Blaming the states for national policy failures won't wash

It seems everywhere you look you see governments failing to lead, failing to take charge, failing to be prepared for problems they should have seen coming.

Last week it was the flooding, before that, the distribution of rapid COVID testing kits and vaccines, before that, the Black Summer bushfires, and before that, soaring prices in the National Electricity Market along with the federal Coalition’s inability to agree on action to reduce greenhouse gas emissions.

The items on this seemingly disparate list have a few things in common. Most arise from the effects of climate change. All of them involve shared responsibility by the federal and state governments, with the all too familiar squabbling, duck-shoving and cost-shifting.

We’re learning hard lessons about what’s needed to get a better-functioning federation. One is that when ordinary Australians are facing dire emergencies of flood or fire or cyclone, they demand that both levels of government be on-the-job doing what needs doing.

Another lesson is that when you’ve got one federal, two territory and six state governments, one of them has to take the lead, and the one that should do so is obvious: the feds.

On climate change, it’s not just that the Morrison government has failed to do anything much to “mitigate” (reduce) our greenhouse gas emissions beyond belatedly accepting the target of somehow achieving net zero emissions by 2050.

It’s also that it has failed to lead the states in adapting to the climate change we already have and, even if we do make it to net zero on time, will get more of: worse and more frequent extreme weather events.

Why does Scott Morrison seem so bad at working on problems we can see coming, until they’ve actually arrived, and we’re in crisis? Then, when we are in crisis, he makes the excuse that it’s a “state responsibility”, which so infuriates the people left stranded by fire or flood.

I think part of the reason is his deliberate downgrading of public service advice on policy. Until recent years, it’s been a prime responsibility of department heads and their senior people to advise the minister of looming problems in their area of responsibility and to develop detailed options on how the feds – often in partnership with the states – could go about fixing the problem.

But when you tell the public servants that you want their diligent obedience, not their advice – as Morrison did – all you’re left with is advice from the growing number of ambitious young Liberal apparatchiks that populate ministers’ offices.

Plus, of course, the occasional expensive report from one of the big four accounting-turned-consulting firms, whose business model is to produce lovely reports with lots of glossy pictures, that tell the paying customer what you think they want to hear.

What they don’t want to be told is that they should get started on a response to this potential problem or that one, just in case they come to a head some time in the future. “That’s the boring stuff public servants are always banging on about, and it’s a real pain.”

“Do you know they’ve been harping on for years about being prepared for some possible pandemic? Yeah, sure. What other long-shot bet do you want me to waste money on? Talk about useless.”

The beauty of getting your advice from the young would-be-pollies in your office is that, like their masters, they’re always focused on the politics of the now. “How can we draw attention away from the latest stuff-up? How can we look like we’re responding decisively? Why don’t we rush through a law making illegal something that already is? The punters would love it.”

As soon as the election is called officially, the public service goes into “caretaker mode” and begins preparing extensive policy recommendations for the incoming government. They prepare a Blue Book to give the Coalition should it win, and a Red Book should Labor win.

The Grattan Institute, our leading independent think tank, has a tradition of preparing its own Orange Book, proposing policy priorities for whichever side wins. It includes a section on energy and climate change, one of the most important areas of shared, federal and state responsibility.

Grattan’s Tony Wood says that, one of the three things that should be done to ensure electricity plays its major role in achieving “net zero” is to “better co-ordinate state and federal government objectives in the National Electricity Market.

“Frustrated at a decade of federal ‘climate wars’, state governments are increasingly going their own way on electricity and gas [and electric vehicles],” Wood says.

That’s another lesson we need to learn: whenever the feds leave a policy vacuum, the states fill it – badly. Only leadership by the Federal government can make our ramshackle federation work.

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How to help the well-off: make their taxpayer assistance invisible

There’s a key principle of economics that’s not widely realised. Economists believe anything that looks like a duck and quacks like a duck must be a duck. Q: When is something that isn’t government spending still government spending? A: when it’s a tax break.

A government can impose taxes and spend the proceeds on achieving some objective – say, helping the retired with their living expenses – or it can achieve the same objective by charging those people less tax than they’d otherwise pay.

Whichever way the government chooses to do it, the effect on the budget balance is the same. And the effect on the people the government’s trying to help should be the same.

The only difference is that the two ways of assisting people appear on opposite sides of the budget. One adds to government spending while the other subtracts from government tax revenue. But, reason economists, this is a distinction without a difference. In principle, it doesn’t really matter.

Which is why economists have long sought to highlight the lack of difference between the two ways of assisting particular people or businesses by referring to special tax concessions as “tax expenditures”.

But though there may be no difference between the two in principle, in practice there’s an important difference. Government spending – on the age pension, for instance – is highly visible. It’s “salient” as psychologists and behavioural economists say.

By contrast, tax concessions – such as those applying to income that’s saved in a superannuation scheme, for instance – are much harder to see.

The practical consequence of this big difference in visibility is that actual government spending is examined carefully each year by the bureaucrats and by the Expenditure Review Committee of Cabinet, whereas all the spending on tax concessions tends to be ignored until someone decides to play around with a few of them.

This relative lack of attention paid to our many tax breaks prompted Treasury many years ago to begin estimating the value of the most important of them and publishing an annual Tax Expenditures Statement.

In 2019, however, the statement’s name was changed to the snappier, more enticing and informative Tax Benchmarks and Variations Statement. What a page-turner.

When the latest statement, for 2021, was published a few weeks ago, Dr John Hawkins, of the University of Canberra – in an earlier life, a senior Treasury official – used an article on the universities’ The Conversation website to explain that the name change reflects the truth that the amount of tax the government forgoes by granting a certain tax concession isn’t necessarily the same as the amount of tax it would regain if it abolished the concession.

Why not? Because when you make certain actions “tax-preferred”, people become more likely to take those actions, whereas when those actions cease to be tax-preferred people become less likely to take them.

But there’s another, less-defensible reason for switching to a title that will make tax expenditures even less visible than they already are. In the main, when governments want to help people in the bottom half of the distribution of incomes, they pay them money or buy things for them. But when governments want to help people in the top half of the distribution, they give them tax breaks.

(Hawkins points to one exception to that rule: the exemption of fresh food from the goods and services tax favours the poor over the rich because fresh food accounts for a higher proportion of the spending of the poor.)

If you’re well-off, and so have to pay proportionately more tax to support government spending to help those not doing as well as you are, it suits you for government spending to be highly visible and regularly scrutinised by politicians looking for ways to save money.

Conversely, it suits you for the support you get from the government to come in the form of tax concessions and thus be hidden from the public’s and the politicians’ view.

Hawkins notes that the biggest annual tax expenditures are: $64 billion because private homes are exempt from tax on any capital gain when they’re sold; $23 billion because the earnings on money in superannuation funds are taxed at a concessional rate; $21 billion because contributions to super funds are taxed at a concessional rate; and $12 billion because capital gains are taxed at only half the rate that income from “personal exertion” (work) is taxed.

Last financial year, the top 10 tax expenditures totalled just under $120 billion, which compares with total actual tax collections by the federal government of $460 billion. This year, 2021-22, the cost’s expected to be $150 billion. That increase of almost a quarter is explained mainly by the boom in house prices and share prices.

While tax expenditures primarily benefit the individual taxpayers who receive them, there’s a flow-on benefit to the industries conducting the economic activity that’s getting favourable tax treatment.

One stand-out is the property industry – developers, builders and real estate agents – which sees itself as benefiting from negative gearing and the 50 per cent discount on capital gains tax.

Another stand-out is the superannuation industry. It’s selling a product that’s heavily subsidised by the government – apart from the small fact that the government compels employers to buy its product on behalf of their employees.

The super industry has led claims that Treasury’s estimates of the value of tax expenditures are overstated. But Hawkins notes that its estimates of the revenue gained by canning a tax break don’t differ greatly from its estimates of revenue forgone.

A final “benefit” from the near invisibility of tax expenditures is that it allows recipients to delude themselves – and others – that they’re not dependent on government handouts.

John Roskam, boss of the Institute of Public Affairs, has written to correct my memory of an exchange between us more than a decade ago, as recounted in earlier editions of this column. I had written that the institute was “taxpayer-subsidised”. He wrote denying my claim. I replied that, since its donations were tax-deductible, this amounted to a subsidy from the taxpayer. He objected that I didn’t describe other government-supported organisations in this way.

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Why prime ministers do have to hold a hose (and much else)

If we don’t have another setback on the COVID front between now and May, it seems likely Scott Morrison will escape having his various fumbles in handling the pandemic loom large in the federal election campaign. Even so, the coronavirus was a stark reminder of how much the running of this nation is down to the premiers, not the Prime Minister.

The premiers took full advantage of this opportunity to raise their political profiles. And they’re likely to stay more assertive for years to come.

We’ve all lived all our lives with Australia’s federal system of government. We all know it doesn’t work so well. We long ago tired of the eternal bickering, buck-passing, duck-shoving and cost-shifting between the two levels of government. But just as we’re “learning to live with COVID”, so we long ago got used to living with a dysfunctional federation.

Does a nation of 25 million people really need one federal, six state and two territory governments? Well, if you were starting with a clean sheet of paper, you wouldn’t design it that way.

But we’ve never had a clean sheet. Back in the 1890s, we began with six self-governing colonies. They would never have agreed to dissolve themselves in to one national government. And, today, it’s not just that all those premiers and state parliamentarians wouldn’t want to give up their well-paid jobs.

The Australian mainland is such a big island, and its people are so widely spread around its coastal edge, I doubt if voters in any state would choose to be ruled henceforth solely from distant Canberra.

But the states being immovable, efforts by various prime ministers to make the system work better have had little success.

The pandemic has reminded us that our constitution grants to the states, not the feds, ultimate responsibility for most of the things we expect governments to do for us: healthcare, education, transport, law and order, housing, community services and the environment. Only the states and territories had the constitutional power to order lockdowns or close state borders.

But the problem isn’t just constitutional. It’s also economic. It’s what economists call “vertical fiscal imbalance”. Over the years – and with much help from rulings of the High Court – the feds have accreted to themselves most of the power to levy taxes.

See the problem? The feds raise most of the tax revenue, whereas the states have most of the responsibility for spending it.

Economists think the federation would work better if there was a closer alignment between each level’s spending responsibilities and its tax-raising capacity. But prime ministers haven’t been keen to hand over their taxing powers.

The bigger problem with VFI, as the aficionados call it, isn’t economic, it’s political: the feds cop the blame for levying nasty taxes; the states get the credit for lots of lovely spending. The states love it, the feds hate it.

Related to this is a truth that seems to come as a shock to prime ministers. The feds run defence and foreign affairs and customs and trade. Apart from that, they raise taxes and write cheques – to the premiers, universities, chemists and bulk-billing doctors, pensioners and people on unemployment benefits.

What the feds don’t do much of is deliver programs on the ground, whereas that’s the main thing the states do. Run hospitals and schools, build highways, fight bushfires and clean up after floods.

Turns out that when the feds do try to deliver programs on the ground – put pink batts in ceilings; roll out vaccines across the land – they stuff it up.

In all this you have the hidden explanation for some of Morrison’s coronafumbles.

Despite him setting up the national cabinet – and doing most of the on-camera talking after each meeting – it turned out that most of the credit for our success in handling the pandemic went to the premiers, not him. “What? Even though the feds were picking up almost all the tab?”

Apart from the feds’ failure to order enough vaccines early enough, it seems clear Morrison decided to deliver them through an essentially federal distribution chain of GPs and pharmacists, in the hope this would yield him more of the credit.

That’s how the rollout became a stroll out. It was slow and unfamiliar. Only when the feds admitted defeat and started distributing vaccines through the experts – the states’ public hospitals and mass-vaccination hubs – did things speed up.

I suspect other hold-ups – in replacing JobKeeper; in distributing rapid antigen test kits – came because the feds and states fell to arguing over how the bill should be divvied up. “Why am I paying when you’ll be getting all the credit?”

Morrison said what he did about hoses because bushfires are a state responsibility. Constitutionally, correct; politically, incorrect. He’s had to learn the hard way that if a state problem affects more than one state – or just gets too big for the state to cope with – it becomes a federal problem in the minds of voters.

If you can’t hold a hose, just bring your chequebook.

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It will take more that faith to keep the economy growing

Treasurer Josh Frydenberg says it’s time for the private sector to drive the economy’s recovery. And, this being a Liberal Party article of faith, he’s likely to keep saying it in this month’s budget and the election campaign to follow. One small problem: there’s little sign it’s happening.

Last week’s national accounts for the December quarter were a reminder that the economy’s living on borrowed time and stored heat. Both households and businesses are cashed up as a result of “fiscal stimulus” – government income support – and income they weren’t able to spend during lockdowns.

It’s estimated that households have an extra $200 billion or more waiting to be spent. As it is spent, private consumption will continue growing strongly in real terms. But, absent further lockdowns, there’ll be no more special support from the budget. No more JobKeeper payments and the like, no more grants to encourage home building, and a looming end to tax breaks to encourage business investment in equipment and construction.

The two main things we need to achieve continuing strong economic growth (by which I mean growth in income per person, not just more immigration) is strong real growth in household consumption spending and business investment spending.

Trouble is, last week’s figures offered little assurance that either requirement will be forthcoming. Starting with business investment, Kieran Davies, of Coolabah Capital, reminds us that (even after including intangible investment in software and research and development) it’s presently at the “extraordinarily low” level of 10 per cent of gross domestic product, similar to the lows it reached in the recessions of the 1970s and 1990s.

It may be about to take off – or it may not be. It’s hard to think why a take-off is likely. Davies reminds us that a major benefit from a big lift in business investment would be a lift in the productivity of labour, as workers were supplied with the improved equipment they need to be more productive.

Indeed, you can turn the argument round the other way and wonder if the weak rates of business investment over the past decade or so do much to help explain why productivity has improved so little over the period.

Even the most tightwad employer must agree that improved labour productivity means wages can rise faster than prices without adding to inflation.

And if we want to see consumer spending, which accounts for well over half of GDP, continuing to grow strongly once all the money households saved during the pandemic has been spent, rising real wages are the only thing that will do it.

Trouble is, the (temporary) surges in consumer spending whenever we end a period of lockdown have given the impression the economy is booming, while concealing the truth that, after allowing for inflation, wages have been falling, not rising.

This is also reflected in last week’s news from the national accounts that “non-farm real unit labour costs” – which, by comparing the change in firms’ real labour costs with the change in the productivity of that labour, reflect the division of surplus between labour and profits – have fallen by 3 per cent since the start of the pandemic.

This should not come as a surprise when you remember that, in early 2020, when we feared the battle to control the virus would send us into a deep and lasting recession, most businesses moved immediately to impose a wage freeze.

Worried about whether the deep recession would sweep away their jobs, workers and their unions accepted the necessity of the freeze.

But that’s not the way things turned out. The pandemic wasn’t nearly as bad as epidemiologists first expected it to be, vaccines turned up much earlier than had been hoped, lockdowns were often short and intermittent, and unprecedented fiscal stimulus shifted much of the cost of the lockdowns off private businesses’ profit and loss accounts and onto the public sector’s budgets.

In the main, private sector profits have held up surprisingly well.

So the key issue of whether consumer spending, and thus the wider economy, can continue growing strongly after households have finished the spending repressed during the lockdowns is what happens to wage growth. And that comes down to three questions.

First, will employees get outsized pay rises this year to compensate them for the wage freeze that turned out not to be needed?

Second, will employees also get pay rises big enough to cover all the recent increase in living costs they face – higher petrol prices and the rest – or will employers, public as well as private, ask them to “take one for the team” one more time? If so, real wages will fall further and future consumer spending will be stuffed.

Third, will the econocrats’ strategy of running a super-tight labour market force tight-fisted employers to increase wages, as the only desperation measure able to attract the workers they need?

Or will the labour shortages gradually dissipate now our border’s been reopened to overseas students, backpackers and skilled immigrants on temporary visas?

Meanwhile, the man who should be solving our cost-of-living/weak wages problem will be blustering on about the private sector taking over the running. If the Opposition can’t make this the central focus of the election campaign, it deserves to lose. It, too, would be bad at managing the economy.

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The plague hasn’t wounded the economy, but the boom won’t last

The pandemic has caused much pain – physical, financial and psychological – to many people. But what it hasn’t done is any lasting damage to the economy and its ability to support people wanting to earn a living.

That’s clear from this week’s “national accounts” for the three months to the end of December, with the Australian Bureau of Statistics revealing the economy’s production of goods and services – real gross domestic product – rebounding by 3.4 per cent, following the previous quarter’s contraction of 1.9 per cent, caused by the lockdowns in NSW, Victoria and the ACT.

Despite those downs and ups, the economy ended up growing by 4.2 per cent over the course of last year. It was a similar story the previous year, 2020, when despite the nationwide lockdown causing the economy to contract by a massive 6.8 per cent in the June quarter, it began bouncing back the following quarter.

Over the two years of the pandemic, the economy’s ended up 3.4 per cent bigger than it was before the trouble started.

Be under no illusion, however. The economy would not have been able to bounce back so strongly had the federal government not spent such huge sums topping up the incomes of workers and businesses with the JobKeeper wage subsidy, the temporary increase in JobSeeker benefits, special tax breaks for business (including to encourage them to invest in plant and equipment) special incentives for new home-building, and much else. The state governments also spent a lot.

The Reserve Bank also cut interest rates – from next-to-nothing to nothing – and bought a lot of government bonds, but I find it hard to believe this made a big difference, except to house prices and home building.

It’s true that these figures for GDP and its components don’t include the effects of the Omicron wave, which came mainly in the first half of January. But by now it’s pretty clear its effect on the economy was fairly small. Of course, we may not be finished with the Greek alphabet.

None of this is to deny that the pandemic has done lasting damage to some individual workers, businesses and industries. Overall, however, the economy’s in surprisingly good shape. And this is confirmed by turning from the national accounts to the jobs market.

We have 270,000 more people in jobs than we did before the pandemic, and both unemployment and underemployment are at 13-year lows, while the number of job vacancies is at a record high.

This remarkable achievement is partly the consequence of shortages of young, less-skilled workers, caused by our closed border, however. Those shortages will gradually go away now the border’s been reopened.

Unsurprisingly, the detailed figures show that most of the growth during the quarter came from a rebound in the two unlocked states, NSW and Victoria, plus the ACT.

More surprisingly, most of the growth came from a rebound in consumer spending in former lockdown area, which rose by 9.6 per cent, compared with 1.6 per cent in the rest of the country.

The only other positive contribution to growth in the quarter was a rise in the level of business inventories – meaning the rest of the economy was holding it back.

Spending on new housing and alterations fell by 2.2 per cent in the quarter, mainly because of temporary shortages of workers and materials.

The government’s stimulus program has ended, but the industry still has many new houses in the pipeline. However, Thursday’s news of a 28 per cent collapse in the number of new residential building approvals in January makes you wonder how long the housing industry will keep contributing to growth.

Business investment in new equipment and construction also fell during the quarter. Businesses say they’re expecting to increase their spending significantly this year but, as Kieran Davies, of Coolabah Capital, has noted, “companies find it hard to forecast their own investment expenditure”. And the government’s tax incentives won’t last forever.

The jump in consumer spending came despite a fall in households’ disposable income, caused by a decline in assistance from government. Thus, to cover the increased spending, households had to cut their rate of saving during the quarter from almost 20 per cent of their disposable income to 13.6 per cent.

What’s been happening is that households save a huge proportion of their income during lockdowns (because they can’t get out of the house to spend it), but cut their rate of saving when the lockdown ends and spend much more than usual as they catch up on things and services they’ve been waiting to buy.

Even so, a saving rate of 13.6 per cent is about twice the normal rate - meaning households still have a lot of money stashed in bank accounts – more than $200 billion – that they’ll be able to spend in coming months.

Most of this is money they’ve earnt in the normal way, but much of it is also money that’s come to them in special assistance from the government.

It’s mainly because of all this extra money waiting to be spent that the Reserve Bank is forecasting that, after contracting by about 1 per cent in 2020 and growing by 4 per cent in 2021, the economy will grow by a bit more than 4 per cent this year.

Remember, however, that the economy usually grows by only about 2.5 per cent a year. So what looks like booming growth last year and this, is really just catch-up from the temporary effects of lockdowns.

We simply can’t – and won’t – keep growing at the rate of 4 per cent a year. That’s why the Reserve is expecting growth to slow sharply to a more-normal 2 per cent next year, 2023.

Most of the extra money households are holding may have been spent by the end of this year. And the forecast for 2023 assumes we’ll be back to wages growing a bit faster than the cost of living – which has yet to happen.

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You may be appalled by the ever-declining standards of propriety as the two main parties chase each other to the bottom of the barrel, putting career advancement ahead of their duty to voters. But recent events show our courageous auditors-general haven’t lost their commitment to upholding honest behaviour.

Which, particularly in the absence of a federal independent commission against corruption, is one thing to be thankful for.

Just last week in NSW, state Auditor-General Margaret Crawford issued a highly critical report on the Stronger Communities grants program established by the Berejiklian government before the 2019 state election.

The report said there was “little or no [defensible] basis” for the selection of grant recipients, with 95 per cent of all grant money flowing to 22 local councils belonging to Coalition electorates. These decisions were made by the former premier and her deputy, Gladys Berejiklian and John Barilaro.

This is reminiscent of federal Auditor-General Grant Hehir’s equally critical 2020 report on the “sports rorts” grants made by the Morrison government before the 2019 federal election. He found that the Australian Sports Commission’s carefully evaluated recommendations for grants were overridden by the minister’s office.

More than 61 per cent of the grants awarded failed to reach the commission’s merit cut-off. Rather, the grants went predominantly to sporting organisations in marginal electorates held by the Coalition.

When announcing tax cuts, Liberal politicians in particular love making speeches about how they’re only returning taxpayers’ own money. But in their attitude to pork-barrelling – it’s not illegal and everybody does it, in the immortal words of Saint Gladys – pollies on both sides act as though it’s really their money, to be spent as best suits their interests.

We’d know much less about their misuse of our money were it not for our auditors-general. The pollies want to keep it dark, but they can’t stop the auditors doing their duty. Scott Morrison was so grateful to the Australian National Audit Office he cut its funding. (More proof he regards taxpayers’ money as his own.)

As an accountant who was glad to escape auditing and become a journo, I’m pleased to acknowledge our debt to the auditors-general’s diligence. But I’m particularly impressed by the fearless Crawford’s blow against that great blight on budget honesty, “creative accounting” – using loopholes in the rules of public accounting to make the budget balance look better – or less worse – than it really is.

Some years ago, some bureaucrat in the NSW government (I doubt if any pollie could have come up with it) got the bright idea of making the budget look better by transferring the state’s railway assets to a new off-budget body, the Transport Asset Holding Entity.

This way, the cost of additional annual spending on rail infrastructure could be removed from the budget and treated “below the line” as an equity investment in a government-owned business. But this turned into an almighty and long-running battle between the state Treasury and the state Transport department.

Treasury prevailed and the Transport boss was dismissed without explanation. Enter the Auditor-General. Crawford declined to issue an audit report for the government’s 2020-21 accounts until she was satisfied all was in order.

In particular, she required evidence that the new holding entity was genuinely independent of the government and a genuinely profitable business. This would require higher annual payments from the budget for the use of the rail assets, thus reversing the engineered improvement.

Treasury delivered that evidence on December 23, allowing Crawford to issue an unqualified audit report about three months’ late. Soon after, Treasury secretary Mike Pratt, a former banker, announced his return to the private sector.

In another report last week, Crawford accused Treasury of obstructing her investigation into the holding entity by dragging its feet, withholding critical documents and overestimating the expected budget benefit from the transaction.

NSW Treasury’s reputation for probity has been damaged by evidence about the imbroglio given to a long-running parliamentary inquiry. Treasury regularly struggles to extract full and timely information from other departments. Now it has given them a master class in misbehaviour.

The parliamentary inquiry’s hearings have also damaged the reputation of KPMG – one of the big-four auditing firms moving into the more lucrative field of consultancy – which was revealed to have given opposing advice to Treasury on one side and Transport on the other.

The new NSW Treasury secretary is the highly experienced state and federal econocrat Dr Paul Grimes. Grimes has the distinction of having been sacked as head of the federal Agriculture department by Barnaby Joyce.

Joyce claims to have sacked him to show who was boss. It’s easier to believe that “a relationship of strong mutual confidence” between them wasn’t possible. In any case, the era of NSW Treasury being run by itinerant bankers seems to be over.

The holding-entity budget fiddle has its parallel federally. Both sides of politics have exploited a loophole in the definition of the budget balance introduced by Peter Costello’s Charter of Budget Honesty in the late 1990s.

The former Labor government used the loophole to stop its massive spending on the National Broadband Network from worsening the budget deficit by treating it “below the line” as an equity investment in a new for-profit business.

The present government is using the same trick to hide spending on its Nationals-inspired inland freight railway from Melbourne to Brisbane. A profitable business to be sold off at some future date? I think not.

There was a time when Yes, Minister was a reasonably accurate depiction of the relationship between a minister and his department head. But that was in Bob Menzies’ day. These days, the term “permanent head” is hardly apposite. Department heads have renewable fixed-term contracts, but it’s relatively common for prime ministers and premiers to lop off the heads of those who displease them.

When Tony Abbott sacked several department heads on coming to office in 2013, he was following the precedent set by John Howard in 1996. If the objective was to discourage unwelcome advice from bureaucrats – “Sorry, minister, that would be contrary to the Act” – it seems to have worked a treat.

So, how come our auditors-general are still so diligent in telling us when ministers have been playing ducks and drakes? Auditors-general are statutory officers appointed by the governor or governor general, and report to the parliament, not cabinet. They’re appointed for non-renewable eight or 10-year terms, and can’t move on to another government job. It’s a terminal appointment.

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Sense about improving education, before the political bulldust flies

In the looming election campaign we’ll be hearing a lot of silly, scary and self-serving stuff. Who’s better on the ukulele, ScoMo or Albo? Who’s the more “human”? Which side “won the week”?

We’ll see the content of carefully compiled “dirt files”. Each side accusing the other of hypocrisy. The other side’s policies have been/would be absolutely frightening.

Great. I can’t wait. But last week I ran across the thoughts of someone who’s had much experience in governance, but isn’t running for office. He was on about education – a topic of direct or indirect relevance to us all – but one that won’t be heard once all the shouting starts.

He’s Professor Peter Shergold, former head of the Prime Minister’s Department under John Howard, but these days chancellor of the University of Western Sydney and writer of government reports.

At every level of education – early childhood education and care, schools, universities and vocational education and training – the polite judgement on our performance is: could do better.

Shergold had many sensible things to say in a report to federal and state education ministers that lobbed only after the plague had begun.

He starts by putting education in a broader, more balanced context. “Education must prepare young people both for active citizenship in a democratic society and for purposeful engagement with the labour force,” he writes.

“This is vital at a time when trust in democratic governance and institutions is at a low level and cognitive technologies are transforming the future of work.”

School leavers don’t just need to be employable. They need to be adaptable, flexible and confident. Education must provide students with the essential attributes they require for lifelong learning in whatever fields of endeavour they may choose, he says.

The professional and applied skills they need will change significantly over their lives. The jobs they do will be transformed. Most will switch careers.

Academic achievement is important but not the sole reason for schooling. We need to focus more on preparing the whole person, no matter what career path they choose. Many senior secondary students enjoy school. Some, for a variety of reasons, just want to leave as soon as possible. Both groups need to be supported by more flexible learning.

Education will remain the foundation of a “fair go” Australia, Shergold says. Senior secondary students from disadvantaged backgrounds should be supported to ensure they can follow the same pathways available to others.

Literacy, numeracy and digital literacy should be recognised as essential skills for every student. At a time of technological transformation, when the future of work is uncertain, these attributes are more important than ever, he says.

Students must be supported to attain capabilities in these areas before they finish school. “Every young person who leaves school without them is having their economic and social future short-changed.”

All pathways through school should be delivered to the same high standard. While university will remain an aspiration for many young people, academic pathways should no longer enjoy more privileged access to school resources than apprenticeships, traineeships or other vocational education and training.

Shergold gets more specific in a report he wrote for the NSW Education Department with someone whose name seems familiar, a David Gonski. They find that vocational education and training – VET – is plagued by problems across the nation.

Skills development hasn’t received the level of government investment required, which has helped reinforce the public perception that VET is less valuable than university education. This misconception is too often instilled in students while they’re still at school.

When they move on from high school, they enter a world bifurcated between university and vocational education. Forced to choose, many opt for a uni degree, for which there are no upfront costs, rather than paying fees for certificate-level vocational education.

Partly because career advice is so poor, many parents and students believe the demand for vocationally qualified workers is in decline. This is utterly mistaken, Shergold and Gonski say.

Federal figures on skilled occupations show shortages in many trades, including mechanics, panel beaters, plumbers, electricians, bricklayers, plasterers, carpenters and cabinet-makers. A rapid rise in demand is forecast for certificate-trained workers in child care, aged care and disability care.

Get this: a “significant proportion” of uni graduates then move to VET to enhance their employability. It’s clear to me that a lot of kids who struggle through uni (with many failing to make it) would have been better going to VET.

Little wonder Shergold and Gonski want to bring universities and VET into a single system. They want much better career advice, which should be available to people throughout their working lives, including those obliged to make mid-career changes.

They want senior secondary schooling to be less obsessed with having kids direct all their efforts to maximising a single number, the Australian Tertiary Admission Rank. There are better ways for unis to select good recruits. And high schools could do more to get students started on a vocational “pathway”.

All this is worth debating in the coming weeks – but ain’t likely to be.

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The climate-change changes the politicians don't want to talk about

It’s strange to think that both sides of politics are leading us to a policy-free federal election campaign at a time when we have so many problems we should be debating. Not that the parties won’t have policies written on a bit of paper somewhere, but that they don’t want to talk about them.

Why not? Because any policy you propose can be used by your opponent to spread scare stories about your intentions. Last time, for instance, Scott Morrison used Labor’s support for electric vehicles to claim it was out to destroy the weekend.

This time, one issue neither side wants to dwell on is climate change. We have – at long last – reached bipartisan agreement on getting carbon emissions down to net zero by 2050. And on the question of how far we should have got by 2030 (yes got, not gotten; you may have reverted to English as it was spoken when the Pilgrim Fathers left England in 1620, but I haven’t), the parties are offering a genuine choice between ambitious and unambitious.

But neither side wants to talk about how we’ll get to net zero. Which leaves us in debt to a top energy expert, Tony Wood, of the independent think tank the Grattan Institute, who does want to talk about it.

Wood and his team flesh out something we know: that the main strategy is to get as much as possible of the energy we need from electricity.

“Households and business will rely on low- or zero-emissions electricity more than ever as it replaces their current use of petrol and diesel for transport and gas for cooking and heating,” he says.

Thanks to the move to renewables, emissions from the electricity sector have fallen consistently over the past five years and are expected to fall much further over this decade. But, on present policies, emissions from all other sectors – including transport, industry and agriculture – are expected to stay much the same.

To achieve net zero by 2050, demand for electricity is likely to double, at least. That means installing a lot more wind and solar (including rooftop) to meet this increased demand and to replace existing coal and gas-fired power stations as they’re retired.

As the anti-renewables crowd continually reminds us, this requires much ingenuity, effort and expense to ensure a reliable supply of power across the national electricity grid, despite the ups and downs of demand and the vagaries of wind and sun.

But it also involves a lot of investment in changing the transmission grid from one that largely moved high-voltage electricity from a handful of big power stations in the country to the big cities, to one that joins up a multitude of small commercial and household sources of solar and wind power. An increasing proportion of homes will be putting power into the grid sometimes and taking it out other times.

The Morrison government is insisting on a large and continuing role for natural gas in the electricity system. Wood is far from convinced. “The large-scale use of gas as a ‘transition fuel’ – supplying ‘base-load power’ with lower emissions than coal – does not stack up economically or environmentally,” he says.

Nearly 80 per cent of Australia’s hugely increased gas production is exported as liquefied natural gas. It’s sold at the world price, meaning “the good old days of low-priced east-coast gas are gone, making gas an increasingly expensive energy source”.

At present, gas provides about a quarter of Australia’s local energy consumption and contributes close to 20 per cent of our emissions. And whereas electricity prices have been falling, gas prices have been rising.

Gas has been declining as a share of Australia’s power supply since 2014, and this is likely to continue. “Gas will play an important backstop role in power generation when the sun isn’t shining and the wind isn’t blowing – but this role will not require large volumes of gas.”

In the home, people value being able to choose between gas and electricity for cooking and heating, but this can’t continue. They’ll save money and reduce emissions when all new houses are all-electric.

“The uncomfortable truth is that natural gas is most likely in decline in Australia, and achieving the net-zero target requires that to happen … Attempts to hold back the tide through direct market interventions, such as contemplated in [Morrison’s] National Gas Infrastructure Plan, will probably require ongoing subsidies at great expense to taxpayers.”

As for cars and other light vehicles, achieving net zero by 2050 requires all new cars to be electric or hydrogen-powered by 2035. That’s because, on average, our cars stay on the road for more than 15 years. The alternative is “costly and inefficient measures to scrap large numbers of cars in the 2030s and ’40s.”

To achieve the 2035 target, we need to do what almost every other rich country does. We need to do what the car manufacturers have asked for: set mandatory emissions standards. But neither major party is willing.

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Everyone else has an inflation problem, why can't we have one too?

I suspect we’re engaged in a strange exercise of trying to convince ourselves that we, like the Americans, Brits and Europeans, have a big problem with inflation. I fear that, if we try hard enough, we’ll succeed.

As the December quarter consumer price index shows, it’s true some prices have risen noticeably. The price of petrol has jumped and so have home building costs.

But, as our top econocrats have been reminding us, that’s not a big deal. The world price of oil has always gone up and down, for many reasons – none of which we have any ability to influence. Most other rises we’ve seen are temporary problems caused by the pandemic and governments’ response to it, as the supply of certain goods (but not services) falls short of demand. Computer chips, for instance.

And, as Reserve Bank governor Dr Philip Lowe demonstrated in his recent testimony to a parliamentary committee, our price rises are nothing like as big a deal as those in America, Britain and Europe, where there’s a lot more going on than just the passing effects of the pandemic.

Lowe noted that, over the past year, electricity and gas prices have risen by 25 per cent in the US and Europe, and even more in Britain, but by 2 per cent in Australia. Used car prices are up 40 per cent in the US, but nothing like that here.

People complain about rising rents but, as with mortgage interest rates, there’s a gap between advertised rates and what people actually pay. Actual rents have fallen in Sydney and Melbourne. And though everyone’s highly conscious of the jump in petrol prices, petrol accounts for only about 3 per cent of the cost of all the goods and services households buy.

The funny thing is, there are various groups in Australia that want to believe our problem’s as big as the other rich countries’. The key group is the financial markets. As Lowe said, “some in financial markets look at what’s going on in the United States and Europe and say, ‘They’ve got higher inflation, it’s coming to Australia’. They may be right” - he said before going on to explain why that was unlikely.

But so convinced are our financial markets that we’re just a carbon copy of the US economy that they’re laying bets the Reserve will be forced to start whacking up interest rates within a few months and will go hell for leather for the rest of the year.

The media have been happy to report this speculation as though it’s pretty much set in stone. “Inflation on the rise” is a good story and “rates to rise” even better.

As for the public, it’s kinda pleased to be told inflation’s a big problem, not because it likes rising prices, but because it confirms what people have always believed: that keeping up with “the cost of living” is always a struggle.

If you run a bit short before pay day, this is incontrovertible proof that prices are rising rapidly. The notion that the problem may be inadequate pay rises never seems to occur.

The CPI people carry in their heads always gets much bigger increases that the one calculated by the Bureau of Statistics because ordinary mortals’ memory of price rises is always stronger than their memory of price falls. And it never occurs to them to include in their sums all the many prices that didn’t change.

Which means, I fear, there’s a big risk that all the talk of inflation and rising prices – and all the media stories of a rise in this or that price; stories that multiply when “inflation” becomes the flavour of the month - could become a self-fulfilling prophecy.

To see this, you need to remember where we’ve come from: eight years of surprisingly weak growth in wages and six years of the (officially-calculated) inflation rate being below 2 per cent.

For much of that time, Lowe – whose scrutiny of statistics is supplemented by having his “liaison” people speak to more than 100 key businesses a month – has explained the weakness in wage and price inflation as arising from a strong “cost-control mentality” among Australian businesses.

Lowe explains that many businesses – retailing in particular – have been through a period of intense competition. There’s the threat from “category killers” such as Bunnings and Officeworks, the decline of department stores, Aldi taking on Coles and Woolies, and the move to online shopping, which has opened access to overseas competitors and made price more “salient” in decisions to buy things.

This increased competition came at a time when retail demand hasn’t been particularly strong (thanks mainly to weak wage growth). Special sales and other forms of discounting have been widespread.

In these circumstances, firms have been most reluctant to raise prices. Rises in purchase costs that may not last have been absorbed rather than passed on. Instead, firms have become obsessed with controlling their costs – including, and in particular, their labour costs.

In their book Radical Uncertainty, British economists John Kay and Mervyn King argue there’s no such thing as a profit-maximising firm. It’s not that firms wouldn’t like to earn maximum profits, it’s that they don’t know where that point is.

In real life, there’s no diagram or equation you can look up to tell you. You know there is a “price point” beyond which you’ll lose more in sales than you gain from the price increase, but you don’t know where it is. In real life, you have to feel your way, reading the signs and making sure you don’t push it too hard.

See where I’m going? We’re coming from a period where price rises have been heavily constrained for a long time. Not big, not many. “I haven’t been game to raise my prices because none of my competitors have been been either.”

Suddenly, however, everyone’s talking about inflation and every day the media are reporting that this price is rising and that price is going up. It’s obvious prices everywhere are taking off.

“One of my competitors has moved, so I can too. There’s always some cost increase I can point to. In this environment, I won’t get much push-back from customers. The media’s been softening them up.”

Can we talk ourselves into having a real inflation problem like the other rich countries? We’ll find out whether prices can be raised by imagination alone.

I fear, however, that getting those higher prices passed through to bigger wage rises will be a taller order. And, if that doesn’t happen, we’ll get no ongoing increase in the inflation rate, just a worsening in the cost of living.

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Competition boss warns faith in market economy under threat

In his parting remarks last week, veteran econocrat Rod Sims, boss of the Australian Competition and Consumer Commission, offered some frank advice to his political masters and big business.

Let me put it even more frankly than he did: if governments don’t require businesses to improve their behaviour, voters and consumers could lose faith that they’re getting a fair shake from a lightly regulated economy and fall for populist solutions that make things worse for everyone.

Though business leaders make speeches in praise of competition, the truth is businesses hate competition. Why wouldn’t they? It makes their jobs much harder. To the extent the law allows, they buy out or bankrupt small competitors, and take over big ones.

In its public statements, the Business Council poses as wanting economic “reform” in the interests of us all. Behind the scenes, it lobbies governments hard to preserve big businesses’ ability to take over competitors and to impose unreasonable terms in transactions with small businesses.

Politicians make speeches about the importance of small business because all those owners add up to many votes. But pollies yield to the lobbying of big businesses because they make generous donations to party coffers, which can be used to buy votes through advertising and the rest.

It follows that the competition commission and whoever’s running it get a hard time from business interests. The more effective that person is in seeking to achieve “effective competition”, the more criticism they attract.

Whenever they take court proceedings that fail, there’s much crowing by business commentators. Elsewhere, competition regulators are attacked for being sleepy and toothless watchdogs.

Of course, public servants are too discrete to say all that. So let’s switch to what Sims actually said in his valedictory speech to the National Press Club. It was frank - by the standards of econocrats.

“When I arrived at the commission [11 years ago] I mentioned my main objective in chairing the commission was ‘that Australians see that a market economy and strong competition work for them and that they see the commission working tirelessly for the long-run interests of consumers’, he said.

“We must recognise that a market-based economy is fragile, as its organising principle relies on companies and businesspeople pursuing their own self-interest. This is not an obvious way to organise things.

“For this to work to the benefit of all Australians requires, at a minimum, strong competition between firms and strong enforcement of the Competition and Consumer Act.

“In our society, large established businesses have a strong voice, which is not surprising as the largest firms employ many people and supply Australians with many of their needs.

“Often, however, the understandable interest of large established businesses in short-term advantage sees them, I believe, work to the disadvantage of their own long-term interests,” he said.

Large established businesses had opposed all the main changes to the competition Act when they were introduced, he said. For example, laws against misleading and deceptive conduct.

“I would ask, however, how many specific interventions and extra red tape would we now have that would damage our market economy, if we did not have this general provision?”

The competition Act largely had economy-wide laws, whose effectiveness underpinned the necessary wide acceptance of the market economy. “Perceptions of unfairness and inequity will see faith in a market economy eroded,” he warned.

Last year Sims proposed a tightening of our merger law. Big business was loud in its disapproval. Distinguished corporate lawyers insisted the present laws were working fine. Business commentators were dismissive.

Last week Sims said “large established businesses and their advisers will oppose these changes, but my guess is that well over 90 per cent of Australians would support them. Further, I think such changes would strengthen our market economy, and would benefit the vast majority of Australian businesses.” (He means the smaller ones.)

When Sims took over the commission in 2011, it had a near-perfect success rate in its court actions. He took this as a sign it was being too cautious in its efforts to enforce the law.

Eleven years later, “we have a good win/loss record, including recent guilty pleas in cartel cases, including by individuals in two criminal cases. I recognise, however, that we have had some losses, including in a recent high-profile case.”

The commission’s record on enforcing the protection of consumers “includes creative wins against companies such as Trivago (where we unpicked its algorithm) and Google, and we have seen penalties imposed by the courts for breaches of the Act increase from $1 million being seen as high, to recent penalties of $50 million against Telstra, $125 million against VW, and $153 million against AIPE, a vocational education provider.”

Let’s hope Sims’ successor is just as diligent in protecting the market economy against its own excesses.

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