Good news for bad reason: rates tipped to fall

THE Reserve Bank will cut interest rates four times over the next year or so, as Australia slumps into a marked slowdown, with unemployment rising and consumers saving instead of spending, Westpac has forecast.

Breaking ranks with other economists who forecast rate rises and a boom year ahead, Westpac's chief economist, Bill Evans, said growth would remain stuck in second gear in 2011 and 2012 - forcing the Reserve to take back its last four rate rises.

''Interest rates are too high in Australia, given the state of the non-mining sectors of the domestic economy,'' Mr Evans said. ''A downward adjustment is required to avert a damaging round of contraction.''

His forecast comes as ratings agency Standard and Poor's warned there is now ''at least'' a 50 per cent chance that it will downgrade $14 trillion of US government debt unless Republicans and Democrats agree on a $4 trillion deficit reduction package.

If the stalemate over the deficit is not resolved by August 2, the US will run out of money and default on debt repayments. Analysts say this would trigger a second global financial crisis.

US President Barack Obama wants to cut $US4 trillion from forecast deficits over the next 10 years by cutting spending and closing off more than 150 tax loopholes. Republicans are insisting that the loopholes remain.

Mr Evans predicts that global growth will be below average in 2012, with Europe possibly in recession. Slow global growth will slash Australia's export prices and send the Australian dollar back below the US dollar.

He forecast that the Reserve would take time to concede that it had overdone the monetary tightening. But Westpac expects the first rate cut in December, to be followed by cuts every three months or so in 2012. If it is right, that would cut $250 a month off the cost of servicing a typical $300,000 mortgage, saving home buyers $3000 a year.

But what would be welcome relief for home buyers would also see widespread job losses, particularly in retailing, wholesale trade, manufacturing, non-mining construction and finance.

Westpac predicts unemployment will rise from 4.9 per cent now to 5.7 per cent within a year. That implies 100,000 more people unemployed.

''The Reserve Bank has made it clear that it welcomes softer activity in the household/housing sector to create [spare] capacity for the mining boom,'' Mr Evans said.

''We assert that it will see it is over-achieving, given that consumer spending and housing investment represent 60 per cent of economic activity, while mining investment is around 4 per cent.''

He said concerns over the carbon tax have contributed to a slide in consumer confidence, now at its lowest level since the global financial crisis.

Mr Evans said a similar slump before the GST came in lasted until some months after it had taken effect. ''With the carbon price not due to be introduced until July next year, it is likely to remain a drag on confidence for some time yet,'' he said.

The sharpest fall is in households' perception of their own financial situation. Mr Evans said households' forecasts of where they will be in 12 months' time is ''at extremely weak levels, only recorded on three previous occasions - during the recessions of the early 1980s and early 1990s, and in mid-2008''.

His grim forecast sent the Australian dollar plunging half a cent in half an hour on financial markets yesterday. Futures markets are predicting one or two rate cuts in coming months, but a Bloomberg survey found most market economists still predicting a rate rise by November.

David Jones chief Paul Zahra this week blamed the carbon tax debate for causing the worst conditions for retailers in 20 years.

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Running on empty: PM under fire

RETAILERS have rounded on the Gillard government over the carbon tax, saying the debate surrounding it is partly to blame for a slump in consumer spending that yesterday sparked a $1 billion rout of retail companies on the sharemarket.

A day after department store giant David Jones revealed a dramatic reversal in its sales and profit outlook, its chief executive took aim at the Prime Minister and her carbon tax, saying it had contributed to shoppers curbing their spending.

The Australian National Retail Association also warned that the debate over the carbon tax was adding to the worries of consumers after a year when interest rates and energy prices had been on the rise.

An already fragile sharemarket was rattled by the warning from David Jones boss Paul Zahra that his stores were experiencing the worst trading conditions in more than 20 years.

The warning sent the David Jones share price plummeting almost 20 per cent and produced a knock-on effect across the retail sector, with Myer and shopping centre owner Westfield among those sold off.

While Mr Zahra emphasised that rises in interest rates and the cost of living were spooking shoppers, he said the retail outlook was made worse by political uncertainty and the threat of new taxes, which were particularly costly for DJs' core higher-income customers. "There is such a level of uncertainty with a minority government . . . people just don't know what else is about to hit them," he said.

He cited the flood levy and the carbon tax debate as ways in which Ms Gillard's government had hurt confidence. "So the reality is she has hit our customers directly," Mr Zahra said. "That aspirational customer has actually stopped shopping and people are just not confident about the year ahead.

After the carbon tax policy was released on Sunday, Myer boss Bernie Brookes said it would add $3 million to $6 million to costs, and these would be passed on to consumers.

But Australian National Retail Association chief Margy Osmond said confidence had already been hit by rates and living costs before this week. "When you add to that things like the Queensland flood levy, the carbon price and the prospect there might be more interest rate increases . . . it's combined to make a serious loss of confidence," she said.

Russell Zimmerman, of the Australian Retailers Association, said talk about the carbon tax from both sides of politics was biting. "There is a lot of talk about it out there and people get concerned by the fact they are uncertain about how it is going to affect them."

But Opposition Leader Tony Abbott disputed the claim by Treasurer Wayne Swan that his talking down of the economy had hit confidence. "I want to restore confidence by stopping the carbon tax," Mr Abbott said.

Access Economics director Chris Richardson said retailers were facing "an absolutely howling headwind" because households were now saving their money after two decades of spending freely. "DJs are the canary in the mine warning of a decline in discretionary spending," he said. "But there's a number of causes, not just the carbon tax. The talk of possible interest rate rises, the crisis in Greece, and the soft patch here in Australia: worrying signals are clearly flashing."

Financial markets are now punting on a rate cut in coming months, and possibly two.

The Bureau of Statistics says household saving jumped sharply during the global financial crisis, fell briefly, but is now back at crisis levels. In the March quarter, households saved 11.5 per cent of their disposable income, up from 0.7 per cent in the six years to 2007.

Household savings are now almost as high as in the mid-1980s, before Australians began taking on serious debt.

The downturn has led to a number of collapses in the retail sector including booksellers Borders and Angus & Robertson and fashion chain Colorado. And last night, the former Direct Factory Outlet in Melbourne's Southern Cross station was placed in receivership.

Meanwhile, sharply weaker conditions in the real estate market are predicted to push Victoria's home prices lower in the next year, the National Australia Bank said in its quarterly assessment of the market.

The NAB residential property index tipped home prices would sink 2.1 per cent in the 12 months from June.



RETAIL SHARE PRICES IN FREEFALL

HARVEY NORMAN $2.30

DOWN 4.6%

JB HI-FI $15.65

DOWN 5.32%

MYER $2.48

DOWN 6.4%

DAVID JONES $3.20

DOWN 18.2%

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The death of coal?

"I just make the point that the whole purpose of tax is to phase out the coal industry . . . I think that the coal industry is the foundation of a modem economy.

"If you look at the Government’s own figures, they say that coal will go from 80 per cent of our power generation to 10 per cent, or 25 per cent if you include clean coal using various forms of sequestration. So the government’s own figures involve a radical downsizing and ultimate demise of the coal industry."

— Tony Abbott yesterday.


Does a price on carbon spell the end of the coal industry? Tony Abbott says it will, and the Greens hope he’s right. But if so, that end is decades away, and the experts who try to gaze into the future of power prices believe that coal can clean up its act and live on.

It's a big issue for Australia. We have a few years’ supply of oil, a few decades’ supply of gas, but several centuries’ supply of coal. If a Way can be found to burn coal without filling the air with carbon dioxide, our descendants will be grateful.

What might worry us more is whether we witl still have affordable power. (No, we haven’t lost it yet, despite all the steep price hikes since 2005. On a global comparison, Australia still has cheap electricity, and is tipped to stay that way.)

But the further out you look, the less we know. Future power costs will depend on how much gas is discovered, which technologies make the biggest breakthroughs to bring down costs, and howmuch global demand raises fuel prices here.

The coal industry is no danger of being killed off by the carbon tax. The great bulk of Australia’s coal production is exported. A carbon tax of $1 or so a tonne on coal output will barely dent export growth when coal prices are more like $200 a tonne.

Treasury estimates the carbon tax will mean coal exports will grow 45 per cent over this decade instead of 48 per cent. So long as Japan, China, India and Korea keep burning coal, the industry will keep upsizing. If they stop burning coal, it’ll be because of their own policy choices.

But What is the future of coal in Australia’s power mix? The reality is that it depends on whether carbon capture and storage develops into a economically viable technology. If it does, coal — including the brown coal of the Latrobe Valley — has a future here. If it doesn’t, it won’t.

Coal is in limbo. For years, few new coal-fired stations have been built in - Australia. Projects have been put on hold until the future of carbon prices becomes clearer. They look set to stay on hold.

The power companies have turned instead to gas and wind. In Victoria, the Western District is home to the new power industiy, with Origin’s 550 megawatt (million watt) gas plant about to open in Mortlake, and AGL building a 420 MW wind farm by Macarthur.

By 2009-10, coa1’s share of our electricity supply was already down to 75 per cent. Gas now provides 15 per cent and wind 2 per cent. By 2030, officials forecast, gas will provide 37 per cent of our power, Wind 12 per cent and coal just 43 per cent.

As the graph shows, we have a range of options. It is taken from a report by the Australian Academy of Technologicial Sciences and Engineering, whose experts predict that by 2020 carbon prices will make lower-emission gas decisively cheaper than black coal, let alone brown.

Coal’s future lies with carbon capture and storage (CCS). Its progress has been disappointingly slow; industry plans have foundered, and last year Tony Abbott promised to withdraw all government funding from CCS programs. But in the long term, it has to work if coal is to have a future in a world of carbon pricing.

The experts believe coal will make it. As the world cuts emissions, carbon prices rise, CCS technology will become cheaper, and finally, economically viable. By 2050, Treasury forecasts, almost 30 per cent of Austra]ia’s electricity will come from coal and gas-Fred power stations that Will bury their carbon dioxide underground.

Let’s hope it’s right.

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Sense in carbon tax oddities

IT DOES seem weird. With all Australian households facing higher costs from the carbon tax, how is it that the biggest compensation will go to retired couples with a combined private income of $80,000?

Why is it that single working Australians on the same income will receive virtually no benefit from the tax cuts Labor proposes to ease the cost of the carbon tax?

And what is it about having a combined income of more than $150,000 that seems to disqualify households from receiving any benefit from Labor government programs - whether it's tax cuts, family benefits, paid parental leave - or now, relief from the carbon tax?

A close look at the detailed costs and benefits for households of 18 different types and 28 levels of private income might well leave one puzzled as to why the package was designed this way.

Treasury estimates that, of the 504 different households modelled:

. The biggest winners are (mostly) self-funded retiree couples with no dependants and a combined income of $80,000, split 70/30 between them. Thanks to a combination of tax cuts, pension rises and increased Medicare levy thresholds,they will get $2289 more from the government, yet they face a carbon tax bill of only $501. They will end up ahead by $1788 a year.

. In sharp contrast, a couple with three young children and a single income of $150,000 will get only $77 back from the government to help them pay an effective carbon tax bill of $785. They will end up behind by $708 a year.

. And single individuals will be net losers from the tax package if they earn more than $50,000. A single earning $80,000 will receive just $16 in benefits but pay $441 from businesses passing on the carbon tax.

This outcome seems to make no sense, but there are reasons why it happened.

Firstly, Labor wanted to ensure no one at the bottom was worse off. So it decided to lift benefits by 1.7 per cent, even though the modelling estimated the carbon tax would cost people on benefits just 1.1 per cent (which is more than the 0.7 per cent average for all households, because people on benefits spend more than they earn).

But in a futile bid to avoid complaints from the seniors lobby (which complained anyway), Labor passed on this benefit to anyone with a seniors health card. So self-funded retirees won on every count: pension rises, tax cuts, and for those in the sweet spot, exemption from the Medicare levy.

Secondly, the tax cuts. Since 2008, to boost work incentives, Labor has doubled the low-income tax rebate for millions of workers, from $750 to $1500. But people didn't see it as a real tax cut. So this time Labor will strip back the rebate and lift the tax-free threshold for all to $18,200 - and then claw back most of it by raising marginal tax rates. That means the tax cuts erode as your income rises, and cut out at $80,000.

While one aim was to lure more women and older people into part-time work by making it tax-free (to $18,200), inevitably, the main gains will go to people who did not get the low-income tax rebate: retirees whose incomes are from investments.

Family benefits will also rise, but they start cutting out at about $100,000, depending on how many children you have. By $150,000 they are gone, so families earning above that will get no help paying their carbon tax.

They also missed out on family handouts during the global financial crisis, on paid parental leave, on the baby bonus - and if Labor can get the legislation through, on tax breaks for private health insurance.

But bear in mind that individuals on $150,000 were the big winners from the Coalition's tax cuts. From 2003 on, they gained a massive $14,430 rise in take-home pay. Both sides protect their own.

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Home prices segregate Melbourne

MELBOURNE is becoming increasingly segregated along class lines. Rises in house prices in the inner and middle suburbs have far outpaced those further out, leaving poorer families with fewer choices about where they live.

An analysis of shifts in house prices and households over the 20 years to 2006 has found that Melbourne's real housing shortage is a shortage of affordable housing in inner and middle suburbs.

The analysis, by Maryann Wulff and Margaret Reynolds for the Australian Housing and Urban Research Institute, finds that between 1986 and 2006, more poor households moved to the outer suburbs, while inner and middle suburbs became increasingly full of well-off people.

In 1986, housing prices were remarkably similar across most of Melbourne.

The Bureau of Statistics divides the city into 16 suburban regions, and in 1986, median house prices in 11 of them were clustered around or just below the city's median price, between $140,000 and $163,000, in 2006 prices.

The exceptions were at the top: in the arc of leafy middle suburbs from Balwyn to Beaumaris, in the inner suburbs, and in the Yarra Valley around Eltham.

But between 1986 and 2006, house prices in all these areas except the Yarra Valley outer fringe grew much faster than prices in the rest of Melbourne. And their social make-up changed.

The inner suburbs were traditionally the first home of migrants arriving in Melbourne. By 1986, gentrification had changed that, but the old and the new were evenly balanced: 38 per cent of residents were in the top two bands of household income, and 35 per cent in the bottom two.

But between 1986 and 2006, housing prices in the inner suburbs grew faster than anywhere else, the median price jumping 220 per cent even in real terms (after deducting inflation).

And by 2006, even with tens of thousands of students there, only 28 per cent of inner-suburban households were on low or lower-middle incomes, while 58 per cent were on upper or upper-middle incomes.

By contrast, in outer suburban Hume (Broadmeadows/Craigieburn/Sunbury), real house prices rose only 61 per cent between 1986 and 2006, so people on lower and lower-middle incomes flocked to suburbs where they could afford to buy or rent. Their share of Hume's households jumped from 17 to 29 per cent.

On the opposite side of town in Dandenong, suburbs that were middle-class in the '70s now have Melbourne's highest share of low-income residents, with 40 per cent of households on low or lower-middle incomes. The study notes that a third of the Somali refugees in Melbourne went to Dandenong.

Separate data issued by the Valuer-General shows that while 116 suburbs in September 2009 had median house prices under $400,000, 86 of them were 20, 30, 40 or more kilometres out of town. Most of those closer in were around Sunshine.

Professor Wulff and Ms Reynolds urge the federal and state governments to focus particularly on increasing the supply of affordable rental housing in inner and middle suburbs.

They suggest that more public housing be built there, and incentives offered for social housing in redevelopments by VicUrban and private developers.

The Age, July 12, 2011

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At last, a tax they want you to avoid

AUSTRALIA is set to embark on its biggest economic reform in a generation, with a surprise last-minute twist: a Robin Hood tax reform that will make lower and many middle-income earners better off but make higher-income earners pay most of the cost of the carbon tax.

The core of the plan unveiled yesterday sounds simple. The 500 biggest greenhouse gas emitters in Australia will have to pay a tax on their emissions, starting next year at $23 a tonne. Households will be compensated generously at the bottom, not at all at the top. The firms most at risk will be given free permits. And several billion dollars will be spent to cut emissions by changing technologies.

But it's complex. Be warned: you are about to be bombarded by claim and counter-claim from all quarters. Truths, half-truths and outright lies will be difficult to tell apart.

The first complexity: within three years the carbon tax will morph into an emissions trading scheme, in which companies buy and sell emissions permits including from overseas to meet the target to reduce Australia's emissions in 2020 to 5 per cent below 2000 levels.

Second: only 500 firms will be taxed, but they will pass on their costs to their consumers. The people really paying will be us. Overall, the impact on prices will be small: a 0.7 per cent lift in consumer prices initially, and then about 0.1 per cent a year.

Third: the compensation is very uneven. If you're in the bottom half of the income range, your price rises will be outweighed by big tax cuts or benefit rises: you will be better off. If you're in the top half, the balance probably will be the reverse: most will be worse off, if only by a few dollars a week.

Those at the top the top 10 per cent according to the government, though that looks like an understatement will pay the full tax, costing roughly 1 per cent of their take-home pay.

But it's complex. Try some of the key facts.

Will it cut our emissions? If so, how much?

Yes and no. Australia now emits 582 million tonnes of greenhouse gases a year. By 2020, Treasury projects, that will rise to 679 million tonnes without a carbon tax, and 621 million tonnes with one.

Even with a carbon tax, that is, Australia's emissions will rise, to be well over our 2020 target of 530 million tonnes. To meet the target, we would have to buy 91 million tonnes of international permits, from tribes pledging to preserve rainforests or whomever, at a global price Treasury estimates by then at $37 a tonne.

Treasury estimates the carbon tax would cut our 2020 emissions by 58 million tonnes. That's a cut of 0.1 per cent of projected global emissions at that time. Only global action can end global warming; Australia's actions would be part of that.

Would Australia be out in front of any other country?

In some ways, yes. More broadly, no.

More than 30 countries already have a price on carbon, mostly through the European Union's emissions trading scheme, which up to now has been smaller than what we're planning. But its third stage, to start from 2013, will be similar in coverage, and will move gradually to auctioning permits.

But the EU scheme is targeted at electricity and transport; even in stage three, most manufacturers will get their permits free. Australia's new tax promises fewer free permits, to fewer sectors, and for only five years, with a review in 2014.

We will lead the world in taxing emissions from mining and manufacturing. By contrast, our plan will exempt petrol, agriculture, and diesel for freight (at least until 2014). It had to Tony Windsor and Rob Oakeshott helped write it but many see congestion taxes as a better option.

Who are the big winners?

Senior couples living on investment income. Treasury estimates that a couple earning $70,000 evenly divided will get $2008 in government help, even though their share of the carbon tax would be only $480.

Welfare beneficiaries, part-time workers and people in low-wage jobs all come out ahead, although most by only a few dollars a week. But a couple splitting a household income of $40,000 and supporting a teenager would get $1793 in help to pay a carbon tax of $389.

And the losers?

Some will be on ordinary incomes. Singles are treated badly again: a single earning $80,000 will get only $16 aid towards his or her carbon tax of $441. Treasury assumes the tax is proportionate to your spending, so the more you earn, the more you pay and even for families, compensation virtually cuts out at $150,000.

So you can't avoid this tax?

Yes, you can! This is a tax they want you to avoid! Its purpose is to drive change. Cut your use of things generating carbon emissions, and you get the cuts while dodging the worst of the tax.

Overall, Labor and its allies have given us a tax that will make only a modest initial impact on most households and business, and only a modest contribution to driving change and cutting emissions.

If global warming grows, both impacts will grow. If it doesn't, they won't.

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Push to adopt new voting model

AUSTRALIAN voters would be freed from having to fill out all the boxes on their ballot paper at future federal elections, under a plan by Labor and the Greens as long as the candidate they vote for has registered a how-to-vote card.

Against strong opposition from Coalition MPs, the Labor/Greens majority on the parliamentary electoral committee has proposed adopting the South Australian system, in which votes that mark only one preference are counted and assumed to follow the candidate's preferences.

At last year's election, a record 729,304 votes for the House of Representatives were declared informal 5.5 per cent of all votes.

The Australian Electoral Commission estimates that almost half were deliberately invalid, with 210,587 voters lodging blank ballot papers, and 123,102 writing protest messages on their ballot papers.

But the commission estimates that more than 375,000 votes, or 2.9 per cent, were unintentionally informal, with more than 300,000 voters disqualified for writing only one or two preferences, instead of filling out the entire ballot paper.

Most were in New South Wales and Queensland, where voters at state elections no longer have to give more than one preference. In recent state elections, Labor has urged supporters to just vote 1 for Labor. Confusion between federal and state laws resulted in almost 200,000 NSW and Queensland voters at the last federal election marking only a single preference. All were declared informal.

The South Australian system was introduced in the mid-1980s, and is accepted by all parties in the state. The difference is that if you cast just a first preference in NSW and Queensland, only that preference is counted. In South Australia, you are assumed to have cast your preferences in line with those of your candidate's how-to-vote card.

In a dissenting report, Liberal MPs objected strongly to using this "fraudulent" system at federal elections. "Opposition members are resolutely opposed to any proposal that purports to count votes in a way not so marked or cast by the voters themselves," they wrote.

"This proposal is the equivalent of a drawn grand final being decided not by extra time or by a replay, but by adding the number of near misses to the score to determine a winner after the siren sounds."

Victorian Liberal senator Scott Ryan was a lone voice urging that voters be free to decide how many or how few preferences they want to direct.

The committee's report also urged that:

The deposits that candidates have to pay be doubled to $1000 for the House of Representatives and $2000 for the Senate, to discourage token candidates from cluttering up the ballot paper.

The electoral commission be allowed to update voter rolls from any sources of data it judges reliable, rather than requiring voters to register. The commission estimates 1.4 million Australians are not on the rolls, and about 165,000 provisional votes cast on polling day had to be rejected for that reason.

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Jobs growth slows to a crawl

AUSTRALIA'S previously buoyant jobs growth has hit the wall in 2011, with only 38,000 jobs created in the first six months of the year, compared with 188,000 in the second half of 2010.

The Bureau of Statistics estimates that jobs growth slowed to almost a crawl in the June quarter. In net terms, the trend level of full-time jobs grew by just 4000 throughout Australia, and part-time jobs by 8300.

The unemployment rate has remained unchanged at 4.9 per cent over that time, but only because the proportion of people surveyed in a job or looking for one has dropped from 65.9 per cent at the end of last year to 65.5 per cent now.

The trend is one of the key reasons for the Reserve Bank's sudden change of mood this week, when governor Glenn Stevens flagged that an interest rate rise was now off the agenda, and said the Reserve would cut its bullish growth forecasts.

It was as close as the Reserve ever gets to saying ''we were wrong''. As late as May, it forecast growth in 2011-12 to be 4.5 per cent. Last Saturday, The Age economic survey reported that private forecasters forecast growth of just 3.2 per cent.

Even that would require a big pick-up in jobs growth from its current pace - on these figures, the slowest since Australia emerged from the global financial crisis two years ago.

On the rough measure that two part-time jobs equal one full-time job, Australia added the equivalent of just 34,000 full-time jobs in the six months to June, compared with 161,000 a year earlier.

Victoria was a beacon of light, creating the equivalent of 25,000 full-time jobs, and reducing trend unemployment to 4.7 per cent - the best of any state except Western Australia (4.2). Over the year to June, the trend figures imply Victoria added the equivalent of 84,000 full-time jobs - an astonishing growth of 3.5 per cent.

In New South Wales, by contrast, the trend figures imply equivalent full-time jobs grew by almost 80,000, or 2.6 per cent, in the second half of 2010, yet then fell by 19,000 in the first half of 2011. Experience shows the survey tends to give roller-coaster results as different people rotate in and out of the survey. Nationally and in NSW, even the smoothed trend figures probably overstate the real jobs growth last year, and overstate the slowdown this year.

The even more volatile seasonally adjusted jobs figures rose by 23,500 in June after falling by 29,000 in the previous two months. Seasonally adjusted unemployment remained at 4.9 per cent.

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$23 carbon price, $4billion blowout

THE government has dramatically slashed the number of companies hit by its carbon tax from 1000 to about 500, in a scheme expected to have a $23 a tonne starting carbon price.

But the cost of the plan, which was to be broadly revenue neutral, has blown out to about $4 billion over four years from its start on July 1 next year. Most of the extra costs come upfront, from implementing the scheme.

As the government seeks to minimise the political damage, the exclusion of fuel has reduced the number of companies liable to pay the tax.

Companies that will be excluded include liquid fuel suppliers, small wholesale suppliers and importers of liquid fuels and suppliers and importers of synthetic greenhouse gases, including companies that service air conditioners. Only 0.02 per cent of businesses will be directly liable to pay the carbon tax.

Despite the deal having been done with the Greens and country independents Tony Windsor and Rob Oakeshott, the full cabinet has not yet seen the total package, although it agreed earlier in the week to its Sunday release. A cabinet meeting has been called for Saturday at 5pm, with ministers dialling in from interstate, to give final approval.

Opposition Leader Tony Abbott yesterday obliquely threatened a Coalition government would consider a double dissolution if the Senate blocked the repeal of the carbon tax.

He said if the Coalition won, he would not expect a demoralised Labor Party to stick with something that had cost it the election.

But if it did, "there are provisions under our constitution for deadlocks to be resolved . . . I hope it wouldn't come to that but nevertheless there are mechanisms and everyone is aware of them".

Ms Gillard told Parliament, "I will of course be speaking to Australians about any issue they want to raise with me". She expected one they would want to raise was what was said in the election campaign when she promised there would be no carbon tax.

The Age understands the scheme will cost more than the revenue it raises over its first four years, with most of the cost blow-out coming in the first two years. It is expected to become budget neutral later, but Treasury modelling to calculate the exact costs is still being finalised.

The government will make budget savings to cover the extra costs over the early years, including a reduction in the 38-cents-a-litre diesel fuel tax credit for some industries.

It is understood while mining companies will face the partial cut to the diesel rebate rumoured to be about six cents a litre a number of other sectors will be shielded from the rebate reduction, including the agriculture, fishing and forestry sectors.

Mining companies last year claimed $1.7 billion back in diesel rebates and accounted for about 30 per cent of all claims under the scheme.

Along with the package, the government is expected to reveal its plans to reduce carbon dioxide emissions from new vehicles, which have been simmering on the backburner for almost a year, since Ms Gillard foreshadowed them in last year's election campaign.

Labor floated a target to reduce average emissions of new cars, sports utility vehicles and light trucks from 213 grams per kilometre in 2010 to 190g/km by 2015 and 155g/km by 2024. But these targets were denounced as "weak" by Greens deputy leader Christine Milne, who pledged targets of 160g/km by 2015 and 95g/km by 2020.

A spokesman for Infrastructure Minister Anthony Albanese promised an announcement "very soon". The decision to exempt petrol from the tax, along with the reality that emissions are falling rapidly as buyers turn to smaller cars, could see the target tightened further.

The carbon deal comes as the head of the Australian Coal Association Ralph Hillman said yesterday the industry would fight the carbon price until the last minute it passes Parliament, claiming it will render Australia less attractive for investors and force the closure of some existing mines.

But Mr Hillman also conceded the coal industry would continue to grow under a carbon tax, adding "I think it is naive and blase to say 'oh we've got growth, it will just be a bit less' growth is precious."

Reports yesterday said Treasury modelling is expected to show that under an indicative $20 carbon price, coal exports and production would still double during the next 40 years, although will be lower than without a carbon price.

The government is expected to include a $1.275 billion compensation package for coal miners under the scheme. The Age understands some of the compensation roughly $70 million will be committed to research and development of technologies to reduce emissions from gassy coal mines.

Ms Gillard said: "I am very confident the coal industry has got a fantastic future in this nation - a future of growing jobs with $70 billion in the pipeline."

British entrepreneur and founder of the Virgin Group Sir Richard Branson, speaking in Brisbane, said any tax should ideally be on a global basis, rather than country by country.

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Age Economic Survey: What we should do

AUSTRALIA'S market economists believe we have entered a long boom in minerals prices, which will keep the dollar high and make it futile to try to shield sectors such as manufacturing, agriculture and tourism from the ongoing damage this will create.

The panel of economists in The Age's half-yearly conomic survey endorses the Treasury/Reserve Bank view that surging demand from China, India and other developing countries will keep commodity prices relatively high for years and perhaps decades.

They agree this will keep the dollar high, and that in turn will drive a long decline in prospects for other trade-exposed sectors of the economy. But they argue against government support to shield these industries, other than retraining retrenched workers.

Two policy proposals won widespread support. Some in the panel urged the government to make a third try at the mining tax, to extend it across other minerals sectors and raise its rate to something closer to the original plan. Many called for the proceeds to be put into a sovereign wealth fund.

The Gillard government opposes both options. Its minerals resource rent tax, to start in mid-2012, would apply only to coal and iron ore mines, and at a rate of 22.5 per cent of profits above a generous threshold. On Treasury's estimates, most of the proceeds would be spent immediately, while others warn that the spending could outweigh the revenue.

AMP Capital chief economist Shane Oliver said: ''Industrialisation in China, India and elsewhere has a lot further to go, resulting in supply continuing to struggle to keep up with demand.

''Apart from broadening the mining resource rent tax to include all mineral commodities, the best thing governments can do is to help to make sure that the whole economy is acting as efficiently as possible by boosting infrastructure, removing impediments on the supply side of the economy, and [addressing] labour shortages by training and immigration policies.

''Artificially propping up adversely affected industries would be futile and ultimately against the national interest.''

HSBC's Paul Bloxham agreed but urged the government ''to get back to fiscal surplus more quickly'' by imposing ''a larger mining tax'', the revenues of which would be put in a sovereign wealth fund and ''put aside for a rainy day''.

Richard Robinson of BIS Shrapnel urged the mining tax be extended to gold and base metals and levied at a higher rate, although he urged that part of its revenue be used to reduce company tax rates to benefit the rest of the economy.

But Paul Brennan of Citigroup said that opportunity was lost by the mishandling of the mining tax and forecast ''it won't be revisited, at least in the next few years''. He said ''the best policy response is to support retraining of workers affected by the two-speed economy''.

ACCI's Greg Evans emphasised the need for the government to run ''structurally tighter fiscal policy'' to reduce pressure on interest rates. NAB's Alan Oster added that ''the RBA will also have to take into account the effect of interest rate hikes on the less robust enclaves of the economy''.

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Age Economic Survey: Carbon tax please

THE opinion polls disagree, but market economists in The Age survey panel almost unanimously endorse a price on carbon as the best way to tackle climate change.

BT's Chris Caton summed up the mood of the panel in a few terse words: "Yes", he said to a carbon tax. "The science is now beyond question. The key danger is making the legislation too complicated and inefficient by loading it up with 'special treatment' for polluting industries, petrol etc."

"The government should definitely have a carbon tax", said Richard Robinson of BIS Shrapnel.

"The main danger is affecting the competitiveness of the tradeables sectors, especially manufacturing sectors such as steel and aluminium. Some sort of compensation should be provided to these industries, but [it] should decrease over time . . . We should not, however, provide compensation to the electricity generators, coal producers or LNP/gas producers."

Monash University economist Jakob Madsen rejected the idea that a carbon tax would create unemployment. "Carbon prices have the same economic effects as oil price hikes," he said. "Oil prices have increased several fold over the past decade, and yet it has not had any visible unemployment effects."

Melbourne University iconoclast Neville Norman voted "maybe". While supporting a carbon tax in principle, he wants to see the detail of the plan, evidence of its likely impact and a compensation package focused "on those who hurt, rather than those who scream".

There were two dissenting voices. Greg Evans of the Australian Chamber of Commerce and Industry warned of "significant implications for our competitiveness in moving ahead of our trade competitors".

"We should not impose a unilateral carbon price on the domestic economy until there is agreed global action to do the same", he said.

"Prior to confirmed global action, Australia's response to mitigating climate emissions should rely on efficiency and technology measures adopted in the marketplace."

Sarah Gorman of Dun & Bradstreet mused that "it might be optimal for humanity in the long run if Australia imposed a steep export tax on coal". But rather than taxing emissions, policy should "help the economy prepare for the likely shocks of climate change".

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Age Economic Survey: Is training the answer?

AUSTRALIA'S market economists are divided over whether the economy really is near full employment, as the Reserve Bank and Treasury claim with some saying the real problem is too little investment in skills training.

While Reserve Bank governor Glenn Stevens and senior officials are making a case for interest rate rises to prevent competition for skilled workers driving up wages and prices, economists in the private sector say there are other ways to solve the problem.

Economists in The Age survey argued for more resources to go into skills training, more initiatives to lift the country's low workforce participation rate, more skilled migrants to fill job gaps and more flexible working arrangements.

"Measures to alleviate skills shortages and otherwise encourage labour force participation are the best policy," said John Rothfield of Merrill Lynch. He and others were sceptical that higher migration was the solution, warning that we first need to build "enough supply of houses, utilities and transport systems to carry them".

NAB's chief economist, Alan Oster, warned that without "adequate skilled employees to meet burgeoning demand growth ... a consequence will be stronger wage growth and ... contractionary monetary policy".

Brian Redican of Macquarie ridiculed the official view that a 5 per cent unemployment rate means full employment. "Many other economies have been able to get unemployment below 4 per cent without generating higher inflation," he said. "Australia also achieved this in the '50s and '60s."

If it were true unemployment could not fall below 4.75 per cent without generating inflation, as officials imply, "it reflects a failure of policy to equip the unemployed with the skills demanded by the economy".

Greg Evans of ACCI was particularly trenchant. "The rate of labour force underutilisation stands at 12.2 per cent of the workforce, implying that roughly one in eight in the labour force, or 1.44 million people, are unable either to find work or sufficient hours of work," he said.

"There are a further 1.3 million people who want work, but are not classified as part of the labour force. It is difficult to reconcile supposed 'full employment' with the fact that the labour market is not meeting the needs of 2.7 million Australians."

There was widespread agreement on the panel that Australia needs to invest more resources in training its own workforce to meet its needs. Saul Eslake of the Grattan Institute argued for reducing effective marginal tax rates to improve incentives to work, and doing more to raise the "employability" of the unemployed and underemployed.

But Katie Dean of ANZ argued that training skilled workers takes time, and "in the short term", the best solution is to attract more skilled workers as permanent or temporary migrants.

Masters Builders economist Peter Jones warned that restricting entry of skilled workers would be "extremely damaging for the Australian economy", with skills shortages, project delays and bottlenecks inevitably leading to higher inflation, higher interest rates "and possibly recession".

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Hockey's truth target a long way off

PRIME Minister Julia Gillard says never mind the carbon tax: if you get the Coalition's direct action plan for tackling climate change, you'll end up paying $720 a year per household to finance it.

Rubbish, says shadow treasurer Joe Hockey: Treasury has costed our policy and endorsed its estimates of both the cost and the planned outcome to cut Australia's emissions by 2020 to 5 per cent below 2000 levels.

Who is right? Neither. In fact, the Coalition never submitted its direct action plan for costing by Treasury. It was one of the hundreds of policies it refused to have costed, arguing it could not trust Treasury because it works for the government.

In the immediate aftermath of the campaign, at the request of the three independents, Treasury costed the policies of both sides (the famous costing that estimated the Coalition had overstated its savings by $10 billion over four years). But that costing did not even mention the direct action plan.

There was no need to. It's pretty obvious that a plan to spend $3.2 billion over four years would cost $3.2 billion over four years. Treasury did not endorse the Coalition's claim that this would be enough to cut Australia's per capita emissions in 2020 by a third from their present trajectory which the 5 per cent target implies.

Quite the reverse. An undated Treasury note released in April under freedom of information laws warned that the Coalition plan as proposed presents a "significant budget risk relative to a carbon price". For the Coalition to achieve its target of cutting emissions to 5 per cent below 2000 levels, the note maker wrote, it would need to be "scaled up . . . [and would be] likely to have major fiscal costs".

But how much? When Labor talks of $720 per household, it is making it up. Like the Coalition, it makes assumptions that suit it about how much these projects would cost, how much carbon abatement they would deliver, and how much the Coalition would then have to spend to buy international permits to meet the target.

The reality is that it's impossible to say how much the Coalition's scheme would cost. Few observers believe it will deliver anything like a cut of 33 per cent in per capita emissions by 2020. They say Tony Abbott would then have to choose between spending far more than planned or scrapping the target.

If you think he would choose to honour the target, then you can make your own guess as to what he might make you pay. But I think he would scrap the target.

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Age Half-Yearly Economic Survey - All okay?

AUSTRALIA'S private sector economists are less confident about the new financial year than their official counterparts, but nonetheless expect it to be a year of solid growth for Australia and the world.

At the end of a financial year that delivered rather less than they had expected, the panel of 19 economists in The Age half-yearly economic survey, by and large, predict growth to accelerate over the next 12 months, the sharemarket to rebound, commodity prices to peak and edge down, unemployment to fall, and interest rates to rise.

Given the risks hanging over the global economy partisan conflict in the US Congress making the nation ungovernable, government debts in Europe threatening to unravel the euro zone, China struggling to control its economy for a soft landing that would make 2011-12 a very good year for business, workers and investors in Australia.

Our panel of forecasters expects 2011-12 to be a normal year for the Australian economy. If it's right, Reserve Bank governor Glenn Stevens and Treasurer Wayne Swan will go down on their knees to give thanks.

On average, the panel predicts Australia's GDP to record year-average growth of 3.2 per cent in this new financial year. That's in line with its long-term average growth, but significantly below the 4.5 per cent growth forecast by the Reserve Bank, or the 4 per cent forecast by Treasury.

The gap between the panel and the official line is partly due to the presence of Monash University's resident pessimist, Jakob Madsen, who, for the third year in a row, is forecasting Australia and the US to sink into recession. One day he'll be right, but hopefully not this time.

The other members of the panel on average forecast growth to be 3.5 per cent. That is probably more like the way Reserve hopes the year will turn out, since that would not require it to show the same activism on interest rates.

No panel members believe that growth will reach the 4.5 per cent predicted by the Reserve in May. Only six thought Treasury's budget forecast of 4 per cent growth would be met.

Commonwealth Bank chief economist Michael Blythe is at the head of the bull pack. He sees Australia growing by 4.3 per cent over 2011-12, thanks to continuing strong growth in China and the global economy. Unemployment would fall to 4.5 per cent by next June but well before then, the Reserve would have stepped in twice to raise interest rates.

Professor Madsen is alone at the other end of the forecast range, predicting Australia will follow the US into recession in coming months, cutting annual GDP by 1.4 per cent in this financial year.

But four other forecasters predict growth in this new financial year will be less than 3 per cent. They include Katie Dean at the ANZ (2.5 per cent), Paul Brennan of Citigroup (2.9 per cent), Saul Eslake of the Grattan Institute (2.8 per cent). Worryingly, Neville Norman of Melbourne University predicts growth to be just 2.1 per cent.

That is worrying because for the second year in a row, Professor Norman has won the Palme d'Or as the most accurate forecaster in our survey. Two years ago he was one of few optimists to see a solid recovery coming. But last year, as now, he was the wary one, predicting below-average growth as higher interest rates held activity back.

Professor Norman sees China booming in the year ahead but the US floundering. That would slow global growth, bringing the Australian dollar back below parity, and sending unemployment back up, albeit only to 5.3 per cent by mid-2012.

The panel as a whole expects global growth to edge down slightly to 4.1 per cent in 2011, held back by slower growth in the US (2.6 per cent), Europe and Japan. There are differing opinions about China, where growth forecasts for 2011 range from 10.6 per cent (Professor Norman) to 8 per cent (Greg Evans of the Australian Chamber of Commerce and Industry).

For the most part, the panel expects unemployment to edge down over the next 12 months, to 4.7 per cent by mid-2012. No one sees a dramatic change ahead: the range of forecasts is between 4.2 and 5.5 per cent.

The panel as a whole expects the budget deficit to be halved to about $22 billion, a tad under Treasury's own forecast. But a few, including government insider Heather Ridout of the Australian Industry Group, predict it will end up a lot better than officially forecast, while a couple, including the outsiders at ACCI, predict it will end up a lot worse.

All the panel, apart from Professor Madsen, expect the Reserve to raise interest rates at least once by Christmas. An interesting detail: five of the 10 panel members from financial institutions, including ANZ, Commonwealth Bank and NAB, predict two rate rises by then but no one outside the financial sector shares that view.

The panel also divided over the future of the dollar. Four forecasters predict it to rise to $US1.10 by New Year's Eve; four think it will stay more or less where it is; five think it will edge back closer to parity; while six expect it to drop back below parity. John Rothfield of Merrill Lynch is the currency bear, tipping it to close the year at US93?.

Most of the panel expect a gradual rise in share prices over the new financial year. Of the 14 forecasters who chanced their hand at tipping the market, 11 see it heading up, on average predicting the S&P/ASX200 index to be nudging 5000 by New Year, and above 5300 by mid-2012.

But Professor Madsen expects it to sink to 4000, while our two Evans Bill Evans of Westpac and Greg Evans of ACCI see global jitters nudging the index down over the six months, and, in Greg's view, next year too.

On one of the big issues for the Australian economy, the panel shares a broad consensus that commodity prices are now nearing their peak and will be falling in the first six months of 2012.

On average, the panel predicts Australia's terms of trade (the ratio of export prices to import prices) to rise about 6 per cent between now and the end of the year then lose nearly all of that by next June to end the financial year where they started.

Some disagree. Katie Dean of ANZ sees the terms of trade continuing their rise into 2012, but at slower pace. But Master Builders economist Peter Jones joins Greg Evans in predicting that they've peaked already, with the terms of trade to sink 5 per cent in the rest of the year and 10 per cent in early 2012.

The official family probably wouldn't mind that at all, as it would reverse our path towards a two-speed economy. But they're not expecting it.

Click to Enlarge:

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Mining boom failing to spark national economy

THE Australian economy has ended the financial year with the brakes biting hard. New data released yesterday reports lending and activity slowing, house prices falling, and job opportunities shrinking.

Separate snapshots released by the Australian Bureau of Statistics (ABS), the Reserve Bank and private research bodies throw doubt on official forecasts that the new financial year beginning today will see a boom in economic activity.

The Reserve has forecast growth of 4.5 per cent over the coming year, and recent speeches by governor Glenn Stevens and assistant governor Phillip Lowe flagged more interest rate rises ahead. Treasury is forecasting growth of 4 per cent, and more than 200,000 new jobs.

But yesterday's figures reported that:

. Net lending by the banks rose just 0.3 per cent in May, after recording no growth in April, as Reserve Bank figures show business and households remain averse to taking on new debt.

. Job vacancies in the private sector, as measured by the ABS, fell by 12,000 or 7 per cent in the six months to May, with Victoria and South Australia recording the biggest falls.

. House and unit prices nationally have fallen in every month this year, according to the RP Data-Rismark index, dropping by 0.3 per cent in May and by 2.7 per cent since December. In Melbourne, the median price fell by 1.8 per cent over the May quarter to $500,000.

. Hotels, motels and serviced apartments recorded a 0.8 per cent fall in takings in the March quarter, ABS figures show, as Australians profited from the strong dollar to holiday overseas while overseas tourist arrivals remained flat.

While the Reserve Bank would not be concerned to see little growth in debt, or house prices edging down, yesterday's figures come after broader-based measures show employment growth has slowed to a virtual standstill in recent months.

They come amid rising fears for the future of the global economy. The US government is now only a month away from running out of money, with Republicans and Democrats locked in a bitter stalemate on how to reduce the deficit.

Global ratings agency Standard & Poor's warned on Wednesday that US bonds would be downgraded to a D, or junk bond status, if it defaults on debt payments. US Treasury Secretary Timothy Geithner warns this is inevitable unless Congress raises the country's debt limit by August 2.

In Greece, Parliament on Wednesday approved an austerity package to cut its deficit but the fear is this will do little more than postpone an inevitable default, with the Greek government's debt now 150 per cent of GDP.

The domestic economy seems to have entered 2011-12 with mining construction booming but the rest of the economy sluggish. That might not stop the Reserve Bank raising interest rates again in coming months, since it believes the weakness is temporary, and next year it will need to rein in growth to stop the mining boom setting off inflation.

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