Dutton almost promised to fix bracket creep. Here's why he didn't

By MILLIE MUROI, Economics Writer

Taxes are a necessary evil – which is why neither side of politics is willing to sign themselves up to the best way to keep them in check.

While most of us acknowledge the merits, you’ll be hard-pressed to find anyone jumping for joy when they find out their tax bill is growing.

The one you’re probably most familiar with is personal income tax – a chunk of your income scooped out from your salary every pay cycle. Luckily for politicians, it’s not often that they need – or choose – to raise them.

That’s because the tax system is designed in a way that “naturally” fattens the amount of tax raked in by the government every year. You’re paying more in tax this year? “Not our fault,” they can shrug. It’s simply the way things are.

As you know, we pay bigger tax rates within higher tax brackets (slices of our income) with the amount of our income determining which rates – and ultimately, how much tax – we pay. While your income usually climbs each year, those tax brackets and rates don’t budge automatically.

When the growth of your pay packet is faster than the rise in consumer prices (such as the price of the champagne you might crack open after a pay rise), it’s not so bad. But when your pay isn’t keeping up with inflation, your tax bill still increases, leaving you doubly worse off.

This extra tax you pay is called “bracket creep”.

If we let it march on unchecked, by 2031, the average full-time worker is on track to get bumped from the 30 per cent tax bracket to the 37 per cent tax bracket, regardless of whether their wages, in “real terms” (after allowing for inflation) are going backwards, forwards, or sideways.

So, why is no politician on the crusade against bracket creep?

To be fair to Opposition Leader Peter Dutton, he had one of the best ideas in this broadly uninspiring election campaign: change the system. “Bracket creep, as we know, is a killer in the economy,” he declared in an interview this month, adding a worthy note of urgency: indexing (or raising tax brackets in line with inflation) needs to be introduced – quickly.

How quickly, exactly? Well, this is where his sensible idea seems to fade into a vague mist of political fantasies. First, we’ll have to “get the budget into a position where we can index the brackets”, he clarified at a later press conference on his campaign.

That’s about as clear a caveat as mud. What is that magical budget position? A budget surplus? By how much? And with the budget now, under Labor, forecast to remain in deficit for the next decade, it’ll be more than just the average worker being pushed into that 37 per cent tax bracket by the time the budget is back in balance. But if the Coalition (if elected) makes some deep cuts to spending, gets gifted some unexpected jumps in the tax on income from mineral exports, or rakes in significantly more money from other taxes, perhaps then.

But with plenty of policy costings yet to be released just a week out from election day, how are we to know if the Coalition has a coherent plan to get the budget – and apparently the country – “Back on Track”?

Dutton also labelled his idea an “aspiration” rather than actual policy, just about giving it a final kiss goodbye in the graveyard of good ideas. I can “aspire” to kick a goal for the Matildas once I get myself into a position where I can do that. I’ll leave the judgment to you on how likely that is.

Labor’s stance is not promising either. Prime Minister Anthony Albanese hasn’t even expressed a nice, fluffy goal when it comes to indexing income tax brackets. Instead, he has made a fairly safe tax promise: Labor will generously gift us taxpayers 1¢-in-the-dollar tax cuts in 2025-26 and 2026-27 for the lowest slice of our income that we pay tax on. That works out to be a saving of about $5 a week in the first year, and $10 a week the year after.

Sure, that compensates for some of the additional tax we’ll pay from bracket creep. But it’s not a lot, and it doesn’t stop the root problem: the growing number of workers who will be pushed into higher tax brackets in the years ahead.

All we seem to see from either side of politics is this kind of tinkering around the edges. Or, it’s temporary measures such as the Coalition’s low-and-middle-income tax offset in 2018, which gave a tax saving up to $1080 for people earning up to $126,000 a year (until 2022) and their promise this election of a $1200 “cost-of-living tax offset” for Australians earning up to $144,000.

It makes you think bracket creep is a problem neither side of politics really wants to solve – and you’d be right.

Have you ever noticed politicians are always announcing tax cuts, but never tax increases? They can thank bracket creep.

It’s a villain that allows whoever is in government to play the hero: “Look at these wonderful tax cuts and relief we’re offering!” It’s a bit like a doctor ignoring the preventative measures their patient could take, instead offering temporary or tiny relief through various medicines that simply alleviate the symptoms.

Bracket creep is also an excellent revenue driver for the government: a way for them to increase their tax take every year without lifting a finger. Not only does the government of the day get to wave offsets and tax relief around as if these things are a big favour to punters – they avoid having to put their name to the unpopular decision of increasing taxes.

Permanently tying the level of tax brackets to inflation also commits future governments to more budget discipline. If they don’t sufficiently limit the growth in government spending, they can’t rely on the quiet power of bracket creep to boost their coffers.

For now, it looks like neither side has the guts to end the sugar hit they get from bracket creep – all at the cost to workers’ pay packets. Getting tax “Back on Track” has a nice ring to it. If only Dutton had the guts to go with it.

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This election is one of the worst I've seen

How are you going with the election? Are you getting a lot out of the debate, seeing the big issues canvassed and making up your mind who’ll win your vote?

It’s not as if the choice isn’t clear: do you want to wait 15 months for a permanent tax cut of $5 a week, rising to $10 a week a year later, or would you be eligible for a $1200 once-only tax cut in July 2026, plus an immediate one-year cut of 25c a litre in the price of petrol?

If that’s not enough to seduce you, there’s more. Anthony Albanese will cut the price of draught beer by 5¢ a glass for two years or, for small businesses, Peter Dutton will make entertainment expenses tax-deductible (conditions apply).

But you may want to judge it on the character of the leaders. Again, the choice is clear: do you want the controlled, experienced hand of Albanese, who’ll never do anything rash, whose goals are modest and whose motto is “steady but slow”? Got a problem? He’ll think about it. If you want a prime minister who’s on everyone’s side, Albo’s your man.

Or do you want tough cop Dutton on the beat, always quick on the draw and ready to protect us from the threatening world we live in? He’s heard of a supermarket worker who’d had a machete held to her throat. That won’t happen to you on Dutto’s watch.

And it’s not as if the campaign so far hasn’t been action packed. We’ve had Albanese falling off the platform at an election rally, then denying it. We’ve had Dutton joining a kids’ football game and hitting a cameraman in the forehead.

What would a campaign be without seeing pollies in safety helmets and high-vis vests on TV every night? Or at a childcare centre, showing how human they are and what good fathers they must be whenever they can make it home?

What’s new this time is Greens leader Adam Bandt taking a big red toothbrush with him to TV interviews (must have some meaning I’m missing) or his colleague waving round a bleeding headless salmon in the Senate.

What’s that? You don’t think much of the election campaign? It’s been neither interesting nor edifying, and hasn’t got to grips with the big issues?

Well, I agree. I think both sides are treating us like mugs. Maybe like the mugs many of us have allowed ourselves to become.

In my 51 years as a journalist, this is the 20th federal election campaign I’ve observed at close quarters, and I’m convinced they’re getting worse: more contrived, manipulative, transactional and misleading, and less focused on the various serious problems facing us, which are far greater than they used to be, and now include America’s abdication from leadership of the free world.

In short, election campaigns have become dishonest, aimed at tricking us into voting for one side rather than the other, using trinkets to distract us from the bigger issues that neither side has thought much about nor has any great desire to tackle.

I know that’s easy to say for an oldie like me (77, since you were too polite to ask). “It was much better in my day.” But though things weren’t great in the old days – we’ve never been a paragon of Socratic debate – I think they’ve got worse over the years, and I’ll try to show how they’ve got worse and explain why.

But I must say this: even if things in Australia have got worse, they’re not as bad as they are in many other countries, particularly the US. Nor are they ever likely to be.

Three things protect us from other countries’ decline. First, compulsory voting, which forces everyone to register a choice and pay at least some degree of attention. Second, preferential voting ensures the person who wins is the one most of us prefer.

And third, an independent electoral commission which regularly increases the number of electorates and redraws boundaries to ensure there’s roughly the same number of voters in each, and these have boundaries that aren’t gerrymandered to give one side or the other a built-in advantage.

This is in marked contrast to the US, where each state government determines its own federal voting arrangements. Their gerrymandering ensures they have very few marginal electorates, whereas we have a lot. And we don’t have voting arrangements designed to disadvantage certain classes of voters, such as racial minorities.

So we shouldn’t complain too much. Even so, our election campaigns have changed over the years, and not for the better.

They’ve changed because the voters have changed – Gen Z seems a lot less interested in conventional politics than we Baby Boomers were at their age, when there was so much disapproval of Australia’s part in the Vietnam War, and so many young men (including me) hoping not to be conscripted.

Another important source of change is technological advance, particularly the effect of the information revolution, which has armed the parties with greater knowledge of voters’ views, and changed the media by which politicians reach out to voters.

Finally, the political class’s changing aspirations have affected the way campaigns are run. In the olden days – even before my time – politicians used to travel round, visiting key electorates and talking to voters. They’d do this at evening public meetings or, during the day, from the back of a truck in the main street.

But the advent of television changed all that. While local politicians and their supporters may canvas their electorates door to door, most contact between the party leaders and the voters occurs via TV.

These days, leaders still visit marginal seats around the country, but what they do during the day is aimed at producing the colour and movement that will get them a spot on the evening TV news – hence helmets and high-vis.

They’ve worked up a list of promises to announce, and they (and their media entourage) go somewhere vaguely relevant to deliver the announcement. Guess where they go to announce a change in childcare?

A big advantage of this is that their busy day ends late afternoon, once the TV news camerapeople have got what they need for this evening. Then the leaders can go to a fundraiser, appear on a current affairs program, or get an early night.

Trouble is, though the pollies haven’t changed their routine, the evening TV news bulletin isn’t nearly as universal as it was. When there were only four channels, all airing their news at the same time, if you wanted to watch telly while you had dinner, you couldn’t avoid the nightly news bulletin.

Now the proliferation of TV choices makes it much easier to avoid the news, which many do. The parties have started using social media to spread their messages, but this makes it harder for the rest of us to see what they’re up to.

As the proportion of people who don’t follow the news – and aren’t much interested in politics – has grown, the parties have had to reach them via advertising. They now spend a fortune on TV ads, with far fewer ads in print and on radio. My theory is that, for the many people who don’t follow politics but know they’ll have to vote, they do their last-minute homework by remembering the TV ads they’ve seen.

But advertising works by appealing to our emotions, not our brains. Don’t explain the details, just make me feel nice – or angry. The parties know negative ads – attacks on their opponents – work better than positive ones (“you’re gonna love my policies”), which is hardly a boon to the democratic process.

This is what has made fear campaigns – misleading people about how badly they’d be affected by the other side’s planned changes – so fearfully effective. And the increasing resort to fearmongering is a major way by which election campaigns have become less informative and more misleading.

So it’s not just the way the mechanics of campaigning have changed. More importantly, it’s the way what’s said has changed, and the way the politicians’ objectives and behaviour have changed.

Politics has become more professional. In former times, politicians tended to be men (yes, almost all of them men) who turned to politics after a career as a lawyer, businessman or union official. They’d wearied of making money and decided to spend the last part of their working life fighting for a cause.

I’m sure personal ambition has always been a big motivation for getting into politics, but in those days, it came mixed with a strong desire to make the world a better place. These days, politics has become a career path you follow for most of your working life.

When young people are interested in politics and would like to make a career of it, they get started as soon as they leave university, taking a job working for a union, or in a minister or opposition minister’s office. The number of people working in ministers’ offices has grown considerably during my time in journalism.

It started in the Labor Party, but then the Liberals joined in. You work your way up the ladder, first aiming for preselection as a parliamentary candidate. Once you’ve made it into parliament, you work towards a job as a minister or shadow minister, then see how far you can make it towards the very top.

Such a career path teaches you a lot about how the political game is played, but not much about how government policies work best in the interests of the public. It tends to replace any initial idealism with pragmatism and cynicism. It tends to feed ambition.

These days it’s rare for politicians to enter politics later in life. Two exceptions were the Liberals’ Dr John Hewson and Malcolm Turnbull. Both were hugely intelligent, and both cared about good policy, but both had trouble playing the political game at the professional level and didn’t survive at the top. Labor’s exception was Bob Hawke. His great success at the top came from all the politics he’d learnt while rising to the top of the union movement.

So when the barroom experts assert that most politicians care more about their personal advancement than about doing good things for the nation, I’m inclined to agree. As someone famous once said, “by their fruits ye shall know them”.

The professionalisation of politics is a main reason that what’s said and done in election campaigns has changed, but another reason is that politics has become more scientific. In former days, politics was played by ear. Pollies decided what voters liked and didn’t like from what the voters they met said to them, then used their own intuition to fill in the gaps.

These days, the parties spend a lot of money conducting private polling, not just of how people intend to vote, but what issues are more important to them at present. They also use carefully selected focus groups to get ordinary voters expressing their views on particular issues.

When someone says something and everyone round the table says “yes, that’s right”, the professionals running the group take note and pass it on to the pollies for them to use. Or it can work the other way: the pollies and their people think of lines to help sell a policy measure, and they’re tried out on appropriately chosen focus groups. What goes over well gets used in public utterances.

Between the careerism and the carefully gathered knowledge of what voters think, election campaigns have become more contrived. We’re transported to a fantasy land, where everything is nice and nothing is nasty (except the bad guys on the other side).

The pollies never try to tell a voter something they don’t want to hear. They never tell a voter they’re wrong about anything, and seem to go along with anything you may say, no matter how silly.

Have you noticed the way politicians expect us to be – and encourage us to be – completely selfish? It simplifies their job. They tell us what they can do for us and our families, never what we should be agreeing to in the interests of the country.

And the more they talk about doing this little thing or that little thing for us – the more they make following elections good preparation for a trivia quiz – the more they avoid having to talk about a host of big but controversial issues: climate change, the environment versus jobs, AUKUS, school funding, online gambling and even uninsurable homes. Of course, I couldn’t swear the media had played no part in dumbing-down election campaigns.

The pollies always tell us about the various nice things they plan to do to make our lives better, and never tell us of the not-nice things they’ll have to do to improve our lives. In election campaigns, every player wins a prize.

Not so long ago, a big part of elections was pollies being pressed to tell us exactly how much their promises would cost and exactly how they’d be paid for.

But doing that is what caused Labor’s Bill Shorten to lose the 2019 election he was expected to win. He had some expensive promises, but spelt out some small tax changes that would cover their cost.

These changes had been carefully selected to hit only some well-off people who could afford the loss, but the Libs ran a scare campaign telling ordinary punters they’d be hit and, with the effect magnified by a lot of yellow and black ads paid for by some fat Queenslander, Shorten lost enough votes to cost him the election.

The trouble here is that politicians on both sides have broken so many promises and said and done so many tricky things for so long that many voters have concluded they are all liars. This is why so many people have stopped listening to them.

But there’s one exception. The only thing a politician says that the doubters are prepared to believe is that their opponents are not to be trusted because they’re out to get you. “Ah yes, ain’t that the truth.”

That’s why scare campaigns have become the currency of election campaigning, with stultifying effect.

And that’s why the 2019 election has made elections and their campaigns much worse than they were. Under Albanese, Labor vowed never to be caught like that again. He made himself a “small target” at the 2022 election, promising to do very little, and not to do many things: introduce new taxes, increase existing taxes, and cancel or change the already legislated stage 3 tax cuts.

Apart from the latter, he’s kept those promises. He’s been a small-target prime minister, doing as little as possible to tackle our many problems, which is why so many of us are so uninspired by his performance. It’s far too risk-averse.

A leader who’s not game to do anything unpopular – such as putting up taxes – is a leader who’ll never make much progress solving our deeper problems, like giving our youngsters a fair shake, and never improve the future they profess to care about so much.

Trouble is, under our two-party system, when one side takes a position, the other side almost always copies it. We get less choice, not more. So when Albanese decides it’s safest to stay small target, Dutton stays small target.

When ditto Dutto keeps changing his policies mid-campaign, we’re watching him learning on the job not to be daring, not to fix things and, above all, to be only superficially different from the other side.

The big change since the 2019 election is that neither side will ever have the courage to propose any kind of tax change that would have some people paying a bit more – even those who could easily afford it. The tiniest possibility of an increase for some, and the fearmongers on the other side will soon have taxpayers throughout the land shaking in their boots.

This has taken the election-campaign fantasy land to a whole new level of unreality. The laws of economics have been suspended for the duration of the campaign. Government spending can only ever go up, while taxation can only ever go down. The budget deficit is presumed to be unaffected, covered by a sign saying Don’t You Worry About That.

Surely you remember the days when campaigns devoted much attention to “what do your promises cost and how will you pay for them?” That’s what tripped up Labor in 2019 and, I confidently predict, Dutton won’t let trip him up now.

Some worthy souls in the media keep lists of what the promises have cost and demand a detailed account of how that cost will be covered, but the two sides just brush them aside. They’re in tacit agreement not play that game any more. In truth, both sides will add to deficit and debt.

The other way to look at all this is that, by their poor behaviour – government by scare campaign – the two sides of politics have fought to a standstill. Neither side is game to do anything about any of our big problems for fear of the lies this would allow the other side to say about them. Now, I know what you’re thinking: “OK, Ross, if you’re so smart, what’s the solution to the mess election campaigns have got into?”

The good news is, the nation’s voters are already working on the solution. So many people have lost faith in the two sides of politics that the proportion of people voting for the two majors is the lowest it’s ever been.

In the 2022 election, the share of first-preference votes going to the minor parties and independents rose to almost a third, with the remaining two-thirds shared roughly equally between Labor and the Coalition. We saw the Libs losing seats to the teal independents, and the Greens winning more seats in the lower house.

I’m confident the minor parties’ share of the vote will go higher in this election. The experts are pretty sure that, whichever major gets more seats, it will be in minority government, needing the support of enough minors and independents to convince the governor-general it could govern effectively.

Both major parties would like us to believe minority government would mean chaos and no agreement on anything. Don’t be fooled. As we saw with Julia Gillard’s minority Labor government in 2010, the government was stable and passed more legislation than usual.

What changed was that, to get that support and stability, Labor had to agree to put through controversial measures it wouldn’t have been game to propose by itself. Such as? The carbon tax. Minority government transfers some power to the parties and independents who still believe we need real, controversial policy changes to solve our problems and improve our future.

So if you don’t like what the two major parties have done to campaigns and timidity in government, you should share my hope that this election puts neither major party back in majority government.

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Budget deficit perfection would be nice, but among the best is fine

The independent economist and former Treasury officer Chris Richardson, the leader of Treasury-in-Exile and thus chief apostle of fiscal rectitude, does the country a favour with his eternal campaigning to keep budget deficits and public debt levels low.

It works like Defence, where the retired generals do the talking for the serving generals, whose opinions must be expressed only to their political masters in private.

But all those people who, only in recent times, have joined the protest march demanding an end to deficit and debt don’t want to do the country any favours. I’m no great admirer of the Albanese government, but that doesn’t make every criticism of its performance reasonable.

According to these partisans’ version of events, the budget was in surplus and doing fine until this terrible government started spending with abandon, plunging the budget into deficit, where it’s likely to stay for the next decade, leading to ever-rising public debt. So should some great global mishap come along, we’d be in deep doo-doo.

The first thing wrong with this narrative is its implication that the prospect of a decade of deficits is all Labor’s doing. There’s nothing new about budget deficits; the budget’s been in deficit for more than two in every three years in the past half-century.

What’s more, Treasury was projecting a decade of deficits in then-treasurer Josh Frydenberg’s budget before the last federal election in 2022. So why don’t I remember the people who profess to be so worried now, expressing much concern then? Surely not because debt and deficits only matter when you’ve got a Labor government?

Actually, and as Treasurer Jim Chalmers never tires of reminding us, the projected decade of deficits and rising debt we’re told about today isn’t nearly as bad as the one we were shown back then – the one that didn’t seem to worry anyone.

Why was the projection three years ago so much worse than this one? Because Treasury’s forecasts and projections soon became woefully wrong. The budget deficit of $78 billion it was expecting in 2022-23 turned out to be a surplus of $22 billion. For the following year, the expected deficit of $57 billion was a surplus of $16 billion.

That’s an improvement of more than $170 billion right there. And because this hugely better outcome came so early in the decade, it also meant a huge reduction in the feds’ projected annual interest bill.

But while Chalmers is wrong to claim so much credit for this astonishing turnaround, his critics are wrong to give him none. They dismiss this vast improvement in the debt outlook as nothing more than good luck.

Huh? Rather than falling, as Treasury always assumes they will, iron ore and coal prices took off, so mining company profits and company tax payments boomed.

That’s only half the story, however. Treasury failed to foresee that the economy would return to near full employment – and pretty much stay there to this day, despite the big increase in interest rates intended to get the inflation rate down.

This meant a record proportion of the working-age population in jobs, earning wages and paying income tax. As well, the inflation surge meant a lot more bracket creep than expected.

So, remembering the Albanese government and Reserve Bank’s joint policy of seeking to get inflation down without inducing a recession, you have to say there’s been an element of good management as well as good luck, for which Chalmers and Albanese deserve some credit.

Chalmers gets credit for saving rather than spending most of the government’s higher-than-expected tax collections – something that wouldn’t have happened if Labor had been spending as uncontrollably as the partisan critics claim.

Much effort has been put into demonstrating that government spending is “out of control” and will continue that way for a decade unless something’s done. But analysis by Dr Peter Davidson of the Australian Council of Social Service gives the lie to such claims.

Davidson measures budget spending by the average annual increase after adjusting for inflation and population growth – real spending per person. Over the 27 years to 2018, the long-term average increase was 1.7 per cent a year.

But under the Abbott and Turnbull governments from 2014 to 2018, there was a period of budget austerity when the spending increase averaged just 0.1 per cent a year, as backlogs were allowed to build up and deficiencies were ignored.

Then, during the Covid response period from 2018 to 2022, spending grew by an exceptional 2.6 per cent a year. Now, over the six years to 2028, spending growth is expected to average 1.3 per year.

So claims of Labor’s profligate spending are themselves on the profligate side. It’s here that the critics move from partisanship to self-interested ideology. Their obsession with government spending comes from their ideology that, while all tax cuts are good, all spending increases are bad.

Why are they bad? Because they increase the pressure for higher taxes and reduce the scope for tax cuts. A decade of deficits caused by excessive tax cuts would be OK, but one caused by trying to ensure the punters got decent education, healthcare and social security is utterly irresponsible.

The final respect in which decade-of-deficits bewailers are wrong is their claim that our government’s financial position has us sailing close to the wind. Rubbish.

As former top econocrat Dr Mike Keating advises, if you take the debt of all levels of government in 2024, our gross public debt is equivalent to just 58 per cent of our gross domestic product. This compares with the Euro area on 90 per cent, Britain on 103 per cent, Canada on 105 per cent and the US on 122 per cent.

Much of the credit for our relatively low level of debt and deficit should go to decades of preaching by Treasury and its alumni, including Chris Richardson. But though they sometimes imply we’re at risk of being dangerously overloaded with debt, what they’re really trying to do is maintain our longstanding record as only moderate drinkers.

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Budget to give the economy a push next financial year

By MILLIE MUROI, Economics Writer

If there’s only one thing you gleaned from the budget – and it is the new tax cuts – that’s exactly what the government wanted.

The clock is ticking for Prime Minister Anthony Albanese, who, at the time of writing, was expected to call an election as early as Friday. That means a sweetener – such as a promise to let you keep more of your pay – is perfectly timed to nudge voters its way.

But the move also doubled as a distraction from something Labor would rather not talk about: the fact the nation’s finances will be in the red for the next decade despite a turnaround in the economy’s health.

This isn’t the end of the world, but with most of its major policies already announced in preparation for the election, the government knew it needed to give the press something good to latch onto when it unveiled its budget on Tuesday.

The tiny tax cut – the equivalent of about $5 a week for most taxpayers – due to kick in next year, was a sure-fire way to make a good impression.

But the budget revealed a bit more than just a cute tax cut. It also painted a picture of the state of the economy and the government’s game plan.

“Fiscal policy” is the government’s way of steering the economy by changing how much it spends and collects in tax. When the government increases its tax collections by more than it increases its spending from year to year, it’s choosing a “contractionary” stance (one that slows down the economy by taking more money out of it than the government pumps in).

When the government increases its spending by more than it increases its tax collection, it is adopting an “expansionary” stance (stimulating the economy by pumping more money into it). That’s the position taken by the government this year.

Turning to a page in the budget papers many economists call the “table of truth” shows us how the budget position for this financial year (and expectations for future years) has changed from previous forecasts – and what the biggest drivers are.

The “parameter variations” in this table tell us how cyclical factors – things the government has little control over – affect the budget. For example, lower global interest rates over the next few years are expected to shrink the interest rate bill paid by the government despite its growing debt.

AMP chief economist Shane Oliver says higher commodity prices and employment were the kind of parameter variations that helped deliver the government two back-to-back surpluses in 2022-23 and 2023-24.

Then there’s the effect of government policy decisions that weighed down the budget this financial year (2024-25) by $137 million more than was expected back in December, mostly because of an increase in spending on things such as cheaper medicines. This affects what’s called the “structural” part of the budget.

Next financial year, 2025-26, the government’s decisions will drain roughly $7 billion more than previously expected. That’s because it has made new promises such as earmarking $8 billion to boost the amount of bulk-billing and a six-month extension of electricity bill relief at a cost of $1.8 billion.

But improved economic conditions next year should help top up the budget by $12 billion. That’s mostly because of what’s called “automatic stabilisers”, which affect how much money comes into – and leaves – the government’s coffers, adjusting automatically to changes in the speed of the economy.

When business is booming and incomes are rising, for example, people pay more in tax, meaning more cash gets swept into the government’s hands. When the economy gets sluggish and people lose their jobs, the amount of tax flowing in falls.

As Betashares chief economist David Bassanese notes, the government is assuming (among other things) that there will be more people in jobs over the next few years, meaning there should be more income tax flowing in.

The government is also expecting economic growth to pick up and inflation to stay around the 2 per cent to 3 per cent target range, while slightly tweaking down its unemployment forecast to 4.25 per cent over the next four years.

Most of the savings, though, will be spent by the government, leaving the budget only a few billion dollars better off than expected back in December over the next four years – and still in deficit.

At the time of the mid-year budget update, the coming financial year was expected to have a $47 billion deficit – which is 1.6 per cent of GDP. Now, because of measures in the budget and changes in the government’s forecasts, it’s going to be $42 billion, or 1.5 per cent of GDP. The deficit is still a lot bigger than it was last financial year.

Now, it’s worth noting the Coalition, in 2022, also had deficits (that is, spending exceeding revenue) laid out for 10 years. As independent economist Saul Eslake points out, neither side of politics really wants to have the tough conversation of how to fix this problem when there’s growing demands for spending in areas such as healthcare and defence – and especially not before an election.

But the government isn’t the only major player when it comes to managing the economy. The Reserve Bank is also a heavyweight. It doesn’t have the same spending or tax powers, but it uses a tool called “monetary policy” – which you might know better as interest rates.

Like the government’s fiscal policy, monetary policy can be expansionary when interest rates are dropped (because it encourages spending and investment), or contractionary when interest rates are increased.

For the past few years, the bank has been cranking up interest rates in an effort to rein in inflation. For the first time since mid-2022, the bank in February notched down interest rates from 4.35 per cent to 4.1 per cent, moving towards an expansionary stance. Why?

Because it reckons, like the government, that prices are now rising slowly enough, and demand has softened enough relative to supply, to indicate the economy is no longer running too far ahead of its capacity.

The budget is unlikely to have much sway on the Reserve Bank’s forecasts or coming rate decisions. The spending changes were modest, the deficits have been flagged for months and the government’s forecasts aren’t drastically different to what the bank is expecting.

But if the outlook for the economy over the next few years is as rosy as the government is expecting, there’s a case for whoever is in charge in future years to ramp up efforts to return the budget to a surplus, or at least a neutral position, earlier.

That doesn’t have to mean drastic cuts to spending. It could mean changing the way the government collects revenue by introducing an inheritance tax or reducing the capital gains tax discount, and pursuing bolder productivity-boosting measures (Labor’s ban on non-compete agreements is a good start).

In the meantime, the budget for this financial year is expected to be nearly $28 billion in deficit. In the coming year, that deficit is expected to increase to $42 billion. This is an increase equivalent to 0.5 per cent of GDP, making the stance of fiscal policy adopted in the budget mildly expansionary.

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The government is timid and uninspired. This budget is a perfect fit

If you’re having trouble working up much interest in the budget, don’t feel bad. It’s not you, it’s the government. So much fuss is made about the annual federal budget that we expect it to be full of major announcements. Well, not this one, and not from a government that never wants to rock the boat.

It is, however, a budget we’ve wished on ourselves. We’ve made it clear that, while ever we’re feeling pain from the cost of living, we’re not much interested in anything else, and an unambitious government has been relieved to take us at our word.

Most of the measures in the budget are small cuts to various charges that affect households’ budgets. The government will be spending more to encourage GPs to bulk-bill their patients and to cut the maximum cost of a pharmaceutical prescription to $25 a pop.

It will extend the electricity bill rebate for the last half of this year, yielding households a saving of $150.

And not forgetting the big one that will make all the difference to the cost of living: indexation of the excise on draught beer will be paused for two years. Anyone who can see the saving per glass gets a prize for exceptional eyesight.

All this is to be done just as soon as we vote to re-elect the Albanese government – except that Peter Dutton has promised a Coalition government would do the same.

Of course, all these measures to ease the cost of living have already been announced, with one exception: a two-stage cut in income tax. Who knew? Surely, that’s something to get excited about?

Well, yes, until you examine the details. When Treasurer Jim Chalmers says the tax cuts are modest, he’s not exaggerating.

It boils down to this: in 15 months’ time, July next year, everyone earning more than $45,000 a year ($860 a week) will get a tax cut of a bit over $5 a week. A year later, they’ll get a further cut of $5, taking it up to $10.30 a week. Part-timers earning between $350 and $860 a week will get an initial saving of up to $5 a week.

Even with this last-minute addition, it’s not hard to believe that, until Cyclone Alfred intervened, Labor was hoping to hold the election in April and leave the budget until later. Why did the delayed election date prompt it to go ahead with a budget when it had nothing much to announce? Law and practice. It had to.

Still, budgets also tell us the government’s latest forecasts for the economy and for the budget bottom line: is the government expecting to spend more than it raises in taxes, or less? More. Every financial year for the next 10.

So the government foresees a decade of budget deficits and further borrowing to cover those deficits. Does it have any plan to correct this? Not that it’s telling us about. My guess is that its policy is to worry about that only after it has been re-elected. If it isn’t, good luck, Mr Dutton.

But since we can’t see further than the cost of living, how are we doing? On the face of it, we’re well over the worst. Over the year to December, consumer prices rose by a modest 2.4 per cent.

The rate of inflation is forecast to stay low, meaning the Reserve Bank is likely to keep cutting interest rates in coming months by a total of 1 percentage point or so, which will take a lot of pressure off people with big mortgages.

The government expects wages to rise a bit faster than consumer prices which, if it comes to pass, will ease the cost of living to a small extent. But if many people still feel it’s a struggle to pay their bills, I won’t be surprised.

Why not? Because, over the five years to last December, consumer prices rose by about 4.5 per cent more than wages did. Until that “wage deficit” is closed, many people will still be feeling the pinch.

This makes it all the more important to understand why the government’s move to continue its energy rebate for another six months isn’t as good as it sounds.

The rebate – which is temporary and paid directly to your electricity retailer – began from July 1 last year. It thus caused quarterly electricity bills to be $75 less than they otherwise would have been.

Its extension for the last two quarters of this year won’t stop your bills being higher than they were because your retailer has increased its prices. But it will stop your bill also being $75 a quarter higher than otherwise. Thanks to generous Anthony and Jim, that unpleasant surprise won’t come until you get your first quarterly bill in 2026. (Come to think of it, maybe the new tax cut is timed to ease the pain of higher power bills.)

As for Trump and his planned trade war, the T-word doesn’t get a mention. Rather, Chalmers worries about “heightened global uncertainty” and “escalating trade tensions”. Why the obfuscation? Maybe Chalmers wants us to see what a great job the government’s done fixing the cost of living and doesn’t want that terrible man raining on his parade.

Actually, it’s too early for concrete actions. We don’t yet know how stupid Trump intends to be, let alone whether the other big economies intend to worsen it by giving as good as they get (otherwise known as cutting off your nose to spite your face).

So right now is the time to think hard about our options, not announce a response. We do know our government won’t be tempted to retaliate, and Chalmers is right to say we must make our economy more resilient to shocks from overseas.

But spending on a new “buy Australian” campaign? It may make uninformed voters feel better, but I doubt it will fix the problem.

This government is timid, uninspired and uninspiring. This budget fits it perfectly.

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The outlook for house insurance is much worse than we're being told

The big news on house insurance this week was the response of the insurance industry’s peak body to a parliamentary committee’s extensive criticisms of its treatment of people claiming on their policies after the massive floods of 2022.

The Insurance Council of Australia accepted some of the committee’s recommendations, announced an “industry action plan” and generally promised to be good boys in future. But the consumer groups were unimpressed.

Drew MacRae, of the Financial Rights Legal Centre, said the insurers “have a long way to go to restore trust and confidence in a sector that systematically failed customers during the 2022 floods. Today’s announced plan to get there is welcomed, but ‘trust us’ just won’t cut it.”

Meanwhile, in their pre-election campaigning, Anthony Albanese and Peter Dutton are as one in portraying our insurance problem as a matter of misbehaving insurance companies.

Asked if he accepted a journalist’s claim that the companies had doubled premiums in recent years, “had plenty of money” and “are ripping us off”, Albanese flatly agreed. “We will certainly hold the insurance companies to account,” he added.

Dutton’s response was to threaten to split up the big insurance companies – until wiser heads in his team calmed him down.

Sorry, all this is delusional for some and, for others, a knowing attempt to mislead us on the seriousness of the problem. Have the insurance companies been behaving badly? Yes. Should they be forced to treat their customers fairly? Of course.

But will that fix the problem? No. Have the companies been ripping us off, putting up premiums just to increase their profits? No. They’ve been grappling with a problem they know they can’t solve: you can’t insure against climate change.

The cost of house insurance has been rising rapidly for several years because more bushfires, cyclones, storms and floods have led to more claims. We know that continuing climate change will cause extreme weather events to become more frequent and intense.

So the great likelihood is that house insurance premiums will just keep rising rapidly. The outfit that’s doing most to alert us to the deep trouble we have with insurance is the climate campaigning Australia Institute. Its recent national poll of 2000 people found that while 78 per cent of home owners said their home was fully insured, 15 per cent said they were underinsured and 4 per cent said they were uninsured.

As house insurance premiums rise, more people will become underinsured – many with no insurance against flood damage, for instance – and more will be uninsured. Many of the latter will be people whose homes the companies have refused to insure.

The insurance companies know what’s coming, as do the banks and the government. They know what’s coming, but they don’t want to talk about it before it happens, mainly because they don’t know what to do about it.

Remember, insurance is an annual contract. So if I’m confident there’s little chance of your house being destroyed in the next 12 months, I’m happy to give you the assurance of insurance. But when, sometime in the future, I decide you’re a bigger risk, it will be a different story.

The point is, there’s no magic in insurance. It can do the possible, but not the impossible. The way insurance works is that, if I can gather a “pool” of many thousands of home owners, each with only the tiniest risk of having their house burn down, I can promise all of them that, in return for a modest premium, they’re all fully covered in the event of a major mishap.

A few of them will have such a mishap, but I can pay them out from the pool of premiums and still have enough left to make it worth my while being in the insurance business.

Once the risk of your home coming to grief becomes less than tiny, however, the game changes. When more than a few people in the pool make claims, I make no profit, or maybe a loss. So I can start by making owners with bigger risks pay more than those with low risks, but once your risk is too high, I can either charge you a premium that’s impossibly high, or just refuse you insurance.

Because of their ever-growing record of claims, the insurance companies are well-placed to make a reasonably accurate assessment of how risky it is to cover your house – even to the point of charging more in some parts of a suburb than others.

This means, of course, that home owners in some parts of the country will be charged far more than others. Premiums will be highest in northern Australia, where cyclone risk is higher, but also in areas where flooding or bushfires are likely. And even people living well away from harm in the inner city will be paying more to help out.

All this is why we should be doing more – and have been doing more this long time – as our part in the global effort to limit climate change. But what should we do to reduce the damage that’s arrived or is on its way?

Well, certainly not having the government subsidise insurance. That would just encourage people to keep doing what they should stop doing. Taxpayers’ money should be used only to help people get away from the risk of fires and floods.

Just as fighting a fire is easier than fighting a flood, bushfires are less difficult to get away from than floods. We must start by preventing anyone else building in risky areas.

Then we need to move people off the flood plain. As for Lismore, the whole town needs to be moved to higher ground.

But here’s a tip. Don’t hold your breath waiting for Albanese or Dutton to raise these issues in the election campaign. That’s not the way losers behave. Much easier to shift the blame to the greedy insurance companies.

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Argy-bargy on the way to next week's off-again, on-again budget

According to the business press, Anthony Albanese was desperately hoping for an early election so he could avoid next week’s budget and the drubbing he’ll get when Treasurer Jim Chalmers is forced to reveal projections of a decade of budget deficits.

If you think that, you don’t know much about budgets. But, more to the point, nor do I expect to believe the budget’s forecasts for the economy in 2025-26.

The first reason I don’t believe Albanese was living in fear of having to reveal a decade of deficits is that, although the business press may be shocked and appalled by budget deficits, the voters have never been. That will be particularly so at a time when all they care about is the cost of living.

The business press and the rest of the partisan media will make a great fuss, but the punters won’t care – just as they didn’t when, in the previous government’s last budget of March 2022, treasurer Josh Frydenberg revealed his own projections of a decade of deficits.

Funnily, I don’t remember the business press making a big fuss back then, perhaps because it only feels a need to worry about deficits when a government of the wrong colour is in power.

But if you’re wondering why, three years later, we still face a decade of deficits, I’ll give you a clue: what the two projections have in common is the stage 3 tax cuts. If all you care about is balancing the budget, the tax cuts were unaffordable then, and they’re still unaffordable now.

Of course, the “Trumpist” logic of big business is that tax cuts are always responsible, whereas increased government spending, for any purpose, is always irresponsible.

Another reason for doubting that Albanese thought having an economic statement rather than a full budget would allow him to avoid admitting to the prospect of a decade of deficits is the requirement under the Charter of Budget Honesty for the secretaries of Treasury and Finance to produce a PEFO – a pre-election economic and fiscal outlook statement. That statement would have revealed. . . the projected decade of deficits.

What the press gallery seems not to know is the reason for the modern practice of governments providing an economic statement immediately before announcing an election – unless, of course, the election is called immediately after a budget’s been delivered, as will happen next week for the third election in a row.

Why must the officials’ PEFO always be preceded by a government economic statement in some form? So an excitable media won’t leap to the conclusion that any deterioration in the budget balance since the previous government statement represents the econocrats revealing something their political masters were hiding.

Guess what? The politicians’ statement and the PEFO a week or two later are always almost identical. (And I bet it was the econocrats who suggested the idea to the pollies. The last thing the bureaucrats want is to embarrass the duly elected government of the day.)

But enough already on the politics of budgets. Better get to some actual economics. I don’t expect to believe the economic forecasts we see in next week’s budget. Why not? Because they’re highly likely to be wrong. Economists are hopeless at forecasting even just a year ahead because the models they rely on – whether mental or mathematical – are so woefully oversimplified.

That being so, the forecasters’ rule of thumb is to predict “reversion to the mean”. If last year was below average, this year growth will be up; if last year was above average, this year growth will be down.

As well, when times are tough, official forecasts tend to err on the optimistic side. (This is no bad thing when, to some extent, their forecasts tend to be self-fulfilling; the last thing we need is the government predicting death and destruction.)

But I’m under no such constraint. And I can’t see the economy getting out of second gear in the financial year ahead. The obvious reason for expecting further weak growth is the effect of all Trump’s antics. But this factor is easy to overestimate. Unlike some countries, we don’t do much trade with the US.

The media have tended to exaggerate the likely effect on us of all Trump’s off-again, on-again tariffs to make it a better story. The ultimate effect on us will come mainly via China, our biggest export destination, but the Chinese have their own ways of protecting themselves in the unending tussle with the Yanks for the title of top dog.

What’s likely to have a bigger effect on us is the uncertainty about how Trump’s craziness will play out. Uncertainty has real effects when it prompts businesses and even households to delay investment decisions until the prospects are clearer.

So there will be some adverse effect on our economic growth. Even without Trump, however, it’s too easy to sound wise by making a big thing of what’s happening in the rest of the world. Never forget that roughly three-quarters of all the goods and services we produce are bought by Australians, while roughly three-quarters of all the goods and services we buy are made by Australians.

On the positive side for economic growth, it can’t be long before the Reserve Bank cuts interest rates back to their normal or “neutral” level. But that suggests a total cut of only 1 percentage point or so. It won’t set the world on fire.

Similarly, the parties’ many election promises will add to government spending and act as a stimulus to the economy and private spending. But again, don’t let the modern practice of exaggerating the significance of government policy measures by quoting their expected cost “over four years” mislead you.

From the perspective of the budget’s immediate effect on economic growth, it’s only the cost of the measure in the first year that matters. And, because we’re measuring annual growth, it’s only any increase on the first year’s spending that matters.

The fancy mathematics economists indulge in is overrated, but simple arithmetic isn’t.

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Everyone hates government spending - until someone tries to cut it

It seems government spending will be an issue we hear a lot of in this year’s federal election campaign. But remember this: much of what’s said will be influenced by partisanship, ideology, self-interest and populism.

Peter Dutton is making wild claims that need fact-checking. The business press is saying things that aren’t a lot better. And the debate will proceed according to an eternal political truth: while voters never mind you bad-mouthing government spending in general, as soon as you get specific, they start fighting back.

“I’ve always thought the money the government’s giving you was a great waste, but the money – and the tax breaks – I’m getting are vital to the economy.”

It’s obvious that some part of the $730 billion the federal government spends each year must be wasteful, just as some of the 365,000 people it employs must be in excess. But how much is some – at lot or a little? No one’s ever bothered to find out. Much easier to stick to unsubstantiated claims and exploiting voters’ prejudices.

Dutton has been laying it on thick. When he made Senator Jacinta Nampijinpa Price shadow minister for “government efficiency”, he claimed the Albanese government “has spent money like drunken sailors”.

So what spending would he cut? He’ll tell us later. We do know, however, that Albanese & Co have increased the number of federal public servants (not the same thing as total federal employees) by 36,000.

This addition of “Canberra public servants”, Dutton has said, was “wasteful” and meant the public service was now “bloated and inefficient”. It’s an example of “wasteful spending that is out of control”. “We’re not having 36,000 additional public servants in Canberra”.

So is he going to sack them all? He’d be happy for you to think so, but he hasn’t actually promised he would. What he has said is he’d get rid of diversity and inclusion positions, along with “change managers” and “internal communication specialists”.

Whether that would be a good or bad thing, the saving would be chicken feed.

Dutton has tried hard to give the impression all the extra workers are in Canberra. Not true. The proportion of all federal public servants in Canberra has actually fallen to 37 per cent. Most of the extra people are working in frontline services around the states, helping people using the national disability scheme, visiting Centrelink and so forth.

Andrew Podger, a former top Canberra bureaucrat, notes that, at less than 0.7 per cent, the federal public service is now smaller than it was in 2008 as a proportion of the population, with its share of the total Australian workforce having fallen to less than 1.4 per cent.

Dr Michael Keating, a former topmost bureaucrat, says there’s plenty of evidence that the previous Coalition government was underfunding many services. Hospital waiting lists blew out, public schools didn’t get the resources needed to do their job adequately according to the Gonski standards, waiting times for welfare payments and for veterans’ compensation were far too long, and delays in processing visa applications led to more unauthorised immigrants.

Ending or reducing these policy-caused delays explains most of Albanese’s increased government spending. Sound like waste to you?

Keating notes that, according to the latest official estimates, federal government spending this financial year will be almost the same as it was in the Morrison government’s last year, when measured as a proportion of gross domestic product. Sound profligate to you?

He further notes that, when you take total spending by all levels of government as proportion of GDP, Australia is actually the lowest among the 38 members of the Organisation for Economic Co-operation and Development, save for Ireland, South Korea and Switzerland.

And get this: as a proportion of national income (GDP), our spending by all levels of government is more than 4 percentage points lower than the average for all OECD countries. Remind you of a drunken sailor, does it?

According to the opposition’s shadow minister for the public service Jane Hume, “you don’t grow the economy by growing the size of government. Every public-sector job has to be paid for by a private-sector worker”.

I hope Hume is smart enough to know she’s talking nonsense and is just trying to mislead those people silly enough to believe her. This is a defence of private-good/public-bad ideology that makes no sense. Apart from her inference that people who work for the government don’t have to pay taxes, it’s as silly as saying Woolies and Coles don’t add to the economy because every cent they earn comes from their customers’ pockets.

If we left health, education, law and order and all the rest completely to the private sector, do you reckon we’d have an economy that was bigger or smaller than we have today?

Back to Dutton. He says “a major cause of homegrown inflation is rapid and unrestrained government spending”. If it’s the huge spending by federal and state governments during the pandemic he’s referring to, that’s no more than the economists’ conventional wisdom.

But I guess he’s referring to the more recent spending by Albanese & Co. And get this: ignore the wild exaggeration and the business press has been saying much the same thing for months.

Although the argument has been disavowed by Reserve Bank governor Michele Bullock, the business press has been arguing that the government’s spending, especially that intended to ease cost-of-living pressure by subsidising electricity prices and increasing rent assistance for pensioners, is causing consumer demand to be stronger than otherwise and keeping the jobs market stronger than otherwise, so has allowed businesses to keep increasing their prices.

Fundamentally, the business press is right. The way to get inflation down faster would have been to hit the economy harder, with higher interest rates and zero discretionary spending by the government. Instead, the Reserve and the government took the compromise position by aiming for a soft landing and a consequent slower return to low inflation.

I get why the press hasn’t wanted to spell out more clearly its preference for the tougher choice. What I don’t get is why it thinks its business customers would have preferred a full-blown recession.

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You can blame Albanese for all our woes - except the cost of living

I try not to be a pollie basher – we get the politicians we deserve – but I can’t remember a time when I’ve been more disillusioned and disheartened by the performance of both major parties. It’s fair to criticise them on every topic except the one that obsesses us: the cost-of-living crisis.

Let’s start with that. For several years, we had prices rising at a rate that was actually lower than the Reserve Bank and economists regarded as healthy: less than 2 per cent a year. But then, in the months before the federal election in May 2022, at which Scott Morrison and crew were tossed out, prices took off.

By the end of that year, consumer prices had risen by almost 8 per cent. As you remember, the Reserve Bank began trying to get inflation back under control the only, crude way it knows: to discourage households from spending so much by using higher interest rates – particularly on home loans – to leave us with less to spend on other things.

Why did the Reserve Bank start raising rates during the election campaign, rather than waiting until it was over? Because it foresaw that a change of government was likely and didn’t want anyone getting the idea that it was the new government that had caused the problem.

By the same token, it’s hard to blame the surge in prices on the Morrison government. Prices took off in all the rich economies for much the same reasons. First, because the pandemic caused major disruption to supply of many goods, and because Russia’s attack on Ukraine disrupted world gas and oil markets.

But second, because the efforts to prop the economy up during the lockdowns – by slashing interest rates almost to zero, and the shedloads of government spending on the JobKeeper scheme, the temporary doubling of unemployment benefits, and on many other things – proved to be wildly excessive. When people started spending all that extra money, demand for goods and services grew faster than businesses’ ability to supply them, so they whacked up their prices.

You could blame this gross miscalculation on Morrison & Co – except that it was the first pandemic the world had seen in a century, the medicos had no idea how bad it would be or how long it would take to develop a vaccine, and like all governments everywhere, our government and its econocrats decided it would be safer to do too much than too little.

Since then, the passing of the international supply disruptions and the Reserve Bank’s many interest-rate increases have succeeded in getting the rate of price increase down a long way. But the bank won’t start cutting interest rates until it’s convinced our return to the 2 to 3 per cent inflation target zone will last.

Despite the unceasing criticism of a largely partisan news media, the Albanese government’s part in helping get inflation back under control has been as good as it’s reasonable to expect.

One reason it’s taking so long is that both the government and the Reserve Bank have been trying to avoid causing a huge rise in unemployment, and in this, they’ve been spectacularly successful. The proportion of the working-age population with jobs is at a record high.

So if it’s not fair to blame Albanese and his ministers for the cost-of-living crisis, why am I so critical and disapproving of the government – not to mention the opposition?

Because on almost every other matter Albanese has touched, he’s done far less than he should have. And in their time on the opposition benches, the Liberals and their Coalition partners have laboured mightily to make themselves more extreme and less electable.

As always, we turned to a new government in 2022 full of hope that it would make a much better fist of dealing with our many problems. And it’s always been true that Albanese and his people knew what needed doing. It’s just that, somewhere along the line, he seems to have lost his bottle.

He’s done a bit to tackle each of our big problems, but with one exception, he’s stopped short of doing nearly enough. Everything gets a lick and a promise.

The one exception has been the government’s significant efforts to reduce job insecurity – to improve the wages and conditions of less-skilled workers – for which we can thank the unions. Under the Labor Party’s constitution, the union movement holds a mortgage over the party and its members of parliament.

On everything else, Albanese seems to live in fear of annoying some interest group somewhere. So he always does something, but never enough. When business and other interest groups lobby the government privately to tone down its planned changes, he invariably obliges.

You can see this in the government’s changes to gambling advertising, Medicare bulk-billing, the adequate taxation of mining and gas, the National Anti-Corruption Commission (no public hearings), the housing crisis, vocational education and training, aged care and so forth.

But on no issue has Albanese failed so badly as on the one most vital to our future: climate change. Sure, he’s shored up the Coalition government’s “safeguard mechanism” and legislated the target of reducing emissions by 43 per cent by 2030. At the same time, however, he’s acted to secure the future of natural gas extraction and authorised expansion of three big coal mines.

It’s as though he’s taking an each-way bet. He seems desperate to stay in office, but has no great plans to govern effectively.

Meanwhile, under Peter Dutton, the Liberals and their pro-mining National Party colleagues have used their time in opposition to make themselves negative, divisive and utterly unworthy to take over from a weak government. Their one substantive policy is to be off with the nuclear fairies.

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The best thing our pollies have done in decades is also the worst

With the coming departure from politics of Bill Shorten, it’s time to talk about his former bouncing baby, and now obese adult, the National Disability Insurance Scheme. To his credit, his final act has been to put it on a strict diet.

The NDIS is one huge contradiction. Its introduction, in 2013, is Julia Gillard’s short-lived government’s greatest achievement, and Labor’s biggest extension of our welfare state since the introduction of Medicare in 1984.

Before the scheme began, the physically and mentally disabled received some help from state governments, but not a lot. To a great extent, the day-to-day care of the disabled was left to their families.

Under the NDIS, however, the lives of hundreds of thousands of Australians living with a disability have been transformed. They’ve been given greater choice and control over the services and supports they receive. More of their needs are being met, with more of their care being provided by paid workers and less left to family members.

People with a disability are given a personalised “package” – a budget to cover the cost of specified goods and services they need. It sounds like a great improvement, and for many thousands of people it has been.

So, what’s the problem? It’s costing taxpayers far more than ever expected. It’s supporting more people than were expected to need help – more than 600,000 – and covering more forms of disability than intended.

The scheme’s cost is rising far faster than expected. It’s become the second-biggest item of spending in the federal budget, after the age pension. It’s expected to cost $49 billion this financial year, rising to $61 billion in three years’ time.

In 2014, the Medicare levy was increased from 1.5 per cent to 2 per cent of individuals’ taxable income to cover the cost of the scheme. This has proved wildly inadequate. The scheme’s cost has been rising by an astonishing 11 per cent a year.

This was clearly unsustainable. Since Labor returned to power in 2022, Shorten – the man who championed and initiated the scheme – has been struggling to control its ever-mounting cost, and thereby secure its future.

Last month, after reaching agreement with the states and gaining the support of the opposition, Shorten put through the Senate changes in the scheme’s rules intended to reduce the growth in its cost to a mere 8 per cent a year. The scheme will support fewer forms of disability and do more to limit overcharging by service providers. The states will be required to accept more responsibility.

As proof that costs are coming under control, Shorten has said the scheme ended last financial year about $600 million under budget.

But how has such a well-intentioned scheme been such a disaster financially? It’s been a victim of the misguided crusade for smaller government – also known as neoliberalism – and its ideology that the public sector is always inefficient, whereas the private sector is always efficient.

The great misstep of our age has been the privatisation of many government-owned businesses and the “outsourcing” of taxpayer-funded services to private providers.

The proposal for a disability scheme was given a big tick by the Productivity Commission because a market could be established where private businesses competed to provide the goods and services to individuals using government money. This was ideology-based delusion. Governments can’t wave around the cash and create out of thin air a “market” that has any of the self-controlling properties described in economics textbooks.

Many people with disabilities can act like an ordinary consumer, making sure they get the good or service they need at a fair price, but many can’t, or don’t. Even where they have the understanding, they don’t have the same motivation to spend taxpayers’ money with the care they spend their own.

Where people’s disability means they’re unable to pick and choose, the government can pay someone to help them make their choices. But that adds to the cost. And who can be sure that person’s own interests don’t get in the way of them doing the best by their customer?

Even when most of these helpers do the right thing, are they highly motivated to ensure no more taxpayers’ money is spent than necessary? And that’s before you get to the actual providers of goods and services to the disabled. Since their prices are being paid from the bottomless pit of the government’s coffers, what’s to stop them providing more services than are strictly required, or padding out their prices, or even charging the government for services they didn’t provide?

When the feds took over responsibility for the disabled, the states happily stopped providing those limited services they were providing. So where they had, for example, employed providers in regional centres, they ceased to. Did a market of self-employed providers spring up to fill the vacuum? No, it didn’t.

The other hard lesson we’ve learnt is that the bureaucrats administering the scheme aren’t much good at detecting and preventing overservicing, overcharging and outright fraud.

Let’s hope that changes.

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Albo’s quiet quest: stop wasting so much taxpayers’ money

If you’ve gained the impression that Anthony Albanese’s government is one that knows what it should be doing to fix our various problems, but lacks the courage to do anything that might be controversial – even just including questions in the census about people’s sexual orientation – I can’t tell you you’ve got the wrong idea.

What people outside Canberra often don’t realise is how obsessed governments, of either colour, become with how their opponents will react to anything they do or say. Albo seems to have a bad case of this.

It’s something economists understand from their study of the behaviour of duopolies. Albanese has forgotten the golden rule of competition laid down by the social psychologist Hugh Mackay: to compete successfully, focus on your customers, not your competitors.

But while Albo’s lack of courage keeps hitting the headlines, it’s not the whole story of this government. Behind the scenes, it’s gearing up to do a better job of ensuring that the many billions of taxpayers’ money it spends each year are more effective in improving our lives.

Governments don’t deliberately waste our money. Almost all of it is spent with the intention of making us safer, improving our health, adding to our education, ensuring we don’t starve because we can’t find a job or are too old to work, or just to help us travel from A to B more easily.

But while almost all government spending is done with good intentions, a surprising amount of it does little to achieve its stated objectives. Why? Because we’re spending on things we’ve always spent on, doing things the way we’ve always done them. Because we’re spending on new things just in the fond hope this will make things better. And because our spending choices are guided by ideology, anecdotes or – and this one’s a favourite – because it’s spending you know will give voters the impression things are improving.

After decades of pursuing the quest of making government smaller – by privatising government-owned businesses and paying private businesses to deliver government-funded services – Albanese and Treasurer Jim Chalmers are on a quest to make government better.

They’ve set up within the Treasury the Australian Centre for Evaluation, which will co-operate with other departments in assessing government spending programs to see how well they are achieving their objectives. The goal is to build a body of evidence of what spending works and what doesn’t. Spending programs should be based on such evidence, not on hunches and hopes.

Last week, Treasury secretary Dr Steven Kennedy gave a long speech outlining his department’s commitment to “evidence-informed policymaking”.

For many years, the medical profession has been committed to using “randomised controlled trials” to evaluate the effectiveness of medicines and medical procedures. These involve experiments where subjects are divided into two groups selected at random. One group is given the pill or the procedure, then compared with the “control” group to see what difference it made.

Now the econocrats want to use this technique to evaluate government spending. And on Tuesday Dr Andrew Leigh, the assistant minister for competition, charities and treasury, gave a speech on evidence-based policing.

Controlled experiments have been used to study the effectiveness of police behaviour in America for many years. For instance, it’s widely believed that the use of body cameras will improve the way police treat members of the public.

But a study involving more than 2000 police officers in Washington DC found that wearing cameras had an insignificant effect on police use of force and on civilian complaints. Their benefit was in providing better evidence in court.

In Australia, the Queensland community engagement trial tested the effect of training in “procedural justice” on citizens’ views of the police. Traffic police were taught to use a script when speaking to drivers stopped for random breath testing.

The study found it improved drivers’ views of the police, though they were no more likely to obey officers’ directions. (But I doubt if many people disobey the coppers, no matter how impolite they are.)

Many randomised trials involving the police are being conducted in Victoria. One seeks to reduce the number of people who fail to appear in court after being summonsed.

It tests the effect of providing simpler information, replacing a 2200-word, seven-page document with a 60-word statement and links to support services from Victoria Legal Aid and the Victorian Aboriginal Legal Service.

The initial results show that the shorter document leads to better court attendance, and thus fewer arrests and incarcerations of people who don’t turn up. The results of many more experiments are on the way.

Meanwhile, the Brits have set up a What Works Centre for Crime Reduction, and Leigh hints that we may do something similar in Australia.

Policing is just one example, of course. It all seems pretty laborious, but if it leads to less ineffective spending and better government it’s a worthwhile endeavour. And not before time.

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Unthinking privatisation leaves much mess to be cleaned up

It’s been a week of facing up to the various troubles caused by the fad of governments trying to solve their problems with help from the private sector.

All governments have indulged in the fashion of privatising their businesses and outsourcing the provision of public services to a greater or lesser extent, with varying degrees of success. Victoria was first with the idea of selling off its electricity monopoly, and it’s had its own adventures with private toll roads.

But this week it was NSW’s turn to grapple with the almighty mess it’s made of its toll roads, guided by two visiting Victorians – Professor Allan Fels and Dr David Cousins. There is much for Victorians to learn from the northerners’ travails, as they struggle to keep the schadenfreude off their face.

First, how did this supposed “reform” push get started? Partly, it was ideological – many people believe private businesses are always efficient, whereas governments are always inefficient.

But mainly it was politicians trying to do the impossible – or look like they’d done it. How can the government do more without getting bigger? How can we respond to the voters’ unceasing demand for us to provide more without increasing taxes or adding to government debt?

I know, let’s use “public-private partnerships” to work their magic. This thinking has left Sydney ringed by 13 toll roads, 11 of which are majority-controlled by the ASX-listed giant tolling company Transurban, along with many minority partners.

Toll roads now make up almost half of Sydney’s motorway network. It has more toll roads than any other Australian capital city, which hasn’t stopped it from being the most congested. These toll roads have grown like Topsy, each with differing tolls and rules about how the toll is regularly increased.

Taken together, the toll road system is regarded as inefficient, unfair and lacking transparency.

This week’s final report of Fells’ and Cousins’ independent review found that tolls are higher than they need to be and higher than they should be. Unless something is done, they’ll increase too quickly in coming decades.

Tolls are too high in the sense that they probably encourage trucks to use less suitable roads, and lead to greater congestion on other roads as motorists try to save money. There is no provision for pricing rules set to run for decades to be reviewed to ensure they still make sense.

A toll road contract is a natural monopoly, but not all the contracts were awarded after competitive bidding. Where bidding did occur, contracts weren’t necessarily awarded to the firm offering to charge the lowest toll.

Often, the government set what the toll would be, with the contract awarded to the firm offering to take on the most of the government’s obligation. This was a way of shifting costs that should have been covered by the taxpayer onto motorists, thereby making budgets look better and taxes lower.

Sometimes the cost to motorists was disguised by contracts where the toll started low but rose excessively over time.

All the contracts involved the private firms borrowing the money to pay for the motorway, even though governments can borrow much more cheaply than businesses can. This made government debt look lower, but hid the higher interest costs in higher tolls.

All the contracts involved the company accepting “traffic risk”. When fewer cars use the road than had been predicted, the company’s out of pocket, but when there are more cars than predicted, the company makes a windfall gain.

By now, windfall gains are common, and the companies are cleaning up. But this is an unnecessary burden on motorists. Why? Because companies have to be paid to take on the risk, whereas governments are much better at bearing such risks. They can spread any costs over millions of taxpayers so that they become trivial.

The system of tolls is biased against motorists who live in the outer western suburbs, and biased in favour of those in better-off northern suburbs using long-established, government-owned toll roads crossing Sydney Harbour.

For some years NSW governments have sought to reduce this unfairness by paying subsidies to western suburbs motorists with excessive weekly toll bills. This makes the system less unfair by adding a cost to taxpayers with no loss to the toll companies. They actually benefit because more motorists can now afford to pay their high prices.

The Minns Labor government has vowed to bite the bullet and renegotiate the contracts. This week’s final report recommends that it replace the hodgepodge array of tolls with a uniform system where the price is based on distance travelled, with those travelling longer distances charged less per kilometre.

The Harbour Bridge and Harbour Tunnel tolls would be included in the pricing mechanism, so that northern suburbs motorists paid more, while western suburbs motorists paid less.

The government says it will compensate the toll companies for losses from changes to their contract arrangements, but would transfer “traffic risk” and its windfall gains to the government. This would help cover lower tolls in the west.

Transurban has belatedly agreed to renegotiate, but proposes setting the toll on a different basis, suggesting the negotiations may be long and hard. But getting agreement from all Transurban’s many minor partners could take an eternity. The government wants a deal by Christmas.

To this end, the report recommends that the NSW government take back control of tolls by setting up a state-owned entity, NSW Motorways. Its changes to tolling arrangements would be overseen by the NSW Independent Pricing and Regulatory Tribunal. The new entity should look for opportunities to add competition to the system, especially for any new roads.

The existence of the new tolling entity would allow the government to act should it take Transurban and its many partners too long to agree to a satisfactory deal.

The private companies have rights, but they don’t have the right to impose on the people of NSW and their government an unfair and unsustainable arrangement lasting forever and a day.

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Forget smaller government, let's shoot for better government

We pay our taxes, then governments spend them. But where does all that money go? And how much of it is wasted? Well, where it goes is no secret, but how much of it does little to benefit us is something we don’t really know. Why not? Because we put so little effort into finding out.

In 2022-23, the federal and state governments spent almost $890 billion. Nearly 33 per cent of that went on social security payments; 21 per cent on healthcare (hospitals, doctors, medicines); 15 per cent on education (from pre-primary to university); 5 per cent each on defence and law and order; plus transport, the environment, housing, recreation and culture, and much else.

People who resent the taxes they pay like to think it goes to council workers leaning on shovels and public servants sitting around drinking tea, but really, they should be thinking of doctors, nurses and ambos; teachers and lecturers; soldiers, sailors and fliers, coppers, firies and garbos.

Those people are busy almost all the time doing what they’re paid to do. If some government departments once were overstaffed, years of cost-cutting should have fixed that.

No, the trouble isn’t that workers in the public sector aren’t working hard. It’s that they can be working away on programs that seem like they should be delivering for taxpayers, but aren’t.

Consider these four plausible propositions. First, parents are more likely to get their kids to school if threatened with the loss of government payments. Second, testing students’ literacy is an accurate way to assess their ability.

Third, early childhood staff have all the skills they need. Fourth, a health program designed by both educators and their students will be more likely to discourage risky behaviours.

Sorry, turns out none of those programs worked.

In 2016, researchers discovered that the Northern Territory’s efforts to improve school attendance by making welfare payments conditional on getting kids to show up had no effect on attendance.

In Dubbo, other researchers found that if you made a literacy test more culturally relevant by changing a story about lighthouses to one about the dish-shaped telescope in Parkes, you halved the gap between the scores of Indigenous and non-Indigenous kids.

In NSW, researchers found that giving early childhood staff a half-year professional development program boosted the achievement of their kids, especially their literacy.

Yet more researchers – in Brisbane, Perth and Sydney – found that, despite the students’ involvement in designing the Health4Life program, it had no effect on alcohol use, smoking, screen time, physical inactivity, poor diet or poor sleep.

What all these research efforts had in common was that they evaluated these programs using RCTs – randomised controlled trials. This involves using the toss of a coin to divide similar participants in the trial into two groups. One group gets the treatment and the other “control” group doesn’t. You then compare the two, confident that any differences between them have been caused by your intervention.

Point is, this is a far more rigorous way of judging whether government spending programs achieve the benefits you were hoping for, rather than just doing a pilot program and deciding whether it seems to have worked.

But these four careful trials are the exception, not the rule. A study by the Committee for Economic Development of Australia examined a sample of 20 federal government programs worth more than $200 billion. It found that 95 per cent of them hadn’t been properly evaluated. The committee’s examination of state and territory government evaluations reported similar results.

“The problems with evaluation start from the outset of program and policy design,” it said. Across the board, the committee estimated that fewer than 1.5 per cent of government evaluations use a randomised design.

Similarly, a Productivity Commission report in 2020 into the evaluation of Indigenous programs concluded that “both the quality and usefulness of evaluations of policies and programs … are lacking”.

This is in marked contrast to the medical profession, where controlled trials are standard in the evaluation of medical operations. These have demonstrated that the treatments preferred by experts were often worse for patients.

For instance, radical mastectomies for breast cancer disfigured 500,000 women while doing nothing to increase their odds of survival. Many treatments found to be harmful had been supported by expert opinion and low-quality before-and-after studies.

If you can feel a commercial message coming on, you’re right. Dr Andrew Leigh, former economics professor and now Assistant Minister for Treasury and many other bits and bobs, has been championing the use of randomised controlled trials in government program evaluation for years.

And last year the Albanese government set up within Treasury the Australian Centre for Evaluation, with Leigh responsible. It aims to expand the quality and quantity of program evaluation in co-operation with other government departments. Its leader, Eleanor Williams, has a modest budget and a staff of more than a dozen. A key principle is that high-quality evaluation of a program’s impact needs to be built into the design of the program from the get-go. The centre will also collaborate with evaluation researchers outside government.

And now the Paul Ramsay Foundation, Australia’s largest charitable foundation, is providing a $2.1 million round of grants for people to run randomised trials on important social problems. The centre, which has been given access to a wealth of “administrative data” – statistical information collected by government departments – will make this available to academics and others receiving grants.

I think this is all to the good. And about time. Econocrats went for decades supporting the push for smaller government, which led to the privatising of many government-owned businesses (including a national electricity market now dominated by three big companies) and much outsourcing of government services to private businesses – which, as should have been expected, have proved highly efficient at increasing their profits.

Great. What we could use now is a lot more attention to achieving better government.

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Yes, we need tax reform, but it offers no easy answers

When we’re reminded that income tax cuts represent merely the partial return of the proceeds of earlier bracket creep, and that the process of clawing back the latest tax cut starts the same day it arrives, it’s easy to join the impassioned cry for tax reform. Sorry, it ain’t that simple.

Surely if we could end the crazy business of bracket creep, we’d pay less tax? Well, yes – but no.

Bracket creep occurs because our income tax scales ignore the reality of inflation. When our wages rise to take account of inflation, we’re no better off in real terms, but we’re often pushed into a higher tax bracket, which raises the average rate of tax we pay on the whole of our income. (If we’re not literally pushed into a higher bracket, our average tax rate still goes up because a higher proportion of our income is now taxed at a higher rate.)

So we’ve long known how to (largely) end bracket creep: do what the Americans do and increase all the bracket limits once a year, in line with the annual increase in the inflation rate. Then, it would only be rises in your real income that pushed up your average tax rate, which is fair enough.

Mission accomplished. Now we’ll all be paying less tax.

Except that the net profit the taxman makes after all the to-ing and fro-ing on bracket creep isn’t just kept in a jam jar somewhere. It’s used to help cover the ever-growing cost of all the services the government gives us, and thus to limit the size of budget deficits and government debt.

So, without the benefit of bracket creep, governments would be forced to keep making explicit increases in the rates of income tax, or to announce new taxes.

Wouldn’t that be an improvement? In principle, yes. In practice, our (politician-fed) aversion to paying higher taxes would just make politics an even bigger shoot-fight than it already is. The pollies would spend more time abusing each other and less time getting on with fixing our problems.

One thing we can be sure of is that it wouldn’t do much to slow the growth in government spending. Why not? Because our demand for more and better government services is insatiable. Because both sides of politics fight every election campaign promising more and better services – and by never showing us the tax price tag on whatever it is they are selling.

How can I be sure tax indexation would do little to slow the growth in government spending? Because that’s what happens in America. They keep running bigger budget deficits and amassing more government debt than the other rich countries (except Japan).

But they get away with it because their economy’s so big, and they’re the centre of the world financial system. A middle-level economy like ours could never pull it off.

So tax indexation isn’t high on my list of desired tax reforms. Bracket creep turns out to be just one of the dirty little tricks by which the politicians who’ve done so much to make our political system almost unworkable keep it staggering along.

It’s easy to agree on the need for tax reform, but its advocates want to reform differing things and have differing motives. “Reform” is a lovely, positive word, but you need to beware of people whose idea of reform is: I pay less, you pay more.

All the alleged reform advocated by the (big) Business Council, for instance, takes that form. They want a lower rate of company tax and a lower top rate of personal income tax – all paid for by a higher goods and services tax.

Spruikers for the highly paid make a big fuss about the government’s heavy reliance on income tax – which they exaggerate – and always claim discourages them from working and investing.

But economic theory doesn’t support these claims, and the empirical evidence – which would be more persuasive – doesn’t either. The people whose behaviour is influenced by the rate of tax on additional earnings are “secondary earners”, who have more ability to increase or decrease the hours they work because they have part-time jobs. But the nation’s executives don’t worry much about them.

No, the tax reform I think we need is higher tax on capital gains, less concessional tax on the superannuation of people such as me, a decent tax on highly profitable mining companies and, probably, a tax on big inheritances.

But don’t hold your breath waiting for that to happen.

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Despite what we're led to believe, tax cuts are no free lunch

Isn’t it wonderful that the Albanese government – like all its predecessors – has been willing to spend so many of our taxpayers’ dollars on advertising intended to ensure no adult in the land hasn’t been reminded, repeatedly, about the income tax cuts that took effect on Monday, first day of the new financial year?

But believe me, if you rely only on advertising to tell you what the government’s up to with the taxes you pay – or anything else, for that matter – you won’t be terribly well-informed. The sad truth is there’s a lot of illusion in the impressions the pollies want to leave us with when it comes to tax and tax cuts.

For instance, none of those ads mentioned the eternal truth that, when we have income tax scales that aren’t indexed annually to take account of inflation, the taxman gradually claws back any and every tax cut the pollies deign to give us. And this slow clawback process – known somewhat misleadingly as “bracket creep” – begins on the same day the tax cuts begin.

So readers of this august organ are indebted to my eagle-eyed colleague Shane Wright, who asked economists at the Australian National University to estimate how long it would take these tax cuts to be fully clawed back, using plausible assumptions about future increases in prices and wages.

A tax cut reduces the average rate of income tax we pay on the whole of our taxable income. A middle-income earner’s average tax rate will fall from 16.9 cents in every dollar to 15.5¢. The economists calculate it will take only two or three years for inflation to have lifted most taxpayers’ average tax rate back up to where it was last Sunday.

So that’s the terrible truth the pollies rarely mention. But don’t let that make you too cynical about the tax-cut game. Just because this week’s tax cut will have evaporated in a few years’ time doesn’t mean it’s worthless today. Actually, as tax cuts go, this is quite a big one. Someone earning $50,000 a year is getting a cut worth almost $18 a week. At $100,000 a year, it’s worth almost $42 a week. And on $190,000 and above, it’s worth $72 a week.

Is that enough to completely fix your cost-of-living problem? No, of course not. But if you think it’s hardly worth having, please feel free to send your saving my way. I’m not too proud to take another $18 no one wants.

Remember, too, that had Anthony Albanese not broken his promise in January and fiddled with the stage 3 tax cuts he inherited from Scott Morrison, most people’s saving would have been a lot smaller, even non-existent.

Everyone earning less than $150,000 a year got more, while those of us struggling to make ends meet on incomes above that got a lot less. In my case, about half what I’d been led to expect.

But the politicians’ illusions are built on our self-delusions. Our biggest delusion is that government works quite differently to normal commercial life. We know that when you walk into a shop you have to pay for anything you want. If you want the better model, you pay more.

Somehow, however, we delude ourselves that governments work completely differently. That the cost of the services we demand from the government need to bear no relationship to the tax we have to pay.

The politicians actively encourage this delusion in every election campaign by promising us this or that new or better service without any mention that we might have to pay more tax to cover the cost of the improvement.

Any party foolish enough to mention higher taxes gets monstered – first by the other side and then by the voters. No one wants to admit that what we get can never be too far away from what we pay.

For the near-decade of the Liberals’ time in government, they drew many votes by branding Labor as “the party of tax and spend” while claiming they could deliver us the services we want while keeping taxes low.

This was always a delusion. So they squared the circle by using various tricks they hoped we wouldn’t notice, such as underspending on aged care, allowing waiting lists to build up and secretly ending the low- and middle-income tax offset, thus giving many people an invisible tax increase of up to $1500 a year.

But the main trick they relied on was the pollies’ old favourite: bracket creep.

Get it? When we delude ourselves that we can have the free lunch of new and better services without having to pay more tax, they resort to the illusion that income tax isn’t increasing by letting inflation imperceptibly increase our average tax rate.

This is the tax-cut game. As an economist would say, our “revealed preference” is for no explicit tax increases, but for tax to be increased in ways we don’t really notice and for tax cuts to be only temporary.

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