What if people just want better jobs, not more stuff

Sorry, but the more the great and good bang on about the urgent need for more “productivity”, the more doubts I have. Have you noticed it’s always the businesspeople, economists and politicians who tell us what we need more of, never us telling them what we’d like?

How do we know whether what they say we need would be better for them but not better for us? Short answer: we don’t. We’re supposed to take their word for it.

The urgers rarely take the time to explain what this “productivity” is, let alone why we need much more of it. I’ve no doubt that, following the coming three-day economic roundtable, the Albanese government will make some changes to taxes and regulation that, it assures us, will increase this productivity thing, whatever it is.

We’ve seen such exercises many times before. “We’ll do this and it’ll all be much better.” Trouble is, they never come back to check whether it really is better – or who did better and who didn’t.

We were assured that cutting some rich people’s taxes would, say, create more jobs. The tax cuts go through, but we never hear any more about the jobs. Makes you wonder whether it was just a story we were told.

So, what’s the story with this fabulously desirable thing called productivity?

What we do in the economy is take a bunch of resources – labour, capital, equipment and raw materials – and transform them into a host of the goods and services we use to live our lives. When the output of goods and services grows faster than our input of resources grows – when our production processes become more efficient – economists say our “productivity” has improved.

Which means we’re better off. More prosperous. Believe it or not, our productivity has improved a bit almost every year since the Industrial Revolution. How? Mainly by us inventing better machines, finding better ways to do things and having a better-educated workforce.

It’s this huge improvement in our productiveness that’s given us a standard of living many times better than it was 200 years ago. Our homes, our health, our food, our entertainments and our possessions are far better than they were.

What’s worrying the great and the good is that this process of small annual improvement in our living standards seems to have stalled about a decade ago. They don’t actually know why it’s stalled, or whether the stoppage is temporary or permanent.

But the people at the top of our economy are worried by the thought that, unless we do something, our standard of living may never go any higher. This thought appals them, and they assume it appals us just as much. We’ve got used to ever-rising living standards, and for this to stop would be disastrous.

Well, maybe, maybe not. What no one seems to have observed is that this is a completely materialist view of how our lives could be better. Better goods, better services and a lot more of both.

My guess is that, for the managerial class, more money to buy bigger and better stuff is what they most want. But I’m not sure if that’s what the rest of us want – especially after we’d given some thought to the alternatives.

If an ever-higher material living standard came free of charge, of course we’d all want it. But if it came at a cost – as it’s likely to – we’d have to think harder about the price and what we’d have to give up to pay it.

When the big business lobby groups argue that our productivity has stopped improving because their taxes are too high and the Labor government has introduced too many regulations controlling how they pay and treat their workers, sometimes I think what they’re saying is: we could make you so much richer if only you’d let us make your working lives a misery.

In a recent article for Project Syndicate, Dani Rodrik, a Harvard economist, argues that most working people probably want a good job more than higher pay. “When people are asked about wellbeing and life satisfaction, the work they do ranks at the top, along with contributions to their community and family bonds,” he says.

This is something economists keep forgetting. In their simple theory, work is a pain. And the only reason you do it is to get money to buy the stuff you want. The bad bit is work; the good bit is consumption.

In truth, most of us get much of our identity, self-worth and satisfaction from our jobs. Some people hate their jobs, of course, but that’s the point: they would be a lot happier if they could find a job they enjoyed.

Rodrik adds that jobs can be a source of pride, dignity and social recognition. It’s clear that Australians hugely value having a secure job. One where they don’t have to worry about where their next meal’s coming from. Where they know they’ll be able to keep up their mortgage payments. Where their job classification is permanent, not temporary.

Good pay is nice, but work is about a lot more than pay. Psychologists tell us that job satisfaction is helped by having a degree of autonomy in the way you do your job. A more obvious need is a boss who treats you fairly and with respect. No one wants to work for an idiot who thinks they should treat ’em mean to keep ’em keen.

I have no doubt that all workers want the pleasure of being loyal to their boss and their company. But they have to be receiving loyalty to give it back.

So here’s my radical thought: what if, instead of pursuing an ever-higher material living standard, governments focused on improving Australian workers’ job satisfaction? Would that be better or worse? A good way to lose votes? I doubt it.

It could even be that a more satisfied workforce was more productive.

Read more >>

Roundtable: When they say 'modelling' grab your bulldust detector

The warm-up for next month’s three-day economic roundtable has begun, and this week we’ll start hearing from worthies who know exactly what we should do to improve our productivity. What’s more, they have the modelling to prove it.

Did you see last week’s headline that “Productivity boost would make workers $14,000 richer”? It was attached to the news that this week Productivity Commission boss Danielle Wood will release a report recommending the government overhaul company tax, speed up planning approvals for infrastructure projects and embrace artificial intelligence.

And doing this would lead to Australia’s full-time workers being $14,000 a year better off within a decade, would it? Well, no. That’s not what she said. It was that if our productivity performance could return to its long-term average, then that would translate into every full-time worker being $14,000 a year better off by 2035.

So, there was no actual link between what she wanted us to do and this mere calculation of what a return to the higher rate of productivity improvement in our past would do to our pay cheques in the present.

But even this simple calculation assumes that, should a return to a higher annual rate of improvement in productivity come about, the workers would get their fair share of the proceeds.

My point is, we’re about to hear many worthies proposing we do more of this or more of that particular thing because it will improve the economy’s “productivity” – its ability to turn the same quantity of labour, capital equipment and raw materials into a greater quantity of goods and services than before.

Sometimes they’ll advocate change X because they genuinely believe it would make the rest of us better off, and sometimes it’s just themselves they’re hoping to benefit. But, either way, many of them will try to make their argument more persuasive by producing “modelling” showing how much better off we’d be.

Let me tell you something, the politicians, businesspeople and economists who wave it in our faces never bother to: modelling isn’t all it’s cracked up to be. It can’t tell you much you didn’t already know except the answer to very complicated sums.

It allows to you to say, “if I assume A, B, C ... and K, what would that do to the rate of economic growth, employment and incomes, given that the economy works the way economic theory says it does?”

There’s a class of modelling using “computable general equilibrium” (CGE) models that’s very popular in Australia, though less so overseas. These models are often used to measure the likely effects of a change in government policy or of a proposed major infrastructure project.

It’s a safe bet we’ll be told the results of a lot of such modelling exercises before, during and after the roundtable. Just remember that modelling is more about helping me sell my idea to you than about finding out whether my great idea would actually work and, if so, how well.

The problem with economists is that they’re much more about religious faith than scientific inquiry. Our economics profession’s leading sceptic is Dr Richard Denniss, director of the Australia Institute. Other economists know what he knows and share his reservations, but they keep it to themselves.

With Matt Saunders, Denniss has written a paper on the limits of CGE modelling, which would make enlightening reading for many. “General equilibrium” means the model is designed to take in the whole economy, not just one part of it.

“Part of the persuasive power of CGE models comes from the perception that they contain a large amount of objective mathematics and theory,” they say. But while these models “contain many equations, this is not the same thing as a large amount of objectivity.

“The modeller needs to make decisions about the values of thousands, potentially millions, of model variables. It is not the model that estimates the many inputs for which no good data is available, it is the modeller and the modeller’s client that makes such choices.”

One way of viewing the economy is to say that the growth in real gross domestic product is determined by “the three Ps”: population growth, the proportion of the population that participates in the labour force, and the rate of improvement in the productivity of labour.

With these models, all three of those Ps are “exogenous variables”. That is, the modeller makes their best guess on what will happen to population growth, the rate of participation and the rate improvement in labour productivity, then punches them into the model and turns the handle to see what it says will happen to economic growth, employment and all the rest.

This means modelling can tell us little about productivity. If you had a list of things you wanted to do because you thought they’d improve productivity, the model couldn’t tell you whether each of them really would improve productivity, nor by how much all of them would improve it.

So, for instance, modelling can’t tell us whether cutting the rate of company tax would do more for productivity than, say, doubling government support for research and development. When it comes to productivity, it’s always the modeller telling the model what to think, not the other way around.

The great contradiction of modelling is that, while you have to be really good at maths to run a model, let alone build one, and really good at economics to build one that makes sense, the economy you end up modelling is so grossly oversimplified it’s like a world inhabited by stick figures.

Unlike all the people happily quoting modelling results to us, Denniss and Saunders tell us that, although these models spit out many numbers with dollar signs in front of them, there is no actual money in the model, no interest rates, credit, loans or savings.

The models usually assume that inflation has no effect on the real economy, most assume that the profits in each industry are minimal because competition competes them down, and capital equipment can be repurposed at no cost.

It’s fortunate for economists that their profession has never worried too much about ethics.

Read more >>

The ABS just had to bin some statistics. Here's what went wrong

By MILLIE MUROI, Economics Writer

Within the world of chaos and uncertainty that economists – and, in fact, many of us – constantly work, the Australian Bureau of Statistics is usually a comforting presence.

Like clockwork, at 11.30am most weekdays, the national bureau releases the latest wave of data: everything from what’s happening in our jobs market to how much prices have risen and how many houses are being built.

These are key numbers that the Reserve Bank uses to set interest rates, politicians use to inform policy, and that we use to hold the government to their word.

So when the bureau declared last week that it would not be releasing statistics from its latest survey of income and housing this year, it came as a bit of a shock … at least to the nerds (myself included) keeping a close eye on the bureau’s homepage.

And it’s actually bad news for everyone.

In a statement to the media, the bureau said this particular set of data – from a 2023-24 survey – failed to meet its high standards.

“While we were compiling the statistics … we found serious shortcomings in the questionnaire design and data collection processes that we could not overcome, despite our best efforts,” deputy Australian statistician Dr Phillip Gould revealed.

It might not seem like a big deal. But it means one of our best trackers of income, housing costs such as mortgages and rent, assets and liabilities such as property, motor vehicles, investments and credit cards – from 30,000 households across the country – has essentially been thrown out the window.

Wasted data is never good. And it’s especially painful during a housing affordability crisis when we need the information to formulate good policies.

And it’s especially a problem given we haven’t had an update to this particular set of statistics since 2019 because of disruptions during the pandemic – and won’t get an update until at least 2027 given the lag with which the results are released.

So, what exactly went wrong?

First, it’s worth noting that the bureau (also known as the ABS), is not alone in some of the hurdles it faces. National statistical organisations around the world are finding it increasingly difficult to collect information from households.

The UK’s statistics agency – the Office for National Statistics (abbreviated to the less, or perhaps more, fortunate ONS) – has had to start fixing some of its “virtually unusable” employment figures as well as some of its data on inflation and trade. Experts have warned these issues have left the UK’s central bank, the Bank of England, “flying blind”.

The problem with its employment data mostly came down to the response rate which plummeted to 17 per cent at its lowest point. Jonathan Portes, an economist at King’s College London, said UK households had become more reluctant to respond to surveys – an issue that worsened during the pandemic.

But he also flagged years of tight budgets and low pay for the office’s statisticians compared with private sector peers as further possible factors in the falling quality of the data.

Independent economist Nicki Hutley says the bureau – which in 2023-24 received about $417 million in government funding – is probably also not adequately funded.

“It would be great if we had a properly resourced bureau that could make sure that it was able to do things in ways that it was comfortable,” she says.

While a spokesperson for the bureau said the overall response rate for the survey of income and housing was “acceptable”, they said the mix of responses was not representative of the population.

There are a few reasons for that, including that people now prefer to interact with the government online, at a time that suits them, with some people being especially difficult to reach.

That’s driving up the cost of conducting these surveys because households are becoming less available and willing to engage, the spokesperson said: “[This] means field interviewers may need to make more frequent contact attempts, including in-person visits, to households.”

While the bureau says it generally receives excellent cooperation from households, it can legally direct people to provide information.

Besides being more annoying and knocking on more doors, the spokesperson said the bureau would make it easier for households to participate in surveys by improving the design of surveys and the ways in which they could offer help and receive feedback.

In December last year, the government committed $98 million over four years for the bureau to improve how it collects data and interacts with Australians, including improving the digital experience for key surveys.

But the bureau has also learned some lessons. It will, for example, monitor response rates more closely and frequently so that it can intervene earlier if the data isn’t looking up to scratch – and therefore avoid having to bin all the findings at the end.

It has also set clearer targets to allow for better tracking of the results as they come in.

While the bureau didn’t point to specific issues with the design of its 2023-24 survey, its spokesperson said some wording of questions had been changed from previous years.

When it came to changes to its 2025-26 survey of income and housing, the bureau undertook “extra user testing”, testing updates with the Australian public more vigorously before sending the survey out widely.

That testing was aimed at more carefully checking the public’s understanding of the questions to make sure it aligned with the things the bureau wanted to measure, and looking at how people worked their way through the survey forms to make sure they were easy to use but collected the necessary information.

While Hutley says the missing data is not catastrophic, she says it is pretty painful.

“A lot of people might think that this is not necessarily significant because there are other indicators that are available and some workarounds for some things, but there’s certainly things you can’t do, and this data gets used for an awful lot of research, especially around things like income inequality which is a growing issue in Australia” she says.

“Being told, ‘well, we’re not confident in the series’, is a little bit concerning.”

It’s also a problem given the data is meant to be an ongoing measure that allows changes and conditions to be tracked over time.

In a comment on LinkedIn, UNSW professor of housing research policy, Hal Pawson, said the missing data, which is supposed to be updated every two years, was a “shocking slip-up” by the bureau.

“This survey provides invaluable official data on rental affordability and housing under-utilisation, as well as on broader topics including the distribution of income and wealth,” Pawson said. “A data series that should be refreshed every two years will be badly damaged by a gap of at least five years [since the last release].”

Although this particular oversight may not be the end of the world, it will have consequences, and it’s an issue the bureau will be acutely aware of for some time.

As the census, the biggest survey of them all, enters the testing phase before its five-yearly distribution in 2026, the stakes will be even higher. That survey is one the bureau can’t afford to get wrong – or ghosted on.

Read more >>

Cutting HECS debt is not the best way to help young Australians

It may seem an age since the federal election, but the new parliament has just convened for the first time. Anthony Albanese will be giving top priority to enacting his election commitments – “an honest politician? Really?” – and starting with his promise to cut uni graduates’ HECS debt by 20 per cent.

Unsurprisingly, the promise was popular, meaning the Coalition and the Greens won’t want to make themselves unpopular by blocking the cut in the Senate. In any case, the Greens’ policy is to abolish uni fees – a fairyland promise that’s easy to make when you know you’ll never have the numbers to keep it.

But just because a cut in graduates’ debt is popular doesn’t necessarily make it good policy. Is it? No and yes.

HECS – the higher education contribution scheme – now called HECS HELP because some imaginative smarty thought of adding the moniker “higher education loan program”, began life 36 years ago as an eminently fair and sensible way of helping the government afford to provide university education to a much higher proportion of our youth.

Over the years, however, successive governments have stuffed around with it, making it less generous and less sensible. So something needed to be done, but simply cutting the size of graduates’ debts doesn’t really fix the problem.

It’s clear that being provided with a uni education gives a young person a great private benefit: a lifetime of earning a wage usually much higher than most non-graduates earn. So it’s fairer to non-graduates to ask graduates to contribute towards the cost of their education.

It’s also true, however, that those taxpayers who don’t benefit from higher education still benefit from being able to work in an economy alongside more highly skilled workers. This “public benefit” justifies not requiring graduates to pay anything like the full cost of their education.

But the trouble with bringing back uni fees was the risk that it could deter bright kids from poor families from seeking to better themselves. This is where the designer of HECS, Bruce Chapman, an economics professor, came up with a brilliant Australian invention, the “income-contingent loan”, which should be up there with the Hills Hoist and the stump-jump plough.

You don’t pay the tuition fee upfront – the government pays the university on your behalf, and you repay the government. But, unlike any commercial loan you’ll ever get, when you to have start repaying, and the size of your repayment, depend on how much you’re earning. So, in principle, you should never be paying more than you can afford.

You don’t pay interest on the loan, but the outstanding balance is indexed to the rate of inflation – which, to an economist’s way of thinking, means you’re paying a “real” interest rate of zero.

If you never earn enough to be able to repay the loan – say because you become a monk – you never have to pay the loan back. That’s by design, not accident.

Trouble is, successive governments have not only made the scheme less generous, the post-COVID inflation surge has added greatly to people’s HECS debts. Debts have become so big they reduce the size of the home loans banks are willing to give graduates.

Worse, in the name of encouraging young people to take supposedly “job-ready” courses such as teaching, nursing and STEM (science, technology, engineering and maths), in 2021 the Morrison government reduced their annual tuition fees, whereas fees for courses such as business, law and the humanities were greatly increased.

Fortunately, this half-brained scheme did little to change students’ choices, but did mean abandoning the previous arrangement in which the fees for various courses were geared roughly to the size of the salaries those graduates were likely to earn.

The cost of an arts degree is now about $17,000 a year, or a massive $50,000 for the full three years. So it’s people who have studied the humanities who now have debts quite out of whack with their earning ability. Smart move, Scomo!

Albanese’s 20 per cent cut in debt levels will do little to fix this crazy misalignment of fees with future earning potential. The cut will have a cost to the budget of about a huge $16 billion in theory, but more like $11 billion when you allow for all the debts that were never going to be repaid anyway.

By making it a percentage cut rather than a flat dollar amount, too much of the benefit will go to highly paid doctors and lawyers. And, in any case, of all the young adults having trouble with the cost of living in recent years, those on graduate salaries are hardly the most deserving.

On the other hand, at a time when, justifiably, the young feel the system has been stacked against them, I can’t be too disapproving of Albo’s flashy measure to help keep the younger generation’s faith that, in the end, the democratic process will ensure most age groups get a reasonable shake.

The young are right to feel bitter about the way earlier generations have enjoyed the ever-rising value of their homes while allowing the cost of home ownership to become unreachable for an ever-growing proportion of our young. And that’s before you get to other features of our tax and benefits system that favour the old.

Thankfully, the government is making the rules for HECS repayments much less onerous, making them work the same way as the income tax scale. The minimum threshold for repayments will be raised from income of $56,000 a year to $67,000. Your income between $67,000 and $125,000 will require a repayment of 15 per cent, and 17 per cent on income above that.

This will yield significant savings to those with debts. But, of course, the lower your repayments, the longer it will take to clear your debt and the more your outstanding balance will be indexed for inflation.

The government’s changes offer justice of a kind, but the rough and ready kind.

Read more >>

How Chalmers can fix the budget despite stagnant productivity

As if Treasurer Jim Chalmers didn’t have a big enough problem trying to improve the economy’s productivity, we now know Treasury has privately reminded him he’ll need to find additional tax revenue and reduce government spending to keep the budget “sustainable” – that is, to stop the government’s debt getting a lot higher.

Some of the measures he’d like to take to get the economy’s productivity improving could involve reducing certain taxes but, with the budget already overextended, he can’t afford them. He’s had to stipulate that all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.

This suggests productivity improvement and budget repair will need to be kept in two separate buckets. If so, Chalmers will probably end up avoiding tax changes and sticking to reforming the regulation of certain industries, which would have little cost to the budget.

But some measures to improve productivity may lead to increased tax collections. If so, it may be better to put together a big package of interlocking measures that together would help improve both problems.

The successful reforms of the 1980s involved big packages, with their size actually helping to reduce opposition to them. When you propose reforms one at a time, those who lose from the measure can make such a fuss that the government decides it’s not worth insisting.

But you can put together a package so big that most industries and individual taxpayers would gain something as well lose something. So if I oppose the package because of my loss, I put my gain at risk. And not only that; I get a lot more pushback from the many groups and individuals who see themselves as net winners from the package.

Even so, if I were Chalmers and cuts in government spending were needed, I’d tread carefully. The independent economist Saul Eslake sees government spending likely to be about 2 percentage points of gross domestic product higher in coming years than it averaged over the 40 years before COVID.

In contrast, the former top econocrat Dr Mike Keating thinks that to balance the budget while making adequate provision of government services will leave a gap to be filled of about 4 per cent of GDP.

We know from the voters’ frighteningly hostile reaction to the big spending cuts proposed by Tony Abbott in the 2014 budget that proposals to slash government spending are delusional. Voters want more services not fewer.

But smaller, more carefully considered spending cuts ought to be possible. Years of performance audits by the federal auditor-general have revealed how common it is for particular spending programs to be failing to achieve their stated objectives.

Trouble is, it’s just as common for such programs to roll on with only superficial efforts to fix their ineffectiveness. That’s partly because even programs that aren’t working still put money in the hands of their recipients, who will fight hard to keep their money coming.

What’s more, the people who earn their living delivering ineffective programs – the public servants and private-sector providers – have little interest in changing the status quo. The truth is, the auditor-general’s performance audits reveal a public service that doesn’t put enough effort into ensuring taxpayers are getting value for money.

This may be because, under previous governments, public service numbers were run down, and more money spent on expensive private sector consultants, none of whom had any great interest in ensuring government spending delivered the expected benefits.

Another part of the problem was the many failings of the grand experiment of attempting to increase “efficiency” by transferring the provision of public services to private businesses. Too often, the private businesses did what came naturally and sought to maximise their profits at the expense of a government driven by ideology – “public bad/private good” – rather than common sense.

The governments’ neoliberal delusions stopped them remembering to make sure the remaining public servants managed all the private businesses to stop them overcharging and underdelivering to a customer they regarded as an easy cop. Meanwhile, the remaining public servants went into a sulk, watching the private providers rip off the government, but not bothering to tip the pollies off.

The point is, while it’s idle to imagine governments can simply slash spending on public services, there’s solid evidence that much money is being misspent. So there is scope for reducing spending on particular programs without great loss to voters.

Just stop spending on programs that aren’t achieving their stated objectives. Governments should try a lot harder to reduce waste, and the public service should be made to see that alerting their political masters to instances of waste is a big part of their job.

Reducing wasteful spending matters also because voters’ misperception that most of their taxes are wasted is a big part of their justification for opposing increases in tax. It strengthens the argument so many pollies are afraid to make: “Guess what? If you want more and better government services, you’ll have to pay for them.”

But if I were Jim Chalmers, I wouldn’t consider simply increasing the rate of taxes such as the goods and services tax before I’d tackled the “waste” in the existing tax system. The people – usually the well-off – and industries that should be paying more under the present arrangements but aren’t, thanks to deliberate exemptions or inadvertent loopholes. Picking off the undeserving should cost fewer votes than just whacking up the tax on the unfavoured majority.

As Treasury told Chalmers, the first place to look for higher revenue is the superannuation tax concessions, which offer the well-off (including me) huge scope to minimise the tax they pay. The well-off get a much higher proportion of their income from sources other than wages, sources that are taxed far more lightly.

So, as Saul Eslake says, much extra revenue could be raised by reducing the 50 per cent tax discount on capital gains, curbing negative gearing, taxing trusts as though they were companies, and taxing payouts from super. And that’s before you get to the hugely undertaxed mining industry.

Balancing the budget wasn’t meant to be easy, but less politically risky solutions are there if you hunt them out.

Read more >>

Like ChatGPT, we need clear goals and rules - on the environment

By MILLIE MUROI, Economics Writer

If there’s one thing that ChatGPT has taught us, it’s that what we get from it is heavily dependent on the goals we set and the boundaries we spell out for it.

The chatbot is not always predictable (and sometimes outright wrong), but it often works much better when we give it specific targets and clear confines to work within.

We humans are remarkably similar. Most of us like to think we make good decisions with the information we have. We even have a field that looks at optimising our choices: economics.

Yet, we make plenty of bad decisions daily and, when it comes to the environment, over many decades, despite knowing better.

It’s why former Treasury secretary Ken Henry, who led possibly one of the best-known reviews of the Australian tax system, is so furious.

He has previously described our failure to manage our natural resources as an “intergenerational tragedy”, “intergenerational theft”, and a “wilful act of intergenerational bastardry”.

“I guess I’m in danger of running out of printable descriptions to convey the gravity of the situation,” he admitted in a speech to the National Press Club this week.

It was in this speech, too, that Henry pointed out why we seem to be failing so badly at protecting our environment.

Opposition Leader Sussan Ley and Social Services Minister Tanya Plibersek – both former environment ministers – have spoken about the need to fix our national environment laws.

And, after an independent review led by the former chair of the competition watchdog Graeme Samuel recommended a series of big reforms in 2020, both ministers – from opposite sides of the political fence – promised to act on them.

“Yet here we are, in the winter of 2025, and nothing has changed,” Henry points out.

That’s despite the clear warning signs and relatively broad support for such change.

Could it be that political focus has shifted to the economic issue of the day? Treasurer Jim Chalmers, having moved past inflation, has made it clear the government’s second term will be focused on boosting the country’s lagging productivity growth. Never mind the existential issue we face.

But as Henry points out, even if productivity is our focus, no reform is more important to the country’s ambition to pump out more of what we want (with less work hours or materials) than environmental law reform. “If we can’t achieve [that], then we should stop dreaming about more challenging options,” he says.

There’s been no shortage of activity on environmental reform – from policy papers to bills and endless rounds of consultation – yet little to show for it.

Henry rejects the idea that this “policy paralysis” comes down to a conflict between climate warriors and those wanting to charge ahead with economic growth. If this were the case, then why, he asks, is the pace of environmental damage speeding up at the same time our economy is stagnating?

Henry acknowledges reforms won’t be easy. Businesses and politicians are good at seizing moments of uncertainty when new changes are floated to send those changes to the graveyard.

For some, he says, the stakes are high: “We have whole industries with business models built on the destruction of the natural world.”

But we’ve done hard things before. And Henry points out it’s now or never.

While Prime Minister Anthony Albanese and his team won’t want to hear it, changes have to be made within this term of parliament.

The Labor Party may have been swept into a second term in power with a huge majority despite doing little to improve environmental laws. However, the growing national vote for the Greens is solid proof that voters have more appetite for environmental reform than the major parties have been serving.

Many of these reforms are clear and supported by a wider range of people with different interests.

So, what reforms are we actually talking about?

Well, Graeme Samuel’s review made 38 recommendations. But a big focus was on fixing what’s known as the Environment Protection and Biodiversity Conservation Act, which Samuel said was complex, cumbersome and essentially powerless.

Samuel’s suggestions ranged from introducing a set of mandatory National Environmental Standards and enforceable rules to apply to every environmental decision made around the country. These standards would be detailed, based on data and evidence, use clear language and leave very little wriggle room.

He also recommended wiping out all special exemptions and moving from a species-to-species and project-by-project approach, to one that focused on the needs of different regions: areas that shouldn’t be developed, those needing to be revived, and those where development assessments could be waved through more quickly.

This would help give businesses greater certainty, but also help us overcome one of our biggest shortcomings.

Because nature is so vast, when we assess the negative environmental impact of one project at a time, it will often seem tiny and irrelevant. That leads us to underestimate the environmental damage we are allowing over time, especially in particularly vulnerable ecosystems.

The remarkable thing is that Samuel’s recommendations were – and still are – widely supported by both business and environmental organisations.

Yet, there has been no movement five years on.

That’s a problem because there are plenty of big projects we need to get cracking on: huge investments in renewable energy generation and the government’s ambitious target of building 1.2 million homes by 2030.

In 2021, assessment and approval of a wind farm or solar farm blew out to 831 days – up from 505 days in 2018.

And between 2018 and 2024, 124 renewables projects in Queensland, NSW and Victoria needed to be assessed under the Environment Protection Act. Only 28 received a clear “yes” or “no” answer.

There could also be a way to give accreditation to state and territory decision-makers if they proved they could protect the national interest. That would remove the double-ups and complexity in approvals processes, and cut down the time taken to assess development proposals.

Of course, developers have stressed the importance of the types of reforms which fast-track development, while environmentally-focused groups have pushed for more focus on new protections.

Samuel also recommended an expert, independent and trusted decision-maker, in the form of a national Environmental Protection Authority, to work with the government to protect the national interest.

Us humans are full of shortcomings, but by recognising them and changing the frameworks we work with, we can improve the way we look at our choices and make decisions.

One of our problems is that, under the current Environment Protection Act, we tend to undervalue the environment. Part of that, as we’ve discussed, comes down to the vastness of nature (which needs to be matched by a broader regional lens, rather than our project-by-project approach).

The other is our short-sighted view. Because the cost of damaging nature is overwhelmingly shouldered by future generations, Henry points out we have found it very difficult to stop ourselves stealing from the future.

Like bad eyesight, these issues are not unsolvable. We just need clear goals, rules and accountability measures to keep us on track.

As Henry puts it, economics is concerned with optimising choices. That requires carefully defining what we’re wanting to achieve and, just as importantly, determining the constraints that shape the choices we’re incentivised to make. “If the constraints are mis-specified, then decisions will be suboptimal,” Henry says.

Unlike ChatGPT, we can set our own rules and guardrails. But we must choose – and act on – these ourselves before the damage we do forces limitations on us against our will.

Read more >>

Trump wants us to spend a bomb on defence. Why exactly?

While I was on holiday, I had a kind of nightmare: suddenly, every rich country in the world – including us – is vowing to spend many billions more on defence each year. This will cost taxpayers an absolute bomb. Why exactly are we doing this?

Has some new existential threat to each of the countries emerged? Or is the fear that a few countries may come under foreign invasion but, since we don’t know which few it will be, all of us are arming ourselves to the teeth just in case?

Let’s assume we spend these many trillions on armaments rather than lesser worries such as health, education and climate change, and nothing untoward occurs. Will this prove the money was well spent, or that it was a complete waste? We stocked up for a party, but no one came. We’ll never know.

Unsurprisingly, this strange behaviour was in response to a pronouncement of Donald Trump, who told us and his other presumed allies we should no longer rely on America’s defence shield, but spend more on our own security.

Initially, his demand was for us to increase our spending from 2 per cent of national income to 3 per cent, a rise of about $28 billion a year. This would swell defence spending by more than half, with the increase almost as much as federal spending on public hospitals.

But then Trump’s Defence secretary, Pete Hegseth, said the countries of South-East Asia should boost their spending to 5 per cent of national income.

The European members of NATO have been told the US will be shifting forces away from Europe, so they should greatly increase their own spending. They’ve agreed to increase it to 3.5 per cent. In Britain’s case, that would be up from a bit more than 2 per cent.

It’s remarkable how few people have remarked on what a strange way this is to decide how much more needs to be spent. You’d think the defence people would decide it based on the cost of the extra weapons and programs they judged to be needed to complete our security.

Assessing it as a fraction of national income makes you wonder if the goal is spending for spending’s sake. Or maybe they’re planning to fire decimal points at the enemy.

But who is the enemy? Which is the country preparing to invade us? We keep being told the world has become more threatening but, from our perspective, I don’t see it. It may be true that there are more wars at present, but how do they threaten us?

There’s been another breakout in the Middle East, but how are we affected? How’s it going to spread as far as Oz? Or do we need to increase our capacity to intervene on the side of the Palestinians?

Then there’s Russia’s long-running attempt to take over Ukraine. Not going too well and, it seems, a great drain on Russia’s ailing economy. Europe has lived in fear of attack from Russia since World War II – that’s what NATO used to be about.

But let’s assume Russia’s glorious victory over Ukraine is near at hand. Will they lose no time in moving in on some other country? And even if they were, how high would Oz be on their little list?

Maybe the Indonesians could turn on us at any moment? Ah no, to the truly paranoid among our defence experts, the imminent threat is China. Those baddies could be coming after us at any moment. And the proof? China is building up its military. What other possible reason could there be for this than their desire to invade us?

Well, I can think of a few. Maybe they’re doing it because, if you want to be a superpower, you need to impress people with the size of your army. Take the US. It likes to intervene in other people’s wars, but no one thinks it’s gearing up to take over any other country (barring Canada and Greenland, of course).

So why does the US spend far more on defence that many other countries combined? Because that’s what superpowers do.

Of course, China might be building its defence forces because it’s readying for a war with the US. And maybe the US is staying strong for the same reason. If so, that’s a reason for us to keep well out of the way, not for us to increase our own defences.

It’s worth noting that Trump’s instruction to his erstwhile allies that they’ll get less protection from the US and should shoulder more of the burden of their own defence has involved no reduction in America’s own spending.

Trump being Trump, maybe what he’s after is for us and the other allies to spend more on buying defence equipment from US companies.

Here’s a thought: does having every country armed to the teeth deter war, or make it more likely?

And here’s another: in the hugely unlikely event that the Chinese were coming down to take us over, how could we possibly have a military big enough to stop them?

What gets me is the ill-disguised glee with which our defenceniks – most of them with a vested interest in greater defence spending – accepted without question or justification that our spending must be greatly increased.

Why has there been so little discussion of how any extra spending would be paid for? When our richest woman, Gina Rinehart, opined that our spending should be increased to 5 per cent of national income, I wanted to ask her how much of that she was offering to pay.

I don’t think Anthony Albanese will be taking orders from Trump on this. But to the extent that, without thinking, we do increase defence spending, we’ll all be paying higher taxes. Unless, of course, we borrow it all and leave the bill for our offspring to pick up.

Read more >>

If the RBA is muddled on interest rates, we'll suffer from its fumbling

Taken in isolation, the decision last week by the Reserve Bank’s new interest-rate setting committee to defy all expectations and delay a cut in the official interest rate of a mere quarter of a percentage point, by a mere five weeks, is neither here nor there. Even so, the fuss it has caused damages the Reserve’s credibility – “do these guys know what they’re doing?” – and thereby its ability to manage the economy successfully.

And the coincidental timing with the first application of the new rule that the Reserve publish the numbers of committee members voting for and against – a supposed reform intended to encourage greater debate before such decisions are made – won’t help the Reserve convey confidence that it’s charting a steady course to peace and prosperity.

It was obliged to reveal that while six board members wanted to delay a rate cut, the other three wanted to get on with it. I don’t have any doubt that the six included governor Michele Bullock and her deputy, Andrew Hauser.

And, though I have no inside information, it wouldn’t surprise me if the new Treasury secretary, Jenny Wilkinson, was among the dissenters. Why? Because her predecessor, Dr Steven Kennedy, quietly made it clear in a succession of speeches that Treasury saw no reason for the Reserve’s great fear that wage growth could explode at any moment. (In passing, note that the recent changes to the Reserve’s Act make it clear that, while the Treasury secretary’s seat on the board is “ex officio”, he or she acts in their individual capacity, and cannot be directed by the Treasurer.)

The Reserve’s insistence on delaying the next rate cut – based, apparently, on the flimsy argument that the inflation figures for the month of May may have somewhat overstated its rate of fall – came at a most inauspicious time.

While Trump’s erratic pronouncements are adding greatly to uncertainty – prompting consumers and businesses to delay making big new spending commitments – the last thing the authorities should be doing is adding to it. By this silly decision, the Reserve has shaken the faith of the financial markets, businesses and households in its predictability and desire to steer a steady course to low inflation and higher growth.

Not that this means I have much sympathy for the red-faced participants in the financial markets and the media. They’re just playing their own games for their own commercial reasons. The reason the financial markets are so obsessed by predicting whether the Reserve will or won’t jump at its next rate-setting meeting is that they place bets on the outcome.

So a different headline for stories about the unpredictable decision is: 100-to-1 outsider wins the Reserve Bank Stakes at Martin Place on Tuesday.

As for the media, we have no shame. We use the financial markets’ placement of bets, plus the business economists’ opinions, to pander our customers’ insatiable desire to know what the future holds. Psychologists explain our addiction to forecasts as part of humans’ delusion that, if only we can know the future, we can control it.

When the media’s prediction that the Reserve is almost certain to cut interest rates on Tuesday proves to be dead wrong, the media’s not embarrassed, it’s excited. The routine rates story has suddenly got a lot more interesting. Two stories for the price of one.

It doesn’t do a lot for the media’s credibility, of course, just as the Reserve’s needless unpredictability is ill-judged at a time when the greatest threat to the economy is uncertainty and the suspension of spending intentions, particularly by business.

The fact is that our economy’s recent growth is weak. Hesitant. The risk that the economy will wallow, far exceeds the risk that inflation will take off. The message the Reserve needs to be getting through is: “Good news. Inflation’s coming down and so are interest rates, so now’s the time to look to the future with confidence. Don’t be the last to clamber onto the expansion train”.

Part of the economy’s hesitance is explained by the news that people with mortgages aren’t using the fall in interest rates to reduce their mortgage payments. In which case, the fall in interest rates isn’t strengthening consumer spending as much as could have been expected.

Particularly because of Australia’s unusual prevalence of variable-rate mortgages, the use of higher interest rates to fight inflation puts most of the burden on people with big mortgages. This is not only unfair, it’s inefficient: the two-thirds of households without mortgages are under little pressure to reduce their spending. So those with mortgages have to be hit all the harder to achieve the desired reduction in overall demand for goods and services.

It may be that people with mortgages have been hit so hard in recent years that, rather than using the lower interest rates to increase their spending, they’ve decided to leave their mortgage payments unchanged to reduce their exposure to those unfeeling blighters in Martin Place. If so, that’s a strike against our use of the manipulation of interest rate to smooth the growth in demand.

Readers’ letters to the editor of this august publication strongly supported the Reserve’s decision not cut rates. Huh? It’s easily explained. People with their homes paid off, and their savings held in fixed-interest bank deposits, gain when rates rise and lose when they fall.

This is another strike against the use of interest rates to fight inflation and smooth demand. When rates rise to discourage people with mortgages from spending on other goods and services, they actually encourage the retired to spend more. So the negative effect on the spending of people with mortgages is partly offset by its positive effect on the spending of the retired.

Maybe one day we’ll wake up and find a better way to manage the strength of demand. Meanwhile, we’ll suffer from the Reserve’s reluctance to stop fighting the last war against inflation and start fighting the next war against uncertainty and weak growth in the economy.

Read more >>

We should be paying more for our energy. Here's why

By MILLIE MUROI, Economics Writer

Very few people would agree if I were to say our energy bills should be higher. But what if I told you you’re already paying more than the number you see written on your bills every quarter?

Those relying entirely on renewable energy sources such as the sun to power their homes might think they’re spared. But even the most environmentally conscious among us are paying a higher price than what we see on paper.

Of course, as Rod Sims, former chair of the country’s competition watchdog and Superpower Institute director, said in a speech last month, we couldn’t have gotten where we are without fossil fuels. Coal, oil and gas have helped propel us from city to city, country to country, and even earth to moon. Most of our day-to-day activities would be much harder – if not impossible – without them.

But Sims points out there is no contradiction between enjoying what we have and wanting the world to move away from fossil fuels as fast as possible.

The problem is, humans are generally quite good at procrastinating. Despite the deadline to hit net zero emissions looming closer and clearer, we seem better at ignoring the threat of irreversible climate change than acting on it.

But as economics professor Ross Garnaut puts it, we did not move from the Stone Age because we ran out of stones. We have something to learn from our ancestors’ drive to do things better.

There are a handful of people who still deny the science behind climate change. But there are also plenty of sensible people with reasonable concerns about the best way forward for Australia. Sims outlines several of these worries and why we shouldn’t let them get in our way.

First, the concern that the rest of the world is not moving to net zero, so Australia taking action is pointless.

But just because everyone else is sleepwalking towards a cliff, it doesn’t mean we should follow. In fact, it’s a good time to walk in another direction. It’s also a myth to say no one else is trying or that we’re all lacking in ambition.

As Sims points out, we often hear about China building coal-fired and nuclear electricity generation facilities at a mind-boggling scale. But last year, about 80 per cent of China’s 429 gigawatts of new electricity-generating capacity (roughly enough to power 322 million homes) was solar and wind powered.

And the European Union has had enough appetite (or perhaps courage) to introduce a price on carbon.

Second, some people claim Australia only accounts for about 1 per cent of world emissions, so it doesn’t matter what we do.

The clear moral argument is that we should still play our part. But Sims also points out that when we include exports (Australia is the biggest supplier of coal and gas combined in the world), our contribution to emission is more than three times higher.

From an economic perspective, we’re also throwing away what’s called our “comparative advantage”. That is, because of our nearly bottomless supply of solar and wind, and our relatively small population, we’re actually able to generate clean energy at a lower cost than most other countries – and sacrifice far less in terms of other things we could be doing with our time and resources.

Countries such as China, Japan, South Korea and India face a growing shortage of low-cost green energy to run their economies, meaning there’s a big opportunity for Australia to step in as a supplier.

But Australia also has a chance to step up as a maker and exporter of goods such as iron and steel.

Right now, despite Australia having the ingredients – huge amounts of iron ore, the coking coal needed to turn the iron ore into iron (the metal), and the thermal coal and gas to power the whole process – most of our iron ore is shipped out to, and turned into iron and steel in, north-east Asia.

That’s because all these ingredients are fairly cheap to ship and north-east Asia can produce things at a scale – and therefore low cost – we can’t match.

But as green iron becomes more crucial in the quest for a net zero world, the costs of producing the stuff will change.

The renewable energy needed to create green hydrogen (the replacement for coking coal), and to power the process (instead of thermal coal) are expensive to export – as is green hydrogen. Sims notes exporting coking coal only adds about 10 per cent to the cost of producing iron, while exporting hydrogen instead would just about double the cost.

Rather than sending off all the ingredients, Australians could (and it will make more sense to) make the entire green product here ourselves. What we do now to build this capability will matter hugely – for ourselves, and for the world. By some estimates, Australia producing intensive green exports could slash world emissions by up to 10 per cent.

Third, some people ask why Australia can’t use nuclear energy or carbon capture and storage rather than renewables such as solar and wind power.

The Liberal Party’s resounding defeat, while not purely down to their nuclear policy, was a sign the political appetite is just not there for nuclear. But nuclear and carbon-capture techniques are also very costly.

“Of all the nuclear plants built since 2000 in countries such as the USA, the UK and France, projects have been much delayed and costs have around tripled those first estimated,” Sims points out. “Nuclear energy costs are now three to five times that of firmed renewable energy.”

The possible exceptions to this trend – South Korea and China – have more opaque costings for nuclear and have been helped along by heavy government subsidies.

While carbon-capture costs haven’t yet fallen enough to be a realistic option in most circumstances, and nuclear costs have continued rising, the cost of solar, wind and batteries has fallen rapidly. Solar power in particular could, over the next decade, offer electricity at half the cost of the cheapest available today.

The fourth issue people raise is that green products are expensive. But that is only if you ignore the cost of climate change. The harm to our environment and the possibly irreversible change to our planet are costs that are not reflected in the price we pay for products and energy generated using fossil fuels.

People living in floodplains and farmers facing longer and worse droughts might see these costs most directly, but many of us don’t see it in our everyday lives.

Putting a price on carbon helps to capture this cost. It might drive up the price of some of our goods and services – especially over the short term – but it helps reflect the full consequences and guides businesses and customers to push for cleaner alternatives.

The government providing subsidies – such as payments or grants – to generators of renewable energy and makers of green products could also achieve a similar aim.

Just as gas and minerals have played a huge role in Australia’s economic development, so can exporting green energy-intensive goods. Research by the Superpower Institute’s research lead Reuben Finighan shows the potential export revenue from these goods could amount to roughly the same size as all Australia’s current exports put together, and six to eight times larger than the country’s combined coal and liquefied natural gas export revenue.

That’s if we invest about 5 per cent of our economic output – or gross domestic product – every year for the next few decades. It’s another bill to foot, but as Sims points out, about the same level of investment as when Australia leapt on the Chinese minerals boom two decades ago. We’ve done it before so we can do it again.

Read more >>

How Canberra's favourite book might help my hunt for a first home

By MILLIE MUROI, Economics Writer

Anyone who has rented (or knows a renter) knows the woes of living on someone else’s terms: unresponsive landlords, rent hikes and the threat of getting evicted despite doing everything right. There’s also the bitter aftertaste of effectively paying off someone else’s mortgage – or simply topping up their bank balance while watching your own dwindle.

Recently, I’ve started looking for an exit – or rather an entry. House and unit price growth across most of our capital cities has slowed recently, but they are still steadily climbing, meaning many home owners continue to watch their wealth grow. That’s made it harder for many first home buyers to get a foothold in the housing market, but I’m also increasingly getting the sense that I’m missing out on boarding the growth train so many people seem to be on.

Between inspecting some properties this week (as a hopeful home buyer rather than a renter for the first time), I started chewing through a copy of the book finding its way onto the bedside tables of our top decision-makers and their staffers.

Two American journalists, Derek Thompson and Ezra Klein, have lit a bit of a fire under the seats of left-leaning governments – and lefties more broadly – with their new book: Abundance.

While both ends of Australia’s political spectrum have zeroed in on housing affordability recently, those on the left have generally believed in the power of government to look after people, including yanking housing back into the reach of everyday Australians.

Thompson and Klein have plenty of qualms about the political right, too. But their speciality lies in getting lefties around the world to reflect on ways they might be letting good intentions get in the way of solving some of our most pressing problems. Chief among them? The housing crisis.

Why, when we’ve become better and faster at doing so many things, have we seemed to become slower at building one of the most basic necessities of life? And why is homeownership stuck at such low rates?

There’s no shortage of answers – many of which help to explain part of the problem. But the big one, write the American duo, is this: the thicket of red tape we’ve wrapped ourselves in.

Abundance brings a fresh left-wing twist to a topic often seen as a buzzword of the right-wing anti-government crusade.

A lot of our regulation has important aims: protecting the environment, making sure workplaces – including construction sites – are safe, and stopping that big company from setting up a huge, noisy factory right next to your house.

When businesses need to comply with hundreds of rules at federal, state and local levels on where and how houses are made, it becomes a hugely time-consuming process that not only slows down construction but discourages would-be developers or builders from giving it a go.

It’s like trying to send a truck to a flood-affected region, stocking it up with so much stuff – medicine, sandbags, food, tools, life vests – that it takes weeks or months to get there. You might get all the important aid there, but it will take so long it may have been better to leave some things behind.

The Productivity Commission warned this year that Australia is building half as many homes for every hour worked compared with three decades ago. Among the biggest handbrakes? Planning regulations have increased markedly and can run into thousands of pages.

This “unambiguously” jacks up the cost of development and construction, and ultimately the cost of housing for Australians, the commission’s experts said.

Even when all existing laws are met, minor objections from residents can cause delays to housing projects. And some regulations, as my colleague Shane Wright pointed out last week, just seem arbitrary: a bedroom by Victorian standards, for example, is not liveable if it’s not at least 3 metres by 3.4 metres in size.

This build-up of regulation and processes comes with several costs. Economists are especially obsessed with one otherwise invisible problem called “opportunity cost”: essentially what we give up or miss out on by taking a certain path.

If you buy a boat, you can’t use that cash to get a new car or renovate your house. Life, and economics, is about trade-offs.

By having lots of regulation, we might ensure only “perfect” buildings get built. The opportunity cost means we end up with fewer buildings that are built slower.

It’s harder to recognise because it’s not a cost most people can see. Even when you’re shopping for a home and struggling to nab one because there’s not enough of them, you probably don’t realise that regulation has choked supply.

The growing pile of regulations is also a great example of what economists call “diminishing marginal returns”. That’s the principle that the more you have of something, the less benefit you tend to get out of adding more of that thing. One block of chocolate, for example? Delicious. By the time you’ve eaten two, it’s probably getting a bit much. And by block five? You might be taking a queasy trip to the bathroom.

Regulation, similarly, can be great. But having too much can lead to more harm than good, including blocking the new housing we so desperately need.

Of course, concerns such as environmental protection are important. But there are plenty of other cumbersome requirements and processes we can start to chop down. And as our American authors point out, there’s an abundance of other ways, including investment in the energy transition, we should be looking at to preserve our environment (that’s a column for another time).

Treasurer Jim Chalmers said last month that Abundance had been a wake-up call for the left and that a roundtable on productivity he is organising in August would tap into the ideas outlined in the book. Just how much the government will get out of its own way as it pushes to build 1.2 million homes by 2029 is unclear.

If I manage to buy my own shoebox flat, I’ll join the army of Australian home owners whose wealth is almost entirely locked away in housing, and whose self-interest will therefore be a continued surge in home prices. That cannot coexist with the vision to make housing more affordable. I probably won’t be a direct winner of the government’s long-term Abundance agenda. But I hope by the time I’m at dire risk of forgetting the struggle of buying my first home, the government has done what it takes to make it easier for the generations to come.

Read more >>

We like to hate big businesses but they get one thing right

By MILLIE MUROI, Economics Writer

There’s little in our daily lives that drives us up the wall like our supermarkets, airlines and banks.

Just today, my flight from Sydney to Melbourne with one major airline was pulled forward from 8am to 7am – and diabolically communicated to me through a text message at 4.30am while I was fast asleep and pondering this piece in my dreams.

Big businesses are accused – often rightly so – of everything from deceptive pricing to last-minute cancellations and unethical conduct.

So it might come as a whiplash moment to find out they’re getting at least one thing (seemingly) right.

By now you’re probably well aware of the big economic issue of our times: we’re trundling along, making flat whites, digging up coal and flying planes, but we’re not getting much better at doing most of it. We’re barely any faster, thriftier or masterful at going about our business than we were 10 years ago.

A truckload of theories has made the rounds about why – and Treasurer Jim Chalmers will next month hear plenty of them at a round-table fielding policy suggestions that could fix our stubborn productivity problem.

While we’ve tended to look at productivity growth as something that happens gradually and across a broad swath of firms, a report from global management consultancy McKinsey tipped that view on its head.

Looking at 8300 big firms across the US, UK and Germany, the research found productivity growth has generally been turbocharged by a handful of (in this case, fewer than 100) stand-out businesses.

In the US it was household names such as Apple, Amazon and United Airlines. More than three-quarters of productivity growth could be traced back to just 5 per cent of the American businesses they looked at.

These were businesses that made bold moves and were able to dramatically grow the number of customers they were serving and amount of money they were bringing in – without footing as much of a jump in the costs they were paying.

In doing so, they triggered chain reactions – prodding other businesses to respond and lift their game. The growth of digital firms and discounters in the UK retail sector, for example, meant not only did those businesses bring productivity gains, they also pushed other businesses, such as Tesco, to start boosting its online presence.

Big businesses often get big precisely because they’ve found ways to be the most productive.

Now, looking at Australian big businesses, though, you might be scratching your head. Have Qantas and Virgin really been helping productivity growth to take off? And how innovative have Woolworths and Coles been in improving our weekly grocery shopping?

While the McKinsey researchers didn’t look at Australia, we know larger firms do tend to be more productive here as well.

But there are a few important points to note. First, we know Australian industries tend to be more dominated by a handful of firms than industries in the US or UK.

Coles and Woolworths, for example, make up about three-quarters of the supermarket sector, while Qantas and Virgin control about 70 per cent of the aviation industry.

While that’s not totally a bad thing, it gives these companies disproportionate power and can lead to weaker competition, which we know is key to keeping companies on their toes and looking for ways to improve.

Big firms lead a lot of productivity gains but we also have to remember many of the behemoths started off as small firms themselves. In order to kick-start the productivity growth of our existing big businesses, and also usher in young, innovative and groundbreaking firms, we need to do frequent health checks on the level of competition in our economy.

We also know that labour mobility – the ability for workers to move around to better-suited jobs – has been weaker in Australia than it has been in the US.

As former economics professor and Assistant Minister for Productivity Dr Andrew Leigh points out, not all firms are equally productive, and one way of getting productivity growth is by having the most productive firms grow faster than those that are lagging.

In the US, for example, half of the productivity growth identified in McKinsey’s research came from the most productive firms expanding and unproductive firms closing or rethinking their business.

How do we make this happen more in Australia? By making sure it’s easy for people to move to the jobs that best match their skills, and to companies that are best at doing what they do.

That’s a big part of the reason, Leigh says, that the government this year promised to get rid of non-compete clauses – the fine print in many job contracts that make it difficult or impossible to move jobs – for low- and middle-income earners.

Knocking down hurdles for people to move to the jobs where their time and skills are most effectively used is key to driving productivity growth.

And it’s not just about sneaky clauses in job contracts. Another issue – one that stares us right in the face, most days – is housing affordability and the incentives in place for us to stay put, even if our home isn’t the best fit for us.

Our major cities are where many of our best job opportunities are. But with a continued surge in residential property prices across most of our major cities – and less in the way of wage growth – it has become increasingly difficult for people to move to the jobs that are the best fit for them.

That means businesses are missing out on some of their best talent, and people’s skills are not being used in the most productive way they could.

Stamp duty – a tax paid when purchasing a property – also makes this problem worse because it discourages people from moving, even if they have outgrown a place, want to downsize or move closer to their work. It should instead be replaced with a broad-based tax on the value of the land.

While we like to hate big businesses, they do get some things right, especially when it comes to productivity growth. The big challenge is keeping our heavyweights in boot camp by making sure they don’t muscle out newer, nimbler firms.

As I blearily yanked myself out of bed and to the airport this morning, I pondered the productivity costs of our aviation industry. Probably profound, I concluded between yawns. A new, more reliable airline – and one that texts me at reasonable hours – would be a most welcome competitor.

Read more >>

Oil prices have jumped. Do you need to run to the petrol station?

By MILLIE MUROI, Economics Writer

Despite our concerted attempts to unstick ourselves from the stuff, oil is still a fossil fuel we can’t function without. That means anytime its price jumps, we notice – and it tends to freak us out.

The first place most of us notice it flowing through is when filling up the tank – or while smugly driving an electric vehicle past the many petrol price signs that punctuate our daily commutes.

If it seems like petrol prices reflect oil price surges more quickly than they do falls, you’re not just imagining it. It’s true we tend to notice price increases more than decreases (a hangover of our instincts to fixate on the tiger in the trees over the nice patch of sunlight glimmering through).

But we also know prices increase faster than they fall in response to sudden changes in costs – such as oil prices – in the petrol market.

The latest oil price scare has come from an intensification of the war in the Middle East. Last week, Israel unexpectedly launched an attack on Iran, a country that produces a lot of oil.

It’s still unclear how badly Iran’s production facilities have actually been hit (and of course, the human cost is the immediate worry). But it was enough to spook the world and cause big surges to flash on market monitors – and probably heart monitors – across the globe.

Petrol is the single biggest weekly expense for most households, and it affects transport and energy costs for nearly all our businesses.

Politically, it’s also a worry. Treasurer Jim Chalmers and Reserve Bank governor Michele Bullock have probably only recently started sleeping without the inflation dragon flapping around in their nightmares.

Now, their dreams of slow and steady price growth might become just that again: dreams.

Chalmers has spent the week spruiking his latest plans to boost our living standards – but oil prices have clearly trickled to the front of his mind. This might have consequences for Australians at the petrol bowser, he told ABC Radio on Thursday, but there’s also a lot of concern about what it might mean for inflation, and it’s a “dangerous time” for the global economy.

But how much of a worry should it really be?

Well, first, it’s important to remember just how much we rely on oil.

In 2022-23, oil was our most important type of fuel, making up nearly 40 per cent of Australia’s energy use. That’s not even accounting for the other ways we use it: to produce plastics, chemicals, lubricants and the sticky stuff we use to pave roads.

Petrol is the single biggest weekly expense for most households, and it affects transport and energy costs for nearly all our businesses. Basically, changes in the price of oil ripple through nearly every crevice of the country.

A shortage of oil makes business harder – and in some cases, impossible – to do, strangling the supply of many goods. If Iran decides to shut the Strait of Hormuz – a key shipping route that carries tens of millions of barrels of oil every day – the delays and additional costs of taking longer routes will drive up costs further.

Those costs will probably be passed on through higher prices by businesses – and not just those directly dealing the stuff through petrol pumps.

The price of oil itself is determined, like most things, by the forces of demand and supply. But it’s also affected by expectations of supply and demand.

Most of the time, the physical product doesn’t even change hands. Instead, the market is largely made up of buyers and sellers who enter into “futures” contracts, which are legal agreements to buy or sell something (in this case, oil) at a particular price and time in the future.

It’s a bet of sorts: buyers are hoping the price they lock themselves into will be lower than it will be in the future, and sellers are hoping it will be higher.

When Brent Crude Oil and the US West Texas Intermediate (WTI) – two types of oil futures – surged 13 per cent last week, that reflected worries, not just about a short-term dip in supply, but concerns that the conflict could worsen.

But even so, the oil market hasn’t moved as crazily as we might have expected.

As Dr Adi Imsirovic points out, Iran itself only accounts for about 2 per cent of the world’s oil supply, shipping most of it to China, and while a sudden drop in Iranian oil exports would usually trigger stronger panic, there’s a few factors keeping it in check – for now.

First, Iran is part of a big group of oil exporters known as the Organisation of the Petroleum Exporting Countries (OPEC), which produces about 40 per cent of the world’s crude oil. OPEC, because of the huge share of oil it produces, tends to co-ordinate the amount of oil its members supply to the world to keep prices from falling through the floor (and profits from slipping too much).

It just so happens that OPEC is in the middle of reversing production cuts it imposed early in the COVID-19 pandemic, leaving it with an unusually large spare capacity of roughly 4 million barrels a day – mostly held by Saudi Arabia and the United Arab Emirates.

And although there are worries about the Strait of Hormuz being closed, Imsirovic says there are alternative supply routes.

That’s not to say we won’t feel anything here in Australia.

The increased risk of wider conflict in the Middle East means oil prices – and especially oil futures – have jumped. And shipping costs have sailed higher, including the cost of insurance for ships travelling through the Strait of Hormuz which has climbed 60 per cent since the start of the war.

We don’t import our oil directly from Iran, buying most of it from countries such as South Korea, the United Arab Emirates and Singapore.

But the cost of petrol in Australia will probably rise over the next few weeks because Australian fuel prices are pegged to international benchmarks.

And because Australia doesn’t exist in a vacuum, the slowdown in economies worldwide – from the uncertainty, higher costs and delays – will undoubtedly have a knock-on effect for our economy.

Slower growth and higher inflation will challenge the Reserve Bank, which next month must decide which way to take the country’s interest rates. If the US central bank’s decision this week is anything to go by, the Reserve Bank will probably keep rates on hold to see how things play out.

The panic in oil markets has seemed to wear off a little since Israel’s attack on Iran, but it will only last so long as the conflict doesn’t escalate.

There’s no crisis in oil markets yet, but your bill at the bowser might come in a little higher over the next few weeks. As long as the global economy is stuck in limbo, don’t be surprised if our economy isn’t running like a well-oiled machine.

Read more >>

The government can print money, so why can't it keep borrowing

By MILLIE MUROI, Economics Writer

Every few years, the US government goes into crisis-mode, and not just because of a certain unpredictable president. While it’s always been resolved, the debacle around raising the debt ceiling – how much the government is allowed to borrow – is almost always a dramatic affair.

In theory, it’s a good way of keeping government budgets in check. In practice, it’s mostly a distracting debate that only ends in one way: with an agreement (once again) to lift it because failing to do so would lead to financial turmoil.

Luckily, we only bothered with our own debt ceiling in Australia for a brief period between 2007 when it was introduced by Kevin Rudd, and in 2013 when the Coalition and the Greens struck an unlikely deal to scrap it.

And when it comes to the level of total debt, the Australian government actually has a pretty middling $900 billion – roughly a third of the size of our economy (or gross domestic product, also known as GDP).

Among wealthy countries, debt is expected to reach about $94 trillion, or 85 per cent of the size of their economies. That’s nearly double the share it was in 2008, and nearly as high as it was when we were racking up huge amounts of debt to pay for the Second World War.

That means Australia, right now, is better positioned than most countries when it comes to the money our government owes. This matters because when governments have high levels of debt – especially compared with the size of their economies – it means more money needs to be allocated to interest payments.

That, of course, leaves governments with less cash to splash on other priorities including welfare, healthcare and building. Or, it means they have to keep borrowing, digging a deeper debt problem for themselves.

So, why do governments borrow money in the first place? Why aren’t countries such as Japan (with a debt-to-GDP ratio of 240 per cent) freaking out? And what’s stopping governments – including the Australian government – from just continuing to borrow?

Well, borrowing a bit of money is generally a good thing.

As independent economist Saul Eslake puts it, most households want to pay off their debt at some point in their life so as not to leave debts behind for their children. But it’s a different matter for governments and well-run companies because they don’t (usually) die.

Australia, right now, is better positioned than most countries when it comes to the money our government owes.

In fact, he says funding some infrastructure spending – such as on a new railway, hospital or renewable energy technology – is a reasonable way of making sure future generations contribute something to the cost of creating something they will benefit from, rather than the entire burden falling on the current generation.

Of course, it also depends on what that borrowed money is spent on. Relying on it to pay for day-to-day expenses such as salaries and wages is probably less fruitful than investing it in big projects like a new train line that people can use for years to come.

It also depends on the state of the economy. When growth is weak or receding, there’s a stronger case for the government to borrow money to pump into the economy. But when things are going well and business is booming, borrowing can drive up demand and push up prices.

It’s also less worrying for the government to be borrowing when interest rates are low. When the cost of borrowing starts to creep up, that’s when a big pile of debt can be problematic.

Then, there’s also the question of whether the government is borrowing from within the country, or outside it.

The Japanese government, for example, borrows mostly from its own Bank of Japan, Japanese financial institutions and Japanese citizens. That means, despite its huge debt, it tends to pay lower interest rates because there’s a huge supply of savings within the country and lower transaction costs than if they were to borrow more from overseas. It also takes out loans in its own currency: the Japanese yen. By comparison, only about one third of Australian government debt is held domestically.

Most debt crises, including the infamous Greek debt crisis in 2009, came to a head partly because those countries were borrowing from outside their borders or in currencies that weren’t their own. That left them vulnerable to sudden global movements and also meant they couldn’t just print off money to pay down their debt.

Of course, it’s not really a strategy at all for governments to just print money.

As we saw during the COVID-19 pandemic, a larger supply of money floating around the economy pushed down its price, or value. In other words, printing too much money leads to inflation because everyone’s money becomes less valuable and, therefore, they are less able to buy things.

But back to the Australian government’s debt, which Treasurer Jim Chalmers managed to trim back to 38 per cent of GDP, then 34 per cent, before this year letting it creep back up to 36 per cent.

This year, the federal government has set aside $28 billion towards interest payments. That works out to about $1400 per Australian taxpayer. But it’s also only $3 billion shy of one of our most expensive government programs: Medicare.

There’s no hard and fast rule for how much debt is optimal. And for now, with an AAA credit rating – the best possible mark for a country’s ability to repay its debts – the Australian government can borrow at lower interest rates than many other countries.

If anything, it’s our state governments that have received a warning from one of the world’s biggest ratings agencies that their rating could be dropped to AA if they don’t rein in their spending.

And while Australia’s government debt is far from being at crisis level, it is important to keep in mind that it comes at a cost. We know that printing money comes with its own problems. But higher debt also means the government will have to hike taxes, reduce spending, or a combination of the two, to pay it off.

Losing that AAA rating is not the end of the world for the states or for the federal government. But it does mean our borrowing options will shrink a bit, and the interest costs will pick up.

Our government does most of its borrowing through the Australian Office of Financial Management (AOFM), which sells loans (also known as bonds or bills) on behalf of the government. These loans are then bought mostly by huge asset managers, including pension funds and insurers, hedge funds and central banks, including the Reserve Bank – with some of it bought by non-professional individual investors.

As Eslake points out, some of the big lenders will be barred (by their own rules) from taking on more Australian government debt if our rating is knocked down a notch.

However, pressures on government spending will probably only rise in years to come as the population ages, the energy transition becomes more urgent and housing demands intensify.

While a debt ceiling such as the one in the US is an arguably silly concept, it’s not a bad idea to have a debt-to-GDP target to measure up against.

Read more >>

I have good news and bad news about your superannuation

When the government wants to cut back the massive tax concessions the rich receive on their superannuation, the media is full of it for weeks. Ask the rich to pay a bit more and there’s hell to pay. But I bet no one’s bothered to tell you of something that’s about to affect the super of every worker in the country.

Why no mention? Because there’s no shootfight. It’s only when people are boxing it out that the media take an interest. And it seems like it’s good news, not bad. Apparently, there are winners, but no losers. Is that possible? Of course not.

The workers think someone else is paying, but that someone else – the bosses – know they’re not. So, no fight, no story.

What is this thing no one thinks we need to be told about? It’s that from the first day of next month, your employer’s compulsory contribution to your super will be increased by 0.5 percentage points to 12 per cent of your wage.

For the past 12 years, the government has been steadily increasing the contribution rate from 9 per cent to 12 per cent, where it will stay. Surely that’s good news? Well, maybe.

On its face, the government is forcing employers to make a greater contribution to the retirement savings of their workers. But if that’s all there is to it, why haven’t businesses been bitching about it unceasingly, warning that it was discouraging them from employing more people and killing the economy? Because business knows it’s not paying the impost.

In theory, there are three things that could follow: the business bears the cost in the form of lower profits, or it passes the cost on to its customers via higher prices, or it passes the cost back to its employees via pay rises which are that much lower than they otherwise would have been.

(Actually, there’s a fourth possibility: a bit each of two or three of the possibilities.)

Economists have long believed that the cost is passed back to the workers. And empirical studies have confirmed this. A study by one of the great experts in this area, the Grattan Institute’s Brendan Coates, has found that, on average, about 80 per cent of the cost is passed back to employees over the following couple of years. (Which raises an interesting point. Few if any commentators – including me – have thought to point out that some part of the cost-of-living pain working families have felt in the post-COVID period is explained by the government indirectly requiring them to increase their saving for retirement, thus leaving them with less to spend.)

Between July 2021 and today, employees’ super contribution has been increased by 2 per cent of their pre-tax wage. In three weeks’ time, that will increase to 2.5 per cent. Of course, you’ll get that money back, with interest, but not until you retire.

For years, many people have worried that they aren’t saving enough to live comfortably in retirement. And for years, the banks and fund managers that make their living looking after your super fund savings – which they do by taking a seemingly tiny percentage of your accumulated savings each year – have given people an exaggerated impression of the size of the lump sum they’ll need to have on retirement to be comfortable, in the hope that people will add their own contributions to their employer’s contributions, thus adding to the fund managers’ fees.

The worriers should remember this: Compulsory employer contribution started in 1992, at 3 per cent of wages. This was gradually increased to 9 per cent in 2002. As we’ve seen, between 2013 and next month, it will have gradually increased to 12 per cent.

Get it? For older people, the more of their working years that have been in this century, the less cause they have to worry about not having enough. And for younger people, the more of their likely total of 45 years working that are ahead of them, the more the risk of not having enough should be the furthest thing from their minds.

Remember that the less you have in super, the more help you’ll get from the age pension. But the more super you have, the less eligible you’ll be for a part pension. It oughtn’t to be too long before it’s rare for people to retire on a full pension, and common for people to have so much super their eligibility for a pension is wiped out.

The big qualification to all that, however, is whether you own your home. Life can be a lot tougher for those retirees dependent on renting in the private market. Pensioners who rent get some assistance from the government – and more than they used to – but it can still be a struggle.

Remember, too, that it’s easy for a person still working to overestimate how much they’ll need to live comfortably in retirement. They’ll be paying far less, if any, income tax. They won’t be putting money into their super. They won’t have dependent kids.

They’ll go on a few overseas trips – and then they’ll decide they can’t be bothered going on another. The older you get, the less you want to run around doing expensive things. Coates’ research confirms that many retirees end up saving rather than spending all their retirement income.

The more pertinent question is whether some young person who spends all or most of their working years getting annual contributions of 12 per cent will retire with far more than they need to live comfortably – whether they’ll end up living like kings (if they have the energy).

So here’s the bad news: once you accept that workers actually pay for their employer contributions by receiving smaller pay rises over their working years, will they be forced to exchange a lower living standard while they’re working for more money than they want to spend in retirement?

Read more >>

If bulldusting about productivity was productive, we'd all be rich

It seems the longer we wait for a sign that productivity has stopped flatlining, the more and the sillier the nonsense we have to listen to, brought to us by a media that likes to stand around in the playground shouting “Fight! Fight! Fight!″⁣.

The combatants are led by Canberra’s second-biggest industry, the business lobbyists, unceasing in their rent-seeking on behalf of their employer customers back in the real world. Their job is to portray all the problems businesses encounter as caused by the government, which must therefore lift its game and start shelling out.

In your naivety, you may have imagined that if a business isn’t managing to improve its productivity, that would be a sign its managers weren’t doing their job. But, as the lobbyists have succeeded in persuading all of us, such thinking is quite perverse.

Apparently, productivity is something produced on the cabinet-room table, and those lazy pollies haven’t been churning out enough of it. How? By deciding to cut businesses’ taxes. Isn’t that obvious? Bit weak on economics, are you?

Unfortunately, those economists who could contribute some simple sense to the debate stay silent. The Chris Richardsons and Saul Eslakes have bigger fish to fry, apparently.

The latest in the lobbyists’ efforts to blame anyone but business for poor productivity was their professed alarm at the Fair Work Commission’s decision last week to increase award wages, covering the bottom 20 per cent of workers, by 3.5 per cent, a shocking 1.1 percentage points above the annual rise in the consumer price index of 2.4 per cent.

According to one employer group, this was “well beyond what current economic conditions can safely sustain”. According to another, the increase would hit shops, restaurants, cafes, hospitality and accommodation the worst.

Innes Willox, chief executive mouth for the Australian Industry Group and a leading purveyor of productivity incomprehension, claimed that “by giving insufficient attention to the well-established link between real wages and productivity, this decision will further suppress private sector investment and employment generation at a time our economy can least afford it”.

The least understanding of neoclassical economics shows this thinking is the wrong way round. It’s when the cost of labour gets too high that businesses have greater incentive to invest in labour-saving equipment.

At present, we’re told, business investment spending as a proportion of national income is the lowest it’s been in at least 40 years. If so, it’s a sign that labour costs are too low, not too high.

The other reason firms are motivated to invest in expanding their production capacity is if business is booming. But this is where business risks shooting itself in the foot. Whereas keeping the lid on wages may seem profit-increasing for the individual firm, when all of them do it at the same time, it’s profit-reducing.

Why? Because the economy is circular. Because wages are by far the greatest source of household income. So the more successful employers are in holding down their wage costs, the less their customers have to spend on whatever businesses are selling. If economic growth is weak – as it is – the first place to look for a reason is the strength of wages growth.

Fortunately, however, while sensible economists leave the running to the false prophets of the business lobby, my second favourite website, The Conversation, has given a voice to Professor John Buchanan, of the University of Sydney, an expert on the topic who isn’t afraid to speak truth to business bulldust.

“In Australia, it has long been accepted that – all things being equal – wages should move with both prices and productivity,” he says. “Adjusting them for inflation ensures their real value is maintained. Adjusting them for productivity [improvement] means employees share in rising prosperity associated with society becoming more productive over time.”

In recent times, however, all things ain’t been equal. Depending on how it’s measured, the rate of inflation peaked at 7.8 per cent (using the CPI, which excludes mortgage interest rates) or 9.6 per cent (using the living cost index for employed households, which does include them).

So the Fair Work Commission has cut the real wages of people on award wages by about 4.5 per cent – something the lobby groups somehow forgot to mention. That’s what honest dealers these guys are. If there’s a way to fiddle the figures, they’ll find it.

The supposed real increase of 1.1 per cent in award wages is actually just a reduction in their real fall to about 3.4 per cent. So much for the impossible impost that will send many small businesses to the wall.

The commission has always been into swings and roundabouts. Cut real wages now to get inflation down, then, when things are back to normal, start getting real wages back to where they should be. So we can expect more so-called real increases – each of them no doubt dealing death and destruction to the economy.

Speaking of fiddling the figures, the commission points out a little-recognised inaccuracy in the conventional way of measuring real wages. It says that, if you take into account that prices rise continuously but wages rise only once a year, award wage workers’ overall loss of earnings since July 2021 has been 14.4 per cent.

What the lobbyist witch doctors have been doing is concealing the truth that the best explanation for our weak productivity performance is that employers have been seeking to increase their profits by holding down wage costs, rather than by investing in labour-saving technology.

Read more >>

Someone's doing the heavy lifting, and it's not the government

By MILLIE MUROI, Economics Writer

In the goldmine of numbers unearthed this week, we learned a lot of things. Among them: that gold diggers (not those ones) stepped up while the government stepped back.

Treasurer Jim Chalmers celebrated, declaring like a proud dad that he had deflated the fiscal floaties on our economy. The private sector is now “doing the heavy lifting” he said: in other words, private businesses and households are now swimming rather than sinking.

Now, the gold producers are a bit of a special case. While uncertainty – driven by the volatility in the world at the moment – hurts most businesses, those dishing out gold (or digging it up) tend to do well. Why? Because when people get scared, they gravitate towards gold, driving up its value

Our economic growth – in real gross domestic product (GDP) – came in more sluggish than expected by many economists, at 0.2 per cent. And while the “national accounts” for the March quarter seem to mark a turning point in some ways, they don’t factor in the wrecking ball (also known as Donald Trump) which largely swung into action in April.

Nonetheless, there are some nuggets of hope to sift out from the figures.

First, the government is no longer the star player on the economic pitch. Over the past two years, public spending on everything from infrastructure to electricity bill relief has kept the economy from grinding backwards (sometimes going forward by as little as 0.1 per cent).

That’s not the case any more – or at least, our politicians aren’t propping up the economy to the same degree they have been.

The federal government still spent a bit more in the three months to March than it did in the previous three months. But the growth in its spending was slower, as its outlays on social benefits programs such as Medicare and the National Disability Insurance Scheme dropped.

State governments, meanwhile, actually reduced spending in the first three months of the year, with most winding back energy bill relief as cost of living pressures have eased.

Some of the pullback in spending growth – especially nationally – is probably thanks to the budget’s “automatic stabilisers”: government payments such as unemployment benefits which naturally fall as the economy improves (and rise when the economy is in the doldrums and people are losing their jobs).

But the flat government day-to-day spending and fall in government investment spending (partly due to the completion of projects such as Sydney’s metro) certainly seem to suggest they’ve become happier to sit on the bench and let private businesses and households make more of the runs. This fall in public demand ended up subtracting the most from overall quarterly growth since 2017.

The overall picture is also a bit murky after quarterly growth in the economy slowed to the lowest rate since March last year. And GDP per person – generally a better measure of our living standards than total national GDP – slipped 0.2 per cent in the March quarter.

While it’s welcome news that private businesses and households seem to be regaining some of their gusto, neither were close to shooting the lights out.

Household spending is one of the most hotly anticipated pieces of the puzzle because Australian households' spending accounts for more than half of the country’s GDP. That means what consumers choose to do has an outsized effect on our economy.

Turns out we went more gangbusters on holiday sales last year than economists were expecting, but then decided (perhaps as our New Year’s resolutions) to rein in our spending.

We still splurged on big events including going to see artists such as Billie Eilish. And a warmer-than-expected summer (as well as the pullback in energy bill relief) meant that – whether we liked it or not – we had to splash more cash on keeping ourselves cool. That all contributed to household spending climbing 0.4 per cent.

But when it came to spending that isn’t strictly necessary, our purse strings tightened a bit, suggesting we’re still treading cautiously.

Partly thanks to Donald Trump’s unpredictability spooking us, we decided to squirrel away a bigger chunk of our income – even though we were generally earning more – in the March quarter. In fact, the saving ratio (which measures the proportion of our disposable income we stow away for a rainy day) climbed from 3.9 per cent to 5.2 per cent: the highest it’s been since 2022.

Another factor feeding into that higher saving ratio was Ex-Tropical Cyclone Alfred in Queensland which led to the government (and insurance companies) paying out to those affected – who in turn, ended up stashing a good portion of it away.

Investment by the private sector took the podium when it came to the part of GDP with the strongest growth, rising 0.7 per cent in the March quarter. That was largely thanks to a stronger appetite for investment in dwellings, including building houses and making renovations, perhaps helped along by the first cut to interest rates in nearly four years.

Businesses were also eager to sink money into manufacturing projects and more digging – not just for gold but for other minerals, too – contributing to the growth in private investment.

Net trade – exports minus imports – meanwhile, weighed down our overall growth, wiping 0.1 percentage point from the March quarter. While both imports and exports fell, the drop in exports was bigger. Production and shipments of coal and liquefied natural gas were disrupted by severe weather which, together with subdued growth in the number of international students and less spending per student, drove down Australia’s exports.

The implications of all this data for the Reserve Bank – and thus for all of us – is not immediately clear. The national accounts are always a delayed set of data (a good deal can change in the following three months), and there are signs of both continued weakness and of renewed strength in the economy.

The step back in public spending will probably make it easier for the Reserve Bank to drive forward with another rate cut next month – especially given it was close to slashing rates by 50 basis points at the last meeting, price pressures seem to have faded into the background, and growth is crawling along at snail’s pace.

With unemployment laying low, the inflation dragon tamed, and the private sector stepping up, there are glimmers of hope that Chalmers and the RBA have struck gold in our economic management. Now it’s about safeguarding the spoils by pulling up productivity and getting economic growth well off the ground.

Read more >>