Melboure. It's a town of services, not manufacturing

MELBOURNE'S future is here. In the past decade, new professional services firms have mushroomed in inner Melbourne, becoming the state's strongest source of growth in private sector jobs, a conference on Victoria's future has been told.

The Victoria at the Crossroads conference, co-sponsored by The Age, heard that new firms in Victoria's two fastest-growing industries finance, and professional and scientific services are overwhelmingly choosing to set up in the CBD and inner suburbs, in the buzz of the city.

By contrast, new workplaces in transport, warehouses and wholesale trade are springing up in outer western and northern suburbs, along the Western Ring Road, Professor Bruce Rasmussen of Victoria University said.

These clusters of emerging industries hold the key to Victoria's future producing food, services and tourism, and education opportunities for the booming economies of Asia conference speakers agreed.

The secretary of the Department of Business and Innovation, Howard Ronaldson, said new infrastructure such as a Melbourne metro and the east-west link "is arguably the biggest single factor that will make us more productive".

Mr Ronaldson said most big cities now have metro systems, freeing up inner-city road space for commercial vehicles. Melbourne should do the same, he said: "It's a fair bet that most of the high-value-added jobs will be generated in and around the CBD. One of the big demographic shifts recently has been that close to half of all Melburnians live in the suburb they work in, or close to it."

The conference was convened by Victoria University, the Committee for Melbourne and The Age after the high dollar and high interest bills sent Victoria's economy sliding on a wide range of indicators: jobs, investment, retail and housing.

It ended, however, with a consensus that while the high dollar had created real problems for the state in the medium term, its long-term future looked good after a decade of strong growth in knowledge-intensive industries.

"When the Chinese no longer pay as much for iron ore and coal, what will we sell to the Chinese and other middle-class consumers to our north?" asked economist Saul Eslake, of Merrill Lynch. "The answer is likely to be: agricultural commodities, and commercial and personal services. Victoria is better placed than many other states to cater for the likely sources of export demand in the next 20 years."

Also at the conference, Prime Minister Julia Gillard lashed out at the Baillieu government's $300 million cut to TAFEs, using a speech on the Victorian economy to call it "crazy" and a threat to the state's competitiveness.

Ms Gillard also rejected suggestions from business and commentators that industrial relations reform was a "magic bullet" for boosting productivity, instead nominating strong education and training as a far more powerful avenue.

But Ms Gillard did not address demands for more Commonwealth infrastructure spending in Victoria, including calls from state Treasurer Kim Wells to bring money to the table for the east-west road tunnel project.

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CSL. The science experiment that paid off

At 33, Brian McNamee was chosen to run the Commonwealth Serum Laboratories: a small government enterprise manufacturing plasma, antibiotics, flu vaccines and other medicaments for Australia and its neighbours.

This week CSL announced its first $US1 billion ($954 million) global profit for 2011-12. It is now Australia's most successful manufacturing business, and by a long way.

While CSL too is being belted by the high dollar, the annual earnings report a "foreign currency headwind of $108 million", its global structure, with manufacturing plants in four countries, its high productivity and premium products have allowed it to withstand those headwinds, and remain highly profitable. (Its $US1 billion profit was achieved on just $US4.6 billion of sales.)

It has been an amazing journey that few would have expected when, in late 1989, the industry minister John Button headhunted the young McNamee to become director of CSL, with the ultimate aim of privatising it to be a flagship for the fledgling Australian pharmaceutical industry.

It is an unusual story, of a most unusual company, in which the cultures of the scientific researcher and the corporate carnivore have somehow merged to create an enterprise that in some ways defies modern fashions and in other ways anticipated them.

It is now very much a global company, on the verge of becoming one of the world's top 20 pharmaceutical companies, and with 90 per cent of its revenues coming from outside Australia. Yet it is based in an unpretentious old building in Melbourne where CSL has been since 1918. Its head office has only about 20 staff.

Its big markets are the US and Europe, with a fast-growing trade in Asia. But it is led by an Australian-dominated board, chaired by molecular biologist Professor John Shine, carries out half of its vast research and development activity in Melbourne, employing 400 to 500 researchers, and credits Australian research for much of its global revenue.

It is not just McNamee who has been with the company for decades. Most of his senior executive team have also been there for decades, either with CSL itself, or in the companies it has acquired. McNamee's main interest is in strategy, and he is happy to delegate and trust his deputies. In conversation, he habitually uses "we", not "I", to explain his thinking. For a top 20 company, it sounds remarkably collegial.

"People think we're scientists bubbling away with test tubes", he says with self-deprecation. "But we think we're also pretty good at business. We've been financially conservative but, operationally, very bold and aggressive."

McNamee always envisaged CSL becoming something like this. His goal, he says, was to create "a great Australian company". He's done that, and after 23 years at the helm, plans to hand over in July next year to Paul Perrault, now head of CSL Behring, its Philadelphia-based plasma subsidiary.

A doctor by training, McNamee drifted into pharmaceuticals in his 20s, while in Germany after a brief try at emulating his brother Paul on the professional tennis circuit. At 27 he was recruited back to Australia by Fauldings, helped Button draft the "Factor f" pharmaceuticals industry plan, then ran Pacific Biotech before being conscripted to CSL.

From the outset, McNamee set his sights on building a global business, created by specialising, building scale, innovating, exporting - and making strategic takeovers. They began at small scale, even before CSL was floated on the stock exchange in 1994, valued at $300 million. It is now valued at about $20 billion.

"Most of Australia's assets are stressed: small assets, low scale", he says. "It's either get bigger, or get out. You either consolidate, or get consolidated. We elected to be the consolidator."

CSL developed its expertise in mergers and acquisitions through smaller takeovers before astounding critics in 2000 by taking over a firm roughly its own size, its Swiss counterpart ZLB Bioplasma, at a time when McNamee was desperately sick and fighting testicular cancer. Four years later it followed that up by acquiring a second big target, US-based Aventis Behring. A third ambitious bid, for rival Talecris, was blocked by US regulators in 2009.

Many other Australian firms have made ambitious foreign purchases, only to come a cropper. McNamee says CSL succeeded because it was patient, disciplined and had worked out how the merged companies would fit together.

"Most acquisitions fail, in my view, because people overpay," he says. "We were very disciplined about what we bid and we had a very clear idea of how we would add value to it. You're always looking at things, but you have to be patient. You only buy a business when they're suffering; if they're not suffering, you overpay.

"You have to decide why you are the natural owner of that business. We never wanted to be a big company. We wanted to be a fine company that was very good at what it did."

CSL is now organised into a global supply chain, collecting and processing plasma and manufacturing a range of products. Its plants in Melbourne supply Australia, Asia and the Pacific. Its factory at Kankakee, near Chicago, produces plasma intermediaries for all CSL plants and supplies North America, and its plants in the Swiss capital Berne and Marburg in central Germany, supply Europe and the rest of the world.

Mergers were only part of McNamee's game plan. At the outset, he moved to lift productivity sharply by slashing CSL's staff. He made exports a prime goal. He cut out low-margin products, and - with some exceptions for the Australian market - narrowed CSL's product range to those where it could be globally competitive. And he was lucky that at Broadmeadows, the Hawke government was already building a global-scale plasma plant.

With Australian manufacturing now under so much pressure from the high dollar, those remain his core strategies. "You have to set your focus on world markets", he says. "We need to focus on being good at a smaller number of activities. We have to be in the premium products end.

"Switzerland and Germany have worked out how to deal with the problems of an overvalued currency, and that's primarily the problem we face. If the high dollar is here to stay, we need innovative industries and clusters. We're very fortunate to be in the Parkville area - the [research] networks it created have been very important for us."

One other thing McNamee firmly believes Australia must learn from Germany and Switzerland is the importance of wage restraint, to keep manufacturing globally competitive. CSL has just been through an unusually bruising wage negotiation in which its unions used strike action to win wage rises of 3.75 to 4 per cent over each of the next three years.

This was very different from the way its enterprise-based unions in CSL's Swiss and German plants operate. Germany entered the euro with an overvalued deutschmark, but won back its lost competitiveness with 15 years of wage restraint. Swiss workers have wage restraint ingrained in them. The OECD reports that in the 15 years since 1995, average wages have risen 22 per cent in Germany, 33 per cent in Switzerland - but 107 per cent in Australia.

So far, CSL has been able to cope with a dollar above parity, but McNamee warns that is no longer inevitable: "If you combine a high dollar with wages growth that sits ahead of the global competition, it's inevitable that will put many assets at risk - including CSL's."

But this time next year, that will be someone else's problem. Brian McNamee is not sure what he'll be doing, but at 55, he's got a lot of life in him.

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RBA warns on loan risks

INTEREST-ONLY housing loans, and loans for 100 per cent of the property's valuation, could be scrapped in future after the Reserve Bank's annual conference heard that they inflate property booms and busts.

Three papers from key economic institutions found requiring borrowers to finance part of the purchase themselves would help to moderate future housing booms - and reduce the scale of the subsequent bust.

Senior officials of the Reserve Bank, the International Monetary Fund and the Bank of International Settlements separately reported that setting maximum loan-to-valuation ratios could help reduce the damage housing cycles cause to the economy.

The Reserve Bank paper, co-authored by the head of its financial stability department, Luci Ellis, also found similar benefits from requiring borrowers to pay down the capital of the loan over time, rather than taking out interest-only loans.

Most Australian home loans already meet both criteria. But many housing investors take out interest-only loans for 100 per cent of the property's valuation, as do investors in commercial property.

Housing booms and busts, in the United States, Spain and Ireland, were the main cause of the global financial crisis. While Australia escaped relatively unscathed, the Reserve has used this year's conference to work out how the booms and busts could be better regulated in future.

Australia's banks are free to lend as they see fit. But the Australian Prudential Regulation Authority makes them set aside extra capital to cover loans for more than 80 per cent of a property's valuation. There are no bars to interest-only loans.

In a survey of housing policy options, senior IMF researcher Giovanni Dell'Ariccia found the most promising were setting limits on loan-to-value ratios, and borrowers' debt-to-income ratios.

"Containing leverage will reduce the risks associated with declines in house prices", he said. "This will likely result in fewer defaults when the bust comes ... (and) reduce the risk that a large sector of the real economy ends up with severe debt overhang."

The Reserve's paper, by Ms Ellis, Mariano Kulish and Stephanie Wallace, concludes that the terms of loan contracts "matter a great deal for financial stability... Loans that build in some amortisation of principal over time are less destabilising.

"Short-term loans that must be rolled over are particularly dangerous. This helps explain why commercial property lending ... has been so problematic for financial stability."

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For Victoria, it's a case of life in the slow lane

THE problem with the Australian economy is that there isn't one. Rather, there are two of them, or arguably several. The data groups them as one, which makes it a misleading guide.

You know the story, but even so, the data is astonishing. Half of Australia's growth is coming from investment in one sector, mining, which generates just 7.5 per cent of our output. In the past year, on the latest figures, mining investment grew by 80 per cent. This is the biggest mining boom we've seen.

The other half of Australia's growth comes from the rest of the economy. Growth in the mainstream of our economy is just 1 to 2 per cent, in line with population growth. To put it another way: take out mining and its offshoots and growth per head in the rest of the economy is about zero.

Take out mining from the capital expenditure figures, and they show business investment in the rest of the economy has slumped to its lowest level in almost 40 years: less than 5 per cent of GDP. At last report, non-mining business was forecasting a further fall in 2012-13.

If they were some minor part of the economy, you might say, so what? But this is not minor: it's the mainstream of the economy, it's High Street, it's Victoria, New South Wales, south-eastern Australia, south-eastern Queensland. It's us.

Victoria is at the centre of it. After 20 years of surprisingly solid, even enviable, growth, this state is now at the crossroads. The forces that drove its growth in recent years have gone into reverse. The headwinds it has struggled against have grown stronger and more dominant. It is not clear where the state's next drivers of growth will come from.

The story is certainly not all bleak. Victoria's housing industry is no longer running at record levels, but it's still the shining light in a weak national outlook. A couple of big hospital projects saw the state also lead Australia in 2011-12 in new non-residential building approvals. The Baillieu government has budgeted for record infrastructure spending in 2012-13 and is looking for ways to accelerate that in future. And the state continues to outperform the rest in attracting new visitors.

All through Victoria, creative minds are finding ways to overcome the problems heaping up on them: the overvalued dollar, the new wave of consumer restraint and cost-cutting by other businesses and governments. Despite the dollar, many are building or maintaining export-oriented firms. Victoria's exports of goods in 2011-12 grew 10 per cent, faster than Western Australia or the nation.

To explore the options for Victoria's enterprises, The Age has joined with Victoria University and the Committee for Melbourne to present a conference later this week, Victoria at the Crossroads, with speakers including Prime Minister Julia Gillard and Victorian Treasurer Kim Wells, and experts from a wide range of areas.

The springboard was concern that global and Australian economic conditions are now working against Victoria. The state will have to find new sources of growth or remain stuck in the slow lane of a two-speed economy.

For example:

. In the year to March, demand (total spending) grew 10 per cent in the mining states (WA, Queensland and the Northern Territory) but just 2 per cent in the rest of Australia, including Victoria.

. The state's unemployment rate has risen in a year from 4.9 per cent to 5.5 per cent, with the official figures showing 27,000 full-time jobs lost and 41,000 part-time ones added.

Ominously, the June survey of the Victorian Employers' Chamber of Commerce and Industry found only 9 per cent of its member companies surveyed expect the Victorian economy to strengthen over the year ahead, while 61 per cent expect it to weaken.

The problem is that Victoria has lost its main drivers of growth. Spending by foreign students in the state fell by $1 billion in 2010-11 as the high dollar, tougher migration policies and anti-Indian violence sent students elsewhere. The heavy debts we took on in giddier times now restrain consumer spending. In Spring Street and Canberra, expansionary budgets have given way to contractionary ones.

Housing starts in the six months to March were down 16 per cent from their record high a year earlier, and housing is a big buyer of goods and services. House prices have fallen for a year and a half, provoking caution.

Manufacturers from Ford to the backyard sheds are doing it tough and shedding jobs under the crushing weight of the high dollar. And investment surveys suggest there is worse to come.

This is not just Victoria's story; it's the story of south-eastern Australia. The Reserve Bank's recent interest rate cuts will help at the margin, but the core message from policymakers is: it's your problem.

That means it's got to be our solution. We must be tough, resourceful, patient and creative: to find better ways to work, make new products and find new customers. Good luck.

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What does the manufacturers' task force want? Lots

THE Gillard government now faces a host of tough budgetary and policy choices after its manufacturing task force urged it to cut business taxes, reduce "the impacts of the carbon price", and lift spending on infrastructure, skills and a range of other areas.

The task force, mostly of business and union leaders, warned that since 2008, the high dollar has cost 110,000 manufacturing jobs, 10 per cent of its workforce and 85,000 more are at risk.

With the dollar likely to stay high, the report said, the challenge is to create an economic environment and workplace culture that will make manufacturing more internationally competitive.

"This requires a business environment that supports continual innovation in products, processes and management," they said. But their 41 recommendations show this will not be cheap.

With manufacturing output 8 per cent below 2008 levels, they urge the government to bring forward infrastructure investment, buy more local content, create a housing recovery, and step up spending on small business and skills training.

The report proposes:

. A government-led effort to win Australian companies a bigger share of supply contracts for the $470 billion of mining-related investment in the pipeline, rather than see most of it go to imports.

. Bringing research institutes and industry together in "smarter Australia precincts", like Melbourne's Parkville medical precinct, so more of Australia's research expertise is directed towards making new products or improving them.

. Building on Australia's strengths by processing raw materials before export, especially processed food for Asia's markets.

. Developing more global niches in knowledge-intensive manufacturing, as Futuris has done in automotive interiors and CSL in plasma.

. Monitoring the impact of the carbon tax on emission-intensive industries, and ensuring it is "refined as needed" to keep firms globally competitive.

Prime Minister Julia Gillard said the government supports most of the report in principle, but shied away from committing to its spending proposals, saying they would be considered in the budget process.

She said the government's manufacturing support arms will combine to help Australian manufacturers bid for contracts in infrastructure and resource projects. It will also set up a "manufacturing leaders group" bringing employers, unions and government together.

"I want to make sure that we still have a strong manufacturing sector beyond the resources boom," she said. "Manufacturing provides us with a skill base, with innovation, and it provides working people with jobs."

Australian Industry Group CEO Innes Willox said Australian manufacturing needs to build on its strengths, improve its partnership with public sector research, become part of global supply chains and build a culture in which small manufacturers can grow big.

Mr Willox said manufacturing's biggest problem was the high dollar, quipping: "The dollar is number one, and it's about four games clear on top of the ladder." But industry must lift its productivity to become globally competitive even with a high dollar.

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Mining makes us 6th richest

THE resources boom has given Australia the sixth highest GDP per head in the Western world but most of that comes from temporary causes that will reverse, making high productivity growth imperative for our future, a new report warns.

Global consultants McKinsey points to the resources industry as the main culprit for Australia's poor productivity growth in recent years, saying it is wasting capital by overambitious planning and poor project control.

In a new perspective on Australia's productivity debate, a McKinsey report shifts the spotlight from labour productivity to capital productivity. It says the efficiency with which we use capital has fallen in recent years, putting a brake on growth at a time when mining investment has dominated the economy.

"Capital productivity in mining is the major issue", McKinsey partner Chris Bradley told The Age. "Australia's productivity challenge is to do the major projects better. We're not even halfway through this resources boom. The amount of investment ahead is bigger that what we've seen so far. We have the opportunity now to leverage the experience we've gained in this area to make the second half much better.

"Prices are not going to stay high, in all likelihood, and we're not the only resources player."

The report, Beyond the boom: Australia's productivity imperative, was written by a team headed by McKinsey senior public sector partner in Sydney, Charlie Taylor. It says Australia is one of the "fortunate few" rich countries with good income growth but its causes are transient, and productivity growth must drive the economy in future. The report estimates that most of Australia's income growth between 2005 and 2011 came from one-off factors: mostly rising export prices (the terms of trade) and the boom in capital inputs (mining investment).

While most of the fall in capital productivity had sound reasons the long gestation period of new mines, and miners digging up lower-value seams while prices are high it says capital productivity in new mines could be improved 30 per cent by better timing of projects, using simpler solutions, and making the design fit the budget rather than vice versa.

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It is time we intervened to hold back the dollar

OUR problem is the dollar. You can pontificate until you're blue in the face about productivity, or business taxes, or the carbon tax or cautious consumers and they're all important. But what is putting otherwise viable Australian businesses at risk now is the fact that our dollar is too high for them to compete.

On the broadest measure, the Australian dollar is now 72 per cent higher than it was a decade ago. Against the US dollar, it has almost doubled. At $US1.05 or more, it is 50 per cent higher than its long-term average of US70?, between 1985 and 2005, before the mining boom drove it up.

A high dollar makes Australian exports more expensive in the rest of the world. It makes imports cheaper here. It makes it cheaper for us to spend our money abroad as tourists or consumers and more expensive for the world to spend its money here.

If you lower the dollar, the other problems become second order issues. If you can't lower it, and it keeps going higher, then business and government may have to move hard and fast to find ways to save enterprises and the workers they employ.

That is the reality the Reserve Bank highlighted in its quarterly statement on monetary policy last week. It is the reality that has made its former board members Warwick McKibbin and Adrian Pagan urge it to try new ways to stop foreign demand for Australian dollars driving up its price.

In March, I wrote on this page that we need to talk about the high dollar, suggesting the Reserve should drop its hands-off policy, and intervene to cap its value, as the Bank of Switzerland has capped the value of the Swiss franc. That conversation has now begun, and about time.

The stakes are high: not only for our trade-exposed enterprises and their workers, but for both sides of politics. On July 1, we began living with the carbon tax that Tony Abbott has told us over and over will be "like a wrecking ball through our economy". It has become the defining issue of our politics, the prime mover for Abbott's rise in the polls and Julia Gillard's fall. Now the rhetoric of both will be put to the test.

In July, the wrecking ball failed to wreck anything. Last week the Bureau of Statistics estimated that seasonally adjusted employment grew by 14,000, and private analysts TD Securities and the Melbourne Institute estimated that inflation rose by just 0.2 per cent.

Of course, these are early days, and survey data can be wrong. But it was a preview of the potential damage to Abbott's credibility if the carbon does not wreck the economy. The polls show he himself is unpopular; if his campaign against the carbon tax turns out to be hollow, the political balance could swing sharply against him.

But the argument cuts both ways. If the economy goes badly in 2012-13 and I mean the economy of south-eastern Australia, where Labor has 60 of its 72 seats in the House of Representatives then Labor and its carbon tax will be blamed, regardless of whether or not it really caused the slump.

The Age economic survey last month found an overwhelming consensus among private forecasters that Australia would do well in 2012-13. Virtually none think the carbon tax to be a wrecking ball through the economy.

But the economic tides now are very uncertain. Even the Reserve Bank, with its well-documented tendency to be over-optimistic, now concedes the big risk is that the economy in 2012-13 will go worse than expected, not better.

Part of the reason for that, as the Reserve sees it, is Europe's inability to solve its problems. It is sanguine about China, although the anecdotes from there point to a more alarming slump than the statistics admit to. But it is also worried that the rising dollar is doing more damage than its models have forecast and in Australia too, the anecdotes point to deeper problems than the statistics so far show.

Most observers expect the Reserve to do nothing more than voice concern. It has never intervened in the markets to keep the dollar down, only to push it up. Deputy governor Philip Lowe said last month it was hard to make a case that the dollar was overvalued. But then, the International Monetary Fund disagrees, estimating that in June, when the $A was roughly at parity with the $US, it was already overvalued by 5 to 15 per cent.

What could we do? Two options stand out:

The Swiss solution: impose a cap on the Australian/US exchange rate, maybe at parity, and print dollars to sell whenever the cap is threatened. There is no limit on the Reserve's ability to create Australian dollars only the risk that they will end up back here adding to inflation, and the risk that it will become a huge holder of US dollars and other currencies.

The McKibbin solution: since the main surge in demand for Australian dollars is from other central banks buying them as safe investments, the Reserve should sell them directly to its cousins, printing dollars to meet their needs, and so taking pressure off the dollar in the markets.

I'll say it again: we need to talk about this. We should not let fear of trying something new cost us good enterprises and good jobs.

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Going down. Non-mining investment plummets

BUSINESS investment in the non-mining economy has shrunk to its lowest share of gross domestic product for almost 40 years, as a result of the high dollar and appears set to fall lower still.

The Bureau of Statistics estimates that in the nine months to March, business investment in manufacturing and services such as finance, retailing and IT fell to 4.95 per cent of GDP, its lowest level since 1972-73.

The bureau's quarterly survey, taken in April and May, found companies plan to invest even less in 2012-13. Manufacturers' investment plans were 11 per cent lower than at the same stage last year, while service companies' plans were down 4 per cent.

Even if these plans are upgraded as usual over the year ahead, the survey implied that non-mining business investment would shrink, to about 4.5 per cent of GDP.

That would take it back to levels last seen 60 years ago, in the savage bust that followed the Korean War boom.

The bureau figures were published weeks ago, but escaped attention, as analysts focused on the mining industry's record investment plans. At face value, two-thirds of all business investment in Australia this financial year will be in mining, and just a third in all other industries combined.

The Reserve Bank reported last week that in 2011, more than half of Australia's growth in GDP came from mining investment. Since the entire economy grew just 2.1 per cent, that implies growth in the rest of the economy was barely 1 per cent.

The Reserve voiced concern that the high dollar is doing more damage to the economy than it anticipated. While mining is booming, the Reserve reported that activity in the rest of the economy is subdued.

"In liaison, many firms indicate that they are slowing their investment spending in line with weaker cash flows, and are becoming more selective about which projects to pursue," it said. "Many companies [are] prepared to spend on machinery and equipment investment [only] to the extent necessary to offset depreciation."

The bureau figures show investment by non-mining companies has now slid well below its worst levels in the 1990-01 recession.

Non-mining investment between 1987 and 2000 averaged 6.6 per cent of GDP, as companies built new offices, hotels, retail complexes, or re-equipped factories, truck and car fleets or equipment hire centres.

But since 2010 it has ebbed as mining investment has boomed. Manufacturing investment, which averaged 3.4 per cent of Australia's GDP in the 1960s, has now slumped to less than 1 per cent, with much of that invested to process minerals before export.

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At last, our dollar worries the Reserve Bank

THE Reserve Bank's view of the year ahead foresees the economy growing at trend, against a background of grey clouds: a two-speed economy, with little growth in jobs, and a lot of downside risk from Europe, and the high dollar.

It sees the carbon tax having surprisingly little impact on underlying inflation: just 0.25 percentage points in 2012-13, then no more. It sees mining investment peaking in 2013-14, barely a year away, and detracting from growth thereafter.

If you think that's easily replaced, the Reserve points out that in 2011, even net of imports, mining investment made up most of the growth in our GDP.

The Reserve is troubled by Europe. It's on edge about the US, and the partisan impasse over the budget deficit. But it's relaxed about China, seeing its economy as having hit bottom and about to rebound as stimulus measures take effect.

Part of its concern about Europe is that it sees the investor exodus from European bonds ending up here, and pushing up the Australian dollar at a time when falling commodity prices should be driving it down.

What is new in yesterday's Statement of Monetary Policy is that for the first time, the Reserve accepts that a persistent high dollar could do more damage than it expected to businesses exposed to global prices which now includes much of the economy, as the internet spreads global competition to our service industries.

The Reserve does not canvass possible solutions, such as the Swiss policy of setting a cap on the exchange rate, and printing money to keep it there or in other ways, as advocated by its former board member Warwick McKibbin.

But it sees the high dollar forcing trade-exposed business to lift productivity sharply. That implies weakened jobs growth "in the near term" and a risk of "labour shedding across a range of industries", as the high dollar combines with the housing slump and deep spending cuts at federal and state levels.

It expects unemployment will "edge higher", wage growth will slow to 3.5 per cent, and inflation even with the carbon price to remain within its target band of 2 to 3 per cent.

Yesterday's statement does not imply an interest rate cut around the corner. But it implies that the Reserve is leaning that way. It sees the risks as mostly on the downside, but is sitting back to watch what unfolds, ready to hit the trigger if its fears are realised.

Commonwealth Bank's economics team summed it up as "cautiously optimistic". Yes, but it is more cautious than it was, and less optimistic than it was.

Some analysts interpreted the rise in its growth forecasts for 2012 as indicating stronger growth ahead. Wrong. It reflects stronger growth behind us, due to the Bureau of Statistics' surprisingly high first estimate of 1.3 per cent growth in the March quarter.

The Reserve assumes this will not be revised down much, but will lift the starting point for future growth. That could be optimistic. In the past, on average, high initial estimates of growth have been revised down by 0.4 percentage points. The bureau has already revised its estimate of March quarter retail spending by that much.

The key fact is that the Reserve has left its growth forecast to June 2013 unchanged: between 2.5 per cent and 3.5 per cent. And it has cut its forecast for growth in 2013-14 by half a percentage point, to the same range.

That is, the Reserve forecasts the growth rate over the next two years to be around 3 per cent, plus or minus half a percentage point. It describes this as "around trend". Good. There is a widespread but outdated assumption that our trend growth rate is 3.25 or 3.5 per cent; that was in the days of rising debt, and the Reserve believes those days are gone.

On Thursday, assistant governor Guy Debelle forecast that credit growth will remain subdued for years. He tipped it to grow "at the pace of nominal [GDP] 5, 6, 7 per cent most likely, for the next few years. I'm pretty sure we're not going back to double digit rates."

If he's right, that will have profound implications across the economy especially for growth in house prices, and for investments that depend on them rising at the pace we saw when housing credit was growing at double-digit rates: as it did, with two short breaks, from 1964 to 2008. Stable house prices will be good for first home buyers, bad for investors.

Second, slow growth in credit will have profound effects on banks, retailers, new housing and renovations, tourism, restaurants and discretionary expenditure of all kinds.

For all our talk of "cautious consumers", households have barely begun the task of deleveraging. The ratio of household debt to disposable income has shrunk only from 156 per cent at its peak to 150 per cent. It is still three times as high as it was 20 years ago.

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Carbon tax a mere hiccup, economically speaking

THE federal opposition's scare campaign against the carbon tax has failed its first test. The Bureau of Statistics reports that seasonally adjusted employment rose by 14,000 in July the month the tax took effect while unemployment fell to 5.2 per cent.

For the government, it was a double bonus after the TD Securities-Melbourne Institute monthly inflation gauge reported on Monday that inflation rose just 0.2 per cent in July, and was flat over the past three months.

While this was only the first test of the carbon tax, if the duo of rising employment and low inflation continues, it could have huge political implications undermining Opposition Leader Tony Abbott's repeated claim that the carbon tax would be "like a wrecking ball through our economy".

Mr Abbott yesterday stuck to his claim, pointing out that jobs rose only half as much in July as they had fallen in June. "Make no mistake, this is a python squeeze on our economy, and as time goes by it will squeeze families' cost of living, it will squeeze employment in this country," he said.

But Treasurer Wayne Swan was quick to claim vindication.

"It is yet more evidence that Tony Abbott's scare campaign on the carbon price and the mining tax is absolute baloney," he said. "Today's figures are the latest proof that he is deliberately misleading Australians and talking our economy down."

With the election not due for another year or more, the real test of the tax's impact on jobs and inflation lies ahead. But if the economy thrives over the coming year despite the tax as most forecasters expect it could become the political "game-changer" Labor is hoping for, discrediting the Coalition and its leader.

The bureau's preferred trend figures, however, paint a bleaker picture, which, if sustained, could give the debate to the Coalition. The trend data, which smooths out the ups and downs of monthly figures, estimates that job growth slowed to just 24,000 over the past three months, down from 42,000 over the previous three.

Forward indicators for employment are sending warning bells. The bureau's measure of job vacancies shrank by 15,000 in the 15 months to May.

Most of that decline was in Victoria, and mostly in white-collar jobs in professional offices, administration and healthcare.

Yesterday the SEEK index reported online job ads down 5 per cent last month and 11 per cent over the past year. The rival ANZ series was slightly less bleak, but it reported that job ads, online and in newspapers, shrank by 1800 last month and by 18,500, or 10 per cent, since February last year.

In trend terms, the bureau estimates that jobs have grown by 74,000 this year, or 10,000 a month. Only a third of the growth has been in full-time jobs. But the adult population is estimated to have grown by 136,000 in that time. Of the other 62,000, in net terms, the bureau estimates just 5000 more are unemployed, whereas 57,000 more have settled on the sidelines, not looking for work.

The jobs figures show Australia is still deeply divided between boom and bust, with Western Australia at one extreme, Tasmania at the other, and Victoria and NSW somewhere in the middle.

Western Australia is way out in front of any other state, adding 50,000 full-time jobs in the past year and cutting trend unemployment to 3.6 per cent. NSW takes the silver medal, but a long way behind, adding 20,000 full-time jobs in the year to July, with unemployment down to 5.1 per cent.

Victoria and Queensland were fighting out for the bronze. In Victoria, the bureau estimates, full-time jobs shrank by 23,000 in the year, but part-time jobs grew by 42,000. The state's unemployment rate was 5.4 per cent last month, down one notch from June.

Queensland, by contrast, added 4000 full-time jobs in the year while losing 10,000 part-time jobs. Its unemployment rate stayed at 5.6 per cent.

South Australia and Tasmania were clearly going backwards. On the bureau's figures, South Australia lost 18,000 full-time jobs in the past year one in 30 with unemployment up to 5.7 per cent. It now has fewer full-time jobs than it had before the GFC. Tasmania is in even worse trouble, losing 6800 full-time jobs in the past year, or more than one in 25.

Most forecasters still expect unemployment to edge up in coming months, if only slightly, with the Reserve Bank likely to deliver another interest rate cut this year.

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Fringe fading, inner-city Melbourne booming

MORE than 10 per cent of new homes approved in Victoria in the past year will be built in the city of Melbourne, as developers switch gears to meet the demand for inner city living.

The Bureau of Statistics reports that in the past two years, approvals for new homes on Melbourne's outer fringe have plunged by 25 per cent. Yet approvals in inner Melbourne have almost doubled, almost entirely in the CBD, Docklands and Southbank.

In 2011-12, for the second year in a row, most approvals for new homes in Greater Melbourne were granted in established suburbs within 20 kilometres of the GPO. Of 37,885 approvals in the metropolitan area, 8639 were in the inner ring, 20,374 were roughly within 20 kilometres of the GPO, and 17,511 on the outer fringes.

The figures undercut the state government's decision to take more land out of Melbourne's green wedges for housing. They suggest that increasingly, developers themselves are redeveloping the city and established suburbs to meet demand from buyers.

Last year, Melbourne City Council or the appeals body, the Victorian Civil and Administrative Tribunal approved 5166 new homes in the city, including 1915 in the CBD, 1712 in Southbank, and 640 in Docklands. That was more than the boom municipalities of Wyndham (south-west, 2835 new homes) and Casey (south-east, 2322) combined.

One in 28 homes approved in Australia was in the city of Melbourne. Of the $75 billion of building approvals nationwide, $4.5 billion or 6 per cent was on lord mayor Robert Doyle's turf.

There are fears that supply is rushing ahead of demand, with a risk that apartments could remain unsold, or drive down prices across the inner city, or never be built. Similar fears in 2003-04, however, proved unfounded.

The trend to live closer in is not confined to the CBD. Six other inner or middle suburban municipalities Port Phillip, Stonnington, Monash, Boroondara, Yarra and Moreland each approved more than 1000 new homes, mostly apartments and units.

Of the $7 billion of non-residential building approved in greater Melbourne, $3 billion was in the city centre. But Whitehorse council attracted $554 million of non-residential building, including the Box Hill hospital redevelopment.

On the outer fringes, buyers are going north. The biggest number of approvals last year was in Whittlesea shire, where 3260 homes were approved, mostly in booming suburbs such as South Morang and Mernda. The figures will add to pressure on the state government to extend the new South Morang rail line to Mernda.

Geelong is still booming, with 1897 new homes and $911 million of new building approved in 2011-12. Bendigo approved 1222 homes and Ballarat 985. Overall, metro Melbourne dominated, taking 79 per cent of the state's new homes and 81 per cent of the total value of approvals.

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We're moving away from big banks

AUSTRALIAN borrowers are dumping their banks to get a better interest rate. A record 35 per cent of all housing loans written in 2011-12 saw borrowers refinance existing mortgages with a new lender, rather than buy or build new property.

Bureau of Statistics figures show all the growth in new lending to owner-occupiers in the past year was in refinancing. Every week, the banks and other lenders refinance $1 billion of existing loans at better interest rates, as borrowers freed from exit fees vote with their feet.

In the year to June, lending to refinance loans swelled by $7.3 billion or 17 per cent from a year ago, and by 30 per cent from two years ago. By contrast, lending to buy existing real estate fell by almost $1 billion, while lending for new construction rose just $24 million.

Australian Prudential Regulation Authority (APRA) data shows the big four banks have been the losers. This year their market share shrank slightly as growth in their stock of home lending was far outpaced by the smaller Australian banks and wholesale lenders.

But the big four remain dominant. At June 30 they held 86 per cent of all the banks' housing loans, up from 75 per cent four years earlier, before they were allowed to swallow their two biggest rivals.

But in the first half of 2012, the smaller banks won 24 per cent of the growth in the stock of home loans. And the banks collectively saw new lending shrink, with all the growth going to non-bank lenders.

The data suggests Treasurer Wayne Swan's campaign to get unhappy borrowers to vote with their feet has been enough to make the big banks take notice.

A spokesman for Mr Swan said the figures show the government's reforms have stirred competition in banking, to the benefit of mortgage holders.

"People are taking advantage of our ban on mortgage exit fees," he said. "This has put more power in the hands of Australian families: they can walk down the street to another lender if their current bank isn't looking after them."

Victoria, New South Wales and Western Australia have been the main battlegrounds. In Victoria and WA, 37 per cent of home loans in 2011-12 were for refinancing, and in NSW and South Australia, 36 per cent.

The bureau figures report the new loans written each month, and they show all the growth this year has gone to non-bank wholesale lenders. In trend terms, between December and June, monthly lending by banks shrank by $224 million or 2 per cent, but wholesale lenders lifted lending by $69 million or 27 per cent.

Excluding refinancing, seasonally adjusted new lending rose 2 per cent in June, suggesting the Reserve Bank's interest rate cuts have injected life into the market, as intended. The growth went mostly to finance new construction, rather than existing real estate.

The APRA figures show that even though new lending fell in 2011-12, the stock of money we owe the banks in housing loans grew by $83 billion or 8 per cent. Smaller banks gained $10 billion of that, with Macquarie Bank more than doubling its lending to $3.8 billion, and the Bendigo and Adelaide Bank's lending up by $3.4 billion or 16.5 per cent.

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Inequality fell under Swan, but it wasn't his doing

WAYNE Swan tells us his source of inspiration is Bruce Springsteen, and his anthems for the working-class battlers of America. It's a new way to try to persuade us that Labor's goal is to make Australia a more equal place and the Liberals' goal to make it a more unequal one.

It might work, because this is an issue on which Labor has a good story to tell. While John Howard in his first eight years as PM was sensitive to the needs of the "battlers", he lost office largely because he lost that focus as he went on. Swan as Treasurer has done nothing dramatic to make Australians more equal. But he has persistently pushed his "Labor values" into virtually every reform, every fiscal package, to nudge the outcomes in that direction.

It's gone surprisingly unnoticed, except by those on high incomes, who have found themselves excluded from virtually every initiative Labor has taken to "ease the burden on struggling Australian families". That has fuelled the perception among some of them that Swan is a class warrior, and his bid to recruit Springsteen to the cause only intensifies that.

To take a few examples:

. All of Labor's handouts to families were targeted to lower and middle-class households, and left out those on incomes above $150,000. High-income earners have lost their tax rebates for private health insurance, and those on more than $300,000 have had their superannuation tax breaks pruned.

. Making employers lift their superannuation contributions from 9 per cent to 12 per cent could make workers better off, unless employers recoup the cost from lower wage rises.

. Pensioners, including the disabled, won big pension rises in 2009 from the Harmer review although, typically, the unemployed were excluded.

. The big bipartisan tax cuts from the 2007 election went everywhere, but Labor's tax cuts since have gone to the lower half of income earners. The latest lot cut tax by $10 a week for workers on $25,000 a year, but just 5? a week for those earning $80,000 or more.

No economist has tried to piece it all together, so we don't know how much of a difference it has made. The latest income distribution data from the Bureau of Statistics is for 2009-10, and won't be updated for another year. And in any case, so many other factors affect income distribution that its data can't tell us what impact government policies have had.

For example, the distribution of wages and salaries has become far more unequal as we have moved away from national wage fixing and industry awards to enterprise bargaining and individual contracts. That was what was meant to happen, but the size of the shift is startling.

Bureau of Statistics figures show that in the three years to August 2011, average wages for full-time workers at the bottom fell by $4 a week, or 0.6 per cent. Those in the middle had an average wage rise of $36 a week or 3.4 per cent, while those at the top had an average rise of $206 a week, or 10.3 per cent. These changes swamp anything the government has done.

The wage share of national income has fallen and the profit share has risen, so that returns to investors now account for a far bigger share of income. This boosted the share of income going to high-income earners in the boom years, and has shrunk it since the GFC bust.

Moreover, Swan's concern for working families specifically excludes the unemployed. Even in opposition, when he wrote a book, Postcodes, on the inequity of Australia's income distribution, he ignored the ugly fact that we pay the unemployed a benefit below the poverty line. Now in office, this Springsteen fan ignores them still, expecting them to live on $35 a day.

But Labor has kept intervening in small ways to favour working battlers, and it is false to pretend otherwise as The Australian did last Thursday when it ran across its front page a supposed expose.

"Inequality has grown on working-class warrior's watch", its headline ran. "Income inequality has increased slightly on Wayne Swan's watch", its story began. Yet the figures it cited showed the opposite.

It reported that inequality had increased over a 10-year period (which 10 years was not clear). Yes, the bureau data shows inequality did rise between 1995-96 and 2007-08, but that was under the Howard government. Swan became Treasurer only at the end of 2007. His first budget took effect in 2008-09. The Australian chose to blame Swan for the growth of inequality under Howard.

Its story eventually quoted the data for what happened under Swan's watch. The share of income going to the top 20 per cent of earners "rose to 47.6 per cent in 2007-08 before easing back to 46.7 per cent in 2009-10". Inequality in fact fell on Swan's watch.

But that wasn't primarily due to him. The GFC cost investors a heap of money, and investors tend to be in the top 20 per cent of income earners. Let's get real.

What is remarkable in all this is that, in small ways, Swan has quietly put income equality back on Australia's political agenda. It's nothing dramatic. Probably all Labor has done has been to moderate the growing inequality of wage and investment income.

But if you believe in equality of opportunity, it is a step forward. Those doing well in the markets don't need more help from government. It should focus on helping those who need it.

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Where the bloody hell are we? Probably overseas

WHERE the bloody hell are you? If you're an Australian on holidays, probably in Bali. Maybe in Auckland. Perhaps on the Inca trail in South America, or lying on a beach in Thailand, or sitting at a cafe in Berlin or London. Wherever it is, you're probably not here.

Australians made a record 8 million overseas trips in the year to June, 80 per cent of them as tourists or to visit friends and family. In just five years, the Bureau of Statistics reports, the numbers of trips we make overseas has swelled by almost 3 million or 57 per cent while the number of foreign visitors coming here has risen just 340,000 or 6 per cent. We made more than a million trips to New Zealand, took almost a million holidays in Indonesia, paid more than 800,000 visits to the US, and 600,000 to Thailand. On top of that, we made 1.23 million trips to Europe mostly to the continent, not Britain more than a million trips to other Asian destinations, 603,000 to South Pacific islands, and more than half a million trips to other places from India to Latin America, Africa and the Middle East.

With the high dollar now giving Australians almost double the buying power overseas that they had a decade ago, an annual trip overseas is becoming part of the lifestyle of millions of people who would once have holidayed at home.

It's not hard to see why the Queensland economy is hurting. In a decade, excluding spending by students, Australians' spending on overseas travel has swollen by $14.7 billion or 144 per cent, while foreign tourists' spending here has gone backwards, shrinking by $154 million.

Queensland has been the big loser. Last year, compared to five years earlier, 114,000 fewer foreign visitors spent most of their time in Queensland, whereas 306,000 more spent most of their time in Victoria, and 120,000 more focused their time on WA.

Victoria has been the big winner, and its run continued in 2011-12. Last year the state hosted 1.27 million foreign visitors (including students, who account for almost half of all spending by foreign visitors), up from 756,500 a decade earlier. It accounted for more than 75 per cent of the growth in visitor numbers, in line with trends since the middle of last decade.

In a decade, visitors to Australia from China have more than trebled, from 172,000 in 2001-02 to 583,000 in 2011-12. In recent months, China has overtaken Britain to become Australia's second biggest source of visitors, after New Zealand. In the past decade, China and New Zealand each account for roughly a third of the net growth in visitor numbers.

Visitors from India (including students) have also trebled, providing our third biggest growth market, with Malaysia fourth. The only other countries to generate any significant increase in tourism to Australia over the decade are Indonesia, France, the US and the United Arab Emirates.

But visitors from Japan almost halved in the same decade, from 659,000 to 344,500, as the rising dollar and word of mouth from poor travel experiences sent Japanese tourists elsewhere, especially to China. Visitors from Britain also fell by 30,000 over the decade, thanks to the high dollar.

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Melbourne's bustling fringe - 1000 newbies a week

MELBOURNE'S outer suburban fringe is growing at its fastest pace in decades, adding almost 1000 people a week, as greater Melbourne is swelling with almost a quarter of Australia's population growth.

New estimates by the Bureau of Statistics report that, in the past decade, the five areas experiencing the biggest growth in Australia were all outer suburbs of Melbourne.

South Morang grew from a fringe of 6667 people in 2001 to a large suburb of 38,895 by 2011. In one decade, it added the entire populations of Carlton, Fitzroy and Collingwood.

Point Cook was a close second; it began the decade with 2092 people and ended with 33,393, almost as many as South Yarra and Toorak combined. In the west, Caroline Springs added 21,400 people. In the south-west, Tarneit grew from 1427 to 22,473, while in the north, Craigieburn and Mickleham together doubled from 16,647 people to 35,807.

All told, the bureau estimates greater Melbourne grew by a massive 647,164 people in a decade, its population rising 18.6 per cent to 4.17 million in mid-2011.

In the sheer scale of growth, no other Australian city came close. Sydney grew by 477,645 people or 11.6 per cent to just over 4.6 million.

If both cities continued growing at this pace, Melbourne would overtake Sydney by 2028 to reclaim the title of Australia's biggest city for the first time since 1901.

Perth and Brisbane both grew faster than Melbourne Perth growing by 26 per cent to 1.83 million, and Brisbane by 25 per cent to 2.15 million.

The bureau has revised its figures after the census found its estimate of Australia's population was roughly 300,000 too high.

The rapid growth of foreign students coming to Australia to study, interstate and overseas tourists, and service industries more broadly, has been the key to Melbourne's rapid growth. The bureau estimates 60 per cent of the state's population growth came from overseas migration, and just 40 per cent from natural increase.

No other city since the 1960s has experienced growth on this scale, or the strain it has placed on services: from public transport to hospitals, electricity and road space. Those growth strains are widely seen as a key reason for the unexpected defeat of the Brumby government in 2010.

While most foreign students settle in the city and inner suburbs, the city's population growth has been overwhelmingly on the outer fringe. The census found three rings: rapid population growth in the inner suburbs, modest growth (or even decline) in the middle and outer-middle suburbs, and booming growth on the urban fringe.

The 11 innermost councils Melbourne, Maribyrnong, Moonee Valley, Moreland, Darebin, Yarra, Boroondara, Stonnington, Glen Eira, Port Phillip and Bayside added 167,500 people over the decade.

Seven outer fringe councils Wyndham (Werribee), Melton, Brimbank, Hume (Craigieburn), Whittlesea, Casey (Berwick/Cranbourne), and Cardinia (Pakenham) added almost 350,000 people between them.

There was less growth in the middle. The population in Keilor, Wantirna, Endeavour Hills and Frankston shrank.

Regional Victoria saw rapid growth around Geelong, Ballarat and Bendigo and in towns along the coast or the Murray River. The Barwon region added 29,285 people, more than 5000 of them in Torquay alone. But that growth was offset by widespread population losses inland, especially in an arc from the Western District through the Wimmera and Mallee to the irrigation areas in northern Victoria.

More than 1000 people left rural areas around Mildura. Almost 1200, or one in six of the population, departed from around Kerang. More than 3000 left the Wimmera.

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The NDIS truth. No-one wants to pay for it.

JULIA Gillard scored a PR coup last week by outmanoeuvring the Coalition premiers to make it appear that they were blocking the goal of a national disability insurance scheme.

The reality was different. It would be more accurate to say that the PM moved the scheme's goalposts to favour her government then blasted the premiers for not kicking to where she had moved them.

It's an important issue that deserves more than superficial examination. In an era when the policy climate is hostile to big government initiatives and new spending, here is a big new initiative to fill what is widely seen as a gap in community services. No one is against the NDIS. Everyone wants to make it work.

The question is: how? The dispute between the Prime Minister and the premiers was not over the need for a scheme, but over who should pay for it or, to be exact, over who should pay for its "launch phase", the trials proposed in all states except Queensland (where the Newman government didn't want one).

With good reason, the states had assumed that the Commonwealth would pay the cost. What really happened last week was that Gillard refused to have any launch sites unless the states shared the cost. A day or two of bad headlines was enough to show Ted Baillieu and Barry O'Farrell that the political cost of holding out would outweigh the fiscal cost of giving in. So they gave in.

But that does not resolve the issue. As Baillieu points out, to roll out the full scheme will cost 20 to 30 times as much as these trials. The real issue is: who will pay for the full scheme. Baillieu and O'Farrell correctly suspect that the Commonwealth is using the issue of who funds the trials as the thin end of the wedge, to lock them into sharing the cost of the full rollout.

Hence their resistance last Wednesday. And the fact that they crumbled on Friday says more about how the media treats these issues than the merits of their case.

Let's go back to the start. In 2008, activists such as Bruce Bonyhady, of Yooralla, and Rhonda Galbally, of the National People with Disabilities and Carer Council, got the ear of Bill Shorten, then parliamentary secretary for disability and children's services, pointing out the gaps and shortfalls in the funding of services for the disabled. Shorten saw the moral imperative. He commissioned a taskforce headed by Ian Silk, CEO of Australian Super, which urged the government to investigate the feasibility of a national disability insurance scheme.

To give political cover against charges of big spending on welfare, the Rudd government commissioned the Productivity Commission to do the feasibility study. The commission's report last August set out a blueprint for the scheme, arguing that the patchwork of services for disabled people were "inequitable, underfunded, fragmented and inefficient, and give people with a disability little choice".

On funding, the report was unambiguous. "The Australian government (should) take responsibility for meeting the entire funding needs of the NDIS," it said. "This would provide certainty, clear lines of funding responsibility, avoid the inefficiencies of the Commonwealth-state 'blame game' . . . and reflect the Australian government's unique capacity to raise efficient and sustainable taxes of the magnitude required."

Despite inaccurate spin by Gillard and Jenny Macklin, the commission did not propose that the states share the funding, or make the absurd suggestion that the states return tax powers to Canberra. Rather, in line with its small government theology, it proposed that Canberra fund the $7.2 billion-a-year cost from spending cuts unspecified while the states cut stamp duties by the amount of disability spending taken over by Canberra.

That was the first problem. The obvious solution, proposed by many (now including the Liberal premiers), was to pay for the scheme by a Medicare-style levy. Instead, the commission proposed a tax cut, and a "magic asterisk": unspecified spending cuts. Officially, its report was warmly praised. Unofficially, its failure to spell out a source of funds meant it was doomed.

The Council of Australian Governments pledged to introduce the scheme. Federal and state ministers began meeting to discuss how it would work. But by COAG's April meeting, the commission's report was just "a good starting point"; Macklin got the states to agree that "design and implementation of (an NDIS) will be a shared responsibility of the Commonwealth and the states". She now depicts that as implying agreement by the states to share the bill; the states disagree.

The commission got two things right. The states do not have the fiscal means to meet their share of an expanded bill. And as we saw last week, to share responsibility is to open the sluice gates for endless buck passing. The best solution would be a referendum to return to the states the tax powers the constitution intended them to have. But that would require bipartisan political support; we don't do that here.

The Commission's preference for a Commonwealth takeover is the next best. But whatever it says, the Commonwealth has rejected that. So we now we have third best: shared responsibility and buck passing.

Tony Abbott says the Coalition would pay for it all by spending cuts. OK, Tony, what would you cut? Tell us that, and we will take you seriously. Until then, let the buyer beware.

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Men are better paid, but.... (from the ABS)

MEN are better paid, but women are better educated. Men dominate the top executive jobs, at least in business, while women do most of the unpaid work and care at home. Women live longer, and are less at risk of violence - but only because it is mostly about blokes hitting blokes.


A data round-up by the Bureau of Statistics offers a diverse picture of the differences between men and women. Overall, it seems you're still better off to be a man: men get paid more, but work less, when all the unpaid work is taken into account. Women are making up ground, but the pace of change is very uneven.

Take the broadest measure of income: hourly wages. In 2006, the median male in a non-managerial job earned 9 per cent more per hour than the median female. By 2010, the gap had shrunk to 8 per cent. At that rate, it will close in about 2040.

Or take an elite level measure: key executive managers in Top 200 companies. In 2002, 8.4 per cent of them were women; in 2010, 8.0 per cent were women. Almost half of the Top 200 have entirely male executives. Only six of them have a woman as the CEO, and 92 per cent of their directors are also male.

The public sector, by contrast, is changing rapidly. In nine years, the number of women in the Commonwealth's senior executive ranks have more than doubled. Women now make up 38 per cent of senior executives, 46 per cent of all lower level managers, and 31 per cent of judges and magistrates.

The basic social divisions remain. Men work twice as long as women in paid employment; women work twice as long as men in unpaid employment at home. One astonishing detail: of elderly parents with disabilities being cared for at home, 92 per cent have a daughter as primary carer, only 8 per cent are cared for by their sons.

Women are doing better than men in other areas. On average, they live four or five years longer than men, although the gap is closing. Young women are better educated than young men, and that gap is widening. And despite widespread perceptions, men are the main victims of crime (as well as the main perpetrators).

The bureau finds women are more likely to say they feel pressed for time, and are suffering from a high level of psychological stress. Yet they are less likely to suffer mental disorders than men and less likely to be disabled.

The crime stats show men are twice as likely to be victims of violence, and 50 per cent more likely to be robbed. But most victims of harassment are female, as are 85 per cent of all victims of sexual assault.

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Why on earth is Aboriginal employment shrinking?

ABORIGINAL employment rates have slumped in the past five years, despite unprecedented efforts by the public and private sectors to increase indigenous workforce participation.

The Bureau of Statistics estimates that just 46.4 per cent of adult Aborigines and Torres Strait Islanders had a job last year. That was a slight rise from 45.6 per cent in 2010 but well below the peak of 50.4 per cent in 2006.

The figures suggest that despite federal government intervention, numerous programs and private sector initiatives, indigenous participation in the workforce since 2006 has shrunk, not grown.

On these figures, for every 100 people added to the adult Aboriginal population in the past five years, only 22 had a job, while 78 were unemployed or outside the workforce.

Researchers have challenged the bureau's figures, which are complicated by the end of the Community Development Employment Program in remote communities. The program was essentially a work for the dole program, but the bureau counted those working on it as employed.

Australian National University economists Matthew Gray and Boyd Hunter have estimated that when CDEP participants are excluded, the bureau figures show that indigenous employment in non-CDEP jobs has been rising since 2006, especially among women.

But the bureau figures show a decline in employment rates among indigenous people in every state, every age group, and every type of location: big cities, regional areas and remote communities alike.

Even comparing three-year averages, the trends are the same. They suggest that indigenous workers, like other less skilled workers, have been the victims of the rise in unemployment and slowdown in jobs growth in Australia since the financial crisis began in 2008.

The Aboriginal leader Warren Mundine, the chief executive of GenerationOne, said the figures showed that existing policies were off track and should refocus on giving indigenous Australians clear pathways to jobs.

''I'm not surprised, to be honest,'' he said. ''This is why GenerationOne has been campaigning to end funding of training courses unless there's a guaranteed job at the end of them.

''We've got Aborigines out there with more certificates than a Harvard law professor but they don't have jobs. You've got to get people job ready first.

''The GenOne approach is to deal first with their lifestyle issues, health issues, family issues and their education issues, literacy and numeracy - then give them training with a promise of a job at the end.''

Mr Mundine said GenerationOne, a private sector non-profit group founded by the mining billionaire Andrew Forrest, had put 11,000 indigenous people into jobs and had pledges of 62,000 jobs from 330 companies.

''We're dealing with people who can't read and write, can't do maths,'' he said. ''They're not job ready. Quite frankly, a lot of money is being spent, for very little outcome.

''We could resolve the employment problem in a generation but to do that, governments have to focus on the real issues.''

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Hamer Hall is back, but at a cost...

THE centre was meant to cost $24 million and open in 1977. But that was before it emerged that it had to build it on the top of old river bed, on silt rich in acid, 40 metres above the bedrock and with workers whose union used the project ruthlessly as a pacesetter in pay and conditions.

The construction of Hamer Hall was not easy. From conception to opening took almost 40 years. It stopped and started as more problems were discovered with the site, relationships frayed, and costs blew out. Had its planners known at the outset what lay ahead, they would never have begun.

But as premier, Dick (later Sir Rupert) Hamer saw it as an act of faith in Victoria's future to build a concert hall and theatre by the Yarra, as the second stage of Melbourne's Arts Centre. Premier from 1972 to 1981, Hamer was the first leader of modern Victoria, a forward thinker who saw the arts as a vital activity to human society, and wanted Melbourne to have the best of them.

As the cost of the project kept escalating, eventually to $225 million, Hamer, as premier, treasurer and minister for the arts, kept finding the money to keep it on track. It was still unfinished when he resigned as premier in mid-1981, but his Labor opponents recognised his role in the project with two unusually generous gestures.

In 1982, as premier, John Cain invited Hamer, the political father of the project, to open the first half of it to be completed the concert hall. And 22 years later, after Sir Rupert's death at the age of 87, then-premier Steve Bracks decided to rename it Hamer Hall, as a lasting memory to a man who had changed the course of Victoria.

But Hamer Hall has many fathers and one mother. Its story began in 1942, when Sir Keith Murdoch father of Rupert, husband of Dame Elisabeth, then head of the Herald and Weekly Times group, and chairman of the National Gallery of Victoria asked a committee of trustees to draw up a 50-year plan to redevelop the gallery, then squeezed into the State Library on Swanston Street.

They decided the best option was to build a new gallery south of Princes Bridge, on the site of Wirth's Park, a popular entertainment area. Albert Dunstan was premier of a Country Party government; he had little interest in the arts or Melbourne, but agreed to reserve the land.

Then Melbourne's music-lovers wanted in on it. Margaret Sutherland, the spirited composer, led a committee that collected 40,000 signatures asking for not just an art gallery, but a "Combined Arts Centre": a 1000-seat theatre, lecture hall, recital studios and courtyard restaurant.

John Cain snr, as head of a Labor government, passed legislation in 1946 reserving Wirth's Park for a national gallery and cultural centre. But it was only when Henry Bolte led the Liberals to power in 1955 that talk gave way to action. Bolte, too, had no interest in the arts, but he wanted to show he would govern for all. He decided to build the National Gallery, and start planning the rest.

Architect Roy Grounds was commissioned to design the gallery at the southern end of the site, on solid rock that was once the cliff overlooking the deep Yarra gorge. There were rows over his design, but the building went up smoothly. When the gallery opened in 1968 to widespread acclaim, Bolte was ready for stage two.

However stage two was not ready for him. The design changed constantly to meet the needs of different users.

In 1966 the cost was put at $11.76 million, but a year later that rose to $27.5 million. Some bits were trimmed, and in March 1969 the premier unveiled a new $24.3 million design, to be built by 1976.

That too proved illusory. Soil testing revealed a site, in one consultant's words: "beyond belief . . . the site is underlaid by soft ground and Coode Island silt. Below the silt is gravel, which forms the old bed of the Yarra, and below that, the basalt rock." And the silt was so acidic it could corrode steel foundations.

Bolte left it to Hamer, Grounds, and Kenneth Myer, long-time chairman of the building committee, to find a solution.

Grounds finally decided to enclose the entire building in a vast underground tub, of concrete a metre thick, surrounded by a protective rubber membrane.

The tub sat in steel pylons reaching all the way down to the bedrock, with electric currents flowing down the pylons to neutralise the acid.

Work finally began in 1977 but not for long. Drillers digging a lift well hit an aquifer, which flooded the site. Norm Gallagher, as head of the Builders Labourers Federation, made the site an industrial relations nightmare.

But Hamer's dedication to the project never wavered, though he agreed to downsize the spire as a cost-saving measure. (Jeff Kennett as premier reinstated the original design). In her history of the Arts Centre, A Place Across the River, Vicki Fairfax writes that Hamer's role in the project was critical: "It is unlikely that without his sustained personal support, it would have had the form . . . it did."

A lover of classical music, Hamer also founded the Victorian College of the Arts and later chaired the Victorian State Opera. His hall is a fine tribute to a broad-minded, generous man who exemplified long-term thinking and tolerance.

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Construction inquiry. Why is building so expensive?

VICTORIAN Premier Ted Baillieu's campaign for an inquiry into construction costs and productivity has finally paid off. The Council of Australian Governments will appoint a panel to review the industry, with wide terms of reference, including workplace relations.

But in a significant shift, the review will be carried out by "three eminent independent people", as yet unnamed, rather than by the Productivity Commission. Unions opposed giving the commission the role, accusing it of bias.

Instead, the panel will be appointed by COAG so appointees will require bipartisan agreement from the Labor federal government and Liberal state governments and comprise people with "relevant legal, industry, workplace relations and economic expertise".

It will report back this time next year after examining:

. The changing market structure of the construction industry, including openness to foreign suppliers.

. The cost of compliance with regulations.

. The impact of taxes and other charges.

. The roles of skilled labour supply and shortages, industrial relations and project management.

Other issues such as allocation of risk, availability of finance, and new technology.

Mr Baillieu said he would have preferred a Productivity Commission inquiry but the terms of reference were satisfactory and its value would depend on who sat on the panel.

"We want to ensure that the three of them are experienced, and they are independent, and they don't have any vested interests," he said. Victoria would oppose unions having a representative on the inquiry.

The timetable envisages the panel being appointed next month, with a secretariat of Commonwealth and state officials set up by September. A discussion paper would be released by the end of the year, and a final report delivered by July 31 next year.

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Stevens thinks things are great, but in Victoria...

VICTORIAN business has sent out a mayday call, warning that the state's economy is deteriorating.

A new business survey reports that conditions have slid to their worst levels since 2009, and are expected to get worse in the coming year.

As Reserve Bank governor Glenn Stevens talked up the economy at a lunch in Sydney, the quarterly survey by the Victorian Employers Chamber of Commerce and Industry (VECCI) and the Commonwealth Bank found a very different message coming up from ground level, in Melbourne and regional towns alike.

The 300 or so employers surveyed said conditions were the worst since the global financial crisis. Sales, profits and business investment were all at their lowest level since March 2009. The only growth was in wages and labour costs, they reported.

Forecasts for 2012-13 were even bleaker. For Victoria, only 9 per cent forecast stronger growth in 2012-13, while 61 per cent tipped growth to weaken.

For Australia, they were only slightly less pessimistic: 13 per cent predicted the economy would improve while 51 per cent expected it to weaken.

VECCI chief executive Mark Stone was almost apologetic, suggesting the results might have been affected by "uncertainty due to global instability (and) . . . the introduction of the carbon tax on July 1". But he said it did reflect recent conditions and urged the federal and state governments to give a lead by:

. Lifting investment in productivity-enhancing infrastructure projects, such as the East-West Link.

. Reducing "unnecessary red tape stifling small business competitiveness".

. Helping more Victorian firms get into export markets.

The survey highlights the reality that Australia is a two-speed economy, growing mostly in the minersphere mining and industries dependent on it. Deloitte Access Economics forecast this week that in the next five years Victoria and the rest of the south-east would grow at barely half the pace of Queensland, Western Australia and the Northern Territory.

"The bulk of the evidence suggests Victoria's slowdown will be modest, with the dangers of its housing setback contained without wider damage," Deloitte said. It predicted that the state's economy would be rebooted by solid growth in consumer spending, sharply rising exports and a housing recovery from late 2013.

Others are less confident. BIS Shrapnel chief Frank Gelber has urged the state government to bump up infrastructure investment, to make it a driver of growth, rather than cut it as planned.

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We agree on most things, right?

THE winner in Saturday's byelection was the party that didn't stand. The Liberals stood back to watch as Labor and the Greens fractured the alliance that is the alternative to them, with neither winning a real victory.

Labor held the seat, and with it came the end of the era when the Greens could expect preferences to favour them. Yet at the end of counting on Saturday night, Labor's vote was down 2.3 per cent on first preferences, and 4.8 per cent on the two-party-preferred vote. Melbourne was a safe Labor seat for 100 years, yet on Saturday Labor won just a third of the vote.

The Greens' vote rose by 4 to 5 per cent on both measures, but they lost again in an election they had expected to win. The results confirmed that preferences are now working against them. Without preferences, the Greens will not win lower house seats in future. Without seats, they will lose momentum. Without momentum, they will revert to the fringes.

It was a weird result. As of Saturday night, only 66 per cent of the voters had cast a vote, and 8.5 per cent of those were informal. In 2010, 84 per cent of Melbourne's electors cast a formal vote; this time, it will be around 64 per cent. One can assume that most of the absent 20 per cent would have voted Liberal: so had the Liberals stood, Labor's vote would have been lower still.

The Liberals must have been left chuckling when NSW Right powerbroker Sam Dastyari attacked the Greens his government's partners as loopy extremists akin to One Nation. The only thing voters can conclude from that is that the Labor-Greens alliance is a mismatch of enemies, an unstable partnership bound to fail.

All three parties need to step back and take a look at how they relate to each other. The Liberals dominate the federal scene, but their lead is brittle when the polls show half their own supporters want Malcolm Turnbull to replace Tony Abbott as leader. And while Ted Baillieu may have no plausible rival, his own polls are worrying for a first-term government that should be on its honeymoon.

Baillieu has enemies to the left and right, but fewer friends than he deserves when his government is mostly making sensible decisions. A prime example is its decision to reopen New Street, one of Brighton's main roads, by installing relatively cheap boom gates. It rejected the two bad options: to leave a main road closed, as Labor did, or to put in an expensive underpass, as some locals wanted. You just wish it would apply the same common sense by revisiting its excessive TAFE cuts and scrapping its wasteful policy to put two security guards on every railway station.

But, of course, Labor and the Greens can't praise any decision by the Baillieu government, because we seem to have a new rule that oppositions must oppose virtually everything a government does. The only Gillard government policy that Abbott supports is to send soldiers to fight in Afghanistan.

My thesis is that Australia, and Victoria, cannot afford the degree of political partisanship we now have. The centre needs to be strengthened. In reality, most of us agree on most things. We need political structures that reflect that.

There will always be partisanship: politics is a contact sport. But we need to create a second avenue, in which big long-term issues are dealt with on a bipartisan (or all-party) basis, so that business has certainty about future policy frameworks and can plan investments accordingly.

Last week I wrote on the impasse on infrastructure investment. We want better roads and public transport, but, egged on by whoever is in opposition, we oppose every means of paying for them: higher taxes, higher debt or user charges such as road tolls.

Past governments dealt with this by handing such issues to all-party committees to resolve on the understanding that they suspend hostilities on the issue and work for a joint decision, rather than split on party lines. It offers oppositions a partial share of power, so that decisions with big consequences are made by weighing up long-term costs and benefits, not short-term political ones.

Climate change is another issue on which a bipartisan approach is needed. Whatever system we adopt to tackle it, it will work only if business can trust future governments to honour commitments made by the current one.

The Liberal Party supported a carbon price under John Howard, Brendan Nelson and Turnbull as leaders. Climate change requires a long-term bipartisan policy so business can invest with confidence that the goalposts will not be moved. Kevin Rudd wasted his opportunity by trying to use the issue to divide the Liberals, ultimately causing his own downfall.

Australia deserves better. We won't get it from Abbott, who is partisan to the core. We won't get it from Gillard or Rudd either. But we could get it from Baillieu and Daniel Andrews. They could show the next generation of Australian political leaders the benefits of taking some big, politically difficult issues out of partisan politics to get the decision right.

Where would the Greens fit into this? In Tasmania and the ACT, they are working well in coalition or partnership with Labor governments, and accept compromise as normal. In Victoria, they seem to stand alone. Should they be islands of purity, or build bridges to become part of the main game?

Their model should be Germany where the Green "realos" (realists) wrested control from the "fundis" (fundamentalists) to became part of the Schroeder government which transformed the country and form state governments with both sides. Compromise is not a dirty word.

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Plain Packs: Dominican Republic v Australia

THE international legal campaign against Australia's controversial plain cigarette packaging laws is spreading, with a third country joining in a formal challenge at the World Trade Organisation.

The WTO announced overnight that the Dominican Republic, a leading cigar exporter, had joined Honduras and Ukraine in claiming that the plain packaging legislation breached Australia's commitments under global trade rules.

The case is shaping up to become the biggest trade dispute Australia has ever faced as a defendant. And while anti-smoking campaigners see it as driven by the big tobacco companies - Ukraine has not exported tobacco to Australia for years - it has the potential to overturn the anti-smoking law.

The WTO was set up to spread free trade, and defendants rarely win cases before its disputes panels. In recent times WTO panels have ordered Australia to end export subsidies (the Howe Leather case), and scrap state laws or quarantine rules to open our markets to Canadian salmon and New Zealand apples.

But the plain-packaging case is an unusual one. Observers say part of the interest in it is because it has significant implications for interpreting the Agreement on Trade Related Aspects of Intellectual Property Rights (known to its friends as TRIPS), signed in 1995 as part of the Uruguay Round.

The Department of Foreign Affairs and Trade has taken the unprecedented step of setting up a special branch-level taskforce to handle the WTO case and a second challenge, brought by Philip Morris Asia, which claims the laws breach Australia's investment treaty with Hong Kong. That case is now well advanced. A three-member disputes panel was set up in May under United Nations rules, to arbitrate on the cigarette company's claim that the plain-packaging law expropriates its intellectual property by forbidding it to use its own packaging.

Australia in reply pointed out that Philip Morris transferred ownership of its Australian arm to a Hong Kong-based subsidiary some 10 months after the legislation was announced. Critics say the move was a blatant example of ''forum shopping''.

The case before the WTO is still in the preliminary stage of consultations. Australia has refused to give ground, so the original complainants now have the option of requesting a disputes panel. That can take up to a year, and the loser then appeals, which can take another few months before there is a final ruling. Compliance with the ruling can take longer still.

The 12 countries that have joined the WTO consultations have a range of motives: three are neighbours of Honduras. Some, such as Indonesia, are significant tobacco producers; Indonesia's biggest tobacco maker Sampoerna, now part of the Philip Morris empire, withdrew its clove-flavoured Kretek cigarettes from Australia in 2009 rather than display the ghoulish warnings required by existing packaging laws.

But New Zealand has joined the case because it is considering similar legislation to Australia, and the European Union, which has interests on both sides, also signed up to the case as a neutral observer.

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Ford killed Ford

THE Ford Falcon is limping to its grave. Ford's head office is not going to save it. Without a sudden reversal of taste, Australia's car buyers are not going to save it. And given all that, no future government will save it.

In the first half of 2012, Ford sold just 9083 passenger Falcons and 3304 utes. Passenger sales were down 25 per cent on last year, which in turn was down 65 per cent from 2005. This has been a long death; the buyers slowly turned away.

It used to be different. Once, the Falcon was Australia's top-selling car, a family icon. For decades, manufacturing the Ford Falcon was Melbourne's biggest industry. Even in 2003, the Falcon family sold 105,000 vehicles 97,000 in Australia and 8000 as exports with an Australian design and 80 per cent Australian content.

Then our tastes changed. Oil prices rose. Families shrank. Business became more cost-conscious. And the dollar started its immense rise. The Falcon was a big petrol guzzler, and they went out of fashion. By 2010, Falcon family sales were down to 44,000. This year, they will be barely 25,000.

Some of that went to its cousin, the Territory. But even the Territory has lost ground as the high dollar made its foreign rivals much cheaper and put export markets out of reach.

Ford's US bosses failed to be decisive. They wanted their cars to have global platforms, yet the Falcon's rear-wheel drive was unique to Australia. They would not allow it into the big export markets that underpinned Holden and Toyota. And they kept it as a big powerful guzzler when tastes changed.

So were the federal and state governments wrong to throw Ford a lifeline in January? The Gillard government pledged $34 million, and the Baillieu government a secret amount, so Ford would produce one more model here, and keep manufacturing to the end of 2016.

Arguably, it was a bad call. But that money is earmarked to develop the next Falcon and Territory, not to support the current ones. And there are still 55,000 Australians employed in car manufacturing, 30,000 of them in Victoria.

Holden and Toyota are better placed to survive. They have good export markets. The Commodore and Camry/Aurion are selling better than the Falcon, and Holden's Cruze has been a hit. Hopefully they can sustain the industry.

Unless the dollar falls, unless our tastes change, unless Ford's global strategy changes, the next Falcon will be the last. Its end will send shockwaves through Melbourne, Geelong and the car parts industry but not as badly as it would have a decade ago. This has been a long, slow farewell to our old icon.

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Getting the roads we need. Let's talk about it.

WHAT would you think if the state decided to sell the Eastern Freeway, West Gate Bridge, or the Western Ring Road to become privately owned toll roads - and invest the revenue from the sales to build better road and rail links?

How would you react if, in future, there were no new freeways, only toll roads, so that the cost of building them falls entirely on users, rather than on taxpayers?

Would you agree if the state decided to give up its AAA credit rating and pay higher interest rates so that it could borrow more money and build the really big projects, such as giving Melbourne an east-west link or a metro rail network like that of Paris or London?

And would you object if the government built a smaller toll road to the port for trucks and commercial vehicles only, with the rest of us banned so that we don't clog it up?

If you haven't thought about all this, better start now. These radical ideas are proposed by federal Treasury, Infrastructure Australia and the private sector to solve the problem of how to finance the $700 billion of infrastructure Australia will need over the next generation.

These ideas are not Baillieu government policy; far from it. Treasurer Kim Wells says the state is considering all options (toll roads) for funding future freeways, but has no plans to sell existing freeways.

Still, that doesn't rule it out. And while the Kennett government took a bit of flak when CityLink turned existing freeways into toll roads, that didn't cost it any seats.

The Gillard government too hasn't endorsed these ideas. Infrastructure Australia chairman Sir Rod Eddington wants governments to start a community debate, but Treasurer Wayne Swan and Infrastructure Minister Anthony Albanese have been too shy to say a word about them.

Some think governments would rather sell off assets remote from our daily lives: ports, for example, although that has its own problems. And you can understand why any politician would be reluctant to suggest that we pay to drive on roads that we now use free of charge.

Similarly, it would take a brave politician to argue that Victoria should double its debt to build the infrastructure we need, rather than accept congestion and poor services as the price of a AAA credit rating.

But Infrastructure Australia, and their advisers on the infrastructure finance working group, are right: this is a debate we have to have. These are issues that touch on our daily lives: the taxes and charges we pay, and the efficiency and convenience of the cities we live in.

Yet our knee-jerk reaction is to oppose all this. Yes, we want better infrastructure, but we're against having to pay for it through higher taxes. We're against governments taking on higher debt to pay for it. And we're against having to pay for it through user charges such as tolls.

The debate needs to move beyond these prejudices. If we don't, our politicians will remain trapped within them, and we will not get the new infrastructure we need. Anyone who wants Melbourne to have better roads, or a metro rail system, needs to start thinking about how they should be paid for.

A good place to start is the refreshingly frank report of the infrastructure finance working group, Infrastructure Finance and Funding Reform, at www.infrastructure.gov.au. Chaired by Jim Murphy, deputy secretary of federal Treasury, the group brought together infrastructure and finance experts from the federal government and the private sector - but no one from the states, which allowed it to be very candid about the options.

It argues that the states have no more room to borrow without losing their AAA credit ratings. In Victoria, John Brumby and Ted Baillieu have pushed state debt almost to the limit for AAA-rated borrowers. Even to keep up existing infrastructure spending after 2012-13, Baillieu would have to tax more, or cut spending on other priorities, or bust the AAA limit and accept a downgrade and higher interest rates.

Clearly, none of those are politically palatable options, but the working group urges governments to think hard about the last one. If the benefits of having the infrastructure outweigh the benefits of having a AAA rating, then it makes sense to borrow and build. The group notes that federal government transport economists estimate that its current infrastructure projects will deliver a return of $2.65 on every $1 invested.

In the past, roads such as CityLink were built as private toll roads, but will ultimately revert to state ownership. The report suggests this be reversed. After new toll roads in Sydney and Brisbane fell far short of targets, superannuation funds see the privatisation of existing roads as much safer investments. The report argues that the states should sell them, use the money to build new toll roads, preferably as joint ventures, then once they're running smoothly, sell them and build more.

The report makes one ugly call. Believing the states will be reluctant to embrace toll roads and asset sales, it wants the federal government to coerce them into doing so, by funding new road projects only if they are built as toll roads. To me, giving Canberra more power is not progress.

Another concern is that its blueprint envisages a road network with multiple private sector owners, yet operating as one flowing entity. This suggests serious challenges that the report does not explore.

But the working group and Infrastructure Australia have put this on the table, as one of the big issues Australia must face up to. If the politicians are reluctant to do so, it's our job as a community to take it up, to think past the stereotypes and simplicities, and face those hard decisions. If it were our choice, what would we do?

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