Don't let any politician convince you your taxes will be going down

Whenever an election approaches, we can expect the bulldust count to soar on claims about the prospects for the economy and, particularly, about how well the budget’s being managed.

Election campaigns inhabit a financial fantasyland, with both sides promising lower taxes, higher government spending and improved budget balances.

Our politicians have spent decades training voters to believe that, when it comes to the budget, we can have our cake and eat it.

It’s now pretty clear that, whether the federal election is held in March or May, Scott Morrison will be repeating the winning formula he used last time: the Liberals are the party of lower taxes, whereas Labor is the big-spending, big-taxing party.

You want lower taxes? Vote Liberal.

But take my tip. Whatever party gets voted in, and whatever tax cuts they’ve promised in the short term, over any longer period taxes will be going up.

Why? Two reasons, one general, one specific. And remember this: one of Morrison’s claims is to have abolished “bracket creep” – the way inflation causes you to pay a higher proportion of your income in tax. He hasn’t.

The general reason we’ll be paying more in tax is that, as the Australian Council of Social Services reminded us this week, “as people become wealthier, they expect better health, education and income support and modern public infrastructure.

“As the populations of wealthy nations age, we sensibly devote more resources to health and [aged] care.”

Just so. Where it concerns budgets, the notion of Smaller Government – lower government spending and lower taxes – was always a pipedream.

As the Economist magazine has written recently, “stopping further growth of government over the coming decades will be close to impossible. The most important debates to come will be about the state’s nature, not its size.”

Why is it that economists, business people and mainstream politicians unceasingly advocate economic growth? To raise our material standard of living. To give us more income to spend on the things we want, to improve our lives.

But here’s the trick: many of the things we want more of come from the government, or are heavily subsidised by the government. We pay for them indirectly, via the taxes we pay.

That’s true of health (doctors, medicines, hospitals), education (schools, TAFE and universities), all the various forms of “care” (childcare, disability care, aged care) and much else.

As our incomes rise over time, we spend more on some things but not others, as we see fit. Much of what we choose to spend more on comes from the private sector. Better homes, for instance. Not a problem, as young waiters say incessantly.

But when the things we want more of come via the government, suddenly there is a problem. What? You want me to pay higher taxes just because I demanded more and better health care? Outrageous.

We even have conservative politicians trying to tell us paying more tax for more health care is bad for the economy. Bad for jobs and growth.

What? Employing more doctors, nurses and other health workers is bad for jobs? Spending more on health is bad for growth? Are you stupid? It is growth.

Over the 30 years between 1991 and 2019, federal government spending per person grew at the rate of 1.7 per cent a year, after inflation.

What we got for that included the introduction of Medicare, pensions (but not unemployment benefits) linked to wage increases so pensioners’ living standards kept pace with the rest of the community, and introduction of the National Disability Insurance Scheme.

But get this. Between 2010 and 2018, the rate of real growth in federal government spending per person slowed to just 0.5 per cent a year.

And the budget last May projected that the rate of growth from 2022 to 2024 would be minus 0.7 per cent a year.

But the independent Parliamentary Budget Office warned in its recent review of budget projections to 2032: “Australians’ expectations about the volume and quality of services provided by government mean greater risks that [public expenditures] will be higher”.

That’s a bureaucrat’s way of saying “You guys have got to be kidding”.

The latest growth in real annual spending per person of just 0.5 per cent is unsustainable. The projected fall of 0.7 per cent a year is simply unbelievable.

The Morrison government has been trying to cover the cost of its various tax cuts by, as ACOSS and the community sector have said, running a “low-cost government”. It claims to have guaranteed the provision of “essential services” but, in truth, it’s been cutting corners and penny-pinching all over the place.

Its income support payments to people of working age, of just $45 a day, are well below the poverty line. We have a growing number of people who can’t afford housing, but the government refuses to spend on social housing.

The government imposes long waiting times for in-home aged care packages and other care services – which are often of poor quality. It seems to be yielding to pressure to reduce funding of the national disability scheme.

It has neglected to spend what it should on dental care and mental health care. Its privatised system of employment service providers has failed to reduce entrenched, long-term unemployment. It has allowed a decline in public and community education and training infrastructure.

It has failed to Close the Gap with community-controlled Aboriginal and Torres Strait Islander services.

And it’s made inadequate investment in the transition to a clean economy, disaster resilience and other help for people to adapt to global warming.

Governments can get away with this neglect for only so long before voters start pushing back and – as we saw with the big spending on aged care in this year’s budget, following the royal commission’s damning report – government spending has to catch up.

And where government spending goes, taxes follow – whatever false impressions pollies try to give us in election campaigns.

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Net zero can't be reached by magic, but we can ease the pain

Scott Morrison’s long-term plan for net zero emissions by 2050 won’t impress anyone who’s been following Australia’s long and tortuous battle over climate change. But then, it’s not intended to.

His “learning” after miraculously wining the unwinnable election in 2019 is that whatever half-truths he tells voters will be believed by enough of them. Particularly since God is on his side, not the side of those other, untruthful and ungodly people.

No, his Plan – which is not a plan to achieve net zero, just an optimistic forecast that it will be achieved – is largely a political document, intended to be sufficient to convince those voters who aren’t paying attention that he’s “doing more” to cope with climate change.

His goal is not so much to fix the climate as to neutralise it as an issue at next year’s election. Climate change is an issue that naturally favours Labor. He wants all the focus to be on two issues that naturally favour the Coalition: the economy and national security.

He was walking a tightrope last week. He had to discourage voters in Liberal heartland seats who were worried about global warming from trying to send their party a message by voting for liberal independents – as they’ve done in Tony Abbott’s former seat and, briefly, Malcolm Turnbull’s – by convincing them he was serious about reducing emissions.

At the same time, however, he needed to reassure voters in the National Party’s various Queensland coal-mining seats that he wasn’t serious.

His solution was to produce a document that says: the boffins I hired assure me we’re on track to eliminate net emissions by 2050 but, don’t worry, this will be achieved by the miracle of new technology, without anyone feeling a thing.

There’ll be no new taxes, no new regulations forcing people to do things and no new costs on households, businesses or regions. We won’t shut down coal and gas production, and no jobs will be lost.

Does it sound a bit too good to be true? Voters in the Liberal heartland tend to be well educated and well informed. I doubt it will do the trick.

As we’ve seen with the pandemic, when our federal leaders fail to lead, others feel a need to fill the vacuum. The premiers, of course, but also many people from business and the community.

The latest report from Tony Wood and colleagues at the Grattan Institute, Towards net zero: a practical plan, offers a more realistic assessment of the challenge we face, says why we must get more achieved by 2030 and proposes ways this can be done without too much pain.

Perhaps because he’s not standing for office, Wood is frank about the difficulty in getting to net zero. The scale and pace of change involved in a net-zero target are “daunting, but they are outweighed by the consequences of the alternative.

“Factors outside Australia’s control will shape the flow of capital and the demand for our exports, while climate change itself will increasingly threaten Australians’ lives and livelihoods.”

Just so. Only a fool would believe we can avoid pain by doing nothing. We can seek to delay the pain, but that would relinquish our ability to influence our future, as well as making the pain greater.

The longer we leave it to make big progress towards net zero, the more pain we ultimately suffer. But also, our failure to throw our support behind the global push for earlier progress – which is what we’re failing to do in Glasgow this week – increases the risk that the goal of limiting warming to 1.5 degrees will be exceeded by the end of this decade, making it less likely we ever get back below it.

But while it’s foolish to think we can avoid pain, we shouldn’t imagine the pain will be intolerable. And here’s the trick: provided it’s done sensibly, paying a bit more tax and putting up with a bit more regulation is actually intended to reduce the amount of pain, and share it more fairly.

Wood accepts Morrison’s figuring showing that we’re likely to exceed the 26 to 28 per cent reduction in emissions by 2030 we promised to make in 2015. But we’ll still fall short of the 45 to 50 per cent reduction we’re being asked to make and other rich countries are agreeing to.

Wood’s plan for getting up to the higher target is neither heroic nor frightening. While we wait for the technological breakthroughs Morrison’s modelling assumes will come, we should get on with applying the technology we already have.

Generate electricity almost completely from renewables, and step up the move to electric cars and vans by tightening emission standards for petrol-driven cars, giving EVs tax breaks and supporting the spread of charging stations.

This is the first step towards the new green manufacturing industries that will provide the regional jobs for miners and gas workers to move to as other countries stop buying our coal and gas.

It won’t be easy or painless, but it’s not beyond the wit of decent governments.

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Cheapest, easiest way to reach net zero is to put a price on carbon

If Scott Morrison fails to front for the Glasgow climate conference at the end of the month, his preference to stay home while we’re dismantling the lockdown will be only one reason. The other’s that the conference isn’t looking like it’ll be a roaring success.

You wouldn’t know it from all Morrison’s agonising over signing up to net zero carbon emissions by 2050, but it’s the easy bit. The hard part about Glasgow is the expectation you’ll make an improved commitment on how much you’ll have done to reduce carbon emissions by 2030.

Unlike us, most of the big players have already put their revised commitments on the table. That’s the problem with Glasgow. So far, those commitments add up to much less than needed to hold the global average temperature rise to the “well under 2 degrees” agreed on at Paris in 2015, let alone the 1.5 degrees the poorer countries demand.

As many of us now realise, we wouldn’t be trembling in our boots over the enormity of getting our emissions down to net zero by 2050 – and making big strides long before then – had we not abolished after only two years the perfectly good carbon pricing scheme the Gillard government introduced in 2012.

By 2014, people had realised the carbon tax accounted for only a little of the huge increase in electricity prices we experienced, and that the Coalition’s talk of $100 legs of lamb was just a fairy story.

Of course, the carbon price would be higher by now, and we’d have had to extend it beyond electricity and gas to all other sources of emissions.

The series of studies the Grattan Institute’s Tony Wood is doing on how we can reduce emissions in other parts of the economy – transport, manufacturing, agriculture – shows that without the help of a carbon price it’s much harder going.

And it strikes me that insufficient reliance on a carbon price may explain much of the trouble the other parties to the Paris Agreement are having in making adequate progress. Indeed, it could be we won’t make it to net zero without the biggest emitters making greater use of emissions pricing.

In a recent paper, Ian Parry, of the International Monetary Fund, says more than 60 carbon tax or emissions trading schemes have been introduced at sub-national, national or multi-country levels. In recent months, China and Germany have launched major initiatives, the carbon price in the European Union has risen above €50 ($80) a tonne of carbon dioxide, and Canada announced its price would rise to the equivalent of $185 a tonne by 2030.

Even so, only about a fifth of all global emissions are covered by pricing schemes, and the global average price is only about $4 a tonne. Parry says that’s a far cry from the global price of about $US75 (more than $100) a tonne needed to reduce emissions sufficiently to keep global warming below 2 degrees.

Does $100 a tonne sound expensive? It is in the sense that the price increase built into the prices of emissions-intensive goods and services needs to be big enough to produce sufficient change in the behaviour of consumers and businesses.

But it’s cheap when you realise that the purpose of a carbon tax (or, equivalently, the proceeds from the government auctioning emissions permits to businesses who need them) is not to raise additional revenue but to change behaviour.

So the proceeds can be used to make equivalent reductions in other taxes, especially income tax. Thus people pay more for some of the goods and services they buy, but pay less income tax. People on welfare benefits have them indexed to cover their higher living costs.

As we discovered in 2012, introducing a carbon tax or emissions trading scheme (ours was the former that, after a few years, would become the latter) is a relatively simple business. You don’t tax emissions directly, but use scientific estimates of the average amount of carbon dioxide the production and use of that class of product emits.

But almost all economists recommend using a carbon price to decarbonise the economy also because they think it’s the policy instrument likely to achieve the objective with the least disruption to the economy and least loss of growth in the production of goods and services.

That’s what economists really mean when they say a carbon price is the cheapest way to get to net zero. They know that sufficiently large changes in relative prices will change people’s use of fossil fuels.

Get this: a carbon tax is a tax the government actually wants people to find ways to avoid having to pay. It’s intended to discourage people from using fossil fuels. How? By using electricity, gas and petrol less wastefully.

By switching to renewable energy (which is untaxed) because it’s relatively cheaper. By making sure that the next car or appliance or production machine people buy is more energy-efficient than the last. By increasing the monetary incentive for businesses to come up with less-polluting ways of doing things and inventing less-polluting machines.

To save face, Morrison has set his face against using the price mechanism to save the planet. But economic reality – or pressure from other, more sensible countries, or even voters – may yet change his tune.

One worry about putting a price on carbon is whether it would put our exporters at a disadvantage. A new and opposite worry is whether countries that have one when we don’t will protect their industries by slapping a “carbon tariff” on our exporters.

But the International Monetary Fund has come up with a solution to these worries that would also allow every country to use carbon pricing to make greater progress towards net zero. It proposes that the G20 countries (including us) phase in a uniform carbon minimum or “floor price” of $US75 a tonne of CO2 by 2030. Smart idea.

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We won’t be paying back government debt, but we WILL be paying

If you’re one of the many who worry about how we’ll pay off the massive debt the Morrison government has incurred during the pandemic, the Parliamentary Budget Office has reassuring news.

The budget office – which is responsible to the whole Parliament and so is independent of the elected government – has prepared its own projections of the budget deficit and debt over the decade to 2032.

It’s also assessed our “fiscal sustainability” over the 40 years to 2061, testing the budget against 27 different best, worst and middle scenarios with differing assumptions about economic growth, the level of interest rates on government debt and the size of our budget deficit or surplus.

It finds that the federal government’s debt is projected to keep growing until it reaches a peak equivalent to about 50 per cent of gross domestic product in 2029. After that it’s projected to keep growing in dollar terms, but at a slower rate than the economy is growing, so that it slowly declines relative to the size of the economy, to reach 28 per cent of GDP in 2061 in the middle scenario.

We don’t pay off any debt unless we get the budget back into annual surplus. But this happens only in the best-case scenario, where the debt is completely repaid by 2058. Don’t hold your breath.

So the budget office’s reassuring news is not that we’ll be able to repay the debt – it’s unlikely we will – but that it accepts Scott Morrison’s assurances we don’t have to repay it to keep out of trouble. That, unless our leaders go crazy, we can outgrow the debt and that the interest bill isn’t likely to become a significant burden on taxpayers even though the debt remains unpaid.

These are not controversial propositions among economists. If you find them hard to believe then – forgive me – but you don’t understand public finances as well as you should. It’s a mistake to think that a national government of 25 million people has to live by the same rules as your household.

Households must pay off their debts before they’re too old to work, but governments go on forever and always have most of their population working and paying taxes. Their populations keep growing and getting a bit richer every year, so they can keep rolling over their debts.

They can do what no household can do: pay their bills not by working but by imposing taxes on other households. So stop thinking governments have to pay off their debts the way you and I do.

And stop thinking our kids will be lumbered with massive government debts; they won’t be. Indeed, it won’t be government debt our kids and grandkids will hold against us, it’s our generation’s failure to act early enough to stop global warming.

But that’s not to say government debt doesn’t matter or that it comes without a price tag. In its projections over the next decade and its scenarios over the next 40 years, the budget office assumes that the “shocks” causing ups and downs in the economy in the future will be no worse than those we’ve experienced over the past 30 years or so. Maybe; maybe not. As well, it assumes that present and future governments will be no more reckless spenders than governments have been over past decades.

It judges that our deficit and debt position will be sustainable over the next 40 years – will cause no need for “major remedial policy action” (no horror budgets) – “provided fiscal strategy is prudent”. We can continue to run budget deficits provided they’re “modest”.

We’ll need “a measured pace of fiscal consolidation”. Translation: if governments stop trying to keep deficits low, all bets are off. So governments will need to avoid wasteful spending. And they’ll need to ensure tax collections are sufficient to cover most of any growth in government spending.

It’s here I think the budget office’s projections of an ever-diminishing budget deficit out to 2032 are hard to believe. They’re based on assumptions that government spending grows no faster than the economy grows, but tax collections grow a lot faster than the economy.

How? By letting bracket creep rip. The tax cuts we’ve been promised for 2024 will be limited to high-income earners, and will be the last we see for the decade.

That’s not hard to believe. What’s hard is believing governments can keep the lid on government spending for another decade. We know we’ll be spending hugely more on nuclear subs and other defence equipment, on aged care and on the National Disability Insurance Scheme.

So how is government spending supposed to grow only modestly? Because spending on social welfare – age pension, family tax benefits, disability support pension, JobSeeker and sole parent payment – will fall as a share of GDP.

Get it? The only way we’ll keep on top of our debt and deficit is by driving the disadvantaged further into poverty. If we’re not that heartless, we’ll be paying a lot more tax – whatever we’re promised at the election.

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How Morrison can get going towards net zero - if he wants to

Scott Morrison seems keen to keep his job as Prime Minister, but not so keen to do the job PMs are paid to do: make tough decisions in the nation’s interests. So it’s up to the rest of us to step into the breach. And when it comes to the decision Morrison fears most – getting to net zero emissions by 2050 – no one’s keener to help out than Tony Wood and his team at the Grattan Institute.

Wood begins where everyone with any sense begins: by noting that the best way to reduce emissions at minimum cost to the economy - and all the people in it - would be to introduce a single, economy-wide price on carbon emissions.

But the temptation to win elections with populist bulldust about “a big new tax on everything” proved too great and so, with that off the table, we must find other, more interventionist, sector-by-sector ways to skin the cat (many of them requiring additional government spending, which will have to be paid for somehow).

The basic strategy for reducing our emissions is clear: move from fossil fuels to renewable ways of producing electricity (plus the use of batteries to store it), then meet all other energy needs with electricity. In practice, it’s more complicated, of course.

Official projections foresee emissions from electricity falling substantially over his decade, while the next four largest sources of emissions either grow or, at best, plateau. Grattan is producing a series of five reports proposing relatively easy and obvious ways of achieving early reductions in emissions in each sector.

Its thinking is to get early progress because, even if we were to reach net zero emissions just before 2050, that wouldn’t be sufficient to stop the increase in the global average temperature being a lot greater than 1.5 degrees – which is about as much as we can take without major social and economic disruption, not to mention personal discomfort.

If we take as many easy shots as we can now, that buys more time for technological advances to help us with the harder stuff. Getting some momentum going should help build public acceptance of the need for more, as well as giving business a clearer picture of where we’re heading and the risks it runs if it ploughs on regardless.

In any case, the latest report of the UN’s Intergovernmental Panel on Climate Change isn’t likely to be the last telling us temperatures are rising faster than earlier thought. It wouldn’t be surprising to see the 2050 deadline brought forward.

Wood’s first report in Grattan’s five-part series covered the transport sector. It proposed measures to achieve an early move to electric cars, while we wait for hydrogen technology to help with heavier transport.

Wood’s second report, on the industrial sector, was released on Sunday. This covers emissions arising from the production of coal, oil and gas – as opposed to their customers’ use of their products – emissions from the mining and processing of other minerals and metals, and emissions from processing in manufacturing.

As well as burning fossil fuels to help extract fossil fuels, coal, oil and gas production involves “fugitive” emissions of greenhouse gases during the extraction process.

The sector’s emissions have increased significantly since our base year, 2005, mainly because of our foolish decision to permit three different companies to build huge liquefaction plants on an island off the coast of Queensland and turn us into one of the world’s largest exporters of liquid natural gas. Liquefaction, it turns out, involves massive emissions.

The entire industrial sector accounts for almost a third of our total emissions, which are projected to be little changed over the decade. The good news is that 80 per cent of its emissions come from just 187 large facilities. Most of these are subject to the federal government’s existing “safeguards mechanism”, which sets a baseline – or maximum - for each facility’s emissions.

So Wood’s chief proposal is for this mechanism to be modified and extended. Existing facilities should be required to use technologies now available to gradually reduce their emissions. New facilities should be required to meet benchmarks substantially lower than existing ones.

“From now on,” Wood says, “every decision to renew, refurbish or rebuild an industrial asset potentially locks in emissions for the coming decades. Getting these decisions right will be critical for reaching net zero.”

Of course, when it comes to the many facilities producing fossil fuels for export, their future prospects will be affected more by other countries’ climate-change policies than by ours. Good luck finding customers for fossil fuels as the reality of global warming catches up with them as well as us.

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Getting to net-zero emissions an easier ride than some want to think

I have a mate who – in normal times, anyway – gives me a lift to the gym in his new all-electric Mercedes. He loves its lack of engine noise and amazingly fast acceleration when the lights change (not that I’m implying he’s a rev-head hoon the police should be watching). I’m no car lover, but it’s certainly a smooth, quiet ride.

Most of us accept that, as part of the world’s move to net-zero emissions by 2050, we’ll all be moving to electric cars. Other countries are already further down this road than us.

We’ve made big strides in shifting electricity generation to renewables, and our emissions are falling. But electricity production accounts for only a third of our total emissions. Transport, in all its forms, accounts for about 20 per cent of total emissions, so its move away from fossil fuels is another part of the transition we should get on with.

In all the years we’ve been arguing about climate change, people have tried to convince us how costly it will be. How disruptive to industry and our way of life. All the higher prices, the tax we’ll pay, the jobs we’ll lose.

So far, however, there’s been little extra cost or disruption. The rise of wind and solar power has happened without much pain. And a report this week from Tony Wood and colleagues at the Grattan Institute think tank suggests the move to electric vehicles can be achieved without angst.

More than 60 per cent of the transport sector’s 20 per cent of total greenhouse gas emissions comes from the tailpipes of cars and light commercial vehicles, including our two biggest selling cars, Toyota HiLux and Ford Ranger utes. That leaves trucks accounting for 20 per cent of the sector’s emissions and domestic aviation for about 10 per cent.

Australia has about 18 million light vehicles, up from fewer than 15 million in 2010. And we’re driving bigger, heavier cars than we were a decade ago. (All those appalling SUVs. One day they’ll run over my little Toyota Yaris.)

At present, electric vehicles make up just 0.7 per cent of new sales in Australia. This doesn’t count hybrid electric/petrol cars which, because of their continued use of fossil fuel, can’t be a lasting part of the shift, Wood says.

Our tiny all-electric share of new sales compares with 2 per cent in the US, 3 per cent in New Zealand, 11 per cent in Britain and 75 per cent in Norway.

Because it takes more than 20 years to replace our light vehicle fleet, for our transport sector to make a sufficient contribution to the target of net-zero total emissions by 2050 we’ll need to get to the point where all new light vehicles are electric by about 2035, he estimates.

Government projections suggest that, if the market is left to itself, the move to electric vehicles will cause light vehicle emissions in 2030 to be 7 per cent lower than they were in 2019. This isn’t good enough.

So what can be done to speed the shift? Wood says governments should reduce the main barriers to buying an electric car. First, the high cost of switching and limited choice and, second, the lack of charging points.

We pay an average of about $40,000 for a new car. But we have fewer than 30 electric models to choose from – much lower than overseas – and of these, just three models retail for less than $50,000.

As with all innovative products, the price of electric cars is coming down as the novelty wears off and sales increase. They’ll fall further as batteries become cheaper to make. But the point where the price of an electric car falls below an equivalent conventional car is still some years away.

So Wood proposes removing several taxes on the purchase of new electric cars. Scrapping state stamp duty would cut the price by up to 6.5 per cent, he estimates. Remembering that, these days, all vehicles are imported, removing federal import duty would cut the cost by up to a further 5 per cent.

Exempting electric cars from the federal luxury car tax – a tax of 33 per cent of the price exceeding the first $80,000 – until 2030 would also help.

Australia is alone among the rich countries in not having mandatory fuel efficiency and emissions standards. And there’s a suspicion some foreign makers send us only the high-emissions conventional models they have trouble flogging in other markets.

So to these carrots, Wood adds a stick: to phase out petrol and diesel cars, the feds should impose an emissions limit on light vehicles and reduce it to zero by 2035.

Many people hesitate to buy an electric vehicle because they worry about finding places to recharge. Wood says governments should require all new buildings with off-street parking to make provision for vehicle charging.

Getting everyone into electric vehicles wouldn’t solve our emissions problem, but it would help. And it’s another indication that the fears of huge costs and disruption are greatly exaggerated.

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Reality is catching up with our freeloading, populist climate deniers

Don’t be taken in by the Morrison government’s outraged cries of “protectionism” against the EU plan to impose a carbon tariff on our exports to Europe. It’s we who are in the wrong, failing to do what we should have to reduce emissions, in favour of politicking and populism.

What we’re seeing is just the reality of the world’s need to act to limit climate change catching up with a government and federal party which, since Tony Abbott used denialism to seize the party’s leadership from Malcolm Turnbull in 2009, decided to make global warming a party-political football: a way to beat your opponents, not a need to tackle the nation’s biggest problem.

It’s a condemnation of our business people that, when their own side of politics offered them a way to postpone the inevitable costs of adjusting to a low-carbon world, they happily embraced it.

It’s a condemnation of Australian voters that they were willing to allow their preferred party to tell them whether they cared or didn’t care about their children’s future. It should have been the other way round. “It’s all too hard; you do my thinking for me.”

But the game has moved on since those bad days, and now it’s not just the rest of the world that’s realised there’s no future in denying the reality of climate change and the need to act. As each day passes, we see more evidence that our own financial regulators, banks, investors and businesses are accepting the inevitable and modifying their behaviour.

All our state governments – most notably the Berejiklian Coalition government of NSW – have embraced the target that all other rich nations have embraced, net-zero emissions by 2050. Everyone can see that our refusal to take climate change seriously is wrong-headed and unsustainable.

So, apart from being a national embarrassment – we’re the person stopped for not wearing a mask, so to speak – it’s no bad thing that even other countries have stepped in to oblige our national government to shoulder its responsibilities.

As part of their plan to reduce their emissions by 55 per cent by 2030, the Europeans are toughening up the emissions trading scheme they introduced in 2005, which imposes a price on the carbon emissions of European industries.

To prevent this putting their industries at a disadvantage against imports from countries that don’t impose a similar carbon price on their own industries, the Europeans plan to use a “carbon border adjustment mechanism”, a tax on imported cement, fertilisers, aluminium and iron and steel to bring their carbon costs up to those faced by local producers.

This not only levels the playing field for local industry, it eliminates the incentive for producers to move their production to countries without carbon pricing.

These problems are ones we ourselves worried about when designing Kevin Rudd’s original carbon pollution reduction scheme (which the Coalition and the Greens voted down in 2010) and Julia Gillard’s carbon pricing scheme of 2012 (which was repealed by Abbott in 2014).

So what the Europeans want to do can’t honestly be called protectionism. It bears no similarity with the new import duties China’s imposing on some of our exports.

What’s true is that it’s a messy but necessary way of solving the “wicked” problem of climate change which, being global, can only be fixed by all of the world’s big emitting countries doing their bit. This is why we can expect many other big countries – starting with America, and maybe extending to Japan − to impose similar carbon border taxes on those countries that try to freeload on those doing the right thing, while helping to sabotage the good guys’ efforts in the process.

So there’s no reason for any of us who believe climate change is real and must be countered to have any sympathy for the Abbott-Turnbull-Morrison government. All its sins of expedience and populist politicking are finding it out. It took a bet that the rest of the world wouldn’t get serious, and we lost.

The point is, had we stuck with either the first or the second version of our own emissions trading scheme – which were actually designed to fit with the Europeans’ scheme – we wouldn’t have this problem.

By now our exporters would be paying our carbon tax to our government (or, if they weren’t yet, we could easily fix it) rather than paying the same tax to foreign governments. Why’s that a good idea?

From the beginning, this government has used climate change as nothing more than an opportunity to attack the other side of politics by pushing populist delusions that taxes are always and everywhere a bad thing. Bad for the economy. Yeah, sure.

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Reform not a dirty word when it benefits the many, not the few

The idea that the economy needs to be “reformed” has been hijacked by the business lobby groups. Their notion of reform involves making life better for their clients at the expense of someone else. But that doesn’t mean there aren’t things that could be changed to make the economy work better for most of us, not just the rich and powerful.

Trouble is, Scott Morrison shows little interest in any kind of reform, whether to advance business interests or anyone else’s. Reform involves persuading people to accept changes they don’t like the sound of, and increases the risk they’ll vote against you at the next election.

Morrison’s government is making heavy weather of our most urgent problem – getting all of us vaccinated against the virus ASAP – so maybe it’s not such a bad time for him to Keep it Simple, Stupid.

But we do have an election coming up, in which it’s customary to think about what improvements could be made over the next three years. And it’s not illegal for us to dream about what could be improved if sometime, somewhere we ever found leaders interested in doing a better job as well as staying in office.

Next to the pandemic, the most important problem we need to be working on is climate change. That’s stating the obvious, I know, but not to Morrison and his Treasurer, Josh Frydenberg, whose recent intergenerational report paid lip service to the issue but then proceeded to project what might happen to the economy and the federal budget over the next 40 years without taking climate change into account.

What’s surprising is that another Coalition government, Gladys Berejiklian’s in NSW, did take account of global warming in its state intergenerational report. It found that more severe natural disasters, sea level rises, heatwaves and declining agricultural production would reduce incomes in NSW by $8 billion a year in 2061 under a high-warming scenario compared to a lower warming one.

Clearly, climate change will be bad for everyone in the economy – some people more than others – while acting to reduce our emissions of greenhouse gases will be a cost to our fossil fuel industries.

But the world’s demand for our coal and gas exports is likely to decline whatever we do. Our government doesn’t believe climate change needs to be taken seriously but, fortunately for more sensible Australians, the rest of the world does, and is in the process of forcing “reform” on our obdurate federal government.

In the meantime, however, our electricity industry is finding it hard to know what to do because the Morrison government won’t commit itself to a clear plan on how we’ll make the transition to all-renewable power.

Worse, our abundance of sun and wind relative to most other countries makes us well placed to become a world renewables superpower – exporting “clean” energy-intensive manufactures, maybe even energy itself - if we act quickly.

Right now, however, our need to choose between being a loser from the old world or a winner in the new world is sitting in the too-hard basket.

Moving to less strategic issues, Danielle Wood, chief executive of the Grattan Institute, gives a high priority to lowering barriers to workforce participation by women, by making childcare more affordable and improving paid parental leave.

We’ve long seen the benefits of free education in public schools. Making “early childhood education and care” free would not merely make life easier for young families, it would get more of our kids off to a better start in the education system and allow women to more fully exploit the material benefits of their extensive education, not just to their benefit but the benefit of all of us.

The benefits of getting an education greatly exceed getting a better-paid job – education broadens the mind, don’t you know – but it makes no sense for girls, their families and the taxpayer to put so much effort and money into gaining a better education, then make it so hard for them to do well in the workforce when they have kids.

One factor that’s widening the gap between rich and poor in the advanced economies is years of “skill-biased” technological change, which is increasing the wages of highly skilled workers while doing little to increase the wages of unskilled workers. Indeed, many routine jobs are being replaced by machines.

This says one way to ensure Australian workers prosper in the digital future of work is to ensure our workforce is well educated and highly trained. We must be willing to spend – to invest – however much it takes to have a workforce capable of providing the more analytical, caring and creative skills employers will be demanding.

We need to do more to help our teachers teach better so that fewer kids leave school early without having acquired sufficient education to survive in the world of work. Some teachers are better at it than others; they need to be used to train younger teachers on the job and rewarded accordingly.

Universities need to be better funded by the federal government, so they can afford to give students a higher quality education, vice-chancellors aren’t so eternally money hungry, unis stop exploiting younger staff with insecure employment and aren’t so dependent on making money out of overseas students and thus obsessed by finding ways to game the international university league tables.

How’s all this to be afforded? By all of us paying somewhat higher taxes, how else? By politicians giving up their election-time pretense that taxes can come down without that leading to worse quality government services rather than better.

Throwing money at problems doesn’t magically fix them, you must use the money effectively. But when mindless cost-cutting is the source of much of the problem, nor is it possible to fix problems without spending more.

If our politicians would speak to us more honestly along the lines of “you get what you pay for”, that itself would be a welcome reform.

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Little sign Morrison is serious about improving productivity

Improving the economy’s productivity is so central to lifting our material standard of living that politicians and big business people talk about it unceasingly. But the funny thing is, most of what they say makes little sense.

But first, let’s be sure we know what “productivity” means. It may be that politicians and business people get away with talking so much nonsense on the subject because so many of us aren’t sure.

A lot of people assume “productivity” is just a flash way of saying “production”. Wrong. It’s also possible people – particularly business people – think it means the same thing as profit, competitiveness or effort.

Wrong again. As Dr Richard Denniss and Matt Saunders, of the Australia Institute, say in a new paper, “while cutting the wages of a worker may lead to an increase in profit, and potentially improve the competitiveness of one firm compared to another, wage reductions do not result in an increase in productivity.

“Indeed, lowering wages may lead to a reduction in productivity if it dissuades firms from investing in labour-saving technology.”

The productivity of a business (or an economy) is the quantity of its output – production – of goods and services compared with the quantity of its inputs of raw materials, labour and physical capital.

It’s most commonly measured by dividing output by the quantity of usually the most expensive input, labour, to get output per hour worked.

The great achievement of capitalist economies is that they’ve been able to extract a bit more output from the average hour worked almost every year for the past two centuries.

It’s this improved productivity that almost wholly explains why the developed countries’ material living standards have got a bit better almost every year.

But how on earth has it been done? Mainly by advances in technology. Continuously since the Industrial Revolution, we’ve been inventing machines that allow us to produce goods using fewer and fewer workers.

This has greatly reduced the proportion of the workforce needed to work in farming, mining and manufacturing, but made it possible to afford far more people delivering services ranging from doctors and professors to people working in aged care, disability care and child care. Over the decades, total unemployment has been little changed by labour-saving technology.

The productivity of labour has been improved also by better education and training of workers, and by improvements in the way businesses are managed.

Now, as discussed last week, Australia’s rate of productivity improvement has slowed markedly since the global financial crisis. And, to be fair, we should remember that much the same has happened in the other rich economies.

But that’s no reason why the government shouldn’t be doing what it can to turn this around. And there’s been no shortage of talk about all the things the Coalition is doing to improve our productivity. What’s missing are signs that all this professed effort is doing much good.

It’s clear Scott Morrison hates being held accountable, but Denniss and Saunders have gathered a remarkable list of the claims he’s made, particularly while he was treasurer, to be working wonders on the productivity front.

In 2016, he claimed the creation of the Australian Building and Construction Commission was “an important reform . . . that will drive productivity, that will support wages growth, that will support increases in profits of small businesses so they can grow and expand”.

The same year he claimed the alleged “free-trade agreements” that the government had been making with other countries would “increase Australia’s productivity and contribute to higher growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation”.

That’s a claim the Productivity Commission and many economists would strongly dispute.

Treasurer Morrison also claimed “the government is implementing a $50 billion national infrastructure plan to unlock our productive capacity, generate jobs, and expand business and labour market opportunities”. Train station car parks, for instance?

Other ministers have made similar claims, including Christian Porter’s assertion that his reform of wage-fixing rules would “make the bargaining system . . . more efficient and, most importantly, capable of delivering those twin goals of productivity and higher wages”.

This is not to mention the various tax cuts – in the rate of company tax for small business; the three-stage cuts in income tax, including the last stage, in 2024, which will give huge tax cuts to high income-earners despite adding $17 billion a year to an already swollen budget deficit – which are always justified as encouraging more effort, innovation and investment.

Trouble is, all this supposed achievement did nothing to encourage the authors of last week’s intergenerational report to raise their assumed rate of annual productivity improvement over the next 40 years.

Indeed, they cut the rate a fraction to 1.5 per cent a year. They said nothing about any of the above “reforms” helping to justify even that lower assumption, which is actually much higher than the 0.7 per cent average annual improvement achieved over the five years before the coronacession.

What’s more, both the report and Treasurer Josh Frydenberg acknowledge that it will take a lot more reform to get the rate of productivity improvement up to 1.5 per cent a year. What they don’t do is say what reforms they have in mind. Maybe we’ll be told after next year’s election. Or maybe it’ll just be more of the same sort of “reforms” Morrison has assured us are doing so much good.

In former times, big business worthies and conservative politicians used to tell us our goal must be to increase the size of the pie for everyone (which is what improved productivity does), not fight over the size of my slice of the pie compared to yours.

Maybe they’ve stopped saying this because, if we looked too hard at all the changes they assure us will improve productivity, we’d notice they’re aimed at increasing the slice of pie going to business owners and high income-earners.

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The real reason the budget may stay in deficit for the next 40 years

If you follow a rule that when a politician cries “look over there!” you make sure you stay looking over here, there’s much to be deduced from Treasurer Josh Frydenberg’s Intergenerational Report, before we put it up on the shelf with its four predecessors.

That’s especially so with a federal election coming by May next year. Elections are times when politicians try to convince us they can do the arithmetically impossible: cut taxes while guaranteeing adequate spending on “essential services” and getting on top of “debt and deficit”.

Intergenerational reports always involve sleight of hand. They’re always about getting us to focus on a certain aspect of the problem and ignore other aspects.

As Frydenberg admits, the five-yearly intergenerational reports “always deliver sobering news. That’s their role. It is up to governments to respond.”

He’s given us little idea of what that response will involve. But there’s little doubt about his sobering news: the budget is projected to stay in deficit in each of the 40 years to 2060-61.

And we’re left in no doubt about the stated cause of those deficits and growing government debt: excessive growth in government spending.

As the report’s authors confess in an unguarded moment, “the emphasis of the [successive intergenerational] reports rested on pressures that demographic change [that is, the ageing of the population] was likely to impose on future government spending”.

We’re told that, even after you remove the effect of inflation, government spending per person is projected to “almost double”. (And I thought only journalists were prone to exaggeration. “Almost double” turns out to be an increase of 73 per cent.)

Why the huge growth in real terms? Mainly because of huge growth in spending on healthcare, but also because of big growth in spending on aged care and interest payments.

Get it? Government spending will grow like steam because of the ageing of the population. Except that when you read the report’s fine print you find that’s not the main reason. Only about half the projected growth in health spending is explained by population growth and ageing.

The other half is explained by advances in medical “technology, changing consumer preferences and rising incomes”. That is, as Australians’ real incomes rise over time, they want to spend a higher proportion of that income on preserving their good health and living longer.

And improved medicines and procedures almost always cost more than those they replace. But voters won’t tolerate government delay in making the latest drugs and operations available under Medicare.

As for the projected greatly increased spending on aged care, only part of it’s due to the Baby Boomers eventually reaching their 80s. The rest is explained by “changing community expectations”.

That’s a bureaucrat’s way of saying that “after the royal commission confirmed all we’ve been told about widespread mistreatment of people in aged care, governments will have no choice but to stop doing aged care on the cheap”. That is, it’s the higher cost of better-quality care.

Expressed as a percentage of national income, spending on the age pension is expected to fall as bigger superannuation payouts put more people on part-pensions. And, even though this saving is projected to be more than offset by the increased cost to revenue of super tax concessions, the combined effect is that the retired will have a lot more money to spend than their parents did.

Now get this: whereas total government spending is projected to grow, in real terms, at an average rate of 2.5 per cent a year in the coming 40 years, this compares with growth of 3.4 per cent a year over the past 40 years.

So it’s not just that ageing doesn’t adequately explain the expected growth in government spending, it’s also that the projected 40 years of budget deficits can’t be adequately explained by excessive spending.

The real reason the spending horse is expected to outrun the taxing horse is that the taxing horse has been nobbled. At a time when the coronacession led to a huge blowout in the budget deficit, the government used this year’s budget to bring forward the second stage of its tax cuts, and will proceed with the third-stage tax cut in July 2024 despite the continuing deficits and rising debt.

Worse, the projections assume that, because projected tax collections would otherwise exceed the government’s self-imposed limit on taxation as a proportion of national income after 2035-36, we’ll be getting new tax cuts in each of the last 15 years up to 2061. Yes, really.

No wonder interest payments are projected to account for three-quarters of the budget deficit in 2060-61.

We can be sure Scott Morrison will go into the election campaign claiming the Liberals are the party of lower taxes. But what voters will have to decide is whether a re-elected Morrison government would “respond” to the Intergenerational Report’s projection of its existing policies by letting taxes grow, slashing spending on “essential services” or letting debt and deficit just keep keeping on.

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My new hero, Mathias Cormann, now valiant for truth

I find it hugely encouraging. Don’t know if you’ve heard the glad tidings but, on his road to Damascus – or, in this case, Paris – our own Mathias Cormann, former senator and minister for finance, has experienced a miraculous conversion. He’s gone from persecutor of those who care about climate change to being a leader of the cause.

As we said in my Salvo youth, there is much joy in heaven over one sinner that repenteth. I bet Brother Scott’s joy is unconfined.

And it’s clear from Cormann’s first speech as Secretary-General of the revered Organisation for Economic Co-operation and Development that he’s seen the light on a lot more than climate change. Indeed, the new man is exhibiting a distinct air of wokefulness. He’s now valiant for “stronger, cleaner, fairer economic growth”.

Speaking to a meeting of the OECD’s 37 rich and wannabe-rich member-country Council at Ministerial Level last week, Cormann said: “We need to continue to overcome the immediate health challenge, including by pursuing an all-out effort to reach the entire world population with vaccines.

“This is not just an act of benevolence from advanced economies. It is about sustained virus protection for all of us and about giving ourselves the best chance of a sustained recovery.”

Enlightened self-interest. I love it.

Cormann hasn’t changed his tune on chasing down slippery multinational tax avoiders. “It is very important we [the OECD] continue to lead the global fight against tax evasion and multinational tax avoidance and to ensure that digital businesses and all large businesses pay their fair share,” he said.

“We need to complete this work, including by facilitating agreement on an appropriate minimum level of global taxation and by minimising the profit-shifting that has accompanied the digitisation of our globalised economy.” All well and good.

On other matters, where I come from, there was nothing we enjoyed more than hearing some reformed Trophy of Grace testifying to his former wicked ways. As finance minister, Cormann led the Coalition’s repeated cuts to our overseas aid budget which, as a poor country with a big debt, we were told, we could no longer afford.

The reborn Cormann sees it differently. “We [the rich OECD countries] must also continue to strengthen our development co-operation. Low-income countries need our co-operation more than ever – to ensure access to vaccinations, to trade, to financing to help them deal with the climate challenge,” he said.

Cormann, you recall, was one of Tony Abbott’s lieutenants in abolishing Labor’s (already watered-down) minerals resource rent tax and its “price on carbon”.

At the time we were led to believe Julia Gillard’s carbon tax was the reason the retail price of electricity had risen so steeply. Turned out it was just a small part of the story. Prices stayed high.

But, in any case, new insight has come to Cormann in a blinding flash. “Market-based economic principles work,” he now sees. “Global competition at its best is a powerful engine for progress, innovation and an improvement in living standards.”

True, he admits, competition can be uncomfortable. “It can lead to social disruption which, collectively, we need to better manage.” Love that new thought that we ought to do more things “collectively”. Doesn’t quite roll off Cormann’s tongue, but he’s getting there.

“We need to ensure access to high quality education, upskilling and reskilling to ensure everyone can participate and benefit. We need the necessary social supports for those who struggle,” he said.

Amen to that. No hanging the unis out to dry during the pandemic. No spending a decade starving technical education of funds.

On climate change, he tells us that “more and more countries are committing to net-zero emissions as soon as possible and by no later than 2050.

“The challenge is how to turn those commitments into outcomes and to achieve our objective in a ... way that will not leave people behind.”

It’s easy to be cynical. In my youth, working in a big private-sector bureaucracy and watching people fighting their way to the top, I formed the view that many people were happy to adjust their views to fit their new role in the organisation.

When, with much assistance from the Morrison government, Cormann was travelling the world canvassing support for the top OECD job, many environmental groups were loudly opposing his candidacy. They failed to anticipate the fluidity of his views.

In my limited contact with the man, I found this Rocksolid Roarer of the Right friendly to the point of charming. Remembering how successful he was at getting crossbench Senate support for the government’s controversial measures – and at so little cost to the exchequer – I think he has just the right qualities to succeed in bringing the OECD’s divers members to agreement.

And, after all, he wouldn’t be the first person lately to realise that the climate worm has turned and fossil fuel’s days are ending.

Benediction from the Apostle Mathias: “Protecting ourselves from competition and innovation does not stop it from happening elsewhere – it just means that, over time, those who find themselves behind those protective walls fall further and further behind.”

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Key reform needed to fix debt and deficit: ditch stage 3 tax cut

Scott Morrison and Josh Frydenberg won’t admit it. But most economists agree that at the right time, the government should take measures to hasten the budget’s return to balance, even – to use a newly unspeakable word – “surplus”.

Economists may differ on what they consider to be the right time. But, if we’re to avoid repeating the error the major economies made in 2010 by jamming on the fiscal (budgetary) policy brakes well before the recovery was strong enough for the economy to take the contraction in its stride, the right time will be when the economy has returned to full employment, with no spare production capacity.

At that point, the inflation rate’s likely to be back within the Reserve Bank’s 2 to 3 per cent target range, with wage growth of 3 per cent or more. Any further fiscal stimulus from a continuing budget deficit would risk pushing inflation above the target, and could induce a “monetary policy reaction function” where the independent Reserve countered that risk by raising interest rates.

So, better for the government to act before the Reserve acts for it. And if you take the econocrats’ best guess at the level of full employment – when unemployment is down to between 5 and 4.5 per cent – and take the budget’s forecasts at face value (itself a risky thing to do) the right time will be in the middle of 2023.

But the growth in wages and prices has been so weak for so long, that I wouldn’t be acting until it was certain wage and price inflation was taking off.

Even so, since its own forecasts say that point will come towards the end of the next term of government, Morrison and Frydenberg should be readying to give us a clear idea of the steps they’ll take to cut government spending or increase taxes when it becomes necessary.

And, in an ideal world, they would. But, thanks to the bad behaviour of both sides of politics, our world is far from ideal. Former Labor leader Bill Shorten is only the latest to be reminded of the awful, anti-democratic truth that parties which telegraph their punches expose themselves to dishonest scare campaigns.

But that’s just the most obvious reason Morrison and Frydenberg will avoid any discussion of the nasty moves that will be necessary to make the “stance” of fiscal policy less expansionary and, when needed, mildly restrictive, thus slowing the government’s accumulation of debt in the process.

The less obvious reason is that no pollie wants to talk about the policy instrument that’s played a leading part in all previous successful attempts at “fiscal consolidation” and will be needed this time.

It’s what Malcolm Fraser dubbed “the secret tax of inflation”, but the punters call “bracket creep” and economists call “fiscal drag”.

Because our income-tax scales tax income in slices, at progressively higher rates – ranging from zero to 45c in the dollar – but the brackets for the slices are fixed in dollar terms, any and every increase in wages (or other income) increases the proportion of income that’s taxed at the individual’s highest “marginal” tax rate, thus increasing the average rate of tax paid on the whole of their income.

A person’s average tax rate will rise faster if the increase in their income takes them up into a higher-taxed bracket but, because what really matters in increasing their overall average tax rate is the higher proportion of their total income taxed at their highest marginal tax rate, it’s not true that people who aren’t pushed into a higher tax bracket don’t suffer from what we misleadingly label “bracket creep”.

I give you this technical explanation to make two points highly relevant to the prospects of getting the budget deficit down. Both concern the third stage of the government’s tax cuts, already legislated to take effect from July 2024, at a cost of $17 billion a year.

Although this tax cut is, in the words of former Treasury econocrat John Hawkins and others, “extraordinarily highly skewed towards high income earners”, Frydenberg justifies it with the claim that, because it would put everyone earning between $45,000 and $200,000 a year on the same 30 per cent marginal tax rate, it would end bracket creep for 90 per cent of taxpayers.

First, this claim is simply untrue. For Frydenberg to keep repeating it shows he either doesn’t understand how the misnamed bracket creep works, or he’s happy to mislead all those voters who don’t.

What’s true is that the stage three tax cut would greatly diminish the extent to which a given percentage rise in wages leads to a greater percentage increase in income-tax collections, thereby sabotaging the progressive tax system’s effectiveness as the budget’s main “automatic stabiliser”. Its ability to act as a “drag” on private-sector demand when it’s in danger of growing too strongly.

In an ideal world, income-tax brackets would be indexed to consumer prices annually, thus requiring all tax increases to be announced and legislated. But in the real world of cowardly and deceptive politicians – and self-deluding voters – the stage three tax cut is bad policy on three counts.

One, it’s unfair to all taxpayers except the relative handful earning more than $180,000 a year (like me). Two, the biggest tax savings go to the people most likely to save rather than spend them. Three, by knackering the single most important device used to achieve fiscal consolidation, it’d be an act of macro management vandalism.

Think of it: by repealing stage three you improve the budget balance by $17 billion in 1024-25 and all subsequent years. Better than that, you leave intact the only device that works automatically to improve the budget balance year in and year out until you decide to override it.

Without the pollies’ little helper, fiscal consolidation depends on a government that’s still smarting from its voter-repudiated attempt in the 2014 budget, having another go at making big cuts in government spending, and a government that seeks to differentiate itself as the party of low taxes now deciding to put them up.

Good luck with that.

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Only bipartisanship will let us relieve the squaller of aged care

Despite all the appalling stories of the neglect and even abuse of old people we’ve heard during the two years of the royal commission into aged care, it’s hard to be confident this will be the last time we’ll need an inquiry into what’s going wrong and why.

Looking at the eight volumes of the commission’s report – even its executive summary runs to 115 pages – it’s easy to conclude the problem must be hugely complicated. And if you get into the gruesome detail, it is.

But if you look from the top down, it’s deceptively easy. All the specific problems stem from a single cause: we’ve gone for decades – under federal governments of both colours – trying to do aged care on the cheap, and it’s been a disaster.

The basic solution is obvious: if we want decent care of our oldies we must be prepared to pay more for it – a lot more. The problem is, neither side of politics has been game to ask us to do so.

That’s partly because the first side to do so fears it would be attacked by the other: “Don’t vote for them, they want to put up your taxes!”

But also because neither side believes the public is prepared to put its money where its mouth is. We’re happy to be scandalised by the terrible treatment of many people in aged care, and blame it on our terrible politicians, but don’t ask us to kick the tin. We’re paying too much tax already.

I believe that a government with the courage to make the case for a specific tax increase to cover the cost of better aged care could be successful, but in this age of leaders who find it easier to follow than to lead, it’s not terribly likely.

The commission makes no bones about its conclusion that the aged care system has been starved of funds. It finds that the Aged Care Act, introduced in 1997 by the Howard government, was motivated by a desire to limit its cost to the budget.

“At times in this inquiry, it has felt like the government’s main consideration was what was the minimum commitment it could get away with, rather than what should be done to sustain the aged care system so that it is enabled to deliver high quality and safe care,” the report says.

In 1987, the Hawke government introduced an “efficiency dividend” under which the running costs of government departments and agencies are cut automatically each year by a per cent or two. The practice persists to this day. The report estimates that, by now, this has cut more than $9.8 billion from aged care’s annual budget.

Another way the government has limited costs is by rationing access to home care packages – which help people avoid going into residential care (and so, in the end, help the government save money). There’s a long waiting list for home care, with those in greater need of help waiting longer than those needing less.

Every so often the government announces with great fanfare its decision to cut the waiting list by X thousand places. But since the demand for places is growing – and even though many people die before their name comes up – the list never seems to get lower than about 100,000 at any time.

“The current aged care system and its weak and ineffective regulatory arrangements did not arise by accident,” the report says. “The move to ritualistic regulation was a natural consequence of the government’s desire to restrain expenditure in aged care.

“In essence, having not provided enough funding for good quality care, the regulatory arrangements could only pay lip service to the requirement that the care that was provided be of high quality.”

Yet another way governments have sought to limit the cost of aged care is to contract out responsibility to charities – including Anglicare and United Care – and then for-profit providers.

Commissioner Lynelle Briggs finds that government-run aged care providers “perform better on average than both not-for-profit and, in particular, for-profit age care providers”.

This is hardly surprising. All of them are underfunded, but private operators have to cut costs harder to make room for their profits.

The report doesn’t say how much extra we need to pay to have decent aged care, but the Grattan Institute suggests about $7 billion a year would do it. That would be on top of the $21 billion the government already spends, plus user fees of $5 billion a year.

Briggs says the government should introduce an “aged care improvement levy” of 1 per cent of personal taxable income, from July next year.

Would Morrison do such a thing? Well, “you know our government’s disposition when it comes to increased levies and taxes. It’s not something we lean to,” he says.

Oh. Well-informed sources, however, tell us he’d be prepared to introduce the levy if the opposition supported it. If Labor chooses to play politics, he’ll let the aged care misery continue.

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Why much of what we're told about taxes is off beam

There are lots of ways to describe the subject matter of economics, but the ponciest way is to say it’s about “the study of incentives”. It’s true, but a less grandiose way to put it is that conventional economists are obsessed by prices and not much else.

If you’ve heard someone being accused of knowing “the price of everything, but the value of nothing”, that phrase could have been purpose-built for economists. Read on and you’ll see why economists so often make bad predictions and give bum advice.

The early weeks of most courses in economics are devoted to explaining the economists’ version of how markets work. How the demand for a particular good or service interacts with the supply of the particular item to determine its price.

Over time, movements in the price act as signals to both the buyers of the product and its sellers. A rise in the price tells buyers they should use the now more-expensive product less wastefully, and maybe start looking for some alternative product that’s almost as good but doesn’t cost as much. On the other hand, a fall in the price tells buyers to bog in.

To the sellers, however, the price signals sent by a price change are reversed. A price rise says: this product's now more profitable, produce more; a fall in the price signals that supply is now less profitable, so produce less.

You can see how changes in the price act as an incentive for buyers and sellers to change their behaviour.

You see too how, following some disturbance, this “price mechanism” acts to return the market for the product to “equilibrium” – balance between the supply of it and the demand for it. It sets off what real scientists call a “negative feedback loop”: when prices rise, it acts to bring them back down by reducing demand and increasing supply; when prices fall, it brings them back up by reducing supply and increasing demand.

Note that all this is about changes in relative prices – the price of one product relative to the prices of others. It ignores inflation, which is a rise in the level of prices generally.

The way economists think, taxes are just another price. And there’s no topic where people worry more about the effect of incentives than taxes – particularly the effect of income tax on the incentive to work.

Consider this experiment, conducted in 2018 by two (married) economists from the Massachusetts Institute of Technology, Esther Duflo and Abhijit Banerjee, with Stefanie Stantcheva of Harvard. Duflo and Banerjee were awarded the Nobel prize in economics in 2019.

The three surveyed 10,000 people from all over America, asking half of them questions about how people would react to several financial incentives. Half of these respondents said they expected at least some people to stop working in response to a rise in the tax rate, and 60 per cent expected people to work less.

Almost half of the 5000 respondents expected the introduction of a universal basic income of $US13,000 ($17,000) a year, with no strings attached, to lead people to stop working. And 60 per cent thought a Medicaid program (providing healthcare for people on low incomes) with no work requirement would discourage people from working.

But here’s the trick: the economists asked people in the other half of their 10,000 sample the same questions, but how they themselves would react, not how they thought other people would. Their responses were significantly different, with 72 per cent of them declaring that an increase in taxes would “not at all” lead them to stop working.

As Duflo and Banerjee summed it up in their book, Good Economics for Hard Times, and in an excerpt in the New York Times, “Everyone else responds to incentives, but I don’t”.

It’s possible those people could be deluding themselves – after all, most people believe they’re not influenced by advertising, when it’s clear advertising works – but in this case the hard evidence shows financial incentives aren’t nearly as influential as is widely assumed.

The first place to see this is among the rich. “No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap. Research shows that when top tax rates go up, tax evasion increases . . . but the rich don’t work less,” they say.

And we see it among the poor. “Notwithstanding all the talk about ‘welfare queens,’ [and the use our Morrison government has made of similar talk to justify keeping the JobSeeker dole payment low] 40 years of evidence shows that the poor do not stop working when welfare becomes more generous,” they say.

“When members of the Cherokee tribe started getting dividends from the casino on their land, which made them 50 per cent richer on average, there was no evidence that they worked less.”

It’s true that in many circumstances – but not something as deeply consequential as decisions about how much work to do – differences in prices will influence the choices people make. In a supermarket, for instance, many shoppers will reach for the cheaper jar of peanut butter.

But when we’re making decisions about bigger and more consequential issues – such as whether to work and how much of it to do – monetary incentives such as the rate of tax on it, go into the mix with a multitude of other, non-monetary incentives.

Such as? “Something we know in our guts: status, dignity, social connections. Chief executives and top athletes are driven by the desire to win and be the best. The poor will walk away from social benefits if they come with being treated like a criminal. And among the middle class, the fear of losing their sense of who they are,” Duflo and Banerjee conclude.

Why do economists so often make bad predictions and give bum advice? Because they keep forgetting that a model of economic behaviour that focuses so heavily on prices leaves out many other powerful incentives.

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This one-year, fold-away budget won't do the trick

From the way the budget blows out debt and deficit, it may seem that Scott Morrison and Josh Frydenberg have stopped caring how much they rack up, but it ain’t so. This budget is just a one-year plan, which not only brings the handouts to an early stop, but then starts reeling much of the money back in.

This budget is like a fold-up bike you can put back in the boot after you’ve finished with it. Technically, its design is clever. But I fear it’s too clever by half.

If it turns out Morrison has turned off the budgetary stimulus too soon – as many business economists fear – he won’t have got the economy growing strongly enough and unemployment falling far enough.

His decision to turn the stimulus off so early – and to choose his budget measures based more on political correctness than job-creating effectiveness – may prove a great error of political (as well as economic) judgment as the election approaches in late next year or early 2022.

But let’s unfold Frydenberg’s one-year, fold-away budget. First, the two initial, big-ticket stimulus measures – the JobKeeper wage subsidy scheme and the temporary JobSeeker unemployment benefit supplement – have already been scaled back and their termination dates set.

The $17-billion dole supplement will end in December (with almost every dollar saved coming out of retailers’ cash registers) and JobKeeper will end in March, after a total cost of $101 billion.

First among the budget’s new measures is the immediate write-off for tax purposes of businesses’ capital equipment purchases. It will apply to new assets from now until June 2022, at a cost to revenue of $31 billion over the three years to June 2023.

But because this measure simply allows firms to deduct the cost of new equipment earlier than would otherwise apply, by the fourth year, 2023-24, firms are expected to be paying in excess of $4 billion more tax than they otherwise would have in that year.

Buried deep in the budget’s fine print you discover that what costs the revenue $31 billion in the first three years, ends up costing only a net $3 billion “over the medium term”.

Similarly, while the measure allowing companies (but not unincorporated firms) to carry back losses incurred in the three financial years to June 2022 for tax purposes will cost the revenue more than $5 billion in its first two years, by 2023-24 it will begin reeling the money back in. The net cost over the medium term is expected to be less than $4 billion.

Get it? Though the huge early cost of these measures, combined with the miniscule number of new jobs they are expected to create, makes them look like a giant handout to the government’s business supporters, in truth all they involve is a temporary improvement in businesses’ cash flows, as opposed to their profits.

Next, note that, though the JobMaker wage subsidy “hiring credit” has a cost of $4 billion over three years (with almost three-quarters of that hitting the budget next financial year), the scheme will be open only until October 7, 2021. The further cost to the budget after June 2022 will be minimal.

Finally, remember that the tax cut comes in two bits: the continuing tax cuts for people earning more than $90,000 a year, plus the temporary cost of the one-year extension of the misleadingly named “low and middle income tax offset”, aimed mainly at above-median tax-filers on $48,000 to $90,000.

Because the cash benefit of the temporary tax offset is delivered retrospectively, the two-year draw-forward of stage two (as opposed to its continuing cost from July 2022 on) will cost the budget about $7 billion this financial year and about $17 billion next year but – get this – add to revenue by almost $6 billion in 2022-23.

By then, much of this year’s budget will have been folded away.

Now you see why, after blowing out to $85 billion last financial year and an expected $213 billion this year, the budget deficit is expected almost to halve to $112 billion next year, and fall to $88 billion in 2022-23. (After that, the rate of improvement tapers off, with the deficit projected to take seven years to fall from 3 per cent of gross domestic product to 1.6 per cent.)

Question is, will the economy be able to keep up with this contraction in the budget? At present, the $101-billion JobKeeper is supporting 3.5 million workers – a quarter of all workers. It will end in March, to be replaced by the $4-billion JobMaker scheme for young workers. Doesn’t seem enough.

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Budget is big on political correctness but weak on job creation

The more I study the budget, the less impressed I am. It spends a mint of money – which it should - but Scott Morrison and Josh Frydenberg have chosen its measures based on how well they fit the government’s "core values", not on whether they’re likely to deliver "bang for buck" – maximum jobs per dollar forgone.

The funny thing is, if you read the budget papers carefully, they admit that its measures were run through the filter of Liberal Party political correctness, while also providing enough information to allow us to calculate that its most expensive measures are expected to create surprisingly few jobs.

The budget papers say the government’s fiscal (budgetary) strategy "is consistent with the government’s core values of lower taxes and containing the size of government, guaranteeing the provision of essential services, and ensuring budget and balance sheet discipline".

Over the years, macro economists have given much thought to how well particular types of budget measures stimulate the economy and create jobs. They identify three broad categories of measures.

First, give tax breaks and incentives to businesses, in the hope that this will induce them to expand their operations, spending more on capital equipment and new employees.

Second, give tax cuts (or maybe one-off cash grants) to individual taxpayers or welfare recipients, in the hope that they will spend most of the money and thereby generate economic activity and jobs.

Those two categories involve the government making "transfer payments" from itself to households or firms. The third category is the government spending money directly by paying someone to build a house or an expressway or to work for the government and perform some service.

As a rule, economists expect direct spending to yield a greater stimulus (and thus have a higher "multiplier" effect) than transfer payments. That’s because all the government’s spending adds to demand for goods and services in the "first round", whereas some of the money you transfer to a firm or individual may be saved rather than spent, even in the first round.

Economists consider saving a "leakage" from the various rounds of the "circular flow of income" round and round the economy. Other leakages occur if the money is spent on imports rather than locally made goods and services.

Still on direct spending, if your primary goal is not so much to add to the production of goods and services (real gross domestic product) as to increase employment, you’d be better off directing your government spending to a labour-intensive purpose (employing an extra uni tutor or aged-care nurse, for instance), rather than a capital-intensive purpose, such as a new expressway.

Now let’s look at how the budget’s main measures fit these three categories. Its temporary measure to allow firms an immediate write-off of the cost of new equipment (costing the revenue $26.7 billion over four years), its temporary measure allowing firms to carry back current losses for tax purposes ($4.9 billion), its research and development tax incentive ($2 billion) and its temporary JobMaker "hiring credit" - wage subsidy – ($4 billion) add up to total revenue forgone under the first category of tax breaks to businesses of almost $38 billion.

This is far bigger than the money going to individual taxpayers and welfare recipients in the second category: personal tax cuts ($17.8 billion over four years) and "economic support payments" to pensioners ($2.5 billion), a total of just over $20 billion.

Under the third category, direct government spending on goods and services, the main measures are various infrastructure programs – mostly via grants to state governments - worth more than $10 billion over four years.

So you see how much the budget’s fiscal stimulus measures have been affected by the government’s "core values". No less than $38 billion goes as tax breaks to business, three-quarters of the $20 billion in transfers to individuals comes as tax cuts, leaving about $10 billion in direct spending going to the least labour-intensive purpose – transport infrastructure.

Now, according to the budget papers – or according to the budget "glossies" fudged up by ministerial staffers with lots of colour photos of good-looking punters – the government and its minions have estimated the number of jobs the top programs are expected to create.

The immediate asset write-off and loss carry-back for businesses is expected to create about 50,000 jobs. Is that a lot? Well, remembering we have a labour force of 13.5 million, it doesn’t seem much. And dividing the 50,000 into the budgetary cost of $31.6 billion gives a cost of $632,000 per job.

That’s infinitely more than any of those extra workers are likely to be paid, of course, and absolutely pathetic bang per buck. Giving money to business in the hope it will do wonders for "jobs and growth" is a classic example of "trickle-down economics". Clearly, a lot of the money doesn’t.

But, when you think about it, it’s not so surprising that so much money produces so few extra jobs. Why not? Because almost all the capital equipment Australian firms buy is imported. And because firms get the concession even if they don’t buy any more equipment than they would have done.

Next, the budget documents imply that the personal tax cuts worth $17.8 billion will create a further 50,000 jobs. That works out at $356,000 per job – still terrible bang per buck. Why so high? Too much of the tax cut is likely to be saved.

Finally, the budget documents tell us the $4 billion cost of the JobMaker hiring credit will yield "around 450,000 positions for young Australians". That’s a much better – but still high - $8900 per "position" – which I take to mean that a lot of the jobs won’t be lasting or full time.

So, what measures would have yielded better job-creation value? The ones rejected as politically incorrect: big spending on social housing, a permanent increase in the JobSeeker unemployment benefit – or even just employing more childcare workers.

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Innovative: a two-class tax cut with disappearing cake

 Surely the most unfair criticism of Josh Frydenberg’s budget comes from the economist who said it was uninspiring. It’s the most innovative, creative document I can remember. With uncharacteristic modesty, he’s presented the tax cut that forms its centrepiece as just another cut, whereas in truth it’s like no other we’ve seen. Frydenberg will be remembered as the inventor of the two-class tax cut.

Those travelling first class get a big tax cut that’s permanent and will show up in their pay packet (or, these days, bank account) in a few weeks. Those in second class get a small tax cut that’s temporary, and they won’t see it until the second half of next year – which is when it will then be whipped away, leaving them paying more tax, not less.

This strange result arises because the second stage of last year’s three-stage tax plan was designed not to be of benefit to the great majority of taxpayers, those earning less than $90,000 a year. Also because of the great invention of Frydenberg’s predecessor as treasurer, Scott Morrison: the appetisingly named “low and middle income tax offset” – known to tax aficionados as the LaMIngTOn.

In its final form, announced in last year’s pre-election budget, the lamington provides an annual tax reduction of up to a princely $255 to taxpayers earning up to $37,000. Those earning between $37,000 and $48,000 have the size of their lamington phased up to $1080, with all those earning between $48,000 and $90,000 getting the full $1080 cake. Then it phases down to no cake at all by the time incomes reach $126,000.

That $1080 is equivalent to a tax cut of a bit less than $21 a week. But, being a “tax offset” rather than a regular tax cut, you don’t get your hands on it until you’ve submitted your tax return after the end of the financial year, and it’s included in your annual tax refund.

On the face of it, the second stage of the tax plan (which wasn’t intended to start until July 2022, but the budget brings forward to July this year) gives a tiny tax cut to those earning between $37,000 and $45,000 and a bigger cut that starts at incomes of $90,000 and keeps growing until income reaches $120,000 – by which time it’s worth $2430 a year, or about $47 a week.

Under the bonnet, however, stage two does something an old accountant such as me regards as quite clever. It whisks away the lamington and substitutes other things, without those who got it under stage one being any worse off.

Trouble is, while almost no one earning less than $90,000 would be worse off, nor would they be any better off. Taken by itself, stage two would give noticeable tax cuts only to those earning more than $90,000 (which is getting on for double the median taxpayer’s income).

Sound fair to you? It would be politically unsaleable. Nor would it fit with the government’s claim to have brought the tax cut forward purely to do wonders for “jobs and growth”.

So someone had a bright idea. While quietly whisking away the old lamington, introduce a new, identical lamington – but only for the present financial year. Problem solved. Every player gets a prize.

The 4.6 million taxpayers earning between $48,000 and $90,000 get a tax cut of $1080 or a little more, while the 1.5 million earning between $90,000 and $120,000 get up to $2430. Everyone earning more than $120,000 gets the flat $2430 (thanks, Josh).

All this was carefully spelt out in one of the sheaves of press releases Frydenberg issued on budget day. But the things he said in his televised budget speech didn’t quite fit his own facts.

“As a proportion of tax payable in 2017-18, the greatest benefits will flow to those on lower incomes – with those earning $40,000 paying 21 per cent less tax, and those on $80,000 paying around 11 per cent less tax this year,” he said.

“Under our changes, more than 7 million Australians receive tax relief of $2000 or more this year.”

Sorry. By comparing this financial year’s tax cuts not with last year’s, but with the tax we paid three years ago, in 2017-18, Frydenberg has managed to add last year’s tax cut to this year’s. For people receiving the lamington, that doubles the tax cut they’re supposedly receiving “this year”.

Why has Frydenberg chosen to describe his tax cut in such a misleading way? Because it helps disguise the truth that high-income earners are getting much bigger dollar savings than low- and middle-income earners.

Similarly, comparing tax cuts according to the percentage reduction in a person’s total tax bill is nothing more than playing with arithmetic – which, to be fair, every government does. Remember, if your income was so low you paid only $10 tax on it, I could change the tax system in a way that dropped you from the tax net and claim you’d had a 100 per cent tax reduction – which made you by far the biggest winner. Yeah, sure.

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Budget’s easy future: no more surpluses, lots more tax cuts

Last week’s budget quietly brought about a historic shift in the fiscal policy “framework”: we moved from the Treasury puritanical view of what constitutes responsible budgeting, to the more licentious Republican view.

Until now, the Liberals have been committed to ending “debt and deficit”, but now they’ve decided they can live with both. The coronacession has left them with little choice, but there’s more to it.

America’s Republicans adhere to two fiscal principles: first, budget deficits are terrible things - but only because those appalling, big-spending Democrats are in charge. Second, once the Republicans are back in power, deficits are of less concern and no barrier to us granting our supporters big tax cuts.

Treasuries – including state treasuries – have a lot of firmly held views about what constitutes good public policy, but what they care about most – their sacred duty – is to keep the budget in balance.

Every time a recession pushes the budget into deficit, they fight untiringly until the economy’s recovery and much “fiscal consolidation” has returned the budget to balance. Their rationale for this obsession is that if they don’t care about balancing the budget, who will? The vote-buying politicians?

Early in the term of the Howard government, when the budget had still not fully recovered from the recession of the early 1990s, Treasury persuaded the Libs to enshrine this objective as their “medium-term fiscal strategy” - to “maintain budget balance, on average, over the course of the economic cycle”.

Successive Labor and Liberal governments have adopted that strategy with minor alteration.

After the Rudd government’s use of fiscal stimulus to avoid the Great Recession in 2009, it added a “deficit exit strategy” which committed it to “banking” any recovery in tax receipts and avoiding any policy changes (that is, tax cuts), as well as limiting real growth in government spending to an average of 2 per cent a year (a commitment Labor only pretended to keep).

In Tony Abbott’s first budget, the Libs’ “budget repair strategy” committed them to more than offset new spending measures by reductions in spending elsewhere, and to bank any improvement in the budget bottom line until a surplus of at least 1 per cent of gross domestic product had been achieved.

In Malcolm Turnbull’s first budget in 2016, however, he broke the commitment by deciding to cut the rate of company tax while the budget was still well short of surplus.

With that commitment out the window, it was easy in last year’s pre-election budget for Scott Morrison to promise a three-stage tax cut, spread from July 2018 to July 2024 and costing $300 billion over 10 years, purely on the strength of projections showing that tax collections would otherwise exceed the government’s ceiling of 23.9 per cent of GDP and keep soaring to 25.6 per cent by 2029-30. Immediately after its miraculous re-election, it rushed the plan into law.

It was always folly for any government committed to eliminating its debt to enact tax cuts five years into an uncertain future. The projections were overly optimistic at the time, but then the coronacession blew them away.

Tax collections are now expected to be only 21.8 per cent of GDP this financial year, and are projected only to have recovered to 22.9 per cent by 2030-31 – still way below the ceiling formerly said to justify a round of tax cuts.

Any government still committed to getting the budget back to surplus as soon as reasonably possible would have cancelled the legislated tax cuts – which now would be funded by borrowing – when further targeted-and-temporary government spending would be far more effective in creating jobs. Rate-scale tax cuts (as opposed to the one-year extension of the middle-income tax offset) are a continuing drag on the budget balance.

But no, rather than cut his coat according to his cloth, Scott Morrison has doubled down, bringing the second-stage tax cuts forward two years under the pretence it will do wonders for “jobs and growth”. The budget is projected still to be in a deficit of 1.6 per cent of GDP in 10 years’ time.

To make it all legit, however, the commitment to achieve budget surpluses on average has been junked and replaced with a new medium-term fiscal strategy merely to “focus on growing the economy in order to stabilise and reduce debt”, which will thereby “provide flexibility to respond to changing economic conditions”.

As the budget papers explain, and Josh Frydenberg has said, “with historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP – provided the economy is growing steadily”.

Which is true. And the new, weaker medium-term strategy also provides the flexibility for governments to act like the Republicans and give a tax cut in response to changing political conditions. Happy days.

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