Someone has to give if we’re to fix the budget

The nation's budget problem still won't be solved when, one day in the distant future, we get the federal budget back into surplus. Only a change in strategy is likely to produce a sustained solution.

As successive intergenerational reports demonstrate, on present policies government spending will just grow and grow, requiring ever-higher taxes.

If we don't like that idea – or politicians regard it as an impossible sell – we need to think a lot harder about what we're spending on, why it's growing so fast, what things we should stop spending on, and how we can make our spending more effective, in the process slowing the rate at which it's growing.

The five biggest areas of spending include welfare benefits, health, education and infrastructure. Infrastructure's too important to share a column, so we'll return to it.

But it, plus health and education, are even bigger when you remember how they dominate the states' budgets – a reminder that federal and state budgets need to be considered together, and that cutting federal grants to the states, and cost-shifting by the states back to the feds, aren't genuine solutions.

Of three categories – welfare benefits, health and education – the intergenerational reports make it clear health will be by far the fastest growing.

That's not so much because of ageing as because advances in medical technology are hugely expensive, and it's quite unrealistic to imagine that Australian voters will settle for anything less than gaining subsidised access to the latest and best technology ASAP.

Since this is the political reality, the problem (and much of the pressure on budgets) is easily solved.

Our politicians simply need to be brave and tell voters the truth: if they want ever more and better healthcare then, as with everything else, they'll have to pay more for it – in the form of, say, regular increases in the Medicare levy.

That's the fundamental solution, but we could also do more to slow the rate of growth in healthcare spending by removing at least some of the waste and inefficiency that everyone in the system tells us exists.

Much could be done to make education spending more effective. Instead, however, since the national knockback of the 2014 federal budget, the government's done little but crack down on the previous year's crackdown on the welfare cheats the Liberal hard right has convinced itself are ripping off billions every year.

Sorry, not nearly good enough. Nor is preaching the evils of tax increases while you wait for bracket creep to claw back the eight successive tax cuts we were awarded when Peter Costello thought the resources boom would run forever.

The trouble with many professed supporters of Smaller Government is that they want to have their cake and eat it.

They want to reduce government spending so they can pay less tax, but they don't want to give up the middle-class welfare they enjoy – much of it awarded to them by the great man who didn't believe in smaller government, John Howard.

Much of Howard's handouts to the comfortable came in the fifth big spending area, tax expenditures – which have the same cost to the budget as ordinary expenditures, but are hidden away on the tax side where they aren't noticed.

These include various new benefits for supposedly self-funded retirees, the private health insurance tax rebate, big increases in grants to non-government schools and Costello's unsustainably generous increase in superannuation tax concessions for high income earners.

To be fair, Malcolm Turnbull has made a good start to cutting back the super concessions – over the vociferous opposition of his hard right backbench.

More must be done to cut back rapidly growing tax expenditures.

But if we're genuine about achieving fiscal sustainability while restraining the rise in tax rates, we need to embrace a new principle to sit beside our heavily means-tested welfare system (which is the main reason Australia's overall level of taxation is so much lower than almost every other developed economy).

The companion principle should be: we're no longer prepared to subsidise positional goods in the name of encouraging "choice".

We'll put all our effort into providing a good public health system and a good public education system, and that's it.

Of course, it's a free country and if you think you can do better than the public system by making private arrangements, feel free.

But don't expect other taxpayers to subsidise your efforts to get better than they're getting.

In any case, the easier you make it for punters to enjoy positional goods, the less positional you make them, cheating the better-off of their feeling of superiority.

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Dig deep and you find the two-speed worm has turned

If you learn nothing else about the economy, remember that it moves not in straight lines but in cycles of good times followed by bad times, and bad times followed by good.

Nowhere is that truer than with our famed "two-speed economy".

For most of the decade to 2012, the resources boom meant that the two main mining states – Queensland and, especially, Western Australia – were growing much faster than the rest of the economy, which was being held back by the effect of the boom-caused high dollar on other export industries.

For the past few years, however, the roles have been reversed, with Queensland and WA now growing much more slowly than Victoria and NSW.

In an article in the latest Reserve Bank Bulletin, Thomas Carr, Kate Fernandes and Tom Rosewell argue that looking at what's been happening from state to state does much to help explain what the Australian Bureau of Statistics is telling us about developments in the national economy.

It also helps explain why Colin Barnett was thrown out of office so unceremoniously in WA last Saturday. Forget the politicos' obsession with the role of One Nation, the deeper explanation is economic.

After peaking at growth of 9.1 per cent in gross state product (the state equivalent of gross domestic product) in 2011-12 at the height of the mining boom, growth slumped to just 1.9 per cent in 2015-16.

There's nothing new about governments getting tossed out when their boom turns to bust. Especially when it becomes apparent what a hash you made of the good times, spending like there was no tomorrow.

To see how the two-speed worm has turned, consider this. In 2015-16, real GDP grew by 2.8 per cent for the year as a whole.

Within this, NSW's real GSP grew 3.5 per cent and Victoria's 3.3 per cent. By contrast, Queensland's grew 2 per cent and, as we've seen, WA's 1.9 per cent. (If you must know, South Australia's was 1.9 per cent and Tasmania's 1.3 per cent.)

What's that? You think WA's annual growth of 1.9 per cent doesn't sound all that terrible? It's being held up by the increased volume of WA's exports of iron ore and liquefied natural gas.

Trouble is, that generates next to no additional jobs. In mining, most of the jobs come from building new mines. When construction ends, the building workers go back where they came from (which ain't Perth).

Our trio from the RBA say that, over the period of the resources boom's build-up and let-down, differences between the performance of the states have been explained mainly by differences in private investment spending.

Consumer spending accounts for a far bigger slice of GDP/GSP than investment spending. And consumer spending has been much less variable between the states than investment spending – although it's been weakest in WA.

Consumers keep their spending reasonably smooth from year to year. They do this by cutting back their rate of saving when their incomes aren't growing fast enough.

We know from the national accounts that, while wages and employment growth have been weak in recent times, households have been progressively lowering their rate of saving to help keep their consumption steady.

That's normal cyclical behaviour. What we now know from the RBA trio's investigations, however, is that pretty much all the decline in the national saving ratio is explained by the actions of West Australians and Queenslanders. Ah.

Another national-level story we're familiar with says the economy is making a transition from mining-led to non-mining-led growth. So, as mining projects are completed and mining investment spending falls way back, we need strong growth in non-mining business investment to take its place.

The national accounts tell us it's not been happening. You've heard all the wailing and gnashing of teeth – not to mention speculation about causes – that's accompanied this bad news.

But here again the RBA trio's data diving shows the story in a different light. While mining investment was booming in the mining states, so was non-mining investment in those states. Confidence in one part of the local economy spills over to other parts.

While this was happening in the mining states, non-mining business investment in the other states was weak.

As the trio almost admit, this was part of the RBA's dastardly plan to ensure the mining boom didn't cause runaway inflation – as every previous commodity boom had.

While the politicians were letting foreign miners make all the crazy investments we now realise they did – leaving us with a gas-bonanza-caused energy crisis – the RBA had to "make room" for the miners by holding back the rest of the economy and, in particular, non-mining business investment.

It would have been willing to achieve this restraint by holding interest rates higher than otherwise needed but, fortunately for it, most of the work was done by the abnormally high exchange rate, which crunched manufacturers, tourism and foreign student education.

Back to the now. While the national figures reveal non-mining investment failing to show signs of recovery, the trio's data diving shows it's actually falling in the mining states (as lack of confidence in mining spills over) but recovering elsewhere.

In NSW, non-mining investment has grown at an average rate of 8 per cent a year for the past three years. In Victoria, it's been 4 per cent.

The obvious explanation for this recovery is the dollar's return to earth. But much of it's been in business services, including, in NSW, construction of new office buildings. In Victoria, there's been investment in wholesale and retail, with investment by manufacturers stabilising.

But the other private investment category – new housing – is also part of the story. Home building has fallen in the West (what a surprise), but grown strongly in NSW and Victoria.

It's surprising what you discover when you dig.

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Private schools becoming less fashionable

It's drawn little comment, but the decades-long drift of students from government to non-government schools has ended.

Figures released by the Bureau of Statistics last month show that 65 per cent of our 3.8 million students went to public schools in 2016, the same proportion as in 2013. If anything, the public-school share is creeping up.

The non-government share divides between Catholic systemic schools with 20 per cent and independent schools with less than 15 per cent. I'll refer to both as private schools.

But the public schools' 65 per cent today is down from 79 per cent in 1977.

Let's start by trying to explain those many years of drift before we wonder about why it's stopped.

When Ipsos Public Affairs asked people why they thought other people sent their kids to private schools, the most commonly cited reasons included the higher standard of education (50 per cent), the better discipline (49 per cent), the better facilities (46 per cent), the size of classes (43 per cent) and because it's a status symbol (40 per cent).

Almost uniquely among other developed countries, Australian parents have a much higher proportion of private schools to choose, and have been given greater freedom to choose between government schools.

Successive federal and state governments have seen greater parental choice between public and private as a virtue, and have encouraged it by increasing their combined grants to private schools at a much faster rate than their funding of public schools.

But I have my own theory on why so many people have opted for private schooling. I think a lot of it gets down to parental guilt.

These days families have much fewer children, which means parents take a lot more active interest in their kids' schooling than they did when I was the last of four.

And these days both parents are more likely be in paid work – meaning they have more money to spend, but see less of their kids than their parents did.

So what more natural than for parents to believe that, in their decisions about how to spend their income, ensuring their kids get the best education possible should have high priority.

And what's more natural in our market economy than to assume that the more you have to pay for something, the higher quality it's likely to be.

It's the old male cop-out, spread to women: I may not see as much of my kids as I'd like to, but I'm working night and day so I can afford to give them the best of everything.

The more materialist you are, the more you're inclined to judge a school by the quality of its facilities – gyms and swimming pools, music, art and drama theatres – than by the quality of its teachers.

Of course, the former is, as economists say, much more "observable" than the latter.

But whatever people give as their reasons for preferring private schools, you'll never convince me they're not well aware of the status they gain by sending their kids to private schools, especially independent schools.

Private schools are among the things economists classify as "positional goods" – they reveal your position in the pecking order.

But what's changed? Why has the drift to private schools come to an end?

One possibility is that the slow wage growth of recent years has made it harder for parents to afford private school fees.

This may be particularly the case for independent schools, where the rate of increase in fees from year to year bears little relationship to rate at which teachers' salaries are rising.

Nor does the rate at which government grants have been growing seem to have had much effect in slowing the rate at which independent school fees have grown. (The extra government grants may have gone into improving schools' facilities.)

My guess is that, as economic textbooks predict, independent school fees rise according to what the market will bear. They judge how strongly demand for their product is growing relative to supply by the length of their waiting lists.

In any case, keeping the cost of independent schooling high is an essential element in maintaining its status as a positional good.

Another possible contributor to the end of the drift to private schools is the decision of state governments – particularly NSW governments – to increase the number of places at selective schools. Why pay fees when you can get what you want inside the government system?

As a parent who's had one of each – independent and selective – I can assure you selective schooling works well as an (intellectual) positional good.

But there's one last possible contributor to the end of the trend to private schools: maybe parents are realising that paying all those fees doesn't buy your kid superior academic results along with their old school tie.

Julia Gillard's My School website has done little to encourage greater competition between schools (a silly idea she got from economists), but it has provided a fabulous database for education researchers.

Various researchers have used it to demonstrate that the best predictor of children's academic results is the socio-economic status (including level of educational attainment) of their parents.

And when you take account of parents' socio-economic status, there's little evidence that kids of similar backgrounds do any better academically at one kind of school than another.

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GRACEWOOD RETIREMENT VILLAGE

Gracewood Retirement Village 2017

I spent the first part of my working life as a chartered accountant, and people often ask how I went from accounting to journalism. Forty-four years ago I decided to take a break from my career as a chartered accountant, spend a year doing something interesting and then resume my accounting career. I spent the time doing the first year of what’s now the BA (Communications) at what’s now UTS. During that year I became the inaugural co-editor of the student newspaper at UTS, then called Newswit. As the year came to an end my journalism lecturer, Terry Mohan, asked me if I’d thought about making a career in journalism rather than accounting. I hadn’t, but on his prompting, I did. I applied to the ABC and the Fin Review and got nowhere, but Terry said he knew the cadet counsellor at the Herald and would get me an interview. It’s obvious to me now that he also put in a good word for me. I got the job and, at what was then considered to be the terribly mature age of 26, as a qualified chartered accountant, I started as a graduate cadet on a fraction of my former salary.

That was in 1974, the year following the first OPEC oil shock which ended the post-war Golden Age, the year our economy fell apart under the Whitlam government and the year newspapers discovered that politics was mainly about economics and decided they’d better start finding people who could write about economics. I was an accountant, not an economist, but the Herald decided that was near enough. I had a fair bit of economics in my commerce degree, of course. I soon realised the Herald was making quite extensive use of my professional qualifications, so I suggested it start paying me more appropriately and after about four months my cadetship was cut short and I was made a graded journalist. After less than a year I was sent to Canberra as the Herald’s economics correspondent. After a bit over a year I was brought back to Sydney as economics writer, replacing my mentor, Alan Wood, who had resigned as economics editor. About two years later - that is, about four years after I’d joined the Herald - I was promoted to economics editor. That was 39 years ago and I’ve been economics editor ever since.

Journalistic careers today aren’t as meteoric as mine was then. I just had the immense good fortune to be in the right place at the right time. But think of it another way: I’ve been doing almost exactly the same job for the best part of 40 years. I haven’t gone anywhere, haven’t had a promotion in 39 years. My one ambition in journalism was to be the Herald’s economics editor; I achieved that ambition in four years - far sooner than I ever imagined I would - and in all the time since I haven’t been able to think of any job I wanted to do more or any paper I wanted to work for more than what I had. The one big advance I’ve had in that time was when, a long time ago, The Age started running my columns. In terms of combined circulation and quality, newspapers can’t offer any bigger or better platform that the Herald plus The Age.

WRITING TIPS

Use the right words

• Strength in writing comes from the strength of the nouns and particularly the verbs you use. Excessive use of adjectives and adverbs is a sign of weak writing.

• Narrow the gap between words you know, and words you use commonly. That is, wherever possible use a more interesting, less common word, as long as the reader will understand it easily.

• Don’t try to impress people with big words and long sentences.

• Short words with non-Latin origins are preferable, where possible. For example, don’t say ‘employment’ when you can say ‘jobs’.

• Elegant variation: to avoid repetition, use synonyms when referring to something frequently.

• Avoid jargon: don’t say ‘equities’ when you can say ‘share market’; don’t say ‘fresh data’ when you can say ‘new figures’.

• Write as much as possible in the active voice, not the passive voice. A did B. Not, B was done by A.

• Grab the reader’s attention with the first sentence and paragraph. Keep the sentence short, clear, and focused on the part of the story likely to interest readers.

Write for the reader

• Explain concepts that are not immediately obvious. For example: ‘The dollar spiked yesterday’ should be followed by details that show the reader what ‘spiked’ means in this context.

• Write about events from your reader’s point of view. For example: ‘The dollar’ is always the Australian dollar; foreign dollars need to be labeled as such.

• Signal changes of direction clearly to readers. For example: If you say, ‘on the one hand’, you have to follow it up with ‘on the other...’

• Write in a way that will be most easily understood: Don't say April if you can say ‘last month’.

Explanation: 

• A big part of the journalist’s job is to translate complex events into a simpler form, make coherence out chaos.

• Be wary of the curse of knowledge. Don’t assume that because you know it, everyone else does.

• What to explain? If it is not common knowledge, it should be explained to the reader. If the reader has probably forgotten it, it’s new and should be included.

• When explaining a concept, use a concrete example that readers will understand wherever possible. For example: When referring to rural jobs, throw in an example, such as fruit-picker.

Be as clear as possible

• Aim to write so clearly that people never have to read your sentences twice – you only have one shot to get your meaning across.

• Write how you speak. For example, don’t say ‘said Ms Jones’ when you can say ‘Ms Jones said.’

• Cut out the pompous and unnecessary language that often clutters economists' statements.

• Don't sacrifice clarity for the sake of brevity. Unpack phrases that are not intuitive to readers. For example, 'the supply of money' is more meaningful than 'money supply'; don’t say ‘rate cut’ instead of ‘interest rate cut’.

• Avoid words derived from Latin: don't say ‘per week’ instead of ‘a week’.

Other points

I don’t just assert my opinion, I try to argue a case, quoting lots of facts and acknowledging both sides of the argument (eg It’s true that X, but Y). Sometimes your role is to remind the reader of why they disagree with you. That’s fine by me. But no matter how judicious you are, you must, as a matter of artistry, come to a conclusion and state an opinion. Only during an election campaign would I limit myself to on the one hand, but on the other.

You have to combine information with entertainment. Well written and an easy, enjoyable read. An informal, chatty style goes down well. Should inject some of your own personality.

Predictability is the great enemy of all columnists. Try to avoid having obvious, run-of-the-mill opinions on a particular subject. That doesn’t mean always having a contrarian view, tho if you view happens to be opposite to everyone else, that’s a plus. No, you have to have a more thoughtful, better-informed and thus novel view, which you achieve by giving the subject more thought and research than the reader has.

But you also need to avoid being too predictable over time. ‘I stopped reading Paddy because I always knew what he was going to say about any subject’ is the kiss of death for a columnist. Good to have views that are complex - that acknowledge differing shades of grey - and that evolve over time as you learn more from your experience but also your reading.

Criticise from a fixed viewpoint - a fixed model or view of the way the world works or should work - don’t keep changing your vantage point until you’ve got something to criticise. That’s the mark of an amateur.

I sometimes write what you might call primativist columns (like primitive art) - columns intended to connect with the unsophisticated view ordinary readers might adopt towards some development and move them forward, not columns that simply contribute to a debate being conducted at the sophisticated level by my expert contacts. That is, I act as a populariser and a bridge between punter and expert.

Readers are more interested in stories about people than about ideas. And they like stories to be stories.

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Abused public servants help bring Turnbull down

There's no clearer sign that the Turnbull government is in deep political trouble than the never-ending saga of the Centrelink robo-debt stuff-up.

A well-functioning government would have closed down the controversy more than a month ago. If the relevant senior or junior minister hadn't had the wit to do it himself, the Prime Minister would have told him to.

Instead, the controversy's been allowed to roll on, while the junior minister, Alan Tudge, and more particularly the man allowing himself to be described as general manager of Centrelink, Hank Jongen, have repeatedly denied that there's any problem with the automated debt recovery system that's been making life miserable for many Centrelink "customers", including many who, in truth, owe the government nothing.

To broaden the focus, this is the story of how a highly class-conscious government – which sides with the well-off "lifters" against the less fortunate "leaners" – has come adrift from political reality and is using and abusing its public servants to prosecute its war on those unfortunate enough to need to deal with Centrelink.

Its lifters-class sympathies have included the public service among the leaners-class, meaning it's been at war with its public servants, while using them to harass presumed welfare cheats.

Its class consciousness has blinded it to such simple truths as that, while you can always bully the top public servants into covering for you, when you mistreat the servants they stop warning you about the hazards you face and, ultimately, indulge in schadenfreude when you fall over the cliff.

As a class, public servants are not held in high esteem by the public. That's why the government has thought it safe to mistreat them, while also allowing the quality of service provided to the public to decline and using public servants to get tough with the many thousands of leaners imagined by the lifters to be ripping off the system.

Trouble is, when you oblige the public servants to deliver bad service to the public – phones that go unanswered, long waiting times, websites and phones that keep dropping out (not you, Tax Office) – or treat the public unreasonably, the punters blame the government.

As they should. Centrelink and Tax Office "customers" have votes, and their family and friends have votes, too. That counts treble when the "customers" are on the age pension.

First proof the government's at war with its public servants is that its determination to limit public service wages means it's failed to reach enterprise bargains with up to three-quarters of its staff.

One of the first acts of the Abbott government, like the Howard government before it, was to sack a bunch of department heads.

Nothing could be better calculated to make the remaining department heads fear for their jobs should they do anything to annoy the government.

Is it any wonder that when the bureaucrat really responsible for Centrelink, Human Services Department secretary Kathryn Campbell, who'd been refusing to speak to the media for weeks, had no choice but to front a Senate committee, she was full of denials and obfuscation?

No boss enjoys receiving frank and fearless advice, but only the dumb ones take steps to ensure they're surrounded by yes-persons.

The other way ministers limit the ability of their departments to pass on unwelcome advice is to interpose a bunch of young punks and political wannabes between them and their senior bureaucrats.

Successive governments' desire to avoid confronting unpleasant truths has prompted them to fill their departments with armies of public relations people – people who'd be of greater service to the public if they got behind a counter or answered a few phones.

It turns out that Jongen, the man who's happy to leave the public with the impression he's the general manager of Centrelink, has no responsibility for running it. He's just the department's "official spokesman".

He's the chief spin doctor – meaning when he knowingly misleads the public he can do so with a clear conscience. That's what he's paid to do. Apparently, the department has more than 30 people with "general manager" in their title.

The government's contempt for its public servants is reflected in the repeated rounds of "efficiency dividends" it imposes on its agencies.

These far exceed the improvements in labour productivity the private sector's able to achieve, and have become a euphemism for annual rounds of forced redundancies.

The public service union's claim that the 5000 jobs lost do much to explain the poor quality of Centrelink's service, as well as the government's mindless rush to use robots instead of humans, isn't hard to believe.

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The low down on our concerns about investment

Governments and economists have been worried for ages about investment. First we had too much, then we didn't have enough. But what is "investment"? What's so special about it and why are we likely to be living with less of it in future?

The first trap is that the word "investment" is used to mean two quite separate – though related - things.

People say they've invested in some shares in a bank or invested in some government bonds. This is financial investment in financial assets – a piece of paper (or, these days, an entry in an electronic ledger) that records the owner's legal claim on the finances of the particular company or government.

Companies and governments originally issue these securities to raise money from the public. Mostly, however, people buy the securities second-hand (in the "secondary market") from someone who no longer wants to own them.

What do the original issuers use the money they raise for? Mainly to invest in – to build or buy – tangible or physical assets, such as equipment, buildings and structures in the case of businesses, and buildings (schools, hospitals, police stations), roads, bridges, rail and power lines and so forth in the case of governments.

This is the "investment" economists keep on about – investment in the building of new (not second-hand) physical assets.

Households invest in new housing; businesses invest in new equipment, buildings and mines, and governments invest in new infrastructure (see above).

Economists divide the spending done by households and governments into two categories: on consumption and on new physical investment.

Both kinds of spending add to "economic activity" – the production and consumption of goods and services, the value of which is measured by gross domestic product. Our participation in this economic activity allows us to earn an income and use it to meet our physical needs for food, clothing, shelter and all the rest.

But here's the trick: although all spending, whether on consumption or investment, generates income and employment at the time it's done, spending on investment goods does something extra: it increases our ability to produce more goods and services and, thus, generate more income and employment.

In econospeak, both consumption and investment spending add to demand, but investment spending also adds to supply – our capacity to produce more goods and services in the future. (The future service produced by new housing, by the way, is accommodation – shelter – for many years to come.)

It's this special characteristic of investment in physical capital (but also, in "human capital" – the education and training of our workforce) that explains economists' obsession with "investment".

Four main factors contribute to economic activity, and hence to increasing it: using more hours of labour, investing in more physical capital (including infrastructure), investing in more human capital (education and training) and improving productivity – through better machines, economies of scale, better ways of organising work, and so on.

Now we've got all that clear, what's been happening lately to new physical investment spending?

Well, households have been investing in a lot more housing, particularly in Melbourne and Sydney, though this looks like easing back before long.

Governments – state more than federal – have increased their investment in infrastructure, though many would say they should be doing more, and some (like me) would say the investment they are doing could be in much more useful stuff than it is.

Which brings us to the main thing preoccupying economists, business investment spending.

According to a report by Jim Minifie and colleagues at the Grattan Institute, Australia's investment has been "exceptionally strong".

"Since 2005, the capital stock [aka the stock of physical capital at a point in time] per person has grown by a third. Even excluding mining, capital per person has growth by more than 15 per cent. By contrast, in both the US and Britain the capital stock per person grew by just 7 per cent," Minifie said.

"Strong investment has helped to increase output per person in Australia by 10 per cent between 2005 and 2015, compared to 6 per cent in the US and just 4 per cent in Britain."

But – there had to be a but – we're now experiencing the biggest ever five-year fall in mining investment as a share of GDP.

"And non-mining business investment has fallen from 12 per cent to 9 per cent of GDP, lower than at any point in the 50 years from 1960 to 2010."

This, of course, is what's been worrying economists: the failure of non-mining investment to grow strongly as the mining investment boom ends. Latest figures do show growth in the non-mining states of NSW and Victoria, however.

What factors encourage greater investment? Textbooks tell us lower interest rates – lowering the "cost of (financial) capital" – helps, but the Reserve Bank believes that, while its manipulation of interest rates has a big effect on the behaviour of households, it doesn't have much effect on businesses.

Minifie says the Turnbull government's proposed cut in the rate of company tax would probably attract more investment by foreigners, but it "would also reduce national income [the bit Australians get to keep] for years and would hit the budget". Oh.

But the biggest direct effect on businesses' investment spending is how much spare production capacity they've got and how fast they're expecting the demand for their products to grow beyond their present capacity.

My guess is that many firms still have a fair bit of spare capacity and that many aren't confident of strong growth in the future.

Minifie reminds us, however, that there are good reasons business doesn't need to invest as much as it used to. The cost of capital goods – particularly computerised equipment – has fallen, and service industries, which make up an ever-growing share of the economy, don't need as much physical capital as goods-producing industries do.

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Politicians have worked hard to make house prices so high

It has cost the budget a lot of money to make the prices of homes as hard to afford as they now are.

If this shocks or puzzles you, it's intended to. It shows the economics of house prices is more complicated than most people realise. And than can be deduced from the things politicians on both sides say and do in the name of improving home affordability.

The surprising truth is that most of the things pollies – state as well as federal – do in the name of making housing more affordable actually make it less affordable – as well as having a significant cost to their budgets.

It's not surprising that most politicians, not being economists, don't know much about the economics of house prices. But the same can't be said of their Treasury advisers.

So we're left wondering whether our politicians pursue their counterproductive solutions in ignorance of their econocrats' knowledge, or whether the pollies fully understand they're making things worse for first home buyers, but don't care because they also know the punters won't realise they've been conned.

Why do such a thing? Because the pollies know – thanks to their econocrats' advice – that the actual beneficiaries of the things they do in the name of improving affordability are people who already own a home.

And that's a much larger group of voters than the group of would-be home owners.

Scott Morrison advises that the budget in May will have a "housing affordability package" at its centre. Fine. We'll see then how much it does to help or hinder first home buyers.

This is a tacit admission that home affordability has become too hot politically for the government to get away with merely repeating that the obvious solution is to increase the supply of new homes – which just happens to be the primary responsibility of the states, not the feds.

It's true that house prices rise when the demand for them grows faster than their supply is growing. But to imply that the problem can be solved simply by building more homes is to reveal your ignorance of how the housing market works.

Homes aren't a simple consumer good to be bought and soon used up. They're a long-lived asset, one that delivers a flow of service over many years – shelter – while retaining – and, everyone hopes, increasing – their resale value.

This means there's a huge stock of existing homes, the number of which is increased only a per cent or two by each year's building of new homes.

It means, too, that the demand for home ownership is driven not just by people's desire to own the home they live in, but also by their desire to invest in an asset whose value is expected to appreciate.

But if you already own a home, why stop at one? Why not invest in a few of them – especially if such investments are made more attractive by tax breaks such as negative gearing and the 50 per cent discount on the tax on capital gains?

Homes – units as well as houses – come in all shapes and sizes. Not to mention widely differing locations.

One thing this means is that merely building a lot more houses on the outskirts of the city will do little to satisfy the demand of people fighting over the limited supply of homes close to the centre of the city (where most of the good jobs are).

Sensible thinking about housing affordability is plagued by the "fallacy of composition" – the misplaced assumption that what works for the individual must work for everyone.

Take the Victorian government's decision to help first home buyers by reducing or removing the stamp duty they pay.

The individual couple hears this and thinks this will make it easier to afford a first home. Sorry, it won't. Why not? Because all first home buyers will get the same help, thus robbing the individual of any advantage over the other people competing for the place they're after.

All such attempts to make homes more affordable to first home buyers by supposedly lowering the cost of homes backfire. Because demand continues to exceed supply, what happens is that competing buyers use their tax concession to bid the price of first homes even higher.

So the supposed benefit to first home buyers ends up in the hands of those existing home owners who sell them their home, then move on to another. But this doesn't diminish the concession's cost to the state's budget.

When the Howard government introduced the 50 per cent discount on the tax on capital gains in 1999 and made it available to people with negatively geared property investments, it could argue that, by making property investment more attractive, it would increase the supply of homes.

To the extent it induced investors to buy newly built homes, it probably did – a bit. But the main thing it did was to increase investor demand for existing homes, particularly the type of homes bought by first home buyers.

This tax change prompted a massive increase in negatively geared property investment, at great benefit to the investors (almost all of whom would be existing home owners) and at huge annual cost to the federal budget.

It has cost the budget a lot of money to make the prices of homes as hard to afford as they now are.

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Reserve Bank spells out company tax choices to politicians

The pollies can't help themselves. When the Reserve Bank heavies make their regular appearance before the House of Reps economics committee, the main game is to get the governor to say something that favours your side of politics and gives the finger to the other side.

So, when Dr Philip Lowe and friends appeared before the committee a fortnight ago, the Liberal chair of the committee, David Coleman, saw his chance to get Lowe to repeat his remarks in favour of cutting the rate of company tax to make it internationally competitive, remarks that drew headlines of Governor Slams Labor in the national press.

Sorry, Lowe had seen this game before, and wasn't playing. He'd switched to "analytical" mode. In truth, he was backing off at a rate of knots.

Tax, he said, is one of the considerations that internationally mobile capital takes into account when deciding where to do investment, but only one.

"There are a lot of other factors as well," Lowe said. "The kind of legal and political environment, human capital [how well-educated our workers are] and all the other things we value in this country."

Corporate tax rates had been edging down around the world, but in the post-crisis environment some countries had seen lowering the corporate tax rate as a potential strategic advantage to attract business from elsewhere, so we heard governments talking about 15 and 20 per cent rates, he said.

"I think you could argue … that, from a global perspective, this is not actually that useful, because the lowering of the corporate tax rate from one country to another just changes the location of investment and does not increase aggregate [global] investment.

"I hear some economists saying that in a perfect world we would have a common global corporate tax rate, so business would decide where to locate based on the strategic and comparative advantages and not on corporate tax.

"But that is not the world we live in."

So the analytical choice the Parliament faced was to respond to this international competition or to say, "No, we are not going to respond to that because we have other advantages that [make] people want to invest in Australia", he said.

"Australia has other advantages, and the tax system is supposed to deal with issues other than attracting investment – there is equity and fairness and other considerations," he said.

Soon it was time for another Liberal, Scott Buchholz, from my ancestral home of Beaudesert, to try his luck with the assistant governor economic, Dr Luci Ellis. Sorry, no luck.

"If you are a primarily locally oriented corporate entity, you have dividend imputation and it is more or less irrelevant what the corporate tax rate is from the perspective of people who wish to invest in your firm," she said.

"That is also true for the very large pool of superannuation savings that we have in this country."

So the benefit from cutting the company tax rate was limited to its ability to attract investment from foreigners.

But not all foreign capital was equally valuable. Foreign direct investment, she implied, was more valuable than portfolio investment involving "purchasing of existing securities or existing assets [such as businesses]".

Direct investment was where, if the decision to cut the rate was put off, this could "potentially be more damaging to an economy" but – here comes the two-handed economist – "investors think about more than just differential tax rates when they are making foreign direct investment decisions".

"Also," Ellis went on, "you have to remember that many multinational corporations do have the capacity to decide where the revenue [they earn in Australia] is recognised".

"To the extent that there are transfer-pricing alternatives to where you locate your income, it is not clear to me that [the level of our company tax rate] changes people's decisions about whether Australia is a good place to have some business. It might change which government gets the revenue.

"You could imagine that it would become increasingly attractive for multinational firms to seek to locate their revenue recognition in lower tax havens.

"But there are already very low tax jurisdictions where [multinationals] can do that, and we still see investment happening in [this] country.

"I cannot imagine a scenario where a few more countries moving in this direction [of cutting their rates below ours] results in the entirety of that activity moving outside Australia's borders," Ellis said.

What a comfort it is that, while our politicians do little more than try to score points off each other, our econocrats are still capable of laying out the choices we face.

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The news is good, but not for the reason we've been told

Fabulous news on the economy this week. The recession that never was, didn't happen. Phew. That's a relief.

After going backwards by 0.5 per cent in the September quarter of last year, we learnt from the Bureau of Statistics' national accounts that the economy rebounded by 1.1 per cent in the December quarter - meaning, according to the overexcited children of economic reporting, that we've escaped "technical" recession.

Actually, anyone with sense knew three months ago we would. The detail of the national accounts showed the contraction was no more than a pothole on the economic road, the product of an unusual accumulation of negative one-offs.

But even if this week's figures had shown a second consecutive quarter of "negative growth", the recession the excitables would be shouting about would be technical rather than real.

Why? Because you can't have a real recession without falling employment and rising unemployment, and we've had neither. Oh. No one told me.

But back to reality. Just as the economy didn't really contract in the September quarter so, however, the economy didn't really take off like a rocket in the December quarter.

There's a lot of largely inexplicable "noise" in the initial estimates of the quarter-to-quarter change in real gross domestic product. That's why adult economists never take the figures too literally.

It's common for a literally unbelievably bad quarterly figure to be followed by an unbelievably good one.

That's partly because of catch-up – work that couldn't be done in the first quarter because of, say, bad weather, is caught up with in the second.

But also because of the laws of arithmetic. If we compare the December quarter with the weak September quarter, we get an increase of 1.1 per cent. But compare it with the quarter before that and the increase is only 0.6 per cent.

The rate of real GDP growth over the year to December – 2.4 per cent – is closer to the rate at which we're likely to actually be travelling, but even that may be on the light side.

One suspiciously strong aspect of the accounts in the December quarter was growth in consumer spending of 0.9 per cent.

With the rise in wages so small, and only modest growth in employment, household disposable (that is, after-tax) income grew by only 0.2 per cent in nominal terms.

So how could consumer spending have grown so strongly? Since, by definition, income equals consumption plus saving, the statisticians assume households must have reduced their rate of saving.

The national accounts show the household saving ratio peaking at almost 10 per cent of household disposable income at the end of 2011, then falling almost continuously since then, taking a big drop in the December quarter to reach a little over 5 per cent.

If that's really happened and isn't just the product of some misestimate of income or consumption (or both), it's probably explained by a "wealth effect" – people in Melbourne and Sydney, seeing the value of their homes shooting up, feel wealthier and so decide they don't need to save as much and can spend more.

The next bit of apparent good news is that new business investment spending grew by almost 2 per cent. This, believe it or not, included an increase in mining investment, plus a stronger-than-usual increase in non-mining investment.

The former is likely to be just a blip as mining investment continues to fall back to normal, post-boom levels; the latter is an encouraging sign that the rest of business is getting on with the rest of their lives.

The last bit of good news in the accounts is that our terms of trade – the prices we receive for our exports compared with the prices we pay for our imports – improved by 9 per cent during the quarter, taking the improvement for the year to almost 16 per cent.

This is mainly because, after falling sharply since their peak 2011, coal and iron ore prices rose over most of last year.

This is important for several reasons. An improvement in our terms of trade increases our real income – since the same quantity of our exports now buys an increased quantity of imports.

"Real net national disposable income per person" – a better measure of living standards than real GDP per person – increased  2.5 per cent in the quarter to be 5.3 per cent higher over the year.

Many people noticed that company profits (the profits share of GDP) leapt by 16.5 per cent in nominal terms during the quarter, whereas the nation's wages bill (the wages share of GDP) fell by a nominal 0.5 per cent.

Why the disparity? Mainly because of the huge boost to mining company profits from the jump in export prices.

Not to worry. If the economy works the way the textbook says, this gain to miners should flow through the economy, causing higher wages and higher tax payments.

This latter likelihood is shown in the fact that nominal (as opposed to real) GDP grew 3 per cent in the quarter to be 6.1 per cent higher through the year.

This is great news for the Treasurer because we pay taxes (and everything else) in nominal dollars, not real dollars.

Last word goes to Dr Shane Oliver, of AMP Capital, who says there are seven reasons to be upbeat about the outlook for the economy.

"Thanks to a more flexible economy, Australia is on track to take out the Netherlands for the longest period without a recession. South-east Australia is continuing to perform well.

"The great mining investment unwind is near the bottom. The surge in resource export volumes has more to go.

"National income is rising again. Public investment is strong and there are signs of life in non-mining investment. Growth is on track to return to near 3 per cent this year," Oliver concludes.

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How we can get better school results

Have you noticed how our politicians, asked to explain or defend their policy on X will, within a sentence or two, switch to expounding on what's wrong with their opponents' supposed policy?

The sad truth is they much prefer scoring cheap political points and blame-shifting to getting on with developing policies to deal with the various problems the nation faces.

Coming up is policy on schools. We'll be hearing a lot on federal funding of schools in a few weeks when Education Minister Simon Birmingham debates the matter at a meeting with his state counterparts.

I've been boning up on schools in preparation for delivering the Australian College of Educators' Jean Blackburn Oration in Melbourne last week. Here's a taste.

The government keeps telling us the problem with schooling is that, for so many years, we spent more and more on school education and the results did not improve. In fact, they got worse.

Well, the last bit's certainly right.

As summarised by Trevor Cobbold, of Save Our Schools, a public schools lobby group, our results on the OECD's program for international student assessment, PISA, have fallen significantly over the past 15 years. We remain one of the high-performing countries in reading and science, but our maths results have slipped to about average.

The results show continuing declines in the proportion of students at the most advanced levels and also significant increases in the proportion of students below the international standard. This includes high proportions of low socio-economic status, Indigenous, provincial and remote-area students.

We get an even more worrying picture from the results of the national assessment program – literacy and numeracy, NAPLAN.

Peter Goss and colleagues, of the Grattan Institute, have pioneered the technique of converting NAPLAN results into "years of progress", using the results of Victorian students.

They note first that the NAPLAN “national minimum standards” are set very low. A year 9 student can meet this standard even if they are performing below the typical year 5 student – that is, four years behind their peers.

They find that the spread of student achievement from highest to lowest more than doubles as students move through school. Low achieving students fall ever further back. They are two years and eight months behind in year 3, but three years and eight months behind by year 9.

Students in disadvantaged schools make about two years less progress between year 3 and year 9 than similarly capable students in high-advantaged schools.

And get this: bright students in disadvantaged schools show the biggest learning gap. High achievers in year 3 make about 2½ years less progress by year 9 than if they had attended a high-advantage school.

Great. But what about the government's claim to have been spending more and more on schools? Birmingham keeps saying that federal funding has increased by 50 per cent since 2003.

This is highly misleading, particularly since what matters is total school funding, coming from both federal and state governments.

According to Cobbold's fact checking, the real increase in total government spending per student over the nine years to 2013-14 was just 4.5 per cent.

There's more. Although the non-government sector enrols less than 20 per cent of all disadvantaged students, the nine-year increase for non-government schools was 9.8 per cent, whereas the increase for government schools was only 3.3 per cent.

So, does spending more money buy better school performance? Not if you spend it on more of the wrong things.

The truth is that we haven't been spending a lot more in recent times but, in any case, much of what we have been spending hasn't been spent effectively.

Between the federal and state governments, we've given more to advantaged schools than don't need it, at the expense of disadvantaged schools that do need it.

When you study the standardised test results, the answer to how the money could be spent more effectively – that is, in a way that increases the probability it will produce better school performance – leaps out at you: we need to spend more per student on disadvantaged schools and less per student on advantaged schools, where parents have demonstrated their willingness to supplement the school's finances by paying fees.

In other words, the obvious way to make government spending on schools more cost-effective is to put it on a needs basis.

We'll know soon enough whether Birmingham has made any progress on that, or has succumbed to pressure from non-government schools following that less-than Christ-like motto: "For unto every one that hath shall be given".

But though it would help to direct more of the funding to schools with more of the disadvantaged students, we need to ensure schools spend whatever they get as effectively as possible.

One new technique that research says would improve outcomes is "targeted teaching".

One of its advocates, Goss of the Grattan Institute, says teachers should be provided with the time, tools and training they need to collect robust evidence of student learning, discuss it with other teachers, and use it to target their teaching to the wide range of student learning needs in their classroom.

Higher achieving students should be stretched, lower achieving students should be supported to catch up, and no student who stalls should go unnoticed, he says.

The school fosters a culture of progress, in which teachers, students and parents see learning success as being about effort and improvement, not ability and attainment. And see assessment as a way to improve, not to expose student failures.

The best schools in Australia are not necessarily those with the best ATAR or NAPLAN scores, but those that enable their students to make the greatest progress in learning. The goal is for each student to have made at least a year's worth of progress every year, Goss concludes.

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Cut in penalty rates another win for 'bizonomics'

When we look at all the crazy behaviour in the United States, we comfort ourselves that it couldn't happen here. Well, last week we took another step in that direction.

Why do blue-collar workers get so alienated and fed up they vote for someone as mad as Donald Trump? It couldn't be because, while America has waxed fat over the past 30 years, their pay has been stagnant in real terms.

How have the top few per cent of US households captured most of the economic growth for three decades?

Three main reasons, which apply in varying degrees to us.

First, because globalisation and "skill-biased" technological change have produced a small number of winners and a large number of losers.

Second, because far from using the tax-and-transfers system to require the winners to compensate the losers, we've gone the other way, making the income-tax scale less progressive and tightening up on payment of benefits to people of working age.

Third, because although the economy has changed in ways that weaken organised labour, we've doubled down, weakening legislative arrangements designed to reduce the imbalance in bargaining power between bosses and workers.

The unions have been weakened by the greater ease with which employers can move their operations overseas and by the technology-driven shift from goods to services.

The legislative attack has focused on removing union privileges, weakening workers' rights and weakening workers' bargaining power by discouraging collective bargaining and favouring individual contracts.

In the US there's been a failure to raise minimum wage rates. Here, there's been a decades-long campaign to eliminate penalty rates for people working "unsociable" hours which, supposedly, are anachronistic.

The mentality that produced these developments is "bizonomics" – something that sounds like economics because it repeats buzzwords such as "growth" and "jobs", but isn't.

In Australia, micro-economic reform has degenerated into a form of rent-seeking that's saying the way to a prosperous economy is to keep business – the people who create the jobs – as happy as possible.

This bizonomics isn't new, of course, as attested by its slogan: What's good for General Motors is good for America.

As it relates to the labour market, the proposition is that the way to make things better for everyone is to make life tougher for the workers.

Pay them less, give them less job security in the name of greater "flexibility", acquiesce to business's ambition of making working life a 24-hour, seven-days-a-week affair, and we'll all be better off.

The flaws in that argument – and the price to be paid for playing this game for decades – are now more apparent.

For a start, the number of workers and their dependents far outnumbers the bosses and owners and their dependents. So if all you end up doing is transferring income from the workers to the bosses, far more people lose than gain.

Of course, that's never what we're promised. The promise is always that the loss to existing workers is justified by the gain to all the would-be workers who'll now get a job.

Trouble is, too often you end up with a lot of workers making a sacrifice with only a handful of would-be workers finding jobs.

The Fair Work Commission's decision to cut Sunday and public holiday penalty rates for workers in hospitality and retail is an experiment in trickle-down economics, based on faith rather than evidence.

That makes it like everything else on big business's "reform" agenda: the immediate benefits come directly to business – in the form of cheaper labour – but, not to worry, those benefits will trickle down to the rest of us, so in the end it will all be much better for everyone.

Do you wonder why the punters don't believe it and conclude simply that "the government" has cut wage rates to benefit its big business mates, thus adding to their disillusionment and willingness to vote for populist fringe parties?

As I've explained before, the claim that lower penalty rates in retailing will lead to growth and jobs is – like the argument for protection – based on a fallacy of composition and the absence of "economy-wide" thinking.

The most likely effect is that total consumer spending remains little changed, but more of it's done on Sundays and goes on recreation and retail.

Plus an apartheid weekend, where the high-paid still get it, but the poor have to work.

A fearless prediction: now business has got some of the "reform" it's seeking, no one will ever bother to come back in a few years' time and do a proper study to check whether all the promises we were given came to pass.

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Why we've never had 'Gonski funding'

It turns out Christopher Pyne was right: Julia Gillard's version of the Gonski school funding reform was indeed "C​onski".

The con was that the funding changes Gillard put into law in 2013 – which Labor and the teacher unions christened "Gonski" and have virtuously defended from Coalition attack ever since – bore only a vague resemblance to what leading company director David Gonski's panel recommended in its report to the government in 2011.

In a speech last week, Dr Ken Boston, a member of the panel and former NSW Education Department director-general, argued that much of what people think they know about "Gonski" is wrong. He listed four common beliefs that are mistaken.

First, many people believe the Gonski report said additional funding was the key to improving education.

Wrong. "The Gonski report did not see additional funding as the key to improving Australian education. It's most critical recommendations were about the redistribution of existing funding to individual schools on the basis of measured need," Boston said.

"The report envisaged the amount allocated to independent schools being based on the measured need of each individual school, and the amounts allocated to Catholic and government systems being determined by the sum of the measured needs of the individual schools within each system – a process of building funding up from the bottom."

This was in sharp contrast to the process of the last 40 years: top-down political negotiation by the federal government with state governments, independent school organisations, church leaders, teacher unions and others, he said.

The outcome had been that the funding allocations to the three sectors – independent, Catholic systemic and government – were arrived at without any agreed and common system of assessing real need at the level of each individual school.

School funding has been "essentially based on a political settlement, sector-based and largely needs-blind", whereas the Gonski report proposed that it be determined on an educational, not political basis, be sector-blind and entirely needs-based, as well as being bottom up, not top down.

But Gillard rejected Gonski's recommendations and stuck with the old, religion-based arrangements.

"We concluded that an additional $5 billion might be needed on top of the $39 billion being spent annually by the state and federal governments, because of the commitment given by the federal government [Gillard], after the review had started, that no school would lose a dollar as a result of the review.

"This was an albatross around our necks," Boston said.

The second common misunderstanding was that the Gillard and second Rudd governments, having adopted Gonski's approach, then reached "Gonski agreements" with the states, promising additional "Gonski funding" over six years.

Nothing Gonski about it. Gonski recommended that the loading for non-government schools as a proportion of "average government school recurrent costs" – a biased formula that meant public funding for new places for children in disadvantaged government schools automatically increased the federal government grants to non-government schools, without any consideration of disadvantage – should cease.

Gillard, supposedly that great champion of needs-based funding, kept the biased formula alive.

Gonski recommended that the basis for general recurrent funding for all students in all sectors be a "schooling resource standard" for each school, set at a level comparable with schools with minimal educational disadvantage.

To this should be added loadings for schools according to their social disadvantage – low socioeconomic status, English language proficiency, school size and location, and indigeneity​.

Calculation of the resource standard and the size of the loadings should be done by a "national schools resourcing body", similar to the former Schools Commission. Gillard wouldn't touch it.

"Like the Coalition government, Labor has ducked the fundamental issue of the relationship between aggregated​ social disadvantage and poor educational outcomes, and has turned its back on the development of an enduring funding system that is fair, transparent, financially sustainable and effective in promoting excellent outcomes for all Australian students," Boston said.

The third misunderstanding – which Boston labels "the Fairfax view" (not this time, Ken) – is that most of the problems facing Australian education would be solved if we got the last two years of "Gonski funding".

It's true that, so as to disguise the true cost of Labor's politically gutless, bastardised version of Gonski, it was to be phased in over six calendar years, with the bulk of the cost loaded into the last two years, 2018 and 2019.

This was $4.5 billion, which the Turnbull government has cut to $1.2 billion over the four years to 2021.

Even so, "providing the so-called 'last two years of Gonski funding' will not deal with the fundamental problem facing Australian education. Neither side of politics is talking about the strategic redistribution of available funding to the things that matter in the schools that need it, on the basis of measuring the need of each individual school," Boston said.

The fourth common misconception is that the two sides of politics are poles apart. At one level, yes. What they have in common, however, is that neither is genuinely interested in moving to needs-based funding.

"The government and opposition are fluffing around the margins of the issue, and neither appears to understand the magnitude of the reform that is needed, or – if they do – to have the capacity to tackle it," Boston said.

"Equity and school outcomes have both deteriorated sharply since we wrote the Gonski report. Some stark realities now shape the context in which governments – state and federal – must make decisions two months from now about how Australian education might recover from its long-term continuing decline.

"The present quasi-market system of schooling, the contours of which were shaped by the Hawke and Howard governments, has comprehensively failed.

"We are on a path to nowhere. The issue is profoundly deeper than argument about the last two years of 'Gonski funding'," he concluded.

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