Showing posts with label government spending. Show all posts
Showing posts with label government spending. Show all posts

Wednesday, March 27, 2024

What a way to start Easter - a plan to smash the nest-egg

Most of us are too young to see it, but a big way the federal government affects our lives is through its system of compulsory superannuation. As you get older and retirement becomes a lot less distant, you begin to realise that the rules of super – and successive governments’ tinkering with those rules – will have a significant impact on the up to 30 years of your life after you stop working.

When the age pension was introduced more than a century ago, many men didn’t live long enough to reach the age of eligibility, 65. But our greater prosperity, improvements in public health and advances in medical science have changed all that.

Although the age of pension eligibility – for women as well as men – has been raised to 67, and no doubt will reach 70 one day, our longevity has increased by more, making it possible, particularly for women, to live up to 30 years in retirement.

But the introduction of compulsory super in the early 1990s now means that people retiring after about 2030 will do so with so much super that their eligibility for the age pension will be between limited and non-existent.

Since the introduction of that new system, almost every government has changed it. Why? Because the new compulsory system was bolted onto an old voluntary system of tax concessions that proved to be far too generous to high-income earners and too mean to lower-income earners.

Everyone knows the age pension costs the government a lot of money. What many don’t realise is that the tax concessions attached to super contributions and to the subsequent earnings on those contributions also cost the government a lot in the form of income tax collections forgone.

So, all the super changes since those made by the Howard government in 2007 (which gave well-off Baby Boomers like me a huge free kick) have aimed to reduce super’s cost to the budget by reducing the tax breaks going to high earners.

Take my word, there’ll be many similarly motivated changes to come. Those made last year by Treasurer Jim Chalmers won’t be the last.

One way to limit the budgetary cost of super is to stress that its sole purpose is to provide people with enough money to live comfortably in retirement. What it’s not meant to be used for is letting people maximise their children’s inheritance (thus widening the gap between rich and poor).

Trouble is, the compulsory super system is designed to deliver people a lump sum of money upon their retirement for them to use as they choose. It’s easy to see this lump sum as your nest-egg, the amount you’ve saved over a lifetime of working.

If so, surely it’s up to me and my spouse to decide how much of that sum we choose to spend on living expenses and how much we choose to leave for our kids? I’m sure many people think the right thing to do is to live as much as possible on the interest and other earnings from the lump sum so the principal can be passed on largely intact.

This is where a proposal of two economists from the Australian National University, professors Andrew Podger and Robert Breunig, comes in.

But first, one insight of “behavioural” economics, borrowed from psychology, is that people can react very differently to the same circumstances, depending on how they’re packaged or, as the psychologists say, “framed”. It’s been shown that surgeons much prefer a 90 per cent success rate to a 10 per cent failure rate.

This, of course, is spin doctoring 101. Reminds me of the story about the bloke who invented death insurance. Didn’t sell many policies until he changed the name to life insurance.

Podger and Breunig remembered that, in the days before compulsory super, it was limited mainly to public servants who ended up with a lifetime pension, most of which could be passed on to a surviving spouse. It never occurred to them that super had anything to do with inheritance.

So, if you want to stop people with super payouts using them (and all the tax concessions that contribute so much to their size) as a vehicle for enriching their kids, why not move to a system where people are encouraged to use their lump sum to buy a lifetime pension.

The amount of the pension would be determined by the size of the lump sum. Some people scrimp and save in retirement because they can’t know when they’ll die, and they’re not sure their money will last the distance.

One great attraction of a lifetime pension is that it shifts this “longevity risk” onto the provider of the pension.

In the jargon of high finance, such a pension is called an “annuity”. You can buy annuities today, but most are for fixed periods, and they’re not popular. To make them more attractive, they’d have to be for life, and this would require them to be backed by the government.

Don’t shake your head. It could happen.

Read more >>

Monday, March 18, 2024

The budget is rent-seekers central

Last week we got a reminder that, among its many functions, the federal budget is the repository of all the successful rent-seeking by the nation’s many business and other special interest groups. Unfortunately, it added to the evidence that the Albanese government knows what it should do to manage the economy better, but lacks the courage to do more than a little.

Rent-seeking involves industries and others lobbying the government for special treatment in the form of grants, tax breaks or regulatory arrangements that make it hard for new businesses to enter their market or protect them from competition in other ways.

Whenever that rent-seeking involves grants or tax concessions it weighs on the budget. Decades of continuous rent-seeking weigh hugely on every year’s budget, limiting the government’s ability to ensure every dollar of taxpayers’ money is spent to great effect in benefiting all Australians.

For example, a big lump of the feds’ spending on education is devoted to achieving the Howard government’s goal of enhancing parents’ choice of which school to send their kids to. When the callithumpians decide to build their own schools, so their children can be educated without contamination by people of other religions, the federal taxpayer coughs up.

That all this spending on choice leaves the great majority of kids attending public schools that aren’t adequately funded is just an unfortunate occurrence, which we may get around to fixing if we ever have any spare dollars looking for a home.

What you certainly couldn’t do is cut back the money you’re giving the callithumpians. They’d kick up the devil of a fuss and start telling their followers not to vote for you.

When rent-seeking leads governments to make grants to special interest groups, the details of this spending are there to be found in the bowels of the budget papers. Where it leads to some activities getting special tax breaks, Treasury attempts to keep track of these “tax expenditures” in an annual statement.

When it comes to extracting rents from governments, few industries or occupations are better at it than the medical specialists. (That’s not true of the GPs, however. Their Medicare rebates were frozen for years, as part of the former Coalition government’s pretence that it could cut taxes while in no way harming the provision of essential public services.)

Some years ago, a Labor government decided to cut back the Medicare rebate for cataract surgery because advances in technology now meant a surgeon could perform far more operations in a day.

The rest of the medical profession knew what a rort it had become but, under the ethical principle of dog doesn’t eat dog – or maybe, honour among thieves – they stood silent while their eye-surgeon brethren fought dirty to protect their swollen incomes.

They pretended the sky was falling, telling their elderly patients the wicked government had left them no alternative to charging them thousands more in out-of-pocket payments. If their elderly patient didn’t think this was fair, perhaps they might like to have a word with their local federal member, saying how terrible it was to have their lovely doctor treated so badly.

Predictably, the government backed off and the rorting continued.

Last week it was the turn of the chemists. Few industries are so heavily regulated by state and federal governments, all with a view to protecting pharmacists’ incomes. There are limits on how many chemists may set up within an area and, in particular, prohibitions on supermarkets having pharmaceutical sections.

Anthony Albanese and his government have made much of the way their introduction of 60-day medicine prescriptions – as recommended by an expert committee – has saved patients money and helped ease the cost-of-living crisis.

But hang on. Surely, that means chemists receiving fewer dispensing fees from the government? This evil must be opposed. Enter a union more powerful than any workers’ union, the Pharmacy Guild. This iniquity will see shortages of medicine and hundreds of chemists closing down across the land, it assured us.

The government fought back, refuting the talk of shortages and revealing figures showing a surge in applications for new pharmacies in the months following the announcement of the prescription change.

It had already promised to plough back into pharmacies the $1.2 billion it expected to save on dispensing fees. But the guild claimed pharmacies’ losses would be $4.5 billion, and last week the guild negotiated a new deal, which would see the government pouring a further $3 billion into pharmacies over five years.

Also last week, we saw the government releasing the report of the aged care taskforce, chaired by Aged Care Minister Anika Wells, calling for the well-off elderly to contribute more to the cost of their own care.

What was the problem? Wells spelled it out in a speech last June: “We must act now. The Baby Boomers are coming … We are going to need a fair and equitable system to meet the needs of Baby Boomers who, with their numbers and determination to solve problems, have shaken every single system they’ve come across.”

The report argued for the present mechanism used to get more from the better-off, the refundable accommodation deposit, to be replaced by a rental-only system.

But it called for the deposit system to be phased out over five years, and postponed the proposed start of the phase-out to 2030. With all its talk of “grandfathering” – applying the changes only to new entrants to the system – it remains to be seen how keen Albo & co are to take on the entitled Baby Boomers.

Finally last week, the Commonwealth Grants Commission’s carve-up of the proceeds from the goods and services tax for the next financial year was announced, bringing a bad shock for NSW and Queensland, and good news for Victoria and the other states and territories.

It was an unwelcome reminder of the separate, but related, special deal then-treasurer Scott Morrison awarded the West Australians in 2018. So great was the uproar from the other states that they were promised more money to ensure the sandgropers’ special deal left the others “no worse off”.

Meaning? That the West Australians’ successful rent-seeking is costing federal taxpayers from other states a bundle in forgone federal spending.

As the independent economist (and proud Tasmanian) Saul Eslake never tires of demonstrating, the Westies had less than zero grounds for arguing that they were getting a bad deal from the carve-up formula.

The grants commission was set up in the 1930s in response to their congenital paranoia that the rest of Australia was having a lend of them. For as long as they were classed as a “mendicant” state cross-subsidised by Victoria and NSW, they were happy.

But from the moment the growth of their mining industry was so great that they were required to join Victoria and NSW in helping maintain the quality of government services in the other states, it suddenly became yet another plot by those “over east” to do them down.

So, here’s the moral of the story for our weak-kneed federal politicians on both sides. Once you give in to rent-seekers, you’re gone. They won’t give up their ill-gotten gains without a massive, vote-losing fight.

Meanwhile, everyone else wonders why, despite the huge sums you’re raising in taxes, the quantity and quality of the services you’re providing is so poor.

Read more >>

Wednesday, March 13, 2024

Well-off baby boomers should pay more for their aged care

The report of the aged care taskforce, released on Tuesday, makes eminently sensible proposals for changes to cover the ever-growing cost of aged care. But since its solution is to require the well-off elderly to bear more of the cost, I doubt if Aged Care Minister Anika Wells will be able to implement the changes without much pushback from those well-off elderly – otherwise known as the “wealthy Boomers”.

The cost of aged care – both residential care and, increasingly, at-home care – is expected to grow hugely in the coming decade for three reasons. First, because federal governments have been underspending on care, as repeated Four Corners exposes have kept reminding us.

There’s been a lot of catch-up spending since the shocking report of the Royal Commission into Aged Care Quality and Safety in 2021, but there’s more catching up to do.

Second, there’s the continuing retirement of the Baby Boomer bulge, plus the increased care that later, longer-living generations will require.

Third, as living standards rise, so do the expectations of the aged for something a lot better than their parents settled for.

The federal government’s spending on aged care last financial year totalled $27 billion. It’s expected to have reached $42 billion by 2026-27. And there’s a lot more to go after that.

The royal commission suggested that the increased spending could be covered by a Medicare-like levy of 1 per cent of everyone’s taxable income. But the taskforce rightly rejected that idea as too unfair to younger taxpayers.

Don’t forget that few of the elderly pay much income tax, even those earning so much that, were they younger, they’d be paying a lot.

So the taskforce has come up with a solution that previous governments have, for decades, not been game to propose: ask the well-off elderly to pay a higher proportion of the daily living expenses – meals, laundry and cleaning – and accommodation costs.

At present, those in residential care who can afford it are required to pay a “refundable accommodation deposit” of many thousands, which is refunded when they leave or die. Effectively, it’s an interest-free loan to the provider of the residential care facility. On the strength of this, those who provide a deposit aren’t asked to pay much of their accommodation costs.

It’s never been a popular arrangement, so the taskforce proposes to phase it out between 2030 and 2035. Those on the old arrangement would be “grandfathered” – allowed to stay on the old deal.

But newcomers would go onto the new, rental-only scheme and be asked to pay a lot more for the accommodation cost than people of lower means.

Unlike me, many Baby Boomers vociferously object to being held responsible for the unfair way the younger generations are treated by the tax system, the superannuation system, the university fees system and the gig-economy system.

But though it’s wrong for youngsters to assume all Baby Boomers are rolling in it – some are still renting and others are locked in long-term unemployment – the truth is that, as a generation, most Baby Boomers have had a rails-run.

Those who went to university got scholarships rather than debt. Most males had little trouble finding a good, permanent, full-time job. They were able to buy a first home without much trouble, have stayed in the property market and today own a house worth an unbelievable sum – through no great effort of their own.

Baby Boomers are the first generation to gain much from the introduction of compulsory superannuation in 1992. These days, almost everyone retires with some significant superannuation sum, and those of us who’ve taken advantage of the various concessions have reached retirement age with super sums in the millions.

The super system is wildly biased in favour of the well-off. And the people who try to tell you that having super and other savings sufficient to eliminate (or even just reduce) their eligibility for the age pension makes them a “self-funded retiree” are deluded.

They have no idea what a high proportion of their payout has come from accumulated tax concessions rather than contributions.

So how would the well-off elderly afford to pay for a much greater share of their aged care costs? By dipping into their super.

The justification for superannuation and all the money it costs the taxpayer is to allow the retired to live comfortably in their final years when they’re too old to work. So the notion of many that they must live only on the annual earnings and never dip in to the principal is wrong-headed.

No, you were granted such generous tax breaks only to support you in retirement. For the well-off elderly to want to pass what’s left of their super on to their offspring is to make the world even more unfair than it already is.

Let’s hope Minister Wells and her boss have the conviction to stick to their guns when the Boomers start crying poor in defence of their privileged existence.

Read more >>

Monday, March 4, 2024

Contrary to appearances, the stage 3 tax cuts will leave us worse off

It’s time we stopped kidding ourselves about the looming tax cuts. They’re what you get when neither of the two big parties is game to make real tax reforms, and the best they can do is lumber us with yet another failed attempt to wedge the other side.

If you want real reform, vote for the minor parties, which may be able to use their bargaining power in the Senate to get something sensible put through.

The stage 3 tax cuts always were irresponsible, and still are. They’ve caused interest rates to be raised by more than they needed to be, and they’ll leave us with substandard government services, as well as plunging us back into deficit and debt.

Only an irresponsible (Coalition) government would commit themselves to making a huge tax cut of a specified shape more than six years ahead of an unknowable future, hoping they could trick Labor into making itself an easy political target by opposing them.

Back then, the Libs thought the budget was returning to continuing surpluses. Wrong. They didn’t think there’d be a pandemic. Wrong. They had no idea it would be followed by an inflation surge and a cost-of-living crisis.

Only an irresponsible (Labor) opposition would go along with legislating the tax cuts five years ahead of time, then promise not to change them should it win the 2022 election.

Let’s be clear. Just because Prime Minister Anthony Albanese’s changes made the tax cuts less unfair, that doesn’t make them good policy. And just because many families, hard-pressed by the cost-of-living crisis, will be pleased to have the relief the tax cuts bring, that doesn’t mean the tax cuts are now good policy.

Don’t be misled by the Reserve Bank’s acceptance of Albanese’s claim that his changes would not add to inflation. Any $20 billion-a-year tax cut is a huge stimulus to demand, imparting further upward pressure on prices.

All the Reserve was saying was that diverting a lump of the tax cut from high-income earners to middle and low earners wouldn’t make much difference to the degree of stimulus. Why wasn’t it worried about a $20 billion inflationary stimulus? Because it had known it was coming for years, and had already taken account of it, increasing interest rates sufficiently to counter its future inflationary effect.

Get it? Had there been no huge tax cut in the offing, interest rates would now be lower than they are, and causing less cost-of-living pain.

As the Grattan Institute’s Brendan Coates and Kate Griffiths have reminded us, the big loser from the stage 3 tax cuts – whether the original or the revised version – is the budget.

The budget has done surprisingly well from the return to full employment, the effect of continuing high commodity prices on miners’ payments of company tax and from wage inflation’s effect on bracket creep. So much so that it returned to a healthy surplus last financial year. It may well stay in surplus this financial year.

Great. But next year it’s likely to return to deficit and stay there for the foreseeable future. Why? Because we can’t afford to give ourselves a $20 billion annual tax cut at this time. As if we didn’t have enough debt already, we’ll be borrowing to pay for our tax cut.

In theory, of course, we could pay for it with a $20 billion-a-year cut in government spending. But, as the Coalition was supposed to have learnt in 2014 – when voters reacted badly to its plans for big spending cuts, and it had to drop them post-haste – this is a pipe dream.

No, in truth, what voters are demanding is more spending, not less. The previous government went for years using fair means or foul – robo-debt, finding excuses to suspend people’s dole payments, neglecting aged care, allowing waiting lists to build up – to hold back government spending as part of its delusional claim to be able to reduce taxes.

As Dr Mike Keating, a former top econocrat, has said, we keep forgetting that the purpose of taxation is to pay for the services that our society demands, and which are best financed collectively.

So when we award ourselves a tax cut we can’t afford, the first thing we do is condemn ourselves to continuing unsatisfactory existing services, and few of the additional services we need.

Those additional services include education – from early education to university – healthcare, childcare, aged care, disability care and defence. (Another thing the Libs didn’t foresee in 2018: our desperate need to acquire nuclear subs.)

But don’t hold your breath waiting for any politician from either major party to explain that home truth to the punters. No, much better to keep playing the crazy game where the Libs unceasingly claim to be the party of “lower, simpler and fairer taxes” and Labor says “I’ll see you and raise you”.

Anyone who knows the first thing about tax reform knows that achieving that trifecta is impossible. But if the Liberal lightweights realise how stupid repeating that nonsense makes them seem to the economically literate, they don’t care.

All they know is that the punters lap up that kind of self-delusion. Which, of course, is why Labor never calls them out on their nonsense.

The other thing we do by pressing on with tax cuts we can’t afford is sign up for more deficits and debt. Coates and Griffiths remind us that the high commodity prices the budget is benefitting from surely can’t last forever.

If you exclude this temporary benefit, Grattan estimates that we’re running a “structural” budget deficit of close to 2 per cent of gross domestic product, or about $50 billion a year in today’s dollars.

We’re ignoring it now, but one day we’ll have to at least start covering the extra interest we’ll be paying. How? By increasing taxes. How else? Ideally, we’d introduce new taxes that improved our economic efficiency or the system’s fairness. Far more likely, we’ll just be given back less bracket creep.

It’s the pollies’ bipartite policy of not stopping bracket creep by indexing the income tax scales each year that makes their unceasing talk of lower tax so dishonest and hypocritical. They’ve demonised all new taxes or overt increases in existing taxes, while keeping bracket creep hidden in their back pocket.

Which is not to argue we must eradicate it. Most of the tax reform we’ve had – notably, the introduction of the goods and services tax – has come with the political sweetener of a big, bracket-creep-funded cut in income tax. (Would-be reformers, please note.)

Another name for bracket creep is “automatic stabiliser”. When spending is growing strongly and inflation pressure is building, bracket creep is one of the budget’s main instruments working automatically to help restrain demand by causing people’s after-tax income to rise by a lower percentage than their pre-tax income.

The pollies can’t just let bracket creep roll on for forever. You have to use the occasional tax cut to return some of the proceeds. But July 2024 turned out to be quite the wrong time to do it.

So even if the Reserve starts to cut interest rates towards the end of this year, the tax cuts mean rates will stay higher for longer than they needed to.

Read more >>

Wednesday, February 28, 2024

Paying for the cowpat sandwich Morrison handed Albo

It never pays to be too sorry for politicians. They’re all volunteers, they’re well paid for what they do, and even the nicest of them have thrust themselves ahead of many others to get as far as they have.

But I can’t help feeling a bit sorry for Anthony Albanese. He got himself elected by promising not to change much, but I doubt he expected to be handed quite such a cowpat sandwich from the smirking Scott Morrison.

As part of his efforts to prove he could keep taxes lower than Labor, Morrison avoided fixing anything much and allowed waiting lists to build up. Now everywhere Albo and his ministers look, they find problems.

These problems will be expensive to fix. This week it’s Education Minister Jason Clare’s turn in the spotlight. The final report on the Universities Accord, which was released on Sunday, reveals plenty that needs fixing.

For openers, the previous government’s job-ready graduates scheme has been a disaster. Under the guise of encouraging students to pick courses that left them job-ready, it cut fees for teaching and nursing, while more than doubling the fees for such courses as arts and humanities, including economics and law.

As the experts predicted, this had little effect on the courses chosen. But it did have its intended effect: saving the government money. One expert suggests that returning tuition fees to something more reasonable could cost the government about $1 billion a year.

The report recommends that the fees for particular courses be set according to the expected lifetime earnings of someone with that degree. Good idea.

I’ve always been happy to defend the HECS-HELP debt scheme as a way of getting people to contribute towards the cost of their education. With repayments geared to the size of their income, and an interest rate far below commercial levels, it should not deter youngsters from poor families from attempting to better themselves.

But unsympathetic governments have fiddled with the scheme incessantly, and with the (hopefully brief) return to high inflation, it’s not surprising Gen Z is so dissatisfied. But Clare seems disposed towards the tweaks the report proposes.

Annual indexation of the debt would occur after deducting the year’s repayments, rather than before. The debt would be indexed to the lower of the rise in consumer prices or the wage index. And the rates at which repayments were required would be applied to successive slices of your income, just as income tax is applied.

There are shortages of workers with various tertiary qualifications at the moment, and the report sees the demand continuing to grow. At present, about 60 per cent of workers have trade or degree qualifications, and we need to reach at least 80 per cent by 2050, the report says. This would involve more than doubling the number of Commonwealth-supported students each year to 1.8 million.

Clare worries that not enough disadvantaged young people are making it to – and through – uni. (Let me tell you, people have been worrying about this at least since Gough Whitlam’s day. And even making university free didn’t help much.)

At present, people from poor families – those of “low socio-economic status” in academic-speak – account for about 17 per cent of enrolments, compared with 25 per cent of the population. Other target groups are First Nations peoples, people with a disability and people living in regional and remote areas.

The report proposes that uni students’ places be funded on a needs basis, similar to Gonski’s scheme for schools. Unis would receive a base amount per student, plus further loadings according to the particular students’ disadvantage.

This would mean regional and outer-suburban unis got a lot more funding per student than the sandstone central-city Group of Eight. But the extra money would be used to reduce the chances of disadvantaged students failing to complete their course for monetary or other reasons.

There would be fee-free courses to prepare chosen students for the rigours of university learning, and financial support for students required to undertake presently unpaid work placements.

It all sounds a big improvement. Quite apart from fairness, it’s clear that the higher the proportion of young people the government wants with a uni degree, the more it will need to include people from disadvantaged backgrounds.

But note this: none of these good ideas has been costed, let alone accepted by the Albanese government. We don’t know whether those that are accepted will start in this year’s budget or in 10 years’ time.

As for Gonski-like arrangements, the real Gonski needs-based funding for schools has still not been fully implemented more than 12 years later.

Let me quote Clare back at himself: “We’re not going to tackle this problem if we think that we can solve all the problems at the door of the university when someone turns 18.”

Just so. With education, it’s best to start at the bottom and work up. But we won’t solve many of our multitude of problems until some pollie has the courage to say maybe we need taxes to be higher, not lower.

Read more >>

Wednesday, February 14, 2024

Want better productivity? Start by ensuring our kids can read

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Friday, December 15, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Friday, October 27, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Friday, October 20, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Wednesday, October 11, 2023

Voting No? You may have this key assumption wrong

If you’re thinking of voting No in the Voice referendum because governments have been spending so much taxpayers’ money trying to “close the gap” without much sign of success, perhaps you need to reconsider. If the Voice to parliament of Aboriginal and Torres Strait Islander people is enshrined in the Constitution, obliging our politicians and bureaucrats to listen, chances are that money will be better spent.

But I can tell you now the message First Nations people will be trying to get across: we want the local spending on health and education and the rest to be administered by Indigenous-led local organisations.

Why? Because when you do it that way, the money’s spent by people with a much better understanding of what the problems are, and the best ways to go about fixing them. Because when the government’s being represented by Indigenous-run outfits, they get much more trust and co-operation.

I’ve realised this mainly by reading a report, Better Outcomes and Value for Money with a Seat at the Table, issued by the Lowitja Institute, a largely government-funded, Indigenous-controlled health research organisation, based in Melbourne.

Let’s start with some facts about government spending on Indigenous people.

According to the Productivity Commission’s most recent estimates, for the 2015-16 year, spending by all levels of government on Indigenous people totalled $33 billion, representing 6 per cent of those governments’ total spending of $556 billion.

Some mates of mine believe Aboriginal people get a lot of government money the rest of us don’t. Only $6 billion of that $33 billion was specifically targeted to Indigenous people. The remaining $27 billion was the share of ordinary spending on hospitals, education, aged care and, importantly, the justice system, used by Indigenous people.

Even so, that $33 billion represents average annual spending of $44,900 per Indigenous person, compared with $22,400 per non-Indigenous person.

Why are Indigenous people getting twice as much? Because they have more disadvantage than the rest of us, and so need more help. For instance, their burden of disease is 2.3 times that of non-Indigenous people, the report says.

Indigenous people “have survived centuries of systemic racism, economic and social exclusion, and intergenerational trauma. As a result, our peoples now die far earlier and experience a higher burden of disease, disability, poverty, and criminalisation than other Australians,” it says.

But here’s the upside. Because governments are spending so much, “slight improvements in the efficiency of the existing spend would generate substantial savings, both directly and through flow-on impacts to other policy areas,” we’re told. For a case study, read to the end.

The federal government first signed a statement of intent to work in partnership with Aboriginal and Torres Strait Islander peoples in 2008, to “achieve equality in health status and life expectancy … by 2030”.

This partnership was refreshed and strengthened in 2020 by a National Agreement on Closing the Gap, made between peak Indigenous community organisations and all federal, state, territory and local governments.

The agreement accepted four priority reforms: formal partnerships and shared decision-making, building and strengthening the community-controlled sector, transforming government mainstream organisations, and shared access to data and information at a regional level.

Are you getting the message? In practice, however, the report says, “these changes have been patchy and incremental despite increased investment from government”.

“An Aboriginal and Torres Strait Islander Voice could support more effective public investment in our wellbeing because our communities know what they need and how to deliver outcomes with the right support,” we’re told.

The report argues that government-run, top-down programs to close the gap haven’t worked as well as community-controlled initiatives.

Research indicates that Indigenous-controlled community health organisations “attract and retain more Aboriginal and Torres Strait Islander patients than mainstream providers, are more effective at improving our health, and see more significant health benefits per dollar of expenditure,” the report says.

It was Indigenous community health organisations that had the knowledge and expertise to rapidly respond to the especially great threat presented to their people by COVID-19.

Throughout the first year of the pandemic, just 147 cases of the virus were reported among Indigenous people, out of 28,000 total cases in Australia. There were no Indigenous deaths and no identified cases in remote Aboriginal communities.

In the second year, Indigenous community health organisations worked tirelessly to ensure their communities were vaccinated.

Turning to education, the report says the federal government’s “remote school attendance strategy”, begun in 2013, with total spending of more than $200 million over eight years, had seen falling attendance rates.

By contrast, the report argues, in 2017, the community-led Maranguka justice reinvestment project in Bourke achieved a 31 per cent increase in year 12 retention, a 23 per cent reduction in recorded rates of family violence incidents, and a 42 per cent reduction in adult days spent incarcerated.

These improvements were calculated to have saved the NSW economy $3 million that year – five times the project’s operating costs.

I’ve drawn my own conclusions from all this. So close to the vote, I leave you to draw yours.

Read more >>

Wednesday, August 30, 2023

Murray-Darling basin: farmers’ friends are helping them self-harm

Not only in America. If you think the United States has become dysfunctional and incapable of solving its pressing problems, I have three words to say to you: Murray-Darling Basin. Last week, federal Environment and Water Minister Tanya Plibersek announced a brave new plan to rescue the Murray-Darling rescue plan, which the feds, NSW and Victoria had agreed to give up as all too hard.

Since the issue’s unlikely to be front of mind, let me tell this sorry story from the beginning. I’ll do so with much help from Professor Jamie Pittock of the Australian National University, an environmental scientist who’s been studying it for most of his career. (His many articles are on the universities’ The Conversation website.)

The Murray-Darling Basin covers about a seventh of Australia’s land mass: most of NSW, all the Australian Capital Territory, much of Victoria, and parts of Queensland and South Australia. It covers the Murray and Darling rivers, plus all their many tributaries, including the Murrumbidgee.

You could call it the nation’s biggest food bowl, underpinning the livelihoods of 2.6 million people and producing food and fibres worth more than $24 billion a year. Vast amounts of water are extracted from the rivers to supply about 3 million people, including those in Adelaide, but particularly for irrigating farms.

It’s also a living ecosystem that depends on interconnected natural resources. About 5 per cent of the basin consists of floodplain forests, lakes, rivers and other wetland habitats. Like all our rivers, the Murray-Darling is subject to recurring droughts and flooding.

Over the past century, however, the extraction of water, especially for irrigation, has reduced water flows to the point where the system can no longer recover from these extreme events.

Over the past decade, millions of fish have perished in mass die-offs, toxic algae have bloomed, wildlife and waterbird numbers have declined and wetlands have dried up.

Efforts to reverse the river system’s decline began with big-spending announcements by John Howard and his environment minister Malcolm Turnbull before the election they lost in 2007. It took five years before Julia Gillard and Tony Burke reached agreement with the basin states on a plan to restore the river system.

Under the then $13 billion plan, 3200 billion litres a year would be returned to the rivers, largely by buying back water entitlements from willing farmers. But the plan’s been modified several times and in 2015 the feds decided to cease buying back entitlements. Both the NSW and Victorian governments had been persuaded by their farmers to oppose buybacks.

NSW and Victoria have not delivered on their promise to reach agreements with riverside landowners to allow bought-back water to spill out of river channels onto floodplain wetlands. Another problem has been farmers drawing more water than their entitlement.

The buybacks have stalled at 2100 billion litres a year, even though the planned 3200 billion litres is probably too little to counter the evaporation caused by global warming. The plan had been due to be completed by June next year, with a new agreement in 2026.

But, in the 2022 election campaign, Anthony Albanese promised to revive the scheme and buy back the remaining water needed to meet the 3200 billion-litre target, and last week Plibersek announced a new deal with all the states, bar Victoria.

She agreed to another two or three years to deliver the remaining water, more options to deliver it, more funding to pay for it and more accountability by the feds and other governments to deliver on their obligations.

But she will need the support of the Greens and independents to get the new deal through the Senate. The opposition won’t support the resumption of buybacks, whereas the Greens don’t like the extra time to be taken.

Of course, even if the legislation goes through, there’s no guarantee the various governments will do what they’ve committed to. The feds are doing what the feds always have to do to get the states’ co-operation – offer them more money – but Victoria and NSW will always be tempted to keep their own farmers and river towns on side, which remain strongly opposed to buybacks.

How can it be so hard to ensure the continued survival of such an important river system? To say that, without remedial action, the rivers could shrink to a chain of billabongs is no great exaggeration. That might not happen for 50 years but, the way climate change seems to be accelerating, it could be a lot sooner.

You’d think the people who’d see this most clearly were those who stand to lose most as the rivers continue to shrivel. But, no, myopia prevails.

Take some pain now to avoid catastrophe later? No way! You can keep all the city-slickers’ tax money you want to pay us to help us adjust. We’re betting it will never happen. In any case, I’ll be dead by then.

And politicians who will take the votes of people who’d prefer to self-destruct aren’t hard to find. Reminds me of the way things are in the Land of the Free.

Read more >>

Monday, August 28, 2023

How to make sense of Treasury's latest intergenerational report

Our sixth intergenerational report envisages an Australia of fewer young people and more elderly, with slower improvement in living standards, climate change causing economic and social upheaval, aged and disability care becoming our fastest-growing industry, and home ownership declining, while we spend more defending ourselves from the threat of a rising China, real or imagined.

That does sound like fun, but remember this: just as I hope many of the predictions I make will be self-defeating prophecies – because people act to ensure they don’t happen – so it is with Treasury’s regular intergenerational reports.

They say, here’s the pencil sketch of the next four decades that we get when we assume present economic and demographic trends keep rolling on for 40 years, and that present government policies are never changed.

Get it? Intergenerational reports are Treasury’s memo to the government of the day, saying things will have to change. The memo to you and me says: you may hate change, but unless you let our political masters make changes, this is how crappy life may become.

Every intergenerational report comes to the same bottom line: if you think you won’t be paying more tax in future you must have rocks in your head.

The media can’t stop themselves from referring to the report’s findings as “forecasts”. Nonsense. Forecasts purport to tell you what will happen. These reports are “projections”: if we make a host of key assumptions about what will happen, plug them in the machine and turn the handle 40 times, this is what comes out.

Remembering that Treasury demonstrates almost annually its inability to forecast in late April what its own budget balance will be in just two months’ time, June 30, let’s not imagine that anything it tells us today about 2063 could prove close to the truth, except by chance.

This is no attack on Treasury. No one’s forecasts are less wrong than theirs. It’s just saying don’t let the false confidence of the economics profession fool you. Only God knows what the world will look like in 2063 – and she’s not telling.

We’re all peering through a glass darkly, doing the best we can to guess what’s coming around the corner. How many pandemics in the next 40 years? Treasury’s best guess: none. How many global financial crises? Best guess: none.

We know from experience that the economy rarely moves in straight lines for long, but the nature of Treasury’s mechanical projections is that most curves stay straight for 40 years. Unexpected things are bound to happen. Some will knock us off course only briefly; some may change our direction forever. Some will be bad; some will be good.

The report’s single most important assumption is the rate at which the productivity of labour will improve. Until now, Treasury has avoided argument by assuming that the average rate of improvement over the next 40 years will be its rate over past 30 years.

The first report in 2002 assumed a rate of 1.75 per cent, but in later reports it was cut to 1.5 per cent. Now it’s been cut to the seemingly less unrealistic 20-year average of 1.2 per cent.

This shift makes a big difference. The first report had living standards – measured as real gross domestic product per person – climbing 90 per cent in 40 years. This report has them climbing by only 57 per cent in the next 40.

Since this is only the second of the six intergenerational reports produced under a Labor government, it’s only the second that takes climate change seriously. The other four looked into the coming 40 years and didn’t see any consequences of climate change worth taking into account.

Labor’s first report, in 2010, had a lot to say about climate change, but this report attempts to measure its effect on the economy and the budget. It estimates that climate change will cause the level of real GDP in 2063 to be between $135 billion and $423 billion less than it would overwise have been, in today’s dollars.

The report’s title has always been a misnomer. If it lived up to its name, it would deal with the intergenerational transfer of income and wealth from the young to the old – an issue that deserves much more attention than it gets.

It would talk about the way our treatment of housing favours the elderly, and how the tax, spending and superannuation decisions of the Howard government, in particular, shifted income from the young to the old.

But no. The real reason it’s called the intergenerational report is that its main purpose is to bang on about the huge effect the ageing of the population – the rise in the population’s average age – will have on the federal budget (while ignoring any effects on the states’ budgets).

It’s here, however, that Rafal Chomik, of the ACR Centre of Excellence in Population Ageing Research at the University of NSW, has noted this overhyped story being toned down over the six reports. In 2002, the first report projected that, by 2023, the share of the population aged 65 and over would climb from 12.5 per cent to nearly 19 per cent.

Actually, it’s only up to 17.3 per cent. And the projection for 2063 is 23.4 per cent, less than the 24.5 per cent originally projected for 2042.

Another factor on which the report was too pessimistic at the start is the effect of ageing on participation in the labour force (by having a job or actively seeking one). Whereas it was expected to dive as the Baby Boomers retired, it’s now expected just to glide down.

Participation actually reached a record high of 66.6 per cent this year – who knew our response to a pandemic would return us to full employment for the first time in 50 years? – and is now projected to have fallen only to 63.8 per cent by 2063. If so, that would be higher than it was in 2002.

Chomik says the first report projected government spending on health care to reach more than 8 per cent of GDP by 2042. Now it’s projected to reach just 6.2 per cent by 2063. But, thanks to the royal commission, the cost of aged care is now expected to grow faster, to 2.5 per cent of GDP by 2063.

Which brings us to Treasury’s bottom line, the federal budget. Treasury projects that, as a percentage of GDP, the budget deficit will decline steadily until 2049, before ageing causes it to start heading back up.

Note, however, that while government spending is projected to rise by almost 4 per cent of GDP, tax collections are assumed, as always, to be unchanged.

Get the (unchanged) commercial message from Treasury? Taxes will have to rise.

Read more >>

Wednesday, August 9, 2023

Universities teach us much about government mismanagement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Friday, July 21, 2023

Covid spending makes bread and circuses too costly for Andrews

These days it’s not unusual for cities to realise they prefer not to host major sporting events such as the Commonwealth Games and Olympic Games. What is unusual is that it’s taken so long for Premier Daniel Andrews to pull the plug.

The later the decision, the greater the disappointment and the ire of organisers, athletes and sport fans. And, no doubt, the greater the wasted spending.

Even so, it does take great political courage – and maybe overconfidence – to make such a decision, especially based on an undocumented claim of such a massive cost overrun – from $2.6 billion to as much as $7 billion.

If there isn’t a political price to be paid at the next Victorian election, it really will prove Andrews’ invincibility – with able assistance from a hopelessly divided opposition.

It isn’t hard to believe that the now-expected cost is far higher than the initial estimate. But the latest estimate of up to $7 billion does stretch credulity.

Overruns are a virtual inevitability in games hosting. This is shown by a table of overruns for the summer and winter Olympics, prepared by researchers at Oxford University.

It shows that Sydney’s stated overrun of 90 per cent in 2000 was on the high side, but nothing to compare with Atlanta in 1996, Barcelona in 1992 and the all-time winner, Montreal in 1976.

Even so, the table does suggest that the size of overruns has fallen in recent times as, presumably, host cities wise up. Perhaps now it’s cities with more experience – and good existing sporting facilities – that are more likely to seek and win the games, or perhaps these days cities know to take more care with their budgeting.

Initially understating the likely cost seems standard political practice for all public projects, let alone major sports events. “It’ll be great fun, bring us the international recognition we deserve, not to mention huge tourist dollars – and it won’t cost all that much.”

But it’s not just the pollies who mislead us. We’re all so keen to enjoy the games at home that we’re easily convinced they won’t cost much and will bring great benefits.

What gives hosting international games such a great risk of blowouts is partly the international sporting body’s demand for many new venues, but mainly the need for them to be completed by a specific, immovable date.

This leaves the games organisers hostage to greedy unions and private contractors.

But there’s rarely a shortage of “independent” consultants willing to take a highly optimistic view of what it all will cost, and what the (always greater) monetary benefits the games will bring in. Even to the extent of putting a dollar value on the supposed “social” benefits they will bring.

It’s all too easy to overestimate the benefit that all the spending by sport fans – local and visiting – will bring. Economists have put much thought into what they call “the economics of special events”, remembering, as most people don’t, to allow for the greatest insight of economics, “opportunity cost” – what your decision to do X means you now won’t be able to do.

Another pertinent concept is “intertemporal substitution” – decisions to move spending between time periods. Remember, too, that the amount of benefit varies with the perspective from which you view it.

Holding the Commonwealth Games in Melbourne, for instance, would attract many visitors from other states, spending on tickets, travel, accommodation, meals and so forth.

From the perspective of the Victorian economy, that’s a benefit. From the perspective of the Australian economy, however, the extra spending in Victoria is cancelled out by the reduced spending in other states.

From a national perspective, the only benefit is from overseas visitors, spending money in Oz that they otherwise wouldn’t have.

Most of the spending would come from Victorians themselves. But it’s likely most of this is money they otherwise would have spent in Victoria on other things, at other times in the year. So, little net benefit to the state’s economy, except for spending by overseas and interstate visitors.

It’s a different matter, however, for the mayors of the five regional cities that were planned to share the hosting of the games. Their cities would have benefited greatly from the spending by visitors from the rest of Victoria, other states and overseas.

Andrews’ decision to regionalise the games was intended to be their special feature, a new model for how the games could be run. But this dispersion seems to have added greatly to the games’ cost. Even at $2.6 billion, Victoria would have been spending much more than other state hosts of Commonwealth Games.

Andrews has promised that the regional cities will still get their planned new sporting venues, but it’s hard to see how this squares with his new view that the state has more pressing spending priorities.

So, just why has Andrews cancelled at this embarrassingly late stage?

He hasn’t said so, but it’s obvious. Because he spent so much coping with the pandemic, and the great debt this has left him with. He has no room left for spending on bread and circuses.

It’s now become common for cities to think twice about their plans to host Commonwealth or Olympic games – though not for them to leave it this late.

It’s noteworthy that Melbourne had no rivals in its bid for these games. And that no other Australia state is interested in filling the vacuum.

Why has hosting become less attractive? Because it’s finally dawning on cities that building so many new sporting venues – which will be little used after the games’ fortnight – is a waste of money that could have been spent on far more lasting and useful things.

But I doubt this means the days of these funfairs are numbered. The international controlling bodies will have to trim their demands for new facilities, and rotate the games between a few cities that have maintained adequate existing venues.

Read more >>

Wednesday, July 19, 2023

Don't let the political duopoly block the little guys

What could be better for democracy than taking the big money out of election campaigns? Both Victoria and NSW have made moves in this direction, but the feds have done nothing. Until now. The Albanese government’s working on plans for reform.

Last month, the parliament’s Joint Standing Committee on Electoral Matters, now chaired by Labor’s Kate Thwaites, tabled an interim report recommending sweeping reforms to the rules on donations to political parties.

Thwaites wrote that the evidence the committee heard allowed it to “develop clear goals for reform to increase transparency in election donations and curb the potentially corrupting influence of big money, to build the public’s trust in electoral and political processes, and to encourage participation in our elections”.

The committee proposes that limits (“caps”) be set on the maximum permissible donation and the maximum spending by election candidates. Caps would also apply to “third parties”, such as big organisations seeking to influence the election outcome.

The maximum donation that could be made without the donor’s identity having to be disclosed should be lowered from the present $15,200 to $1000. And the disclosure would have to be made at the time, not months later after the dust had settled.

The Labor majority report also urged a new system of increased public funding for parties and candidates in the light of the effect these changes might have in discouraging private donations.

The committee didn’t specify how the caps on donations and spending would work but left it for the government to decide.

Wow. Wouldn’t all that be an improvement? What’s not to like?

Well, I can think of a big risk. At present, the two major parties are at loggerheads, with the Coalition committee members issuing a minority report. They’re particularly – and rightly – opposed to Labor’s desire to regulate donations from big business while exempting donations from big unions.

But as I’ve written before – and will keep writing – the big political development of our time is not the continuing struggle between Labor and Liberal, but the continuing decline of the two-party system of government, as the bad behaviour of both sides turns an ever-growing proportion of voters away to the minor parties and independents.

I think it will become rare for one side to have a comfortable majority, and common to have a minority government. If so, whichever side forms government will be more dependent on winning the support of the crossbenchers – which, I hope, will make them more reformist.

My interest in this is not just that it affects the economic policies governments will be pursuing, but that economists have given much thought to the way small numbers of big firms – “oligopoly” – find ways to compete that are better for them and worse for their customers.

One thing economists know is that the two parties of a duopoly commonly settle into a carve-up of the market that makes life cosier for both of them.

Oligopolists collude – tacitly, of course, since overt collusion is illegal – to keep prices and profits high. This leaves them exposed to some new firm entering their market and taking business away from them by undercutting those excessive prices.

So oligopolists devote much attention to finding ways to raise barriers that stop interlopers entering their market. Often, this involves persuading governments to raise those barriers for them. All for the greater safety of the customer, naturally.

Do you see the parallel with the threat the teals pose to the Liberals, and the Greens pose to Labor? Except that, in the two big parties’ case, when they combine to repel intruders, they don’t have to extract a favour from the government because they are the government.

Surely, there’s some hidden solution to neuter those pesky minor parties that the two big guys could cook up?

Well, the teals, in particular, needed huge donations from badly dressed internet billionaires (and lesser mortals) to knock off so many sitting Liberal members. So maybe we can toughen up on donations in a way that wins much approval and looks even-handed without people noticing it’s disadvantaged the interlopers more than us.

If we have fewer funds from donations, but more public funding, that advantages the established parties because, although every candidate gets the same dollars per vote, the funding you have to spend in this election campaign was determined by how many votes you got last time.

Oh, you didn’t run last time? What a pity.

But that benefit is small compared with the advantages of being the incumbent. Sitting MPs and senators get better paid than most of us, but they also get electoral staff, cars, travel allowances, printing allowances and much else.

All this support is justified as helping the pollie give their constituents good service. But it’s easily diverted to helping them get re-elected. When pollies shake many hands at a school fĂȘte, are they just doing their job, or shoring up their vote? Both.

When the government comes up with its plans to reform election donations and spending, we’ll need to examine their implications carefully.

Read more >>

Monday, May 29, 2023

Gilding the budget lily: Labor brings in the creative accountants

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Friday, May 19, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>