Showing posts with label budgets. Show all posts
Showing posts with label budgets. Show all posts

Wednesday, August 9, 2023

Universities teach us much about government mismanagement

I’m starting to worry about Anthony Albanese and his government. As politicians go, they’re a good bunch. Well-intentioned, smart and hard-working. Only occasionally got at by their union mates.

They’re anxious to fix things, which is surely what we elect our politicians to do. Things the previous lot either neglected or worsened. But, like all pollies, their overriding objective is to stay in office.

And I fear they lack what John Howard called the “ticker” to make the tough decisions. To knock heads together when needed. To make the unpopular decisions their predecessors shied away from.

Above all, to say to voters what a tradie says to a home owner: “I can fix it, but it’s gonna cost ya.”

Everywhere you look in the federal space you find problems: aged care, the National Disability Insurance Scheme, government employees who’ve gone for years being underpaid, especially women in the “caring economy”, who’ve been exploited for decades. Medicare, with its overstretched hospitals and staff, overpaid specialists and underpaid GPs. The way the increasing frequency of extreme weather events is making insurance unaffordable.

Housing – whether it’s home ownership or renting. The decades of neglect of public housing. The rundown of the public service and its expertise and its replacement by untrustworthy management consultants charging exorbitantly for self-serving advice.

What many of these problems have in common is that they’re the consequence of both parties’ decades-long experiment with “smaller government” and lower taxes and the always-dubious notion that, because the private sector is inherently more efficient than the public sector, handing institutions over to private owners and the provision of various public services over to for-profit providers would leave us much better off.

No. Government is smaller only because so many of its bits have been sold off. The new private owners have rarely hesitated to whack up their charges, but our taxes don’t seem any lower. Put it together, and we’re paying more for services whose quality has declined.

Education Minister Jason Clare’s plans to fix universities are an extreme example of supposed “reform” gone wrong.

Last month, he issued an interim report promising five immediate actions to start fixing the sector’s many problems, ahead of the more comprehensive changes to be proposed in the accord panel’s final report in December.

These involve setting up 20 additional “study hubs” in regional areas plus up to 14 outer-suburban hubs, abolishing the Morrison government’s rule requiring students who fail to pass 50 per cent of their courses to be sent away, giving uni places to all First Nations students who meet the eligibility requirement for the course, guaranteeing uni funding for a further two years, and persuading state governments to appoint more people to uni councils who actually know something about universities.

That list is too modest to fault, but nor is it likely to do much good. When it comes to universities, everywhere you look you find problems. The academics tell you the government isn’t giving them enough money to do good research; the students tell you the teaching isn’t good enough, with too much of it palmed off onto casuals. Too many students drop out of their courses without anyone much caring. Young graduates seeking a career in academia get no job security and are treated badly.

The Morrison government’s crazy Job-ready Graduates scheme cut the tuition fees for degrees it approved of – teaching, nursing and agriculture – while doubling the fees for the humanities degrees it disapproved of. There’s been no decline in people doing arts degrees, just a lot more debt for those who do.

The HECS student loans started life in the late 1980s as carefully designed and fair, but governments’ attempts to get the money repaid faster have stuffed up the fairness.

The plain truth is that successive governments have brought about a sort of back-door privatisation of our universities with disastrous results. They’ve been trying for ages to get the unis off the federal budget. Their big let-out has been to allow the unis free rein in overcharging overseas students.

They’ve succeeded in giving unis the worst of both worlds. Unis have been filled with layers of high-paid managers, whose main role seems to be to annoy the academics. If businesses can fill up with casuals and keep accidentally underpaying people, we can too.

Vice-chancellors have become fund-raisers, always hunting for new sources of revenue. They spend much time finding ways to game the various international rankings of universities, which impresses the parents of overseas students and allows the big-city unis to charge higher fees.

One problem for Clare is that though the unis are agreed the system is bad and needs big change, they can never agree on what the changes should be.

But the biggest problem is that nothing can be fixed without costing the government a lot of money. This is where Clare risks raising expectations the government can’t meet. We’re stuck with smaller government in the sense that the pollies aren’t game to ask us to pay more for a better one.

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Monday, July 31, 2023

Another rise in interest rates is enough already

Whatever decision the Reserve Bank board makes about interest rates at its meeting tomorrow morning – departing governor Dr Philip Lowe’s second-last – the stronger case is for no increase. Indeed, I agree with those business economists saying we’ve probably had too many increases already.

If so – and I hope I’m wrong – we’ll miss the “narrow path” to the sought-after “soft landing” and hit the ground with a bang. We’ll have the recession we didn’t have to have. (That’s where recession is measured not the lazy, mindless way – two successive quarters of “negative growth” – but the sensible way: a big rise in unemployment over just a year or so.)

For those too young to know why recessions are dreaded, it’s not what happens to gross domestic product that matters (it’s just a sign of the looming disaster) but what happens to people: lots of them lose their jobs, those leaving education can’t find decent jobs, and some businesses collapse.

Market economists usually focus on guessing what the Reserve will do, not saying what it should do. (That’s because they’re paid to advise their bank’s money-market traders, who are paid to lay bets on what the Reserve will do.)

That’s why it’s so notable to see people such as Deloitte Access Economics’ Stephen Smith and AMP’s Dr Shane Oliver saying the Reserve has already increased interest rates too far.

Last week’s consumer price index for the June quarter gave us strong evidence that the rate of inflation is well on the way down. After peaking at 7.8 per cent over the year to December, it’s down to 6 per cent over the year to June.

As we’ve been told repeatedly, this was “less than expected”. Yes, but by whom? Usually, the answer is: by economists in the money markets. Here’s a tip: what money-market economists were forecasting is of little interest to anyone but them.

That almost always proves what we already know: economists are hopeless at forecasting the economy. Even after the fact, and just a week before we all know the truth. No, the only expectation that matters is what the Reserve was expecting. Why? Because it’s the economist with its hand on the interest-rate lever.

So, it does matter that the Reserve was expecting annual inflation of 6.3 per cent. That is, inflation’s coming down faster than it thought. Back to the drawing board.

The Reserve takes much notice of its preferred measure of “underlying” inflation. It’s down to 5.9 per cent. But when the economy’s speeding up or slowing down, the latest annual change contains a lot of historical baggage.

This is why the Americans focus not on the annual rate of change, but the “annualised” (made annual) rate, which you get by compounding the quarterly change (or, if you can’t remember the compounding formula, by multiplying the number by four).

Have you heard all the people saying, “oh, but 6 per cent is still way above the target of 2 to 3 per cent”? Well, if you annualise the most recent information we have, that prices rose by 0.8 per cent in the June quarter, you get 3.3 per cent. Clearly, we’re making big progress.

But the next time someone tells you we’re still way above the target, ask them if they’ve ever heard of “lags”. Central Banking 101 says that monetary policy (fiddling with interest rates) takes a year or more to have its full effect, first on economic activity (growth in gross domestic product and, particularly, consumer spending), then on the rate at which prices are rising. What’s more, the length of the lag (delay) can vary.

This is why central bankers are supposed to remember that, if you keep raising rates until you’re certain you’ve done enough to get inflation down where you want it, you can be certain you’ve done too much. Expect a hard landing, not a soft one.

Since the road to lower inflation runs via slower growth in economic activity, remember this: the national accounts show real GDP slowing to growth of 0.2 per cent in the March quarter, with growth in consumer spending also slowing to 0.2 per cent.

How much slower would you like it to get?

The next weak argument for a further rate rise is: “the labour market’s still tight”. The figures for the month of June showed the rate of unemployment still stuck at a 50-year low of 3.5 per cent, with employment growing by 32,600.

But the nation’s top expert on the jobs figures is Melbourne University’s Professor Jeff Borland. He notes that, in the nine months to August last year, employment grew by an average of 55,000 a month – about double the rate pre-pandemic.

Since August, however, it’s grown by an average of 35,600 a month. Sounds like a less-tight labour market to me.

And Borland makes a further point. Whereas the employment figures measure filled jobs, the actual number of jobs can be thought of as filled jobs plus vacant jobs – which tells us how much work employers want done.

This is a better indicator of how “tight” the labour market is. And, because vacancies are falling, the growth in total jobs has slowed much faster. Since the middle of last year, part of the growth in employment has come from reducing the stock of vacancies.

Another thing the Reserve (and its money-market urgers) need to remember is that, when it comes to slowing economic activity to slow the rise in prices, interest rates (aka monetary policy) aren’t the only game in town.

Professor Ross Garnaut, also of Melbourne University, wants to remind us that “fiscal policy” (alias the budget) is doing more to help than we thought. The now-expected budget surplus of at least $20 billion means that, over the year to June 30, the federal budget pulled $20 billion more out of the economy than it put back in.

Garnaut says he likes the $20 billion surplus because, among other reasons, “we can run lower interest rates”.

One last thing the Reserve board needs to remember. Usually, when it’s jamming on the interest-rate brakes to get inflation down, the problem’s been caused by excessive growth in wages. Not this time.

Since prices took off late in 2021, wages have fallen well behind those prices. Indeed, wages haven’t got much ahead of prices for about the past decade. And while consumer prices rose by 7 per cent over the year to March, the wage price index rose by only 3.7 per cent.

This has really put the squeeze on household incomes and households’ ability to keep increasing their spending. And that’s before you get to what rising interest rates are doing.

Dear Reserve Bank board members, please remember all this tomorrow morning.

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Monday, July 24, 2023

Beating inflation shouldn't just be left to higher interest rates

Everyone’s heard the surprising news that last financial year’s budget is now expected to run a surplus of about $20 billion, but few have realised the wider implications. They strengthen the case for relying less on interest rates to fight inflation.

But first, the news is a reminder of just how bad economists are at forecasting what will happen to the economy – even in not much more than a year’s time. Which shows that economists don’t know nearly as much about how the economy works as they like to imagine – and like us to believe.

Then-treasurer Josh Frydenberg’s budget in March last year forecast a budget deficit in 2022-23 of $78 billion. By Jim Chalmers’ second go at the budget last October, that became a deficit of about $37 billion.

By the following budget, in May, the best guess had turned into a surplus of $4 billion. And just two months later – and that financial year actually over – the best guess is now a surplus of about $20 billion.

That’s a forecasting turnaround, over the course of only about 15 months, of almost $100 billion, or 4 per cent of gross domestic product.

What did Treasury get so wrong? It grossly underestimated the growth in tax collections. This was partly because it assumed a fall in the prices of our key commodity exports that didn’t happen, thus causing the company tax paid by our miners to be higher than expected.

But mainly because collections of income tax were much higher than expected. The economy grew at close to full capacity, so more people found jobs and many part-time workers got more hours or became full-time.

A huge number of new jobs have been created, almost all of them full-time. Do you realise that a higher proportion of people aged over 15 have paid employment than ever before? The rate of unemployment fell to its lowest in 50 years and many people who’d been unable to find a job for many months finally succeeded.

Obviously, when people find work, they start paying income tax, and stop needing to be paid unemployment benefits. So full employment is excellent news for the budget.

But the rapid rise in the cost of living during the year caused workers to demand and receive higher pay rises, even though those rises generally fell well short of the rise in prices.

So all the people who already had jobs paid more tax, too. But not only that. Our “progressive” income tax scale – where successive slices of your income are taxed at progressively higher rates – means that pay rises are taxed at a higher rate than you paid on your existing income.

Ordinary mortals call this “bracket creep”. Economists call it “fiscal drag”. Either way, the higher rate of tax workers paid on their pay rises also made a bigger-than-expected contribution to income tax collections and the budget balance.

Note that this unexpected move from deficit to surplus in the financial year just past, this underestimation of the strength of tax collections, has implications not only for the size of the government’s debt at June 2023, it has implications for the size of tax collections in the next few years, as well as for the amount of interest we’ll have to pay on that debt this year and every year until it’s repaid (which it won’t be).

In Frydenberg’s budget in March last year, the projected cumulative deficit for the five financial years to June 2026 was just over $300 billion. By the budget in May, this had dropped to $115 billion.

And now that we know last year’s surplus will be about $20 billion, the revised total projected underlying addition to government debt should be well under $100 billion.

Get it? Compared with what we thought less than 16 months ago, the feds’ debt prospects aren’t nearly as bad as we feared. And the size of our “structural” deficit – the size of the deficit that remains after you’ve allowed for the ups and downs of the business cycle – isn’t nearly as big, either.

Which suggests it’s time we had another think about our decision in the late 1970s – along with all the other rich economies – to shift the primary responsibility for managing the macroeconomy from the budget (“fiscal policy”) to the central bank and its interest rates (“monetary policy”).

One of the arguments used by the advocates of this shift was that fiscal policy was no longer effective in stimulating the economy. But our remarkably strong growth since the end of the pandemic lockdowns shows how amazingly effective fiscal policy is.

It’s now clear that fiscal “multipliers” – the extent to which an extra $1 of deficit spending adds to the growth in real GDP – are much higher than we believed them to be.

We know that a big part of the recent leap in prices was caused by shocks to the supply (production) side of the economy arising from the pandemic and the Russia-Ukraine war. But central banks have argued that a second cause was excessive demand (spending), which happened because the stimulus applied to cushion the effect of lockdowns proved far more than needed.

If so, most of that stimulus came from fiscal policy. Our official interest rate was already down to 0.75 per cent before the pandemic began. So, further proof of how powerful fiscal stimulus still is.

But another implication of the $20 billion surplus is that the stimulus wasn’t as great – and its ultimate cost to the budget wasn’t as great – as we initially believed it would be.

In the budget of October 2020, the expected deficit of $214 billion in 2020-21 was overestimated by $80 billion. In the budget of May 2021, the expected deficit of $107 billion in 2021-22 was overestimated by $75 billion. And, as we’ve seen, the deficit for 2022-23 was initially overestimated almost $100 billion.

This says two things: the fiscal stimulus caused the economy to grow much faster than the forecasters expected, even though the ultimate degree of stimulus – and its cost to the budget – was much less than forecasters expect.

Economists know that the budget contains “automatic stabilisers” that limit the private sector’s fall when the economy turns down, but act as a drag on the private sector when the economy’s booming.

We’ve just been reminded that the budget’s stabilisers are working well and have been working to claw back much of the fiscal stimulus, thereby helping to restrain demand and reduce inflation pressure.

Whenever departing Reserve Bank governor Dr Philip Lowe has been reminded of the many drawbacks of using interest rates to manage the economy, his reply has always been: sorry, it’s the only instrument I’ve got.

True. But it’s not the only instrument the government has got. It should break the central bank’s monopoly on macro management and make more use of fiscal policy.

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Wednesday, July 12, 2023

Robodebt: Politicians behaving badly to win our approval

Cliches become cliches because so many people see how aptly they capture a situation. My rarely achieved goal is to initiate them rather than reuse them. But at least let me be the first to see how aptly one applies to the robo-debt scandal, by paraphrasing Thomas Jefferson: we get the politicians we deserve.

You may not know it, but there once was a time when the convention – rigorously policed by Yes, Minister-style bureaucrats – was that incoming governments did not inquire into the doings of their predecessors.

But that convention was breached a long time ago, and now it’s conventional for every newly elected government to immediately initiate formal inquiries into the misdeeds – actual or supposed – of the government the voters have just thrown out.

It’s become another of the many advantages of incumbency. You improve your chances of a prolonged period in power by discrediting your traditional opponent in the eyes of the electors.

The first such inquiry I remember was the Costigan royal commission into the notorious activities of the Ship Painters and Dockers Union, called by Malcolm Fraser’s Coalition government in 1980, in the hope of embarrassing Labor.

The Howard government established another anti-union royal commission, into the building construction industry, and the Abbott government set up royal commissions into the Rudd government’s ill-fated “pink batts” home insulation program, and into trade union governance and corruption, hoping to embarrass the then Labor leader, Bill Shorten. So it may not be a simple coincidence that Shorten was the minister who commissioned the robo-debt inquiry.

I was once a supporter of the no-looking-back convention, but now I see that the decline in standards of political behaviour require governments to be held more strictly to account – if only in retrospect. When you think about it, the old gentlemanly convention – that dog doesn’t eat dog – arose from the two political sides colluding to make their lives easier at the expense of the public’s knowledge of what they’ve been up to.

So, it’s a good thing that this royal commission has shone a bright light on robo-debt as “a crude and cruel mechanism, neither fair nor legal” that made many people on the dole and other benefits “feel like criminals”.

“In essence, people were traumatised on the off-chance they might owe money,” the commissioner concluded.

The Liberal ministers who initiated and had oversight of this horrendous scheme should face the music, and those ministers who allowed it to run on for years despite its iniquities being well known (I wrote about them in early 2017) should be ashamed.

But while we’re all pointing accusatory fingers at the former government, I don’t think the rest of us should get too high on our high horse. Most of us don’t come out of this episode with clean hands.

The truth is, most of us knew – or certainly could have known – what was going on, but weren’t too bothered by it. We didn’t inquire further.

When the opportunity arose to disgrace its political opponents, the Albanese government knew where the bodies had been buried but, at the time, the Labor opposition didn’t make a great fuss about robo-debt.

Media outlets love boasting about the royal commissions their investigations have forced on reluctant governments but, with an honourable exception or two, they can claim little credit for this one. This one’s a win for the #notmydebt victims using social media.

People are right to see the former government as being utterly, shockingly lacking in compassion in its treatment of people falsely accused of owing the government money. For such a measure to be initiated by someone proud to proclaim his Christian faith is truly shocking.

But it’s wrong to see these people just as ruthless debt collectors, determined to cut government spending by fair means or foul. Scott Morrison wanted to be seen as the tough welfare cop.

The government wanted to be seen getting rough and tough with dole bludgers because it knew many voters would find it gratifying.

Labor knows it, too. That’s why it wasn’t making much fuss at the time. And why, in the May budget, it rejected expert advice that it greatly increase the rate of the JobSeeker payment to stop it being well below the poverty line.

Both sides of politics know there’s much “downward envy” among Australians. Hard-working, tax-paying people who greatly resent those people – mainly youngsters – who prefer sitting around at home rather than getting out and finding a job, but still have the government giving them money.

There are many reasons I’m proud to be an Australian. But one thing that makes me ashamed is the way our politicians seek popularity by pandering to the worst side of the Australian character: our tendency to scapegoat those less fortunate than ourselves, particularly boat people and the jobless.

Like Joe Hockey, we see ourselves as “lifters”, and greatly despise those we regard as “leaners”.

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Wednesday, June 14, 2023

Grim Reaper is catching up with the Baby Boomers, waving bills

Having witnessed the last days of my parents and in-laws, I don’t delude myself – as they did – that I’ll be able to avoid being carted off to an old people’s home. Sorry, an aged care residential facility.

Actually, I dream of dying in the saddle. My last, half-finished column would be the announcement that I’d finally made way for the bright young women coming up behind me. That’s assuming they hadn’t already found a chance to push me under a bus.

Speaking of bright young women, Anthony Albanese’s Minister for Aged Care and Sport, Anika Wells, seems to be attacking her job with much more enthusiasm than her Coalition predecessors.

In a speech to the National Press Club last week, she noted that Labor inherited a system that a royal commission had characterised with a single word – “neglect”. She’d spent the past 12 months engaged in “triage” and “urgent reform” and was now able to think about the future.

And what’s she been thinking? “I don’t want Australians to be scared about the care they will be provided in later life,” she said. “I don’t want daughters and sons worried about the treatment their parents will receive.”

The Howard government’s Aged Care Act of 1997 was aimed at saving money by turning aged care over to community and for-profit providers. It was focused on how the providers were to run their services, setting out their obligations and responsibilities.

But, as recommended by the royal commission, the government planned to introduce a new act next year, this time focused on the rights of older people, with “a clear statement that the care provided to residents is safe and of high quality”.

Labor had already done much to fix the system, she said, but there were more challenges ahead, and “we must act now”. Why? Because “the Baby Boomers are coming”. (I’d have thought they’d come some time ago, and the real problem was their looming departure.)

But I imagine the Boomers (present company excepted) will be living a lot longer than previous generations – thanks to advances in medical science and being the first generation to realise that exercise was something to be sought and enjoyed, not avoided.

But though their arrival in aged care may be at a later age, their later lives won’t be trouble-free and certainly not doctor-free.

One change we’ll be seeing is more in-home care. Almost everyone would prefer to keep living at home rather than go off to a “facility” (sounds like a toilet block). The previous government did introduce the home-care package, but it was expensive and so was limited in how many people were given it.

Wells is introducing a new Support at Home program in July 2025 which, by delaying or eliminating people’s move to facility care, should save money.

But her big announcement last week was the setting up of an aged care taskforce – chaired by her good self – to answer the royal commission’s “great unanswered question”: How to make aged care equitable and sustainable into the future?

Which is a politician’s way of saying, “How we gonna pay for all this?”

One of the commissioners wanted a new aged care tax levy of 1 per cent of everyone’s taxable income (which, in practice, would be added to the present 2 per cent Medicare levy), whereas the other wanted some unspecified combination of a levy and a means-tested contribution from users.

Wells notes that, within a decade, we’ll have, for the first time ever, more people aged over 65 than under 18. And the proportion of people aged 15 to 64 – the people working and paying income tax – will shrink.

Now, this is the point where we need to remember that we’ve gone for decades stacking the financial rules against the younger generation and in favour of the oldies. We’ve kept handing tax breaks to the ageing. Old people can have good incomes that are largely untaxed, whereas young people on the same money have to pay up - and pay for their tertiary education.

It’s not true that every Boomer’s rolling in it – there are poor people in every generation – but most have done pretty well. Most were able to climb aboard the home-ownership gravy train when homes were still affordable. Many have been able to buy an investment property or two on the top.

And though the compulsory superannuation scheme hasn’t applied to the whole of their working lives, they’ll be retiring with a lot more, hugely taxpayer-subsidised super than any previous generation.

So, the idea of spreading the entire cost of the Boomers’ aged care – whether in-home or in-facility – across all those people young enough to still be working and paying income tax ought to be unthinkable.

If Labor doesn’t summon the courage to ask those Baby Boomers who’ve done OK to help pay directly for the cost of their highly privileged lives’ last stage, it will just prove what a rotten world Albo and the rest of us have left our offspring.

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Wednesday, May 31, 2023

PwC: How are the haughty chartered accountants fallen

As we watch the Albanese government and the Senate crossbench getting to the bottom of what’s become “The PwC Scandal”, it’s important to join the dots. It’s not just a question of who did what and when, and how they’ll be held accountable for their actions. It’s more a question of how did a formerly highly respected firm of chartered accountants come to behave in such an unethical and possibly illegal way. And how did the federal government allow itself to get into such a compromised position?

It’s an issue that interests me on many levels. There’s a caste system among accountants, and the ones who call themselves “chartered” – acting under a charter from the King – regard themselves as the brahmins.

Before I became a journalist almost 50 years ago, I worked for one of the “big eight” firms of chartered accountants – Australian partnerships that had affiliated with one of the eight big, American-based international firms. (I’m still a fellow of the chartered accountants’ institute.)

The big eight coalesced into today’s big four, with their snappy, slimmed-down names: PwC, KPMG, Deloitte and EY. Historically, the main thing they did was audit publicly listed companies, certifying that their published accounts were “true and fair”. They also gave tax advice and did rich people’s tax returns.

But there’s not much money in auditing, so each of the big four has branched out into providing consulting services to big companies – in a big way. The consultants – few of whom would be accountants – have become the fat tail wagging the chartered dog.

There is much potential conflict of interest between these three activities, and it’s possible this scandal will hasten the separation of the auditors from the consultants – something that should have happened ages ago.

That’s enough about boring accountants, except to say that, if you wonder why PwC has been so slow to send the offending heavies packing, it’s because these businesses aren’t companies with the usual command structure, they’re unwieldy partnerships. “Why should I vote to get rid of one of my partners, when I might be next?” In Australia, PwC has about 900 partners and 8000 staff.

These days, much of the big four’s income is from consulting to federal and state governments. In 2021-22, the feds paid $21 billion for “external labour” – consultants, but also contractors and labour-hire companies. Senator Barbara Pocock, of the Greens, says this is equivalent to 54,000 full-time workers, and compares with 144,000 directly employed federal public servants.

Barrister Geoffrey Watson has asked “why is Australia outsourcing so much of its governing to private enterprise? Policy development and implementation are now routinely taken from the public service and turned over to private consultants.”

To leftie academics, the answer is that it’s part of the rise of “neoliberalism”. To me, its part of the quixotic quest for smaller government and lower taxes, via deregulation and privatisation in all its forms: not just the sale of government-owned businesses, but the provision of publicly funded services such as job search, childcare, aged care and disability care by church and community groups and profit-making businesses.

Plus, in the present case, getting rid of public servants in favour of advice from private consulting firms. At the beginning, the big four had no great understanding of public policy. But they set up offices in Canberra and hired many of the policy experts being let go by government. These people got paid a lot more, and their services sold back to the government at an even higher rate.

What’s not to like? It’s only taxpayers’ money.

Remember that PwC’s questionable behaviour occurred long before the arrival of the Albanese government. It was the Coalition government, particularly under Scott Morrison, that distrusted and disliked public servants.

One of the attractions of paying outside consultants for advice is that, to ensure repeat business, they tend to tell you what they think you want to hear. Whether in auditing or consulting, the notion that anyone can buy genuinely independent advice is a delusion.

According to Andrew Podger, a former senior public servant, the government’s imposition of ceilings on staff numbers and wage bills “led to the use of external labour even when departments knew it didn’t represent value for money”.

Consultants will always give their business’s profits priority over the public interest. When you join the dots, they go from the PwC affair to the problems we encountered years ago with privately owned childcare, the royal commission into aged care, and all the present problems with the cost of the National Disability Insurance Scheme.

The great experiment of finding out whether it’s better for public services to be delivered by the private sector than the tea-drinking public servants has been a resounding failure. And the suggestion that, by dishonouring its confidentiality agreements, PwC may have broken the law, provides a link to the royal commission on banking misconduct, and even to the epidemic of wage theft.

Somehow or other, the “smaller government” policies of recent decades have left many businesses believing they are no longer required to obey the law.

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Monday, May 29, 2023

Gilding the budget lily: Labor brings in the creative accountants

This month’s budget is not as profligate as its critics claim, but nor is it the deficit-disappearing, penny-pinching budget it was tricked up to be.

When ministerial staffers use words to gild the fiscal lily, it’s called spin doctoring. When the government’s bureaucrats show the treasurer and, more particularly, the finance minister how to do it with numbers, it’s called creative accounting.

So, never fear, Jim Chalmers and Katy Gallagher didn’t need to pay PwC a motza to explain how to make the budget seem better than it was.

No, not the way the former NSW Coalition government paid KPMG to show it how to make its budget balance look better by moving the state’s trains off-budget. Nor has the same firm been paid by another part of the state government to write a report on why it was a bad idea.

There was something a bit odd about the media’s treatment of Chalmers’ second budget. Because the budget’s purpose is to reveal the government’s plans for taxing and spending in the coming financial year, the media give all their attention to the budget balance for the coming year.

Which, this time, is expected to be a deficit of $14 billion, rising to $35 billion the following year, with the budget projected to stay in deficit through to at least 2033-34.

Usually, the media ignore the estimated budget balance in the present financial year, which will end on June 30. It’s “old”. But not this year. This time, a surplus of $4 billion is expected.

Once the media got wind of a surplus, they lost interest in anything else. A surplus! First surplus in 15 years! What an achievement. And after being in power for only a year. How could you get more convincing proof of Labor’s skill as a manager of government finances?

Now, let’s be clear. The expected surplus is perfectly believable, and not the product of creative accounting. But it is the media displaying their economic ignorance.

For a start, in a budget of $630 billion a year, in an economy of $2600 billion a year, a surplus of a mere $4 billion is nothing to get excited about. It’s really a balanced budget, just as much as a deficit of $4 billion would be near enough to a balanced budget.

More significantly, the notion that any treasurer, no matter how wonderful, could turn an expected deficit of $78 billion into a surplus of $4 billion in the space of a year is fanciful. If any pollie should get the credit for it, it would have to be Chalmers’ Liberal predecessor, Josh Frydenberg.

Only he had enough time to do the things capable of helping produce such a result. With the benefit of hindsight, what Frydenberg did was greatly overstimulate the economy, adding to a surge in inflation as well as causing the unemployment rate to fall to 3.5 per cent so workers and businesses paid a lot more income tax.

Another way to look at it is that, had Treasury been better at forecasting, Frydenberg could have forecast a return to budget balance in his last budget.

But this didn’t stop Chalmers and his spin doctors from claiming the credit for himself. Consider this from the budget papers: “The improved fiscal outlook since October largely reflects government decisions to return tax upgrades to budget.”

Talk about twisting the truth. Chalmers wants to take all the credit because, confronted with an unexpected surge in tax collections of $88 billion, he only spent a bit of it.

But, surely, it was the silly media that made all the fuss about the surplus, not that nice young Mr Chalmers. Well, that’s certainly what his spin doctors want you to think – all the adulation came from the crowd.

But they were subtly pushing an easily distracted media in a favourable direction. Consider this. The usual practice in the construction of budget tables is to highlight the coming “budget year”. Not this time. This time it was the old year that got highlighted. So, the $4 billion surplus was shown in bold type, not the $14 billion deficit.

(By the way, as The Australian Financial Review has reported, had Frydenberg’s $690 million [yes, million] deficit in 2018-19 – the one that presaged all the Libs’ happy election talk about “back in black” – been calculated using the same accounting rules under which Chalmers’ surplus was calculated, it would have been a surplus of $7 billion. But no, this isn’t a fiddle, either. The decision to change the rules was made, in prospect, many years earlier by some finance minister named Penny Wong.)

Now we get to the creative accounting, which the Centre for Independent Studies’ Robert Carling, a former NSW Treasury officer, has pointed out. The budget papers make much of the claim that “the government’s spending restraint has limited real [note the real] payments growth to an average 0.6 per cent over five years from 2022-23 to 2026-27”.

Wow. Now that’s what I call restraint. What an achievement. Elsewhere in the papers we’re told that this compares with real average spending growth of about 4 per cent in the eight years before the global financial crisis, and 2.2 per cent over the eight years before the pandemic.

Wow. What restraint the Albanese government is showing. Except that pollies usually quote budget figures over the four years of the budget year plus three years of “forward estimates”. So, why is the 0.6 per cent an average over five years?

Because the extra year includes in the sum the pre-budget year ending in a month. And, purely by chance, real government spending in 2022-23 is expected to fall by 4.3 per cent.

By contrast, real spending in the coming year will grow by 3.7 per cent. Then comes projected annual real growth of 0.6 per cent, 1.9 per cent and 1 per cent.

Why the huge fall this year? Partly, I suspect, because of the effect of temporary pandemic spending programs coming to an end. But also because the indexation of various spending programs was lagging the huge rise in the consumer price index, which is the inflation measure used to calculate the “real” change.

What’s worth remembering from this little fiddle is: never trust calculations of average spending growth into the future. The first year will be close to the truth, but the projections for subsequent years will always be way too low because they’re based on the assumption of unchanged policies, whereas it’s certain that spending plans will have grown by the time we get there.

The first treasurer to con me with this averaging trick was Chalmers’ former boss, Wayne Swan. But Swan got his comeuppance by making himself a laughing-stock when he treated Treasury’s forecasts of future budget surpluses as in the bag. Turned out they weren’t.

The assumptions that policies won’t change and that targets will always be achieved are the reason the budget papers’ “medium-term” projections of deficits and debt 10 years into an unknowable future shouldn’t be taken seriously.

In both sense of the word, they are calculated to mislead.

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Friday, May 26, 2023

What they don't tell you about how the budget works

Now we have some space, there are things I should tell you that there’s never time for on budget night. If you don’t know these things, the media can unwittingly mislead you, and the government spin doctors can knowingly mislead you.

A budget’s just a plan for how much income you’re expecting in the coming period, and what you want to spend it on. Governments have budgets and so do businesses and families.

You may think you know a lot about budgeting and that all you need is common sense, but the federal government’s budget ain’t like any other budget you’ve known.

Where people go wrong is assuming the government’s budget is the same as their own household budget, only much bigger. Families budget so they don’t end up spending more than they earn.

But governments often spend more than they raise in taxes – run at a “deficit” – and only occasionally spend less than they raise – run a “surplus”. When they run deficits, they borrow to cover it; when occasionally they run a surplus, they can pay back a bit of it.

Governments can borrow, and keep borrowing, in a way families can’t. Why? Because they can’t go broke. When they run short of money, they can do what no family can do: order all the other families to give them money. It’s called taxation.

And national governments can go one step further and print their own money. Money is just a piece of plasticky stuff that’s worth, say, $50. Why is it worth $50? For no reason other than that the government says it is, and everyone believes it.

Actually, these days the government doesn’t print money so much as create it out of thin air, by crediting bank accounts. This is done not by the government itself, but by a bank the government owns: the Reserve Bank. It created hundreds of billions during the pandemic (although now the Reserve is making the government gradually pay it back, by actually borrowing the money).

Everyone knows that whatever you borrow has to be paid back. What’s more, you have to keep paying interest on the debt until it is paid back. Parents know they have to get any home loan paid back before they retire.

The trouble with a family is that eventually it dies. The kids grow up and start families of their own, then mum and dad pop off. But governments don’t die. The nation’s government acts on behalf of all the families in the country. There are always some families dying, but always others taking their place.

This is why families have to pay back their debts, but governments don’t – and often choose not to. Because governments go on and on, the main way they get on top of their debts is by waiting for the economy to outgrow them, so the size of their debt declines relative to the size of the economy.

Remember, unless you add to it, a debt is a fixed dollar amount, whereas the size of the economy – gross domestic product – grows with inflation and “real” economic growth.

The final thing making government budgets different from family budgets is that a particular family’s budget is too small to have any noticeable effect on the economy, whereas the federal budget is so big – about a quarter the size of the economy – that changes the government makes in its spending and taxing plans can have a big effect on an individual family’s budget and indeed, many families’ budgets.

But it also works the other way: what happens to one family won’t have a noticeable effect on the budget, but what happens to many families – say, everyone’s getting bigger pay rises, or many families are cutting back because they’re having trouble coping with the cost of living – certainly will affect the budget.

What common sense doesn’t tell you is that there’s a two-way relationship between the budget and the economy. The budget can affect the economy, but the economy can affect the budget.

Whenever a treasurer announces on budget night that he (one day we’ll get a she) is expecting the budget deficit to turn into a surplus, the media usually assume this must be because of something he’s done.

Possibly, but it’s more likely to be because of something the economy did. In this month’s budget, it’s because the economy’s been growing strongly, leading families and companies to earn more income and pay more tax on it.

Because many in the media imagine the government’s budget is the same as a family’s budget, they assume that budget deficits are always a bad thing and surpluses a good thing.

Not necessarily. If the budget was in surplus during a recession, that would be a bad thing because it would mean that, by raising more in taxes than it was spending, the budget would be making life even harder for families.

Only when the economy’s growing too fast and adding to inflation pressure is it good to have the budget in surplus and so helping to slow things down. And deficits are a good thing when the economy’s in recession because this means that, by spending more than it’s raising in taxes, the budget’s helping to prop up the economy.

But not to worry. When the economy goes into recession, the budget tends to go into deficit – or an existing deficit gets bigger – automatically. Why? Because people pay less tax and the government has to pay unemployment benefits to more people. Economists call this the budget’s “automatic stabilisers”.

Hidden away in the budget papers you find Treasurer Jim Chalmers quietly admitting he has no intention of trying to pay off the big public debt he inherited. His “overarching goal” is to “reduce gross debt as a share of the economy over time”.

Finally, for a family, a $4 billion surplus is an unimaginably huge sum of money. But for a federal government, it’s petty cash.

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Wednesday, May 24, 2023

Reach into your pocket, rise of the care economy will come at a cost

From even before the days early last century when people began leaving the farm to work in city factories, the industry structure of our economy has always been changing. In the ’80s, we saw the decline of manufacturing and the rise and rise of the service industries.

We’re probably kidding ourselves, but it seems the pace at which the economy is changing is faster than ever before. What’s certain is that change is occurring in several fields.

As explained in a part of this month’s budget papers I call Treasury’s sermon, it’s happening on at least three fronts. What gets the most attention is our transition from fossil fuels to renewable energy. Then there’s all the change coming from the digital revolution, which is working its way through many industries, with the use of artificial intelligence expected to bring much more change.

But the industry trend that’s doing the most to change how we live our lives is the rise of the “care economy”. On the surface we see childcare, disability care and aged care, but looking deeper we see nurses, allied health professionals, social workers and welfare workers. There are those who work directly with people receiving care, and an army of support workers in clinics, kitchens, laundries and cleaning stations.

By Treasury’s reckoning, the proportion of our workforce employed in the care economy has gone from 2 per cent in the ’60s to 10 per cent today. About 80 per cent of these workers are women, and more than 16 per cent of all working women work in the care economy.

Treasury offers three main reasons for this rise. Most obvious is the ageing of the population, which is greatly increasing the demand for healthcare and aged care.

Less obvious, but more significant, is what Treasury calls “a transition from informal to formal care”. In the old days, women stayed at home to look after young kids, aged parents and anyone with a disability.

But once girls became better educated, more of them wanted to put their education to work in paid employment. So young children went to childcare, oldies went off to a home and, particularly since the advent of the National Disability Insurance Scheme a decade ago, people with disabilities got more professional care.

One of the simple truths of economics is that economies are circular. On the one hand, more women wanted to go out to paid employment. On the other, this created more paid jobs for women in childcare, aged care and disability care.

As medical science advanced, there were more jobs for women in hospitals and clinics, in the allied professions as well as medicine and nursing – which now requires a degree.

Our greater understanding of the way brains develop has prompted us to begin schooling one or two years earlier, and turn childcare into “early childhood education and care”. Play-based learning became a thing. And more childcare workers needed teacher training.

Treasury’s final explanation for the inexorable rise of the care economy is “increased citizen expectations of government”. Just so. Our growing affluence has involved increased demand for services best paid for via the public purse.

All this has a lot further to go. A former government agency expected the demand for care economy workers to double over the next 25 years or so. Fine – but that says we’ll all be paying a lot more tax to cover it.

And there are other reasons the cost of care will be increasing. One is the weird notion that women should be paid as much as men. Another is that we can’t go on exploiting the motherly instincts of women by paying those in caring jobs less than those in uncaring jobs (so to speak).

One reason we can’t go on underpaying care economy workers is that they ain’t taking it any more. There are shortages of workers, and those who do sign up often don’t stay long once they see how tough the work is.

This budget includes the cost of a special, 15 per cent pay rise for aged care workers, awarded by the Fair Work Commission because their work had been undervalued. Nothing to do with the cost of living – that’s on top. Don’t think there won’t be more work-value cases elsewhere in the care economy.

Then there’s the fate of the theory that getting the care delivered by private businesses would be more efficient and so save money. Wrong. They made their profits by cutting quality.

As for the runaway cost of the NDIS, I think it’s more a matter of providers seeing the government as an easy mark. The government’s hoping to limit the cost growth to a mere 8 per cent a year – but we’ll see about that.

In recent times, much of the nationwide growth in jobs has come from the care economy. Which should be a comfort to those wondering where the jobs will come from in future. I don’t see our kids and oldies being left to the care of robots any time soon.

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Friday, May 19, 2023

Climate change will hurt, but we can still be the Lucky Country

What are we in for with climate change? How will it change the environment, the way we live and the way we earn our living? Is it all bad news for the economy, or is there some upside? And, by the way, how much is it costing us as taxpayers?

The previous federal government didn’t want to think about these questions, much less talk about them. You could read the budget papers each year and hardly find a mention.

But all that’s changed with the change of government. So, no surprise that last week’s budget has a lot in it about climate change.

In various parts of the budget papers, the Albanese government acknowledges that, with the globe already having warmed by an average of 1.1 degrees above pre-industrial levels, global warming will continue changing our weather (short-term changes) and climate (longer-term patterns) for the rest of this century.

It will endanger more species and reduce biodiversity. It will adversely affect human health, with more days of extreme heat leading to more deaths of old people.

The productivity of labour and the number of hours worked are expected to decline as temperatures increase, particularly for people who work outdoors in agriculture, construction and some manufacturing.

Treasury expects farming yields to decline, and I expect that, over time, the production of different crops and the grazing of animals will migrate to the parts of Australia where the climate is less unsuitable.

Speaking of migration, you’d expect our population to grow faster where it’s relatively cooler, with fewer people wanting to live where it’s even hotter than it is today.

And that’s before you get to people – refugees, even – moving between countries in response to rising sea levels. Starting, in our case, with people from the islands of the South Pacific.

Treasury says the increased frequency and severity of natural disasters will also lead to reductions in the production of goods and services through disruptions to economic activity, and to the destruction of private property and road, bridge and rail infrastructure.

It shows that the value of insurance claims has steadily increased over the past decade, with temporary peaks caused by the floods in Queensland and NSW in March 2013, Cyclone Debbie and Sydney hailstorms in March 2017, then bushfires and hailstorms in NSW and the ACT in the last quarter of 2019 and the first quarter of 2020.

So far, the greatest insurance claims – $6 billion-worth – were from the floods in south-east Queensland and NSW in the March quarter last year. Then there were (less costly) floods in NSW, Victoria and Tasmania late last year.

Treasury says our economy will be reshaped by both the physical impacts of climate change and by the efforts of the more than 150 countries that have now signed up to the target of net-zero emissions by 2050. What they do will affect us, plus what we ourselves do.

Australia is one of world’s biggest exporters of fossil fuels, so we can expect our exports of coal and gas to decline steadily over the next decade or two, as our overseas customers reduce their own greenhouse gas emissions from burning the dirty fuel they bought from us.

Of course, not all of them will have their own plentiful sources of renewable energy. They’ll have to import it from somewhere, just as they’ve had to import our fossil fuels.

Which gives us an opening. As our great apostle of smart climate change, economics Professor Ross Garnaut, was first to realise, Australia’s huge expanse, full of sun and wind, means we’ll be able to produce far more renewable energy than we need for our own use. And do it cheaply.

Gosh, what good luck we’ve got. Turns out the move to renewables will give us a “comparative advantage” in international trade we didn’t know we had. All we’ve got to do is play our cards right and get in quick before other, less well-endowed countries sign up our potential customers.

The former government wasn’t interested but, as the budget papers make clear, the Albanese government is. The “net-zero transformation”, which represents one of the most significant shifts in the industrial structure of the economy since the Industrial Revolution, “holds major opportunities for Australia, given our endowment of renewable energy sources and our large reserves of many critical minerals,” the papers say.

There is a problem, however. As yet, there isn’t an economic way to ship raw clean electricity and green hydrogen across the sea to other countries.

But this could be a good thing. We can “embed” our renewable energy in our mineral exports by further processing our iron ore into green steel, and our bauxite into green aluminium, before we export them.

Whereas in the old, fossil fuel world the further processing of our minerals before export wasn’t “economic” (profitable) – in the renewables world it could well be economic.

Get it? We could give our declining manufacturing industry a whole new lease on life. What’s more, it would make economic sense to do the further processing out in the regions, close to the solar and wind farms generating the clean electricity.

Implementing such a transformation would require huge capital investment and risk-taking, the early part of which would have to come from the government.

So, yes, climate change – both the bad bits and the good bits – will come at a great cost to the budget, and thus to taxpayers.

The budget papers reveal the Albanese government planning to spend an extra $25 billion on new climate-related programs over several years in its first budget last October, and now a further $5 billion in last week’s budget. Don’t think that will be the last of it.

So, get ready to hand over more in taxes as the government seeks both to ameliorate the costs of climate change and turn the world’s energy transformation to our advantage.

At least now we’ve got a government willing to get off its backside.

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Chalmers and Lowe: good cop, bad cop on the inflation beat

Have you noticed? There’s a contradiction at the heart of Treasurer Jim Chalmers’ budget. Is it helping or harming inflation?

Both Chalmers and Reserve Bank governor Dr Philip Lowe are agreed that our top priority must be to get the rate of inflation down. That’s fine. Everybody hates the way prices have been shooting up. The cost of living has become impossible. Do something!

But while Lowe seems to be just making it all worse, jacking up mortgage interest rates higher and higher, nice Mr Chalmers is using his budget to take a bit of the pressure off, helping with electricity bills, cutting prescription costs and so on.

It’s as though Lowe is the arsonist, sneaking round the bush to start more fires, while Chalmers is the Salvos, turning up at the scene to give the tired firefighters a kind word, a pie and a cup of tea.

Is that how you see it? That’s the way Chalmers wants you to see it, and Lowe knows full well it’s his job to be Mr Nasty at times like this.

But what on earth’s going on? Has the world gone crazy? No, it’s just the usual dance between brutal economics on one hand, and always-here-to-help politics on the other.

Let’s start from scratch. Why do we have an inflation problem? Because, for the past 18 months or so, the prices of the things we buy have been shooting up, rising much faster than our wages, causing the cost of living to become tough for many people.

Why have prices been rising so rapidly? Partly because the COVID-19 pandemic and Russia’s attack on Ukraine caused international shortages of building materials, cars, computer chips and fossil fuels. But also because the massive increase in our governments’ payments during the pandemic left us cashed up and spending big on locally made goods and services.

When the suppliers of the stuff we buy can’t keep up with our demand for it, they raise their prices. The media may call this “price gouging”, but economists believe it’s what happens naturally in a market economy – and should happen because the higher price gives the suppliers an incentive to produce more. When they do, the price will come down.

When inflation takes off like this, what can the managers of the economy do to stop prices rising so fast? They can do nothing to magically increase supply; that takes time. But what they can do is reduce demand – discourage us from spending so much.

How? This is where it gets nasty. By squeezing households’ finances so hard they have to cut their spending. Once demand for the stuff they’re selling falls back, businesses are much less keen to raise their prices.

At present, households are being squeezed from all directions. The main way is that wages aren’t keeping up with the rise in prices. As well, more of the wage rises people are getting is being eaten up by income tax, thanks to “bracket creep”.

And the fall in house prices means home-owning households aren’t feeling as wealthy as they were.

All that’s before you get to Mr Nasty, raising the interest rates paid by people with mortgages, which is particularly tough on young home owners, with more recent, much bigger mortgages.

(You may wonder if this extra pressure on, say, only about 20 per cent of all households is either fair or the most effective way to get total household spending to slow. And you may be right, but you’d be way ahead of the world’s economists, who think the way they’ve always done it is the only way they could do it.)

But what part is the budget – “fiscal policy” – supposed to play in all this? It should be helping put the squeeze on, not reducing it. Now do you see why some are questioning whether Chalmers’ $14.6 billion “cost-of-living relief package” will help or hinder the cause of lower inflation?

The budget balance shows whether government spending is putting more money into the economy, and its households, than it’s taking out in taxes. If so, the budget’s running a deficit. If it’s taking more money out than it’s put back in, the budget’s running a surplus.

The way the Reserve Bank judges whether the budget is increasing the squeeze on households, or easing it, is to look at the size and direction of the expected change in budget balance from one year to the next.

The budget papers show the budget balance is planned to change from an actual deficit of $32 billion last financial year, 2021-22, to an expected surplus of $4 billion in this financial year, ending next month.

That’s an expected tightening of $36 billion, equivalent to 1.6 per cent of the size of the whole economy, gross domestic product.

No doubt such a change is adding a big squeeze to household incomes. But then the budget balance is expected to worsen in the coming financial year, 2023-24, to a deficit of $14 billion. That’s an easing of pressure on households’ finances equivalent to 0.7 per cent of GDP.

Put the two years together, however, and its clear the budget will still be putting a lot of squeeze on households – on top of all the other squeeze coming from elsewhere.

Somewhere in there is most of Chalmers’ $14.6 billion relief package. As a matter of arithmetic, it’s undeniably true that, had the package – which, by the way, is expected to reduce the consumer price index by 0.75 percentage points – not happened, the squeeze would be, say, $10 billion tighter than it’s now expected to be.

But there’s no way, looking at that – and all the other sources of squeeze – the Reserve will be saying, gosh, Chalmers is adding to inflation pressure, so we’d better raise rates further.

Chalmers has said the “stance” of fiscal policy adopted in the budget is “broadly neutral”. Not quite. So, I’ll say the nasty word Mr Nice Guy doesn’t want to: the stance is “mildly contractionary”.

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Monday, May 15, 2023

Debt and deficit fixed in just Labor's second budget. Really?

Small things amuse small minds. Too many people have allowed their excitement over an expected budget surplus of a tiny $4 billion this financial year to distract them from noticing a much bigger deal.

Remember that mountain of government debt we ticked up fighting the pandemic? Now Treasurer Jim Chalmers tells us it’s more like a big hill. Remember the frightening spectre of the “structural” budget deficit? Not to worry, it’ll have disappeared in a decade – if you can believe it.

Assuming it happens, achieving an infinitesimally small, and one-off, surplus of $4 billion may be significant politically, but from an economic perspective, it’s not worth popping the champagne cork. In a budget worth $630 billion a year, in an economy worth $2600 billion a year, it’s no more than a rounding error.

No, what’s genuinely significant is not that magic word “surplus”; it’s that this time last year we were expecting a deficit of $78 billion. It’s the absence of another big deficit that’s the big deal. It represents the passage of a year in which we didn’t add to the existing public debt. And, as a consequence, didn’t add to the size of our annual interest bill every year until we’re all dead.

What’s more, the absence of a deficit this year suggests the expected deficits for the next few years will also be smaller than we thought. So next year will see not just a smaller than expected annual interest bill, but a smaller than expected addition to the debt, and thus an even smaller than expected addition to the following year’s interest bill, and so on and on forever.

Well, in principle, anyway. What this news also shows is how hopeless Treasury (and all economists) are at predicting the future.

Next, note that this year’s expected deficit disappeared not thanks to Chalmer’s superior management, but thanks to Treasury’s failure to realise how strong the economy would be. More people are in jobs and paying tax (and not needing to be paid the dole).

Company profits are up, as is the tax they pay. Export commodity prices have stayed higher than Treasury was expecting, so mining companies’ taxes are well up. And remember this: inflation causes taxes to rise faster than government spending does.

But though nothing Chalmers did caused the big improvement, he’d like a round of applause for not spending much of the extra dosh.

And he’s got some very impressive news he’d love me to tell you about. Treasury hasn’t just produced revised forecasts for the financial year just ending and for the budget year 2023-34, it’s done “projections” for a further three years. It’s also made “medium-term” projections right out to 2033-34.

What they show is truly amazing. Unbelievable, even. The budget papers say the absence of the formerly expected $78 billion deficit this financial year, and consequent improvement in forecasts for the following few years, “will avoid $83 billion in interest payments over the 12 years to 2033-34. It also means [the government’s] gross [public] debt, as a share of gross domestic product, will be 7.1 percentage points lower in 2033-34.”

That bit you can believe. It’s just compound interest – which, of course, works in reverse for a borrower rather than a saver.

Now it gets hairy. The Albanese government’s various decisions to limit the growth in government spending mean real spending growth is now “expected to average 0.6 per cent a year over the five years [to] 2026-27”.

This compares with average real (inflation-adjusted) spending growth of about 4 per cent in the eight years before the global financial crisis of 2008, and 2.2 per cent a year over the eight years to 2018-19, before the pandemic.

Really? That’s a truly Herculean achievement. And with so little blood on the floor.

What used to be a mountain of debt is now just a big hill. Phew. And we thought it was only Scott Morrison who could call forth miracles.

Except, of course, that it hasn’t been achieved. It’s just “projected” to happen. All those other averages are “actuals” whereas, the unbelievable 0.6 per cent is simply a projection.

Projections are based on assumptions, which are then mechanically multiplied out, year after year. One assumption is that the economy, and the budget, will just move in a straight line over the next five years, with nothing unexpected – say, a pandemic or a recession – blowing us off course.

The five-year projection says the gross public debt is now expected to peak at 36.5 per cent of GDP in June 2026. Now, get this: this would be 10.4 percentage points lower, and five years earlier, than projected just seven months ago in Labor’s first budget.

And if you keep cranking the projection handle, the public debt “will” (their word) be down to 32.3 per cent of GDP by June 2034.

Next, remember all the economists wringing their hands over the “structural” budget deficit? This is the part of the budget balance that’s left when you take out the part that’s just the product of where the economy happens to be in the business cycle at the time.

The balance will look good when you’re at the top of the boom (as we are now) and bad when you’re at the bottom of a recession (as we may be in a year or two). The structural deficit or surplus is a calculation of what the balance would be if we were in the dead middle of the cycle, neither up nor down.

In Chalmers’ first budget, last October, Treasury took its projection of the budget balance out 10 years, and estimated the structural component to be steady at a deficit of about 2 per cent of GDP.

That’s $50 billion a year in today’s dollars. A medium-size economy with a big debt can’t live with that. We have to get it down, so we’re well placed to borrow heavily in the next recession or pandemic.

Well, has Chalmers got good news for those economist worrywarts. Seven months later, the projection (budget paper No. 1, page 131) shows the structural deficit steadily withering away until it reaches almost nothing in 2033-34.

So, how did Chalmers magic it away? Assumptions, dear boy, assumptions. For years, the biggest single program driving the growth in government spending has been the explosive growth in the National Disability Insurance Scheme.

But the government has decided to take steps to limit its growth to a mere 8 per cent a year. The projections are based on mechanically projecting “existing policy”, so the 8 per cent target – which may or may not be achieved – is baked in.

Take that monumentally optimistic assumption, add further optimism about restraint in other spending areas, allow them to magnify the believable bit (that a disappeared deficit right at the beginning of the projection significantly reduces our formerly expected interest payments over a decade) and you’ve eliminated the problem.

If only reality was as easy.

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Monday, May 8, 2023

How budget spin doctors manipulate our first impressions

These days, federal budgets are just as much marketing and media management exercises as they are financial and economic documents. That’s because the spin doctors’ role has become central to the way Canberra works. This is just as true under Labor as the Coalition. Media management is a characteristic of government by the two-party duopoly.

Budgets are actually the management plan for controling the government’s spending and tax-raising over the coming financial year. Because you can’t do a budget without first making guesses about what will be happening in the economy at the time, the budget documents contain detailed economic forecasts and commentary about what it has supposed will happen.

These forecasts are taken very seriously on budget night, but rarely referred to again. That’s because this era of dominant “monetary policy” (manipulation of interest rates), conducted by an independent central bank, means it’s the Reserve Bank’s forecasts that matter.

We’ve had those already, on Friday. The financial markets care more about the Reserve’s opinions than the government’s because they’re always trying to guess what the central bank will do to interest rates. What’s more, the RBA revises its forecasts quarterly, so the budget forecasts soon become outdated.

All this means the government’s forecasts can’t be very different from the Reserve’s. Differ by more than half a percentage point, and you get headlines about a split between Treasury and the central bank. Nothing the econocrats hate more (even though there’s unceasing rivalry between the two outfits).

A separate question is what effect the budget, and particularly the new measures it contains, will have on the economy: on gross domestic product, inflation and unemployment. Now that the macroeconomic fashion (aka “best practice”) dictates that the management of demand be left to the central bank – except in emergencies, such as the pandemic – the budget papers will contain little discussion of this.

But the inescapable fact remains that, the federal budget being so big relative to the economy, everything it does affects economic growth. That’s true whether the economic effects were intended or are the unintended consequence of politically driven decisions. All budget measures are political but, equally, all have economic consequences.

At this time of year, many people say they don’t know why the government is bothering to hold a budget when it has already announced the changes it’s making. Well, not quite.

What’s true is that, these days, budgets – and the days leading up to them – are highly stage-managed by the spin doctors. These people are based in the PMO – prime minister’s office – with extension into every minister’s office, via the minister’s press secretary. All paid for by the taxpayer, naturally.

The spin doctors’ job is to use the “mainstream media” to convey to voters an unduly favourable view of the government and the things it’s doing. They do this by exploiting the foibles of journalists and their editors.

Hence, the common trick of releasing potentially embarrassing information late on a Friday, when it’s less likely to make the bulletin. The hope is that, by Monday, the under-reported story is passed over as “old”.

The spinners have the great advantage of a near monopoly over news about what the government is doing. Much of this news is put into press releases, but much is held for selective release to journalists and outlets that are in favour with the government. Write a piece like this one and don’t expect to be popular.

In the olden days, many budget “leaks” really were leaks, the product of journalists talking to bureaucrats and putting two and one together to make four. These days, bureaucrats are forbidden to speak to journos, so most budget leaks have come from the spin doctors, intended to soften us up for what’s to come.

Sometimes, something – say, that the government has decided to increase the JobKeeper payment only for the over-55s – is leaked to just one or two news outlets to “run it up the flagpole and see who salutes”. If it goes over well enough, it will happen. If there’s a big adverse reaction it may never be heard of again.

Any bad news is usually officially announced ahead of the budget, so it won’t spoil the budget’s reception on the night. Lots of small but nice decisions will be announced early, so they don’t get overlooked on the night.

But, particularly if there has been a big pre-announced unpopular measure, the spinners will save some nice, un-foreshadowed hip-pocket measure for unveiling on the night. This, being the only major budget measure that’s “new”, will dominate the media’s reporting. I call it the cherry on top.

As a former treasurer, John Kerin, demonstrated in 1991 – much to the disapproval of Paul Keating - there is no genuine need for reporters to be locked up and allowed to see the budget papers well before the treasurer delivers his speech at 7.30pm, immediately after the ABC evening news.

But the budget “lockup” persists to this day because of its great media-management advantages. It’s of much benefit to have the treasurer’s made-for-telly (that is, full of spin) budget speech broadcast in prime time, rather than after lunch. (The smaller disadvantage is that the ABC gives the leader of the opposition – not the shadow treasurer – right of reply, at the same time on Thursday night.)

The other advantage of a lockup is that letting journalists out so late in the day gives them little time to ask independent experts what they thought of the budget. Rather, they’ve spent six hours locked up with Treasury heavies. (I remember one saying to me, long ago: “Not much there to criticise, eh?” )

This media manipulation usually ensures the media’s first impressions are more favourable to the government than they should be, getting the budget off to a good start with the voters. Only on day two do the interest groups finish combing through the fine print and finding the carefully hidden nasties.

All pretty grubby, but true.

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Wednesday, May 3, 2023

Starving the unemployed shames us all

I wouldn’t want to be Treasurer Jim Chalmers, as he puts the finishing touches to next week’s budget. Everywhere he looks he sees problems – problems that need solving by spending more taxpayers’ money. But the budget deficit must be kept low if we’re to get inflation down without even more rises in interest rates. Which raises what is, for any politician, a horrifying thought: perhaps we should be paying more tax, not less.

However, to any person with a shred of conscience, any belief in decent treatment of the less-fortunate, any care about maintaining Australia’s pride in being the land of the fair go, one issue towers above all others: our shameful treatment of the unemployed.

For years, we’ve gone on allowing the unemployment benefit – these days called the JobSeeker payment – to fall further and further below what the rest of us get, and further below the poverty line.

Get that? Since the mid-1990s, we’ve had – not as an unfortunate oversight, but as a conscious choice – a policy of starving the unemployed. Keeping them on a payment so low that, by the time they’ve paid rent and other inescapable costs, they often have to skip meals.

Late last year, the independent senator for the ACT, David Pocock, forced the Albanese government to introduce the biggest budget reform in ages. It had to set up a committee of experts to review the adequacy of welfare benefits, which would report its findings to the government every year, no less than two weeks before the annual budget.

The government released the Economic Inclusion Advisory Committee’s first report about two weeks ago. It made 37 recommendations, but stressed that one recommendation trumped all the others: that the government commit to a “substantial increase” in the base rate of the JobSeeker payment.

Specifically, it wanted the JobSeeker payment raised from 70 per cent of the age pension rate to 90 per cent.

Some unemployed people told their stories to the committee. “You can buy a tray of sausages and bag them up in the freezer for the fortnight,” one person said. “But yeah, you rarely get to have any meat. Fruit and vegetables are absolutely shocking. You can’t afford to eat healthily, that’s for sure. So, they’re killing us, basically.”

Another said, “I needed to manage my budget strictly. This included going for cheaper items in the supermarket, having smaller meals (i.e. an orange for lunch, soup at dinner time), only filling up petrol when I really needed to, using public transport or walking where I could to save on the cost of fuel, managing health appointments around how much money I had left in the bank that week.”

Think of it. Every year, just before the budget, this committee will pop up to remind us what a mean-spirited people we are, and how much worse it’s become since last year – until we do something to get it off our conscience.

But here’s what sticks in my gullet: when the government released the committee’s report, its spin doctors did all they could to play down the report and stress the absurd notion that the government could possibly afford to do anything about it when times were so tough.

They made 37 recommendations, which would cost $34 billion. Are you kidding? Where could we find that kind of money? And what about the report of the Women’s Economic Equality Taskforce (which the government just happened to release at the same time) and all its expensive recommendations?

Get real. We can’t do everything. So, what’s it to be – the unemployed or the women? (Never mind that half the people on JobSeeker are female, including the sole parents who got pushed off the parenting payment onto the dole.) And, some helpful journos have relayed, just between you and me, there’s no votes in increasing unemployment benefits.

I fear that’s true. It may even cost a few votes. There’s a lot of “downward envy” among Labor’s working-class voters. And both sides of politics are well aware of the electoral benefits of pandering to the worst side of the Australian character – resentment of boat people and supposed dole bludgers.

It’s easy to exaggerate the cost of raising the dole. As former Treasury secretary Dr Ken Henry points out, the annual cost of the committee’s proposal is $6 billion, less than 1 per cent of total government spending. “No more than an adjustment at the margin,” he says.

Among rich countries, we have the third-lowest unemployment benefits. If, as usual, you set the poverty line at half the median disposable income, the single JobSeeker payment has fallen from 14 per cent below the poverty line in 2000 to 68 per cent below in 2022.

Is that a record we’re happy to live with? Is Anthony Albanese, who’s always telling us how hard he and his pensioner mother did it, willing to let the jobless continue to suffer because there are no votes in doing the right thing? Is that all modern Labor stands for?

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Wednesday, April 12, 2023

The taxman's sneaky trick that will quietly pick our pocket

I’ve seen some sneaky tax tricks in my time, but nothing that compares with this. It could go down in history as the perfect fiscal crime – except that many people won’t notice that some politician has taken money out of their pocket. Which, of course, is what makes it the perfect crime.

All most people may notice is that the cost of living’s got even worse, but they won’t quite realise why. That’s partly because most of the media won’t be making a song and dance about it.

Why not? Because nothing’s been announced. Because you have to know a fair bit about the tax system to understand what’s happening. Because neither side of politics wants to talk about it. There’s no controversy. And neither side’s spin doctors are keen to confirm to inquiring journalists that the strange story they read in this august organ is right.

Since the trick first became apparent to the experienced eye, in Scott Morrison and Josh Frydenberg’s budget in March last year, just before the election, my colleague Shane Wright and I have been determined to make sure our readers were told.

Wright was at it again on Saturday, and now I’m making sure you got the message. Don’t say we didn’t tell you, even if others have been far less vocal about it.

It’s a complicated story, hard to get your head around and, particularly because it’s about something that isn’t happening now but will happen later, one that’s easily forgotten.

As you see, the move was initiated by the Coalition, but will have its effect under Labor. The opposition may try to blame it on the government, but it’s probably too complicated.

This is a story about the misleadingly named Low and Middle Income Tax Offset, known to tax aficionados as “the LAMIngTOn”. It began life as stage one of the three-stage income tax cuts announced in the budget of May 2018, to take effect over seven years.

The previous government kept changing the amount of the offset – a kind of tax refund – over the years. It started out as “up to” $530 a year, but was increased to $1080 a year just before the 2019 election.

It was to have been absorbed into the second stage of the tax cuts, but it was decided to keep it going. Then, in last year’s pre-election budget, it was decided to increase it by $420 to “up to” $1500 a year. Yippee, we said. Good old Liberals!

By then, people earning up to $37,000 a year got a refund of $675 a year. It then slowly increased to be the full $1500 for those earning between $48,000 and $90,000 a year. Then it started cutting out, reaching zero when income reached $126,000.

This meant more than 10 million taxpayers – almost 70 per cent of the total – got a rebate on top of any other refund they were entitled to.

But here’s the trick. Unlike a normal tax cut, which goes on forever, the lamington was a temporary measure. If it were to be continued for another financial year, a decision had to be made. Morrison and Frydenberg’s last budget contained no such decision.

Why not? Because, in the days leading up to the budget, cabinet decided to increase it, but not to continue it beyond June 2022. Decisions not to do things don’t have to be announced, and this one wasn’t. For obvious reasons.

You really had to be in the know to realise that this constituted a decision to increase the tax 10 million people would pay in 2022-23, by up to $1500 a throw.

Wright and I were at pains to point this out in our coverage of the budget. We thought that, especially with an election imminent, people might find it pretty interesting. But, with neither side of politics wanting to talk about it, few people took much notice. Perhaps they didn’t believe us.

The other strange thing about the lamington is that, whereas a normal tax cut flows through immediately to increase your fortnightly take-home pay, you don’t get a tax cut delivered in the form of a tax offset until after the relevant financial year has ended and you’ve submitted your tax return. The taxman just adds it to any other refund you’re entitled to.

This means the last-ever lamington, for 2021-22, was served up between July and October last year.

It also means that the only way many lamington eaters will get a hint that they paid a lot more tax in the year to June 2023 is when, some time after July, they notice that their refund cheque is a lot smaller than last year’s and wonder why.

Note, I don’t disagree with the two-party cartel’s decision to be rid of the lamington. It was a stupid way to cut tax, born of creative accounting. But when they tacitly collude to conceal what they’ve done, it’s supposed to be the media’s job to point it out. We’ve done our bit.

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Wednesday, March 8, 2023

Relax, student loans show there's fate worse than debt

If you believe what you see in the media, our youth are groaning under the weight of debt they’ve acquired under the Higher Education Loan Program (HELP), alias the Higher Education Contribution Scheme. But I don’t believe every sob story I hear. Soft heart, hard head is my motto.

The latest is an ABC report claiming HELP debt has helped entrench women’s economic disadvantage. And the Futurity Investment Group’s latest University Debt Report, released on Wednesday, claims to reveal “the long-term financial and social burden the cost of a university education is having”.

As I’ve written recently, Baby Boomers are leaving a terrible legacy for the rising generation: climate change, unaffordable homeownership, precarious employment and tax breaks reserved for the old.

I suppose that, to many youths, adding a HELP debt to all that seems like adding insult to injury. But really, compared with that catalogue, student debt is well down the list.

According to the ABC’s report, women say they are frustrated by the HELP debt system and feel disadvantaged. It claims graduates today “often look like” a woman who, having had her children and approaching her 40s, retrained as a teacher.

Seven years later and working part-time, she’s frustrated because, despite paying back $6000 on her debt, she’s only $2000 ahead of where she started. Another woman fears she’ll end up living in her car.

The report says women hold the majority of all student debt, and claims “researchers say the student debt system has exacerbated structural financial inequities between men and women”.

This is a reference to a paper by Mark Warburton of the University of Melbourne. But his message is actually more nuanced, saying student debt has “become unfair for women, but there is a way to fix this”.

Considering that more girls than boys go on to uni, it’s no surprise that women hold the majority of student debt – even if, on average, men’s debts are greater than women’s.

Women take longer to repay their debt, but this is actually a feature of the scheme that adds to its fairness.

According to the Futurity Investment Group’s survey of about 1000 people who attended uni, student debt is pretty much the source of all social evil.

We’re told that three in five respondents say their student debt has affected their ability to buy a home. One in three say it has had a “moderate to very large” effect on their ability to start a family. A slightly smaller proportion say it’s affected their ability to get married. (Maybe they mean afford a big-budget wedding.)

A bit under a third of respondents say it’s had a “moderate to very large” effect on their ability to change jobs.

Sorry, but my bulldust detector is pinging like crazy. I just don’t believe it. I’m always sceptical of the results of small-sample surveys sponsored by vested interests, with the results just happening to endorse the outfit’s sales pitch.

Speaking of which, the Futurity Investment Group sells a range of “education bonds” which “allow parents and grandparents to tax-effectively save and invest to accumulate the funding to support their family’s life-long education objectives”.

I suspect that a lot of the resentment of HELP debt stems from a self-serving belief that university education should be free, as it was for a relatively brief period under the Whitlam government.

But that was when less than the top 10 per cent of school-leavers went on to uni. Today it’s 40 per cent. And, as Warburton reminds us, the student loan system was introduced in 1989 so taxpayers could afford to offer higher education to many more young people.

The scheme was carefully designed – by Professor Bruce Chapman, of the Australian National University – to allow universities to charge tuition fees without that discouraging bright kids from poor families from seeking to better themselves.

To this end, the government would lend people the fee-money up front, which they’d have to start repaying only once they were earning the average wage. If you lost your job, the repayments would stop until you got back on your feet.

The government would index your outstanding debt to the inflation rate but, unlike every commercial loan you’ll ever get, it won’t charge you a “real” interest rate of several percentage points on top of the inflation rate.

This is why it’s a good thing, not a bad thing, that women (and men) working only part-time are given longer to repay. A commercial bank wouldn’t do you the favour. And since the whole basis of the scheme is that if you can’t afford to repay the loan, you don’t have to, people need to learn not to worry about student debt the way you should about normal debt. It’s a very different animal.

Even so, in recent years the Coalition tightened up the repayment arrangements in ways that make the scheme less fair, particularly for those working part-time. But, as Warburton says, Labor can fix this.

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Wednesday, March 1, 2023

Don't waste sympathy on self-funded retirees ... like me

You probably haven’t noticed, but I never write about self-funded retirees without adding a pejorative adjective – “so-called” or, better, “self-proclaimed”. As worthy causes go, they’re at the top of their own list, but not high on mine.

One day, a reader took me to task: “Why are you so down on self-funded retirees, Ross, when from what I can see, you’ll be one yourself when you retire?”

Ahem, ah, yes, well... Some explaining to do. If self-funded means you’re so well-off you couldn’t possibly meet the means test to be eligible for the age pension then, yes, I’ll be self-funded. One thing I don’t have to look forward to is waiting on the phone for hours for help from those lovely souls at Centrelink.

In my experience, no one ever tells you they’re self-funded without expecting you to give them a medal. While other people have led spendthrift lives and now expect the taxpayer to support them in old age, I worked hard and saved my pennies, and now I’m getting nothing from the government.

What a good citizen I am. If only other people could be as self-sacrificing as I am. And, by the way, while we’re talking money, since it’s a bit of a struggle without the pension, I was wondering if the government could manage to give me a little something by way of appreciation. Say, a special tax offset for seniors, or easier access to a healthcare card?

What gets me about all this is that it’s just the wrong way round. It’s not the supposedly self-funded who are doing the taxpayer a favour, it’s the pensioners who retire without much in the way of super.

Why’s that? Because so much of any superannuation balance comes not from what you saved, but from the accumulated tax breaks you were given. I guess what many people don’t realise is that you get compound interest not just on what you contributed, but also on the concessions you received, year after year.

Many people retire with quite modest superannuation payouts, which do little to reduce their eligibility for the age pension. According to the Association of Superannuation Funds of Australia, the median balance for people aged 60 to 64 is less than $360,000 for men and less than $290,000 for women.

But people who retire with a super balance big enough to extinguish all or most of their pension eligibility will be getting far more help from the government than someone on the full pension. So, for such people to think of themselves as “self-funded” is delusional.

Consider these figures from Brendan Coates of the Grattan Institute. In 2019-20, the average tax break on earnings received by people with at least $1.6 million in super totalled about $60,000 a year. This was nearly three times the value of the single pension.

It’s not well understood that, whereas the age pension costs the government about $55 billion a year, the annual cost of superannuation tax concessions is almost as large – $52 billion. At the rate we’re going, it won’t be many more years before the super concessions exceed the cost of the pension.

Now perhaps, you understand why, at a time when so many demands are being made on the budget, Prime Minister Anthony Albanese and Treasurer Jim Chalmers have decided to make the super tax breaks less generous for the 0.5 per cent of people with a super balance exceeding $3 million.

According to Coates’ calculations, this will free up about $1 billion a year for use in more deserving causes – decent aged care, for instance. Think about it. Balances of more than $3 million – I couldn’t spend that much money before I died if I tried. Especially because, the older you get, the less inclined you are to do things that cost a lot of money. You could be living it up at the George V Hotel in Paris, but you don’t feel like it.

According to Coates, nearly 90 per cent of the tax breaks go to the wealthiest 20 per cent of retirees. So, the critics are right to describe super as it presently stands as a taxpayer-funded inheritance scheme for wealthy Australians.

It’s only natural for people to aspire to leave their offspring well provided for. What’s not natural is for you to expect other, less fortunate taxpayers to contribute to your kids’ greater comfort.

The trouble with super is that it’s arse-about. The people who have the highest incomes, and thus the greatest ability to save, are given the greatest assistance, while the people with the least ability to save are given little or no help.

Oh, perhaps I should have mentioned it. If these appalling Labor people go ahead with lopping the tall poppies of superannuation, they’ll be aiming their scythe directly at me. Please write to the treasurer and say how terribly unfair this would be.

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Tuesday, February 21, 2023

Caring folk care about early learning. So do hard-nosed economists

So, what did you make of the Albanese government’s Early Years National Summit at Parliament House on Friday? What? You didn’t hear about it? Well, yes, it got little coverage from the media. Yet another case of us letting the urgent and the controversial crowd out the merely very important and the encouraging. Maybe it’s a pity Peter Dutton hasn’t said he was thinking of opposing it.

In truth, the government’s election promise – to do a better job of delivering what’s now called ECEC, early childhood education and care – is its most expensive and, after climate change, probably its most important. The two have much in common, of course: the wellbeing of our kids and grandkids.

Note the way our need for affordable and available childcare has morphed into a concern to start children’s education much earlier than age 5.

Neuroscience long ago established that our brains develop continuously from birth to adulthood, but the development in the first five years of life is crucial to later development. It’s determined partly by our genes, but also by our experiences in the early years. Children who are badly treated, or don’t get enough attention, are likely to have problems in later life.

To put it more positively, there’s now much evidence that good quality early childhood programs help children get a better education. Starting earlier seems to help kids “learn how to learn”. All children benefit, but those from disadvantaged homes benefit most.

Other research shows that early learning leads to better health, reduced engagement in risky behaviours such as smoking, drinking, drug taking and over-eating, and stronger civic and social engagement.

These benefits to individuals are, in themselves, sufficient justification for government spending on early learning. But the benefits spill over to their families and the wider community.

As well, the economy benefits from having more people working rather than in and out of unemployment. This improves government budgets by increasing the number of taxpayers, as well as by reducing the need for remedial spending on school drop-outs or people with literacy problems. Or those who’ve got into trouble with the police.

The American economist and Nobel laureate James Heckman has found that quality early education helps break the cycle of generational poverty. And skills developed through quality early childhood education can last a lifetime.

Last week’s summit brought together 100 experts to help the government develop an “early years strategy”. To see what’s been happening, it helps to start with childcare, then move on to early education.

The Morrison government reduced the cost of childcare for second and subsequent children, but Anthony Albanese topped that by promising to increase the subsidy to up to 90 per cent for the first child, starting in July.

This was Labor’s biggest election promise, costing more than $5 billion a year. It has also asked the Productivity Commission to review the childcare system and asked the Australian Competition and Consumer Commission to develop a mechanism to regulate the cost of childcare.

But cost is only one problem. Many families have trouble finding a place for their kid. Research by Victoria University’s Mitchell Institute has found that more than a third of Australians live in regional and rural areas where three children vie for each place. Areas with the highest fees usually have the highest availability of places, suggesting private providers go not only where the demand is, but also where they’re likely to make higher profits.

I trust you noticed that all those wonderful benefits came from quality care. Successive federal governments have worked to increase the quality of childcare, including improved ratios of staff to kiddies. This helps explain why the cost of childcare keeps rising.

Politicians and economists tend to see the main benefit from more and cheaper childcare as allowing more women to get paid employment. This is about gender equity, not just a bigger economy.

But another reason childcare keeps getting dearer is the push for childcare to be about early education – “play-based learning” – not just child minding. This means getting better qualified carers, including a proportion with teaching qualifications.

The other part of the early education push is the introduction of “universal” preschool education for 4-year-olds. The previous government started this some years ago, with the states. Now the push is for preschool to be extended to 3-year-olds. And last year the Victorian and NSW premiers announced plans for greatly increased early childhood spending, particularly on preschools.

What more the feds will be doing, we’ll know when they produce their early years strategy. But whatever the plan, it’s unlikely to succeed unless it involves higher pay for childcare workers – paid for by the government, not parents.

Considering the many benefits of early education, however, the extra cost should be seen as an investment in our children’s wellbeing. Not to invest what’s needed would be to “leave money on the table”, as economists say.

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