Monday, June 28, 2010

Gillard's big talk more a case of shift in emphasis

IS JULIA Gillard's first policy statement as Prime Minister a real policy shift? Or is she pushing on a door that was already closing?

We all remember the headlines last October when Kevin Rudd endorsed Treasury's projection that Australia would have 35 million people by 2050. "I actually believe in a big Australia," the then prime minister said. "I make no apology for that."

But as polls showed the vast majority of Australians disagreed with him, Rudd retreated.

In April, he appointed Tony Burke as Minister for Population, to produce a population strategy to "balance" the need for more people with their impact on infrastructure and communities.

"Many Australians have legitimate concerns about the sustainability of population levels," the old prime minister said, citing the impact of growth on urban congestion, infrastructure, housing, government services, water and agriculture.

Yesterday the new Prime Minister said much the same, with a different emphasis. She rejected a "big Australia", said sustainability was the prime goal and added a concern that skilled migration should not substitute for skilling young Australians.

But population policy here is largely immigration policy. And whatever the rhetoric, Immigration Minister Chris Evans has been busy making policy shifts to slow immigration.

Evans has cut the official migration intake by 21,500. He has reduced the number of people here on section 457 temporary work visas by 12,500.

He has halved the number of skilled occupations that qualify for entry, toughened a range of rules, and closed the back door by which foreign students in lower-level courses could claim permanent residency.

The bottom line, he reported last month, was that net overseas migration this financial year is set to fall to about 240,000, down 20 per cent from a peak 306,000 in the year to March 2009.

If the door was not closing under the old government, the doorway was narrowing. Gillard's words do not set a new policy direction, but aim to reassure Australians worried by high immigration that she understands and shares their views.

But let's not lose sight of the real issue. As Committee for Melbourne chief executive officer Andrew MacLeod points out, Australia's population will keep growing. We need to plan for that, and build the infrastructure it will need.

Cities far bigger than Melbourne work very well if they build a good metro system, and go up as well as out. Good infrastructure and good planning make big cities work.

Tuesday, June 22, 2010

Control fetish stifles ALP

OPPOSITIONS don't win elections, governments lose them. It's an old saying but a good one. Governments are well-resourced, oppositions poorly resourced. So governments normally win re-election. If they lose, it's usually because they made a bad mistake.

Were it not for WorkChoices, our prime minister now would be John Howard or Peter Costello. Had the Kennett government kept its promises to regional Victorians instead of cutting their services, our premier might still be Jeff Kennett.

Longevity is a factor, too. I recall Dick Hamer reflecting that every decision you make in government costs you support from someone, and eventually you end up with more opponents than supporters. But that shouldn't trouble a first-term government.

So why is the Rudd government at risk of becoming Australia's first one-term government since the Great Depression? What big mistakes has Labor made that has cost it so much support in the polls?

First, an essential caution. I've looked back over 25 years of polling, and in every one of the past eight federal elections, the opposition was leading in the polls at or around this stage. But in only two of those - Howard in 1996, and Kevin Rudd in 2007 - did the opposition win the election. In the other six, voters came back to the government by election day in sufficient numbers to re-elect it.

That's not a forecast of what will happen this time. But it's a strong reminder that what we tell opinion polls months before the contest may not be the way we vote in the polling booth. Opinion polls at this time are a verdict on the government. Our votes on election day are also, in part, a verdict on the opposition.

A Newspoll yesterday implied that voters could be already turning back to Labor, which led by 52 to 48 in two-party terms. But that lead was due entirely to Newspoll's incorrect assumption that the 25 per cent of Australians now supporting the Greens or minor parties will distribute their preferences in the same way as the 15 per cent who voted that way in 2007.

The Age/Nielsen poll instead asks those supporting smaller parties which major party they prefer. In its last poll, a third of Greens preferences were going to the Liberals (up from a fifth in 2007), as were half of those from minor parties and independents. Replace Newspoll's wrong assumption with Nielsen's data, and its bottom line should read 50-50.

Labor is still in trouble. What went wrong?

Opinions will differ. To me, it's a combination of four specific policy failures, with a related set of broader underlying problems about how this government operates.

The first problem was the lack of qualitative controls in Labor's stimulus spending, which opened the way for rorts and poor workmanship by contractors on the insulation and school building programs. This has left Labor looking incompetent, and many voters don't forgive that.

Second, as the refugee boats returned, Rudd vacated the policy debate on how they should be treated, leaving the ground free for the Coalition and the shock jocks to fan Australians' fears that we are being swamped by refugees, and that the only solution is to keep them out of Australia.

Third, the dumping of the emissions trading scheme was an act of breathtaking cynicism from a Prime Minister who had told us that tackling global warming was the great moral issue of our time.

In part, the ETS was sacrificed to meet the government's self-imposed 2 per cent spending cap, a prime case of the tail wagging the dog. It mattered, because it cost Rudd and Labor respect. It told Australians that what this government cares about is keeping power, and anything else is expendable to that end.

The fight over emissions trading, like the fight over the resource rent tax, erupted because Rudd and his inner circle had no political strategy to get difficult reforms through the Senate - and for an opposition, the easiest choice is always to oppose.

A reforming government has two choices: accept battle, and fight like tigers to educate the public and win the debate - or bring the opposition into negotiations early, sharing the credit for reform, but also the responsibility. Rudd did neither.

By instinct, the PM is a manager, and a hands-on, untrusting manager. His ministers are not free to make policy in their areas, as in the distant past. They are advisers before policy is made, then sales reps afterwards. Like Paul Keating, like Howard, Rudd makes the decisions, using cabinet at best as a sounding board, or at worst - as when deciding to ditch the ETS, and impose a resource rent tax - ignoring it completely.

The common thread to all this is an overriding desire to control events. The ministerial press flacks consult at 5.30 each morning, having already read the papers, to decide what the government's lines will be, and to ensure that all ministers say the same thing. The stifling of individual initiative is one reason why the government is so ineffective at selling its message.

Labor, the party of reform, needs to reform itself. It needs to stand for the things it believes in. It needs to have the courage to go out and confront a sceptical public, and make the case for the reforms it knows we need. It needs to free up its frontbench and backbench talent, and use it better.

It needs to convince Australians that it stands for something more than just staying in power.


Saturday, June 19, 2010

Parties try to push the boundaries

THE ALP wants the Geelong seat of Corio to be shifted north into Werribee, to shore up its hold on the neighbouring seat of Corangamite adding 8500 voters in (Labor) Geelong, and shedding 15,000 voters in and around (Liberal) Colac.

The Liberals, instead, want Julia Gillard's seat of Lalor to be moved down into northern Geelong. That would push Corangamite out of Geelong and back into the Western District, to make it a Liberal seat again.

Welcome to the upcoming redistribution of Victoria's 37 federal electorates, in which all parties are trying to get the Australian Electoral Commission to change the electoral boundaries in their favour.

In Melbourne, where Finance Minister Lindsay Tanner is under threat from the Greens, the rapid growth of the CBD and Docklands means the seat must shed 10,000 voters. But where?

Labor has asked the redistribution commissioners to split off green-leaning North Fitzroy, Clifton Hill, and south-east Brunswick. But the Greens and Liberals suggested the commissioners instead cut off the Labor stronghold of Ascot Vale putting Mr Tanner in even more danger.

It is Victoria's first redistribution for eight years, and sorely needed because the last redistribution concentrated most outer suburban growth into just four electorates.

While all seats are meant to have roughly equal numbers of voters, McEwen in the Plenty corridor now has 110,741 voters, or 30 per cent more than middle suburban Chisholm (85,187).

By 2014, the commission projects, four outer suburban seats Lalor, Gorton, McEwen and Holt will have enough voters for an extra seat between them. But a ring of 16 middle suburban seats will have only enough voters for 15 seats.

The usual solution in redistributions is to push seats further out to where the voters are moving, rather than abolish some seats to create new ones. By drawing the boundaries so that each outer seat has only one growth corridor, voter numbers can be kept fairly even.

In the past, shrinking populations in rural areas saw redistributions abolish regional seats to create new seats in Melbourne. But with all of Victoria now growing, such radical surgery appears unlikely this time.

The 11 regional seats as a group would be only 30,000 below their quota in 2014. With oversized, outer suburban McEwen having a similar number of country voters, the obvious solution is to put them in the regional seats.

But that hasn't stopped the parties suggesting massive boundary changes. The Liberals want to bring the northern seat of Murray as far south as Romsey, and send the north-east seat of Indi sprawling halfway across the state, from Corryong to Wallan.

The commission will deliver its draft report next month. Its final report is due in December, probably too late for this year's federal election. But it will set the boundaries for the next two elections at least.

Thursday, June 17, 2010

Eastern economies will decelerate

THIS is the Asian century. Since 2007, the continent with most of the world's people has generated most of its growth. And despite the question marks over China, the odds are that it will keep doing so.

We knew that. On the International Monetary Fund's figures, the 2000-01 tech wreck saw the world's engine of growth shift from the G7 countries to the developing economies of Asia, mainly China and India. In the past decade, gross domestic product (GDP) in the G7 increased by 16 per cent. But developing Asia — China, India, Indonesia and so on — more than doubled its GDP, up 116 per cent.

In the past five years, say the IMF figures, developing Asia generated half the growth in the world's output. The rich countries generated 18 per cent, and the G7 just 9 per cent.

The baton was passed long ago. Why does the IMF proclaim it as something new?

It reflects a confusion between two ways of measuring countries' output. The easy way — widely used because it's so easy — is to translate each country's output into US dollars using today's exchange rate. But on that measure, output rises and falls whenever markets or governments change the exchange rates.

A more realistic measure comes from comparing prices in each country to calculate its purchasing power parity (PPP). In 2006-07, a World Bank team led by former Australian Statistician Dennis Trewin carried out rigorous worldwide price comparisons to do that. The IMF figures quoted here are based on its work.

A simple example: suppose it costs $20 to see a film in Japan but $1 to see it in India. On the exchange rate measure, the value produced in Japan is 20 times as much as in India. On the PPP measure, the value is the same whichever country you see it in.

The differences are huge. On the exchange rate measure, India and Australia have roughly similar levels of GDP. But on a PPP basis, India produces more than four times as many goods and services as we do.

But the exchange rate measure does allow us to measure the size of countries' markets in a common currency. That matters for exporters. And reducing the disparity between the two measures matters if we want to rebalance the world's economy and reduce the risks raised by large sustained current account imbalances — especially in the US.

But you can only predict future GDP levels on the exchange rate measure if you can predict exchange rates. Even the IMF can't do that, which makes yesterday's forecasts by its Asia director, Anoop Singh, pointless.

One of the odd things in his paper is a graph predicting that Asia's share of the world economy will shrink between 2000 and 2030. That's probably an error, but it reminds us that demographics will be working against east Asia, not for it.

The population of Japan is falling already. By 2030, the populations of China, Korea and Taiwan will all start shrinking. As the century goes on, these proud economic powerhouses will have to accept migrants or shrink relative to the rest of the world.

Africa, the Middle East and Latin America have begun to apply the secrets of growth. That, and their growing populations, means they will grow faster in the long term, as Asia slows.


Tuesday, June 15, 2010

Fiscal time bomb yet to explode

PAUL Krugman has a Nobel Prize in economics, and we don't. He is also a columnist with The New York Times, where he writes with insight, deep knowledge, and the courage of his convictions. But he's not infallible. Martin Wolf is chief economics commentator for London's Financial Times, and the most respected of all our tribe worldwide. His columns are rich in detailed grasp of the facts, and in wisdom to judge what weight to give them. But he too is not infallible.

It is because Krugman and Wolf have earned such respect and trust that their crusades, if misdirected, become very dangerous. In my view, that is happening now.

Both disagree sharply with the change in economic tack by Western policymakers in the wake of the Greek fiscal crisis, the subsequent panic in financial markets, and the Tories' victory in the British election.

Last year's consensus was that governments and central banks should remain focused on fighting the legacy of the global recession, and be wary of withdrawing their fiscal and monetary stimulus too soon.

But this year the world has focused on the flipside of that stimulus: debt.

And the more policymakers have focused on debt, the more alarmed they have become: not only by the debt run up to end the recession, but the accumulated debt that has financed three decades of deficits in the G7 economies.

In the 1930s, Keynes taught us that, rather than governments aiming to run balanced budgets, they should adopt a counter-cyclical role: borrow and spend in bad times, when private sector demand has collapsed, then save and repay the debt in good times, when the economy needs no support.

But outside Australia, the first of these goals has proved far more popular with governments than the second. The United States has run a budget surplus just once in the past 50 years. Japan, France and Italy have not run a surplus in the past 30 years, while Britain has had just five years of surplus amid 25 years of deficits. This year, the International Monetary Fund forecast in April, G7 deficits would range from 11.4 per cent of GDP in Britain and 11 per cent in the US, to 5 per cent in Canada, Italy and Germany.

Most alarmingly, by 2015, when their economies are forecast to be back to normal, they would still be running deficits of 7.3 per cent of GDP in Japan, 6.5 per cent in the US, and 4 to 5 per cent in Britain, France and Italy.

Is this sustainable? Take a look at the table below, which shows the IMF's projections of net debt in 2015. Since the Reagan era began, the net debt of the US has soared from 25 per cent of GDP to 66 per cent, and on current settings, the IMF projects it will reach 86 per cent by 2015, and 107 per cent (roughly Greek levels) by 2020.

Japan and Italy already have net debts above 100 per cent of GDP, and by 2015 the IMF projects debt ratios of 75 to 85 per cent of GDP for Britain, France and Germany.

(And Australia? See how low our debt will be? There is no debt problem here. Our problem is having a Liberal Party so clueless on economics that it doesn't know what our real problems are.)

Worse, those G7 debts were run up in good years. Yet the real fiscal time bomb is yet to go off. The West is now in a demographic "sweet spot": many people of working age, relatively few children and retirees. But over the next 20 years, the baby boomers will retire, shrinking the number of workers who pay taxes, while doubling the number of retirees governments will have to support in healthcare, pensions and aged care.

During the Greek crisis, I recalled one of the Reserve Bank's rules of thumb: decide which risk has the most serious consequences if you get it wrong, then lean against it.

The worst risk to the global financial system is not that of investors losing confidence in the Greek government's ability to pay its debts. It is the risk of investors losing confidence in the US government's ability to pay its debts.

Rubbish, Krugman and Wolf interject. The US has deep, sophisticated financial markets. It borrows only in its own currency, and could meet any crisis by raising taxes. Where did the investors fleeing Europe put their money? In US government bonds. It is, Wolf says, "the world's most credible reserve asset".

I humbly disagree. The only sense in which the US is a credible safe haven is that markets now view it as such. But in their modern classic on asset booms and busts, This Time is Different (Princeton), Carmen Reinhart and Kenneth Rogoff show that markets normally view the build-up of dangerous debt overload as safe until the moment the truth dawns, when suddenly everyone wants out.

As long as Washington has a political culture in which one side will veto any tax rise and is indifferent to debt, no one can guarantee that future US governments will honour their commitments. A recent survey of US investors found 46 per cent thought it likely that Uncle Sam would default within a decade; only 33 per cent thought it unlikely.

If this global financial crisis seemed bad, just wait for the one we'll see when investors no longer trust the US government.

That is the risk we must avoid at all costs.


Net debt as a percentage of GDP: 1990, 2015

USA 46%, 86%
Japan 13%, 154%
Germany 29%*, 75%
Britain 27%, 84%
France 25%, 95%
Italy 89%, 122%
Canada 44%, 30%
Australia 6%, 4%**

*1991 ** Treasury estimates, 2015-16



Friday, June 11, 2010

Job figures look good, but may not be as seems

SO FAR, so good. After six weeks of nothing but bad news from financial markets, and business and consumer surveys, the strong jobs growth in May comes as welcome relief.

On the trend measure, full-time jobs are returning at the rate of 20,000 to 25,000 a month. At last, they are now back to the levels of August 2008, before the financial panic.

Unemployment has shrunk back to 5.25 per cent. Working hours are rising. The recovery has spread from the leaders, Victoria and Western Australia, to the laggers, Queensland and New South Wales.

But there's a catch. The Bureau of Statistics estimates that in the past year the adult population has grown by almost 430,000, yet growth in the labour force has been barely half that. That suggests a lot of hidden unemployment, not counted in these figures.

The key question is what to make of this. Does it show, as some argue, that Australia's economic recovery is now too resilient to be shoved off course by the tremors in the global economy? Or is it rather that the bad news of May and June didn't hit in time to show up in these figures?

It's probably a bit of both. Australia's economy clearly has momentum going, and business and consumer confidence is still marginally positive. If there's not another surprise twist from Europe or China we're likely to take the panic of May in our stride.

But these figures don't settle the issue.

The jobs data is a lagging indicator: they tell us what was behind us, not what's ahead. This survey was taken in early May, so it really measures jobs growth in April, before the market plunge began.

The sharp fall in business confidence and conditions since April probably means we'll see slower job growth ahead, at least until the markets settle. And that will probably go with slower economic growth.

The markets last night were still punting that the next interest rate rise is at least a year away.


Loss of stimulus hits home

THE Reserve Bank has blamed the strange behaviour of Australia's housing market in recent months partly on the end of federal government stimulus for first home buyers.

Trying to explain the housing market in 2010 when housing prices have soared yet home lending has plunged an article in the Reserve's quarterly bulletin says at least part is due simply to the sharp fall in sales to first home buyers.

The article, by researchers Paul Bloxham, Daisy McGregor and Ewan Rankin, does not explore the role of foreign investors, who have been widely blamed for driving house prices upwards, especially in Melbourne, when finance to local buyers was shrinking.

But they point to a different explanation.

The big change in the market this year, they say, was the fall in purchases by first home buyers once the boost to the federal first home buyers grant ended on December 31.

In 2009, when federal grants for buying existing homes temporarily doubled to $14,000, first home buyers borrowed as much as 25 per cent of all money lent for home purchases. That shrank to just 12 per cent in March and April.

The researchers say 90 per cent of first home buyers take out a mortgage, whereas only 65 per cent of existing home owners moving home do so.

As first home buyers retreat from the market, that explains much of the fall in lending.

Moreover, they say, first home buyers tend to buy cheaper houses. That means that when their share of the market shrinks, the median price of homes rises even if the underlying trend is flat.

"As the composition of housing turnover normalises, the more typical relationship between housing price growth, loan approvals and auction clearance rates is likely to be re-established."

This explanation ignores the central role of housing investors, who on average borrow 40 per cent of all finance for home purchases.

Investors tend to be even more heavily geared than first home buyers.


Tuesday, June 8, 2010

Resource tax amounts to 40% nationalisation

FOR five weeks, our politics has been dominated by a debate that for most of us has nothing to do with our daily lives, and which we have no hope of understanding. Yet it could decide who will govern us next.

What have we learnt from a month of claims and counter-claims on the resource rent tax? I think it comes down to three questions. Should we increase taxes on mining, to give shareholders less and the community more? If so, is this the right way to do it? And, all things considered, is this tax rise about the right amount?

(Future Fund chairman David Murray last week threw in a fourth question: What's the best way to use the new tax revenue? But while I agree with him that a big slab should be invested for long-term benefits, not spent, the first three are the key questions right now.)

The Rudd government chose this fight because it was confident that voters would agree they are not getting a fair share of the record prices now paid for Australia's minerals. Yet, in a month of debate, it has failed to make a convincing case on this. Even its new TV ads focus yet again on what miners pay in royalties to state governments. But why ignore the larger amount they pay in company tax to Canberra? In eight years, that has grown from $1.4 billion to $8.1 billion in 2007-08, and $10 billion-plus in 2008-09.

Treasurer Wayne Swan has hit back with estimates that, even including company tax, the community's share of mining profits has shrunk from 55 per cent over the five years to 2003-04 to 27 per cent in 2008-09. But that is based on Treasury's own estimate of mining companies' "economic income" which it refuses to publish. All we know is that it makes no allowance for depreciation of capital equipment, which some of us might think essential to the industry.

Is the government's case really that weak? No. The Bureau of Statistics' recent round-up of industry data for 2008-09 estimates the profit margin in mining that year was 37.1 per cent. That's three times the industry average of 11.2 per cent. (Mind you, there were no banks in its survey). Mining earned 7.2 per cent of all industry income, but 23.4 per cent of all pre-tax operating profits. They're doing well.

Then there's a second argument the government fails to make, although it slyly alludes to it: the mining boom makes other industries unprofitable. Over the 20 years to 2005, the Australian dollar averaged US70: manufacturers, farmers and tourism operators could live with that. But in the past three years it has averaged US84, even including the months of financial panic and US88 with the panic months excluded.

Analysts believe the mining boom is the main driver of the dollar's rise, which has wiped out sales and profits for industries lacking its huge profit margin as a cushion. And it's only in the early stages.

Access Economics estimates that mining companies have $107 billion of projects already committed or under construction, and another $186 billion in the pipeline. What impact would all that have on other Australian industries?

There are good reasons to believe the mining industry could pay a bigger return to the community and it would be a good thing if our mineral wealth were extracted more slowly. But how?

Even the miners support the principle of a resource rent tax. But this version is fundamentally different to those operating elsewhere, including our own tax on the oil and gas industry. It amounts to a 40 per cent nationalisation of mining projects, with the miners paying the government's share of the costs upfront. They face a sharp fall in the value of their mines, while taxpayers face the risk of paying 40 per cent of the losses of unprofitable mines.

Why on earth did we end up with this? One striking feature of the debate is that, one university economist aside, no one has come out to support this version of the tax. Officials present it as taking from big miners to give to small miners, yet no small miners have come out to support it. And the industry has dented its assumption that a government IOU is as good to the miners as cash.

A first step back from the brink would be to scrap this version for something like the existing resource rent tax, under which oil and gas projects pay the government 40 per cent of profits above a benchmark set 5 percentage points higher than Kevin Rudd and Swan now propose.

How much should the government take for us? Well, it should heed the advice of Jean-Baptiste Colbert, finance minister to Louis XIV: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." And, of course, without making the goose die of cold.

This is a big tax rise, maybe $12 billion extra a year on successful mining projects. Both sides effectively agree it would lift taxes and royalties by roughly half. That could easily be reduced were it not that Rudd is now committed to spending virtually the lot.

Both sides are facing tough choices. If the government gives ground now to placate the miners, they will demand more; but if it doesn't, the fight goes on and the government is losing. If the miners hang tough, they could end up with Tony Abbott as prime minister but if Rudd gets back, they will have lost their best bargaining opportunity. And the real election will be about more than a mining tax.


You can't call the election on what's said in June

BEWARE the polls of June. Polling in June is a poor guide to who will win an election due at the end of the year.

In three of our past four election years, the party leading in the polls in June ended up losing the election later that year. And in every case, the victim was the (Labor) opposition.

In those four years, between our Age/Nielsen poll in June and the outcome on election day, on average the Howard government picked up 5.5 percentage points in support in two-party terms.

That's not the fault of our poll which is the only poll that has correctly called the winner of all four elections. (Remember the front page headlines in The Australian on election days? "Late surge to Beazley" it told us in 1998. In 2004 was: "Latham within striking distance".)

If the Rudd government matched the Howard government's average comeback between June and election day, it would wipe out the entire swing to the Coalition in yesterday's poll, and we would end up exactly where we started.

Whether it will or not is another matter. The government's support has been in free fall since Tony Abbott became Opposition Leader. But precisely because Abbott has been so much the Opposition Leader rather than an alternative prime minister, it's a long way to polling day.

It's too early to call the outcome and history backs the bookies' call in making Kevin Rudd the favourite.

Remember 1998? John Howard had gone back on his "never, ever" pledge to commit to a GST. We didn't like it. And there was an election looming.

In June 1998, Labor under Kim Beazley had a commanding 56-44 lead in our poll (and similar leads in other polls).

The Howard government looked like a one-term government with an unsaleable tax. Yet it stuck to its guns, suffered big swings, but it won the marginal seats, and a second term.

In 2001, the GST's debut had led to a spending strike that sent unemployment rising and confidence plunging. The Howard government looked in even worse trouble than in 2001. In the post-budget poll, Labor led 57-43. Beazley looked home.

Then the economy began picking up. Howard told the patrol boats not to let refugee boats land, but take them to Pacific islands. And al-Qaeda attacked the Twin Towers. By September 12, the election was all over.

Then came 2004, and Mark Latham.

We liked him at first, and Labor soared in the polls. It led 56-44 in May, 52-48 in June, the same in July and 53-47 as late as August. But armed with focus group research, John Howard knew something we didn't. He brought on the campaign and boldly declared the issue was trust. He was right: we didn't trust Latham. The government romped home.

What made 2007 different was Kevin Rudd. As usual, Labor led 57-43 at this stage. But Rudd effectively narrowed the issues to WorkChoices and climate change and gave the Coalition nothing to attack. Even so, that big lead in June shrank to 52.7-47.3 by election day.

None of this means that Rudd will be able to turn it around this time. But it means the election is open, and it's in front of us, not behind us.


Thursday, June 3, 2010

Bravo, Australia, we must be a miracle economy

YESTERDAY'S national accounts tell us that Australia's output grew by 2.7 per cent in the year to March. Yet they also tell us that output per head grew just 0.7 per cent.

That's the true bottom line of this patchy, incomplete recovery, swollen by population growth at a 40-year high and that big government stimulus.

On these figures, all the growth in the March quarter came from government investment; on those schools, halls and gyms.

In the past year virtually all our growth came from the public sector, with the private sector flat. On the trend figures, which are less bumpy and more reliable, consumer spending is growing in line with the economy. Housing is recovering slowly and business is buying a bit more equipment but doing less building.

In the past year, domestic demand grew by a robust 4.3 per cent. Yet private sector spending grew just 2.3 per cent, whereas public sector spending shot up 11.1 per cent.

We all wish it had been money better spent. The Rudd government and its public service chiefs should do some serious self-criticism on why it wasn't and write down the lessons, so that next time we need to spend ourselves out of trouble, we do it without sacrificing value for money.

Even so, when the crisis was on, that stimulus kept the vulnerable retail and construction sectors going. Look how weak private sector demand is even now: how much trouble would we have been in without the stimulus?

One last thing. These figures fail to tell a credible story of what happened in 2008-09. They average GDP figures from three data sets: two of them say we went into recession, the third says domestic spending went into recession. Yet our exports boomed while imports crashed.

So we avoided recession by selling more in a world buying 20 per cent less? We must be a miracle economy.


Tax to drag on mining industry for '100 years'

AUSTRALIA could take 50 to 100 years to recover its position in mining activity because of the excessive cost impact of the government's resource rent tax, Access Economics director Chris Richardson has warned.

Mr Richardson, one of Australia's most widely respected economists, persuaded the mining industry to endorse the idea of a resource rent tax in 2008. But at the Minerals Council conference yesterday, he tore into the assumptions on which this version of the tax was designed.

At the same conference, KPMG tax partner James Macky warned that the tax would not work in its current form, which in effect makes the government a 40 per cent partner in mines but not putting in any money until the mine is profitable.

Mr Macky, who heads the KPMG Melbourne team who modelled the impact of the tax for the Minerals Council in opposition to the KPMG Econtech who did the modelling for the government urged the government to pay its share of the money upfront.

"It could become the lender of last resort, and provide funding at the long-term bond rate", he suggested. Otherwise, mining firms would lose 40 per cent of their profits to the government, while having to borrow at higher cost to fund the government's share of the project.

In a day dominated by mining industry chiefs warning of doom, that was the one positive proposal put forward.

Mr Richardson said Treasury had set out to design a "perfect" tax that would have no impact on activity, but forgot that "no real world tax is perfect".

While it was true that in the very long term, the new tax would allow more mining than the state royalties it is designed to replace, over the next few decades it would reduce mining, by sharply reducing investors' returns.

"Although the minerals aren't mobile, the investment in them is," Mr Richardson said. "As the new tax more than doubles the tax take in royalties, that will add to the cost of mining in Australia, which will push Australian development options up the global cost curve.

"The cost impact of the new tax will send some greenfield developments towards Canada, Indonesia, Brazil and others.

"It will raise output in the long run, when Australian mines have returned to their initial relative position on the global cost curve, in 50 to 100 years' time."

The KPMG Melbourne modelling found that of six key minerals, only bauxite (the raw material of aluminium) could survive much damage. Coal and iron ore mines would become significantly less profitable, while the tax would make it uneconomic to mine gold, nickel and copper in Australia.

But Mr Ferguson said tax rates were only one of many factors in investment decisions, and and Australia was very competitive internationally.


Wednesday, June 2, 2010

Disaffected wave could unseat ministers

THE surge in support for the Greens could unseat two prominent ministers and double the party's numbers in the Senate if it can be sustained to election day, analysis by The Age shows.

The latest readings from the four established polls The Age/Nielsen poll, Galaxy, Morgan and Newspoll on average show there has been a swing of 5 per cent in first preferences from Labor to the Greens since the 2007 election.

This means that one in every eight people who voted Labor in 2007 now say they would vote for the Greens. That has lifted the Greens from 7.8 per cent to 13 per cent their highest rating ever.

On these figures, the Greens stand to defeat Finance Minister Lindsay Tanner in his seat of Melbourne, which he held in 2007 by just 4.7 per cent when the Greens beat the Liberals into third place.

Housing Minister Tanya Plibersek could also lose her seat of Sydney, where the Greens need a 5 per cent swing.

The Greens also have a realistic chance in the inner-Hobart seat of Denison, where former Attorney-General Duncan Kerr is retiring. To win any other seats in the lower house, they would need swings of at least 10 per cent.

To have a realistic chance of winning any lower house seat, however, the Greens would have to match this level of support when Australians are in the polling booths.

Third parties often win in the polls, but lose in the booths. Six months before an election is the time most people express discontent with sitting governments. By election day, they usually do better than polls suggested they would, as voters are bombarded with well-targeted handouts and campaign messages, and recoil from the alternatives.

In 2001 and 2004, John Howard was behind at this stage, then surged home to win.

But with the Greens joining Labor in a coalition in Tasmania, and the example set by Liberal Democrats teaming up with the Conservatives to form a centre-right government in Britain, this election looms as the Greens' chance to make a breakthrough at federal level.

With the polls showing voters split 50-50 between Labor and the Coalition after preferences, a Greens win in any seat could see it share the balance of power in a hung Parliament as well as in the Senate.

If current polling was repeated on election day, the Greens would double their Senate seats, going from five seats now, to 10.

In the 76-member senate, they would have the balance of power to themselves.

They could pick up Senate seats from Labor in New South Wales and South Australia, from the Coalition in Queensland and Tasmania, while in Victoria, medico and perennial Greens candidate Richard di Natale would unseat Family First leader Steve Fielding.

At the 2007 election, the Greens narrowly lost the final seats in three states: by 0.4 per cent in Victoria, by 0.7 per cent in Queensland, and by 1.6 per cent in New South Wales. Senate elections are dangerous to call, but they are odds-on to win the balance of power, at least.

By contrast, there has been no gain since 2007 in the Coalition's primary vote. It has gained about 2.5 per cent in two-party preferred terms, but entirely due to votes shifting from Labor via the Greens, smaller parties and independents.


Tuesday, June 1, 2010

The dirt on dodging the GFC

THERE was a time when the Organisation for Economic Co-operation and Development had clout in Australian politics. Its forecasts and its advice used to be treated as statements from an oracle. Not any more.

Last week, the OECD's half-yearly forecasts passed almost unnoticed here not because they were bad news, but because they were good news, and good news no longer rates.

The OECD forecasts that over the next two years, Australia and Canada will share the second-highest economic growth among its 25 rich-country members (South Korea coming first). Australia's output gap the gap between the level of economic activity and our potential level would be the lowest of all 25.

Australia's government deficit, the OECD predicts, would be the sixth lowest of the 25. Its unemployment rate would be the seventh lowest. The only negatives were that our current account deficit would be the seventh highest in the rich world and our interest rates the second highest, behind Iceland.

OK, you say, it's good news, but it's old news. We all know Australia has been among the best-performing OECD economies over the past two years. Kevin Rudd and Wayne Swan keep telling us we're leading the "major advanced economies" (a flexible term which seems to mean anything they want it to mean). What's new?

What's new is the conflict between the OECD forecasts and the Lowy Institute's 2010 poll, released yesterday, which asked Australians to give the government a mark out of 10 for its handling of the global financial crisis. On average, we gave it a mark of just six out of 10: a pass, but no credit, no distinction, let alone the high distinction Rudd and Swan think they deserve.

This is worth exploring. What we think of the government's economic management is a central issue in any election campaign. I suspect it will have more sway on this election outcome than Labor's tax on mining profits (which will hurt Labor in mining seats and in Perth, but have little effect elsewhere). If you asked the OECD and the International Monetary Fund to rate Australia's performance, I have no doubt they would give it much better marks.

Both have praised the government and the Reserve Bank for the speed and direction of their response and now, for moving early to rein in the stimulus once it is no longer needed. And I suspect most of Australia's market economists would give similar marks.

So why don't Australians in general give the government high marks for steering us out of the crisis? I can think of several reasons.

The first is that Australia's rapid population growth disguises the reality: we suffered more damage that the growth figures suggest. The bottom line is not growth in GDP, but GDP per head. It fell 2.1 per cent over the 15 months to September 2009. Real consumer spending per head has barely grown in two years.

Unemployment rose by 220,000 during the crisis, and is still 185,000 higher than in February 2008. (And remember, the dole for single workers is just $231.40 a week.)

The labour force has grown by 400,000, yet full-time employment is still 40,000 below pre-crisis levels. Parts of the economy are booming. Most are not.

The second reason is that Australians are among the world's most highly indebted people and the cost of that debt has risen sharply since the Reserve Bank and the big banks started raising interest rates last October. We owe the banks 156 per cent of our disposable income (a dramatic rise from 45 per cent two decades earlier). Our mortgage bills have risen 40 per cent in the past year. They are still lower than they were before the crisis, but many voters don't feel grateful.

Third, the Rudd government's stimulus spending has become badly tainted by all the evidence of massive waste, overcharging by contractors, poor regulation of contractors, and general incompetence, as getting value for money was ignored in the rush to roll out programs. That alone would be enough to explain the low marks we gave the government. It was our money they were spending.

But there is a fourth factor. The Coalition and its rusted-on supporters contest the idea that the stimulus spending helped Australia avoid the slumps seen in Europe, the US and even (briefly) Asia.

They've argued that we survived because Labor took over an economy in such good shape that we were never going to go into recession. Now Tony Abbott has introduced another twist, telling us it was the mining industry that saved us from recession.

Treasury secretary Ken Henry has not helped the debate by arguing that, on the contrary, the mining industry itself suffered "a deep recession", basing his claim on figures that show mining jobs falling by 15 per cent in six months.

These figures come from a survey too small to be reliable. They tell us that in 2008, mining jobs shot up by 30 per cent in nine months, then fell 15 per cent in six months, then rose 15 per cent in the next nine months! That is sheer rubbish.

The recession was concentrated in manufacturing, where output fell 11 per cent: mining output fell just 1 per cent. Mining didn't save us from recession. The impact of China's stimulus certainly helped us recover, but only after the worst had passed.

Australia dodged the worst of the global slump for two main reasons. The banks' lending was kept within sensible limits by the Australian Prudential Regulation Authority and their own management teams. And the Rudd government's stimulus measures put a floor under retail spending, housing and construction activity when it was most needed. Let's give credit where credit is due.