Tuesday, June 26, 2012

Two new taxes on the way, don't complain

FEW Australians are aware that we have one of the three smallest governments in the Western world. We complain endlessly that our governments tax too much and spend too much but that is not the way we appear in international comparisons.

The International Monetary Fund estimates that, in 2012, Australia's governments, state and federal, will raise a bit over one-third of our GDP, 34.5 per cent, and spend 36.3 per cent. Of the 34 advanced economies, our revenue is the ninth lowest, our spending the seventh lowest.

That might not sound too flash. But the four lowest-spending countries are Hong Kong (19.1 per cent), Singapore (19.4), South Korea (20.4) and Taiwan (20.9), where your welfare is your responsibility.

Among those with whom we compare ourselves, only New Zealand (33.1 per cent) and Switzerland (34.3) have leaner governments.

But isn't revenue the best comparison, which means the US and Japan are smaller governments than ours? No. Both are running huge deficits as a share of GDP, 7.9 per cent in the US, 9.1 in Japan which will have to be paid for by future taxpayers. Spending, not revenue, is the test of the size of government.

Australia and New Zealand aim to run a Western welfare state while spending far less than other Western countries. The gap between us and them is huge: on average, governments spend 42.2 per cent of GDP in advanced economies, 43.1 per cent in the G7, and 48.2 per cent in the European Union. So far, you would have to say, more spending has not brought more success.

On Sunday, Australia will gain two new taxes. The carbon tax initially will raise $4 billion a year: 0.3 per cent of GDP, rising to 0.4 per cent as it settles in. Revenue from the mining tax can't be estimated accurately, but Treasury puts it at just $3 billion, or 0.2 per cent of GDP, while private-sector economists say it won't even raise that.

Neither tax will change the reality: Australia is one of the lowest-taxed countries in the Western world. If Tony Abbott becomes prime minister next year, as seems likely, he will try to repeal both taxes, and will probably succeed. But it will be only a temporary victory. Both taxes will return, probably in different forms. Both taxes will be levied by future Liberal governments.

You can predict that, because in the past the Liberals have rejected so many Labor reforms, only to adopt them later. Medicare, for example, was initiated by the Whitlam government as Medibank, scrapped by the Fraser government, reinstated by the Hawke government, then embraced proudly by John Howard and his health minister, Tony Abbott.

The Liberals initially fought Aboriginal land rights, only to adopt them once in government. We saw similar feigned anger over the Keating government's Native Title Act, only for the Howard government to adopt it with minor changes. Howard's Liberals opposed compulsory superannuation when the Hawke government introduced it. There are many other examples.

A carbon price is the cheapest way of getting companies and people to make choices that slow the growth in greenhouse gas emissions heating the Earth. Give us a price incentive, and we find ways to reduce emissions with little damage to profits or our standards of living.

The market does this better than governments giving taxpayers' money to companies to do things they would do anyway.

A mining tax is justified because minerals belong to the people, and we deserve a fair share of any super profits made from mining them. The Coalition accepts this argument for oil and gas; the Howard government raised billions of dollars from the petroleum resource rent tax. A future Liberal government will agree that it makes sense to apply a similar regime to iron ore and coal. That is why Liberal governments in resource-rich states have raised royalty rates.

In Victoria, alas, Ted Baillieu does not have that option. And since the High Court interprets the constitution to mean that state governments in effect are forbidden to tax income, tax expenditure or tax production despite the intentions of the founding fathers Baillieu is left with a pack of lousy taxes, mostly on transactions, which are volatile when markets turn down, as now.

The sharp fall in housing sales and prices, flat spending on items carrying the GST, flat jobs growth: state revenue has been hit by a perfect storm. And if you don't have the revenue, you can't pay the salaries.

In 11 years, the Bracks and Brumby governments increased the public service from 23,000 to 37,000. Surely it makes sense for Baillieu to cut it back to 33,000 to help ride out the fiscal storm.

His government is in trouble for many reasons, such as its excessive cuts to TAFE, but cutting the public service should not be one of them.

On most issues, this has been a more moderate and sensible government than it has been given credit for. Its weakness is the one Paul Keating pointed to last week in the Gillard government: it lacks a compelling narrative, a credible explanation to us about what it is doing, and why.

Baillieu became Premier because of his self-discipline, good judgment, a progressive streak, careful planning and willingness to take risks.

Now he must add an ability to communicate, to define his government to us in ways we will endorse. The stakes are high.


Monday, June 25, 2012

Who are we. Melbourne, as seen by the census

ONE in three of Melbourne's residents today was born in another country. Almost as many speak a foreign language at home. Nearly one in five is of Asian ancestry, mostly Chinese or Indian.

You see it every day on the streets, but the 2011 census has confirmed that Melbourne has become a different city different not only from what it used to be, but from the way the rest of Australia still is.

The census results show that more than just the ethnic make-up has changed. Migration has reinforced the city's traditional values, because the newcomers tend to be socially more conservative than those born here.

First, Melbourne has become much better educated: the census found 72 per cent of adult residents have completed year 11 at least, compared to just 60 per cent in the rest of Australia. The city has 18.6 per cent of Australia's population, yet almost a quarter of Australia's full-time university and TAFE students study here.

Second, Melbourne is relatively young. In the rest of Australia, the census found only 34 per cent of people are aged 20 to 44, with 40 per cent aged 45 and over. In Melbourne, by contrast, 38 per cent of people are aged 20 to 44, with just 37 per cent in the older group.

Third, despite what many would expect, Melbourne now leans to traditional family values. More residents over 25 are married here than in the rest of Australia. Fewer Melbourne people live in de facto relationships than elsewhere especially among under 25s.

That reflects the impact of the 433,628 immigrants who have settled in Melbourne in the past decade or so. One in four migrants makes Melbourne their home and they bring with them their homeland's values.

For example, the census found Melbourne has fewer divorces and marital breakups than the rest of Australia. Only 12.2 per cent of people over 25 in Melbourne were divorced or separated, but 13.7 per cent in the rest of Australia were.

Melbourne also has a higher rate of home ownership and, relative to housing prices, lower household debt. The census found the median weekly household income was almost $100 or 8 per cent higher than in the rest of Australia, but the median mortgage payment was virtually identical: $1810 a month in Melbourne, $1800 nationally.

While home ownership rates have fallen everywhere, 71 per cent of homes in Melbourne are owner-occupied, with just 28 per cent rented. In the rest of Australia, occupants own 68 percent and landlords 31 per cent. We re also cosier here. Melbourne

has more mediumdensity housing than average and slightly fewer children, and

45 per cent of homes have three or more occupants, compared to 41 per cent elsewhere.

But immigration has also brought diversity, especially in religion. Once, Melbourne was a

stronghold of Anglicans and Protestants. Now their numbers are fast-dwindling, as other religions advance.

The census found 35.4 per cent of people elsewhere in Australia are Protestants, but just 22.4 per cent in Melbourne. Only 10.8 per cent ofMelbourne people now identify as Anglicans, compared to 18.6 per cent in the rest of the country.

By contrast, Melbourne has more than its share of Catholics (27.2 per cent) and twice as

many Orthodox (5.8 per cent) as elsewhere. Almost half of all Australians who follow Judaism live here. And immigration has given it roughly 30 per cent of the nation s Buddhists, Muslims and Hindus.


Friday, June 22, 2012

Census: How we're changing

MULTICULTURALISM has won the battle for Australia. The 2011 census reveals that Australia has become a melting pot of races, with more than one in four Australians having arrived here as migrants, while almost one in eight have Asian ancestry.

Less than 40 years after the White Australia policy was buried by the Whitlam government, the census results unveiled yesterday by the Australian Bureau of Statistics reveal a land of many cultures, many ancestries and many religions.

In the decade to 2011, the growth in Australia's population was mostly among people of Asian ancestry. From just 982,519 in 2001, the number of Asian-Australians has swollen to 2.4 million in 2011 - or from 5.5 per cent of us to 12 per cent.

Even in Melbourne, where Italian and Greek migrants transformed the city in the post-war generation, more residents now speak Chinese or Indian languages at home than Greek or Italian - and almost one in five Melbourne residents is of Asian ancestry.

Diversity has won the battle for Australia. It has become a country where - for better, or for worse - more and more people are abandoning the old cultural norms. More parents and live-in partners are unmarried. Only 61 per cent of Australians now call themselves Christians, down from 68 per cent a decade ago.

For the first time, most Australians aged 25 to 34 are no longer Christians. Just 49 per cent identified with any Christian denomination - almost half of them Catholics - while 10 per cent declared themselves for Buddhism, Hinduism, Islam or Judaism, 3 per cent professed other beliefs, 29 per cent said they had no religion and 9 per cent gave no answer.

Catholicism is resisting the tide, but the main Protestant denominations are seeing their numbers erode away. In 1981, 26 per cent of Australians said they were Anglicans; in 2011, just 17 per cent were. The Catholics have lost some ground among the young, yet in sharp contrast to the Anglicans' fate, 25 per cent of Australians still call themselves Catholics.

Marriage too is losing ground. The census found fewer than half of Australians over the age of 15 are married. The Prime Minister and the First Bloke were among almost 1.5 million Australians living in a de facto relationship - almost 10 per cent of the adult population. More de facto relationships now include children. In a decade, the number of children living with de facto families has swelled almost 50 per cent to 526,000: one in 10 children.

Seven in every 10 children still grow up in traditional families, with two married parents. But with more than a million dependent children living with single parents, and half a million living with unmarried parents, the old social mores are now deeply fractured - particularly among those born in Australia, rather than overseas.

The census found 548,368 Australians now identify themselves as indigenous, up 34 per cent in a decade. Their median age is just 21, compared to 37 for non-indigenous Australians, which helps explain why so many are footballers.

In the decade, Australians have grown richer, but even more in debt. While the median household income rose 57 per cent since 2001, the median mortgage payment swelled by 108 per cent, and the median weekly rent was up 97 per cent. Only 33 per cent of us own our own home outright, down from 42 per cent.

At least those homes are now wired. Even before the NBN started reaching us, 72 per cent on census night last August had broadband at home, and 80 per cent had some form of internet connection. Would you believe that a decade ago, the 2001 census found only one in three Australian homes was connected to the net?


Thursday, June 21, 2012

Census: We've lost 300,000 Australians

AUSTRALIA lost almost 300,000 people on the way to last year's census. The census count suggests that Australia's population growth since 2006 was much smaller than previously estimated, especially in NSW, Victoria and Queensland.

In its first release of census-based data, the Bureau of Statistics has slashed its estimate of the population in mid-2011 from 22.6 million people to 22.3 million. The cut of 294,400 is equivalent to wiping away roughly a year's population growth.

Based on the census findings, the bureau estimates that at June 30 last year, Queensland had 106,000 fewer residents than earlier reported. NSW lost 91,000 people, Victoria 87,000, and South Australia 18,000.

By contrast, the census found slightly more people than expected living in WA, Tasmania and the territories.

Despite the downgrade, Victoria still added more people than any other state between 2006 and 2011, growing by 408,000 or 8 per cent. NSW added 395,400 people, growing just 5.8 per cent.

The bureau will spend the next year working out what was wrong with its earlier estimates. In an explanation yesterday, it gave several possible reasons, including errors in the 2006 census figures, or in the records of births and deaths, or in estimating the real size of net overseas migration.

Yesterday's figures are only preliminary, with final post-census results to be released in a year's time. The bureau next month will publish revised estimates of city and regional populations, which are likely to slash population estimates for the main cities, other than Perth.

Its updated figures show WA streaking ahead in population as well as economic growth. By the end of December, Australia's population had edged up to 22.5 million, growing by 1.4 per cent, but WA was growing at more than twice that rate.

Over 2011, WA outgrew Queensland in absolute numbers for the first time, its population growing by 67,400 or 2.9 per cent while Queensland grew 66,500 or 1.5 per cent.

Victoria again had the biggest growth in numbers, its population rising 75,400 or 1.4 per cent, while NSW grew by 71,000 or 1 per cent. On December 31 NSW had an estimated 7,250,000 people, and Victoria 5,575,000.

Net emigration from NSW to other states jumped sharply in 2011, from 11,240 to 16,100. Victoria again had slightly more people arriving than leaving, gaining a net 3330 from other states. But the main shifts were to Queensland, which gained a net 9600 people, and WA, which took in a record 8460 net arrivals from the rest of Australia.

The first census data also reveals that Australians are getting older, with the median Australian now aged 37.3 years, a sharp rise from 32.4 years in 1991. The proportion of Australians who have faced 65 candles on their birthday cake has grown from 11.3 per cent in 1991 to 13.8 per cent in 2011.


Tuesday, June 19, 2012

So why aren't we feeling confident?

GLENN Stevens and Wayne Swan want Australians to feel confident about the economy; we refuse. Why?

Look at the fundamentals, our leaders say. In a troubled world, our economy is growing at trend rates. Unemployment is only 5.1 per cent, jobs at record levels. Inflation is negligible. The government has low debt and, with a few fiddles, claims to have a budget surplus. The Reserve Bank's cash rate is near its historical low. So why aren't we confident?

There are many reasons, and we may differ as to how much weight each of them has. They reflect our fears for the future, from the global economy to the carbon tax. They reflect other economic fundamentals that the Treasurer and the Reserve Bank governor are less keen to mention. And they reflect the corrosive impact of the poisonous political partisanship and lack of common purpose in our fast-degrading democracy.

Let's take the global economy first. The narrow victory for the two mainstream parties, New Democracy (right) and Pasok (left), in Sunday's Greek election clears one hurdle facing European leaders. It buys them time to change course and set sail for growth. But Europe is awash with debt: too many governments and banks have taken on too much of it; too much time has been lost by bad decisions; and too many interests remain in conflict. There is a real risk that its great recession will turn into a depression around the world.

Even in Greece, Sunday's vote was anything but a clear mandate. New Democracy and Pasok shared just 42 per cent of the vote, compared to 46 per cent for the four main anti-bailout parties on the far left and nationalist right. Their majority came only from the 50-seat bonus given to the biggest party. The big shift since last month's poll is that the right has regrouped behind the pro-austerity New Democracy, while the left has regrouped behind anti-austerity Syriza, which will now await its time.

Still, a win is better than a loss. It is now up to Germany and the European Union to drop their hard line and admit what everyone knows: that their deficit reduction targets cannot be met by countries in deep trouble, such as Greece and Spain, without taking them into even deeper trouble. Julia Gillard is right: to reduce deficits of this order, you need growth. That requires not only a growth package, but a much slower timetable for deficit reduction.

Most Australians don't spend time thinking about Europe's problems (or those of the US, which by December could eclipse them if Democrats and Republicans can't agree on how to reduce its deficit). We have lost confidence mainly because our real economic situation is less rosy than Swan claims, and because 2? years of non-stop strident partisan politics has corroded confidence in everything: government, opposition and the economy.

Stevens highlighted one key factor. In the past our boat raced along, helped by the tailwind of rapid growth in debt. The ratio of household debt to disposable income almost doubled under Hawke and Keating, from 37 per cent to 70 per cent, and then more than doubled under Howard, to 156 per cent. In 25 years, the amount we owe relative to the amount we earn quadrupled. Some of us have argued for years that this was not sustainable. We now welcome the Reserve Bank to the club as a new member.

Rapidly growing debt felt good. It fuelled our house prices, which created the illusion of rising wealth. Between 1995 and 2005, Stevens said, household assets per head rose by 6.4 per cent a year, mainly due to soaring house prices. As a result, we spent more: on average, each of us bought 2.8 per cent more goods and services every year. And since consumer spending makes up 60 per cent of GDP, that produced strong growth: on average, GDP per head rose 2.5 per cent per head each year.

Contrast that with the years since 2007. In real net terms, the average Australian today owns almost $30,000 less than they did in 2007. Since the GFC sent stock markets crashing, our real wealth per head has shrunk at the rate of 3.25 per cent a year. GDP per head has grown by just 0.3 per cent a year. Growth in real consumer spending per head has halved to 1.5 per cent. Stevens welcomes that as necessary adjustment to the reality that we can't increase debt forever. But, he says, we resent it, and it is primarily that loss of wealth that makes us grumpy.

He is right, but there are two other keys to this story. First, we remain massively in debt. Since December 2007 household debt has grown by a whopping $310 billion. In December 2011, the ratio of household debt to household income was still 150 per cent. Mortgage bills still ate up 11.2 per cent of our disposable income, only slightly less than in 2007. Relative to our incomes, our debt was almost as big as ever and so were our interest bills.

Then shouldn't the Reserve's interest rate cuts lift our spirits? No, because of the banks. Since the end of 2007 the Reserve has cut its cash rate from 6.75 to 3.5 per cent, yet barely half of that has been passed through to households, and even less to small business. The other half has gone to the banks, whose profits, on average, have grown at double-digit rates each year since the GFC began.

Whenever the Reserve cuts rates, the good news is stolen by the banks appearing to grab more for themselves. Some of that was justified, but the bottom line is excessive. Essentially, the banks have looked after themselves, not their clients. So their clients are angry.

Another problem is that there is not one Australian economy any more. Mining is running red hot, some sectors such as health and finance are prospering, but a lot are not. Spending in the mining states is growing at 10 per cent a year. Spending in the south-east, where most Australians live, is growing at 2 per cent, and unemployment is rising. When policymakers ignore the reality around them, people get angry.

Then there is the corrosive effect of Tony Abbott's relentless war on everything Labor does. Politically, it has been very effective; helped by the Murdoch press and some right-wing radio shock jocks, the country's mood outside Victoria now resembles that of 1975. But one of the casualties is confidence in the economy. When Abbott and his troops tell us day after day that the carbon tax will wreck the economy, many people believe him and plan for the worst.

Successful economies tend to be those with a sense of common purpose, where compromise is not a dirty word and opponents are not enemies. Australia had that under Menzies, lost it in the Whitlam years, regained it under Hawke, and has now lost it again. It would help if we could get it back again.


Saturday, June 16, 2012

Productivity. Poor answers from the Commission

LIFT productivity, or die. Stop whingeing about the high dollar, falling asset values, sluggish demand. Instead, adapt to it, by raising productivity.

That was half of Glenn Stevens' message to this week's economic forum in Brisbane. (The other half was to tell us again that we are doing better than we think.) And the Reserve Bank governor hit a theme with many friends.

The government says productivity growth is one of its key priorities. Its forum focused largely on key areas for raising productivity: innovation, infrastructure, skills, and deregulation.

The Business Council and others are focusing their advocacy on their priority areas for lifting productivity.

And while productivity is not the only source of growth, or of competitiveness, it is clearly a crucial one.

The data shows Australia losing traction. In the "jobless recovery" of the 1990s, productivity grew rapidly. Then, in the benign 00s, job growth accelerated, but productivity growth slowed. If you believe the national accounts, in the four years to March 2011, GDP per hour worked grew just 0.1 per cent. (And then in the year since, productivity shot up 4 per cent, but hours worked rose just 0.4 per cent.)

Few economists believe all this. Stevens thinks part of the slowdown stems from timing issues rising from the mining boom, part reflects "a material slowing in productivity growth", and part is just inexplicable. Merrill Lynch chief economist Saul Eslake sees the slowdown largely as a product of the good years.

Companies themselves have the most ability to lift productivity. What government can do is to remove barriers to firms working at their full potential.

The Keating government's dismantling of centralised wage fixing in favour of enterprise bargaining was a classic example.

But policy debates focus on what governments can do. And while some options are obvious governments can lift productivity by rolling out high-speed broadband, or removing level crossings on busy roads making a priority list of reforms is a lot more subjective. Stevens flick-passed it to the Productivity Commission, saying it had published a list of reform proposals. Governments, he said, should "go get the list, and do them".

Sorry, governor, but the commission's last reform wish list was published in 1996. Its chairman, Gary Banks, has named some fields ripe for reform in recent speeches "labour market policies . . . the taxation system . . . business start-ups, development approvals and land-use changes . . . red tape" but Banks has survived 14 years as chairman by speaking fluent nuance, rather than unnerve governments with his own reform agendas.

The OECD, far away in Paris, has no such inhibitions. Every year it publishes a list of reform priorities for its members. For Australia, its 2011 list was:

Infrastructure: build more, but choose it more carefully. Project selection should follow "rigorous and published cost-benefit analysis".

Foreign investment: remove screening for investments under $1 billion, and be more transparent about why decisions are reached.

Tax reform: Cut income tax rates, cut corporate tax rates, and raise the GST. Reform state taxes on housing.

Participation: Encourage workforce participation by lifting the threshold for income tax (as the Labor government has since done) and reduce effective marginal tax rates.

Childcare: Lift benefits for children under school age, but limit them to parents who are employed or searching for work.

But the benefits of these may be long-term. And for many companies, the crisis is now.


Thursday, June 14, 2012

Businesses - don't cut our tax rate

BUSINESS leaders have rejected a new plan put by Prime Minister Julia Gillard to the government's economic forum to restore the government's proposed cut in company tax rates but this time pay for it by raising other taxes on business.

At the forum's closing session, Ms Gillard said the government will direct its business tax working group to give priority to working out how a cut in company tax rates could be paid for by cutting corporate tax breaks or finding other ways to raise revenue from business.

The decision comes just a month after the Government scrapped its plan to cut company tax from 30 per cent to 29 per cent, after the opposition refused to support it and the Greens insisted the tax be cut only for small business.

"We've heard you loud and clear on the company tax rate," she said. "We see it as the priority for the next step in tax reform.

"We're in the cart for a lower company tax rate but it has to be affordable. And that means it has to be funded by other changes in the business tax system."

But business leaders ruled out any such trade-off. Business Council chief executive Jennifer Westacott said a reduction in company tax should be financed by spending cuts, and be part of wide-ranging tax reform, which lowered overall business taxes. Australian Chamber of Commerce and Industry policy director Greg Evans also insisted that the tax cut be paid for by spending cuts.

Australian Industry Group chief executive Innes Willox, who told the forum the government should set a medium-term goal to cut company tax to 25 per cent, dismissed as "ludicrous" a government proposal to finance the cut by slashing tax incentives for research and development. But he welcomed the referral to the business tax working group, calling it "a discussion we have to have".

Opposition Leader Tony Abbott said that once again the PM was taking Australians for mugs.

"What Julia Gillard has announced is that there will never be a company tax cut unless it is funded by a tax increase. That is not a tax cut, that's a tax con and the Australian people and business community will see right through it," Mr Abbott said.

But the business leaders agreed that the forum had been valuable in opening up dialogue between business, government and unions. They particularly welcomed the forum's focus on lifting productivity, which was the main theme of a keynote speech by Reserve Bank governor Glenn Stevens.

Ms Gillard also flagged minor reforms to encourage job seekers to move interstate to find work, to give them more incentive to enter training courses and make it easier for small business employees to undertake training.

She also pledged wide-ranging initiatives to encourage Australian firms to become part of global supply chains.

The forum divided, however, on the crucial issue of reducing construction costs. Ms Gillard ruled out a proposal by Premier Ted Baillieu to hold a Productivity Commission inquiry on construction costs, instead endorsing a proposal by union leaders for tripartite working groups of business, unions and government to examine the issue.

The business response was guarded. Master Builders Australia CEO Wilhelm Harnisch welcomed "the recognition that tackling construction costs has to be an important part of the productivity equation".

But Mr Baillieu said an independent inquiry by the commission was the way to get action.

The only Liberal politician at the forum, Mr Baillieu said he was pleased he had gone and particularly pleased that the forum acknowledged that priority must be given to fiscal consolidation, lifting productivity, and developing new markets in Asia.


Wednesday, June 13, 2012

Productivity: Easy to say, hard to do

Stop complaining about the economy, start adapting to it - and adapt to it by raising productivity.

That's the gist of Glenn Stevens' ideas for Australia, and it's pretty much the same message that Julia Gillard and Wayne Swan are delivering to the Government's economic forum.

Last week Stevens declared that Australia's glass is "more than half full", contrasted its growth with the stagnation of Europe, Japan and the US, and suggested that much of Australia's glum economic mood was due not to the high dollar and the mining boom that caused it, but to the end of the extraordinary rise in wealth delivered by three decades of debt - and particularly, the decade to 1995.

Today he repeated all that, with a further twist: arguing that the high dollar was really not all that high if you look at it in a very long term perspective.

In real terms, the Governor said, the dollar is now back to where it was 100 years ago, relative to the US dollar. In nominal dollars, it's even better: 100 years ago, ten shillings (the equivalent of our dollar today) would buy you $US2.40.

Even in Stevens' own lifetime, he recalled, the dollar had been $US1.40 before the high inflation of the Whitlam and Fraser era.

Well, true. But then, as Keynes said: "In the long run we are all dead".

That distant past is irrelevant to the problems we face now. And to the extent that the Governor conceded that the high dollar is damaging large swathes of the Australian economy, his advice was simply: adapt. Learn to cope with it, by making your business more productive.

How? he was asked. He waved it on to the Productivity Commission, whose chairman, Gary Banks was in the audience. The commissioned has published a long list of proposed reforms, Stevens said. His advice to governments was: "Go get the list, and do them".

"They're not popular. They're politically very difficult", he conceded, pointing to reform of Federal/State relationships as an example. "They're very hard to do, and it's grinding work." But that was his only suggestion.

A Reserve Bank governor has to be careful in what he says. Anyone else might add that politically, reform agendas become virtually impossible when politics becomes as polarised as it is now.

Many of the problems facing the Australian economy - highlighted in the past two days by surveys showing business confidence at a three-year low, and consumer confidence showing virtually no gain from the recent interest rate cuts and budget handouts to households - are worsened by us living in an environment of constant negativity and attacks on whatever course the government decides on.

Tony Abbott's war against everything has made good government in Australia very difficult, and courageous reforms almost impossible. Labor's main contribution has been the carbon tax, and Abbott has taken a blood vow to undo that reform. Whatever it proposes, he opposes.

Look at the United States, and India, where partisan politics has ruled out any serious attempt to reform even the most obvious problems. Australia is now in that state.

Australia would not have been able to achieve the reforms it did in the 80s and early 90s if John Howard, Andrew Peacock and John Hewson had adopted Abbott's take no prisoners approach to the job of Opposition Leader.

They did oppose a lot of things that Liberals now accept - compulsory superannuation, Medicare, indigenous land rights, to name a few - but they waved many of Labor's reforms through. Had they not done so, we wouldn't have had the benefits those reforms have brought since. A war against everything ends up becoming a war against us.

But Labor is also playing partisan games where it ought to be trying to create a bipartisan agenda.

Last night behind closed doors, Swan flatly rejected a call by Victorian Premier Ted Baillieu for a Productivity Commission inquiry into Australia's construction costs. That was a serious step backwards, after Gillard had appeared supportive of the proposal when Baillieu raised it earlier this year at the Council of Australian Governments summit.

The issue is of huge importance to raising productivity. One of the main ways of raising productivity is to invest in better infrastructure - that's exactly why we're building the NBN - and Australia has an estimated backlog of $700 billion of infrastructure projects which could raise productivity significantly if they were built.

But they can't be built because construction costs are so high. Victoria is looking at a $100 million bills on average to replace each of Melbourne's 175 level crossings. Asian cities are racing ahead of us in this area.

Baillieu is the only Liberal premier to accept his invitation to the forum. His proposal was a sensible, modest first step to trying to bring down construction costs.

At worst, it could do no harm. At best, it could do a lot of good. But Labor depends financially on donations by the construction unions, who do not want the Productivity Commission investigating their turf. So no inquiry - and none of the productivity gains that might have resulted from it.

Productivity remains a word that easy to say, hard to do.


Opening night at the economic forum

JULIA Gillard has renewed her push to cut company tax rates and taken aim at the states' stamp duties on home purchases, at the launch of the government's economic forum in Brisbane last night.

Opening the forum, the Prime Minister asked delegates to focus on how the nation could improve its competitiveness and increase labour mobility to ensure that Australian workers filled more of the jobs created by the resources boom.

She made it clear that despite scrapping her promise to lower company taxes, Labor would revive it if it had support from other parties. The tax cut was abandoned after the Liberals refused to support it and the Greens insisted it be restricted to small business.

"I've got no doubt the company tax rate should be lower and no doubt the revenue base has to be maintained as well," Ms Gillard said.

She linked the issue of labour shortages in the mining sector to stamp duties on real estate transactions, saying: "We've got to talk about labour mobility . . . We've got to crack this nut.

"We've worked on national licensing of professions and trades and on incentives for welfare to work, and now we're turning attention to more improvements to jobs services, and to issues like state transaction taxes on property as well."

Abolishing stamp duties on conveyancing would be popular with home buyers, who fork out $23,500 in tax to buy an average $500,000 Melbourne home. But in most of Australia, it is the third biggest source of state revenue. Victoria relies on it to fund $3.5 billion a year of spending.

The ACT government last week began a 20-year phasing out of stamp duties, which it will replace with higher property rates. The states' choices would be to increase the GST which the Gillard government has ruled out or raise land taxes, as the Henry tax review urged.

Critics point out, however, that the mining boom has had to be manned by fly-in, fly-out workers because Australians prefer to stay with their friends and families.

At the opening dinner, Treasurer Wayne Swan called on the 150 delegates from business, unions, governments and community groups to focus on improving productivity in service industries, so that they become the suppliers of choice for Asia's rapidly-growing middle class.

He urged Australians to put down partisan views and start "a mature debate about productivity" with the aim of lifting Australia into the world's top 10.

The opening session of the forum focused on the importance of Asia to Australia's economic future but also on the reforms needed if Australia is to maximise its gains from Asia's phenomenal growth.

Five sessions today, mostly behind closed doors, will debate the problems of the patchwork economy and the high dollar; innovation and collaboration in industry; investing in infrastructure; building skills and education; and deregulation and reform of competition policy.

Mr Swan announced that he would lead a business delegation to China and Hong Kong next month, to celebrate the 40th anniversary of diplomatic relations between China and Australia, and give Australia's business leaders "an opportunity to develop business links with major Chinese companies and authorities".

Mr Swan said he welcomed debate on productivity, but some claims being made "were not grounded in facts". He struck a John Howard stance, telling business leaders: "The challenges and opportunities of the Asian century are bigger than the day- to-day cut and thrust of our political debate. They're bigger than any partisan divide."

But his appeal for bipartisanship fell on deaf ears. Ted Baillieu is the only Liberal premier to attend the event, and Opposition Leader Tony Abbott dismissed it as "a carefully-scripted, choreographed event".

"She [Ms Gillard] is not interested in changing policies. She's just interested in stifling criticism," Mr Abbott said.


Tuesday, June 12, 2012

Good but not that good. The green lights won't last

HOW do we follow up a week like that? For months the economic data here and abroad has been all red and amber lights. Then suddenly we get a wave of green lights, all at once, that seems to clear away the blockages and open up a clear path ahead.

An interest rate cut on Tuesday was followed by the Bureau of Statistics reporting unbelievably strong GDP growth and a sustained rebound in jobs. Then the rest of the world waved us on: China cut its interest rates and announced huge export growth, and European finance ministers agreed to lend Spain up to 100 billion euro($A125 billion) to prevent the collapse of its banks.

If only every week was like that. Then Wayne Swan and the Pollyanna chorus would always be right, confidence would never be short and there would be no point in reading (or writing) columns on economics.

But we know that things are not that simple. We don't usually get waves of green lights sweeping us past every intersection. Good data behind us even if it survives the revisions does not guarantee good times ahead. It's certainly welcome, but while it eases the problems facing Australia and the world in the next 18 months, it does not remove them.

For Australia, the next big test is the introduction of the carbon tax on July 1, along with $2.4 billion of handouts to households in compensation and the school kids bonus. That will be a test of the hyper-emotional, hyper-negative tone that suffocates political debate in these times. Influential forces are trying to derail the tax, and would not mind if they derailed the economy as well.

For Europe, the next big test will be Sunday's Greek election, and the negotiations that will follow, whoever wins, to either rewrite Europe's fiscal austerity pact or remove Greece from the eurozone. At this stage, everyone is taking positions to try to influence the election result. What will happen after it is anyone's guess; the stakes are immense.

Take Australia first. At face value, last week's GDP figures tell us the economy is powering ahead, propelled by robust consumer spending (up 4.2 per cent in a year), quite extraordinary growth in engineering construction (up 53 per cent in that time), strong growth in payrolls (7.4 per cent) and productivity (4 per cent) and booms in sectors from finance to government administration, healthcare, the professions, wholesale trade and agriculture.

Most of that is probably broadly true, if overstated. As I reported on May 11, the Bureau of Statistics has run into technical problems with its jobs data, leading it to overstate jobs growth in 2010 and understate it in 2011 and 2012. Federal and state tax collections confirm that actual job growth has been stronger than the bureau figures show. And that means the economy has also grown more strongly than we thought.

Healthcare and the professions are growth industries. The farmers have had a lot of rain, wholesalers have had a lot of imports. The big banks are shedding staff, but they are also losing market share to smaller banks and non-bank lenders. And migration figures imply that population growth is accelerating.

But there are serious question marks over the two drivers of growth. Growth in consumer spending actually slowed, yet the bureau says that prices have stopped rising, so we've actually hit the pedal to buy more and more. Tell that to High Street.

Even more amazing, it says engineering construction costs are almost flat, despite the mining boom: in the past 3 years they have risen 1.8 per cent (0.5 per cent a year), a sharp change after 24.8 per cent growth in the previous 3 years. Tell that to the Pilbara.

The GDP numbers are likely to be revised down, but to still fairly buoyant levels. The central problem remains: mining is booming while south-eastern Australia is not. In the year to March, spending grew by 10 per cent in the resource states but only 2 per cent in the south-east. The dollar, after three months of welcome falls, has bounced back up to nudge parity with the US dollar. And, like everyone else, our growth depends on what happens in Europe.

The rescue of the Spanish banks buys time for Europe's leaders to negotiate a growth pact, then either exempt Greece from its budget constraints or push it out of the eurozone and risk the fear and uncertainty that would create.

It was a good week for us, and the world, but there are rough times ahead. The best thing is that we are entering this period in stronger shape than we thought. And more than most countries, we are able to make our own fortune.


Saturday, June 9, 2012

Stevens: Why it doesn't feel as if we're doing okay

GLENN Stevens has three messages for us.

First, the economy is going better than we think: our glass is "at least half full".

Second, don't blame the mining boom for the rest of the economy growing slowly: rather, it's the hangover from our binge during the decade of debt.

And third, the days when "the effortless way to get rich was to gear into rising house prices" are gone for good. House prices and debt will not rise like that again. The Reserve Bank will not act "to pump up speculative demand for assets".

And we might draw a fourth message from the governor's speech in Adelaide: don't expect more interest rate cuts soon, unless things in Europe get really ugly.

The first message is hard to dispute after this week's bonanza of strong economic data even if Stevens hints gently that, like other economists, he takes the estimate of 4.3 per cent GDP growth with a grain of salt.

"The underlying pace of growth is probably not quite that fast, but it is quite respectable, something close to trend," he says. "If the recent data are taken at face value, the non-mining economy has grown at about 2 per cent over the past year."

Yes, but with the population growing at 1.5 per cent, economic growth of 2 per cent does not leave much new money to spread around.

And if the GDP number is revised down, as big growth numbers usually are, it leaves less again. Still, he's right: our glass is half-full.

The second message is his central one. Stevens is puzzled by why Australians don't see their economy as the island of growth it seems to outsiders.

He thinks much of our dissatisfaction really stems from the fact that household wealth is now going backwards, after a decade in which it averaged real growth of 6 per cent per head per year. But its growth was fuelled by sharply rising debt, and that had to end.

As we save more and spend less, Stevens says, real growth in consumer spending per head has roughly halved, but our financial position has strengthened: "A certain degree of thrift" is good for us.

His key point is that that thrift is a return to normal. It was the years from 1995 to 2007 that were unusual.

Retailing, banking, real estate and housing investors won't see those times again.

We need more confidence, he says, but "it has to be the right sort of confidence".

Our growth from here should be based on productivity, "doing things better, in 1000 different ways" not on speculation.


Friday, June 8, 2012

Those growth figures - they'll be revised down

Wednesday's stunningly high estimate of 1.3 per cent growth in the March quarter is likely to be revised down in future, if past experience is any guide.

Bureau of Statistics data shows that of the past 100 quarterly GDP figures, 18 originally reported growth as being 1.3 per cent or higher. But 12 of those 18 figures were later revised down, most substantially so. Five were revised up, by small amounts, while just one of the 18 ended up as the figure first reported.

The bureau is constantly revising past GDP figures, often changing them dramatically as new data comes to light. But once the spotlight has moved on to the next figures, the public, politicians and economists take no interest. A spectacular example was the 1990-91 recession. The bureau originally estimated that GDP fell 3.2 per cent in the six quarters from April 1990 to September 1991. But now it estimates that GDP fell just 1 per cent in that time. What was said to be the worst recession since the Depression was revised down to be our smallest recession in loss of output - even though it saw the biggest loss of jobs.

The same is true at the top end. Initial estimates showing big GDP growth are usually revised down, on average by 0.4 percentage points.

Four of the past 100 quarterly estimates showed GDP growing by 1.3 per cent. All have since been revised down, on average to 0.9 per cent.

If that happened this time, it would still be a good result, given the strains on the economy revealed by wide-ranging job losses, falling house prices, and weak business and consumer confidence.

But the figures show most of our growth was in two areas - consumer spending and engineering construction - and both rest on very low estimates of inflation.

On these figures, consumer prices rose just 0.1 per cent in the six months to March. In the frenetically busy engineering sector, construction costs rose just 0.1 per cent in the March quarter, and 2.2 per cent in the year.

Despite the anecdotes and mining companies' complaints about the high cost of construction in Australia, the bureau says that in the past 3? years, engineering construction costs have risen just 1.8 per cent or 0.5 per cent a year. That's some contrast to the previous 3 years, when they rose 24.8 per cent.

If correct, that is remarkable, and it sheds a very different light on what a mining boom means for prices.

If it is wrong, then so are the GDP figures, since engineering construction made up almost half the growth in Australia's spending.


Thursday, June 7, 2012

GDP: These figures strain credulity

THERE'S an old saying among economists: if a figure looks wrong, it usually is. Yesterday's estimate that GDP grew 1.3 per cent in the March quarter amid all the job cuts is a good example.

These figures strain credulity. If they are right, then the economy has far more strength than we suspected. If they are wrong, they will be revised down, or followed by a fall.

These are just first estimates. The bigger the first one, the more likely it is to be revised. For June 2010, the first growth estimate was 1.2 per cent; that now reads as 0.6 per cent. Just a year ago, GDP was estimated to have fallen 1.2 per cent in the March quarter: that fall is now just 0.5 per cent.

Suppose the figures are right: what do they tell us that we didn't know? Quite a lot.

They show an economy firing on two engines: mining investment and consumer spending. We knew about the first, and is it firing! Engineering construction, 5 per cent of the economy, now generates half its growth.

In Western Australia, demand (total spending) jumped 14 per cent in the past year. On these figures, WA is growing faster than China. The surprise is the second engine. On these figures, far from being cautious consumers, we have been on a binge.

Consumer spending shot up by 1.6 per cent in the March quarter. We bought 3.7 per cent more food, 5.5 per cent more flights and transport services, as well as big rises in health services, spending in pubs and restaurants, entertainment, clothing, and so on.

But a close look shows something strange. In fact, growth in spending has not risen. In the past six months, it has been the slowest since 2010. What's new is that inflation has disappeared.

In those six months, the bureau says, consumer prices grew just 0.1 per cent. So virtually all our spending growth must have been used to buy more of everything. Really? Yes, we bought more bananas, but all the other stuff?

A second surprise: productivity shot up. With all the job cuts, hours worked fell 0.6 per cent. But output grew 1.4 per cent, so that means we produced 2 per cent more for every hour worked. The bureau estimates productivity shot up 4 per cent in the year, and 5.3 per cent in the market sector. That's hard to swallow.

Third surprise: the bureau says all sorts of industries are enjoying unexpected booms.

Government spending grew a modest 1.2 per cent over the year, yet the output of public administration shot up 5 per cent. You wonder how they work that out.

Mining had the fastest growth (11.3 per cent) and agriculture (10.6) was close behind. Finance recorded 5.4 per cent growth, despite job cuts and little credit growth. The professions, transport and wholesale trade all grew more than 5 per cent. Even on these figures, Australia is still a two-speed economy. Over the year, demand grew 10 per cent in the mining states, and 2 per cent in the south-east, where 70 per cent of Australians live.

The figures suggest Victoria was in recession in the second half of 2011, but leapt out of it in the March quarter, thanks to us consumers. Uh-huh.

Wayne Swan wants us to take pride in these figures. I would if I could believe them.



Growth in demand, year to March

$b %

Resource states

WA 5.8 13.6
Queensland 5.2 7.8
NT 0.7 15.1
Total 11.8 10.2

South-eastern states

NSW 2.1 2.1
Victoria 1.5 1.9
ACT 0.4 3.2
SA 0.2 0.7
Tasmania - 0.02 - 0.2
Total 4.2 1.9


$m %

key sectors of growth
Consumer spending 7.8 4.2
Engineering construction 7.7 53.0
Exports 3.9 6.3
Machinery & equipment 1.5 7.5
Fed govt investment 1.1 21.2
Business building 0.8 11.8
and those pulling us back
Imports - 8.3 - 11.5
State govt investment - 2.3 -15.3
Housing construction - 1.1 - 6.2


Mining 2.7 11.3
Finance 1.7 5.4
Professions 1.1 5.3
Health 1.1 5.5
Construction 0.9 3.5
Transport 0.9 5.1
Government 0.8 5.0
Agriculture 0.8 10.6
Wholesale trade 0.8 5.5
but not
Manufacturing 0.2 0.6
Electricity - 0.1 - 3.0
IT/communications - 0.1 - 1.2

Source: Australian Business of Statistics

Wednesday, June 6, 2012

Who says one state can't phase out stamp duty?

Stamp duty on conveyancing will be phased out, insurance taxes abolished and payroll tax cut, in pathbreaking tax reforms adopted yesterday in the Australian Capital Territory.

While the Federal government has shelved the Henry tax review’s reform plans, the ACT government has seized on them in a bold set of reforms that shifts its tax burden to property rates.

A minority Labor government supported by the Greens, the ACT government commissioned its own tax review, headed by former ACT Treasurer Ted Quinlan, which came out with proposals broadly similar to those of the Henry report.

Its tax reforms are the first of their kind in Australia, shifting the weight of taxes from transactions to land — in this case, using rates rather than land tax.

They also introduce new forms of Labor’s Robin Hood reforms — hiking taxes on the well-off and cutting them on the hard-up and middling.

Under the reforms set out yesterday by the territory’s Treasurer, Andrew Barr:

* Stamp duties on conveyancing (transfer of property) will be phased out over 20 years, starting today.

* All taxes on insurance will be phased out within five years, starting from July 1.

* The threshold for firms to pay payroll tax will be lifted to $1.75 million, almost three times Victoria’s level.

* Land tax on commercial properties will be abolished.

* Land tax rates will be lowered for 75 per cent of homes, but raised on properties in the top 10 to 15 per cent of the market.

* To pay for all this, rates will be hiked for households and businesses alike, and made more progressive, with rates rising steeply on properties with a high land value.

Mr Barr said the reforms are fairer, simpler and more efficient. ‘‘Tax bases around Australia – including in the ACT – are unsustainable’’, he said.

‘‘The cost of some essential services, notably health care, is rising faster than the rate of economic growth, and the GST base is eroding. Land sales are a finite resource. Further, our taxes are inequitable, volatile and inefficient.’’

The reforms will reduce stamp duty on the sale of a typical $500,000 home by $2450 overnight and by $7000 over the next four years. (Canberra’s median prices are similar to Melbourne’s, but you get more house for the same price).

The new rates system will combine a flat charge of $555 for all households with a new system of four tax brackets ranging from 0.22 per cent to .41 per cent. Rates on a property with a land value of $ 1 million will jump more than 50 per cent.

Tuesday, June 5, 2012

The crisis. No place for stunts.

EUROPE is sliding into recession, and the world is sliding with it. That's not all Europe's fault, but its slump will permeate every part of the world economy in some ways, adding to Australia's problems, in other ways, reducing them.

None of us can see through the fog ahead to know how bad it will be. But some things are clear. Each government is focused on its own political needs. No one seems to be in charge of the world economy. We have many politicians, but no statesmen. And we have no consensus on a solution that might work.

The critics were right to warn that Europe's past "solutions" were inadequate to resolve its problems. Instead, the problems have grown. Any solution to them now would be at the cost of the successful countries, and their voters feel they have no responsibility to bail out those in trouble. The path to a resolution is blocked by political deadlock.

The crisis in Europe is the one that could bring down the global economy. But growth is slowing around the world, and the common factor is a loss of confidence.

Last week's job figures confirm that the US recovery has lost its strength. China's housing market is in recession, driving down its manufacturing and steel production, which in turn is driving down prices for Australian coal and iron ore. India, swimming in debt and politically gridlocked, has seen its growth rate slump to a nine-year low.

Australia has its own problems. Each new data set confirms its growth is mostly in mining and related sectors, which are just a sixth of the economy, mostly in Queensland and Western Australia. The mainstream economy in the south-eastern states is at best growing sluggishly, at worst going backwards.

This week brings an avalanche of data, including new figures for GDP, unemployment and the current account deficit. Yesterday we learnt corporate profits have fallen 10 per cent in six months: mostly in mining, from a high level. But in the past two years, manufacturing profits slumped 34 per cent, while manufacturers' unsold stocks rose to an 11-year high. That spells job cuts ahead.

The Bureau of Statistics does not have the data to measure states' output; it just takes an informed guess once a year. But take all the data we do have, and it suggests Victoria, South Australia and Tasmania are all going backwards. Their industries have borne the pain of the higher dollar without the gain of mining investment and boom prices. And at federal level, no one cares.

Interest rates remain far too high. Even after last month's cut, rates for home buyers, small business and depositors are at 2004 levels, when the economy was in a broad-based boom, with growth of 3.75 per cent and adding 265,000 jobs. That is very different to what we are experiencing now, or what lies ahead.

The dollar remains far too high, still 35 to 40 per cent above its 20-year average from 1985 to 2005. Yet for business, the silver lining in Europe's storm clouds has been a fall in the dollar. Since February, it has slid 10 per cent against the US dollar, and 7.5 per cent against all currencies. Unless you are travelling overseas or buying imports, that is good news, because it reduces pressure on businesses that face global competition. If it is sustained, it will save jobs and incomes, and reduce the risks facing the economy.

One of the most important and vulnerable of these is home prices. Many of us might like to see home prices fall, but you would not want to see them collapse. The RP Data-Rismark index reports that the fall in home prices is accelerating at a worrying rate: down in the year to May by 8.4 per cent in Melbourne, and 5.3 per cent nationally. When house prices collapse, they take wealth and consumer confidence with them. Collapsing house prices played a key part in the intensity of the recession in the US, Spain and Ireland. It's another good reason for the Reserve Bank to cut rates today.

We don't know how serious this will become, but it is no time for political stunts. Treasury secretary Martin Parkinson was right when he said on Thursday that in a global recession, Australia has the ability to fight back with both interest rate cuts and budget measures to defend the economy. "Our fiscal position is so incredibly healthy vis-a-vis the rest of the world that we can actually provide stimulus", he said. "We could, if necessary, actually go back into deficit to support activity."

Tony Abbott endorsed this on Friday morning, then backflipped a few hours later to declare that the promise of a budget surplus should have "no ifs and buts". Is he telling us an Abbott government would rather see Australia go into recession than run a deficit? Seriously?


Saturday, June 2, 2012

Victoria. Great one day, on the slide the next

KEY economic indicators are showing an alarming slide in Victoria's economic activity and weakness throughout the nation's south-east, intensifying speculation of another interest rate cut next week.

Business investment in Victoria slumped 14 per cent in the March quarter from a year earlier, Bureau of Statistics figures reveal.

This wiped away more than 2 per cent of the state's output, as investment sank to 2008 levels.

The high dollar and high interest rates have flattened Victoria's economy, along with most of the south-east and even parts of Queensland and Western Australia remote from mining.

In the six months to March, investment boomed at an annualised rate of 40 per cent in mining, but slumped 10 per cent in service industries and 18 per cent in manufacturing.

A sense of crisis is growing in the global economy. China's index of manufacturing activity slumped 5.5 per cent in May. India reported that its gross domestic product grew by only 5.3 per cent in the year to March, its slowest growth for nine years.

China and India have generated most of the world's growth since 2008, including Australia's export boom. As their demand falls, Australia's trade has sunk into deficit. Commodity prices have slumped 10 per cent, falling 1.8 per cent in May alone.

Futures markets now see interest rates going into free-fall for the rest of the year. They have priced in the equivalent of six more interest rate cuts by December, the first coming when the Reserve Bank board meets on Tuesday.

Economists are divided. The ANZ Bank said the non-mining economy was underperforming and inflation presented no threat. But Merrill Lynch chief economist Saul Eslake said a rate cut now could be wasted, with the federal government handing out $2.4 billion to households through the Schoolkids Bonus and compensation for the carbon tax.

Europe, meanwhile, is sliding deeper into crisis, with no sign of agreement on how to reverse it. Spain's central bank revealed that nervous depositors took ?97 billion ($A124 billion) out of Spanish banks in the March quarter, even before the turbulence of May.

The bureau's figures show Victoria has been flattened by the high dollar and high interest rates.

This week's data shows that:

. Home building approvals slumped 23 per cent in the year to April. Housing, one of the state's great strengths during the global financial crisis, is now in reverse.

. Total construction activity slumped 5 per cent in the March quarter, with building activity shrinking faster than engineering work grew.

? Retail turnover is now flat as shops rely on discounts to attract sales. In the past year, retail sales have simply kept pace with inflation.

. Unemployment on the smoothed trend figures has risen from 4.8 per cent to 5.5 per cent of the workforce, the highest rate outside Tasmania.

Yesterday home prices were added to the list. The RPData-Rismark index reported that Melbourne prices tumbled 2.7 per cent in May alone, and by 8.4 per cent in the past year, to a median price of $490,000.

Westpac economists said the slide in prices was even steeper after seasonal adjustment. In the six months to May, they estimate, house prices fell at annualised rate of 16 per cent, and units and apartments at over 10 per cent.

Westpac senior economist Matthew Hassan said falling prices and rising auction clearance rates suggested part of the slide in May was due to sellers lowering their prices to ''meet the market''.

Manufacturing is also in trouble. The Australian Industry Group's manufacturing index slumped 1.5 points in May to 42.4, its second lowest since 2009. The only growth was in wages, input costs and unsold stockpiles.


Abbott is a Keynesian, after all

WITHIN weeks of a projected surplus being announced, the political argument has quickly turned back to the possibility of the budget falling back into deficit.

The government leapt onto Tony Abbott's comment on Nine's Today that he accepted "that in a crisis the so-called automatic stabilisers will operate to change the overall fiscal position".

Mr Abbott was commenting on Treasury secretary Martin Parkinson's evidence to a Senate committee this week when he indicated Treasury had been planning what it would do if European events generated a new crisis. Dr Parkinson said that while Australia's budget position was "incredibly healthy" by global standards, if the collapse of the euro leads to panic on financial markets, as in 2008, then "it's a different world all bets are off".

"We could if necessary go back into deficit to support activity," he said.

A spokesman for Treasurer Wayne Swan said that despite all his "bluster" about deficits, "Mr Abbott is talking about being in deficit himself. Of course it's no surprise to hear Mr Abbott talking about the Liberals going into deficit given the shadow treasurer has announced a $70 billion crater in the Liberals' budget that he needs to fill to achieve a surplus."

But Mr Abbott rejected the government's interpretation of his comment. "The Coalition's commitment is to have a budget surplus in year one and subsequently," his spokesman said, claiming that Mr Swan had refused to commit to delivering a surplus this financial year.

Asked by journalists whether it would be acceptable if the government, needing to adjust to international conditions, did not deliver a surplus, Mr Abbott said later: "It's never acceptable for governments to break solemn pledges.

"This government has been pledging for months now that no ifs, no buts, it will bring the budget back to surplus. Now, they shouldn't break that commitment.

"My fear is that they are preparing the ground to abandon that commitment and, let's face it, Wayne Swan has been much better at predicting a surplus than delivering one."

Mr Abbott would allow Mr Swan no leeway if there was another global economic crisis, or another natural disaster.

"There was no fine print to Wayne Swan's commitment," he said. "There was no escape clause. He made a solemn pledge again and again to Australians that the government would deliver a surplus . . . Now for him to break that commitment would be yet another sign that you just can't trust this government to manage our economy."