Voters reject economics as usual

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Parties' similarities and differences on economics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Business lobbies sell out Aussie shareholders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Why Turnbull's Google tax would be reasonably effective

So, Malcolm Turnbull and Scott Morrison are introducing a "Google tax" to ensure multinational companies "pay their fair share of tax in Australia". Really? You could be forgiven for being sceptical.

Does the Coalition really want to crack down on their generous mates at the big end of town? And, even if they do, how do we know a Google tax will work?

My sceptical mind (professionally trained by 40 years of living and breathing politicians) can see it all.

Big business had become disillusioned with Turnbull who, like Tony Abbott before him, had balked at increasing the goods and services tax. On no, is he a dud, too?

Turnbull knew he had to deliver "reform" for the big end of town and a cut in the rate of company tax was what it had its heart set on.

Further, he knew he had to have a project to be getting on with, a reason we needed to re-elect him, a way he could be seen to be doing what we expect of governments: adding to jobs and prosperity.

But polling shows most voters don't think cutting company tax is a good idea. Those blighters should be paying more, not less. What about all those internet companies defiantly telling a Senate committee they pay every cent they're legally required to? What about the Panama Papers?

My sceptical mind sees Turnbull realising that, if he wanted to get away with cutting company tax, he'd have to balance it by doing something big on multinational tax avoidance.

I know, let's copy the Brits' diverted profits tax, and not discourage the media from calling it the Google tax.

Look up the government's "tax integrity package" in the budget papers, and your scepticism deepens. It contains eight measures, but six of them only rate an asterisk, denoting that "a reliable estimate [of the revenue expected to be saved] cannot be provided".

The diverted profits tax is expected to raise a mere $100 million a year, and not start doing so until 2018-19.

So how come we're being told the package will raise a net $3.3 billion over four years? Because all the money will come from establishing a new "tax avoidance taskforce" and hiring hundreds more people to audit "large corporates and high wealth individuals".

Hang on. Isn't this something the government could and should have done years ago? Hasn't it actually been cutting Tax Office staff until now?

Right. Got all that? Now get this: although much of that scepticism is no doubt justified – especially in terms of motivations – I'm convinced the crackdown on multinational tax avoidance is genuine, that it started a couple of years ago, and that the new diverted profits tax is likely to be reasonably effective in collecting more revenue.

The fact is that – no doubt in response to pressure from voters and their own difficulties finding the revenue to cover all the spending they want to do – the developed countries have finally got serious about countering tax avoidance by the "transnational corporations" (including some headquartered in Oz) that have come to dominate global commerce.

This requires a high degree of co-operation between countries, and this was initiated by the G20 a few years ago, using the services of the Organisation for Economic Co-operation and Development.

During our year in the G20 presidency, Joe Hockey and Treasury became heavily committed to the organisation's BEPS – base erosion and profit shifting – project, pushing it along and vowing to set a good example to others.

A key part of the project is the "country-by-country reporting requirement" which requires big multinationals to report details of their profits, sales, employees, assets and income taxes paid in each of the countries in which they operate.

They should do this in their home country but, if they don't, any country in which they operate can demand the full report and share it (confidentially) with the other countries involved.

We put our end of the BEPS agreement through Parliament last year. Once this arrangement gets going it will greatly improve national tax authorities' ability to counter transfer pricing.

The Brits got impatient and introduced their own diverted profits tax, which involves the taxman making an estimate of the amount diverted, without the benefit of the detailed information that will soon be available. Their new tax took effect in April last year.

There are plenty of campaigners against multinational tax avoidance and they weren't impressed by the Google tax, just as they were disappointed with the final report on the BEPS project.

By now, however, they've decided the tax is reasonably effective. And Amazon has announced that it will avoid the diverted profits tax by paying ordinary tax on its retail sales in Britain rather than booking sales through Luxembourg.

That's an important point. Our version of the tax, which would apply from July next year, would be levied at the penalty rate of 40 per cent, rather the present big-company rate of 30 per cent.

So it's designed not to raise tax directly, but to encourage multinationals to avoid it by paying the right amount of ordinary company tax. Our expected collections of only $100 million a year would come just from the slow learners.

Fortunately, sometimes it's possible for our pollies to do the right thing for the wrong reasons.

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Poles and wires: who's misleading us about what

The politicians' decades of bad behaviour may have caused them to lose our trust, but not our mistrust - making us suckers for scare campaigns.

This election campaign has been dominated not by reasoned debate but by Labor and the power unions' almighty scare campaign over the sale of the state's electricity poles and wires.

It's the most successful scare-job since all the dishonest things Tony Abbott said about how the carbon tax would destroy the economy.

The truth is it doesn't matter much to electricity users whether the state's power transmission and distribution businesses stay government-owned or are sold off. That's because, being natural monopolies, the prices they charge are controlled by a national body, the Australian Energy Regulator.

The standard of service they deliver - blackouts, for instance - is also tightly regulated.

It is true that private owners would attempt to increase their profits by reducing overstaffing and other inefficiencies - which tells you what the power unions are so excited about - but the regulator has announced its intention to force all the nation's public and privately owned poles and wires businesses to raise their efficiency and to ensure the savings are passed on to consumers as lower prices.

It's clear that, whoever owns the poles and wires, those businesses will be doing it much tougher in coming years. That's because the demand for electricity from their grid will keep falling, with households and businesses moving to solar and the introduction of smart meters helping households cut their usage, especially at peak periods.

This is why the dividends the state government would lose by selling the businesses would be a lot lower than the present $1.7 billion a year Luke Foley keeps claiming. (A characteristic of scare campaigns is that you stick to your wrong claims even after you've been caught out.)

This is not to say we can believe everything Mike Baird has been saying, of course. He describes his plan as "the long-term lease of 49 per cent of the NSW electricity network". This is highly misleading, an attempt to fool us into believing he isn't really privatising the network.

There's little practical difference between a 99-year lease and an outright sale. And that figure of 49 per cent - making it seem the government would retain majority ownership of the network - is highly contrived.

Baird plans to sell 100 per cent of TransGrid, the state-wide high-voltage transmission business, and 50.4 per cent each of Ausgrid and Endeavour Energy - which distribute power locally to about 70 per cent of the state's population living between Ulladulla and Newcastle, and inland to Scone, Lithgow and Bowral.

How does that add up just 49 per cent? By taking account of the plan not  to sell any of Essential Energy, which distributes power to the state's backblocks. Convinced?

A separate question is: is selling the electricity network the only way we would be able to fund the $20 billion in new public transport, road and other infrastructure Baird promises?

Yes - if you think it matters that the state keeps its triple-A credit rating. No - if you don't. I don't.

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Voter volatility caused by politicians' bad behaviour

The latest political excitements in Queensland and Canberra leave a lot more at stake than the future of Tony Abbott and the fortunes of the Coalition. They show the rules have changed in Australian politics, with lessons for politicians on both sides.

What's important for the good government of the country and the economy, however, is that the pollies draw the right conclusions.

Abbott's ministers are right to conclude that politics has become quite volatile, with voters capable of swinging from one extreme to the other between one election and the next. That's what we saw in Queensland on Saturday, and what we may see - to a lesser extent - in NSW next month. It's what the polls say would happen federally if an election were held today.

The first implication of this volatility is that, across the nation, no party stays in the wilderness for long.

In consequence, parties that indulge in blanket negativity in opposition, or vindictiveness towards their opponents when in government, won't have long to wait before the other side gives as good as it gets.

Until that lesson is learnt, it will be a race to the bottom in standards of political behaviour, which will only heighten voters' willingness to throw out governments.

Another implication is the end of the fair go. With the defeat of Coalition governments in Victoria last year and Queensland last week, the comfortable assumption that voters invariably give first-term governments a second chance to prove themselves has gone.

What's more, Julia Gillard's Labor government went within a whisker of defeat in 2010.

There's been a breakdown in voters' "brand loyalty". Some people remain rusted on to Labor and some will vote Coalition no matter what, but the proportion of voters willing to change their vote from election to election - and vote one way federally and the other in their state - is much higher than it was.

The classic swinging voter used to be regarded as someone who took little interest in politics between elections, but if my pilgrimage is any guide, they've been joined by people who follow the politicians' antics closely.

So what has brought this change about? The politicians want to blame the advent of the 24-hour media cycle, including social media. The game moves ever faster, with far more pressure on governments to react to every little thing that comes along and on pollies who "misspeak" in some way.

The media's attention span is much shorter, which makes it harder for governments to explain and justify their reform proposals. Mixing metaphors, this should make it easier for someone in the gun to stonewall until the spotlight has moved on. In practice, the intensity of the blowtorch is so great that offenders crack, adding to the instability.

There's a fair bit of truth to this complaint, but if the pollies think it does most to explain their predicament, they're deluding themselves. The greater explanation is that decades of ever more manipulative behaviour by our politicians have destroyed their credibility and eroded our trust and loyalty.

One problem is their preference for appearing to solve problems rather than actually tackling them. Another is the utter unreality of election campaigns, with all their unaffordable bribes and pretence of painless solutions to problems.

The biggest problem, of course, is decades of broken promises by both sides. Gillard broke her promises to balance the budget and not to introduce a carbon tax. Campbell Newman promised not to sack public servants. Abbott campaigned on the restoration of trust and high standards, but also made promises he can't have intended to keep - and didn't need to make to win.

The great risk from all this is that politicians ignore their own part in causing voters' caprice and convince themselves the public will no long countenance unpopular economic policies.

The biggest issue in the Queensland election was voters' rejection of a massive program of privatisations used largely to reduce government debt. But I'd wait for the outcome of the NSW election - where Mike Baird is promising to devote the proceeds from a smaller program to building new infrastructure - before concluding asset sales are now verboten.

Some Abbott ministers are concluding the public's rejection of last year's budget means voters don't care enough about debt and deficits to be willing to bear a little hip-pocket pain. This is self-delusion.

It conveniently forgets the calculated unfairness of Joe Hockey's choice of budget savings, all the broken promises and the government's ignominious climb-down from its pre-election claim that a "budget emergency" existed but could be fixed instantly and without pain.

The ubiquitous strategy of oppositions getting elected by making themselves a "small target", with promises to do nice things and not do a host of nasty things, is now revealed as a dangerous weapon. It works well enough if the incumbent government is on the nose, but leaves you without a mandate to tackle the difficult problems you inherit.

There's a difference between being tough and being extreme. Newman was sacked and Abbott is in trouble because of their unforeshadowed extremeness - both in their policies and their way of implementing them.

Trust can be restored and tough measures accepted if our politicians stop lying to us and playing favourites in the solutions they propose. Putting up leaders who are remotely likeable would also help.

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Is reversing Labor all we need for our future?

I'm starting to think we didn't get much of a deal when we decided to change the federal government. We got rid of a bunch racked by infighting and bad at executing policy, but substituted a bunch with a very limited idea of what needed to be changed to get us back on the right path.

What a to-do list: sack econocrats guilty of having worked with the enemy, pass an edict against climate change and discourage all discussion of it, stop publicising boat arrivals, build more motorways, move to a cut-price national broadband network and take science for granted.

It's early days, of course, and there's more, but not a whole lot more: abolishing the onerous tax on our impoverished global mining companies, getting rid of red and green tape (translation: making it easier for big business to get its way without delay) and beating up the Tax Office for being too diligent in making small business pay its tax.

It's as if Tony Abbott believes returning the Liberals to power will, of itself, solve most of our problems. Everything was fine when we last had a Liberal government, so restore the Libs and everything will be fine again.

It smacks of complacency, of a belief that nothing much has changed or could change. But that's not how Ian McAuley, an economist at the University of Canberra, sees it in his chapter of a new book from the Centre for Policy Development, Pushing Our Luck: Ideas for Australian Progress.

McAuley argues that, after another round of good luck with the resources boom, we need to secure our long-term prosperity by building a more resilient economy. (He harbours the eccentric notion that there's more to economy policy than balancing the budget, but even Abbott has abandoned that goal.)

"The legacy of our economic history conditions how we think," McAuley says. "After Federation we diversified our economy by building up a strong manufacturing base behind tariff walls. That started out as a smart policy, but it has left us with an undue concern for 'making things' rather than creating value.

"Our success in commodities, which allows for little product differentiation, has contributed to a 'price taker' mentality in business and therefore an obsession with production costs. We think about productivity in terms of mere cost reduction, particularly when labour costs are involved ...

"And our strong growth in the 20th century has created unrealistic expectations about profitability; we find it hard to imagine that the days of easy investment returns may be behind us."

We need to break free of the notion that our economic fortune must inevitably be driven by the fluctuating demand for minerals and energy, McAuley argues. And our dependence on coal exports makes us particularly vulnerable.

"As more countries place a price on carbon, or switch to other energy sources for local environmental or health reasons, there is a chance that we could find ourselves left with some large holes in the ground and idle ports and railways."

The experience of many countries shows that an abundance of natural resources can become a curse because it leads them to keep all their eggs in one basket.

"The consensus among economists is that countries can avoid the resource curse only by treating natural resources as an opportunity to invest through a sovereign wealth fund or domestically in education and infrastructure.

"We should see carbon pricing as an opportunity for industry modernisation, to prepare for an era in which many countries are cleaning up their energy sectors and limiting their carbon emissions."

McAuley says the old manufacturing model was one in which physical capital was expensive and labour was comparatively cheap. Our thinking, still focused on physical capital, distracts us from a new realisation of the meaning and role of capital.

"Capital in the form of a row of machines or a fleet of trucks is less important than the capital in the form of ideas, skills and education, capacities to communicate and to work with others - human capital, in other words. It is the knowledge worker who is emerging as the capitalist of our day, but we are a long way from recognising this."

Rather than thinking about manufacturing and its products, we should think about activities people undertake in adding customer value. Some activities involve transformations to physical products, but there are many other ways to apply skills to add value.

"Policies directed at developing manufacturing for its own sake are bound to fail. Those that enable businesses to adapt to big changes and to develop strong positions in global value chains are more likely to be effective for all businesses, regardless of their sector."

In summary, McAuley says we need to understand the risks of being too dependent on natural resources, break from our old obsession with producing physical products, focus on increasing customer value and not just reducing costs, get rid of the class struggle model of economic activity, stop thinking the only goal is job creation and develop realistic ideas about the rate of profitability.

"We pay far too little attention to our human capital. We still see education expenditure as an expense, or even as a welfare entitlement. And we pay even less attention to our environmental, social and institutional capital," he concludes.

It's hard to imagine Abbott has any of these things in his field of vision.

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No need to exaggerate Labor's failings

They say history is written by the victors, and already the Rudd-Gillard-Rudd government's many critics are busy reshaping our memory of the recent past. But, though Labor's performance was poor in many respects, they shouldn't lay it on too thick.

Those who claim Labor Party governance led to "chaos" should look up the meaning of the word, while those who repeat Tony Abbott's claim that this was "the worst government ever" are too young to remember the Whitlam era.

What is true is that Labor's latest incarnation was far inferior to the 13-year Hawke-Keating government. In just the term of the Howard government, Labor seemed to lose its race memory of how to govern.

Rather than blame all its troubles on the three years of Rudd-Gillard infighting, or keep telling itself its policies were good, Labor needs to reflect deeply on why its execution of policy fell so far short of the Hawke-Keating example.

A fair bit of the reason is its failure to unceasingly explain and justify its policies and instead rely on wet-behind-the-ears spin doctors and dodgy taxpayer-funded ad campaigns.

Rather than explain and justify, ministers preferred to criticise their opponents, forgetting the punters are never edified or impressed by arguing pollies and inadvertently giving the opposition greater credibility. Labor forfeited most of the advantages of incumbency.

One big difference was the way Bob Hawke and Paul Keating maintained the confidence of business. Part of the explanation was that when you reveal yourself to be a soft touch for rent seekers - as Rudd did almost from the start - you incite envy and disaffection, not respect.

Another part of it was Gillard's resorting to the rhetoric of class conflict, which did much more to disenchant business than to energise complacent workers. Hawke and Keating did a lot to redistribute income, but didn't make speeches about it.

The more Abbott and Joe Hockey are forced by economic reality to back-pedal on their promises to "end the waste" and "repay the debt", the more they'll cover their retreat by exaggerating Labor's budgetary failings.

So let's set the record straight from the start. It's unimpressive enough without any need for hyperbole.

The standard critique of Labor governments is that they're "big-spending, big-taxing". This time the latter accusation is false, but the former is all too true.

If you measure the burden of federal taxes as a percentage of gross domestic product - as you should - it reached an all-time high of 24.2 per cent in the mid-noughties and was 23.7 per cent in Howard's last year.

Under Labor, and with much help from the recession we supposedly didn't have, it fell to 20 per cent in 2010-11 and is expected to have recovered only to 22.2 per cent in Labor's last year.

How could this be when Labor introduced two "big new taxes" on carbon and mining? The trick was that most of the expected revenue from these taxes was returned to taxpayers on the form of income tax cuts, business tax breaks and other "tax expenditures". This is why Abbott's unwinding of both tax packages will do so little to cut taxes overall.

Turn to the spending side, however, and you find spending was 23.1 per cent of GDP in Howard's last year and is expected to reach 25.3 per cent in Labor's last year. That represents average real growth of 3.9 per cent a year.

Both those calculations effectively abstract from Labor's clearly labelled fiscal stimulus spending after the global financial crisis, because it really was temporary.

And that average real growth rate of 3.9 per cent occurred even though, in the last four of its six budgets, Labor professed to be more than achieving its goal of limiting real spending growth to 2 per cent on average over the forward estimates.

How was this trick done? All the restraint was in the "out years", never the present. To be fair, real annual spending growth averaged 3.7 per cent in the 10 Howard years before the financial crisis.

The big areas of growth under Labor were public housing, education and health, not counting the biggest, interest on the public debt.

Treasury projected in its pre-election economic and fiscal outlook that, left to its own devices, spending will grow at the real rate of 3.5 per cent a year in the coming decade, spurred by health, the national disability scheme and the Gonski education reforms.

Labor's problem was that its appetite for increased spending on worthy causes knew no bounds but it lacked the courage to ask the electorate to pay more to cover this expansion.

We'll see how much more courageous Abbott and Hockey prove to be.

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The transformation of Tony: can you believe it?

On Classic FM last month they used to play an ad with just a second or two of arguing politicians before the kicker: "Election? What election?" Then on with the soothing music. It was a bit naughty for the ABC, but it was just what many people were thinking.

According to group discussions conducted in the last week of August by the Ipsos research firm for its Mind and Mood report, the consensus from participants' lounge rooms around the country was loud and clear: "We are sick of this election campaign and we just want it over with."

When the groups were invited to discuss what mattered most in people's lives, politics was barely mentioned. When the researchers did raise the election, participants often rolled their eyes or groaned.

Many thought this was "one of the worst elections we've ever had".

But I remember people complained a lot about the 2010 campaign. What doesn't seem to have occurred to people is that it's hard to get excited about a contest when you know who's going to win it. And with the media's incessant quoting of opinion polls, no one could have been in any doubt. If the media want their election coverage to excite interest, they're fouling their nest.

But "one of the main reasons participants felt disconnected from politics and the election was their dissatisfaction with both of the major parties' leaders," the report says. "Regardless of whether their values were more closely aligned with Liberal or Labor (or the Greens) few people had positive things to say about either Kevin Rudd or Tony Abbott."

There was also disappointment with how the campaign had been run and, in particular, the lack of debate about policy, we're told. Many complained the Liberal and Labor campaigns focused on "slagging off" their competition instead of explaining policies.

Participants were tired of the mud-slinging and personal attacks launched directly by the major parties' leaders and felt that both lacked the charisma and vision required to inspire and help them connect with politics.

To this end, many hoped the election would bring an end to minority government, the constant bickering and lack of stability that has characterised the last few years of Australian politics, the report says.

But I say all the bickering and seeming lack of stability arose not from minority government as such, but from Abbott's reaction to it, which was to assume government could fall into his hands at any moment and maintain a stance of total opposition to everything.

The past three years have left a nasty taste partly because of Julia Gillard's unpopularity and Labor's constant feuding, but mainly because Abbott ran a three-year election campaign of politicians eternally at each other's throats.

But did you notice the way he transformed himself for the campaign proper? The man who'd run the highly effective but dishonest scare about the terrible effects of the carbon tax and - as we only now discover - a quite insincere scare about debt and deficit, became the man professing to be "embarrassed" by Rudd's scare campaigns on the Coalition's supposed plans to raise the GST and to "cut, cut, cut" government spending.

And by the campaign proper the man who wrote the book on negativity was accusing Rudd of being "so negative".

In government, the Transformation of Tony has continued. The bruiser and attack dog of opposition now promises a "stable and sensible" government that brings "stability and predictability" and is "methodical, measured, calm" in discharging its duties.

Huh? At one level he's a man who knows he has to mend his ways; that successful prime ministers don't act the way he did as opposition leader. He understands people's longing for greater stability and certainty than they experienced over the past three years.

At another level it's what every incoming Liberal PM says. Malcolm Fraser wanted to "get politics off the front page". John Howard wanted to make us "comfortable and relaxed". They dream of returning us to a Menzian torpor.

Historically, it's what the Liberals stand for. Labor is the eternally dissatisfied party of "reform" while the Libs are the conservatives, satisfied with the world as is and trying to stave off disruptive change as long as possible.

A truth our politicians too often forget is that most of us hate change. I confess Abbott's vision appeals to me enormously. Should the 24-hour media cycle slow down and politics become less thrill-a-minute I'm sure I could still find plenty to write about.

But can Abbott attain this degree of stability and tortoise-like approach to progress? He's always struck me as a man who makes plenty of new year resolutions but never keeps 'em for long.

The sad truth is steadiness is contrary to the spirit of our age. Things have sped up as technology and globalisation have opened us up to changing pressures originating anywhere in the world.

And the non-Labor side of politics has changed from conservative to radical. It's as much addicted to "reform" as Labor. Whereas once it resisted changes proposed by those lower on the ladder, today it wants to reclaim lost ground.

Abbott's promise of "no surprises, no excuses" will be the first he has no choice but to break. As Harold Macmillan apparently didn't say, "Events, dear boy, events".

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A lot of politics is unconscious pre-judgment

At last. God's in his heaven and all's right with the world. The rightful rulers of this country are back in charge, so now things can only get better. You think I'm joking? I'm not.

There's an American psychological test called the implicit association test which asks people to divide nice words and nasty words, black faces and white faces, into two categories and do it as fast as they can.

When journalist Malcolm Gladwell, author of Blink, tried the test he was so dissatisfied with his score he did it over and over, trying to improve his results. Why? Because he's half Jamaican - with a fabulous afro haircut - but the test revealed him to be unconsciously prejudiced against black people.

It turns out more than 80 per cent of all those who have taken the test were found to have "pro-white associations".

Gladwell explains our attitudes towards race and gender operate on two levels. We have conscious attitudes, things we choose to believe, which we use to direct our behaviour consciously. But the test measures our unconscious attitudes, "the immediate, automatic associations that tumble out before we've even had time to think". Such unconscious attitudes affect our behaviour without us realising it.

I believe something similar operates in our unconscious attitudes towards the two main political parties. We see the Liberals - the party of the bosses - as the party best suited to run the country.

Sometimes enough of us feel sufficiently rebellious to install Labor - the party of the workers - but this leaves many of us uncomfortable and yearning for the return of the masters. And when, sooner or later, it becomes clear Labor isn't doing well, no one is terribly surprised and we rush back to the security of our pater familias.

You don't understand anything about the underlying forces of Australian politics until you understand that.

It applies particularly to the economy. For decades pollsters have asked people which side of politics is better suited at managing the economy. And for decades the almost invariable answer is the Coalition.

There was a time during the term of the Hawke-Keating government when the economy was doing well and Labor was ahead on this question. But such times are the exception. Normally, Labor judges its success just by the extent to which it has narrowed the gap with the Libs.

It follows that the more the economy is seen as the dominant issue of federal politics - as it has been since Gough Whitlam's day - the more the Libs are seen as the natural party of government.

No one believes this more fervently than business people, of course. Business is always uncomfortable with a Labor government, but the Rudd-Gillard-Rudd government proved much less adept at maintaining good relations with business than the Hawke-Keating government.

So much so that the economist Saul Eslake has noted "the extent and depth of antipathy among the business community towards the present [Labor] government - which goes way beyond the normal inclination of most business executives or owners towards centre-right governments".

A big part of the problem was Labor's resort to the language of class conflict, starting with its decision to rename the original mining resources rent tax as the resource "super profits" tax.

New governments always enjoy a honeymoon with the electorate and a lift in business and consumer confidence. But this time it's hoped the turnaround in business confidence will be big enough to lead to a recovery in non-mining business investment, which has been weak for several years.

The resources boom and its high dollar, the end of the housing credit boom and the return of the more prudent consumer, and the continuing digital revolution mean that, although the economy has been travelling well enough overall, various industries have been hard hit by "structural change".

Most of these structural pressures are beyond the influence of government policy. That's particularly true of retailing, which includes a lot of small businesses and has been doing it especially tough.

The temptation for hard-pressed business people to blame their troubles on a Labor government has been irresistible. The change of government will make them a lot happier. And the more confident business is about the future, the better it's likely to do. The test will come when businesses realise their underlying problems haven't gone away.

Business people are usually highly critical of anyone seen to be "talking down the economy". But, we've learnt, this ethic applies only when the Coalition is in government. Tony Abbott and Joe Hockey were talking the economy down for at least three years, and many business people were publicly agreeing with them.

Of course, the assumption that Liberal governments always manage the economy well - that, in Abbott's revealing phrase, it's in their DNA - is wrong, just as the assumption that Labor governments are always bad at it is wrong.

The hope that all our problems will evaporate now the good guys are back in charge is wishful thinking.

But that doesn't stop our deeply held assumption to the contrary - an assumption shared by both Liberal and Labor politicians - from having real effects on our behaviour. One of the surprising truths of economics is that, to some extent, our expectations are self-fulfilling.

And already the budget and boat-people crises are over.

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Big change in party, little in policy

Coalition supporters rejoice! The evil incompetents have been banished and the good guys are back in charge. But don't get too excited because by the time we reached polling day many illusions about the difference a change of government would make had been shattered.

A standard delusion of election campaigns is that the Coalition portrays itself as standing for lower taxes, higher spending and lower budget deficits.

And Tony Abbott seemed to be cutting taxes big time, abolishing the carbon tax and the mining tax and cutting the company tax rate to 28.5 per cent.

But now we finally have the Coalition's full costings we see how far the reality falls short of the headline.

Its tax cuts will cost about $20 billion over four years (in cash terms), but its offsetting levy on big companies and reversal of Labor tax breaks - mainly on superannuation and small business - will claw back about $14 billion over four years.

And that's before you count the unlegislated Labor tax increases Abbott will put into law - including the increases in the Medicare levy and cigarette duty, and the new tax on bank accounts - worth about $28 million over four years.

Don't sound like lower taxes to me.

But surely the most disillusioning thing for Liberal true believers is the way five years of railing against Labor's utterly wasteful spending, never-ending budget deficits and soaring debt levels was simply cast aside over the course of a five-week campaign.

When, just before the campaign began, Labor was forced to reveal the deficit would be worse before we returned to surplus in another four years' time, the Libs proclaimed this a ''budget emergency''.

But then, just two days before polling day, they revealed their response to this emergency, which turned out to involve a net reduction in the cash deficit of just $6 billion over four years. On Treasury's projections, cumulative future deficits of a further $55 billion will now be a mere $49 billion and the return to surplus not a day earlier. Yippee.

Let me be clear: I wholeheartedly agree with the Liberals' last minute pull-back from resort to fiscal austerity. But then I was never taken in by their five years of frightening the fiscally illiterate.

What's supposed to be next on the agenda of a new government is a first look at the books, the amazed discovery it's all much worse than their predecessors let on, and the regretful announcement that this fiscal crisis necessitates a huge round of cost-cutting and the breaking of ''non-core'' promises.

Sorry, this ain't gunna happen, either. Why not? Mainly because Peter Costello's charter of budget honesty and, in particular, his instigation of the econocrats' pre-election economic and fiscal outlook statement was specifically designed to ensure he was the last treasurer able to pull that stunt.

If you've read the PEFO you've already seen the books.

But Abbott is further locked in by his repeated resolutions not to break his promises. He's even promised to let the deficit blow out rather than break a spending promise.

Labor claimed the planned ''commission of audit'' will be used as the vehicle for big spending cuts, but this was just its retaliatory scare campaign.

All past Coalition audits have been performed by purist economic rationalists who make radical recommendations no government would dream of accepting.

These and other promised inquiries (44 in Abbott's case) are just a device to get party hard-liners off a Coalition leader's back before elections.

There are just three main respects in which Abbott's policies are significantly different to Labor's.

First, the redistribution of the burden of taxation and the benefit of government spending against the Labor (and, for that matter, National Party) heartland and in favour of the Liberal heartland.

Second, the move from a market-based response to climate change to a pretend response. The campaign revealed a cap on ''direct action'' spending that means Abbott's professed bipartisan commitment to a 5 per cent reduction in emissions by 2020 is a sham.

Third, a marked improvement in business confidence now the socialist hordes have been vanquished.

This is the one delusion that remains from the rubble of an election campaign by the Liberals' most populist and least rationalist leader in a generation.

Fortunately, its delusory nature shouldn't stop it giving the economy a genuine boost as business ends its three-year-long dummy spit.

Today's return to real life will end one more illusion that accompanies every campaign: that it's governments who do most to manage the economy not the unchanging econocrats of the Reserve Bank.

There could be no more powerful reason why the change of government will change surprisingly little.

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Why Abbott wouldn't be a great cost cutter

If Tony Abbott wins the election would he "cut, cut, cut" to fill the "$70 billion black hole" needed to cover the cost of his election promises, as Labor repeatedly claims? Would he follow the Europeans in adopting austerity policies, as others claim?

No. Why not? Because the man who'd be his treasurer, Joe Hockey, isn't that stupid and Abbott isn't that committed.

Let me make a fearless prediction: should the Coalition win the election, we'll hear precious little more about the evils of "debt and deficit".

While Labor was in power, Abbott and his colleagues exaggerated the significance of the size of the budget deficit and the level of the public debt because this was the only way to disparage the economic record of a government that had - with much help from the Reserve Bank - done surprisingly well.

But once the Coalition was back in power its need for fear-mongering about debt and deficit would disappear and it would face the same struggle to get the budget back to surplus that Labor faced.

Whenever it was challenged about its slow progress it would blame Labor but, apart from that, it would prefer to talk of other things.

How can I be sure? Mainly because Abbott's been backing off already. He used to say he'd get the budget back to surplus in "year one". Now his promise is merely that "by the end of a Coalition government's first term, the budget will be on track to a believable surplus" and "within a decade" the budget surplus will be 1 per cent of gross domestic product.

Only "on track" after three years? And "within a decade"? That's three elections away.

But also because the Libs have form on this sort of scare campaign. While John Howard and Peter Costello were in opposition in 1996, they drove a "debt truck" around Australia to ensure every "man, woman and child" knew how much they owed as their share of the nation's foreign debt. In government, however, they never mentioned the foreign debt again.

But can they get away with going cold after having made so much fuss? Well, the Republicans in America have been doing it for years. Their attitude is simple: budget deficits aren't a worry when they're being incurred by Ronald Reagan or the George Bushes, but they're a terrible worry when they're being racked up by Democrats like Barack Obama.

My guess is that, for the most part, those who've been most concerned about our supposedly soaring debt are those who'd naturally vote Liberal. They're really saying: "I'd feel a lot more comfortable about the budget if only the Libs were in charge of it."

Well, if Abbott wins, they would be. And that would be a signal to many people to stop worrying and leave everything to that nice Mr Hockey.

Hockey, by the way, has said several times that they wouldn't risk worsening unemployment at a time when the economy is fragile by pursuing policies of austerity - that is, by cutting spending or raising taxes by a lot more than is needed to cover the cost of their promises, in an attempt to reduce the budget deficit faster than would happen automatically as the economy strengthens.

As the Europeans have demonstrated, trying to force the pace while the economy is weak is counterproductive. It pushes the economy back into recession, actually making the deficit worse rather than better. So I don't have any trouble believing Hockey when he says he wouldn't be so foolish as to try it here.

Labor's claim that Abbott's election promises have created a $70 billion black hole he will need to fill with spending cuts is a wild exaggeration. It's been debunked by several fact-checking outfits.

But Kevin Rudd, Penny Wong and Chris Bowen haven't skipped a beat in repeating this false claim.

So don't for a minute imagine all the scare campaigns, dishonesty and dissembling is limited to one side. If you're tempted by such thoughts you've allowed partisanship to cloud your thinking.

The fact remains, however, that the Coalition is delaying until almost the last moment before revealing the full list of spending cuts needed to pay for its promises.

What's it got to hide? Well, maybe it has a few nasties it's hoping won't get too much attention before the poll, but it's just as likely it's worried about making some mistake in its figuring - in this area oppositions are at a huge disadvantage relative to governments - that Labor could use to damage its credibility.

An Abbott government would be looking for budget savings - just as Labor has been for several years - and would probably be more inclined to cut spending than end tax breaks.

Its first budget, in particular, would be a tough one, including various unpleasant measures that weren't contrary to its promises but many people weren't expecting. Its primary purpose would be to replace Labor's pet programs with the Coalition's pet programs.

But Abbott has made so much fuss about restoring our trust in politicians that I don't expect he'd follow Howard in using his first budget to break a lot of "non-core" promises.

He'd end up breaking many promises, of course - because "no surprises, no excuses" is a promise no honest politician would make - but not at first. And, like Howard, he doesn't have the stomach for genuinely smaller government.

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Why taxes would rise under Abbott

Election campaigns have become works of fantasy where, to enter the spirit of things, you have to suspend disbelief. And the greatest unreality this time is Tony Abbott's claim the budget can be returned to surplus in the coming decade while taxes go down, not up.

To most people the idea of permanently paying less tax is hugely attractive. And Abbott is promising to abolish the carbon tax and the mining tax, cut the company tax rate by 1.5 percentage points and abandon Labor's plan to end tax concessions for company cars. All this would cost about $28 billion over four years.

So what reason is there to doubt he would deliver a lasting reduction in taxes? Simply his promise to get the budget back to surplus - plus the knowledge government spending is set to grow strongly in the next decade.

To return to surplus and to do it while avoiding growth in tax collections would require a literally unbelievable degree of spending restraint.

Remember, though it gets little notice, Abbott is also promising to impose new taxes, increase taxes and eliminate tax breaks. These are partly to help cover the cost of the taxes he's getting rid of and partly to help pay for his new spending promises.

He's proposing a 1.5 per cent levy on big companies to cover the net additional cost of his paid parental leave scheme and a 0.5 percentage-point increase in all rates of income tax (aka the Medicare levy) to help cover the cost of the national disability insurance scheme (both raising $16 billion over four years).

To help cover the cost of abolishing the mining tax he's proposing to save $4.7 billion over four years by cutting business tax breaks: ending the instant asset write-off, removing accelerated depreciation for motor vehicles, ending the phase-down of interest withholding tax on financial institutions and ending the "tax loss carry-back".

Also to help cover the cost of abolishing the mining tax he proposes to save $3.7 billion in four years by effectively increasing the superannuation contributions tax for those earning up to $37,000 a year, and save $1.6 billion in four years on no-longer-forgone super tax breaks by delaying for two years phase-up in compulsory employer contributions.

And all this is before we get to Labor's as-yet-unlegislated tax rises, which Abbott has quietly indicated he would proceed with: extra revenue of almost $10 billion over four years from measures to "protect the corporate tax base", cut research tax breaks, increase cigarette tax and impose a levy on savings accounts.

When you see the list of tax hikes that accompany Abbott's grand tax-cutting gesture, it doesn't exactly inspire confidence he could keep taxes down in a way none of his predecessors has managed to.

And when you realise that - according to the earlier reckoning of Saul Eslake, of Bank of America Merrill Lynch - his election promises involve extra government spending of almost $15 billion over four years, it doesn't inspire confidence he could achieve the herculean spending restraint needed to get the budget back to surplus as well as keep taxes down.

The medium-term projections in Treasury's pre-election economic and fiscal outlook, about which I suspect we'll be hearing a lot more after the election, demonstrate how challenging the budget task will be in the coming decade.

According to the projections, if the government elected this Saturday sticks to Labor's strategy of limiting average real growth in spending to 2 per cent a year and not allowing tax collections to exceed 23.7 per cent of gross domestic product, the budget surplus will recover to 1 per cent of GDP by 2020-21.

But, since spending is projected to grow at an underlying real rate of 3.5 per cent a year, this would require an unprecedented restraint. And, even so, it would still require tax collections to grow 1.5 percentage points faster than the economy - equivalent to an ultimate $26 billion a year in today's dollars - over the decade.

Alternatively, were spending allowed to grow at its underlying rate, this could still leave us with a growing surplus, provided unrestrained bracket creep was allowed to cause tax collections to grow 3.3 percentage points (an ultimate $56 billion a year) faster than the economy.

And, get this. Were you to let spending grow at its "natural" rate, but limit growth in tax collections to a ceiling of 23.7 per cent of GDP - the level in the Howard government’s last year - the rest of the coming decade beyond 2018-19 would see an ever-rising budget deficit.

Whoever wins this election, I'll be amazed if taxes do anything but keep rising.

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Forest logging propped up by conservationists

Everyone knows the environment and the economy are in conflict; that any effort we make to protect the environment comes at the expense of profit and jobs.

So, for instance, everyone knows that if the community wants to see restrictions on the logging of native forests in Tasmania, it's only reasonable for the government to compensate the industry and its workers for their loss of livelihood.

And this is precisely what the federal government has been doing for years. As long ago as 1989, the Tasmanian forestry sector received $42 million under the Helsham agreement. Under the Tasmanian regional forestry agreement of 1997, it got $110 million and under the Tasmanian community forest agreement of 2005, it got $203 million.

Under the Tasmanian forestry agreement - negotiated by the industry, unions and conservation groups, and finalised earlier this year - it will get another $300 million. Two weeks ago, as the battle for Tasmanian votes hotted up, Labor announced that the release of some of this money would no longer be conditional on the preservation of certain forests.

The national native forest industry has been doing it tough in recent years. Over the period from 2009 to 2011, removals of "roundwood" (logs) were 30 per cent below the average of the previous 18 years. And woodchip exports fell by a third between 2008 and last year.

The fall in production and exports has bankrupted the native hardwood industry's largest producer, Gunns Limited, and led to the closure of numerous processing facilities around the country.

State forest authorities have also recorded substantial losses. Forestry Tasmania recorded a net loss before tax and other items of $64 million over the four years to last year, an average of $16 million a year. The Forests Corporation of NSW recorded a total loss of $85 million over the same period, an average of $21 million a year.

The way the industry likes to tell it, it was hit by the banning of logging in certain forest areas and the tightening up of forest management practices. But while it was recovering from this blow, it was hit first by the global financial crisis and then by the high dollar (which has reduced earnings from exports and reduced the price of the imported forest products it competes against).

Talk about bad luck. Clearly, the industry just needs a bit of government help to keep it on track until things get back to normal.

And, indeed, all of the parties to the latest Tasmanian forestry agreement believe it will deliver "an ongoing, vibrant forestry industry in Tasmania based on native forests and, increasingly in the future, plantation".

There's just one problem: this is wishful thinking. The industry's story uses the environment as a convenient whipping-boy to draw attention away from its long-term structural decline - and probably demise.

The chequered story of the native forest industry and the way it has sucked ever-growing subsidies from governments can be deduced (as I have done) from a report prepared earlier this year by Andrew Macintosh, of the Australian National University, for the Australia Institute, The Australian Native Forest Sector: Causes of the decline and prospects for the future.

It's true the industry has been adversely affected by conservation measures, the global financial crisis and the high dollar. But they're secondary to its underlying problem of declining demand for its products and increasing competition both from other products and other, overseas producers of its products.

When you look at it, you see that the logging of hardwood native forests is under pressure from every direction.

To the extent that people still want hardwood, they increasingly prefer it from plantations, not native forests. But demand for hardwood itself is declining in favour of softwood, most of which comes from plantations.

Demand for wood is being reduced by demand for other products such as steel, by engineered wood (where thin bits of wood are glued together in different ways) and by wood-saving innovations.

And all that's before you get to increased competition from wood producers in other countries - competing in our domestic market and competing in our export markets.

The supply and future supply of plantation wood has been greatly expanded by another government subsidy, managed investment schemes, in which misguided punters overinvested in crazy pursuit of tax breaks.

Where the native forest sector can't sell its logs for use in building construction - as increasingly it can't - it sells them to be chopped into woodchips for papermaking. Naturally, woodchips are worth less. But even the native forest woodchip market is facing reduced demand and increased competition.

Macintosh concludes that "with sluggish demand in many key markets, strong competition from Asian, South American and African producers, and a distinct market preference for plantation-sourced products" and "in the absence of additional government assistance, the sector is likely to continue to decline and, in some areas, it could collapse entirely".

See what's happening? Our perception that protecting the environment is always in conflict with the economy and jobs is being used by the industry, its unions and the politicians as a cover for continued handouts to the industry, handouts that will do nothing but delay the inevitable.

And the conservation groups, having been convinced the industry's problems are all their fault, are running cover for an industry that doesn't want to face the truth and politicians trying to buy Tasmanian votes.

The result is that taxpayers are paying to allow an industry that probably would have collapsed to continue doing damage to native forests. It's getting help other industries wouldn't get, partly because it's doing something most other industries don't do: destroying the environment.

This makes sense?

If the conservationists had more sense they'd joint the economic rationalists in urging governments to stop giving subsidies - explicit and hidden - to an industry trying to defy market realities.

Environmentalists would do more good if more of them knew a bit of economics.

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Parties' sameness hides a big difference

You could be forgiven for concluding there's little to pick from in this election; the age of ideology is long gone and the true difference between the parties is minor. The two sides have assiduously eliminated their differences to the point where we're asked to choose between the red management team and the blue management team.

You could be forgiven for thinking all this because there's much truth to it. The more "scientific" and calculated politics has become the further the sides have moved towards the centre.

But it's not the whole truth. The parties may not be terribly ideological and - with the notable exceptions of Julia Gillard and Wayne Swan - they may assiduously avoid the language of class conflict, but they do play favourites in the policies they espouse.

If you think the class war is over, you're not paying enough attention. The reason the well-off come down so hard on those who use class rhetoric is that they don't want anyone drawing attention to how the war's going.

All of them except Warren Buffett, the mega-rich American investor. "There's class warfare, all right," he once said, "but it's my class, the rich class, that's making war, and we're winning."

The reason the wiser heads in Labor don't want to talk about class conflict, either, is they know it gets them nowhere. It alienates people at the top without attracting many at the bottom.

This, of course, is why the well-off like me are winning. The workers are too busy watching telly to notice the ways they're being got at. It requires attention to boring things like superannuation when you could be up the club playing the pokies.

The significant thing about the looming change of government is not that the economy will be much better managed - it won't be; these days most of the key decisions are made by the econocrats - but that the Coalition will bring to its decisions about taxing and spending a different bias to Labor's.

How can I say that? By looking at Tony Abbott's promises. If you do pay attention it's as plain as a hundred dollar bill.

Let's start with that boring question of the concessional tax treatment of superannuation. It's by far the most expensive example of (upper) middle-class welfare.

Super has always been a scheme heavily favouring those on the highest rates of income tax, who also happen to be those most able to afford to save.

But towards the end of his time as treasurer, Peter Costello introduced "reforms" that made it far more favourable to the well-off by making super payouts tax free and opening the scheme wide to "salary sacrifice" by those able to afford it.

At the time, many economists said what they're saying now about Abbott's paid parental leave scheme, that it was so generous as to be fiscally unsustainable.

And so it has proved. In its unending search for budget savings the Labor government has chipped away at that generosity in almost every budget (as I know to my cost).

And as part of its mining tax package, Labor finally acted to remove one of the most iniquitous features of the scheme.

It introduced the "low-income super contribution rebate" to end a situation where everyone earning less than $37,000 a year gained nothing from the concessional treatment of super contributions (while people like me saved tax of 31.5? in the dollar).

Earlier this year, when Labor was making noises about doing more to make super less inequitable - and the big banks and insurance companies were putting up their usual furious fight - Abbott promised to avoid any further changes for three years. Labor later topped this by promising no further changes for five years. Who benefits most from this moratorium - aspirational families in the western suburbs?

And get this: to help pay for its promise to abolish the mining tax - paid on their super-profits by three of the biggest mining companies in the world - an Abbott government would abolish the low-income super contribution rebate.

Who would benefit most from Abbott's opposition to Labor's plan to remove the concessional tax treatment of company cars?

Abbott's paid parental leave scheme would introduce a major new example of middle-class welfare. Since even most on his own side disapprove of it, it's guaranteed to be chopped back in future.

Then there's his pledge to remove the means-testing from the private health insurance rebate.

To its unforgivable shame, Labor has repeatedly refused to increase the poverty-level rate of the dole. In March, however, it began paying dole recipients a twice-yearly supplement of up to $105. No doubt as part of its campaign against waste and extravagance, an Abbott government would abolish this supplement.

Early in its term, the Howard government rejigged its grants to schools so as to favour private schools. After doing nothing for six years, the Labor government accepted the Gonski report's plan to bias school funding in favour of disadvantaged students, most of whom are in public schools.

After roundly condemning the Gonski proposals, Abbott affected a deathbed conversion to them as the election loomed. Read his fine print, however, and the parents of children at private schools can rest easy. The disadvantaged will soon be back at the back of the queue where they belong.

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Checkmate election spells fiscal indiscipline

It's truly ironic that after spending five years banging on about debt and deficit, and then proclaiming us to be in a budget emergency, the side most likely to form the next government has made one fiscally irresponsible commitment after another.

It's all part of the way the two sides' long-running battle of the scare campaigns has morphed into a checkmate election campaign in which most effort has gone into eliminating the differences between the parties, leaving them with little to debate and voters with little choice other than which side to "trust". What if you don't trust either lot?

It's just bad luck for those of us who believe fiscal sustainability is something to be achieved, not just talked about when it's convenient. Perhaps the most irresponsible act arising from the checkmate game is Tony Abbott's commitment - without time limit - never to change the goods and services tax.

This puts paid to big business's dream of increasing the rate or broadening the base of the GST (or both) to finance a cut in the company tax rate. But lots of people have their eyes on the GST as a solution to their problems and I think the premiers have first go.

They were promised a growth tax, but the return of the prudent household (whose consumption spending grows no faster than its income) and the faster-growing exclusions from the GST's base (most notably, private spending on health and education) mean collections from the GST aren't keeping pace with the public's demand for increased spending on most areas of state responsibility, but particularly hospitals.

When Labor keeps accusing its opponents of planning to cut spending on health and education, the Coalition vigorously denies it. But any federal party that refuses to increase collections from the GST will inevitably be squeezing state spending on health and education. (Meaning a re-elected Labor government would too.)

Rivalling the irresponsibility of refusing to change the GST is the Coalition's promise to make no further changes to the concessional tax treatment of superannuation, which Labor matched with a promise to make no changes for five years.

Super is the most egregious example of middle-class welfare - the less help you need, the more you get. So the side that needs to pay for about $28 billion worth of promised tax breaks over four years before it finds ways to cover government spending growing at an underlying real rate of 3.5 per cent a year swears not to touch the biggest rort going.

And the other side, which still doesn't know how it would cover the ever-growing later-year costs of the disability scheme and the Gonski education funding - on top of the inescapable strong real growth in healthcare costs - makes the same undertaking.

One thing you can be certain of is that the Coalition's pledge to avoid further reform of super means its two-year postponement of the phase-up of compulsory employer contributions to 12 per cent of salary will end up being permanent. No bad thing.

Next, note that in one of the few cases where one side outbid the other rather than merely matching it - the Coalition's far more generous paid parental leave scheme - the conservatives have opened up a brand new source of middle-class welfare, a lucrative new entitlement program, one that as well as being expensive and unfair will do little to increase labour force participation.

It's true, however, that there are two big examples of checkmate politics where the Coalition hasn't been as fiscally irresponsible as it would like voters to believe. The first is its me-too on Labor's disability scheme.

As Saul Eslake, of Bank of America Merrill Lynch, has pointed out, the little-remarked 0.5 percentage-point increase in all rates of income tax the Coalition has accepted as part of the package will start four years before the full scheme starts. I'm sure the extra revenue will come in handy.

The second checkmate that won't be as costly as it seems is Abbott's supposed about-face in accepting the Gonski education funding reforms. The first trick is that he's agreed only to match the first four years of spending. Most of the increase is in the following two years. And when he says he'd remove the strings Labor has attached to its scheme he means he will neither make the states contribute towards the cost of Gonski's reforms nor check to ensure they don't use the fed's new Gonski money to cut back their existing spending.

So Abbott's deathbed conversion to more equitable sharing of federal grants to public and private schools turns out to be no conversion at all, just an old private school boy's three-card trick.

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Why election campaigns have become so vacuous

For many of us, the big question isn't who should win the election - or who will - but why election campaigns have become so vacuous. Why so much politics but so little policy? So much argument but so little debate? So much sound and fury signifying not very much?

No doubt there are many reasons but I suspect an important one is that campaigning has become more professional, more scientific. The consultants and others who advise politicians have caused them to think more deeply about what they do and why they do it, what works and what doesn't.

The result is a more pragmatic, even ruthless attitude. It's not their job to foster debate, or ensure voters are fully informed on the choices available to them. And being open and accountable is more likely to lose you votes than win them.

If it's just about attracting enough votes to win, and that's not easy, better not to waste time on anything that doesn't do much to help. Why waste your energy trying to win the votes of people who long ago decided not to vote for you or those who are always going to vote for you?

So these days campaigns are directed at people who haven't made up their minds. It would be nice if these were people who were so deep into the policy choices they needed some extra convincing.

Sadly, politics doesn't work that way. The people whose votes are up for grabs tend to be those who don't have strong opinions, aren't ideological and don't take much interest in politics until the election is upon them.

I'm breaking it to you gently that modern election campaigns aren't aimed at anyone smart enough to read a paper like this one. They're for the people who don't think, not the people who do. So campaigns have become less cerebral and more emotional.

Politicians care more about the ads they run on telly than their televised debates. They find simple slogans and pithy sound bites more effective than complex arguments. They find scare campaigns - on the carbon tax, WorkChoices, the mining tax, debt and deficit, and the goods and services tax - very effective with people who are guided more by feelings than thought.

The way politicians look and sound has become as important as what they say. Perceptions matter more than reality.

Few of us have face-to-face contact with politicians during campaigns, so almost all we know comes to us via the media. So campaigns are a product of the symbiotic relationship between politicians and the media.

But the news media have long been in competition with the ever-growing range of other ways for people to entertain themselves in their spare time. So the news media have had to step up the entertainment content of their news, treating politics as a form of football - who's winning in the polls, who won the week, who's got a problem with their hammies - bringing us endless colour and movement on the campaign trail and eternally searching for laughable "gaffes".

The more the media try to keep news entertaining, the more they keep searching for novelty and changing the subject. They see themselves as catering to their audience's ever-shortening attention span, little realising that by changing the subject so often they're helping to shorten that span even further.

The opposition could have released all its policies weeks ago but it didn't because it needed to "maintain momentum" by releasing individual policies every few days during the five-week campaign. Because of this, we're told, it's unable to tell us how its promises will be paid for until the last week.

But this preoccupation with changing the subject combines badly with each side's strategy of focusing attention on a few issues it knows from its focus groups are its strengths, while shifting attention away from those issues it knows are points of vulnerability.

The amazing result is the large number of important policy changes in this campaign that have been announced but never referred to again as the campaign rushes on to something new. Sometimes both sides are in tacit agreement to slip through a tax increase without it being noticed. More often, one side checkmates the other on an issue, so there's nothing left to talk about.

Thus are we robbed of real choice by two sides who've done nothing but argue furiously throughout the three years of minority government.

Under the heading of looming tax increases it suits neither side to talk about (and so go unexamined by the media) the 0.5 percentage point increase in the Medicare levy, an effective doubling of the tax on cigarettes and a new tax on bank deposits likely to be borne by people with home loans.

Under the checkmate heading are the bipartisan promises to not make further changes to superannuation tax concessions (the biggest middle-class welfare rort of them all), to implement the Gonski school funding reforms (provided you don't read Tony Abbott's fine print), to implement the national disability insurance scheme (and worry about the full cost later), to leave the GST unchanged (and thus keep state spending on health and education under an unrelenting squeeze) and to waste yet more taxpayers' money chasing the pipedream of Northern Development.

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