The economy isn't a Sunday school - it often hurts

When I was a kid marbles were the rage. When you played at home with your brothers and sisters, mum made sure that, whoever won, everyone got their marbles back when the game was over. When you played at school, however, the big boys insisted on "playing for keeps", so kids like me went home with a lot fewer marbles.

I also went to Sunday school, which was run by kindly mothers. If you forgot to memorise your verse of scripture, there was no comeback. If you misbehaved there was no punishment, just a look of disappointment on the face of your teacher.

We've been hearing a lot lately about people losing their jobs. Firms in manufacturing, but also other industries, are announcing redundancies. There've been so many they could give you the impression employment is falling. Fortunately, it isn't; the people losing their jobs are being more than made up for by others gaining jobs (including people who lost their jobs earlier).

Sometimes people are laid off because the economy is in recession, but at present it's happening because powerful forces are changing the industrial structure of the economy. Older industries are shrinking while newer ones are expanding.

It must be a terrible thing to lose your job through no fault of your own, even if they do give you a fat cheque as they push you out. It's anxious waiting after an announcement to see if you'll be among those tapped on the shoulder. When "downsizing" was the fashion in the 1980s and '90s, it was said even those who kept their jobs suffered "survivor guilt".

When you're a victim of structural change - or just a feeling person looking on - it's tempting to look for someone to blame. Managers have been altogether too ruthless in protecting the business's bottom line; they took too long to recognise the problem and when they did respond they could have done it far better. The government should have stepped in to protect the industry.

Since managers are as subject to human frailty as ordinary employees (just extraordinarily more highly paid), there's often some truth to these criticisms - especially with the wisdom of hindsight.

If businesses weren't so quick on the trigger in laying off workers in the early stages of a downturn, fewer downturns would turn into full-blown recessions. If they were more imaginative and innovative they'd find less painful solutions to problems (they'd probably also anticipate a lot of problems that didn't materialise).

But when there are major changes in the forces bearing down on an industry, there's no point imagining change could have been resisted, nor any way that all human pain could have been avoided.

The economy isn't run like a Sunday school. In an economy like ours, everyone - bosses, workers, customers - pursues their self-interest. The economic game is played for keeps. So everyone runs a greater or lesser risk of losing their job. Even bosses get the bullet.

All of us act in self-regarding ways that, whether or not we realise it, contribute to someone's job insecurity. And that means a fair bit of uncertainty, anxiety, fear, disappointment, loss of status, self-doubt, frustration, family discord, despair, humiliation, depression, belt-tightening and worse are part of the deal.

Nor is the risk of pain fairly distributed. Some people never lose their job in a long career, some make the transition to a new job relatively easily, some move into retirement earlier than they'd bargained for, some have considerable difficulty finding another job, some never work again.

Perhaps the greatest force driving structural change is advances in technology - people inventing new products, new things to do or new ways of doing old things. The digital revolution is reshaping our economy - destroying jobs here, creating them there - in ways and to an extent we as yet see only dimly.

Does anyone suggest we should halt technological advance because of all the economic disruption it brings - and has brought since the days of the Luddites? Does anyone imagine such an attempt could work?

Another major force driving economic change is globalisation - the lowering of natural and government-made barriers between countries, caused by technological advance and, to a lesser extent, deregulation.

The historic re-emergence of the mighty economies of China and India - and the rapid economic development of the poor countries generally - is shifting jobs around the world.

Most rich countries are benefiting from cheaper imported manufactures (gains to consumers, but job losses in manufacturing), but Aussies are also benefiting from higher prices and quantities for our rural and mineral exports (increased income for the whole nation, but pressure for capital and labour to shift to mining).

Think the poor countries' pursuit of prosperity should be stopped because of the economic disruption it's causing? Think it could be?

For decades we tried to shut out change from the rest of the world by protecting particular industries. These days we use taxpayer subsidies. But jobs in particular industries can be protected only at the expense of jobs in the unprotected industries. Import restrictions and subsidies merely shift the job pressure (which never troubles the people demanding assistance).

When you're in the thick of it, it's easy to imagine structural change leads to ever-rising unemployment. But businesses have been installing new, "labour-saving" technology continuously for two centuries without it leading to mass unemployment.

Structural change doesn't reduce jobs overall, it destroys them in some industries and creates them in others.

Market economies deliver almost continuously rising material prosperity. But they do so by continually changing, and that change comes with a fair bit of pain for many people.

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Present gloom is more political than economic

The release of two downbeat indicators of business and consumer confidence last week serves only to deepen the puzzle over the gap between how we feel and what the objective indicators are saying about the state of the economy.

My theory is we have two-track minds. Many of us are thinking gloomier than we’re acting.

As you recall, the national accounts from the Bureau of Statistics show real gross domestic product growing by a remarkable 1.3 per cent in the March quarter and a rip-roaring 4.3 per cent over the year to March.

The bureau’s latest labour force figures, for May, show employment growing by an average of 25,000 a month over the first five months of this year, with much of the growth in the ‘non-mining’ states.

I never take the initial reading of frequently revised estimates too literally. The governor of the Reserve Bank, Glenn Stevens, has noted the annual growth figure is probably inflated by a catch-up effect following the disruption to economic activity caused by the Queensland floods early last year. He’s willing to say only that the economy’s travelling at about ‘trend’ (3.25 per cent a year).

Now Dr Chris Caton, of BT Financial Group, has advanced his own theory to explain the surprisingly strong 1.3 per cent growth in the March quarter. He notes the inclusion of a leap day in the quarter - so it contained 91 days rather than the usual 90 - may have thrown out the bureau’s seasonal adjustment process.

Some components of GDP would have been adjusted for this ‘trading-day effect’, but many may not have. Sounds far fetched? Caton looked back over the five previous leap years, finding the March quarter growth figure exceeded the average rate of growth for the three preceding and three subsequent quarters in four of those years, with the excess for the five years averaging 0.46 percentage points.

But even if you accept Stevens’s judgement the economy’s growing at about trend - which I do - you’re still left saying it’s doing a lot better than implied by the gloominess of business and consumer confidence as we conventionally measure them.

NAB’s business survey for May showed business conditions (the net balance of respondents regarding last month’s trading, profitability and employment performance as good) fell to their weakest level in three years.

To put this in context, the conditions index is now 5 points below its long-term average since 1989, but nothing like as bad as it got during the global financial crisis of 2008-09, let alone the recession of the early 1990s.

The index of business confidence (how the net balance of respondents expects conditions to change in the next month) is saying something roughly similar. NAB says the survey implies GDP growth will slow to an annualised 2 per cent in the June quarter.

The Westpac-Melbourne Institute index of consumer sentiment rose a fraction in June to 96, down almost 6 per cent on a year earlier. It’s pretty low, though at nothing like the depths to which it sank in 2008-09.

The overall index can be divided into two bits, the current conditions index and the expectations index. In June the conditions index rose by 6 per cent, whereas the expectations index fell by 4 per cent. And whereas the conditions index stands at 104, the expectations index is a 90.

I’m a great believer that the mood of consumers and business people does a lot more to drive the business cycle than it suits most economists to admit (because their theory tells them little about what drives confidence and, in any case, it’s not easy to be sure what you’re measuring).

So it pains me to admit that, at present - and not for the first time - the conventional confidence indicators seem to have been bad predictors of what HAS happened in the economy, and don’t look like reliable predictors of what WILL happen.

I think there’s a gap between how people are feeling and how they’re acting. How consumers and business people feel is a function of their direct experience and what their peers are saying and doing, but also of what the media is telling them about the wider world.

They probably give a lot more weight to the former than the latter. Direct experience tells them things aren’t too bad; interest rates have dropped a long way in the past six months and, despite all the media stories, they’ve seen little in the way of job losses close to them.

On the other hand, the media are bringing them a lot of worrying news about Europe and elsewhere. It seems pretty clear this is having a big effect on how they feel. It’s less clear how much it has affected their behaviour - so far, at least.

I suspect the present mood - as opposed to present behaviour - is also affected by political sentiment. A lot of people have decided - rightly or wrongly - the economy is being badly managed.

The NAB business survey showed 47 per cent of respondents believed the May budget would have a negative effect on their business. This seems a huge overreaction to the one piece of bad news for business in the budget: the cost of a cut in the company tax rate of a mere 1 percentage point was instead being paid into the pockets of business’s customers.

And consider this: when you divide the consumer sentiment index according to federal voting intention you find the index for Labor voters stands at 119, whereas the index for (the far greater number of) Coalition voters is down to 82.

Perhaps the main thing the confidence indicators are telling us is something we already know: the Gillard government is highly unpopular with consumers and business people.

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How GST has sprung a leak

It's not a good time to be the taxman. The poor chap has fallen on hard times. But if you think that sounds like good news, you haven't thought it through. We don't pay taxes for fun and the government doesn't tear up our money when it receives it. Obviously, it's used to pay for all the services governments provide.

It's now clear how much trouble the Europeans have brought on themselves by ignoring the two sides of their budgets. It's equally clear a big part of the reason we don't share the Europeans' predicament is the acceptance by our governments - federal and state, Labor and Coalition - over many years that their spending and their tax collections must be kept in balance over time.

So if tax collections are falling short of spending, it follows that either spending must be cut or taxes increased. At present, governments are willing to contemplate only spending cuts, and are working on the theory there's enough inefficiency in the public sector to reduce costs without significantly reducing the services it delivers.

But you can push that relatively politically painless idea only so far. And the problems with tax collections are so deep-seated eventually they - and we - will have to face the terrifying prospect of higher taxes.

The federal government has structural problems with income tax, capital gains tax and company tax, but the tax with the biggest problems is the goods and services tax, as was well explained this week in the NSW government's budget papers, which I'll draw on.

When John Howard introduced the GST in July 2000, he neutralised opposition from the premiers by promising them all the proceeds from the tax in place of the feds' former general revenue grants. So GST is a federally controlled and collected tax that benefits only the states.

It's divided between them according to the principle of "horizontal fiscal equalisation", which aims to ensure each state and territory has the fiscal capacity to provide the national average standard of services and infrastructure.

This means the GST proceeds are divided in a way that ensures those states with greater capacity to raise revenue subsidise those with lesser revenue-raising capacity.

For decades this meant taxpayers in Victoria and NSW subsidised taxpayers in all other states. Since 2008-09, however, the resources boom has left the governments of Queensland and, particularly, Western Australia so flush with mining royalties they too have become subsidisers of the remaining states and territories. So, of late, NSW and Victoria haven't had to subsidise the others nearly as much.

When Howard first handed the proceeds of GST to the states, it seemed clear he'd given them the fabulous "growth tax" they'd long dreamt of. Up to 2007-08, collections grew at an average rate of more than 8 per cent a year - faster than the economy (nominal gross domestic product) was growing.

But every time the federal Treasury peers into the future it revises down its projections for growth in GST receipts. It's now expecting growth over the period from 2008-09 to 2015-16 to be just 4.5 per cent a year.

So what's the problem? Well, there are a couple. The first is that, during the 30 years in which Australian households were progressively lowering their rate of saving, their consumer spending on goods and services was (as a matter of simple arithmetic - the formula is: consumption plus saving equals income) growing faster than household disposable income.

But from about mid-2003 households began increasing their rate of saving, and after the global financial crisis in late 2008 they really got down to it. Obviously, while the rate of saving is increasing consumer spending will be growing more slowly than income.

So it's clear the GST captured only the final few years of the outsized growth in consumer spending. In its first year, 2000-01, consumer spending accounted for 59 per cent of nominal GDP. By 2007-08 it had fallen to 56 per cent and by 2010-11, 54 per cent.

But for the past 18 months the net household saving rate has been roughly steady at about 9.5 per cent of household disposable income, meaning consumer spending has been growing at much the same rate as household income. If the household saving rate has stabilised, consumer spending will continue falling as a proportion of GDP only if household disposable income grows at a slower rate than GDP, which doesn't seem likely.

But that's just the first reason the joy has come out of GST as a great little revenue raiser (of an expected $48 billion in the coming financial year, or 3.2 per cent of GDP).

Although we tend to think of GST as a tax on the purchase of all goods and services, in fact a significant slice of the value of our purchases (initially, about 36 per cent) is exempt from the tax. Our spending on rent, health and education were excluded because taxing them accurately was judged too hard. Then spending on food was excluded as part of the deal needed to get the tax passed by the Senate.

Fine. What's happened since then is, although the volume (quantity) of our purchases of these exempt items has grown pretty much in line with the volume of taxable items, the prices of the exempt items have consistently grown faster than prices of the taxable items.

So much so that over the tax's first 11 years, the value (price times volume) of taxable consumption relative to total private consumption has fallen about 4 percentage points.

Since health and education are "superior goods" (we spend an increasing proportion of our income on them as our incomes rise), and costs in both areas grow significantly faster than other consumer prices, we can expect this erosion of the GST tax base to keep rolling on.

At first blush, the feds can dismiss this as the premiers' problem. But the states are so dependent on GST revenue (in NSW's case, to the tune of a quarter of total revenue) and are so restricted by the constitution in what they may tax that, in the end, it's a problem for Canberra.

And since we know from successive intergenerational reports that most of the pressure on federal and state budgets over the next 40 years will come from health spending, the lasting solution is staring us in the face: the GST's tax base must be broadened at least to include private spending on education and health.

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Much change is structural, not cyclical

One of the first lessons economists teach us is that the economy moves in cycles of boom and bust. A second, trickier lesson is that although most of the changes going on in the economy at any moment are "cyclical" (temporary), there may also be changes driven by "structural" (longer-lasting) forces.

In a speech last week, Glenn Stevens, the governor of the Reserve Bank, implied that much of the "unrelentingly gloomy" public discussion about the economy may be caused by people mistaking structural problems for cyclical ones.

Despite the official statistics saying the economy's quite healthy, people think it's weak and want the economy's managers to get it moving by such standard remedies as a tax cut or a cut in interest rates.

But if the problem is structural - if it arises from deep-seated changes in the economic environment - such remedies will make little difference. Structural change is rarely painless - it often involves people losing their jobs and businesses failing - but it's almost always better to adapt to the way the world now works than try to resist it.

The boom in export prices and the construction of new mines arises from the historic re-emergence of the Chinese and Indian economies and is a classic example of structural change. The accompanying high dollar is helping to bring about a long-term shift of workers and capital into mining and away from manufacturing, tourism and overseas education.

But Stevens argues the resources boom is getting blamed for the problems of industries whose tough times are the product of a quite different source of structural adjustment: the markedly changed behaviour of Australian households. Consider his figuring.

In the mid-1970s, households began reducing the proportion of their disposable incomes they saved, meaning their spending was able to grow faster than their incomes. But this went into overdrive between 1995 and 2005.

Over that decade, households cut their rate of saving by a cumulative 5 percentage points. In consequence, their consumer spending grew at an average annual rate of 2.8 per cent per person, after allowing for inflation, even though their disposable incomes grew at a real annual rate of just 2.3 per cent per person.

Why did so many of us feel we no longer needed to save much of our income for use later on? Largely, it seems, because we saw ourselves getting wealthier as each year passed. The gross value of assets held by households - mainly the value of our homes - more than doubled between 1995 and 2007. That involved a real annual increase of more than 6 per cent per person.

Only a small part of this increase came from the building of additional homes. Most of it was just the rise in the prices of existing homes.

So why did housing prices rise so dramatically? Mainly because we went through a decade-long frenzy of competing with each other to move to better homes, which bid up prices.

In the process, of course, households took on a lot more debt, including for investment properties. Total household debt rose from 70 per cent of total annual household income in 1995 to about 150 per cent in 2007. This unprecedented "gearing up" by households was made possible by the deregulation of the banks and the return to low inflation and, hence, low mortgage interest rates.

All this borrowing couldn't have gone on forever, and households began to call a halt a year or two before the global financial crisis reached its peak in late 2008, after which they really began saving a lot more and trying to get on top of their debts.

While households were increasing their rate of saving, their consumer spending grew more slowly than their incomes. But their saving rate has been relatively stable - at a rate last seen in the 1980s - for about 18 months, meaning consumer spending has returned to growing at the same rate as incomes.

As part of our households' return to their former prudence, the rate at which homes change hands has fallen by a third from its average over the previous decade. And now the demand for housing has slackened, house prices have fallen back a bit. They won't keep falling forever, but nor are we ever likely to see them shooting up the way they used to.

The return of the prudent consumer is causing adjustment pains for various industries: the banks aren't doing as much business (I know your heart bleeds), nor are the real estate agents. State governments are getting a lot less revenue from conveyancing duty.

Last but not least are the retailers. The halcyon days of rapid growth in consumer spending are gone for good and they'll just have to get used to it. Those retailers selling the sorts of things people buy when they move into a new home are finding life a lot tougher.

But the end of the "platinum age" is just one source of structural change facing retailers. Another source is that retailers sell goods, but as each year passes, more of the consumer dollar goes on services and less on goods.

Yet another is the digital revolution. While shopping in one store, people are using their smartphones to check the prices being offered in rival stores, then demand they be matched. And the internet is giving people access to the cheaper prices charged by retailers in other countries.

None of these various structural changes are the fault of the government and there's little the managers of the economy can or should do to halt or even alleviate them. Business has little sensible choice but to adjust. In any case, most are for the better.

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Why we can't read the economy without help

The nation's economists, commentators and business people got caught with their pants down last week. They'd convinced themselves the economy was weak, but the Bureau of Statistics produced figures showing it was remarkably strong.

It's not the first time they've failed such a reality test. They prefer not to think about such embarrassing, humbling occurrences, but it's important to ask ourselves why we got it so wrong.

The bureau told us real gross domestic product grew by 1.3 per cent in the March quarter and by 4.3 per cent over the year to March. Then it produced labour force figures for May, showing employment has been growing at the rate of 25,000 a month this year, with much of that growth in NSW and Victoria.

So why is there such a yawning gap between what we thought was happening in the economy and what statistics say is happening?

Well, one possibility is the figures are wrong. That's likely to be true - to some extent. They're highly volatile from quarter to quarter and month to month, and much of that volatility is likely to be statistical "noise" rather than "signal".

But the financial markets, economists and media knowingly add to the noise by insisting on using the seasonally adjusted figures rather than the trend (smoothed seasonally adjusted) figures as the bureau urges them to. Truth is, both markets and media have a vested interest in volatility for its own sake - it makes for better bets and better stories.

However, even if the latest figures are likely to be revised down, their "back story" still contradicts the conventional wisdom. Cut March quarter growth back to the 0.6 per cent economists were forecasting and you're still left with above-trend annual growth of 3.6 per cent.

Consumer spending may not have grown by as much as 1.6 per cent in the March quarter, but - and notwithstanding all the retailers' complaints - it's been growing at above-trend rates for a year.

Another argument embarrassed economists are making is that the March quarter figures are "backward looking". All the news since March has been bad. They always use that excuse. But there's nothing out of date about job figures for May, and they, too, tell a story of strengthening growth.

If you accept, as you should, the figures are roughly right - especially viewed over a run of months or quarters - you have to ask how our perceptions of the economy have got so far astray from statistical reality.

It's less surprising business people's perceptions are off the mark. They're not students of economic theory or statistical indicators; their judgments are unashamedly subjective, based on direct experience and the anecdotes they hear from other business people, plus an overlay of what the media tell them.

More surprising is the evidence economists' judgments and forecasts aren't as rigorously objective and indicator-based as they like to imagine. They're affected by the mood of the business people they associate with and aren't immune to the distorted picture of reality spread by the media (because they highlight events that are interesting - and, hence, predominantly bad - rather than representative).

Like the punters, business people probably overestimate the macro-economic significance of falls in the sharemarket - particularly when our sharemarket is taking its lead from overseas markets reacting to economic news in the US and Europe that doesn't have much direct bearing on our economy.

Similarly, all the bad news from America and, particularly, Europe we're hearing from the media night after night can't help infecting our views about our economy. We're getting more economic news from China these days but we hear about the threats rather than the opportunities.

The familiar refrain about the alleged two-speed economy is tailor-made for the media but, as last week's figures make clear, an exaggeration of the truth. Consumer spending is reasonably strong in the non-mining states, as is employment growth this year.

In the absence of anything better, economists and the media persist in setting too much weight on the bureau's quarterly figures for state final demand, unaware they give an exaggerated picture of the differences in gross state product between the mining and non-mining states (because Western Australia and Queensland use much of their income to buy goods and services from NSW and Victoria).

The risk is the more we repeat the two-speed story to ourselves the more it becomes a self-fulfilling prophesy. This may be part of the explanation for the weakness in non-mining business investment spending, but as yet it doesn't seem to have affected consumer spending.

The media's highlighting of announced job lay-offs is a classic example of the way their inevitably selective reporting of job movements leaves the public, business people and maybe even economists with a falsely negative impression of the state of the labour market.

A recent list of 25 lay-off announcements showed total job losses of 17,000. When people wonder how the bureau's employment figures could be right when we know so many jobs are being lost, they're showing their ignorance of how selective media reporting is and how big the labour market is.

In a workforce of 11.5 million people, job losses of 17,000 are peanuts (though not, of course, to the individuals involved). Far more than 17,000 workers leave their jobs every month and far more take up jobs every month. The media tell us about just some of the job losses and about virtually none of the job gains.

The unvarnished truth - which none of us can admit, even to ourselves - is we think we know what's happening in the economy, but we don't. We're too fallible, and it's too big and complicated.

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Figures to cheer us up

Oh dearie, dearie me. We've been embarrassed in the nicest possible way. The Bureau of Statistics has produced figures showing the economy roaring along in the March quarter, when we'd convinced ourselves things were pretty weak.

It followed that up with figures showing a lot stronger growth in employment in May than economists had been expecting.

Three months ago we were told the economy (real gross domestic product) grew an exceptionally weak 0.4 per cent in the December quarter and 2.3 per cent over the year to December - well below the ''trend'' (long-term average) annual growth rate of 3.25 per cent.

On the strength of this and other indications, economists were expecting growth in the March quarter of just 0.6 per cent and growth over the year to March of about 3.2 per cent.

Instead we've been told this week that growth in the quarter was more than twice that - 1.3 per cent. For good measure, the figure for the December quarter was revised up to 0.6 per cent, and for September it was raised 0.2 points to 1 per cent.

For the June quarter growth was left unchanged at 1.4 per cent, meaning growth for the year to March was a remarkable 4.3 per cent - way above trend.

Question is, can we believe it? Or, to put it more carefully, how literally should we take these figures? Well, I'm no statistical fundamentalist. Unlike many in the media, I don't assume the bureau's estimates (and ''estimates'' is the bureau's word) are God's immutable truth.

Its monthly job figures are subject to sampling error and human error. Its quarterly figures from the national accounts are produced before all the necessary information has come to hand, and so represent a first stab at the truth. As more reliable information comes in, the bureau revises its figures, gradually closing in on an approximation of reality.

I'm not convinced the economy grew as strongly as 1.3 per cent in the March quarter, and I won't be surprised to see that figure revised down in subsequent quarters. So I don't really believe the economy grew by a rip-roaring 4.3 per cent over the past year.

Were that to be true, you'd have expected stronger growth in employment over the period, even though it's been a lot stronger this year than it was in 2011, and the bureau has belatedly confessed that, due to human error, it overstated employment growth in 2010, then sought to quietly correct the problem by understating it in 2011. Not a smart way to protect your credibility, guys.

Even so, it's not possible to point to anything in this week's accounts that looks obviously dubious. And they're now showing a picture of strong growth in all four quarters bar December.

It's true, however, the accounts show a very mixed picture for different parts of the economy. The weakest part is home building. It contracted 2.1 per cent in the quarter and 6.2 per cent over the year to March.

Spending by the public sector is essentially flat in real terms as federal and state governments seek to get their budgets back into operating surplus.

Non-mining business investment spending is weak, while weather problems caused a fall in the volume of exports, and import volumes grew quite strongly. Net exports (exports minus imports) subtracted 0.5 percentage points from growth in GDP during the quarter and 1.3 points over the year.

So where did the growth come from? You won't need me to tell you growth in mining investment spending is exceptionally strong. New engineering construction increased by nearly 20 per cent in the quarter to be up more than 50 per cent over the year.

So far, the story fits the familiar refrain about the alleged two-speed economy. ''No wonder we think the economy's stuffed - in our part of the country, it is. All the growth's in the Pilbara and Queensland's Bowen Basin.''

Sorry, but that won't wash. The other big contributor to growth was consumer spending, growing 1.6 per cent in the quarter and 4.2 per cent over the year. Both figures are way above trend and they mean consumption contributed 0.9 percentage points to GDP growth in the quarter, and 2.4 points over the year.

Yes, you may object, but how do you know the lion's share of the consumer spending didn't come from Western Australia and Queensland? Because I checked. In the March quarter, consumption growth was above trend in all states and territories.

It was strongest in Western Australia with growth of 2.4 per cent, and pretty strong in Queensland at 1.9 per cent. But in sorry-for-itself Victoria it was a rip-roaring 2.1 per cent. The weakest it got was 0.9 per cent in NSW.

Together, Western Australia and Queensland account for a third of the nation's gross domestic product. They accounted for an above-weight 39 per cent of consumer spending in the March quarter. But that left the rest of us accounting for 61 per cent of the spending.

They're going gangbusters but the rest of us are at death's door? I don't think so.

And though it has been true the mining states accounted for most of the growth in employment around the country, it's a lot less true over the first five months of this year.

Using the trend estimates, total employment grew at an annualised rate of 1.5 per cent (not too bad) during the period. Victoria accounted for almost a third of the increase and NSW for more than a quarter.

Returning to consumer spending during the March quarter, when you scrutinise it you find it was strong across all the spending categories. Retail sales accounts for fewer than a third of total consumer spending but even it recorded strong real growth for the quarter of 1.8 per cent (though retailers had to discount heavily to achieve it - which would explain their continuing complaints).

The strong growth in consumer spending has occurred without any significant fall in the rate of household saving, which has been relatively stable at 9.5 per cent for two years. That is, consumer spending has been strong because household disposable income has been growing strongly.

The economy may not be travelling quite as well as the latest national accounts imply, but it has been travelling a lot better than a lot of us have imagined. We'd do well to cheer up.

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How to improve health without paying more to doctors

It's a well established fact and most of us have at least heard of it. It's also a surprising fact. But it's a fact that doesn't get nearly as much attention as it deserves - not from our politicians, the media or the public.

It's known to social scientists and medicos as the "social gradient" or the "social determinants of health". And it means there's a strong correlation between socio-economic status and health. The higher your status, the better your health.

To put it the other way, the lower a person's social and economic position, the worse their health. And the health gaps between the most disadvantaged and least disadvantaged socio-economic groups are often very large.

One organisation that's taken a great interest in the phenomenon is Catholic Health Australia. It has commissioned the national centre for social and economic modelling (NATSEM) at the University of Canberra to produce two reports on the subject, one of them released this week. It has also produced a policy paper of its own. I'll be drawing on all three documents.

You may think the explanation is pretty obvious: the more money you've got, the better health care you can afford. You can also afford a more nutritious diet. And the better educated you are, the more aware you're likely to be of the risks to health from smoking, excessive drinking and insufficient exercise.

These things are part of it, no doubt, but it's not that simple. Medicare is, after all, free or cheap to all. And who doesn't know that smoking damages your health?

There's growing evidence that status and power affect health. The lower you are in the hierarchy, the worse your health is likely to be. A fair bit of it seems to be psychological.

A study of men in England found life expectancy of 78.5 years for a professional worker, 76 years for a skilled non-manual worker and 71 years for an unskilled manual worker.

According to a paper by the American College of Physicians, job classification is a better predictor of cardiovascular death than cholesterol level, blood pressure and smoking combined. And non-completion of high school is a greater risk factor than biological factors for the development of many diseases.

The earlier report from NATSEM found that if people in the most disadvantaged areas of Australia had the same death rate as those in the most advantaged areas, up to two-thirds of premature deaths would be prevented.

Among Australians aged 25 to 44, only 10 per cent of those who are least disadvantaged report having poor health, whereas for those who are most disadvantaged it's up to 30 per cent. Among Australians aged 45 to 64, the most disadvantaged are up to 40 per cent less likely to have good health than the least disadvantaged.

Early high school leavers and those who are least socially connected are 10 per cent to 20 per cent less likely to report being in good health than those with a tertiary education or a high level of social connectedness.

Those Australians who are most socio-economically disadvantaged are twice as likely as those who are least disadvantaged to have a long-term health condition. More than 60 per cent of men in jobless households report having a long-term health condition or disability, and more than 40 per cent of women.

The socio-economic factors best at predicting whether people smoke are education, housing tenure (whether you rent, are paying off your home or own it outright) and income. Less than 15 per cent of individuals with a tertiary education smoke.

Among women aged 25 to 44, less than 20 per cent of those in the most advantaged socio-economic classes are obese, compared with up to 30 per cent of those in the most disadvantaged classes. The likelihood of being a high risk drinker for younger adults who left school early is up to two times higher than for those with a tertiary qualification.

See what this is saying? There are two ways to improve the nation's health. One way is to spend a lot more taxpayers' money on health care. That's the solution we're always hearing about, especially from doctors.

The other way is to reduce socio-economic disadvantage; to narrow the gap between the top and the bottom, not just in income but also in educational attainment (completing secondary education), housing tenure (more affordable rental accommodation) and the way people are treated at work.

This is the solution we rarely hear about. It too would cost money, of course. But it would make more people happy as well as healthy. And it would also save taxpayers money. Just how much is what NATSEM attempts to estimate in this week's report.

If the health gaps between the most and least disadvantaged groups were closed (an impossible ideal, but one we could work towards), up to 500,000 Australians could avoid suffering a chronic illness. Up to 170,000 people could enter the labour force, generating up to $8 billion a year in extra earnings.

That would produce savings in welfare payments of up to $4 billion a year. Up to 60,000 fewer people would need to be admitted to hospital annually, producing savings of $2.3 billion. Up to 5.5 million fewer Medicare services would be needed each year, saving up to $275 million. And up to 5.3 million fewer prescriptions would be needed each year, saving the pharmaceutical benefits scheme up to $185 million a year.

But the real point is that when we choose to allow the gap between rich and poor to widen each year - including by allowing the dole to stay below the poverty line - we're casting a blind eye to the ill health it causes.

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Tax reform lost in saga of expediency

Whether led by Kevin Rudd or Julia Gillard, this government has little sense of strategic direction. Everything it does is a response to the needs of the moment. Consider the chequered history of the Henry inquiry into tax reform, the final blow to which was delivered in the budget last month.

The inquiry had its genesis in one of the first of Rudd's silly ideas, the Twenty-20 summit. Bring a bunch of bright people together with a pile of butcher's paper and who knows what good ideas they could come up with?

The business people attending came up with the world's most predictable idea: what this country needs is more tax reform. What they really meant was that taxes should be changed so they paid less. When it comes to contributing to the public debate, our business people are nothing if not chancers.

But Rudd was desperate for something solid to "take forward" to prove the summit hadn't been a complete fiasco. His need, I suspect, became the Treasury secretary's opportunity. No one in this country knows more, or cares more, about tax reform than Dr Ken Henry. He's been part of all the considerable reform we've had since the mid-1980s.

Knowing his time as Treasury secretary would come to an end, he must have seen his chance to make a last big mark on the future. Of course, his idea of tax reform was quite a bit different from that fondly imagined by business.

The inquiry was ordered to report by Christmas 2009. Really? A report about a subject as contentious as tax reform - with all its winners and losers - set to lob not many months before the next election?

But apparently Labor had a plan. Its coffers were overflowing with proceeds from the resources boom. It could go into the next election promising sweeping tax reform and using all the surplus revenue to square away any losers. What's the problem?

Then the global financial crisis. It quickly emptied the government's coffers and left it spending big to stimulate the economy. Oh no! We've got this blasted tax report coming which will propose all these changes everyone will hate.

By the time Henry reported, Rudd was in a terminal funk over the Senate's rejection of his carbon pollution reduction scheme and the failure of the Copenhagen climate change summit. Rather than putting the tax report out for public discussion he delayed looking at it, pretending to be too busy visiting dozens of hospitals to discuss health reform with the nearest pretty nurse.

Then someone had a bright idea. Among Henry's hundred-plus proposals was one for some new-fangled tax on the miners' economic rents. We could rip a lot of brass off the miners, then use the proceeds to cherry-pick Henry's other proposals.

At no net cost to the budget we could take a tax reform package into the election. We'd spread the proceeds around a host of interest groups. They'd love it and we'd have a reform program only the miners didn't like. But there'd be little public sympathy for them.

We'd cut the company tax rate by a couple of points, give something nice to small business and, above all, get the union secretaries and superannuation industry off our back by covering the budgetary cost of increasing super contributions to 12 per cent.

But caught off guard by a new tax no one understood (and which would raise twice as much as the government imagined), the miners - led by BHP Billiton's Marius Kloppers - opted to campaign for the government's defeat. They ran TV ads assuring the mug punters the mining tax would cost 'em their jobs.

Rudd's losing fight with the miners, coming on top of his collapse in the polls when he walked away from "the great moral challenge of our time", cost him his job. Gillard decided to buy off the big three miners - BHP, Rio and Xstrata - at any price so she could rush to an election and capitalise on her imagined honeymoon with the voters. The deal she did replaced an incomprehensible mining tax with a dog's breakfast designed on the run by the big miners. It came at the expense of their pipsqueak contemporaries - including T. Forrest, G. Rinehart and C. Palmer - and big business generally, which had its cut in the company tax rate halved.

Time passes, Gillard's poll ratings are at rock bottom and we get to this year's budget. With all the whingeing about the cost of living it would be great to give the punters a bribe, but how could we afford it when we're moving heaven and earth to get the budget back to surplus?

Another bright idea. Since everyone's lost interest in tax reform, why not unpick the remnants of the tax-reform package and use the savings to "spread the benefits of the boom to families" with votes?

Why not can the cut in the company tax rate (our stocks with business couldn't go any lower), postpone the higher concessional super contributions cap and forget the new standard deduction and the discount on tax on interest income?

Instead of using the mining tax to cut taxes elsewhere, why not just use it to increase welfare spending? Tax reform is sooo yesterday.

But the one bloke you don't need to feel sorry for in this saga is Henry. He was never so naive as to expect a weak, hard-up government to buy a bundle of unpopular tax reforms on the eve of an election.

What he wanted was to leave his successors in Treasury and elsewhere with a detailed blueprint of the direction in which the tax system should head over coming decades. He got to leave his legacy.

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Pollies' tangled web on infrastructure spending

After all the Rudd-Gillard government has said about its wicked predecessors' failure to invest in infrastructure, what would you think if I told you it's planning to dis-invest in infrastructure in the coming financial year?

It's true - or rather, it's what the budget papers say. They say that whereas the government is expecting net capital investment spending of $4.8 billion in the financial year just ending, "net capital investment is expected to be negative $2.7 billion in 2012-13, $7.5 billion lower than in 2011-12".

Unfortunately, the hard part with the budget papers is not so much finding out what they say, it's working out what they really mean. And that's particularly hard this year because the government's been turning so many cartwheels to meet its promise to budget for a surplus.

Fortunately, when you do decipher what it means, you find it's not as bad as it sounds. But nor is it good.

Turns out the main reason net capital investment will be going backwards is that the total includes "the sale of some non-financial assets". Non-financial assets are assets you can touch - land, buildings, maybe even a highway. Which assets, exactly? We're not told - or, if we are, the news was buried somewhere I couldn't find it. The helpful description we're given is "other purposes". How much are they expecting to get for the assets? Not told that, either - except that if you jump from page 6.52 to page 9.22 in budget paper No.1, you find an item called "gains from sale of assets, $4.7 billion". Ah.

Now, the reason for our interest is, presumably, our belief that the government should be getting on with building new infrastructure. That's true if we care about the adequacy of the nation's infrastructure. It's also true if we're asking the macro-economic question: what effect is this year's budget likely to have on activity in the economy?

From either perspective, it doesn't matter whether the government continues to own existing assets - we're probably talking about buildings - or it sells those assets to someone in the private sector.

What matters is the construction of new infrastructure. So we should ignore the proceeds from asset sales. We should also ignore any other negatives included in net capital investment, such as depreciation.

That is, the best figure for our purposes is (gross) "purchases of non-financial assets". This tells us the government will be spending $8 billion next year. Ah, that's more like it. Except that it's down from $10.3 billion in the old year.

Note, however, that about 60 per cent of this refers to defence assets. That's probably not what you had in mind when thinking of "infrastructure". And it's a fall in defence spending that accounts for most of the fall in the total.

If we're trying to assess the budget's impact on economic activity, it matters whether this is spending on the purchase of equipment and weapons from overseas (which wouldn't have much effect on our economic activity) or it's spending on the building of facilities or equipment (sub-standard subs, for instance) in Australia. If there's an answer to this question, I couldn't find it.

If you're thinking new capital spending of even $8 billion isn't much in an annual budget of $370 billion, you're right. The fact is that, despite all the feds' talk about the need for more spending on infrastructure, they've always tended to leave the lion's share of capital works spending to the state governments.

It's the states that build the schools, hospitals and police stations, as well as the roads, bridges and railways. The Feds limit their direct capital spending to things such as defence and communications. If they think we need more spending on schools or highways or public housing, they give capital grants to the states.

If you keep searching until you get to page 9.21, you find the states will be getting capital grants of $5.4 billion in the coming year - though this is less than half the $11.7 billion they got in the old year.

Not good. Except something tells me this is where the creative accountants have been at work, shifting spending out of the would-be surplus year back into the old deficit year. So, in reality, probably not such a negative to economic activity as it looks to be.

Do you get the feeling we're trespassing into areas the government would prefer us to keep our noses out of? One area where inquiry is unwelcome is the difference between the expected and much-trumpeted "underlying cash surplus" of $1.5 billion and the never-mentioned "headline cash deficit" of $8.7 billion.

This distinction was introduced by Peter Costello, in reaction against the way the Hawke-Keating government used to disguise the size of its budget deficits by including proceeds from the sale of businesses such as Qantas or the Commonwealth Bank.

Costello decided to exclude from the "underlying" budget balance something now known as "net cash flows from investments in financial assets for policy purposes". Businesses such as Qantas were classed as financial assets because what the government owned was shares in those businesses, and shares are financial assets, not "real" (physical) assets.

Good move. Selling existing businesses had little effect on economic activity. It was really just an alternative way of funding the budget deficit to selling government bonds, not a way of reducing it.

But good ole Pete left himself a loophole: he didn't exclude from the underlying budget balance proceeds from the sale of non-financial assets such as land or buildings, even though the same argument applies.

And it would never have occurred to Costello that his successor would come along and, instead of selling a financial asset, would set up new government-owned businesses. Say, one that uses its government-supplied share capital to lay a broadband network around the nation. You can't say paying people to lay cables has no effect on economic activity.

Most of the difference between the underlying surplus of $1.5 billion and the headline deficit of $8.7 billion is explained by spending of $13.3 billion on the setting up of new businesses, including the NBN Co Ltd.

See what's happened? To help get the budget back to surplus, the creative accountants have, first, used a loophole to include proceeds from the sale of land and buildings when they shouldn't have and, second, used a loophole to exclude spending on infrastructure when they should have included it.

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Labor's great appetite for spending but not taxing

It's taken me too long to realise it, but when I retired for a quiet meal after the federal budget lock-up this month, it struck me: there's truth to the opposition's charge that Labor is a big spending, big taxing government. Mind you, there's not as much truth to it as Tony Abbott & Co would like us to believe.

At one level, there's no truth at all. In the coming financial year, federal government spending is expected to equal 23.5 per cent of gross domestic product. It exceeded that level in nine of the Howard government's 12 budgets.

Federal tax collections are expected to equal 22.1 per cent of GDP, well down on the 23.7 per cent they reached in 2007-08, Howard's last budget. Were tax collections still that high, the taxman would be pulling in $25 billion more than he's expecting to.

So Labor can't be accused of being a big taxing government. It may be about to introduce two new taxes - the carbon tax, worth $7 billion a year when it gets going, and the mining tax, worth $3 billion a year - but it's giving back all the proceeds. That's why its expected budget surplus is wafer-thin.

So what's the problem? Well, I'm not sure if this vintage of Labor believes in Big Government but they surely hanker after its fruits. As I'm about to show, they're always initiating big spending programs.

Why then isn't their spending adding up to more than it does? Because, as their critics on the left keep pointing out, they have a fixation on returning the budget to surplus.

How do they reconcile their desire to spend big with their desire to return to surplus? By indulging in a kind of fiscal bulimia. They go through each year greedily gobbling up all these new spending delicacies, then at budget time they put their finger down their throat and vomit what they've eaten off into future years.

Kevin Rudd came to office promising an education revolution. You may not have noticed much change but it's not for want of spending. In five years, Labor's education spending has increased 60 per cent to $30 billion a year.

Rudd also promised to fix the inadequacies of the health system. Though every doctor you meet will assure you this miserly government isn't spending nearly as much as it should, under Labor federal spending on health has increased 37 per cent to $61 billion a year.

Rudd always wanted to be able to say his new policy was the biggest and best ever. He did that in 2009 when, standing in front of a frigate, he released a defence white paper that he claimed was "the most comprehensive of the modern era".

He had a much bigger and grander vision for defence than his predecessors, which he backed up by promising to spend a lot more money: a more generous indexation arrangement, plus extension of the commitment to real annual growth of 3 per cent.

But this is the most remarkable example of fiscal bulimia. In the four budgets since then, Labor has never once delivered the spending increases it promised. Another example is the deferral of Labor's promise to raise its overseas aid payments to 0.5 per cent of gross national income.

In all his time in power, Howard studiously avoided increasing the base rate of the age pension, knowing it would be far too expensive. But Rudd did it in his second budget - at a cost that, with indexation to average earnings and an ageing population, will grow and grow as the years pass.

For years, the self-seeking urgers in the superannuation industry sought to persuade the government to increase the rate of compulsory super contributions for employees. Howard always resisted but Labor gave in. Between 2013 and 2019, the rate will be increased from 9 per cent to 12 per cent of ordinary-time wages.

Ostensibly, the considerable cost to the budget of the concessional tax treatment of super contributions will be covered by revenue from the mining tax. But that cost will grow and grow - at a much faster rate than the tax grows.

Labor was keen to introduce paid maternity leave. In the good old days, a government would simply have imposed the cost of this on employers. But business gets a lot more privileged treatment these days, so this significant cost is being picked up the taxpayer.

Howard resisted pressure to increase federal spending on infrastructure but not Rudd. His greatest project is the gold-plated, Rolls-Royce national broadband network (though much of its cost is "off-budget").

You might think all this munificence came from Rudd, not Julia Gillard. Until we come to this year's budget. It includes greatly increased spending on dental health, taking us another step down the road to expanding Medicare to include dentists.

And it commits $1 billion to making a start on a national disability insurance scheme. When fully introduced, the scheme will cost $6 billion, maybe $8 billion a year. How would this cost be financed? Gillard doesn't know or care.

I must make it clear I approve of most of these new spending commitments. And I'm prepared to pay more tax to cover them. But Gillard and her party would run a mile before admitting taxes will need to be higher, not lower.

If Abbott inherits this grossly overcommitted budget - bringing with him his promises to abolish the two new taxes - just watch him walk away from Labor's grand spending projects: the national disability scheme, the overseas aid promise, the national broadband network, big education spending, the grand defence plan and the increase in super contributions.

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Rudd's grandiose defence plan never flew

I'm no Colonel Blimp, but by far the biggest loser from all the fiscal bulldozing Wayne Swan had to do to budget for a surplus in 2012-13 - and keep it for the following three years - is Defence.

He used his dozer to push billions in planned defence spending off into never never land, beyond the forward estimates. And that's not the first time. Indeed, he's been doing it in every budget since the one in 2009 when, just 10 days after Kevin Rudd had unveiled his grand defence white paper promising hugely increased spending, Swan began postponing its commitments.

For the good oil on what the budget has done on defence spending it's always necessary to wait a few weeks for Dr Mark Thomson, of the Australian Strategic Policy Institute, to produce his annual analysis of the defence budget. Here's a summary - with my comments - of what he found this time.

The budget cut $5.5 billion from planned defence spending over the next four years, with spending in the coming financial year falling by more than 10 per cent in real terms, to $24 billion. In round figures, 40 per cent of this will go on personnel and 40 per cent on operating costs, leaving 20 per cent for investment in new equipment.

That real reduction is the largest annual decline since the end of the Korean War in 1953. Thomson expects spending to be equivalent to just 1.6 per cent of gross domestic product, its lowest proportion since the eve of World War II (though that doesn't necessarily prove much - what reason is there to expect our defence needs to grow at the same rate or faster than our income?)

Most of the cuts announced this month will be to investment spending: $3 billion from purchases of military equipment and $1.2 billion from the construction of facilities.

But that's not all. The budget also involves a redirection of $2.9 billion in spending within the defence budget to meet key cost pressures - areas where spending is expected to exceed previously set limits.

Most of this will be taken from planned investment in equipment. So it's the old story: whenever pollies are under budget pressure, the first thing overboard is capital works. One exception: $360 million will be saved by cutting civilian numbers by 1000 over two years.

When Rudd announced his grand plan to keep defence spending growing by 3 per cent a year in real terms, he also announced a "strategic reform program" to help cover the cost by delivering $20 billion in savings through greater efficiency.

Most of the areas where costs are growing faster than budget are areas where these efficiency savings were to be achieved. The problem seems to be partly that the savings were an accounting fiction and partly that Defence has failed to try hard enough. It would be wrong to imagine all the fault lies with the politicians.

The Defence Department's manifest failings aside, it's clear Rudd wanted a big expansion in defence spending, but neither he nor his ministers wanted it badly enough to find the money to pay for it.

Under unrelenting pressure from the opposition to prove their credentials as good fiscal managers, they gave a higher priority to getting the budget back to surplus. They won't cop any criticism from me on that.

But it's no excuse to say Rudd's grand plan was overtaken by the global financial crisis. As Thomson reminds us, the white paper was unveiled when everyone expected the crisis to hit us harder than it did.

Thomson argues Rudd's plan never added up. It had to make a clear choice about the role it wanted Defence to play in the future, then design a defence force consistent with that role, then commit to providing the necessary resources to make it happen.

It failed on each count. We're left with a Defence Department that's in disarray. It's supposed to be following a plan its political masters have sabotaged at every turn. Little wonder Julia Gillard has brought forward to next year the development of a new plan.

Let's hope this time the government formulates a plan it can afford, one consistent with its iron commitment to "fiscal sustainability" (the great buzz-phrase of this year's budget papers). This suggests it'll be a lot less superlative than Rudd's grandiose effort.

And guess what? Thomson thinks it wouldn't be such a bad thing. "For what it's worth, this author believes that Australia can responsibly adopt a less ambitious defence strategy than that set out in 2009," he says. "It's likely that the defence force we need is also the one we are willing to pay for."

But, you say, surely Tony Abbott will be the one making those decisions after 2013. Quite possibly. But don't assume his approach will be a lot different.

Thomson observes that public opinion has shifted. The strategic fears and misgivings of the post-September 11 decade have been replaced with the uncertainty and caution of the post global financial crisis decade. For the moment, at least, most people are more worried about the next financial crisis than they are about the seemingly remote prospect of a strategic crisis.

And get this: "The opposition's resistance to the latest round of cuts to defence spending has been both muted and laced with caveats. The long-standing bipartisan approach to defence policy has been trumped by bipartisan fixation on achieving a surplus."

Sure. But take a look at the dire straits decades of budget deficits have got the Europeans into and at the Americans' bitter warring over their budget. As vices go, an obsession with keeping the two sides of the budget in balance isn't high on my list of sins.

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Why we've become good savers

Who would believe it? Australia is turning into a nation of savers. We've already lifted our rate of saving - we save more than people in other developed countries - and we're likely to increase our saving rate further.

Who would believe it? Australia is turning into a nation of savers. We've already lifted our rate of saving - we save more than people in other developed countries - and we're likely to increase our saving rate further.

This the surprising message in this year's budget statement 4 - otherwise known as Treasury's sermon. The facts and figures that follow come from there.

Expressed as a proportion of gross domestic product, gross national saving fell significantly from the mid-1970s until the early 1990s. Between 1992-93 and 2004-05, it was fairly steady at 21 per cent. It began to rise in 2005-06 - well before the global financial crisis - and since the crisis it's shot up to reach almost 25 per cent last year.

This is well above the average for the developed economies of less than 19 per cent. Now, their saving rates are down because they're still trying to put the Great Recession behind them and it's arguable that some part of our increased saving since the crisis is also a passing reaction to the uncertainty it continues to cause. But we were well above them before the crisis.

The nation's rate of saving is the sum of the saving done by the three sectors of our economy: the households, the companies and the governments.

Households save when they spend less than all their income on consumption. Companies save when they retain part of their after-tax profits rather than paying all of them out in dividends. Governments save when their revenue exceeds their recurrent spending.

Most of the reason for the increase in national saving - and most of the reason for expecting it to increase further - rests with households.

The household saving rate declined steadily from the mid-1970s to the mid-noughties but then it increased significantly and is now 11.5 per cent of GDP, up from a low of just under 6 per cent in 2002-03.

One reason for this turnaround is the maturing of the compulsory superannuation system. Award-based super was introduced in 1985 but the scheme really got going in 1992, when they began phasing up employer contributions to 9 per cent of ordinary-time wages by 2002.

The value of Australia's super savings is now as much as $1.3 trillion, equivalent to 95 per cent of annual GDP (compared with the average for the developed countries of 68 per cent). Treasury estimates the scheme now makes a gross contribution to national saving of 1.5 percentage points.

Treasury says the more recent increase in household saving is likely to reflect a combination of increased consumer caution following the crisis and a return to more sustainable rates of consumption growth.

To the extent it's a return to more normal rates of growth in consumer spending, it's likely to be lasting. To the extent it's just caution, retailers and others can hope it will go away as all the upheaval stemming from the global crisis is resolved, people become more confident and lower somewhat the rate at which they're saving.

Now, no one can say how much of our higher household saving rate comes from lasting ''structural change'' and how much comes from passing caution. Until more of history unfolds, we can only make guesses.

But my guess is most of it is structural and not much of it is passing. In any case, I can't see the global economy becoming a much more placid place any time soon. Europe's weakness could roll on for a decade.

I think the econocrats are holding out false hope to retailers and others with their talk of ''the cautious consumer'', implying the tough times will end as soon as shoppers cheer up. It would be better to encourage the retailers to get on with adjusting to the new world they live in.

Treasury says the fall in household saving up to the mid-noughties primarily reflected a prolonged, but essentially one-off, structural adjustment to financial deregulation from the early '80s and the transition to a low-inflation (and hence low nominal interest-rate) environment from the early '90s.

Easier access to credit and lower rates led to greater borrowing, rising house prices, high levels of confidence and - thanks to big capital gains - people reducing their saving rate and allowing their consumption spending to grow faster than their incomes.

This adjustment process is likely to have been a significant driver of change in household saving. From the second half of the noughties, however, households began to slow their accumulation of debt and, as a result, the household saving rate began to rise.

With this process now likely to have been completed, households as a whole can be expected to consolidate their financial position over coming years by returning to more normal levels of saving and borrowing.

That's a quick explanation of why we've gone back to being good savers. But why expect our saving rate to go on rising? Partly because our (largely foreign-owned) mining companies are retaining a high proportion of their huge after-tax profits (which they're using to help finance their investment in additional production capacity).

Partly because the federal politicians (and their state counterparts) are struggling to get their budgets back into operating surplus, meaning governments are shifting from dissaving to saving.

But mainly because the compulsory super scheme will soon begin phasing up the contribution rate from 9 per cent of wages, reaching 12 per cent in 2019-20. Treasury estimates this will make a further gross contribution to the national saving rate of 1.5 percentage points of GDP over the next 25 years, with most of that expected to occur over the next decade.

Just as every punter knows in their gut that deficit and debt are always and everywhere a bad thing (it ain't true), so everyone knows saving is always a good thing. But what's so good about it?

The main reason people save is to smooth their consumption over time. For instance, you consume less while you're working so you can have a higher standard of living when you're retired. You can even use saving to pass some of your income on to the next generation. And saving makes you more resilient by providing a buffer against unexpected adverse events.

At a national level, borrowing less and saving more makes us more resilient to possible external shocks. And it helps moderate inflation pressure and so allows interest rates to be lower.

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Why the pollies will keep fiddling with super forever

Have you noticed? Our guardians in the superannuation industry have come out swinging to defend us against the changes to superannuation announced in the budget. Mark Payne, a partner in the legal firm Hall & Wilcox, says "anyone that has turned 50 can feel dudded".

The changes "will be costly to administer, bring little revenue for the federal government and are a real disappointment for the over 50s, who will need to reassess their retirement strategies", he says.

According to John Brazzale, a managing partner of the accountants Pitcher Partners, "there's now less incentive to put money into super, particularly [for] those earning more than $300,000. They would be looking at how to get a better tax return by investing outside of super in, for example, businesses and managed funds etc".

One of his partners, Brad Twentyman, agrees.

"Superannuation at higher incomes has become very marginal and there is nothing compelling to drive self-sufficiency in retirement," he says. "This is not the system we should be aiming for. We need to be encouraging higher income earners to save for their retirement as well as lower income earners."

David Anderson, the managing director of Mercer, a financial services provider, warns that "continual changes to superannuation will unfortunately create a wave of uncertainty, confirming the commonly-held view that superannuation is an irresistible honey pot".

"There is a risk that further complicating and continually changing the rules in superannuation will reduce investor confidence in super and that would be a most unfortunate outcome," he says.

Sorry, but most of all that is self-serving tosh. For someone who's turned 50 to feel "dudded", they also need to be earning more than $300,000 a year (putting them into the top 1 per cent of taxpayers) or to have a super account balance of less than $500,000 and have been in a position to sacrifice salary of up to $25,000 a year.

The two decisions they're complaining about are to reduce the tax concession on super contributions by people on more than $300,000 from 31.5? in the dollar to 16.5? and to defer for two years the promise to raise the limit on concessional contributions from $25,000 a year to $50,000 for people over 50 with balances of less than $500,000. Few people on middle incomes could have afforded to take advantage of the higher limit.

The media have a tendency to quote uncritically business spokespeople who want to have a crack at the government of the day. But most of them are wolves in sheep's clothing.

They claim to be speaking in the interests of their customers but, for the most part, they are, in the money market phrase, "talking their book" - that is, offering advice that serves their own interests.

Even when measures have been carefully targeted to hit only the well off, they'll be shedding bitter tears and predicting dire consequences. Why? Partly because they're very highly paid themselves but mainly because they make more money out of the rich than the poor.

The guys who run super funds are in the ticket-clipping business. They take a tiny nick out of every dollar that passes through their hands and, since our super savings total $1.3 trillion, those tiny nicks add up to very big bucks.

The super industry - which includes not just the fund managers but also the (often union) trustees and the myriad outfits providing advice to them - is among the most lucrative in the country. These guys pay themselves extraordinary salaries.

And it's not just that clipping tickets is such a deceptively cheap way to make a fortune. It's also that, by compelling all employees to save 9 per cent of their wages, the government has delivered them a huge captive market.

Not content with that, however, after years of agitating they've finally persuaded the Labor government to phase up their monopoly from 9 per cent to 12 per cent - at a huge and ever-growing cost to budget in tax revenue forgone.

When this and other favourable changes were announced in 2010, no one in the industry was claiming continual changes to super were discouraging people from saving through super. They trot out this old favourite only when governments make changes that hit the industry's revenues.

Contrary to the claims we've heard, few people will need to "reassess their retirement strategies". And even for the very highly paid, the tax-effectiveness of saving through superannuation remains considerable, not "very marginal".

The proposition that the highly paid need to be bribed by tax concessions to put money aside for their retirement is laughable. Why would they be planning to live only on the age pension? And even if they do turn away from super to other ways of saving, why's that a problem for anyone but the super ticket-clippers?

When you combine this government's plan to ramp up super with the changes Peter Costello announced in 2006 - to make super payouts tax-free for those 60 and over; to sanctify the salary-sacrifice loophole and to ease the assets test on the age pension - you see it's not adding up.

The annual cost of super tax concessions is now growing so fast it's projected to equal the annual cost of the age pension by 2015-16. Such growth is simply unsustainable.

Now add the fact that these concessions go disproportionately to high-income earners, as well as advantaging the retired generation over the working young. The old don't pay income tax but the young do.

Get it? Barring the unlikely event of any politician summoning the courage to fix the whole unfair, unaffordable mess in one go, the pollies will go on fiddling at the edges of the super arrangements in just about every budget.

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How spin doctors have taken control of budget papers

What if I told you the true expected budget balance for next financial year wasn't the much trumpeted surplus of $1.5 billion but a carefully buried deficit of $8.7 billion?

I'd be justified in making such a statement because that deficit figure is officially known as the "headline cash balance" and, as a journalist, I'm in the headline business.

I'd also be justified in drawing it to your attention because the government in its budget papers has made no effort to convince us the headline figure is of no macro-economic significance - rather, we should focus solely on the "underlying cash balance" of a $1.5 billion surplus.

Indeed, I'm not sure the headline figure is of no macro significance. Why not? Because I happen to know - no thanks to the government - that the difference between the two figures includes, among various things, the government's spending on the rollout of the national broadband network.

That's of no macro-economic significance? That has no effect on economic activity? Don't think so, chaps.

I'd really like to be able to tell you just what the transactions are that explain the difference between the headline and the underlying balances. But if there's a table anywhere in the voluminous budget papers spelling that out, I can't find it.

I'm sure if the econocrats had their way there'd be such a table, but the preference of the politicians and their private-office spin doctors is to conceal rather than explain. And even just the figure for the ironically titled headline balance has been carefully hidden to ensure it doesn't hit the headlines.

It didn't rate a mention in the Treasurer's budget speech; in the multicoloured Budget Overview document it was included as a "memo item" (that is, they don't tell you how it was arrived at) on page 36.

In the budget papers proper, it went unmentioned in budget statement 1 (also known as the budget overview) and got a single mention on page 9 of budget statement 3.

The hiding of the headline deficit is just one example of the way the budget papers are becoming less informative rather than more, and the way the government's spin doctors are turning them into an exercise in media management rather than transparency and accountability.

The budget speech used to be a thorough and trustworthy exposition of the new measures announced in the budget; these days it's a made-for-television rave about the budget's good points.

I suspect one reason the budget papers have become less rather than more user-friendly over the years is the spin doctors' desire to drive journalists away from the budget papers proper to the multicoloured Budget Overview, known to econocrats as "the glossy".

It's glossy by name and gloss by nature, putting the best gloss possible on the budget and focusing on whatever messages the government is trying to peddle.

It offers a seemingly useful list of the "major savings" announced in the budget, but you can't be sure all the "saves" you'd like to know about are listed. The single line for "other" savings accounts for almost a quarter of the total.

But that's honest compared with the list of "major initiatives" announced in the budget, otherwise known as "spends". It's a table without totals, meaning it doesn't even have a line for "other" spending. If it did, other would account for almost a third of the total.

Spin doctors work on the assumption journalists are both dumb and lazy, meaning they'll focus on whatever news you give them and not think to go looking for the things you conceal. They also assume journalists who benefit from background briefings and selective leaks won't be game to complain publicly about the way they're led around by the nose.

Journalists turn a blind eye to the rank hypocrisy of the Treasurer and Finance Minister piously refusing to comment on what may or may not be in the budget, while the Prime Minister's press office leaks much of its content to selected journalists, then quietly confirms the story's accuracy to those journos who missed the exclusive.

Unfortunately, there are head office-based journos who aren't part of the club and so feel no such inhibition. There are also, believe it or not, economists and even the odd private citizen who read the budget papers in the hope of enlightenment. They're getting the bum's rush.

This year AAP has accused the government of leaking budget information to selected media for broadcast during the budget lock-up. How's that for duplicity.

Budget paper No 1's coverage of revenue items is pretty thorough, but its statement on expenses leaves much to be desired. It's been stripped of its former graphs showing how spending categories have grown over the years and its tables showing the figures for major spending categories over many years. This paper used to have an index to help you follow a query through, but that was dropped long ago.

You have to delve as far as budget paper No 2 for reliable explanations of particular budget measures, but this information is listed by department rather than program or function, and little effort is made to help users find what they're looking for.

Federal bureaucrats are convinced they're superior to state bureaucrats in all respects, but the states' budget papers are generally superior to the feds' in their transparency, rigour and comprehensiveness. Federal budget papers are particularly inadequate on information about non-financial corporations, such as the NBN Co Ltd.

So tight is the spin doctors' hold on the federal budget process that some nameless operative in the "media liaison" section of the "communications unit" within Treasury's "ministerial and communications division" summarily declined, without explanation, a newspaper's request for budget tables to be supplied in spreadsheet format.

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Macro 'policy mix' returns to normal

In case you missed it, the secretary to the Treasury has spelt it out: with the budget's planned return to surplus next financial year, fiscal policy is being put back in the cupboard and the "policy mix" returned to normal.

Delivering his annual post-budget speech to the Australian Business Economists, Martin Parkinson outlined the "macro-economic framework" - the respective roles of fiscal policy (the manipulation of government spending and taxation), monetary policy (the manipulation of interest rates by the Reserve Bank) and the exchange rate.

"The primary responsibility for managing demand to keep the economy on a stable growth path consistent with low inflation" had been allocated to monetary policy, he said.

So "normal" is for monetary policy to be doing most of the work in keeping the economy steady. Its aim is "to maintain inflation between 2 and 3 per cent, on average, over the cycle". But, as you see, this doesn't mean the Reserve focuses on inflation to the exclusion of all else.

While keeping inflation low may be the target, the goal is non-inflationary growth - growth which should keep unemployment low.

And a key part of the mechanism for achieving low inflation and steady, job-creating growth is, in Dr Parkinson's words, "anchoring inflation expectations". Because the expectations of wage negotiators and businesses tend to influence the demands they make and the prices they set, keeping them expecting inflation to remain low is half the battle.

That's one of the main roles of the inflation target. Provided people are confident the Reserve will stick to its target - as they are - you can allow the economy to grow at a faster rate than otherwise.

Parkinson linked monetary policy with the exchange rate. "Monetary policy is supported by a floating exchange rate, which acts as a shock absorber that offsets some of the effects of global shocks on the economy and naturally adjusts in response to other economic developments," he said.

When, for instance, world commodity prices rise a lot and our terms of trade improve, the dollar tends to rise.

The extra national income flowing from the higher export prices would lead to a surge in demand that could be inflationary (and, in the days when our exchange rate was fixed, it was). But the higher exchange rate reduces the international price competitiveness of our export and import-competing industries which, by reducing exports and increasing imports, reduces the external component of aggregate demand (gross domestic product).

And this, combined with the direct reduction in the prices of imports, helps keep inflation under control. The exchange rate has thus absorbed some of the shock from the rise in commodity prices and so kept the economy growing steadily. When commodity prices fall, the process works in reverse.

But if monetary policy is the main policy instrument used to keep the economy on an even keel, what is fiscal policy's role?

Parkinson says a key objective of fiscal policy is "to maintain fiscal stability from a medium-term perspective". That is, to ensure we don't run so many budget deficits that, in time, we build up a level of government debt that becomes unsustainable.

(To see what nasty things can happen when you don't "maintain fiscal stability" look no further than Greece, with Italy and other European economies heading down the same track.)

But this is Parko's key message: "Outside of the automatic stabilisers, discretionary fiscal policy should only be used for supporting demand during extreme circumstances, such as when: the effectiveness of monetary policy is impeded; and/or a shock is sufficiently large and sufficiently sudden that monetary and fiscal policy should work together to support activity, such as during the global financial crisis."

Let's unpack that mouthful. As we saw here last weekend, the budget contains "automatic stabilisers" that cause the budget balance to deteriorate when the economy turns down and improve when the economy turns up.

So the budget acts automatically to help stabilise the economy as it moves through the business cycle, with public sector demand expanding automatically at times when private sector demand is weak, and contracting automatically when private demand is strong.

Parkinson is saying this is a good thing and the macro framework requires that the automatic stabilisers be unimpeded in doing their job. That is, governments shouldn't take explicit ("discretionary") decisions that counter the effect of the stabilisers.

(Attempting to counter the stabilisers is exactly what the Brits and other Europeans are doing with their "austerity" policies. They've been slashing government spending at a time when the economy is weak. This weakens demand further, pushing the economy back into recession and, far from reducing the budget deficit, makes it worse. By ignoring elementary Keynesian principles, they've blundered into an adverse feedback loop.)

The next element in Parkinson's exposition of fiscal policy's role in the macro framework is that governments may take discretionary measures that reinforce the effect of the stabilisers, but only in extreme circumstances - such as a potentially serious recession.

In other words, apart from allowing the stabilisers to do their thing, it's not normal practice for fiscal policy to be used to manage the strength of demand from year to year. That's the job of monetary policy, for which it's better suited (because it can be adjusted quickly and easily and in small or large steps).

Parkinson says we've had such a "medium-term" approach to fiscal policy since the mid-1980s, "before evolving into a fully articulated framework with the development of [Peter Costello's] Charter of Budget Honesty in the second half of [the] 1980s". The charter requires the government of the day to announce a "medium-term fiscal strategy" and Wayne Swan's strategy is only marginally different from Costello's: "to achieve budget surplus, on average, over the medium term".

This formulation is carefully designed (by, I suspect, the Liberals' Senator Arthur Sinodinos) to allow the automatic stabilisers to push the budget into deficit during recessions - and even to permit governments to implement fiscal stimulus packages during recessions, as this government did - provided the stabilisers are unimpeded in returning the budget to surplus and any stimulus spending is ended.

This means that, over time, all the deficits incurred during downturns are roughly offset by all the surpluses achieved during upswings. The surpluses are used to pay off the deficits, thus keeping the level of government debt steady and sustainable over time.

So fiscal policy and monetary policy have different roles, and monetary policy and discretionary fiscal policy need to pull together only in emergencies.

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Why a little more redistribution is justified

So, has the budget led to an outbreak of class warfare? Only if Julia Gillard's a lot luckier than she's been so far. That is, I doubt it. What I don't doubt is that her disparaging remark about the north shore was a calculated attempt to get a bit of class consciousness going to accompany her give-and-take budget.

But loyalty to parties on the basis of class is long gone. These days people's vote is as likely to be guided by the party divide on social issues as economic ones. Then there's the rise of the "aspirational" voter - people who don't mind seeing the better-off favoured by the government because they hope to be better off themselves one day.

If the public's reaction to this budget is any guide, we've either all become aspirationals or, more likely, a lot of people don't know which side their bread's buttered on. Wayne Swan brings down a Robin Hood budget and, according to last week's Herald poll, 43 per cent of respondents think it will leave them personally worse off and only 27 per cent expect to be better off. Talk about living in a fog.

Be in no doubt: this budget is the most highly redistributive in years. Whether out of desire to awaken class loyalties, to soften the blow of the carbon tax, or to buy votes, this budget gives quite a bit of money to low- and middle-income families.

The discretionary increase in the means-tested family benefit, to take effect from July next year, is well targeted to families in greater need.

The schoolchildren's bonus, the first payment of which will be made within a few weeks, goes only to parents eligible for the family benefit. It's a big improvement on the education tax refund, which mainly benefited those parents able to spend big on eligible equipment and savvy enough to keep receipts and make the claim.

The new income-support supplement, to take effect next March, will give people on the dole a princely 57? a week extra, reducing by a sliver the extent to which we require them to subsist below the poverty line. It is, nevertheless, the first real increase to the dole for more than 20 years. The budget plans for increased spending on dental health for the needy and a start to the national disability insurance scheme in July next year.

But though these measures are welcome, they hardly represent the big increase in welfare their critics claim. According to the calculations of Professor Peter Whiteford, of the University of NSW, their cost of $8 billion over four years represents an increase of less than 1 per cent of total budget spending on health and social security.

Helping to pay for these increases are cuts aimed squarely at the better-off. The top 1 per cent of taxpayers, earning more than $300,000 a year, will have the tax break on their superannuation contributions cut from 31.5? in the dollar to 16.5?, putting them on a par with most workers.

The provision allowing workers over 50 to make low-taxed super contributions up to $50,000 a year - that is, to exploit the salary sacrifice rort (as I've been doing) - will be cut to $25,000 from July. Those with super balances under $500,000 were to have been given an exemption from the cut, but this has been deferred for two years, thus largely closing the salary sacrifice loophole.

Despite the hard-luck stories, workers not on high incomes can't afford to sacrifice salary in this way.

The capped 50 per cent discount on the tax on interest income, which now won't happen, would have benefited the better off, as does the tax offset on net medical expenses, which is to be virtually eliminated.

Almost everyone - whether on the right or the left - automatically assumes company tax is a tax on the rich. So those excitable souls claiming the budget was a plan to "smash the rich" list as Exhibit A the decision not to cut the rate of company tax by 1 percentage point, as had been promised.

But Australian shareholders - including Australian super funds - get tax credits for the company tax paid on their behalf. And tax economists argue that, in the end, the burden of company tax is borne mainly by wage-earners.

So it's not at all clear to me that company tax is a tax on business or on the rich. Business was never terribly enthusiastic about the 1 per cent cut; I'm unimpressed by the bitter tears it's shedding now.

When you combine this Robin Hood budget with the way the tax cuts linked to the carbon tax are limited to individuals earning less than $80,000, with the way the temporary flood levy was aimed at the better off, with the various previous measures to reduce upper-middle class welfare and with the 2009 discretionary increase in the age pension (the largest real increase in the pension ever), you do have to conclude this Labor government, particularly under Julia Gillard, is very redistributive - though its record isn't unblemished.

And unless you're happy to see the gap between rich and poor widening - as it has been - that redistribution is not unwarranted.

According to figures from the Bureau of Statistics, between 2003-04 and 2009-10, average household disposable income rose by 26 per cent in real terms.

But the income of the bottom fifth of households rose by 17 per cent, whereas the income of the top fifth rose by 32 per cent.

Remember that next time you hear highly paid business people banging on about the budget being "more about how we carve the pie, rather than how we grow the pie". It was about time.

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Swan's innovation: the budget as bulldozer

A closer look at the budget papers reveals just how contrived the budget's return to surplus is. Wayne Swan is hardly the first treasurer to resort to "reprofiling" (a word his people invented), but he's the first to use it on such a massive scale, turning the budget into a bulldozer.

Reprofiling means changing the previously announced timing of budget spending or taxation measures. Deciding not to proceed with previously promised tax changes (the 1 percentage point cut in the company tax rate, the standard deduction, the limited 50 per cent discount of tax on interest income) is one thing. In contrast, deciding to defer by two years the increase in the cap on super contributions by older workers is an example of reprofiling.

Nothing demonstrates how contrived this budget is better than the expected real growth in government spending. In the financial year just finishing, 2011-12, spending is expected to have grown by a whopping 4.8 per cent. In the budget year, 2012-13, it's budgeted to fall by a whopping 4.3 per cent.

But the following year it resumes its rapid upward climb, growing by 3.7 per cent. The year after, up by a modest (!) 2 per cent, and in the last year of the forward estimates, 2015-16, up by 2.9 per cent.

The budget papers helpfully note that, if you roll together the old year and the budget year, the average rate of growth is just 0.3 per cent. This tells us, first, much of the real fall in spending in the budget year is achieved by the simple expedient of pushing spending back into the old year.

Second, to have real spending growing for two years in a row at an infinitesimal rate is quite unnatural. And since there have been no announcements of swingeing spending cuts, such a situation could only have been contrived.

In fact, Swan was moving the budgetary furniture around in at least the two previous budgets (and last November's midyear budget review) to make ready for the miraculous return to surplus in 2012-13.

But so extensive have been his labours to bring the planned surplus about that a more robust metaphor is called for. Swan has invented the fiscal bulldozer. The Treasurer always has a big pile of spending in his blade that he's pushing forward into later years.

And, because budgets occur in May, the dozer can always be turned around and used to push spending back into the few remaining weeks of the old financial year.

But let's focus on the measures announced last week. Swan announced "saves" worth $33.6 billion over five years (the old year, the budget year and the three "forward estimate" years) less "spends" worth $22.4 billion over five years. So for every $3 he saved, he gave away $2.

Note, however, that half his saves were tax measures rather than cuts in spending. Of the total value of tax saves, only 40 per cent represents actual tax increases, while 60 per cent represents decisions to abandon or defer tax reductions included in the mining tax package.

When the package was first announced, pretty much all the revenue expected to be raised by the new tax was used to pay for "reforms" of other aspects of the tax system. These alleged reforms were very roughly based on recommendations of the Henry report. But now, roughly $2.2 billion a year of the mining tax's annual proceeds is to be used to finance increased government spending rather than reductions in other taxes.

The budget papers link the changes to the mining tax package to the plans for an increase in the family benefit, the new (pitiful) allowance for people on the dole, the switch from the education tax refund to the "schoolkids bonus", the first stage of the national disability scheme and the increased spending on dental care.

In their efforts to make announcements sound momentous, it suits the pollies and the media to quote budget costs "over four years" (or five, if costs are being pushed back to the old year).

But we budget and think a year at a time, so this practice can mislead.

It's worth noting that, of the total saves of $33.6 billion, only 14 per cent apply to the budget year. This tells us Swan drew up this budget very much with an eye to the following years. Having orchestrated the planned return to surplus in 2012-13, he then had to make sure the budget stayed in surplus over the forward estimates.

Of his total spends of $22.4 billion, a mere 8 per cent apply to the budget year. This is another indicator of how contrived the budget is.

But it also helps explain how a supposedly tight budget could appear so generous, as well as revealing another modern trick: pre-announcement.

Rod Tiffen, of the University of Sydney, has beaten the economic commentators to making a significant point - increasingly, budgets are being used to announce measures that don't take effect for more than a year. Budget headlines are built on stuff that won't happen for ages.

In the case of new taxes, such delay is unavoidable. But that's rarely true of spending. Among the measures announced last week that don't start until July 2013 are the increase in the family benefit and the introduction of the national disability scheme. The dole increase doesn't start until March 2013.

Combine all this with the knowledge the government has never once honoured its grand pledge to increase defence spending each year by 3 per cent in real terms and you conclude Swan's fiscal bulldozer will be on the job again in next year's budget - and any to be delivered by his successors.

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