Saturday, March 31, 2012

Ballarat gold standard for growth

IN AN extraordinary change of pace, Ballarat is now growing faster than the Gold Coast, as commuters in search of cheap housing are descending on Victoria's regional cities to make their new homes.

For perhaps the first time since the gold rush, Ballarat is outgrowing Melbourne and is now the fastest-growing city in Victoria. Last year it added 1867 people, a growth rate of 1.9 per cent the equal third-fastest of Australia's top 20 cities.

V/Line reports that more than a million passengers a year are now taking the train from Ballarat. Passenger numbers on the line have swollen 126 per cent in five years, thanks to the regional fast rail program.

Ballarat mayor Mark Harris says the duplication of the Western Freeway and the new trains have kicked the city's growth rate up several gears, and not everyone likes it.

"We'd been growing at a half to 1 per cent a year for most of my life and people were used to that. It's been challenging for us to have growth at this pace. Our infrastructure has fallen behind and our unemployment rate is above-average," he said.

"My aim is to have jobs in Ballarat and for the city to grow independently of Melbourne. We've set aside land for an extra 30,000 residents in the west, but we're putting in job zones as well."

House prices in Ballarat are far cheaper than in Melbourne, providing a big attraction for young families. The same is true for Bendigo, Geelong and the Latrobe Valley, which are all seeing rapid growth for the first time in decades.

V/Line figures show passenger traffic on the four lines has more than doubled since 2006. Spokesman James Kelly said it has no more rolling stock to meet the growth in demand, and worries that peak-hour passengers might soon have to stand from Ballan.

Last year the four cities between them added 7500 people, or close to 10 per cent of the state's population growth. But growth was slower in Warrnambool, Mildura and Shepparton, which are out of commuting range.


Friday, March 30, 2012

Swan's foolish surplus fetish

WAYNE Swan's determination to deliver a budget surplus, regardless of the state of the economy, is seriously reckless. Labor has chosen to risk sending most of Australia into recession in order to keep a promise it should never have made.

No Australian government has ever proposed such a huge withdrawal of spending from the economy. On his own published figures, Swan plans to take us from a deficit of $37 billion this financial year, perhaps more, to a $1.5 billion surplus in 2012-13.

On Treasury's estimates, that would take at least 2.6 per cent of GDP out of the economy in 2012-13. That is equivalent to shutting down the entire electricity industry, all arts and entertainment venues and all airline travel for a year.

Why on earth would you do this in an economy that has added just 10,000 jobs in the past year, where the growth rate is just 2.5 per cent, and most of that is in mining and related industries, and with Victoria and south-eastern Australia on the verge of recession?

What Swan is planning for 2012-13 goes far beyond any previous budget cuts. In 1986, the hairshirt Hawke-Keating budget cut away 1.1 per cent of GDP. The first Howard-Costello budget in 1996 took out 1 per cent of the economy.

Labor now pledges to deliver cuts two to three times as large as those landmarks of fiscal austerity - at a time when most sectors of the economy are already going backwards or sideways under pressure from the high dollar and low demand.

Swan says it will be OK because ''the economy is moving back towards trend growth''. Not if you take away 2.5 per cent of it, it won't be.

We heard the same claims made in Britain when its Conservative/Liberal government slashed public spending and forecast that the economy would bounce higher. Instead, it hasn't grown for 15 months and unemployment is now at 8.4 per cent.

Just do the sums. Suppose Treasury forecasts trend growth of, let's say, 3 per cent in an economy when it's already taken out 2.6 per cent of activity. That would imply that it thinks growth would have been 5 to 6 per cent had the budget bottom line remained unchanged. In the position we're in now, that is ludicrous.

Swan's economic case for this hara-kiri is, first, that the economy is ''on the way back up''; second, that it will create room for the Reserve Bank to cut interest rates; and third, that it will ''send a strong message of confidence to investors around the world''.

The first claim is clearly wrong. The second is misplaced: the Reserve already has plenty of room to cut interest rates, given low inflation and low growth. It doesn't need an excuse; it just needs the honesty to admit it was wrong.

And the third case is counter-productive. It is because investors are so confident in Australia that they have driven our dollar to levels that have made Australian producers uncompetitive. That's why Victoria has lost 42,000 full-time jobs since last April.

This budget is Labor's last chance to get it right. Its complacency about the real state of the economy is breathtaking; 60 of its 72 MPs are in the south-eastern states, which are being flattened to allow the mining boom to go full speed without triggering high inflation.

The focus of this budget should be on targeting a stimulus to recharge the south-east, including south-east Queensland.

The risk is that, instead, it will end up with most of Australia in recession, the budget still in deficit and Labor losing power in a landslide.


Company tax is weak because company profits are weak

IF AUSTRALIA never had a recession in 2008-09, and is the economic envy of the Western world, as we are told, then why is it so hard for the federal government to get its budget back in surplus?

Wayne Swan says it's because tax receipts are so weak. Tony Abbott says it's because Labor is addicted to spending. Who is right? It depends which figures you compare. If you take the figures for 2007-08 and 2011-12, then both are right.

The midyear forecasts project spending in 2011-12 to be 24.8 per cent of GDP, up from 23.1 per cent four years earlier.

The forecasts expected to slash that to 23.6 per cent in 2012-13, which now looks understated, and would still be above the level Labor inherited.

But is that surprising? After all, unemployment has grown, and the carbon tax and mining tax revenues are all earmarked for new spending. The bills for healthcare, pensions, aged care, all keep rising.

Swan wants us to focus on the fall in revenue. In the midyear update, cash revenue was projected to be 22.6 per cent of GDP in 2011-12, down from 25.1 per cent in the last Costello budget. That's a big fall, about $37.5 billion a year. Even in 2012-13, the government's take was projected to be 23.9 per cent of GDP, which Swan now says will be revised down.

Swan spent a lot of time yesterday explaining how the company tax take had fallen in the mining boom, because mining companies were investing so much depreciation knocked off half their tax bills. Capital gains tax plunged because the GFC left investors and firms with capital losses to write off.

All that is true. But the main reason company tax revenue is weak is that company profits are weak.The real problem is that since 2007 the economy has grown just 2 per cent a year. And it's hard to get back to surplus in a weak economy.


Wednesday, March 28, 2012

Advice from Dow Chemical - manufacture success

DOW Chemical's global president and CEO Andrew Liveris has called on Australian governments to scrap their hands-off policy towards the embattled manufacturing sector and develop partnerships with industry to use Australia's skills and resources to make high-value products.

Mr Liveris, co-chairman of Barack Obama's Advanced Manufacturing Partnership and author of Make It In America, a blueprint for revitalising manufacturing in the US, has returned to his homeland with a similar plan to rebuild manufacturing in Australia.

Launching the plan yesterday at the University of Technology, Sydney, he said Australia should change policies to aim for "a balanced, sustainable economy that adds value to resources", rather than one dependent on minerals and energy.

"Australia's current growth trajectory is unsustainable," he said. "Internal disparities will become exacerbated, and its global competitiveness will decline because other countries are maximising their value-adding capabilities.

"Passivity is not a strategy for growth."

The plan, which Mr Liveris will present tomorrow to Treasurer Wayne Swan, calls on governments to:

Develop a plan to encourage "advanced manufacturing" here, creating the right environment for manufacturing that is export-competitive, dependent on innovation, and on partnerships with researchers, government and other firms.

Increase investment in innovation, by lifting incentives for venture capital, co-operative research centres, and the "D" end of R&D, to bridge the gap between Australia's world-class research effort and its low rate of commercialisation.

Require gas producers to reserve a big share of new gas fields for domestic use at well below world prices, making Australia's huge gas reserves a feedstock for value-added industries, which would have a global comparative advantage.

The plan, titled The Dow Chemical Company Advanced Manufacturing Plan for Australia, also urges new initiatives to increase the focus on science and mathematics in schools, and partnerships between business, universities and government to develop advanced manufacturing.

"Australia has all the building blocks of a global leader, including a vast quantity of natural resources [and] a highly skilled, talented workforce," he said. "Australia has the ingredients, but no recipe.

"We believe the government has a big role to play, not by protectionism, but through focused public policies. The current environment does little to address the challenges associated with commercialising new concepts here, and driving the creation of new markets."

Mr Liveris sharply criticised Australia's energy policies, warning that the carbon tax and renewable energy targets would damage competitiveness. He urged the government to focus instead on low-cost savings through greater energy efficiency, increased use of gas, and cleaner coal.

He urged state governments to reserve part of all new natural gasfields for domestic use, as Sir Henry Bolte did with Bass Strait, giving companies cheap gas to build globally competitive downstream industries.


Tuesday, March 27, 2012

Irish nightmare: Prepare

MARIAN Wilkinson's absorbing Four Corners report this month on the collapse of the Irish economy was a powerful reminder of two fundamental truths. Booms tend to end in busts. And the busts do more harm than the boom does good.

It could be a valuable lesson for the Gillard government - which desperately needs to reconnect with the voters and economic reality - for its advisers, for the Reserve Bank, for the federal opposition, now in effect a government-in-waiting, and for all of us.

A day after Queensland's electoral massacre, Treasurer Wayne Swan began his weekly note with another enthused spiel on how good things are - ''an economy that is growing solidly, low unemployment, very low debt, sturdy public finances, and contained inflation'' - and above all, '' a resources sector that is going from strength to strength''.

''New (resources) investment has risen from $47 billion in 2010-11 to $95 billion this year, and will rise again to an expected $120 billion in 2012-13'', he said, momentarily confusing facts and forecasts. ''The boom in investment isn't surprising given the boom in exports ? (which) are likely to reach nearly $200 billion this financial year, and climb to around $258 billion in five years.''

And all this is good for us? Remember the property boom in Ireland, and how rich it made the Irish feel - until it bust?

Our boom, too, is likely to bust: most booms do. The bigger the boom, the bigger the bust.

Don't worry about it, officials say. This time is different. This boom will last for years, maybe decades. The growth of China and India will see to that.

Uh-huh. Take a look at the graph, produced by the Reserve Bank. The terms of trade is a measure of export prices, expressed as a ratio to import prices. As you see, this is not the first big boom in our export prices. There was one in the 1920s, which ended in the Great Depression. There was one in the Korean War, which ended with 20 per cent inflation and recession in 1952-53.

As the graph shows, those booms ended with a hard fall, and prices then resumed their long-term trend decline (the blue line slanting downwards). This is our third export price boom: how will it end?

Frank Gelber, director of Sydney economic consultants BIS Shrapnel, has been thinking about that. BIS Shrapnel has had an outstanding forecasting record, winning the Palme d'Or as the best tipster in The Age midyear survey seven times since 1993.

Gelber has looked on with alarm as mining investment has risen from 1 per cent of GDP to 4.4 per cent last year, and perhaps 7 per cent by 2012-13. He sees at least five years of strong mining investment ahead. He has seen the Reserve Bank jack up interest rates in response, to rein in the economy so that this boom doesn't lead to an inflationary breakout. And he's seen the dollar soar to its new peaks in response to the mining investment, the high interest rates and the uncertainty over the big Western economies.

But if mining investment is booming by 50 per cent a year, and the economy's growth is held to slightly above trend, that means other sectors of the economy have to shrink to make way for it. Long-established businesses are dying, factories closing, jobs going overseas - all to accommodate a boom that is only temporary and will give way to a bust.

''The boom will end when the supply of minerals catches up with the demand,'' Gelber says. ''I don't know when that is. We've now locked in projects that will underpin investment activity for the next five years, so the question is: what are the probabilities that it will proceed beyond that?

Gelber and BIS Shrapnel estimate a 25 per cent probability that the boom won't continue once these projects are built. They estimate an almost two-in-three probability that the boom will end within 10 years, and 90 per cent that it will be over within 15 years. Whenever it ends, he warns, Australia faces a major recession.

Why? Because the real boom is not in mining, a capital-intensive sector, but in mining investment, which reaches out far more into the economy. Treasury deputy secretary David Gruen estimates that while mining is only about 10 per cent of GDP, the ''mining-related'' economy is now about 20 per cent of GDP. That puts far more jobs at risk when the boom goes bust.

''Half of all the office space in Perth is now tied up with people servicing mining investment,'' Gelber says. ''The same is true for a quarter of the office space in Brisbane. Think of all the jobs in the construction sector, the back-line employment. The fall in investment will see a major decline in growth.''

But can't we then just bring back the industries now shrinking because of the high dollar? No, says Gelber. ''We're burning our bridges. We are losing the skills, the equipment and the markets. When the Australian dollar collapses, we won't have the industries any more. We will have to go through a total reversal of the process of structural change we are seeing now. We will see a big drop in our standard of living.''

What can we do to avert it? Gelber is pessimistic. The mining tax has been neutered. He sees value in governments investing in ''productivity-enhancing infrastructure'', such as the NBN, and in ''soft infrastructure'' such as research and development, and skills training.

But he warns: ''This is a long war of attrition.'' Firms in trade-exposed industries will be fighting for survival. Gelber wants policy makers to grasp that this boom, too, will end, and Australia will need a very different economy then. ''We've got to have an eye to what will happen after the mining boom. I'm aghast at how we are walking over the cliff, like lemmings.''


Saturday, March 24, 2012

High dollar. We're the second-most expensive place to do business

THE high dollar is ravaging the competitiveness of Australian business. Global consulting firm KPMG reports that Australia has become the second most expensive place to do business among the major economies, behind Japan.

In its survey of global business costs, Competitive Alternatives, KPMG finds that since 2010, costs have risen more in Australia than in any other country. Most of that is due to the sharp rise of the Australian dollar against the US dollar, which has pushed up costs in every area.

Of the 113 cities surveyed, Melbourne is now the ninth most expensive place to do business, across areas ranging from manufacturing to back office services and research and development.

Sydney is now the fifth most expensive place to do business, more expensive than New York. Among the 54 big cities in the survey, only Tokyo and Osaka put more strain on corporate profitability.

In the most extraordinary finding, Australia's electricity prices have become the most expensive of any major economy, by a long way. Electricity charges to firms surveyed were more than double those in the US and Canada, and more than 40 per cent higher than in Japan.

The Bureau of Statistics reports that in the five years to December, electricity prices shot up 79 per cent in Sydney and 74 per cent in Melbourne.

The original KPMG survey in 2010 found Australia was the third cheapest location for business of the nine Western economies surveyed.

''The Australian dollar's strength is the key driver behind the changed index results,'' KPMG Australia said. ''Australia is experiencing a once-in-a-generation resources boom that ? has boosted national income and turned around the balance of trade. A corollary has been the strong appreciation of the $A that has affected local firms' competitiveness.''

The report's authors note that ''if the currency were to decline to [the level] in the previous report [March 2010], the rankings for Australia would improve by at least 50 per cent''.

The report surveyed the US, Japan, Germany, Britain, France, Italy, Canada, Australia and the Netherlands, along with China, India, Russia, Brazil and Mexico.

Overall, China was the cheapest location for global manufacturing, and India the cheapest for global service industries. Of Western countries, Britain is now the cheapest location for manufacturing and services, and Manchester the cheapest city. Canada was the best for IT and the Netherlands the best for research and development.

In virtually every sector surveyed, Australia was the the most expensive location outside Japan. The only exceptions were in manufacturing green energy products, in which Australia was the most expensive, and digital entertainment, in which it was the fourth most expensive.

In the car industry, the higher dollar has made Australia's wages the third highest behind Japan and Germany.

One limitation of the report is that it assumes that raw materials cost the same the world over. For example, it also ranks Australia the second worst location for food processing, due to the same mix of high wages, transport and utility costs. In the real world, access to cheap farm-gate produce offsets that.

Against comparable US cities, Sydney was uncompetitive as a location in every sector surveyed. Sydney was the most expensive of any of the 113 cities for biomedical research and development, clinical trials and software design.

Australia had many strengths, including the top rating for ''overall wellbeing'', and high ratings for government, transparency and the rule of law. But often the strengths were not turned to our advantage. For example, Australia ranked second for access to university, but 11th in local graduates. It had the fourth highest public research and development spending, but ranked 10th for commercial innovation.

All four Australian cities surveyed were in the world's 10 most expensive locations. Adelaide (10th) came in marginally cheaper than Melbourne (9) and Brisbane (8), with Sydney (5) bringing up the rear. Chengdu in south-western China was the cheapest location, followed by Chennai, Shanghai and Mumbai.


Friday, March 23, 2012

It'd be a brave PM who pulled the plug on Holden

YOU can have a car industry with taxpayer subsidies. Or you can save taxpayers' money and scrap your car industry. There are good arguments for either policy, but you can't have a car industry without subsidies.

That was the choice facing the Gillard government, and its decision was obvious. Holden is an Australian icon. Its Adelaide plant produces two of the four biggest-selling cars in the nation. It would be a very brave Prime Minister who pulled the plug on Holden.

Why do we have to pay to have a car industry? Because the world does. In Germany, Britain and the US, governments subsidise car plants because they bring not only the jobs of their workers, but far more who make their components, or benefit from the flow-on of all that spending through the economy.

Australia has probably the most open, trade-exposed market of any country in which cars are designed and built from scratch. The average tariff on imports is just 3.5 per cent. In a market of a million cars each year, there are twice as many brands competing as in the US and Japan.

The question is: do we want Australian-made cars to be part of this? Yes, the public says whenever the pollsters ask. Yes, John Howard said when he faced the issue in 1997 and 2002. Yes, Kevin Rudd said in 2008, when he set out the $3.4 billion Automotive Transformation Scheme to roll out support to 2020.

No, the economic rationalists say. They argue that if there is no prospect of Australia's car makers being able to survive without government subsidies, we should cut them off now. In effect, the government will pay almost 20 per cent of the cost of Holden's new models: what other industry receives such support?

That depends how you look at it. Former industry minister Kim Carr used to say Australians pay the cost of a footy ticket a year to support the car industry: $17 a head. That is well short of what we pay to support the mining industry: the diesel fuel tax rebate alone now costs us about $2 billion a year, or almost $100 a head, with far less flow-on to the economy.

Gillard had no choice. Manufacturing is being hammered by the high dollar, and Holden would have left town without support. To let go of Holden would be to say goodbye to manufacturing, and send south-east Australia into an economic maelstrom.

The tough choices are what to do about all the other firms whose profits are being torn to shreds by the high dollar. The answers there are less obvious, but even more crucial.


Wednesday, March 21, 2012

Recovery. Victoria is in danger of missing out

AUSTRALIA will slowly move into a broad-based economic recovery in 2012-13 but Victoria is in danger of missing out, leading forecaster Frank Gelber of BIS Shrapnel predicts.

Unveiling new forecasts in Melbourne yesterday, Dr Gelber predicted that Australia's growth rate would slowly accelerate from 2.2 per cent in 2011 to 3.5 per cent in the 2012-13 financial year. If realised, that would be its best performance for five years.

But there would be two downsides. Interest rates would start rising again, with the Reserve Bank likely to deliver seven rate rises in the next 15 months. And apart from New South Wales, the south-east of the country will continue to struggle.

"The Australian economy is expected to strengthen further on the back of improving consumer spending and continuing heavy investment in the mining sector," BIS Shrapnel said. "However, the recovery is expected to be slow to set in. We expect the increased activity to prompt businesses outside mining to start increasing investment from later this year, after an extended period of underinvestment.

"However, the high Australian dollar, relatively expensive business credit, negative news from abroad, fiscal restraint and political uncertainty domestically will continue to weigh heavily on many industries and regions."

Mining investment would continue to boom, while trade-exposed sectors such as manufacturing, education, tourism and agriculture would continue to shrink. Government would also shrink, while the great mass of other service industries would keep struggling. Victoria would be main casualty.

"We look out two or three years and it's difficult to see where Victoria's growth is going to come from," Dr Gelber told BusinessDay. "We see investment in Victoria falling."

BIS Shrapnel predicts building starts in Victoria will plunge 20 per cent in the two years to 2012-13, while all other states would grow by between 6 and 21 per cent. Housing starts would fall 28 per cent, bringing Victoria back to the pack after years of outperforming the rest, while non-residential building would shrink 10 per cent.

"Victoria has weakened considerably over the past six months. It's lost its drivers of growth," Dr Gelber said. BIS Shrapnel predicts that a big influx of mining construction workers will lift population growth nationally, but NSW and Queensland will overtake Victoria in growth, with even WA coming close.

"There will be a broadening of investment in Victoria, but what is really missing are infrastructure projects," he said. "Investment is the primary driver of growth and Victoria needs better infrastructure to lift its productivity.

"These are things [the Victorian government] could do. But we can't see the next round of infrastructure projects coming through. Victoria is just falling behind the pack."

Dr Gelber hit out at the federal government's pledge to deliver a budget surplus in 2012-13, but said the collapse of its revenue base would see it fail to get there. "Fortunately, they won't achieve it. But they shouldn't even try," he said.

He urged the federal government instead to invest in "soft infrastructure", such as the CSIRO and other forms of research and development, and to take an axe to the jungle of over-regulation that is clogging up business.


Tuesday, March 20, 2012

Our facts have changed. Baillieu needs a narative.

When the facts change, I change my mind. What, sir, do you do?"

- attributed to JOHN MAYNARD KEYNES

WHETHER Keynes ever voiced these exact words is a matter of dispute. What is beyond doubt is that he expressed such thoughts and we remember them because they embody a profound truth. When we find ourselves in a new situation, our ideas must be flexible to respond to it.

Australia is now in a new situation, one unlike anything we have seen before. In the year to December 2011, investment in mining grew by more than GDP did. Mining investment grew by $8.24 billion; the volume of GDP grew by only $7.7 billion.

One industry located mostly in the outback is growing very fast. Most of the rest of the economy, located in the south-eastern cities, where the bulk of Australians live, is growing slowly or not at all.

The main reason our economy has hit a wall is that the Australian dollar has risen to hover around $US1.05 50 per cent above its long-term average of US70?. This has made a wide range of economic activity uncompetitive, forced firms to close and sent tens of thousands of jobs overseas.

Second, the Reserve Bank has set interest rates at levels appropriate for mining, not for the mainstream of the economy. Lending rates for home buyers are now at 2005-06 levels. Lending rates for small business are at late 2007 levels. The economy needs stimulus, yet interest rates are contractionary.

Third, governments are cutting spending to get back to surplus, and cutting hard because revenues have been clobbered by tax losses run up in the global financial crisis, by consumers' caution and by the lack of growth.

Our facts have changed. But our governments, the Reserve Bank and the federal opposition have not changed their minds. What is happening to Australia does not fit the stories each wants to tell us. So for different reasons their policy is to ignore it, and hope that it goes away.

One luminary tells of a recent conversation with a Chinese banker, who gave him an earful of his amazement at Australia's complacency at this threat to our industries. "What is your policy to deal with the dollar at this level?" the man from the world's most successful economy asked with vehemence.

In fact, the banker knew the answer: our policy is to allow Australian manufacturing and service industries to wither, hoping this will "free up" workers to take jobs in mining without causing inflation.

This is not good enough. Our manufacturers are constantly berated with advice that they must be flexible and nimble in responding to challenges. So they do; but it is ludicrous when the advice comes from those who are inflexible in their own job: policy.

Take the dollar. There has long been a consensus in Australia that floating the dollar was a good thing; I too was part of it. The dollar rose and fell over that time, usually between US60? and US80?, sometimes higher or lower. But firms facing trouble could tighten their belts and wait for it to change.

The situation firms face now is very different. Even well-run companies that took tough decisions to adapt to the crisis are now struggling. The dollar has made imports 33 per cent cheaper on the domestic market, and exports 50 per cent more expensive overseas. That is a huge blow to our competitiveness. China would not allow it to happen to its producers, nor would Singapore, South Korea, Taiwan or any other economic success story.

The Bank of Switzerland has drawn a line in the sand; it has intervened in the market to force the franc back below 1.20 to the euro, and keep it there. Central banks can do this because they can create currency. The downside is that increasing the money supply adds to inflation. But the risk of inflation getting out of control in a flat economy is remote.

We need to talk about this. We need to talk too about why Canberra is pledging a budget surplus that will impose a contractionary budget on an already weak economy.

In effect, Wayne Swan is promising us that he will bring down a bad budget that will be the opposite of what Australia needs. And Tony Abbott and his team are attacking him for not promising to make things even worse.

The Baillieu government is in a trickier position. The states have few sources of revenue, and ours is drying up. The Victorian Treasury and its Vertigan review have told ministers they should invest more, but pay for more of it from revenue. And in a normal world, that's the right advice. Victorians need to know that when the state runs a surplus today, it is to invest it in building new infrastructure, not to lock money away in the bank.

Victoria's economic slump into near-recession has been sudden, and due to reasons beyond any state government's control. The government has taken a long time to make decisions, but it is more important that it makes the right decisions rather than fast ones. The Baillieu team has been in power just 15 months. It did not expect to win government, and it came in with a lot of baggage from opposition, most of which it has slowly cast off. It now supports myki, the regional rail link and the desalination plant. Eventually it will abandon its silly policy to put armed guards on every railway station.

Its real problem is that it has yet to decide why it's there. It needs to have a credible central policy that tackles the real problems Victoria faces. It needs to have a story to tell, and be willing to go out, meet people and tell it.

Why was it elected? Primarily because transport infrastructure had not kept up with the demand for services. Building that infrastructure should be its policy. That would lift productivity, growth and jobs. The facts have changed, but that policy would fit them.


Saturday, March 17, 2012

Has Victoria bottomed, or is it sinking?

MATT Hampton can drive around his home town of Nyora, in Gippsland, and point with pride at sheets of metal he made while working at BlueScope Steel's Hastings plant.

Hampton, 38, worked for 15 years at BlueScope, until late last year when he was ordered into a room and offered one of hundreds of redundancies announced by the company in August. He decided to get out while "the going was good".

"We were a bit dumbfounded," Hampton says. "Nobody ever saw that kind of thing coming."

But since finishing in October, Hampton has looked for work in his local area without success. Some of his former colleagues have tried their hands at small business, some have tried the mines, some are still "twiddling their thumbs".

Hampton plans to look for work in other parts of the state or outside the state altogether. "I've lived in Victoria all my life and I love Victoria, but if I have to move to another state, so be it," he says. "It's the state that's going to suffer."

The state, it seems, is already suffering.

In recent weeks, Victorians have been bombarded with a string of bad news, as the state tries to survive and prosper in the shadow of a mining boom that, while physically concentrated in a few pockets of the country, is reshaping the national economy.

In the six months to February, Victoria lost a net 27,700 jobs, according to the Australian Bureau of Statistics. In the year to February, Victorian unemployment has risen from 4.8 per cent to 5.4 per cent, 0.2 percentage points higher than the national rate.

The latest national accounts released last week suggest Victoria is close to joining South Australia and Tasmania in recession, with spending in the state declining 0.4 per cent in the second half of 2011.

On Thursday, the Baillieu government revealed a plunge in taxation revenue, driven by the damp consumer confidence that is hurting retailers and a housing market now receding after defying the gloom for so long.

Meanwhile, the stunning strength of the Australian dollar, a byproduct of the boom, is punishing Victoria's still-substantial manufacturing industry, eroding the retail sector, deterring foreign students and tempting tourists away from domestic destinations.

For the first decade of this century, Victoria consistently outperformed the other south-eastern states. It built more new homes than any other state, providing affordable new homes on its fringe, particularly in the west, and it attracted the largest share of foreign students.

Melbourne became seen as Australia's cool city, attracting tourists and interstate migrants, and it expanded rapidly in high-value services sectors, such as finance and the professions.

But in the past year, those sources of growth have shut down. Housing starts have shrunk from 16,000 in the September quarter of 2010 to 12,000 15 months later. Foreign student numbers have fallen alarmingly, especially from India. Tourists are going overseas and manufacturing jobs and now office jobs are starting to follow them.

Yet the Baillieu government remains determinedly confident. It insists its strategy of cutting costs, including 3600 public service jobs, to ensure a budget surplus of at least $100 million is the best way for the state to navigate the downturn, in part because it will protect the state's triple-A credit rating.

"The volatility of the global economy is being felt in Victoria," state Treasurer Kim Wells said this week. "However, the state is meeting these challenges head on."

Not all agree. This week, prominent company director Elizabeth Proust said the government should be investing more in the state's crowded transport infrastructure and queried the wisdom of cutting thousands of public servants when the state is already losing 1000 jobs a week.

Her comments echoed the sentiments of transport magnate Lindsay Fox, who told The Age last week that the political imperative for surpluses should not precede the need for better infrastructure to create wealth and boost employment. "My biggest concern is that by the end of the year we'll have probably one of the highest rates we've seen of unemployment for years," he said.

More than 2700 Victorian companies entered external administration in the 12 months to January, up almost 10 per cent on the previous 12 months. And Victoria's population growth, which helped keep the economy expanding in recent years, has slowed from 2.25 per cent in 2008-09 to 1.5 per cent in 2010-11.

Statewide, the economic picture is not uniform. "There are people who are doing very well," says Ian Carson, chairman of partners at PPB Advisors, a professional advisory and insolvency firm.

Carson says PPB which also helps "turnaround" troubled operations has been busy, especially with businesses exposed to the high dollar. "We have been busy for four years," he says. But those who are "pro-active" are surviving. "There are many examples of people who are prospering."

But in CBD offices, in suburban shopping centres and high streets, in outer industrial strips and in rural towns, pessimism seems to be setting in.

"People buy fear," says leading business figure David Smorgon. "You can fall into a trap that everything is negative, everything is pessimistic and there is a loss of hope in the community. We are in that cycle of fear."

Months of bad news out of Europe has helped sap the confidence of many Victorians; a Victorian Employers Chamber of Commerce and Industry survey carried out in the three months to December and published last month found just 17 per cent of businesses expected the state's economy to strengthen during 2012, while 40 per cent expected it to weaken.

"For many businesses, the environment is one of uncertainty. There's no doubt jobs are under pressure," says Steven Wojtkiw, chief economist at VECCI.

Yet uncertainty is perhaps the best description of where we're at. The latest National Australia Bank index of business conditions has Victoria at zero, implying that equal numbers of firms are experiencing growth and decline. The NAB's index of business confidence in the state was only slightly worse, at minus two.

Similarly, the Westpac-Melbourne Institute index of consumer sentiment for Victoria in March was 98.4, meaning pessimists only slightly outnumbered optimists. That was a sharp change from 105.5 a year ago and 115.5 two years ago, but it was the second best of any state, if a long way behind top-placed Western Australia (107.0).

In Collins Street high-rises, financial services firms are weary after four years of unprecedented market volatility. Banks have struggled to find people to lend to, insurers have been hit with high re-insurance costs both sectors have announced thousands of job cuts, many in Melbourne. Stockbrokers, too, are limping, with Australian shares although posting a positive few weeks failing to rebound as strongly as in other markets.

"The last few years have been as tough as I can ever remember," says Terry Campbell, the senior chairman of Goldman Sachs in Australia.

A series of retail collapses Fletcher Jones, Brown Sugar, RED Group, Colorado have illustrated the impact of wilting consumer confidence on the state's second-biggest employer.

News of the state's economic slowdown has come as a shock partly because Victoria kept ploughing on through the aftermath of the global financial crisis, its employment and housing markets staying strong.

Retail jobs, for example, surged by more than 20,000, or 8 per cent, in Victoria in the three years to February 2011, on a year-average basis. Jobs in the accommodation and food sector rose more than 15 per cent, and construction rocketed 17 per cent.

Meanwhile, as Perth house prices dropped and Brisbane's trod water, house prices in Melbourne climbed by more than 10 per cent in 2010, making the post-GFC dip a vague memory.

But something shifted over the past 12 months. Over the year to February 2012, the state lost 38,500 jobs in retail and 6300 in the hospitality sector, on the raw figures released by the ABS this week. On a year-average basis, to smooth out the volatility in the figures, the loss was about 13,000 retail jobs and 12,000 in the hospitality sector.

Jobs were gained in finance, the health and welfare sector and professional and scientific services, and construction appears to be holding up, with 3000 jobs added over the past year. But established house prices in Melbourne have dived more than 6 per cent.

"Victoria epitomises the divergence in fortunes between resources-rich states and the rest of the country," says Saul Eslake, chief economist at Bank of America Merrill Lynch.

"To some extent, the weakness in Victoria in recent months owes something to recent strengths. What I think is happening is that Victoria staged a faster recovery in employment after the global financial crisis possibly because Victoria derived more benefit from some of the [federal government's stimulus spending], especially the stimulus applied to housing.

"Now that the stimulus is wearing off and governments are tightening fiscal policy, and because Victoria, almost by definition, is more exposed to the exchange rate, Victoria is now doing worse than the rest of the country."

The high dollar is accelerating the restructure of Victoria's economy that began three decades ago, as the state began its transformation from a manufacturing powerhouse to a services centre.

But although its share of the state's economy has almost halved, manufacturing remains significant in this southern state. It is still the state's second-biggest force, even as its share of the state's economy has declined from 15.5 per cent 20 years ago, to 8.6 per cent of gross state product last financial year.

Finance is now Victoria's lifeblood, expanding from 5.3 per cent of gross state product in 1990-91 to 12.2 per cent last financial year.

Since 2008, finance jobs have jumped by almost 10,000 to 118,000, analysis by The Age shows. Over the same period, some 27,000 Victorian jobs were lost in manufacturing although it still employs almost three times as many people than finance does.

Matt Hampton, for one, is increasingly convinced that his next job wont be in manufacturing. "Manufacturing is a dying art in Australia," he says. "Guys like me should adapt, but a lot of guys can't because that's all they know."

But Ian Carson, who has seen his share of struggling businesses, believes Victoria's manufacturers can survive, as long as they adapt to the new conditions. "The ones which are struggling are the ones doing it the same way they have been doing it for many years and haven't seen the changes coming," he says.

"You can't just go along doing what your dad did or what used to work in the past. You have got to be so pro-active. There are people doing very well and they are people who are innovative."

Carson points to Victoria's continued strength in professional services firms engineers, accountants and management consultants. "Engineering firms based in Victoria and other services are serving not just the mining industry in WA and Queensland but also the world," he says.

Terry Campbell, too, believes there will be some "skim-off" to the economy from the mining boom, and believes things will soon start improving. "We're probably travelling across the bottom at the moment," he says.

Indeed, evidence is emerging that the much-promised "flow through" from the mining boom to non-mining states is taking place. The Reserve Bank argued as much in a bulletin released this week, as it noted that "the benefits of mining investment and exports flow across the country through spending by mining-related firms and workers on goods and services in other states, dividend payments to shareholders, and the tax and transfer system".

Victoria has, in its favour, its status as the second-biggest state in economic terms, and what Moody's describes as its "sizeable and diversified economic base". VECCI's Wojtkiw points to other reasons for optimism the US economy is improving, and Greece has avoided a default, for now.

But whether all of this will be enough to offset the impact of the high dollar and rebuild consumer confidence remains to be seen.

"There are no easy solutions, but in times like this we need government and key businesses people to take a leading role," Smorgon says. "We also need the unions. Maybe things have been too good for too long, because you look at our lack of competitiveness and productivity, and it is obviously a concern."

The next few months will be crucial, for businesses big and small in retail, manufacturing and tourism, for the Baillieu government as it argues the case for its surplus-centred strategy and for the thousands of Victorian workers looking for jobs, and those who may be looking in the near future.

"It's not a time for humpty dumpties in government, in the business world, in the union and the media," Smorgon says. "We don't want people who fall off the wall when it gets tough. We want strong decisions and I sense an absence of strong leadership as we get into this cycle of despair."

Adds one senior insolvency industry figure: "Right now the Victorian economy is in a really delicate position. In retail, we haven't seen the Armageddon that everyone predicted. But what there is, is a crisis of confidence. Everyone [in Melbourne] is nervous about something, they just don't know what they're nervous about."


Friday, March 16, 2012

It's Baillieu's responsibility, not his fault

THE downturn in the Victorian economy was always going to hit the Baillieu government's finances. The surprising thing is that the damage is not worse.

The slump is certainly dramatic: an $823 million turnaround year on year, from a surplus of $482 million to a deficit of $341 million. But most of the fall was in only two areas.

The slump in house prices and clearance rates cut stamp duty on conveyancing by $360 million or 17.5 per cent year on year. And Treasurer Kim Wells says the Commonwealth has held back $230 million of funding for the regional rail link and the new cancer centre in Parkville.

Payroll tax collections remain buoyant, rising 8 per cent year on year, and raising doubts as to whether private-sector jobs are really falling as fast as job figures suggest. And Treasury remains confident that the budget will end up in the black, sticking to its estimate of a $148 million surplus by June.

We hope it's right. But Treasury concedes that employment and consumer demand have both "softened". Sift through all the recent data on the Victorian economy, and the conclusion is unavoidable: the state is either in recession or close to it.

That's not the Baillieu government's fault: it's the the fault of the high dollar, high interest rates, and the public sector passing the baton when the private sector is not in a position to run with it. But the government and its advisers are being strangely defensive about a problem they didn't create.

Why is Ted Baillieu quoting economic growth figures from 2010-11? The view looking back may be fine, but Ted, the issue is where we are now, and where we're heading.

The government should get on the front foot, admit the problem, and change policies to tackle it. Former Premier's Department head Elizabeth Proust suggests it bring forward infrastructure investment as a stimulus. That's good advice.

Victoria slumpig. So it's budget cuts

VICTORIA is facing further deep spending cuts after Premier Ted Baillieu vowed to keep the budget in surplus despite plunging stamp duty revenue and rising unemployment.

State Treasury's latest budget update has revealed the government ran up a $341 million deficit during the final six months of 2011, compared to a surplus of $482 million for the same period in 2010.

The deterioration came as a prominent business leader, Bank of Melbourne head Elizabeth Proust, said Victoria had invested too little in infrastructure over decades, resulting in Melbourne "strangling in its own traffic" and having an inadequate train system.

"It's not just this government, it's all of them," Ms Proust told the Committee for Melbourne. "It doesn't all need to be done by the state there is a role for public-private partnerships but we do need to invest in vital transport infrastructure.

"Our train system is still pretty much 19th century the tracks haven't been extended much since," she said. Melbourne, she said, should learn from other cities such as Singapore, which has built a metro network virtually from scratch over the past 20 years.

Ms Proust, who was head of the Premier's Department in the 1990s during the Kennett era, questioned the Baillieu government's timing in deciding to axe 3600 jobs at a time when Victoria is losing 1000 jobs a week.

She warned that the high dollar would cost many more jobs in manufacturing, tourism and education, but urged the government to respond by lifting investment in infrastructure and skills, rather than trying to prop up threatened jobs.

Mr Baillieu said he wanted to "restore financial responsibility" to Victoria, and blamed the previous Labor government and Canberra for a sharp deterioration in the state's financial position and rising public debt. "I think every Victorian family is concerned about jobs . . . and that's why we want to ensure we have a sustainable budget position," he said.

The comments came after the release of Treasury figures that suggest the government will need to consider inflicting further cuts to deliver on its promise to keep the budget in surplus by at least $100 million.

Stamp duty revenue has been particularly weak, with $1.7 billion collected during the final six months of 2011, $360 million less than the same six-month period in 2010.

Net debt also swelled by $3.4 billion to $15.3 billion. That pushed up the state's half-yearly interest bill up by $129 million to $592 million, equivalent to more than $21 million a week.

Treasury warned the results were an "imperfect guide" to the 2011-12 budget, because they did not include land tax revenue that tended to increase in the March quarter, or delayed payments from the Commonwealth for the regional rail project and the Victorian Comprehensive Cancer Centre project.

Shadow treasurer Tim Holding said said the figures showed the budget position deteriorating and debt "skyrocketing" as infrastructure investment declined.

"At the very time when our economy, when our community, desperately needs investment in infrastructure projects that will create jobs, we've got a state budget update . . . which shows that the budget position has deteriorated, our investment in infrastructure is deteriorating, the economy is grinding to a halt (and) employment continues to weaken," Mr Holding said.

Treasury said the state economy was facing "head winds" linked to the strong dollar, which had eroded the competitiveness of manufacturing. The state now losing more than 1000 jobs a week, and a drop in the number of house sales had crimped stamp duty collections.

"Weak consumer sentiment is also dampening consumer demand, which has been reflected in the relative poor performance of the retail sector," it said. "These conditions have translated into a softening of state taxation revenue and goods and service tax receipts."

The figures showed the government collected $862 million in gambling taxes, up $19 million from the previous year, and $265 million in fines.

Mr Baillieu suggested he would not use debt to finance future infrastructure. "The debt is increasing because Labor infrastructure commitments were unfunded other than by increasing debt, and then we had the GST withdrawn by the Commonwealth government."


Thursday, March 15, 2012

Tax. Might the Coalition put the country first?

THE resources boom that is boosting activity in one third of Australia is flattening activity in the other two-thirds yet the Coalition and the Greens want to stop the government doing something to help.

Labor's plan to cut company tax from 30 per cent to 29 per cent is too modest, but in straitened times, it would help business to stay in business, to keep workers in jobs and to invest in the future.

Its goal is to redistribute some of the revenue from the mining tax to companies that do not benefit from the mining boom.

It would have done that more convincingly if the corporate tax rate had been cut to the 25 per cent proposed by the Henry report, or even the 28 per cent Labor first proposed.

But the budget's revenue base has been badly eroded by the losses run up by companies and investors during the GFC. Treasury secretary Martin Parkinson warns these will hold down revenue for a decade. This is a start; it is better than nothing, and it is in the interests of the country that it be passed.

The goal of the tax cut applies equally to small and big business. There is no economic reason to give a tax cut to one group but not the other, as the Greens propose. The Greens have taken this stand for political reasons, for some brand differentiation to present them as a friend of small business.

That won't wash. The Australian Democrats had a small business constituency, but the Greens are a different party. If they want economic credibility, their policy should be to simplify and streamline the tax system to remove dubious deductions and make it more of a level playing field not to create artificial distinctions between "good" small business and "bad" big business.

As for the Coalition, its stance is pure opportunism. It is in favour of cutting the tax, but it wants to deliver the cut itself. So it opposes Labor cutting taxes, even when it recognises that this would be good for the economy. The clear implication is that the Coalition does not want the economy to improve, lest that hurt its chances of winning office in 2013.

Is it too much to ask that, just once, the Coalition should do something in the interests of the country, not themselves? And, likewise, that the Greens do not oppose good policy just to promote their own brand?


Wednesday, March 14, 2012

Two Australias: Reserve should admit it got it wrong

AUSTRALIA'S economy is not doing as well as our ministers and senior officials like to boast. They keep telling us it is ''in a sweet spot'', displaying strong fundamentals, outperforming the world, we've heard it all. But the statistics show the real Australian economy is very different.

This time last year the Reserve Bank forecast that Australia's GDP would grow by 4.25 per cent over 2011. Even after the Queensland floods it still forecast this, implying a growth rate of 6 per cent over the second half of the year. In the May budget, Treasury raised its growth forecast for the 2011-12 financial year to 4 per cent.

Last week the Bureau of Statistics reported that the economy actually grew 2.3 per cent in 2011. In the second half of 2011 it grew at 2.5 per cent. It has added just 10,000 jobs in a year. And, above all, a sharp divide has opened up between the mining states of the north and west and the everything-else economy of the south-east, where two-thirds of Australians live.

What went wrong?

Quite a few things. First, officials underestimated the strength of the headwinds created by the combination of a dollar at record highs and interest rates at relative highs. Outside mining-related areas, growth in 2011 was minimal, yet home mortgage rates are still at 2005-06 levels. Small business overdraft rates are at the levels of late 2007, when the Reserve was trying to slow down an overheated economy.

Isn't that the fault of the banks? No. The Reserve's chiefs tell us that had the banks not raised their margins, they themselves would have lifted the cash rate to force retail rates to these levels. They think interest rates are where they should be.

Second, market fears over Europe have been a factor, exacerbating the rise in the dollar. But it would be ludicrous to pretend that Europe made more than a minor contribution to our two-speed economy.

The government and the Reserve also made two policy errors. Their goal was to ''make room'' for the mining boom by slowing down the rest of the economy. This would ''free up resources'' so that the mining boom could go ahead without sending inflation out of the Reserve's comfort zone, as it had in 2007-08.

Their goal was to slow down activity in the labour-intensive sections of the economy - manufacturing, retailing, tourism and all manner of services - to allow a boom in mining, which is highly capital-intensive. Clearly, that would hurt jobs.

Mining produces about 10 per cent of Australia's GDP, but employs only 2 per cent of its workers. Much of the activity now is in mining construction, but that is capital-intensive too.

In the year to November, when annual job growth was 63,000, the 50,500 jobs gained in mining and construction employment were outweighed by 51,500 lost in manufacturing alone. Three months later, the bureau estimates that in the year to February Australia added just 10,000 jobs. Updated figures on Thursday could show most of the economy shedding jobs.

This should have been predictable. If you shut down activity that employs a lot of people to ''make room'' for activity that employs few people, jobs growth will suffer. If you do enough of it, it will go backwards, as it is now.

Aren't there flow-ons from mining to the rest of the economy? Yes. Treasury deputy secretary David Gruen estimates ''the mining-related economy'' - ''those parts of the domestic manufacturing, construction and service industries that directly contribute to mining production and investment'' - has swollen from producing 4 per cent of GDP to 9 per cent.

Some of that is in the south-east. But the data is clear: the ''trickle down'' to south-eastern Australia from the mining boom is a trickle. What the high dollar and high rates are doing is not.

But aren't mining profits spent in Australia? When they fund more mining investment, yes. But there is less flow-on from mining dividends: 80 per cent of our mining shares are owned overseas, and most of the Australian shares are held by super funds whose job is to save, not spend.

That leads to the second policy error: the failure to realise that a mining boom with high interest rates would divide Australia into two economies.

The Reserve Bank has been preoccupied with ensuring that it does not let this mining boom unleash inflation as it did in 2007-08. In effect, it has set monetary policy to meet the needs of that industry, and not the mainstream of the economy, as it is meant to do.

Julia Gillard and Wayne Swan locked themselves in to delivering a budget surplus for political reasons. That will give Australia a contractionary budget when we need an expansionary one. The Coalition is not even at the game; they're out at some other field promising big spending cuts and job cuts, which would put the south-east in deeper trouble.

The Reserve needs to show the humility, and integrity, to admit that it got it wrong. Interest rates are far too high for the mainstream of Australia's economy. Swan and Gillard should find the courage to also change course and produce a budget that meets Australia's economic needs, not their political ones.

To err is human. But not to correct one's errors, when one can, is perverse.


Friday, March 9, 2012

Victoria's economy has gone cold, neither government will fix it without a budget deficit

Victoria's economy has gone cold, and neither the federal nor state government can do much to stop it without putting their budgets in deficit.

Ted Baillieu has the bigger problem. Victoria is copping the brunt of job losses and stagnant spending caused by the high dollar, excessive interest rates, and a range of other factors.
Victoria is now either in recession or close to it. Yesterday's figures show the state is losing 5000 jobs a month. Since April, 42,000 full-time jobs - one in 50 - have been wiped out.

Wednesday's figures showed total spending in Victoria shrank in the December quarter.

Our economy needs stimulus. But Tuesday's figures told us the state's revenue base has collapsed. And on Wednesday, Treasury secretary Martin Parkinson said the federal tax base had collapsed too.

Victorian Treasurer Kim Wells is facing a perfect storm. Job losses mean less payroll tax. Cautious consumers mean less GST. Falling house prices mean less stamp duty. Even gambling has stopped growing. It wasn't why Team Baillieu decided to scrap 3600 public service jobs, but it's a good reason to do it.

But to do it now risks making the state's downturn worse. In the '90s Victoria's unemployment rate peaked, not under Labor, but under the Kennett government, because of its job cuts. The lesson from that was: take your time and deliver the pain when it's most easily absorbed.
Wayne Swan has locked himself into a surplus in 2012-13. Now he has to deliver it in an economy already slowing and with company tax revenues flat, which requires even bigger spending cuts. That will add to unemployment, and it makes no economic sense.

Both treasurers should listen to International Monetary Fund chief Christine Lagarde: don't make things worse by cutting spending hard now, she says. Instead, deliver reforms that make your budget stronger over the medium and long term. Australia and Victoria have low debt levels. That gives them the flexibility to make their budgets fit the circumstances.

Baillieu and Wells have options. First, their staff cuts could be made a medium-term goal, to be implemented as the economy picks up. Second, they could turn up the tap of spending on productivity-enhancing transport infrastructure: road, rail, level crossings. And third, they should say a firm ''no'' to the inflexible budget rules proposed by the Vertigan inquiry. The state must be free to respond to the economic situation.

Swan, alas, has already bound his own hands, and will therefore inflict a contractionary budget on an economy needing stimulus. A bolder government than his would break its budget pledge, and tell us honestly why it matters more to keep the economy going than to balance the 2012-13 budget.

Instead, it would seize its chance to tackle the big long-term threat to the budget: the ageing population. The pension age should be raised to 70, not 67 - and start rising before the baby boomers retire, not after the horse has bolted.

Thursday, March 8, 2012

Jobs riddle hints at weakening economy

Australia's jobs market is still flat. Jobs are growing strongly in Western Australia, but collapsing in Victoria. That's the real message coming out of the labour force figures released by the Bureau of Statistics today.

On the seasonally adjusted measures that people are used to focusing on, job numbers zagged after last month's zig.

In the past few months, job numbers rose in November, fell in December, rose in January, and now fell in February: down by 15,000, to end up back where they started.

The headline unemployment rate climbed back to 5.2 per cent.

This shows the naivety of comments last month by Treasurer Wayne Swan and the Reserve Bank seeing the January figures as a sign of improvement, rather than the statistical static you get when you try to use figures for the wrong purpose.

The Bureau keeps warning us that its monthly job movement figures are too imprecise to rely on, and urges us to use its smoothed trend data instead.

Pity the Treasurer and the Reserve don't listen.

And the trend figures this month tell us pretty much what they told us last month: there's virtually no job growth going on out there.

Every month, the potential labour force of people aged 15 and over grows by 18,500, but on average, only 1000 new jobs are created.

Soft spots

That fits with what the Bureau told us yesterday: economic growth has gone soft, above all in the south-eastern states with no coal, iron ore or new natural gas fields.

The economy's output grew at an annual rate of just 2.5 per cent in the second half of 2011, with the great bulk of that going into developing new mines in WA and Queensland.

They don't employ that many people, since much of the equipment is imported, and mining is a capital-intensive industry that employs just 2 per cent of the workforce.

By contrast, the jobs are going from labour-intensive sectors such as manufacturing, retailing, finance and government, which are mostly in the south-east.

That's why Victoria has lost 30,000 jobs since last April, while WA has added 30,000. NSW, South Australia and Tasmania are also losing jobs on balance, but at a slower rate.

In the past couple of months, even Queensland has gone backwards.

Jobs riddle

But if job growth has virtually stopped, and the potential labour force is growing by more than 200,000 a year, why is the unemployment rate stuck at 5.2 per cent instead of rising into the 6s?

Because more than 100,000 people who would normally be in the workforce have stopped looking for jobs, and hence don't count in the figures.

Why? That's the real riddle in these figures, and no one can fully explain it. Most of the people dropping out live in NSW or Victoria.

About a third of them seem to be teenage students deciding not to look for a part-time job. Some of it reflects the ageing of the population, although that is offset by the rapid rise in the proportion of older people staying at work.

But it wasn't happening a year ago. It's another sign of a weakening economy.

Victoria on brink of recession; SA, Tasmania in it

VICTORIA is on the brink of recession and South Australia and Tasmania are already in one, as the high dollar, high interest rates and government spending cuts slowed Australia's economic growth in the December quarter to just 0.4 per cent.

A day after Reserve Bank governor Glenn Stevens left interest rates on hold, telling Australians that growth was ''close to trend'', the Australian Bureau of Statistics reported that growth in the year to December slowed to 2.3 per cent. Even in the six months to December, annualised growth was just 2.5 per cent.

Virtually all of the growth was in the coal and iron ore states of Western Australia, Queensland and New South Wales. Victoria, South Australia and Tasmania all went backwards.

The figures came as Treasury secretary Martin Parkinson revealed that federal and state revenues are now in crisis, with tax collections down by 4 per cent of GDP - almost $60 billion a year - and unlikely to return to former levels ''for many years to come''.

He warned of more pain ahead, saying: ''For both levels of government, surpluses are likely to remain at best razor-thin without deliberate efforts to significantly increase revenue or reduce expenditure.''

Dr Parkinson blamed the revenue collapse partly on tax breaks for mining. He revealed that mining companies earn about 20 per cent of all corporate profits, but pay only about 10 per cent of all corporate taxes, thanks to their huge deductions for depreciation.

Yesterday's figures show that in the first half of 2011-12, company tax collections rose just 1 per cent year-on-year. Last May the federal budget papers forecast an increase of 29 per cent. If the gap persists, it implies a revenue loss of $16 billion a year.

The bureau said state governments' revenue across Australia rose just 1 per cent in the first half of the financial year, while their spending rose 5.4 per cent. The state revenue collapse - mainly due to the slump in house prices - turned a combined surplus for the states of $4.15 billion a year ago into a deficit of $500 million.

The Baillieu government is implementing deep spending cuts to keep its budget in balance, cutting 3600 public sector jobs. The Gillard government has told departments and agencies their budgets will be cut by 4 per cent next year, implying thousands more jobs lost.

Treasurer Wayne Swan said that the poor revenue and weak growth figures would force the government to make ''significant'' spending cuts and/or revenue increases in the May budget to achieve its goal of a budget surplus in 2012-13.

''There's no doubt that there'll have to be significant savings,'' he said. ''But we think we absolutely need to do it ? to send a signal to the world that we're in good fiscal nick.''

Yesterday's figures show spending cuts are already dragging growth down. Cuts in state government investment wiped $2.5 billion off the nation's output for the December quarter, falling 15 per cent year-on-year as federal stimulus payments end and governments put off projects to stay in the black.

Victoria was less affected than most. But in seasonally adjusted terms, the bureau estimates total spending in the Victorian economy fell 0.5 per cent in December, after growing just 0.1 per cent in the previous quarter. On its preferred trend measure, Victoria's bottom line fell marginally in the December quarter.

Victoria, SA and Tasmania are being dragged down by the combination of a very high dollar, relatively high interest rates and government spending cuts. NSW is being kept going by coal investments, while WA and Queensland are booming.

The bureau figures show a very sharp divide across Australia. Spending in Queensland, NT and WA combined grew 11.3 per cent year on year. In Victoria, NSW, SA, Tasmania and the ACT, combined spending grew by just 1.4 per cent.


Wednesday, March 7, 2012

Nation's growth at crossroads

AUSTRALIA is heading for a fifth consecutive year of below-trend growth in 2012, with weakness in most of the economy offsetting spectacular growth in mining investment, Westpac chief economist Bill Evans predicts.

As the nation's commodity price forecaster told farmers that 2011-12 will be as good as it gets for farm incomes, Mr Evans, the first last year to tip that the Reserve Bank would have to cut interest rates, said the Reserve will deliver two more rate cuts in 2012 as job losses mount.

Speaking at the Outlook conference of the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), he predicted that Australia would grow just 3 per cent in 2012, with unemployment rising to 5.75 per cent.

Mining investment would be ''spectacular'' but 40 per cent of it would go on imports. Household spending would be held back by the ''very unnerving'' combination of ''world-class'' household debt and falls in the value of the real estate assets supporting it.

''We need lower interest rates to arrest that disturbing trend,'' Mr Evans said. ''That would help with the labour market. I don't think Australia needs the highest rates in the Western world.''

Unveiling ABARES' annual forecasts, executive director Paul Morris said farmers are now enjoying ''the most positive incomes for about 30 years'' and should use their time at the top of the hill to plan for tougher days ahead.

Mr Morris urged farmers to focus production on ''the highest-value markets, the middle-income countries to our north''. They want to eat more meat, fruit and vegetables, he said, which implies that farms should move away from cereals back to sheep and cattle.

The conference heard sharply different short-term forecasts for the world economy, although similar concerns for the medium to long term. Mr Evans predicted China's growth would slow to 7.5 per cent this year, bringing world growth down to 2.8 per cent - apart from 2009, its weakest year since the ''tech wreck'' of 2001.

But chief economist of J.P. Morgan in New York Bruce Kasman said the world economy is lifting already, with the US likely to grow at 2.5 per cent to 3 per cent, and China growing at 9 per cent by mid-year.

But he warned that this was under threat from the ''unsustainable'' budget cuts demanded in Europe and from the political impasse in the US over deficit cuts.


Tuesday, March 6, 2012

Recession a risk in slow lane of two-speed economy

TEN years ago, mining investment in Australia began rising sharply. By 2005-06 it had trebled in just five years. Over the next five years it doubled again. On current plans, it will double again in just two years to mid-2013.

It is being driven by what Treasury deputy secretary David Gruen calls ''a once-in-a-lifetime boom'' in commodity prices and Australia's terms of trade: the ratio of the prices of the things we sell overseas to the prices of the things we buy overseas. We all know the story, but even so, the numbers are staggering.

The terms of trade index has almost doubled, from 66.2 in June 2003 to 131.5 in September 2011. In other words, the same volume of exports today buys us twice as many imports as in 2003.

The Reserve Bank's index of commodity prices in $US has shot up from 34.2 in June 2003 to 157.0, last August, before ebbing back to 142.0. That means that a typical tonne of coal or iron ore exports today earns its owners four times as much as in 2003.

And where commodity prices go, the $A follows. Between 1985 and 2005 it averaged 70 US cents. In the past year, it has averaged $US1.05. That's made local production 50 per cent more expensive in $US, and imports 33 per cent cheaper in $A. So firms are shutting down and jobs are going overseas.

The scale of this shift is colossal. And it is a tribute to our policymakers, and the policy framework they inherited, that Australia has kept on the rails. Past resources booms always ended in tears, because inflation got out of control. This time the Reserve has focused on keeping inflation down and, apart from a flare-up in 2007-09, has succeeded.

There has been a price for this. The economy is growing more slowly; Australia's average growth since 2004 has been 2.75 per cent, or just over 1 per cent per capita. We're still stuck in third gear. Unemployment is back over 5 per cent, low in our terms, but well above the 2 and 3 per cent of success stories such as Singapore, Korea and Norway.

But there's been a bigger cost that policymakers are reluctant to admit, or tackle. Australia has fractured into two economies.

The growth is overwhelmingly in minerals development, in Western Australia, Queensland and the Northern Territory. The south-eastern states - Victoria, New South Wales, South Australia, Tasmania and the ACT - are now going backwards on some indicators, growing slowly on others. Australia has been a two-speed economy since 2005, but now the two speeds are 100km/h on one side of the country, and 10km/h on the other.

Treasury anticipated this. In a recent speech, Gruen said its budget forecast of 4 per cent growth in 2011-12 assumed the non-mining economy would grow just 1 per cent. The first forecast was way out. Economic growth is now likely to be between 2.5 and 3 per cent, which implies the non-mining economy is virtually flat.

The pain is being felt where the non-mining economy is concentrated: in the south-east, where two-thirds of Australians live and work. The risk of recession in south-eastern Australia is now real. In the past year, that two-thirds of the country has seen falls in jobs, job vacancies, newspaper job ads, construction activity, home building approvals, retail sales volumes, and now, a sizeable drop in business investment plans. Growth is almost at a standstill. What should the government do? The word from Treasury and the Reserve is: do nothing. High mineral prices are here to stay, maybe for a decade, maybe for many decades.

That implies that the high dollar is also here to stay. It may not stay quite as high as it is now, but their message to business is: if you can't find a way to compete with the dollar at something like parity (with the $US), you'd better find another life.

(To be fair, Treasury secretary Martin Parkinson told a Senate committee last month the best way to help manufacturers is to improve education, workplace relations, management skills and infrastructure. But all of them are things we want to do whether manufacturing is in boom or bust. For manufacturing, Treasury's advice is: do nothing.)

If Treasury and the RBA are right in assuming that mineral prices and the dollar will stay high, then their advice makes sense. Australia's car industry cannot compete globally with the dollar at parity. To try to keep it going would be expensive, and probably futile. Better to cut it off now and retrain its workers for jobs elsewhere.

But there are two problems. First, this advice is based on forecasts, not facts. Treasury and the RBA have not covered themselves in glory in recent forecasting; it's a long time since either has got a call right. They're human like the rest of us.

Chris Richardson of Deloitte Access Economics once called it ''a pure punt that China and India will keep growing faster than the world's miners can keep digging deeper''. It is a gamble that the global supply of minerals will never catch up with the growth in demand. And that's a big gamble.

If it's right, then you save money you might have spent trying to salvage industries that are beyond saving. But if it's wrong, the manufacturing firms you shut down will not come back. We would permanently lose economic capacity that we will need when mineral prices subside.

The second problem is that by doing nothing, you risk sending Melbourne, Sydney and two-thirds of Australia into recession or near-recession, so that the Pilbara and Bowen Basin can be developed at top speed. That is not just bad economics. It is bad politics.

Let me try a forecast: if that's Labor's policy, it will end 2013 back in opposition.


Monday, March 5, 2012

A crisis looms in south-eastern Australia

LAST week the Bureau of Statistics revealed that more business investment in Australia now goes into mining than in all the rest of the economy put together. In 2012-13, on companies' present plans, investment in the rest of the economy would shrink while mining's share would swell to 70 per cent. Investment in the south-east, where two-thirds of Australians live, would shrink, and three-quarters of all business investment would be in WA, Queensland and the Northern Territory. Treasurer Wayne Swan hailed the figures as ''a resounding vote of confidence in our economy''.

We believe it is quite the opposite. The investment figures and other data suggest the south-eastern states - Victoria, NSW, South Australia, Tasmania and the ACT - are heading towards recession. In the past year their full-time jobs have shrunk by 38,000, and total employment by 26,000. Their newspaper job ads have shrunk by 21 per cent. Their job vacancies have shrunk by 15 per cent. Their construction activity has shrunk by 1 per cent. Their home building approvals have shrunk by 20 per cent; their retail sales volumes by 0.2 per cent. Their trend level of business investment was still rising, but December's slump and the sharp fall in investment plans suggest that too is turning. All these indicators tell only part of the story. But to see all of them heading down together is ominous. We are now two economies, and one of them is in deep trouble.

The mining economy of the north and west is running red-hot. The everything-else economy of south-eastern Australia has gone cold. The government's economic advisers meant it to be that way, although they have clearly overdone it. They believe Australia is going through a ''structural transformation'' from a diverse economy to one dominated by mining. A global shortfall of minerals has driven up commodity prices, and where commodity prices go, the Australian dollar follows. The dollar is now 50 per cent above its long-term average, making much of the economy of south-eastern Australia globally uncompetitive - in manufacturing, tourism, international education, areas of agriculture and office work that can be done more cheaply overseas. Treasury says we are still only in the early stages of this transformation.

Yet what are the government and the Reserve Bank doing? They are set on slowing the economy further. Federal and state governments are giving the budget surplus priority over jobs and growth. Treasury estimates that federal and state budget cuts will reduce Australia's growth in the two years to mid-2013 by 4.25 percentage points. The Reserve Bank cash rate is at a neutral 4.25 per cent, but governor Glenn Stevens says that is only because the banks are doing its work for it. Had bank margins remained unchanged since 2007, the cash rate would now be at least 5.5 per cent. The bank, the Treasury and the Treasurer believe that if the mining economy is running red-hot, then the rest of the economy has to run cold to prevent things overheating. They did not want it to run as cold as this, but there is no sign yet of any policy shift.

There should be. The floating dollar served Australia well for decades, but it is not serving it well now. When good businesses built up on sound plans are sacrificed because currency dealers make them uncompetitive, then policies must change. In the successful economies of Asia, governments intervene in currency markets to shield local producers. They set budget policies to moderate booms and busts, not to deepen them. They build diverse economies, not bet everything on one industry.

Our policymakers should focus on bringing the dollar down, and bridging the divide between the Pilbara and the rest of Australia. There are ways to do it: lower interest rates, intervention in currency markets, a deeper and wider mining tax and slower budget cuts. Australians will not forgive them if they just stand back and watch us hit the wall.


We are set to live even longer than projected

OUR lives are expanding, at an accelerating rate. The life expectancy of a baby boy in Australia has lengthened by three years in the past decade, the Bureau of Statistics estimates and it is set to stretch a lot more.

In Victoria, a baby boy born today can now expect to live to 80, up from 77 just a decade ago.

Baby boys born 40 years ago had a life expectancy of just 68.

The first decade of the 21st century has given baby girls an extra two years to live. A girl born 40 years ago had a life expectancy of 75. But by the year 2000 that had risen to 82 and now it is 84.

Life expectancy has been increasing but the past decade has seen rapid changes all along the age spectrum between 0 and 80. At any age in that range, the risk of dying has shrunk, in some cases dramatically, compared with 10 years ago.

Retired construction worker Peter Farrugia welcomed the data. "Oh, that's good news for me," he laughed. The 64-year-old grandfather from Westmeadows is "pretty fit and healthy", despite suffering a back injury several years ago that cut short his working career. He also has diabetes.

"Now that I'm not doing any heavy work, I'm pretty good," he said. "I try and stay fit by walking three kilometres every day and I watch what I eat. I have to because of my diabetes."

In Victoria, the bureau estimates, the risk of a man dying at the age of 20 has fallen 45 per cent in a decade, from one in 935 to one in 1700. The risk of a 70-year-old male dying has fallen almost 30 per cent, from one in 40 to one in 56.

Boys and men still have a far bigger risk of death at any age than girls and women, at least until the age of 100. But the gap is narrowing.

While female death rates have also fallen sharply in the past decade down 25 per cent at the age of 30, 23 per cent at 60 and 20 per cent at 80 male death rates generally have fallen faster.

Demographer Peter McDonald, of the Australian National University, attributes the closing of the gap to healthier lifestyles. "There's less smoking, less drinking and far fewer fatal motor vehicle accidents," he said. "These always caused more deaths for men than women. Death rates from heart disease have fallen substantially.

"The rising life expectancy is partly due to changes in lifestyle and partly to medical advances: early treatment, better drugs.

"It's very difficult to say how much is due to one or other."

Professor McDonald said the bureau's methodology was based on current death rates and understated the real life spans we can expect as death rates keep falling in future.

But the bureau's estimates suggest there is still a limit. While the past 40 years have added three years to the life expectancy of 80-year-olds, they added only nine months to the life expectancy of 90-year-olds.


Saturday, March 3, 2012

Carr no trailblazer on state-federal path

Bob Carr is hardly blazing a new trail. He will be the fifth premier of New South Wales to seek a new life in Federal Parliament - and the seventh former premier or chief minister to do so in the past 50 years.

But few former premiers have succeeded in Canberra. Federal politics is far more diverse, and newcomers can win partyroom support only by taking it from those already entrenched.

Some succeed. An example was Mr Carr's predecessor in Macquarie Street, John Fahey, who became a respected finance minister in the Howard government, until a cancer scare forced him out of politics in 2001.

Carmen Lawrence followed her stint as Western Australia's first female premier by becoming minister for health and human services in the Keating government. But her years in Canberra were dominated by a partisan campaign and court charges over the suicide of Perth woman Penny Easton. Lawrence was acquitted on all counts, but it crippled her politically.

Former South Australian premier Steele Hall went on to Canberra, first for the centrist Liberal Movement, then back in the Liberal Party. But despite his high profile, he ended up in the outer, not the members'.

One-time Queensland premier Vince Gair certainly made an impact. Dethroned as Queensland premier in 1957 after he broke with Labor, he was elected as a Democratic Labor Party senator in 1964 and took over as party leader. But after losing the leadership, he accepted an appointment from arch-enemy Gough Whitlam as ambassador to Ireland. His irate colleagues then joined the Liberals to force an election, in which the DLP was wiped out entirely.

State premiers used to have more clout. The first Federal Parliament had at least 10 former premiers, including the only Victorian premier ever to make the move, Sir George Turner, who became the first federal treasurer. But only former NSW Premier Sir George Reid became prime minister, and for a brief, precarious year.

The most successful was Tasmanian Labor premier Joe Lyons. He became a minister in the Scullin government, then acting treasurer when E.G. Theodore, a former Queensland premier, was bogged down by more muckraking. When Theodore was cleared and reinstated as treasurer, Lyons quit the cabinet, then quit Labor and took over as leader of the conservative side, becoming prime minister in 1932 until his death in 1939.


Friday, March 2, 2012

Victoria slumps as mining soars

AUSTRALIA is fracturing sharply into two economies. Mining investment boomed in the December quarter, but investment in the rest of the economy shrank even more sharply above all, in Victoria.

In a stunning development, the Bureau of Statistics reports that mining companies are now investing more money than all other sectors of Australian business combined. A decade ago, mining accounted for just 20 per cent of business investment.

The boom is confined to just two states, with 86 per cent of mining investment going into Western Australia and Queensland, primarily to mine natural gas, iron ore and coal.

Victoria is taking a battering. Business investment in the state in the December quarter was down 7 per cent from a year ago. Companies' investment plans for the next 18 months have shrunk 10 per cent from this time last year.

Other new figures yesterday showed home building approvals remained in free fall in January, plunging 25 per cent in Victoria year on year, and 17 per cent across the nation.

The one bright spot for Victoria in yesterday's figures was that non-housing approvals were bumped up by final approval being given to the $1 billion Victorian Comprehensive Cancer Centre in Parkville, and two large retail/wholesale centres.

On current plans, the divide between mining and the rest will become even sharper over the next 18 months. In 2012-13, if companies' plans are realised, 70 per cent of all business investment in Australia will be in mining, with the rest of the economy going backwards.

Similarly, 72 per cent of all business investment planned for 2012-13 would be in Western Australia and Queensland. Just 25 per cent would be in the south-eastern states.

The deep fracturing raises serious problems for other industries, reflected in their shrinking investment plans. Commonwealth Bank chief economist Michael Blythe estimated that to allow the mining industry to meet its goals without sparking inflation, growth in the non-mining economy must be kept to 1.5 per cent a year.

The fracturing also raises problems for the Labor government, which has 60 of its 72 House of Representatives seats in the south-east.

But Treasurer Wayne Swan described the investment figures as a "reminder of the strength of our economic fundamentals".

On initial estimates, the bureau reports, mining companies plan to increase their investment in 2012-13 to $120 billion 52 per cent higher than their original forecast for 2011-12.

But investment plans for all other sectors combined are just $53 billion, 5 per cent less than this time last year.

The prospects for New South Wales and South Australia are also grim. Businesses now plan to invest just $51 billion in the three states in 2011-12, down from $54 billion in the same survey last year.


Thursday, March 1, 2012

It's a cold bath, for most of us

WHERE did that boom go? The $2.2 billion fall in construction work in the December quarter has left us with an economy that is like an old-fashioned bath, with a hot tap at one end, a cold tap at the other, and most of the bath running cold.

The fall in construction activity comes after a big one-off jump; it's no worry in itself. But new home building is at its lowest trend level since June 2003, while private non-residential building is barely above GFC levels.

But the biggest problem is we are now two economies. Our policymakers are focused on northern and western Australia, where new mines are being developed at a colossal rate, creating jobs, wealth and downstream activity. But Australia's south-east is another country.

Year on year, construction activity swelled 22 per cent in the mining states (Queensland, WA and the Northern Territory), but fell 1 per cent in the south-east (everywhere else).

Retail sales year on year grew 5.3 per cent north and west of that dividing line, but only 1 per cent where most Australians live.

Full-time jobs grew by 44,000 north and west of the dividing line, but fell by 38,000 south and east of it.

Total spending year on year in the September quarter grew 9.6 per cent in the north and west, but only 1.4 per cent in the south-east.

The Housing Industry Association tells us new home sales nationally are at an 11-year low, while the Victorian Employers' Chamber of Commerce and Industry survey finds almost half of local firms expect the Victorian economy to weaken in 2012, and only 17 per cent expect it to improve.

Two-thirds of Australia is in the cold part of the bath. Its economic activity is slowing, because the high dollar has made too much of it uncompetitive. We need policymakers to focus on how to bring it down.

But they won't. The Reserve Bank has set Australia's interest rates to restrain growth, not stimulate it, because it focuses on the hot bit of the bath. The Gillard government is slowing the economy further by new spending cuts, because it focuses on getting the budget in surplus. The high dollar is making much of what we do uncompetitive. The government cannot be just a spectator. It needs to think hard, think outside the circle, then take bold action to restore our competitiveness.