Treasury boss’s message: higher taxes the cure for debt and deficit

Anthony Albanese and his Treasurer, Dr Jim Chalmers, have inherited many problems that won’t be solved quickly or easily. Nor will they be solved without the new government being willing to persuade voters to accept the sort of tax changes no pollie wants to talk about in an election campaign.

That’s the conclusion I draw from Treasury secretary Dr Steven Kennedy’s belated annual speech to the Australian Business Economists this week.

Election campaigns are times when we hear about all the wonderful things the politicians want to do to improve the public services we get and reduce the taxes we pay. It’s after the election that pollies present the bill.

Especially when the election has changed the government. This wasn’t Chalmers bringing us the bill, it was the waiter reminding us we’d eaten quite a lot and the bill was getting pretty long.

The economic story had “shifted significantly”, Kennedy said. Inflation pressures had emerged faster and more strongly than most people expected. These were likely to persist into next year “at the very least”.

This, of course, is why the Reserve Bank has been raising the official interest rate – to eventually bring inflation back to acceptable levels.

“Interest rates are at near-record low levels and therefore highly accommodative and should normalise”, Kennedy said. In other words, they need to be increased until they’re back to more-normal levels. If so, they have a lot further to go.

But, Kennedy says that “just as fiscal [budgetary] and monetary [interest-rate] policy worked together to respond to the pandemic, they will need to work together in managing the risks to inflation and the economy more broadly”.

Ah yes, the dreaded duo, Debt and Deficit. Not a subject to be dwelt on during election campaigns, but one to return to afterwards. Presenting the bill, remember?

Chalmers is, understandably, anxious to remind us that our trillion-dollar public debt is inherited from his predecessors. What Kennedy does is implicitly confirm that the previous government’s “medium-term fiscal strategy” - to “focus on growing the economy in order to stabilise and reduce debt” - is still the go.

With an important, after-the-election qualification: “a more prudent course would be for the budget to assist more over time”.

How? We’ll get to that. But first, he gave the best explanation I’ve seen of how a government can get on top of a big debt simply by ensuring the economy grows at a faster annual rate than the rate of interest on the debt.

To “get” the explanation you have to accept one proposition that many otherwise sensible people and media commentators can’t get their head around: that the government of a nation is in a radically different position to an individual household.

Households have to repay any money they borrow sooner or later, but governments don’t. That’s because every family gets old and dies, whereas nations are a collection of many millions of households that, though the faces change, goes on forever.

For a nation, what matters is not its ability to repay the debt, but just its ability to afford the interest payments on it. As long as the nation continues to exist, it can re-borrow by issuing a new government bond to replace an old government bond as it falls due for repayment.

Kennedy explained that strong economic growth and interest rates that are low compared with what’s been normal for the past 50 years are likely to ease the burden of the debt. This is by reducing its size not in dollar terms, but relative to the size of the economy, measured by the dollar value of all the goods and services the economy produces annually (nominal gross domestic product) in coming years.

Interest payments add to the amount of debt the nation owes, but growth in the economy (nominal GDP) increases the economy’s capacity to “service” (pay the interest on) that debt. “When the economy grows quicker than the interest payments add to the debt, the debt burden will decrease,” he said.

That’s the basic mechanism all governments in all the rich countries have relied on since World War II to get on top of their debt. It’s what the Morrison government was relying on, and it will be what the Albanese government continues relying on.

But – with Treasury there has to be a but – there was a weakness in the previous government’s strategy: their projections showed the budget remaining in deficit for the next decade and, indeed, the next 40 years.

That means it wasn’t just the interest bill that was adding to the debt each year, it was also the continuing deficits.

“The current projected reduction in the debt [relative] to GDP is unusual in that it is relying solely on favourable growth and interest-rate dynamics [that the average rate of interest on the debt will rise more slowly than the rising rate of interest on the new borrowing because the average government bond takes about seven years to fall due] to reduce the ratio [of debt to GDP],” Kennedy said.

So here’s the post-election But (which, since it’s the same Treasury, would probably have happened even without a change of government): “A more prudent course would be for the budget to assist more, over time,” Kennedy said.

How? By getting the budget deficit down a lot faster than the Liberals were planning to. Maybe even by running budget surpluses for a while – which would involve repaying a bit of the debt.

Sure, but how do you get the deficit down? The government will be reviewing all the spending programs left by the Coalition, looking for savings. But what savings it finds will mainly be used to pay for Labor’s promised new spending.

So the main way to improve the budget balance will be by “raising additional tax revenues”. Kennedy implied that this would be done by reducing businesses’ and households’ tax concessions.

The next three years will be interesting.

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Albanese must stop government malice towards the jobless

I was chuffed on election night to hear Anthony Albanese repeat his election slogan, “No one held back and no one left behind” and his promise of “kindness to those in need”. Really? Kindness? Now that’s a first for Labor. And unimaginable from the Liberals, whose promise to give needy people “a go” was limited to those they judged to have “had a go”.

Albanese’s magnanimity was a surprise considering Labor’s only mention of our wildly generous $46-a-day unemployment benefit – JobSeeker – was an announcement that, doubtless as part of its small-target election strategy, it was abandoning its previous promise to review the payment’s adequacy.

Fortunately for those of us struggling to get by on $548 a day – $200,000 a year and above – Labor’s small-target approach also involved promising to match the Liberals’ stage-three tax cuts in 2024. So our $25-a-day tax cut is safe. That blatantly unfair and unaffordable promise hangs round Albanese’s neck like a millstone.

We’re hearing a lot lately about the need for a higher minimum wage. The basic single JobSeeker payment is just 42 per cent of the national minimum full-time wage.

Two of our leading scholars in this field, Professor Peter Whiteford of the Australian National University and Professor Bruce Bradbury of the University of NSW, calculate that, those people also eligible for the maximum rate of rent assistance get 57 per cent of the minimum wage … sorry, that was at the start of the 2000s. Now it’s down to 50 per cent.

A lot of us worry about the jump in energy costs. Those on JobSeeker won’t have a care. They get a special energy supplement of 63 to 86 cents a day.

Does it surprise you to hear that our “net replacement rate” – which compares JobSeeker with the average wage – is about the lowest in the OECD rich nations’ club? If you set the poverty line at half the median (dead middle) income, the base JobSeeker rate is two-thirds of it.

As the boss of the Australian Council of Social Service, Dr Cassandra Goldie, keeps saying, poverty in a rich country like Australia isn’t inevitable, it’s a policy choice. You can see this from the first six months of the pandemic, when the Morrison government’s policy choice was to almost double the rate of the benefit.

Allowing for those unemployed people getting a little income from casual work, the Centre for Social Research and Methods at ANU calculates that this move cut the proportion of recipients in poverty from 67 per cent to just 7 per cent.

And Anglicare found that, while it lasted, the special supplement allowed families to pay rent, access nutritious food and avoid seeking emergency relief from charities. Thank goodness a stop was put to it. Poor people getting it so easy – it’s not right!

But the meagre rate of JobSeeker is just the start of the punishment. According to recent research by ACOSS, in a typical month more than 200,000 people have their payment suspended.

This is nearly one in four of people using “jobactive” services (the private contractors who’ve taken the place of the Commonwealth Employment Service). Nearly half of these suspensions are because people can’t meet the unrealistic job search targets they’ve been set.

More than two-thirds of these people have been looking for work for more than a year. “Despite the low unemployment rate, employers are still reluctant to employ people who have been out of the paid workforce for more than 12 months, older workers, and people with disability,” Goldie says.

“Setting rigid job search targets so high – a default of 20 per month – is setting people up to fail. Unrealistic and inflexible targets have no place in employment services that are designed to help people, and they are an inconvenience to employers.”

Many people locked out of paid work long-term find themselves at the back of the job queue, not because they aren’t trying, but because many employers are still wary of giving them a chance, she says.

There are more than 850,000 people who’ve been on income-support for over a year, and there are 440,000 people aged 45 or older, 390,000 people with a disability, 120,000 sole carers for children (like Albo’s mum was) and 130,000 from Indigenous communities.

According to ACOSS’s survey, two-thirds of respondents said their payment was suspended because of errors made by employment service providers.

Why was the Morrison government so punitive? Because it was always trying to cut government spending in penny-pinching ways the public wouldn’t see. The illegal “robo-debt” exercise – where many people were falsely accused of owing the government money – was primarily about saving money.

But politicians on both sides have also been content to pander to the prejudices of voters who are happy to see people who don’t work (like they do) given a hard time. This mean-mindedness is ennobled as “mutual obligation”. It’s the antithesis of kindness.

To be fair, the new government is keeping its promise to end compulsory “income management” and the use of the cashless debit card in “selected communities”. It was thinly disguised racial discrimination.

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Labor mustn't be panicked into doing something stupid

Who’d want to be the new Treasurer, Dr Jim Chalmers? Certainly, not me. But that won’t stop me giving him a shed-load of free advice. Starting now.

As Chalmers sees it, the economy he’s inherited is in “dire” straits. Everywhere he looks there’s another problem. First, “skyrocketing” inflation.

Second, falling real wages as “a consequence of almost a decade of the deliberate undermining of pay and job security, now coming home to roost in the form of a full-blown cost-of-living crisis”.

And third, a budget “heaving with more than $1 trillion in debt” and worse (though he doesn’t mention it), a budget projected to stay in structural deficit for as far as the eye can see, meaning the debt continues to grow in dollar terms, and falls relative to the growing size of the economy only after a delay, and only slowly.

He could have added a fourth problem: a hostile international economic environment, with a fair risk of the US falling into recession and, worse, a major trading partner – China – that’s mishandling both its response to the pandemic (think more supply-chain disruptions) and its management of the macroeconomy.

Chalmers is, of course, doing what all incoming treasurers (and chief executives) do and laying it on thick. Like Mother Hubbard, he’s discovered the cupboard is bare. Actually, he’s cleaning out the cupboards and finding all the bad stuff his predecessor hid. He’s snapping people out of the campaign fairyland, where government spending can go up while taxes go down and deficits fall.

Even so, his four big problems are real enough – and seem to be getting worse as each week passes. The latest gas crisis is a parting gift from the Liberals, arising from nine years of indecision about how the transition from fossil fuel to renewables should be managed to avoid unexpected mishaps – such as a Russia-caused leap in global fossil fuel prices.

So what should he do? Avoid being panicked by the many partisan ill-wishers and ideological barrow-pushers who would do so. He needs to think carefully about the various problems, the highest priorities, the right order in which to tackle them, their varying degrees of difficulty and urgency, and the way they interrelate - the ways he can kill two birds with one stone, or make choices to fix one problem that make another problem worse.

Chalmers should be wary of conventional thinking about problems that are of unconventional origins. Just as the “coronacession” was unlike an ordinary recession because it was caused by government-imposed restraints on the supply side rather than efforts to curb excessive demand, so he shouldn’t be using demand restraint to try to fix disruptions to supply.

Inflation problems normally arise from an overheated economy leading to excessive wage growth. The standard solution will involve cutting real wages to make labour less expensive. But we’ve had weak real wage growth for a decade.

Those ideologically opposed to fiscal stimulus tell us our stimulus has given us a red hot, inflation-prone economy – as proved by our super-tight labour market. They conveniently forget to mention that the pandemic caused us to ban all imported labour for two years, but that this supply constraint has now been lifted.

If excessive wage growth didn’t cause our high and rising prices, what did? Fiscal stimulus has caused shortages of materials and workers in housing and construction, but most of the price rises have come from external supply constraints caused by the pandemic and the war on Ukraine.

Nothing we could do can fix problems coming from the rest of the world. But we shouldn’t forget that these are once-off price increases. And those import prices will fall at some stage as pandemic disruptions are resolved and the war ends.

It’s not that simple, of course. Why not? Because our businesses don’t seem to have hesitated in passing their increased import costs through to retail prices. That’s the start not of a wage-price spiral, but price-wage spiral. And business and employer groups’ solution to the spiral is simple: allow only a token increase in wages, and inflation will come down in no time.

This is the unspoken doctrine that’s the bastard child of the economic rationalist era: give business whatever it demands and everything in the economy will be wonderful. The business lobby has become so consumed by short-sighted self-interest – so used to getting its own way – that we need a new government with the wisdom and strength to save business from its own folly.

We need a government capable of seeing what business can’t: that wages aren’t just a cost to business and an impost on profits, but also the chief source of income for the 10 million households who are the reason we have an economy and whose spending on the things our businesses produce is what generates their profits in the first place.

Screwing the workers by tolerating ever-falling real wages is a delusional way to increase profits in anything but the short term. The bigger the fall in real wages – and the government can’t stop them falling – the more Labor risks joining the US and China in recession.

This is why, in its worthy desire to keep big business in the tent, the government was wrong to ask the Fair Work Commission to increase award wages by 5.1 per cent only for “low-paid” workers – that is, only about the bottom 12 per cent of workers rather than the bottom 25 per cent.

Do you really think the 88 per cent of workers reliant on bargaining with bosses rather than a commission edict will get anything like a 5 per cent pay rise?

Former Reserve Bank governor Bernie Fraser used to say that any fool could get inflation down – all you had to do was crunch the economy. Is that what business would like? It’s certainly what the financial markets – whose model of our economy is a footnote saying “see America” – want.

As I’m sure the Reserve well understands, we need to get inflation down without causing a recession. And that means being patient about how long it takes. We were below the target range for six years; we can be above it for a few years without the sky falling.

And remember this: if we did fall into recession, the strategy of growing our way out of debt would explode. Not only would the economy be growing more slowly than the debt, the budget’s “automatic stabilisers” would reverse and the deficit would blow out, greatly increasing the debt.

On the other hand, Chalmers should be sceptical of the argument that an additional reason we need to cut the budget deficit ASAP is to reduce the need for interest rates to rise so far. Getting inflation under control is not a big ask – provided we’re patient.

The Reserve’s stated strategy is to shift the stance of monetary policy only from “emergency expansionary” to “neutral”. That is, to take its foot off the accelerator, not to jam on the brakes. This means slowly lifting the official interest rate to about 2.5 per cent, so the medium-term real interest rate is zero.

In theory, at least, this should not cause the economy to contract, nor great pain to most people with mortgages. And it would be a good thing in itself to get rates up to a level remotely approaching normal.

The real challenge for budget policy is to avoid getting us in deeper by proceeding with the stage-three tax cut in its present timing, size and form. It could be rejigged to make it more effective in relieving cost-of-living pressures for people in the bottom half.

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An economy with falling real wages can’t be “strong”

The main message from this week’s “national accounts” is that the economy isn’t nearly as Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed it was during the election campaign. In truth, it’s coming down to Earth.

According to the Australian Bureau of Statistics, real gross domestic product – the nation’s total production of goods and services – grew by 0.8 per cent during the three months to the end of March, to be up 3.3 per cent over the year.

Almost to a person, the business economists said – and the media echoed - this was “higher than expected”. But that just meant it was a fraction higher than they’d forecast a day or two before the announcement, once most of the building blocks for the figure had been revealed.

But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent. Now that would have been strong.

True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot higher than our average annual growth rate over the past decade of about 2.3 per cent.

But it’s high because the economy’s still completing its bounce-back from the two pandemic lockdowns when most people gained more income than they were allowed to go out and spend.

In other words, it’s a catch-up following highly unusual circumstances, which will stop once everyone’s caught up. It’s not an indication of what we can expect “going forward” as businesspeople love saying.

If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.

Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not really. Turns out real household disposable income actually fell by 0.9 per cent.

So the growth in consumer spending came from a 2 percentage-point fall in the rate of household saving during the quarter, to 11.4 per cent. Household saving leapt during the two lockdowns, from its pre-pandemic level of about 7 per cent.

This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer spending was very strong in the states still rebounding from last year’s lockdown – Victoria, NSW and the ACT – and particularly weak in the other states.

Why did real household disposable income fall during the quarter? Because real wages fell. The more they continue falling – as seems likely – the more continued growth in consumer spending will depend on households continuing to cut their saving. Sound sustainable to you?

The other big contributor to growth, of 1 percentage point, came from an increase in the inventories held by retailers and other businesses, caused by an easing of pandemic-related shortages of certain imported goods, including cars.

This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a growth contribution that will continue quarter after quarter.

The third growth factor was a huge 2.7 per cent increase in government consumption spending, contributing 0.6 percentage points to overall growth.

Where did it come from? From increased health spending required by the Omicron variant and spending to help people affected by the floods in NSW and Queensland. Again, not something that will be happening every quarter – we hope.

With those three positive contributions adding up to a lot more than the final 0.8 per cent, there must have been some big negative contributions. Just one, actually. Net exports – exports minus imports – subtracted 1.7 percentage points.

The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points from growth – mainly because the floods disrupted mineral exports.

The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall growth. Another sign of the economy returning to normal, with pandemic disruption easing and imports of cars (and their chips) resuming. Another once-off.

So, what else happened in the quarter? New home building activity fell by 1 per cent. The pipeline of new homes built up by lockdown-related government stimulus still contains homes yet to emerge, but the output has faltered because the industry’s at full capacity, with shortages of labour and materials.

Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new building projects to be entering the pipeline. Housing won’t be a big part of the growth story “going forward”.

Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to be a big part of the growth story.

The quarter saw the share of national income going to wages continuing to fall, while the share going to profits rose to a record high of 31.1 per cent.

On the face of it, that says the workers are being robbed. But the factors moving the respective shares are more complicated than that. For instance, all the growth in company profits during the quarter was from the mining industry. Coal, gas and iron ore commodity prices have jumped.

But a much less debatable indication that businesses are doing well at the expense of their employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit of production – during the quarter, and by 6 per cent since the start of the pandemic.

An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.

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Why Albanese will bring public servants in from the cold

The election was so much about getting rid of Scott Morrison that few but the party faithful turned to Anthony Albanese with great hope and enthusiasm. He’s not the most charismatic bloke you could meet. Yet almost everything we’ve heard from him so far has been encouraging.

From his victory speech on, he’s said everything you’d want him to say. He made a promise which, to be fair, his predecessor never made and so never broke: to govern for all Australians.

Morrison was in the divide-and-conquer mould. He was the most tribal prime minister I can remember. My tribe, your tribe; us and them; good guys, bad guys; lifters and leaners.

Kevin Rudd had to be strong-armed by his colleagues to give the job of ambassador to the US to his vanquished party predecessor, Kim Beazley, a job for which he was highly qualified.

Rudd wanted to prove his magnanimity by giving it to a Liberal worthy – a gesture that John Howard, nor his protege Morrison, would never have made. To them, the spoils of office went solely to the winners.

I remember when “jobs for the boys” was considered a strictly Labor vice. Morrison has filled the Administrative Appeals Tribunal with Liberal cronies. The Libs have pretty much appointed only people from the employer side to the Fair Work Commission. The convention used to be 50/50.

Albanese said he wanted to bring Australians together. “I want Australia to continue to be a country that, no matter where you live, who you worship, who you love or what your last name is, places no restrictions on your journey in life.”

Of course, grand election-night declarations are like New Year’s resolutions: a lot easier to make than to stick to, day after day, as old habits try to reassert themselves.

As we wonder what kind of PM Albanese will make, two things are worth remembering. First, unlike the Liberals, Labor sees itself as the unnatural party of government, the boys and girls from the wrong side of the tracks.

If the Libs have a superiority complex – if they act like they own the place and can make their own rules – Labor is the opposite. As outsiders to power, they tend to be on their best behaviour in the Big House, to worry about using the right fork.

Paradoxically, they’re more likely than the Libs to stick to the conventions rather than overturn them, more likely to consult widely – the unions come back into the tent, but business stays in – and more likely to seek, and take, advice from officials.

Second, as Julia Gillard demonstrated, prime ministers from Labor’s left faction try to prove they’re not really left-wing by being surprisingly right-wing in the policies they pursue. She was fawning towards the Americans, did too little to reverse the anti-union excesses of Howard’s WorkChoices – did someone say we had a chronic problem with weak wage growth? – and her effort to lift schools’ performance by using the publication of metrics to encourage greater competition between the public and private sectors was a faddish idea that didn’t work.

But, against those two positives, remember this. Whenever a government lowers standards, its opponents always promise to restore them. Nevertheless, the two major parties are obsessed with each other and determined the other side won’t gain an advantage.

So, the moment the new government is criticised for some behaviour and replies that it’s only what the last lot did, you’ll know the game is lost.

Recent Coalition governments have seen the public service as an enemy – the voting figures show Canberra is very much a Labor town – and have progressively cut back admin costs and public service numbers. Morrison went further, telling public servants he didn’t need their advice on policy matters. Much policy expertise has been lost in consequence – as witness, the administrative fumbling of the vaccine and RATs rollouts.

On coming to office, both Howard and Tony Abbott sacked many department heads they considered had been too close to the previous Labor government. There’s little doubt this was also intended “to encourage the others”, making them fearful of losing their own jobs should they be judged as less than fully co-operative.

Nothing could be better calculated to ensure ministers are surrounded by yes-persons. It takes a wise and strong manager to see the benefit of having around them people game to say, “Are you sure that’s a good idea, boss?” when considered necessary.

Albanese has promised not to sack any public servants, and he hasn’t so far. Replacing the head of his own department is, by modern convention, an entitlement of the new prime minister.

Politicians are prone to paranoia. Labor is right to trust the public servants. In my decades of speaking to them privately on policy issues, I can’t remember when they’ve expressed to me any criticism of government policy or lack of confidence in the government of the day. To do so would be unprofessional.

Public servants aren’t omniscient. But I’d rather have a government listening to their advice than trying to wing it.

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Why the political duopoly is losing market-share

If you hadn’t noticed, economic policy and politics are closely entwined. And economic journalism is a just specialty within political journalism. But some parts of economics – agency theory and industrial organisation, for instance – are surprisingly useful in understanding how politics works.

The big surprises in this election weren’t the election of Labor, but the steep decline in the two major parties’ share of the primary vote, and the emergence of climate action as the big vote-shifting issue, even though it got little attention in the campaign, especially compared with the focus on the cost of living.

Some decades ago, the two big parties’ share of the primary vote was 90 per cent. By the last election, the non-mainstream vote had risen to a quarter. But this time it jumped to a third, leaving the big guys sharing roughly a third each.

Despite its win, Labor’s third was its lowest since the 1930s, and amazingly low for the winning party. Though the Coalition’s share was bigger than Labor’s, it fell far more this time.

Why are fewer and fewer people prepared to vote for either of the two majors? Why is the two-party system in decline? The economists’ basic neoclassical model of markets assumes intense price competition between a large number of small firms.

In real life, many markets are characterised by “oligopoly” – they’re dominated by a small number of large firms. Many decades of firms pursuing economies of scale do a lot to explain why we see so many oligopolistic markets.

In the sub-discipline of “industrial organisation”, economists seek to explain why oligopolistic markets differ from that basic model of “perfect competition”. They’ve found that the few big firms are not so much competitors as rivals. Their huge size gives each of them “market power” – more control over the prices they’re able to charge – but they watch each other like hawks, and never make a move without considering what the other big firms might do in reaction to their move.

They live in fear of losing market-share. With only two huge firms – a duopoly – the rivalry is that much more intense.

Few people realise that, though our political duopolists paint themselves as poles apart ideologically, the main thing that influences the choices they make is what the other side’s doing. Governments are constrained by oppositions; oppositions are constrained by governments.

See what this does? It makes the rival parties more alike. When I see you behaving badly but getting away with it, I decide I’ll do the same. And if you’re not sticking your neck out on climate action, I decide I’d better not risk it either.

That’s why so many people complain the parties are “all the same”. An economist called Harold Hotelling formulated a rule that two firms serving an area – ice cream sellers on a beach, for instance – will tend to gravitate to the same central location. Why? Because they want to reduce the chance of the other side getting a bigger share of the market than they do.

This, of course, reduces the choice available to customers. So, does it surprise you that, as the two sides of politics become more similar – as they crowd around the political centre – more people set up fringe parties, and more people vote for them?

For many years, the Liberals used climate change as a stick to beat Labor over the head, making Labor more cautious in what it proposed. For years that’s mean Labor’s lost many first-preference votes to the Greens. But this time the Libs lost votes to the teal independents in Sydney, Melbourne and Perth, and both sides lost votes to the Greens in Brisbane.

Yet, just as commercial firms have become bigger over the decades, so politicians and their parties have changed. Economies of scale are one reason for fewer, bigger firms, but another technique we’ve used to get richer is “specialisation and exchange”. The more we specialise, the more efficient we get at doing whatever it is we do.

By now, we have specialties within specialties. We have experts who know more and more about less and less. Politics used to be a game for amateurs. People who’d done well in their careers, switched to politics to “give something back”.

These days, politics has become more professionalised, more a lifetime career where, upon graduating, you start at the bottom as a research assistant for a union or a minister, and work your way up, becoming an MP, then a minister, then who knows?

The more professional politicians become, the more they focus on advancing in the political game, and less on the things they got into politics to fix. They used to have to guess at what the voters wanted; now the majors spend a fortune on polling and focus groups. They’re more inclined to give the voters what they now know they want, and tell them what they know they want to hear.

Voters have shown less loyalty to a particular party the more they suspect the pollies are advancing their own cause, not the public’s. The minor parties and independents are more like the amateur politicians of old: they turned to politics after a career elsewhere and they did so because they cared about a few particular issues. A growing number of voters find these issue-driven politicians more attractive.

The main political parties have changed, too. They used to be grassroots, bottom-up movements with many members. Now, they have few members and those they retain tend to be a lot more hard-line than the people who just vote for the party.

With the professionalisation of politics, the two majors have become more top-down. Just as the interests of executives don’t always align with those of their shareholders and supposed masters, so it is with political parties. Economists see this as a principal-and-agent problem.

The two majors have become more like franchise operations. All the big decisions are made at the centre by the professional managers, leaving the franchisees to just flog the product. These days, the party’s policies are made at the top, with party members getting little say.

In the old days, the branches’ main right and function was to preselect the candidates who would represent them in parliament. They tend to favour candidates who are well-known and well-liked in the district – maybe a former mayor – who’ll work hard attending school fetes and advancing the electorate’s interests.

As we’ve seen in this election, leaders and people at the centre increasingly insist on parachuting in someone with a higher profile and greater leadership potential. The party faithful increasing resent this.

The people at the top must wonder why they still need branches at all. Short answer: they still need enough volunteers to door-knock and man the booths on election day.

We saw that Labor’s attempt to foist Kristina Keneally on some electorate cost it the seat. In the Liberals’ leafy heartland, I suspect the locals’ thought that they might see a lot more of an independent member contributed significantly to the teals’ success.

It’s not at all clear the teals will be one-term wonders. And it maybe the days of either major party ruling with a comfortable parliamentary majority are gone.

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Printing money to fund the deficit ain't the free lunch it seems

The new Treasurer, Dr Jim Chalmers, is saying a lot about the trillion-dollar debt he’s just inherited. He’s saying less about the tension between the new government’s plan to “invest” in improving the economy and all the pressure he’ll be under from mainstream economists to reduce the budget deficit and so reduce what Labor will be adding to that debt.

But whenever I write about debt and deficit, I know to expect puzzled or angry pushback from people who’ve read US Professor Stephanie Kelton’s bestseller, The Deficit Myth, or studied “modern monetary theory” (MMT) at university.

Why all this fuss about budget deficits? Who said the shortfall between what a government spends and what it raises in taxes must be covered by borrowing from the public? That’s just a rule someone made up.

Surely the government can avoid ticking up all that debt – with all the interest payments on it – simply by telling the central bank to “create” – some still say “print” – the money the government needs.

After all, all currencies are “fiat” currencies. When a government prints a $50 note, it becomes “legal tender” worth $50 merely because the government says it is. By government decree or fiat.

So why all the fuss about debt and deficit? Just create all the extra money the government needs with the stroke of the central bank’s computer program.

There’s a lot of truth in what the MMT people say. But if you think it all sounds a bit too good to be true, it is. So what’s the problem?

The “monetarists” of the 1970s taught that every time the government adds to the supply of money in circulation it adds to inflation. Not true. We value money because of what we can buy with it. Economists say what you’re buying is “command over real resources” – that is, raw materials, physical capital equipment and labour, often embodied in goods and services, or physical assets, including buildings and land.

Inflation is caused when the demand for real (that is, tangible) resources runs ahead of the supply of real resources, thereby causing prices to rise.

So, even though people spending the money you’ve created will add to the demand for real resources, this won’t cause inflation provided you do it when demand is weak. Only when you reach the point where demand catches up and overtakes supply will you have a problem with inflation.

That’s the purely pragmatic reason most economists disapprove of MMT. Once politicians had the idea they could keep spending without worrying about debt and deficit, how would you get them to stop adding to inflation by continuing to create money rather switching back to borrowing and having to pay interest?

How would you get them to do what Chalmers is doing as we speak: looking at all the spending plans of his Liberal predecessors that aren’t sensible and stopping them, so as to make room for Labor’s own spending plans?

Even so, as the econocrats would prefer me not to point out, the MMT brigade has had a qualified win. As part of the Reserve Bank’s resort to “unconventional” monetary policy during the pandemic – aka “quantitative easing” – it has bought more than $350 billion-worth of second-hand government bonds.

Bonds it paid for merely by crediting the “exchange-settlement accounts” that each of the banks it bought the bonds from has with the central bank.

So indirectly, the Reserve has done what the MMT people say it should have done: covered about $350 billion of budget deficits by creating money.

This means $350 billion of the government’s $1 trillion debt – and the related interest payments - is owed to the Reserve Bank, which just happens to be owned by the government. Roughly a third of the government’s debt is owed to, and must eventually be repaid to, itself.

So, the government’s liability is cancelled out by its subsidiary’s asset. That’s what I wrote a few weeks’ ago, and it’s true. But, as some fossilised central banker explained to me, it’s not the whole truth.

When you trace through all the double-entry bookkeeping, you see that the created money the Reserve paid into the banks’ exchange-settlement accounts in return for the bonds it bought is still sitting there. It’s still a liability on the Reserve’s balance sheet, and an asset on the banks’ balance sheets.

That money is part of what monetary economists call “base money”. Base money consists of all the “currency” – notes and coins – issued by the central bank, plus all the money the banks are holding in their exchange-settlement accounts at the central bank.

And the trick to base money is that its quantity can be changed only by a transaction with either the government or the central bank on the other end of it. That is, nothing anything any person or business or even a bank can do of their own volition can change the quantity of base money.

It’s true that bank A and bank B can do a deal that reduces the balance of bank A’s account – but only by increasing bank B’s balance by the same amount. That is, the banks can move base money around between themselves, but they can’t change the quantity of base money held by the banks as a whole.

OK, but why is this a problem? Because the banks have money they own stuck in bank accounts with the central bank, on which it pays little or no interest. They’d like to lend it to someone else at a much higher interest rate.

So they’re tempted to enter highly contrived, highly risky arbitrage arrangements which involve borrowing short-term and lending long-term. The Yanks call this “picking up dimes in front of a steamroller”.

It’s fine until there’s a financial crisis, which brings down banks and does huge damage to the rest of the economy, as we saw with the global financial crisis of 2008. Yet another case of there being no free lunches.

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Replacing the misbehaving ScoMo is an easy act for Albo to follow

It is a truth (almost) universally acknowledged by Labor politicians that it’s near impossible to reform from opposition. Be too ambitious, make yourself too big a target, and the government will happily use the many advantages of incumbency to shoot you down.

That’s because all reforms have opponents, and most create losers as well as winners. That’s why, after being reminded of this truth at the 2019 election, Labor made itself as small a target as possible. Part of this was for Anthony Albanese to neutralise most of Scott Morrison’s vote-buying promises by matching them.

Back then, Morrison convinced himself that – apart from having God on his side – his miraculous win was owed to his cunning strategy of painting Labor as the party of tax-and-spend, and the Liberals as the party of lower taxes. He tried repeating the strategy this time.

The first part of his mantra was true enough. The second was bulldust. As independent economist Saul Eslake has demonstrated, in the highest-taxing stakes, the just-departed government runs second only to the Howard government.

Find that hard to believe? You’re forgetting the invisible magic of bracket creep. The loophole in Morrison’s promise not to raise taxes – which Albanese matched – is that it doesn’t include bracket creep. And now that inflation’s back, bracket creep proceeds apace.

Many of the reforms we need – fixing aged care, reversing the squeeze on universities and TAFE, making homeownership affordable, exploiting our chance to become a renewables superpower – would cost big bucks and require greater and changed taxation.

But Albanese’s problem is not just that he’s promised not to increase taxes while making a huge and blatantly unfair cut in income tax in two years’ time, or even that he’s inherited a big budget deficit and huge debt overhang.

That much you see from the budget papers. What you can’t see is the extent to which the Morrison government has been holding back the tide of higher spending by cutting public service jobs, increasing waiting times, cutting NDIS packages and finding excuses to suspend people’s dole payments.

This dam had to burst after the election. And it will do so at just the time when the econocrats are telling Labor the budget deficit must go down, not up.

What was it Paul Keating used to say about excrement sandwiches? Come on down, Albo.

But all is not lost. For a start, on expensive and controversial reforms, Albanese should follow the aforementioned Eslake’s advice and copy John Howard. He got elected in 1996 with a promise to “never, ever” introduce a goods and services tax. So he made an honourable escape by having such a tax fully developed for presentation at the next election.

It was approved – by a whisker. As Eslake reminds us, not since 1931 has any first-term federal government failed to secure a second term.

“Labor needs in its first term to lay the groundwork for a more expansive mandate for its second term,” Eslake recommends.

Next, Labor does have a mandate – both direct and indirect, via the higher votes for the Greens and teal independents – to proceed with climate action, an anti-corruption commission “with teeth”, gender equality, and commitment to the Uluru Statement from the Heart “in full”.

Except for climate action, none of these historic reforms will greatly trouble the budget accountants.

However, as Professor Mark Kenny, of the Australian National University (but formerly of this parish), has helped us see, this election was about something deeper: “The urgent need to rescue longstanding governing norms around transparency, accountability, ministerial standards, trust and honesty and, of course, the viability of the public service.”

Morrison’s approach, he says, was “divide and dither”. “Accountable government, national unity, evidence-based policy, and democratic accountability [whether voters give his performance a tick or a cross] are all on the ballot at this election.”

Let’s get personal. The biggest reason Albanese is now PM is that he’s not Scott Morrison. The biggest policy question in this election, the one almost everyone in the great majority who didn’t vote for the Coalition wholeheartedly endorsed, was: “would you like to see no more of Scotty from marketing?”

It’s simple. The surest way for Albanese to ensure his re-election is to be a better, more likeable PM than that other one.

Just be more truthful, more respectful, more humble, more answerable, more willing to admit your mistakes, more inclusive, more even-handed, more charitable towards the needy, more willing to answer the question, and more protective of Australia’s reputation abroad.

Be less prevaricating, less divisive, less bulldozer-like, less willing to help mates and punish enemies, and less unable to let that five-letter S-word pass your lips unqualified.

I think Albanese’s already got that message. “I want to bring people together and I want to change the way that politics is conducted in this country,” he’s said. Australians have “conflict fatigue”.

Being a saintly prime minister won’t be easy. But think of it this way: conduct-wise, being ScoMo’s successor won’t be a hard act to follow.

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Who's in government matters, but pollies have far from total control

According to Scott Morrison’s last-minute appeal, in deciding our vote we should have considered nothing but the economy and stuck with the Coalition, the only team to be trusted with financial matters. But we spurned his advice and put Labor in charge. Now what happens?

Will the economy be better or worse under Anthony Albanese and a new treasurer, Jim Chalmers?

Short answer: whether economic conditions get better or worse in the next three years will be changed only to an extent by a new government. Things will be different, but not hugely so.

That’s for four reasons. First, because, in our more globalised world, much of what happens is beyond the ability of any government to control. Second, because economies are like ocean liners: they take a long time to answer the helm.

Third, because in this small-target election, Labor’s stated policies weren’t greatly different from the Liberals’. And finally, the elected government shares the management of the economy with the independent Reserve Bank, which made its intention to continue raising interest rates crystal clear earlier this month.

In their response to the pandemic, Morrison and his erstwhile treasurer, Josh Frydenberg, stuck pretty closely to Treasury advice about the budget’s role. And I’ll be surprised to see Labor doing much freelancing.

But aren’t the Libs much better at economic management than Labor? That’s the stereotype deeply ingrained in the thinking of many voters – which Morrison was seeking to evoke in his last-minute appeal.

Trouble is, hard evidence to support this pre-judgment is hard to find. In a recent extensive review of the figures by the independent economist Saul Eslake, he could find no strong support for the idea that one side was clearly better than the other.

Why not? For the four reasons I’ve just listed.

So how is Labor likely to do? Not as well as the new government’s supporters hope, but not as badly as its opponents predicted. At this early stage, however, when we’re so fully conscious of the failings of the last lot, we’re entitled to hope for some improvement.

One we can hope for is that the new government won’t be playing favourites and enemies like Morrison did.

Whatever does happen to the economy in the next few years, one thing we can be sure of is that the Libs will claim to have handed over an economy in tip-top condition. Morrison and Frydenberg spent the entire campaign telling us how “strong” the economy is.

It is in some respects, but not in others. It’s certainly true that the jobs market is in better shape than it’s been in decades. At 3.9 per cent, the unemployment rate is at its lowest in 48 years and underemployment is its lowest in 14 years. The proportion of working-age people with jobs has never been higher.

You’d expect this to mean wages are also growing strongly, but not a bit of it. Wages have struggled to keep up with prices for the past decade and, with the recent surge in prices, have fallen well behind.

Part of the reason is that, thanks to weak business investment in better equipment, there’s been little improvement in the productivity of labour. Living standards have hardly improved in since before the Coalition took the reins in 2013.

It’s weak wage growth that does most to explain why the high cost of living seemed the biggest issue in this election. And it’s the cost of living that helps explain why voters turned on the self-proclaimed great economic managers.

Business profits are doing fine, but the Liberals have failed to deliver ordinary working families their fair share of the lolly – and allowed many of their jobs to become less secure. And that’s before you get to the huge budget deficits the government itself foresaw extending further than the eye could see.

There’s one issue it’s reasonable to expect Labor to care more about and do more to fix: making wages grow faster. Can any government do much about wages? Of course. They can start by urging the Fair Work Commission to lift award wages in line with prices. And give their own employees a decent pay rise after years of wages being held back.

A staunch Liberal mate thinks this was a good election for his side to lose. He thinks the world economy’s likely to weaken and this, combined with our problem using higher interest rates to control inflation, might see us fall back into recession.

I’m not so pessimistic.

There may be some rocky times ahead as the world copes with its various problems. But the Reserve Bank knows if it raises interest rates so high they capsize the economy, all fingers will be pointing to it, not to Albanese and Chalmers.

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Election: a win for the punters against the party professionals

Listening to Anthony Albanese’s victory speech on Saturday night – promising to be a better, more inclusive leader than his predecessor, to help the needy as well as the party heartland, to work hard fixing as many of our problems as humanly possible – my inner accountant came out. Yes, but how will you pay for it all?

If ever there was a case of oppositions not winning elections but governments losing them, this is it. Much more than usually, this election result was voters rejecting not so much the Liberal Party and its policies, but the party’s leader and his divisive, often disrespectful way of conducting himself and his preoccupation with clinging to a fossil-mining past rather than striving for a future as a renewable energy super-power.

What motivated all those people – particularly women – in the most prosperous parts of Sydney and Melbourne to break the habit of a lifetime and vote for a teal independent rather than the Liberal member they had no special gripe against?

It was their overwhelming desire to see and hear no more from the most un-Christlike Christian they could imagine. A bulldozer, indeed. It’s significant that the people they voted for were well-educated, successful businesswomen. Female equality was also a big motivation for the Liberal revolt.

So too, Scott Morrison’s puzzling resistance to the obvious need for a federal anti-corruption commission “with teeth”. If he had nothing to fear, what was his problem?

But it wasn’t just the teals. What about the resurgence in the Greens’ vote, and all the Liberal and Labor voters in Brisbane who switched to the Greens? It’s obvious from the two separate revolts against both major parties that the need for more urgent action against climate change was the election’s single biggest issue.

This despite the majors’ desire to avoid talking about climate change – which the media meekly accepted. It’s significant that both the Greens and the teals were promising much earlier and bigger reductions in emissions. Albanese ignores this message at his peril.

The one issue the majors were happy to debate was the cost of living. So, with the media’s willing acceptance, this became the central issue of the campaign. The great cost-of-living election, with the Reserve Bank making a guest appearance.

Really? Where’s the evidence of that being a key influence on the result? Well, I guess it’s the main reason Labor – the party promising to increase wages – did take a number of seats away from the Libs, in the way the two-party textbook says elections should work.

But we’ve yet to see whether Labor won enough of those seats to form a majority government.

The notion that minority government is a recipe for instability bordering on chaos is a self-serving lie spread by the two majors.

Look at the record – federal and state – and you find that the deals the majors have done to guarantee “confidence and supply” not only achieve stability, they allow the crossbenchers to achieve valuable reforms – often to do with transparency and accountability – that neither of the majors fancies.

With the Gillard minority government, the main gain was a tax on carbon – which, had it survived the depredations of Tony Abbott, would have left us much better-placed today.

We seem to have moved to a non-praying prime minister, but if I were Albanese I’d be praying to be left in a position where I had to let the Greens or the teals impose on me a much more adequate policy on climate change – consistent with the electorate’s now-revealed preference.

This election is no ringing endorsement of Labor, Albo and his small-target policies. The new government has won with an amazingly low primary vote. Timid Labor was not the nation’s first preference.

The election is a step-change in the public’s long-running move away from the two-party system. It was the voters’ message to the Lib-Lab duopoly: “Stuff you and your how-to-vote cards, I’m doing it my way.” If Labor thinks it’s just the Libs with a problem, it’s not thinking.

Albanese’s other problem is that his small-target strategy involved tying one hand behind his back. What he thought he had to do to win government is the opposite to what he now must do to prove himself worth re-electing.

He has inherited a big budget deficit and massive public debt, and will be under great pressure to get that deficit down.

How? He’s promised to deliver the Liberals’ hugely expensive and unfair tax cut in 2024, while promising no tax increases. By cutting spending on health, education, welfare and the NDIS? They’re the things he’s promised to spend more on.

You want to do something about unaffordable homeownership? That requires increasing the tax on home-owners and investors. Where’s Harry Houdini when you need him?

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