Don't believe all you're told about bracket creep

Beware of treasurers promising to protect you from the ravages of bracket creep. They're like Mafia bosses promising to protect you from robbers and thieves. Maybe they're offering something nice, or maybe they're working some kind of con.

Joe Hockey's speech about tax reform on Monday was more an advert than a policy announcement. He said the government would have to do something about the evil of bracket creep, but didn't say what or when, nor how it would be paid for.

The firmest we got was a hint that the Abbott government would go to the election next year promising a tax reform package involving a cut in income tax.

Hockey explained that "bracket creep occurs when people are pushed into higher tax brackets as a result of inflation and rising wages". Not quite right, but near enough.

Hockey warned that the average income earner on about $77,000 a year is just below the second highest tax bracket of 37¢ in the dollar, which kicks in above $80,000.

He estimates that, if nothing is done in the next two years, about 300,000 people will move into that bracket. And if nothing were done in the next 10 years, more than 40 per cent of taxpayers would be in the top two tax brackets. (Remember that the rate you pay on the last part of your income is much higher than the average rate you pay on all your income. Those on just over $80,000 pay an average rate of 22¢ in the dollar.)

The truth is, all treasurers have form when it comes to bracket creep. It can be prevented easily by increasing the four bracket limits once a year in line with the inflation rate. Malcolm Fraser and John Howard tried this in the late 1970s, but soon gave up.

Why? Because it delivered annual tax cuts that were too small and too mechanical for voters to notice and be grateful for. Much better to let bracket creep rip for three years or so, then have a bigger tax cut just before or after an election.

Every year that bracket limits aren't raised, the treasurer is knowingly letting brackets creep up, unless he (or one day, she) grants discretionary tax cuts. With help from Wayne Swan, Peter Costello delivered eight such tax cuts in a row between 2003 and 2010.

Those discretionary cuts cut a lot deeper and cost a lot more than eight years of "tax indexation" as we called it. They were part of the excesses of the resources boom and turned out to be far more generous than we could afford – as we realised after falling coal and iron ore prices started slashing company tax collections.

This is why, since 2010, successive governments have let bracket creep rip. They're trying to increase income tax collections so they play their part in getting the budget back into surplus. We've had our fun, now we're suffering the hangover.

This means the man who now professes to be so concerned to end bracket creep is the same man who used projections of years of further creep in this year's budget to prove he was getting on top of the deficit.

If you think that sounds a bit sus, try this. The low and middle-income earners suffering most from bracket creep at present, weren't the taxpayers who gained most from the eight tax cuts – those were the high income-earners (such as yours truly).

If alleviating bracket creep was Hockey's true motivation for wanting tax cuts, his response would be simple: leave the rates of income tax unchanged, just raise the bracket limits by as much as you could afford.

But in his next breath Hockey was arguing that the top tax rate – 45¢ in the dollar – which cuts in when incomes hit $180,000 a year, was far too high and needed cutting.

See the scope for trickery? Justify tax cuts by telling the majority of voters on low and middle incomes how tough they're doing it, then give most relief to high-income earners again. Lawyers call it "bait and switch".

Hockey is right in arguing that (thanks mainly to the bias in the eight tax cuts), bracket creep hits low and middle-income earners proportionately harder that it hits high-income earners, thus making bracket creep "regressive".

But this raises an obvious question: how would the tax cuts be paid for? Could we be sure the cure wasn't worse than the disease? Assuming Hockey wouldn't have the effrontery to allow them simply to add to the budget deficit, one way would be for their cost to be covered by (massive) cuts in government spending.

We know from his first budget that this would rebound on the very low and middle-income earners he was purporting to help.

But it's a reasonable bet Hockey is hoping for a deal in which the cost of the cuts in income tax is covered by an increase in the rate of the goods and services tax.

Trouble is, the GST is also regressive. And a recent paper by Professor Patricia Apps, of the University of Sydney, demonstrates that an increase in the GST would be more regressive than the bracket creep it corrected. Why? Because it would hit all those people whose incomes were below the income tax threshold.

Beware of treasurers promising to protect you from bracket creep.

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Libs deserve share of reform credit

I am a career-long admirer of Paul Keating. He opened our economy to the world, dragging us into the era of globalisation. Of the 13 treasurers I've observed in my career, I judge him to be far and away the best – though he did have his failings.

But last week Keating came out fighting when John Howard argued that the Coalition opposition of the time also deserved praise "because it gave bipartisan support to so many of [Keating's] reforms".

Keating objected to "a creeping part of the orthodoxy of late that the reformation of Australia's financial, product and labour markets . . . was not executed by the Hawke and Keating governments but was some kind of project undertaken with the active co-operation of the then Liberal-National opposition".

"Nothing could be further from the truth."

Sorry, but Howard has a point.

It's true there was no overt co-operation between Labor and the Coalition, nor any atmosphere of sweetness and light. The Liberals never said anything good about Labor and always found plenty to criticise and oppose. To the casual observer, it was adversarial politics as usual.

In particular, the Libs vigorously opposed almost all of Labor's tax reforms, particularly the taxes on fringe benefits and capital gains, the compulsory superannuation levy and even the restoration of the assets test for the age pension.

They also vigorously opposed Medicare and Labor's Accord with the union movement.

Howard may be happy to praise the Hawke and Keating reforms at this late stage, but he didn't at the time, nor during the almost 12 years he was prime minister. This is an old trick: praising long departed opponents as a way of criticising the present incumbents.

I don't doubt that, had a Howard-led government been elected in 1983, it wouldn't have instigated all the reforms Keating made in the following 13 years. It would have lacked the vision, drive, courage and sense of urgency Keating had – not to mention the support of its Labor opposition.

Keating is no doubt right in saying his biggest problem in pushing reform was getting the Labor caucus and the unions lined up behind him. In this the Accord was a great help, meaning ACTU secretary Bill Kelty deserves his share of the reform credit.

The Labor faithful may regard Keating as a saint up there with Whitlam today, but at the time they thought of him as a turncoat.

But the fact is Howard is right in listing all the reforms the Coalition, under the influence particularly of him and his former adviser, Professor John Hewson, did not oppose: privatisation of Qantas and the Commonwealth Bank, deregulation of bank lending rates, floating the dollar, admitting foreign banks, ending import quotas and virtual phasing out of tariffs, and introducing the HECS scheme for university fees.

Urged on by Hewson, Howard instigated the whole financial deregulation project by commissioning the Campbell report. He implemented as many of its recommendations as Malcolm Fraser would let him, before the Fraser government was swept from office.

It's noteworthy that nothing Keating went on to do was mentioned in the 1983 election campaign. In opposition, Keating joined the rest of Labor in vigorously attacking financial deregulation.

In office, he changed his tune, used a quickie report by the banker Vic Martin to sanctify the Campbell proposals, and proceeded to implement them all.

Howard is right in saying the most politically courageous reform was ending the protection of manufacturing. Until then, protectionism had been a bipartisan policy for decades, strongly supported by business and the unions. It remains supported by the public to this day.

It was usual for protection to be stepped up during recessions. But in the depths of the recession of the early '90s – our worst since the Depression – Keating actually instigated the second stage of its removal.

Never was there a better opportunity for the Libs to rally the nation against this monstrous act of folly. By then they were being led by Hewson and his criticism remains burnt on my brain: Labor should have gone further.

Keating says he never worried about the Libs, never even spoke to them about things. I believe him. What I don't believe is his implication that, had they opposed his reforms, nothing would have been any different.

In the key areas Howard listed, Keating knew his opponents would not attempt to score points against him, that the interest groups and voters adversely affected would have no political flag to rally under. This hugely strengthened his hand.

It was a unique period in our economic history, for which the Libs deserve their share of credit.

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More to infrastructure than just spending more

Everyone knows our federal and state governments haven't been spending nearly as much as they should on public infrastructure. But, sorry, the full story isn't nearly that simple.

Adequate and well-functioning infrastructure has an important role to play in the efficiency of the economy by raising the productivity (productiveness) of our labour.

According to figures quoted by Adrian Hart, of BIS Shrapnel, we went through much of the 1980s and '90s with little increase in annual federal and state spending on infrastructure. This, no doubt, is how we got it into our heads that we have a huge "backlog" of investment in infrastructure.

Over the noughties, however, annual spending just about doubled, reaching a peak of $76 billion in 2009-10. So don't think we haven't been spending a lot – we have.

Since then, however, annual spending has actually fallen in real terms. By 12 per cent to 2013-14 and, according to Hart's estimates, by another 10 per cent in 2014-15.

Now, the macro-economic commentators are right when they say this is crazy at a time when the mining construction boom is coming to an end and leaving a vacuum in the heavy engineering construction industry and the long-term interest rates paid by governments are at record lows.

But this is where the story gets interesting. As the Productivity Commission says in a recent report, "not all public infrastructure supports productivity and generates economic growth and wellbeing". Poorly selected projects may actually make things worse.

As the Grattan Institute put it more bluntly, "the capacity to waste money is a serious risk for infrastructure, given the very large amounts of money involved".

Get it? If we take the attitude that more is always better, and more is never enough, the pollies will happily spend more of our money, but much of it will be wasted.

So just as important as making sure our infrastructure spending is adequate is making sure what we do spend is spent wisely. But how?

First point, at a time when budgets are tight, governments face a temptation to underspend on maintenance. This can shorten the useful life of existing infrastructure, bringing forward the need to spend a fortune building a new one.

The trouble here is that maintenance spending is politically invisible, whereas opening a new facility offers visible, concrete proof of progress on the pollies' watch, gives them a ribbon-cutting photo op and leaves their name on the plaque for decades to come.

Next, consumers and businesses often have to pay a price for the services of infrastructure – for power and water, for instance. Where no price is charged – road use, for instance – it often should be.

If you undercharge you get excessive demand for the service, which prompts you to build more infrastructure than you really need. Overcharge, however, and you get suppressed demand and don't build as much infrastructure as would be in our interests.

The correct price will incorporate the "social" costs involved in the activity, such as the cost its users impose on the rest of the community arising from its adverse effect on the environment.

So get infrastructure pricing right before you rush off and build more stuff.

Case in point: part of the reason for the recent fall in infrastructure spending is the fall in spending by the electricity poles-and-wires businesses now the regulation of their prices has been tightened up.

Before that, they were being granted big price rises to allow them to gold-plate their networks to cope with imagined future peak-load problems, which weren't going to happen and, in any case, should have been solved by the use of smart meters. This stuff-up was brought to you by the nation's economic reformers.

Finally, pick your projects carefully by undertaking rigorous, published comparisons of each project's benefits and costs. The commission says it "found numerous examples of poor value for money arising from inadequate project selection and prioritisation".

To ensure you pick projects with the highest return to the community as a whole, you need to assess social benefits and costs. That is, you also take account of benefits other than the revenue stream the project would generate so as to include any positive or negative effects on economic activity, social activities and the environment.

The point is to analyse information in a logical, consistent way and encourage decision-makers to consider all the costs and benefits of a project rather than focusing on just a few. You should be evaluating the other ways of achieving the same objective – recycling water rather than building a desalination plant, for instance.

Some important costs or benefits may be hard to quantify. You should quantify as much as you can, then compare this result with the unquantifiable factors, so they don't get overlooked.

As a general rule, you should rank all potential projects according to the extent to which their benefits exceed their costs, then implement the most beneficial until you've hit your budget limit.

The experience of the feds' review body, Infrastructure Australia, is that smaller projects (such as fixing rail crossings or traffic hotspots) tend to have much higher benefit-cost ratios than big projects (such as expressways), many of which have benefits only marginally exceeding costs.

But the commission finds that governments prefer the bigger projects because the private firms participating in public-private partnerships need bigger projects to cover their fixed costs.

Unfortunately, there can be ulterior motives: to get the debt associated with the project off the government's balance sheet and onto the private sector's. Or because fixing traffic lights doesn't impress the punters the way opening a new expressway does.

The commission doesn't say it, but what we need is to take an outfit like Infrastructure Australia and give it the statutory independence to conduct rigorous evaluations and make them public, so all of us can know whenever the pollies are planning to do something crazy.

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We can't divorce the economy from the environment

In case you haven't noticed, a lot of economists are very concerned about Tony Abbott's choice of target for the reduction in greenhouse gas emissions by 2030, to be taken to the international climate change conference at Paris in December.

But if you think that means they believe Abbott's target is too tough and will do too much damage to the economy, you've got the wrong end of the stick.

Most would be likely to believe the target should be more ambitious, and few would be concerned that such a target would do significant economic harm. Conventional economic modelling almost invariably shows the loss of economic growth would be surprisingly small, almost trivial.

They'd be more concerned to ensure the instruments used to achieve the target were those likely to do so at the lowest cost in terms of economic growth forgone. That's why few would have approved of Abbott's decision to abandon Julia Gillard's hybrid carbon tax/emissions trading scheme and replace it with "direct action" payments from the budget.

I'm not claiming every economist thinks this way, of course; just the great majority. There are a few exceptions, naturally, just as you can find the odd scientist who disagrees with the overwhelming majority view that global warming is real and caused by humans.

If you hadn't noticed, consider the leading part played by economists in urging that Australia be at the forefront of international efforts to reduce emissions. First, the various reports by Professor Ross Garnaut​, then the chairman of the independent Climate Change Authority, Bernie Fraser – former Reserve Bank governor and former secretary of the Treasury – then leading non-government experts such as Professor Frank Jotzo​ and Professor Warwick McKibbin, both of the Australian National University.

Note, too, the role of Dr Martin Parkinson, who worked first on John Howard's emissions trading scheme, then on Labor's as the first head of the Department of Climate Change. When Parkinson moved on to become head of Treasury, he was succeeded by another Treasury chap, Blair Comley​.

In fact, there were so many senior Treasury people at the top of the Climate Change department, it was a virtual outpost of Treasury. Both Parkinson and Comley were sacked as one of Abbott's first acts on becoming Prime Minister. Presumably, they were punished for caring too much about global warming.

Remember too that, internationally, both the emissions trading scheme and the carbon and other pollution taxes are inventions of economists. A trading scheme was used with great effect by the Americans in their efforts to reduce acid rain.

Two characteristics of economists stand out when it comes to climate change. First, they accept what the scientists are telling us without argument. Unlike some, they're not disposed to explain to the experts where they're getting it wrong.

Second, they don't believe we can go on thinking "the economy" can be kept in a separate box to "the environment". There are major interactions between the two that can't be ignored.

But, as a journalist, I'm not a member of the economists' union, so to speak, so let me stop describing their majority views and give you mine. My thinking has been influenced by the more radical opinions of yet another economist, Professor Herman Daly, of the University of Maryland.

In defending his latest target, Abbott pledged he'd never put the environment ahead of the economy and jobs. This separate-box thinking is like saying you'd never put staying alive ahead of going to work. Lose your life and whether you get to work or not hardly matters.

Daly says the economy is a "wholly owned subsidiary of the environment". Whether at a national or global level, the economy exists inside the environment – the ecosystem. It's a box inside a circle, if you like.

The point is, all human activity – all our producing and consuming – depends directly on the natural environment. The air we breathe, the water we drink, the food we eat, the clothes we wear, the shelters we build and the energy we use all come from the ecosystem that surrounds us.

Much of our economic activity involves misusing, overusing and abusing the natural environment. We've done great damage to our soil, rivers and aquifers, we've destroyed much habitat and many species, and now the world's overuse of fossil fuels is playing havoc with the climate.

We can be divided into those who want to do what we can to stop the destruction and start on the clean-up, and those who want to put it out of mind and keep on as we are, leaving the bill to be picked up by the next generation.

The latter group will always justify their insouciance by claiming to be putting jobs first. Yeah, sure. For the next few years, at least.

Let me be honest with you. I don't believe those modelling exercises seeming to prove that the economic costs of acting to reduce greenhouse gas emissions will be minor. Such results are a product of the assumptions built into all conventional economic models that, whatever shock the economy is hit by, after 20 years or so, everything will be back to where it would have been.

So, the cost in terms of growth and jobs forgone might be greater than we're being told. But of one thing I'm sure: the longer we leave it, the higher those costs will be.

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Shift to services is boosting exports and jobs

For economy watchers, the most fascinating game in town is the continuing effort to explain why employment and unemployment are performing better than you'd expect while growth in the economy has been so modest.

Despite the Bureau of Statistics' latest national accounts showing that real gross domestic product grew by just 2.3 per cent over the year to March, its smoothed seasonally adjusted labour force figures show employment growing by 2.1 per cent – or 240,000 jobs – over the year to July, with the rate of unemployment seeming to have stabilised at about 6 per cent.

So far in the Reserve Bank's efforts to explain this puzzle, we've heard that it's probably a consequence of slower than expected population growth, helped by surprisingly weak growth in wage rates.

But now an assistant governor of the Reserve Bank, Dr Christopher Kent, has used a speech to the Economic Society in Brisbane to add a third factor: the employment consequences of the economy's accelerated shift from goods to services.

Recent figures show that total population growth has slowed from 1.8 per cent in 2012 to 1.4 per cent in 2014. This slowdown is mainly the result of a decline in the rate of net immigration as skilled workers on temporary 457 visas attracted by the resources boom leave for home when their jobs end, and Kiwi workers go home or stay home.

Slower population growth means slower growth in demand but, equally, slower growth in the population of working age and thus in the economy's supply-side potential or "trend" rate of growth.

This has prompted the Reserve to lower its growth forecasts for 2016 a fraction but eliminate its earlier forecast of rising unemployment, leaving it little changed over the next 18 months.

Since the working population hasn't grown as fast as had been expected, this implies the improvement in the productivity of labour has been a fraction greater than first thought.

Last week's figures from the bureau show wage rates rising just 2.3 per cent over the year to June. Wage growth has slowed to a similar extent as happened in the recession of the early 1990s, even though unemployment has risen by much less than it did then.

Kent says wages may have become more flexible over time and there may have been some general decline in the bargaining power of labour.

Whatever, "low wage growth across the economy has enabled firms to employ more labour than would otherwise have been the case".

But Kent says his sense is that "low wage growth only goes some way to explaining the recent pick-up in labour demand".

Now the likely role of a change in the composition of economic activity. Consumer spending, home building and net exports of services (that is, exports of services minus imports of services) have grown reasonably strongly over the past year, even though overall GDP growth has slowed a fraction.

Surveys suggest that business conditions for firms providing services to households have improved greatly since mid-2013. Conditions for firms providing services to businesses are above average. But those for firms producing or distributing goods remain below average.

These survey results line up reasonably well with employment growth in the three sectors. They also fit with the continuing weakness in business investment spending.

Kent's figuring shows, on average, each worker in the household services sector requires the backing of only about $100,000 worth of capital equipment, whereas each worker in the goods sector (including mining) requires capital equipment of almost $400,000.

Get it? If the fastest-growing parts of the economy are labour-intensive, they can grow and create more jobs without this requiring the same degree of increase in business investment spending and, hence, the same degree of overall growth in the economy.

This compositional change in demand from goods to services – from capital-intensive to labour-intensive industries – is a long-term trend.

But Kent argues there is also a cyclical element to it, as mining investment unwinds and growth in housing construction and consumption – which is increasingly dominated by services – picks up.

Another part of it is that the fall in the dollar has encouraged Australians and foreigners to direct more of their spending to Australian tourism, education and business services.

Over the past three years, the extra workers employed in service industries have outnumbered the extra workers employed in the goods sector by five to one.

It adds up to two things. With slower population growth, we can grow more slowly without being worse off materially. And we don't need to grow as fast to get unemployment falling.

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Micro reform: what Treasury wants to change

Under its newish secretary, John Fraser, Treasury has a new slogan. It is proud to be "fiscally conservative, market-oriented and reform-driven". So just what reform does Treasury advocate?

Well, in a speech last week Fraser spelt it out. But first he noted that the key element of market-oriented reform is that it almost always involves heightening competition. He illustrated the point by summarising what happened during the golden age of micro-economic reform in the 1980s and '90s.

When business speaks of the need for Australian firms to be more competitive, it usually means  the government should do something that makes it easier for firms to compete with their foreign rivals.

But this is the opposite of what economists mean when they see heightened competition as the key driver of improved economic performance. They mean Australian firms should be forced to improve their own performance by exposing them to greater competition with other Aussie firms and by making it easier for foreign firms to compete with them.

As Fraser explains, competition is at the heart of how market economies are organised. "Competitive markets generally deliver benefits for all Australians in a way that sheltered markets fail to do so," he says.

"Effective competition in our economy is a key part of its strength and dynamism. Competitive markets benefit consumers by putting downward pressure on prices.

"And over time, competitive pressures drive innovation and investment in new technologies and the development of new products and quality services that meet the needs of consumers. This process of innovation is what drives economic growth and improvements in living standards in the long term."

The modern era of opening Australia to greater pressure from the world economy began when Gough Whitlam cut import tariffs in 1973, he says.

Successive tariff cuts in the '80s and '90s "put Australian manufacturing under increased competitive pressure but, behind the border, changes gave manufacturers flexibility to respond".

Significant among these changes were financial market deregulation and the move to enterprise bargaining, as well as the oft-forgotten reductions to the top personal marginal tax rate from a 60 per cent in 1985-86, to 47 per cent in 1990-91, Fraser says.

The process of reform culminated with the agreement across all levels of government to form the "national competition policy" that began in 1995 and ran through to 2005.

Government businesses were restructured to make them more commercially focused. The electricity, gas, water and rail sectors were transformed.

Legislation was reviewed so it enhanced rather than restricted competition. And a national access regime was established for essential infrastructure. That is, the public or private owners of monopoly networks were obliged to make them available to competitors at reasonable prices.

"Where creativity was once stifled by regulation, competition in product and service markets drove management to change work practices. A liberalised financial sector and a sound macro-economic environment supported strong investment."

Fraser says this era of huge changes offers three lessons on how to get policy reforms accepted.

"First, it was a holistic set of structural reforms. This is important because winners and losers differed and all Australians benefited from at least some of these reforms.

Second, in order to achieve reform we built a political consensus and, more importantly, a community consensus that things had to change and that a delay would make matters worse.

Third, the business community – both large and small – was a big part of this changing culture.
"Managers, no longer distracted by currying [for] government protection, were better able to focus outwards on new markets and inwards on cost savings."

So what's on Treasury's latest reform to-do list? Tax reform, for one. Then there's the financial system. Australia's banking system is relatively concentrated by international standards and the Murray financial system inquiry recommended that regulators increase the emphasis on competition relative to their other objectives.

Then, labour market reform. "I am heartened by Peter Harris and the Productivity Commission's report on workplace relations. Genuine reform  ... can be expected to have positive effects on employment and productivity and to reduce business compliance costs."

Next, competition laws. "It is important that firms that have market power are not able to use that position to exclude competitors and potential competitors. This is why we have competition laws."

The review of competition  by Professor Ian Harper found that current  laws need to be overhauled to make them fit for purpose.

"There remain substantial restrictions on who can supply goods and services, including: professional licensing requirements, liquor and gambling regulation, media and broadcasting restrictions , and the well-known issues of pharmacies and taxis," Fraser says.

"There are restrictions on what can be supplied through product standards, agricultural marketing boards, parallel import restrictions and intellectual property protections. And restrictions on where and when supply can occur: air service agreements, retail trading hours restrictions, and planning and zoning rules."

Fraser concedes that the goal here should not always be deregulation. Regulations are often justified to pursue social goals. "But these goals should be approached through better regulation that doesn't have the side effect of curtailing competition.

"To my mind, foremost among this list, for immediate economic bang for the buck, is planning and zoning."

Planning and zoning systems may create excessive barriers to the entry of new businesses  by limiting  number and size of outlets and  types of business models permissible.

"In other areas, the challenge for governments is not so much to reform regulation as to make way for 'digital disruption'. Uber  connects passengers with drivers and AirBnB  connects travellers with spaces.

"We should welcome competition here too – governments should not be too quick to assume they will always be better regulators than the private sector."

Clearly, Fraser has an ambitious agenda. It's different to mine, but sometimes my duty is to make sure you know what the econocrats are thinking.

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Our poor treatment of mental illness is costing us

Don't take this as implying that I condone the misuse of taxpayers' money, but the almighty to-do over politicians' "entitlements" reminds me that small things annoy small minds.

If you think the odd unnecessary $5000 helicopter ride constitutes the worst of the wastage of our money – or that it makes much difference to the $430 billion the federal government spends each year – you haven't done enough thinking.

As several people reminded me at the Byron Bay Writers' Festival at the weekend, such matters as politicians' pay and perks pale into insignificance compared with the threat to our way of life posed by climate change and other continuing environmental damage.

My conscience tells me that, for as long our response to that threat remains so inadequate – including our inadequate contribution to the success of the Paris climate change conference in December – I shouldn't be writing about anything less consequential.

But we ought to be able to juggle more than one problem at a time, and although climate change is our most pressing problem, it's far from our only one.

One combined threat and opportunity that 'coptergate prevented from getting the attention it deserved last week is one we should have been on to long ago. It was raised in a noteworthy speech to the National Press Club by Professor Allan Fels, now chairman of the National Mental Health Commission (and with a family interest in the topic).

Fels' point was that we've been making a hash of mental health for ages, but that if we got our act together, we could not only reduce the misery of up to 3.7 million Australians, but eventually do everyone else a favour.

Fels is, of course, a professor of economics. So he spoke with authority when he argued that mental health is not just a significant social issue – although that should be enough to make us pay attention – it's a significant economic problem as well.

"Mental health is a significant problem for our economy – as significant as, often more significant than, tax or micro-economic reform," he says. (More significant than tax? Not possible.)

"Many people do not get the support they need, and governments get poor returns on substantial investment. The economic or gross domestic product gains from better mental health would dwarf most of the gains – often modest ones – being talked about in current economic reform debates."

The Organisation for Economic Co-operation and Development estimates that the average overall cost of mental health problems to developed countries is about 4 per cent of GDP. In Australia, this would equate to more than $60 billion a year, or about $4000 for each person who lodges a tax return, or more than $10,000 a family.

Those costs include the direct costs of treatment, plus the indirect costs, such as disability support pensions, imprisonment, accommodation and so on, plus the costs of lost production and income, plus the costs to carers and families and their reduced participation in the workforce.

But just what is the mental illness we're talking about? Of the 3.7 million Australians estimated to have mental health problems in any year, 3 million have a mild to moderate condition, such as anxiety or depression at a clinical level.

It's because so many people with "common" mental disorders are employed – and unemployed – that mental ill-health has such big implications for economic production and productivity. It causes about 12 million days of reduced productivity each year, arising from absenteeism and "presenteeism" (being at work but not getting much done).

The remaining 700,000 people have persistent complex and chronic illness, such as schizophrenia or severe depression.

Seven people die every day from suicide, about double the road toll. But while the number of deaths on our roads has diminished substantially, there has been no major reduction in the suicide rate over the past decade, we're told.

Death from suicide among Aboriginal and Torres Strait Islander peoples is twice that of non-Indigenous Australians.

Fels says there are excellent examples of suicide prevention, treatment, follow-up and "postvention" in Australia.

Even so, the government review conducted by Fels concluded that much of the $10 billion a year the feds spend on mental health "is neither effective nor efficient".

Almost 90 per cent of it is spend on "downstream programs", such as income support for sufferers, payments to support state hospitals and mental health-related medical and pharmaceutical benefit payments.

"Much of this is payment for failure, payment for failure to treat the problems early and cost-effectively," Fels says.

"I believe this heavy expenditure could be reduced with greater emphasis and investment in prevention, early detection, a focus on recovery from mental ill-health and the prevention of suicide."

If we enable people to live contributing lives – to have relationships, stable housing, and to maximise participation in education, employment and the community more broadly – we will help build economically and socially thriving communities and a more productive Australia, Fels says.

I'm not a believer that things we should be doing for social or cultural reasons must first be asked to justify themselves on economic grounds. We're rich enough to afford to look after those among us with problems, and to pursue knowledge for its own sake.

But the argument that doing better on mental health would improve economic outcomes seems unassailable.

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Don’t be sure lower penalties mean more jobs

The argument that reducing or eliminating weekend penalty wage rates would have great economic benefits is obvious to all business people and economists – but not to me. I think it's fallacious.

The received wisdom was well expressed by Anna McPhee, of the Retail Council: "The rebalancing of penalty rates to reflect the needs of the modern economy will mean retailers can create jobs to meet increased consumer demand, which in turn will benefit the economy more broadly."

She was responding, of course, to the proposal in the Productivity Commission's draft report on Australia's Workplace Relations Framework that Sunday penalty rates in the hospitality, entertainment, retailing, restaurant and cafe industries be cut to the same level as Saturday penalty rates.

Even the commission goes along with the received wisdom: "Excessive penalty rates for Sundays reduce hours worked, mean unemployment is higher than it needs to be, and reduce options for businesses and consumers. Trading hours are likely to be lower and capital under-utilised."

But I believe such thinking rests on a fallacy of composition, that what's true for the individual must be true for the whole.

It's not hard to see why particular business people, thinking only of the circumstances of their own business, see lower penalty rates leading to more sales, higher profits and, as a pleasant side-effect, more not-so-well-paid casual employees.

There would be some, of course, who looked no further than benefit of the lower wage rates they'd be paying even if they didn't bother opening their business for more days or longer hours than they are at present.

And, indeed, since they'd now be earning more than they were, that might be enough for some.

But let's assume the owners of the affected businesses really did want to open longer, sell more and profit more. Their fixed costs would now be spread over more sales, while their main variable cost – wages – would be lower per hour.

Question is: where would all these extra sales come from? From rivals that didn't bother opening on Sundays? That advantage isn't likely to last.

From businesses in other industries that now sold less during the week because their customers were seizing the opportunity to spend more on the weekend?

Of course, even if that were true it need be of no concern to any business person confident of being able to sell more. Their motive is to make more money and that's all a market economy expects of them.

But here's my point: just because some businesses can make more and employ more, this doesn't do much for the economy overall if their success comes at the expense of other businesses that make less and employ fewer.

When the advocates of lower penalty rates tell us that many extra jobs will be created, they're surely expecting us to take that as meaning more jobs overall, not just more jobs in some industries but fewer in others.

So let's switch to a macro or, as the commission likes to say, "economy-wide" perspective. We're told it will be great because, with more businesses open on the weekend, consumers will spend more and it's this extra spending that will create more jobs.

But how much the nation's consumers spend is ultimately constrained by their income. Are we expecting that consumers will spend more by saving less? Why would this be a good thing?

Why are we compelling employees to save 9.5 per cent of their wages if we really don't care about people saving much? (And don't mind being more reliant on foreign investment as a consequence.)

Maybe so as to spend more on weekend entertainment the nation's consumers might borrow more – on their credit cards or however. Would this be good for the economy? In any case, borrowing to boost your consumption is not something the nation's consumers can go on doing for long.

I don't believe there is much scope for us to be consuming a lot more than we are already – certainly not over the medium term. If so, then a lot of the businesses that sell more will be taking sales from other businesses.

And there's another possibility, one I suspect is quite likely: those businesses that open for longer on the weekend will sell more at the weekend, but less during the week.

To the extent that businesses achieve nothing more than spreading essentially the same amount of sales over longer opening hours – which I think is quite likely – they're likely to be worse off rather than better. The economy-wide benefits will be small, as will the net gain in employment.

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It's official: the labour market is different

Any report that the hardline commentators brand as "mushy drivel" can't be all bad. And, indeed, the Productivity Commissions' draft report on the Workplace Relations Framework is far more enlightened, balanced and sensible than we've come to expect from that highly model-bound institution.

For several years, militant employer groups and the national dailies have been claiming that Julia Gillard's Fair Work Act reregulated the labour market, put the unions back on top and caused the slowdown in productivity improvement.

The report puts those people back in their box, rejecting outright their claim that the industrial relations system has become dysfunctional.

"Many features work well, especially given the need to find a balance between the conflicting goals of the parties involved," the commission's chairman, Peter Harris, said.

"Changes to the workplace relations framework have to recognise that it's not just about the economics. There are ethical and community norms about the way in which a country treats its employees."

The report's conclusion is that industrial relations needs "repair not replacement". So it does propose a lot of changes – most of which go the employers' way – which are worth debating, but not today. Today let's just record the full extent to which the scales have fallen from the commission's eyes.

Its first realisation is that the labour market isn't the same as other markets and labour is not just an ordinary input to the production process.

"Labour economists [those economists who specialise in studying the labour market] generally recognise that labour markets work somewhat differently from the pure competition model. Of course, no market aligns completely with the basic and tractable model described in introductory economic textbooks, and some of the common divergences from the competitive model arise in labour markets too," the report says.

"However, labour markets additionally have some particularly distinctive features. These features provide a potential economic rationale for different aspects of labour market regulation . . ."

What's distinctive about the labour market is that "units" of labour being added to the production process inescapably come with fallible humans attached. What's more, the human units work for fallible human managers. This makes the labour market far less impersonal than textbooks describe.

"In the real world, employers and employees are people with all their various flaws and virtues, and these can collide in workplaces in ways that have ramifications for how labour markets function."

For one thing, "people make mistakes". For instance, employers and employees may form an employment contract without doing enough to check the other side out.

For another, "employers and employees have values that are important to the way they do their work. An employee may want to work many additional hours at no cost because of professional pride. Employers may want to pay bonuses, provide better staff facilities or assist an employee facing family problems (say domestic abuse) because they are dealing with human beings who they wish to help and please.

"Employers and employees dealing with each other are not merely doing so as part of a calculated business strategy, and in some cases this opens the door for one party to exploit the other's goodwill and non-monetary motivations. (One less altruistic formulation of this is that employers may sometimes set higher prices for labour to motivate trust and to increase the cost of shirking – one example of so-called 'efficiency wages'.)"

The simple model assumes units of input and even units of output are homogeneous (all the same). But "there are few 'representative' employers and employees. People have heterogeneous [different] tastes for workplace conditions and heterogeneous abilities, even when paid the same wage rate.

"Some businesses are poorly managed, and most are not at the technological and managerial frontier [not best-practice]."

Some of these complexities "suggest a need for regulation, others not. For example, regulation of blatantly unfair dismissal is justified, not only because the act itself is problematic but also because the potential to do it allows leverage by an employer to exploit vulnerable employees".

The commission "considers that, on average, employers have stronger bargaining power than employees, with consequences for wages and conditions, unless countered by regulations or (constrained) employee collective bargaining".

Get that? The commission acknowledges the legitimacy of collective bargaining. It also accepts the relevance of ethical and social considerations.

"Labour market outcomes do not just affect economic performance – they also have a substantial impact on equality of opportunity, the stability of family relationships and social cohesion more generally.

"The ethical and social dimensions of the labour market form a basis for many aspects of the workplace relations system that differentiate it from the regulation of other markets. For example, the 'price' of labour differs from the price of most other inputs in an economy.

"A broad principle underpinning Australia's competition policy framework is that lower prices from competition are almost always desirable. In labour markets it is less clear that a lower price is necessary desirable, given that many people's incomes and wellbeing depend to a considerable extent on the price of labour and it can be costly to use alternative mechanisms to redistribute income.

"Indeed, the existence of a minimum wage – a 'floor price' set by regulation, which would usually be seen as contrary to the public interest for other goods and services – illustrates this distinction."

Returning to the commission's dismissal of the militant employers' claims, it finds that "contrary to perceptions, Australia's labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervade historical arrangements have now abated.

"Strike activity is low, wages are responsive to economic downturns and there are multiple forms of employment arrangements that offer employees and employers flexible options for working."

But my favourite quote is this: "Toxic relationships between employers and employees can sometimes surface due to poor relationship management rather than flaws in the workplace relations framework."

Ain't that the truth.

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Digital disruption: more pros than cons

Do you get the feeling we've got a government that's worrying about everything except getting on with governing? One issue that's not getting the attention it deserves is the rise of "digital disruption".

The pace at which the continuing revolution in information and communications technology is reshaping industries and occupations is remarkable.

As the consultants Deloitte Access Economics wrote in a report for Google, just a few years ago most consumers logged on to the internet to access email, search the web and do some online shopping. Most of us still accessed the internet using a computer.

"Today, digital technology including cloud platforms, smart hand-held devices and social networks are the new beachheads of the sweeping impacts of the internet," the report says.

"Rapidly evolving from basic connectivity, these technologies are further changing not only how consumers interact with businesses, but also how businesses are organising themselves."

We've seen the digital revolution change the way we buy and listen to music, read books, learn the news, shop, do our banking, pay bills and check in on flights. Its changes to the news media and banking and other financial services have a long way to run yet.

The digital revolution is about information in all its forms, how it's gathered, processed, accessed, transferred and stored. "Big data" is about how all this information is analysed to produce further information about how we behave.

This is why you don't have to be very brave to predict that digital-driven change will be affecting many more industries before it's through.

As the consultants say, while reaching new customers and responding to customer needs is a big reason for businesses to go online and to use social media, we're now seeing "transformational change" inside businesses as they take advantage of the efficiencies that advances in digital technology are making possible.

This means "cloud, data analytics and machine-to-machine technologies" emerging as a second big driver of change. (It also means you and me learning to live with a lot of high-sounding words we barely understand.)

And phones are taking over the world. "The rise in mobile access to the internet and digital services through smartphones and connected devices [I think that means iPads] has prompted new ways of thinking about presenting information to consumers on smaller screens and capitalising on usage trends."

Read your newspaper on a phone? Sure. Many people already do, and we're working to improve our offering as we speak.

Hip business people speak of digital disruption as though it's a wonderful thing. It will make the world a better, faster, easier place, so bring it on.

But that word "disruption" sounds more nasty than nice. So which is it to be?

Both. If new inventions take hold and spread it's because enough people really do think they're an improvement.

But that doesn't stop the industries and businesses most affected by the advance from being turned on their head and maybe even forced to close. So the benefits to customers usually come at a cost to many workers.

Some are redeployed, some become redundant. Most ejected workers eventually find a new job – even if it isn't always as good as the one they left – though some, particularly older people, may never get back on their feet.

But how far have we got with the digital revolution to date? Deloitte Access Economics has gathered what we know and done some rough figuring in a report for the Australian Computer Society.

The consultants say that, compared with other developed countries, Australia is a high-level user and adopter of information and communications technology, with comparatively high rates of mobile broadband penetration and business adoption of digital technology for commercial practices.

According to the Organisation for Economic Co-operation and Development, for every 100 people in Oz there are about 114 subscriptions to mobile wireless broadband, more than any other country bar Finland.

Almost three-quarters of our businesses have a website and a very high 38 per cent of businesses actually make sales over the internet.

The OECD says our information technology specialists make up 3.6 per cent of our workforce, which puts us right behind the Nordic countries and North America. Using a broader definition, about 22 per cent of the workforce is in info-technology-intensive occupations.

The consultants' own estimates say about 300,000 info-tech workers are in the industry proper, with about another 300,000 in other professional and scientific service industries, public administration, financial services and various other industries. This amounts to 5 per cent of the workforce.

They estimate that the digital economy contributed almost $80 billion to gross domestic product in 2013-14, well up on their previous estimate in 2011 and about 5 per cent of the total economy.

But they identify two areas of weakness. First, the 10 per cent of our total annual spending on research and development that we devote to information and communications technology is way behind other developed economies, even small ones.

Second, demand for info-tech workers is expected to grow by 100,000 over the next six years, but Australian new graduates with info-tech qualifications have declined significantly since the early noughties.

More than 10,000 temporary skilled migrant 457 visas have been granted annually to info-tech workers in recent years. In 2013-14 it was closer to 20,000.

Really? This is the best we can do by our own young people? Surely we should be trying harder.

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