermarkets from using their buying power to extract unreasonably low prices from their suppliers, particularly farmers.

The code is voluntary and has no way of punishing bad behaviour, so hasn’t worked well. It’s drawn few complaints from suppliers, probably because they’re afraid of retaliation by Colesworth. Only if it’s made compulsory and given teeth is it likely to improve the farmers’ lot.

Our groceries market is one of the most concentrated in the developed world. Woolworths has 37 per cent of the market and Coles has 28 per cent, leaving Aldi with 10 per cent and Metcash (wholesaler to IGA stores) with 7 per cent. So our two giants’ combined share of 65 per cent compares with Britain’s top two’s share of 43 per cent. In the United States, the four largest chains make up just 34 per cent of the market.

While we wait for the competition watchdog’s report, what do we know about the chains’ behaviour?

The report of an unofficial inquiry into price gouging and unfair pricing practices, commissioned by the ACTU from a former competition commission chair, Professor Allan Fels, will be published on Wednesday.

But we know from a letter Fels sent to Chalmers last month what it will say about supermarkets. Fels said the inquiry had been inundated with concerns from experts and regular Australians alike on the prices set by the chains.

Fels found that neither Coles nor Woolworths suffered declines in profit during the pandemic because their services had been deemed essential. Since then, however, both have increased their profit margins, thanks to weak competition and their ability to delay passing on any cost reductions.

Fels noted that high prices, including co-ordinated price increases between the two, aren’t actually prohibited by competition law, except where there is unlawful communication or agreement between the firms. (Which, of course, doesn’t prohibit tacit collusion.)

Duopolies have a mutual incentive not to decrease prices where possible, Fels said, particularly on those goods whose prices are closely watched by customers.

“There has not been a price war between the major supermarkets in some years,” he said. This contrasts with the British experience, where Tesco and Sainsbury’s entered an aggressive price war with Aldi.

Here, the entrance of Aldi has been helped by outlawing the ability of the big two to do deals with shopping centre owners preventing rival supermarkets from setting up. Fels said he shared the watchdog’s concern about the big two’s ability to limit competition by engaging in “land banking” – hoarding supermarket sites, so rival companies can’t get a foothold.

Fels worries also about the giants playing “rockets and feathers”. When their costs rise, their prices go up like a rocket, but when their costs fall, their prices drift slowly down like a feather.

Fels found that, as prices have increased, consumers had noticed again and again that once-normal prices were being advertised back to shoppers as “special”.

He quoted one submission to his inquiry asserting that, until August 2022, Coles and Woolies sold a 200-gram jar of Timms coffee for $8. Then Coles increased the shelf price to $12.70 before, a couple of weeks later, reducing the price to $10.70 with a tag saying “was $12.70 per bottle, now ‘down, down!’.”

Another submission asserted that Devondale cheese had gone from $5 to $10 in recent months, but had then been on “special” for $10.

Cass-Gottlieb has said the commission was “carefully looking” at claims that some discounts amounted to deceptive conduct. She also said it was concerned by “was, now pricing”, which might be outlawed.

If all the pain of the cost-of-living crisis at last prompts this government to get tough with the game-playing supermarkets, it will be some consolation.

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Bosses are finding more innovative ways to handcuff their workers

When I joined the John Fairfax superannuation scheme 50 years ago on Wednesday, I little knew my new boss was trying to handcuff me. Fortunately, they were “golden handcuffs”. But these days, bosses use other, more blatant ways to tie their workers to them and stop wages growing so fast.

The Fairfax scheme I joined decades ago must have been fairly common among big companies in the years after World War II, when shortages of skilled labour were almost continuous.

From memory, the company offered to contribute an extra 6 per cent of my pay to the scheme, provided I contributed 4 per cent. That 4 per cent stopped many people joining the scheme, but not me.

What I didn’t realise was that, if you left the scheme before reaching retirement age, you got your own contributions back, with 3.75 per cent interest, but forfeited the company’s contributions and the accrued earnings on them.

But here’s the trick: the company didn’t keep the forfeited contributions and earnings, but transferred them to the scheme’s general fund, to be shared between those loyal employees who did stay until retirement.

Get it? The longer you’d worked for the company, the more you had to lose by leaving. Plus, the more you had to gain by staying on until retirement. You were bound to the company by golden handcuffs.

(A side-benefit to the Fairfax family was that much of the huge sum in the general fund was held in Fairfax shares, thereby increasing the family’s protection against a hostile takeover.)

Relax. My handcuffs are long gone, removed by Paul Keating’s introduction of compulsory super for employees and related reform of existing company super schemes, in the early 1990s. Today, all employer contributions and earnings are immediately "vested" in the employee, meaning you take them with you when you leave the company.

Now, I should remind you that mainstream economists are great believers in "the mobility of labour". The freer workers are to move to another employer offering a better job, or to start their own business, the more efficient the economy is likely to be, and the faster productivity will improve.

So the last thing economists approve of is employers being able to discourage, delay or even prevent their staff from moving on. That is, able to prevent market forces from working the way they should.

But as assistant minister for competition Dr Andrew Leigh reminded us last week, there’s much research showing that employers around the world are increasingly using "non-compete clauses" in their employees’ contracts. To get the job, you have to agree not to leave and work for one of its competitors for a set period, or to yourself set up in competition.

Couldn’t happen in a decent place like Australia? Don’t be so sure. Just as it’s taken longer for our chief executives to start believing they’re entitled to pay themselves many multiples more than they pay any of the company’s other employees, so they’ve been slower to follow the Yanks and Brits in handcuffing those who work under them.

Even so, an online survey conducted by Dan Andrews (not that one) from the e61 Institute, and Bjorn Jarvis from the Australian Bureau of Statistics, found that as many as one in five Australian workers is subject to a non-compete clause.

Smaller percentages of employees must agree not to poach the company’s workers after they’ve left, or not to solicit the business of their former employer’s clients.

The survey found that, as well as applying to senior executives, non-compete clauses may apply to many workers who have close contact with the customers: childcare workers, yoga instructors and specialists in IVF.

It also found that competition clauses applied to 39 per cent of managers, 26 per cent of community and personal service workers, and to 14 per cent of clerical and admin workers.

Leigh says that shifting jobs is typically associated with a substantial jump in pay. Yes, that’s probably why few recruits resist when the new boss slips in some clause about what happens if you leave. Leave? I haven’t even arrived yet.

But Leigh says even many low-paid workers are constrained from shifting to a better job. Don’t forget that, these days, many government-subsidised services are provided by small, for-profit providers.

I hire you to work in my childcare or aged care (or yoga) business, but you prove good at it, and popular with the parents or the oldies’ children, so you leave and set up for yourself, taking some of my customers with you.

Leigh says that, even if some non-compete clauses wouldn’t stand up in court, they are rarely tested. (That’s another yawning gap between theory and practice. In theory, we’re all equal before the law. In practice, lawyers cost big bucks – and the boss has a lot more bucks to play with than you do.)

“In most cases,” Leigh says, “workers subject to a non-compete clause will either choose to suffer the period of enforced ‘gardening leave’ [the months or years that you’ve agreed not to join a competitor or become one] or will stay with their existing employer.”

But this is about more than employers treating you like you’re their slave. It’s also about wages. Especially where workers possess skills that aren’t easy to come by, competition between employers pushes wages up. If you can find a way to dampen that competition, you’ve kept a lid on wage costs.

“This means that workers miss out on potential wage gains,” Leigh says. “It also makes it harder for start-up firms to attract the talent they need to challenge incumbents. In turn, productivity suffers.”

The Bureau of Statistics has added a question about non-compete clauses to its regular survey of employee earnings and hours, which it will publish later this month.

The competition taskforce within Treasury, set up by the government last year, will be looking closely at this information to learn more about the effects of non-compete clauses on workers and businesses in Australia.

Have you noticed how, whenever the (Big) Business Council reads us another lecture on the need for major reform to get our productivity improving again, non-compete clauses never rate a mention?

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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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