Tuesday, July 31, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Saturday, July 28, 2012

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

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

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

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

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

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

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

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

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

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


Friday, July 27, 2012

Why on earth is Aboriginal employment shrinking?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Thursday, July 26, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Construction inquiry. Why is building so expensive?

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

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

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

It will report back this time next year after examining:

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

. The cost of compliance with regulations.

. The impact of taxes and other charges.

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

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

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

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

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


Wednesday, July 25, 2012

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

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

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

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

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

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

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

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

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

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

. Helping more Victorian firms get into export markets.

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

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

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


Tuesday, July 24, 2012

We agree on most things, right?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Friday, July 20, 2012

Plain Packs: Dominican Republic v Australia

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

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

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

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

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

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

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

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

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

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

Wednesday, July 18, 2012

Ford killed Ford

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

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

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

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

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

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

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

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

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

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


Tuesday, July 17, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Every major road a tollway?

FREEWAYS could be sold to the private sector and converted to tollways under a radical proposal for state governments to raise money for expensive new road and rail links.

The proposal, if adopted in Victoria, could lead to major roads such as the Eastern Freeway, the West Gate Freeway and the Western Ring Road being privatised and tolled.

Infrastructure Australia, the independent adviser to the federal government which has proposed the plan, says the proceeds could be used to build infrastructure such as hospitals, the Melbourne metro rail network, the missing link of Melbourne's outer ring road, and the proposed East West link under Melbourne's inner north.

But the plan, first proposed by a federal government and private sector working group headed by Treasury deputy secretary Jim Murphy, is being resisted by the Baillieu government.

A spokeswoman for Victorian Treasurer Kim Wells told The Age: "The Victorian government stands by its position that existing roads will not be tolled".

Infrastructure Australia, in a new report on ways to bring Australia's $700 billion infrastructure wish list to fruition, endorses radical options proposed by the working group and suggests states consider:

. Building all new major roads as tollways, not freeways.

. Breaking the narrow borrowing limits required for states' AAA credit ratings to build major new infrastructure projects, if analysis shows the benefits of having the infrastructure outweigh the benefits of having a AAA rating.

. Cutting costs for road freight links to ports by making them smaller and banning private cars from them making them simply toll roads for trucks and other commercial vehicles.

But Infrastructure Australia stopped short of endorsing the working group's idea that the federal government coerce the states by funding new roads only if they are built as joint ventures for eventual private ownership.

The rules currently require states to consider building new federally-funded roads as toll roads.

While the Baillieu government says it has no plans to toll existing roads, it has blocked the release of 27 documents on the issue, after a freedom of information request from The Age.

Mr Wells' spokeswoman said Victoria would not follow Queensland's example and allow its credit rating to be downgraded in order to build new infrastructure.

"We have made it pretty clear that we believe it's important that we retain our AAA credit rating," the spokeswoman said.

The Infrastructure Australia report comes as the Baillieu government ramps up plans to build the controversial East West Link (which was part of a broader transport plan drawn up for the previous Labor government in 2008 by Sir Rod Eddington) just days before the Melbourne byelection.

The Department of Transport has invited 100 local, interstate and international financiers and constructors from 50 companies to a meeting today to discuss how to finance and build the tunnel, which would run under the inner northern suburbs and provide non-stop connections between the Eastern Freeway, City Link and the Western Ring Road.

It is believed the meeting will canvass whether it should be a toll road, the financing options, construction methods, and whether it will include off-ramps into the city.

The tunnel proposal will be a key issue in Saturday's byelection which, in the absence of a Liberal candidate, has in effect become a two-way contest between Labor and the Greens.

The Greens are adamant that the road tunnel should not be built, but Labor's position is more nuanced. It opposes off-ramps to the city rather than the tunnel itself.

Transport Minister Terry Mulder said the road would be one of the most complex projects ever constructed in Victoria. "We are doing our due diligence to ensure that we consider the latest innovations in developing, delivering and funding projects in a challenging financial environment," Mr Mulder said.


Saturday, July 14, 2012

Melbourne's East-west link gets tentative support

INFRASTRUCTURE Australia has given tentative support to the Baillieu government's plans to build the controversial east-west link, a road tunnel under inner Melbourne. But it has refused to back plans to build a rail link to Avalon Airport.

In its 2012 update of infrastructure priorities, the federal government's independent infrastructure adviser again warns Australians they need to embrace ''user pays'' pricing for roads or end up with second-rate infrastructure.

The report says all infrastructure is ultimately paid for by taxpayers or users. Since big road projects can be easily financed by users, it says, future road projects should be built as toll roads, leaving taxpayers to finance other needs, such as railways and hospitals.

In another controversial finding, it urges the federal and state governments to allow 36.5 metre-long B-triple trucks on the Hume Highway, saying this would lift freight productivity. Infrastructure Australia puts the Melbourne metro rail project and a similar scheme in Brisbane at the top of its priority list as Australia's most urgently needed projects.

Also up there is a further rollout of IT equipment to monitor conditions on the Monash Freeway so motorists have instant updates, and upgrading the rest of the Pacific Highway between Sydney and Brisbane to a freeway.

The east-west link, which the Baillieu government calls its top transport priority, made it to the second rung of priorities, being rated as one of 20 projects with ''real potential'' to address ''a nationally significant issue''.

Its ranking implies that governments should pay for a full study of the project. Victorian Treasurer Kim Wells declared victory and ramped up his demand for the Gillard government to put $30 million into developing a business case for the controversial link.

The report's backing came at an embarrassing time for Labor, just a week before the Melbourne byelection.

The Greens oppose the project but Labor is divided, with influential Labor figures saying the city needs to link its key freeways.

The 18-kilometre project would start from the Western Ring Road in Sunshine, cut through the western suburbs and over the Maribyrnong, then run in a tunnel under the inner northern suburbs to link up with the Eastern Freeway. ''Julia Gillard must ignore the opposition of Daniel Andrews and the state Labor Party, who clearly don't care about the jobs and investment this project will bring to Victoria,'' Mr Wells said. It is assumed the project would be built as a toll road.

But an earlier version failed a cost/benefit analysis and with six-lane urban road tunnels now costing $600 million a kilometre, some believe the government will have to scale down its ambitions to make it a paying proposition. Infrastructure Australia refused to support the Baillieu government's request to finance a study into a rail link to Avalon Airport. It also passed over a request for funding to study removing level crossings.

Infrastructure Australia chairman Sir Rod Eddington said the community must ''look hard and long at our future infrastructure needs and the sorts of cities and regions we want to live in''.

''Our communities deserve appropriate, well-functioning infrastructure and we need to examine ways to provide these assets at least cost to the community,'' Sir Rod said.


Friday, July 13, 2012

We're dropping out, keeping unemployment down

AUSTRALIANS are dropping out of the workforce at unprecedented rates. Since the end of 2010, Bureau of Statistics figures show, two-thirds of the growth in the adult population has been among people who are neither employed nor unemployed, just sitting on the sidelines.

New jobs figures yesterday show that in the past 18 months, the adult population grew by 341,000. But on the bureau's preferred trend measure, only 104,000 jobs were created and only 14,000 more people became unemployed.

Rather, 222,000 people joined the sidelines: neither in work nor looking for it. Most are male. Most live in New South Wales, Queensland or Victoria.

Some are older people moving into retirement. Some are students who in better times might have sought a part-time job. But most appear to be people of mainstream working age.

Yesterday's jobs figures delivered a correction after three months of solid jobs growth. In seasonally adjusted terms, the Bureau of Statistics estimates that Australia lost 27,000 jobs in June, wiping out the gains of May.

Most of the jobs lost were in NSW (down 14,600) and Queensland (10,400). But every state except Western Australia lost ground, and seasonally adjusted unemployment rose from 5.1 to 5.2 per cent.

Share prices and the Australian dollar slumped on the news. Financial markets now see an odds-on chance of another interest rate cut in August, with the Reserve Bank moving to stimulate growth.

The bureau's trend figures, which smooth out the zigs and zags in the data, show jobs are still growing, but slowly. In trend terms, jobs have grown by 12,500 a month since March almost all in part-time work with unemployment steady at 5.1 per cent.

The figures show a startling gap between WA and all other states. On the trend figures, unemployment in WA shrank to 3.7 per cent in June, the lowest rate since the start of 2009. But the next best state is NSW, where unemployment is 5 per cent.

Trend unemployment in June was steady at 5.5 per cent in Victoria, 5.4 per cent in Queensland and 7.3 per cent in Tasmania. The slump has been mostly in South Australia, where it climbed from 5.2 to 5.7 per cent in the past four months.

But unemployment in the eastern states would be well over 6 per cent if not for the 222,000 who have quit the workforce.

In NSW, 90 per cent of all growth in the adult population is among people outside the workforce: 76,000 out of 84,000.

In Victoria, roughly half the population growth has been among workforce dropouts. In Queensland and Tasmania, it has been more than 100 per cent.

The bureau also reports a stunning fall in hours worked, which slumped to their lowest level since January. The figures suggest many workplaces are pressing their workers to take leave or reduce hours, rather than reduce staff.


Thursday, July 12, 2012

Confidence lifts, at last

CONSUMER confidence has finally rebounded in response to the deluge of good things being showered on households: cash handouts from the federal government, interest rate cuts from the Reserve Bank, and cheaper petrol from global oil markets.

But the rise in the Westpac-Melbourne Institute index of consumer sentiment was only modest, as it climbed back from 95.6 in June to 99.1 in July - still in negative territory, since 100 is neutral.

It was the best reading the index has delivered since February, and most of the bounce came in the ailing south-eastern states - NSW, Victoria and South Australia - even if all three remain predominantly negative in outlook.

But Westpac chief economist Bill Evans warned against seeing the rise as a turning point, cautioning that "much can happen, particularly in the international economy" to send it back down in coming months.

Analysis by Michael Chua of the Melbourne Institute reveals a gap as wide as the Nullarbor between Western Australia and the eastern states. Even in smoothed trend terms, the confidence index stands at 116.1 in Western Australia, but just 95.9 in NSW, the next most confident state.

New housing finance figures released by the Bureau of Statistics showed a similar story.

Most of the growth is due to homeowners refinancing existing loans, rather than making purchases. The number of mortgage loans being written is going sideways if refinancing deals are included, or falling back towards last year's lows if they are excluded.

But there is a sharp difference between home-lending activity in the resources states and in the south-east. In trend terms, the number of new loans (including refinancing) written in the resource states (Queensland, Western Australia and the Northern Territory) rose 17 per cent in the year to May - whereas in the south-east, it rose just 2 per cent.

Even in the west, however, the growth is mostly in refinancing. In the first five months of 2012, angry bank customers across Australia refinanced 81,973 home loans, up 21 per cent from the same months in 2011. NSW customers alone refinanced 25,034 loans, up 28 per cent, and those in Western Australia refinanced 12,279, up 40 per cent.

Loans to owner-occupiers to construct new homes have grown 4 per cent in the past year, in trend terms, while loans to buy existing real estate grew just 0.3 per cent.

BT chief economist Chris Caton noted that lending to investors to build new homes fell to the second lowest level in the past decade. "Lending for housing remains moribund," he said.

Westpac's Evans attributed most of the rise in consumer confidence to the Reserve Bank's interest rate cuts of May and June, noting that confidence among people with mortgages rose much more than among tenants or people who owned their homes outright.

He said the threat of a new crisis in Europe had been averted "at least for the time being", and noted petrol prices had fallen 13 per cent since May.


Wednesday, July 11, 2012

The rich getting richer ... again

THE 2008-09 financial year - when the global financial crisis took hold - was a bad one for Australia's rich.

As share prices dived, markets froze in fear and everyone's wealth shrank, the top 1 per cent of income earners saw their share of Australia's total taxable income slashed from 10.1 per cent to 8.6 per cent.

But the following year, 2009-10, was better at the top. Calculations by economist and Labor MP Andrew Leigh show that - even after tax accountants had done their best - the top 1 per cent of earners declared 8.9 per cent of all taxable income in Australia. This was almost twice their share 30 years ago.

Dr Leigh, who was a professor at the Australian National University before entering politics, presented his findings this week to the annual conference of the Economic Society. He argued that the widening gap in income distribution offended Australians' sense of ''a fair go''.

His findings, based on Tax Office data, show that in 2009-10:

?The top 0.1 per cent of adults (17,500 people) earned at least $650,823 each - 3 per cent of Australia's income.

?The top 1 per cent (175,000 people) earned at least $194,365, and almost 9 per cent of all income.

?The top 10 per cent (1.75 million people) earned at least $78,375, and 31 per cent of all income.

Dr Leigh said many economists thought inequality did not matter, dismissing it as ''the politics of envy''.

But he argued that many people showed ''a preference for equality'', seeing balanced income distribution as ''a public good''. Inequality also had practical implications, he said.

His data shows that inequality was most extreme in the 1920s, when the top 1 per cent earned 11.4 per cent of taxable income.

Largely due to government policies, the inequality shrank steadily over the next 50 years to a low of 4.6 per cent in 1981-82, when Malcolm Fraser was prime minister and John Howard was treasurer.

By the end of the Hawke-Keating era in the mid-1990s, the share of the top 1 per cent had rebounded to 7.2 per cent. It climbed to 10.1 per cent before the GFC broke its rise.

The richest 10 per cent claimed 35 per cent of all individual incomes in 1941-42. Their share shrank to 25 per cent by 1978-79, then rebounded to 32 per cent by 2006-07.


Australia. It's better in the west

A WIDENING gap between Western Australia and the rest of the country has overshadowed a slight rebound in business conditions in June, after they hit a three-year low in May.

The latest business survey by National Australia Bank shows that conditions and confidence both remained marginally negative in June, but with large divergences across states and industries.

The balance of positive and negative responses in the survey showed that, across the nation, business conditions in June improved to -1, up from -4 in May. But business confidence went down a tad, from -2 to -3.

The bleakest detail was that the balance of companies reporting good forward orders shrank to the lowest level in three years. NAB chief economist Alan Oster said this was "driven largely by a heavy fall in manufacturing orders".

Mr Oster estimates that the Australian economy was travelling well below trend speed in the June quarter, with underlying GDP growing at an annualised 2.25 to 2.5 per cent.

In the June quarter, conditions deteriorated in every industry except retailing. Mr Oster said the standout pick-up in retailing "possibly reflects increased trading as a result of the recent spate of government cash payments to households".

Retailing conditions picked up from -11 in May to -1 in June. Conditions in the construction industry also improved after an exceptionally bad month in May, the balance of survey responses improving from -29 to -16.

Mining had the unusual double of having the strongest business conditions (+14) but the weakest business confidence (-14). Mr Oster attributed the latter to a combination of a weaker outlook for commodity prices and "trepidation over the MRRT [mining tax] and carbon tax".

Confidence picked up in the finance sector (from -10 to +2) after the Reserve Bank cut interest rates a second time. But it fell sharply in manufacturing (to -10), roughly matching the negative reports on actual conditions for the sector (-12).

But the most startling difference in the survey was between the responses from Western Australia and everywhere else. In June, WA business conditions were rated as +27, while the next strongest state was New South Wales with +1.

Victoria (-10) replaced Tasmania (-5) as the state with the worst business conditions, although Queensland (-7) rated lowest on business confidence. No state, not even WA, recorded positive business confidence last month.

Mr Oster said NAB expected the Reserve Bank to make one more rate cut this year, possibly in September, to offset the impact of the sharp budget tightening. But he expects activity to gradually pick up ahead, predicting growth of 3.3 per cent in 2013.


Tuesday, July 10, 2012

Productivity: we're winning half the battle

"Productivity isn't everything, but in the long run, it's almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

US economist and columnist Paul Krugman (1994).

WE HEAR a lot about productivity now, and with good reason. Productivity is what makes Australia a rich nation and India a poor one. But since 2003-04, the statistics say that Australia's productivity has been falling.

Why do office workers and carpenters, teachers and taxi drivers, earn so much more in Australia than they do in India? Because the productivity of the Australian economy is so much higher than that of India.

What is productivity? In a word, efficiency. A recent Reserve Bank paper defines it as "the efficiency with which an economy employs resources to produce economic output". Or, as economist Saul Eslake puts it: "Productivity is what a workplace, a business . . . or a nation gets by way of goods and services for what it puts in, in terms of labour, capital and other factors of production."

When 75 per cent of us are employed in services, how are we more productive than services workers in India? Well, start with the computers at our desks. They have relatively fast broadband and good software that allows us to do jobs quickly (so long as we don't start surfing the net). We are skilled in using them and thinking laterally when we run into problems.

Second, our workplaces are run so that we work at full stretch, whereas Indian shops usually have more workers than customers.

Technology levels, skill levels and work intensity: these are the factors that University of Queensland economist John Quiggin singles out as the keys to productivity growth. They're not the only ones: Eslake highlights the role of economic reforms in lifting productivity growth. The switch to workplace bargaining in the 1990s is widely seen as having opened the way for productivity-enhancing trade-offs.

The quality of infrastructure matters, too. One argument for the NBN is that high-speed internet connections will raise productivity by allowing us to do more tasks more quickly. Ridding Melbourne of the congestion caused by level crossings would raise productivity by cutting delivery and transport times.

Policymakers are focused on productivity because, after a decade of rapid growth in the 1990s, the statistics say productivity in Australia peaked in 2003-04 and since then it has gone gently into reverse.

Labour productivity the amount we produce per hour worked has kept rising, but at a far slower pace. And capital productivity the amount we produce per dollar invested has gone from shrinking slowly to shrinking fast.

Should we be worried? And if not, why not?

Many analysts have shed light on Australia's productivity puzzle. There are differences of emphasis between the conclusions of policy insiders (the Productivity Commission, Treasury and the Reserve Bank) and those of independent economists such as Eslake and Quiggin. But there is a broad consensus that, to coin a phrase, the glass is half-full (or half-empty). Part of the productivity slowdown is a mirage, but part of it is real.

The mirage stems from what Productivity Commission consultant Dean Parham calls "the usual suspects": events (or errors) that lower official measures of productivity, but don't change underlying productivity. They include the timing of investments, temporary issues such as drought, shifts between industries, and measurement errors, such as ignoring the improved quality of the goods and services we produce.

The first is the big one. In a decade, the mining construction boom has trebled the industry's workforce and doubled its capital stock. Yet so far it has created only a 30 per cent growth in output so productivity in mining has slumped by 40 per cent.

But most of that is just a timing issue. The projects employing those workers and capital are creating long-term assets that will deliver huge increases in future mining output and productivity.

Productivity in the electricity industry has slumped for similar reasons. There's a huge wave of investment under way in transmission and distribution lines, with no increase in output. Electricity, water and mining account for roughly half of the productivity slump.

But what of the other half? There are many opinions, but few unarguable facts.

Eslake blames the lack of big economic reforms since the GST came in. Reserve Bank board member John Edwards takes a more benign view, pointing out that the '00s, like the '80s, saw a lot of growth in employment, largely in low-productivity industries. "Higher participation," he argues, "is not something we should complain about."

I lean towards Edwards' view, but there is truth in both explanations. And for business pressured by the higher dollar, raising productivity is not an option, it's a necessity.


Labor could hand the Coalition the Senate

THE threat by ALP leaders to direct Labor preferences to the Liberals ahead of the Greens would have no impact in the House of Representatives. But it might cost the Greens a Senate seat or two and give the Coalition control of the Senate.

If they mean it, it's a high-risk threat. Like them or loathe them, the Greens are Labor's ally. In 2010, 45 of Labor's 72 MPs won their seats on Green preferences. In the whole of Queensland, Western Australia, Tasmania and both territories, every Labor MP got there on Greens preferences.

Labor's tough guys brush aside the threat: except in five seats at most, Greens voters will ultimately have to choose between Labor and Tony Abbott. Election after election has shown that Greens how-to-vote cards make almost no difference: most Greens voters give their preferences to Labor whether told to or not.

But in the House, Labor's threat is hollow. In the handful of seats the Greens have a chance of winning, Labor preferences will not be distributed. In seats such as Melbourne, and at a stretch, Batman and Wills, the fight would be between the Greens and Labor. Liberal preferences would decide it.

The Senate is different. Given the size of the ballot paper, most of us tick the box for our party and its preferences, rather than fill out our own. In 2004, Labor preferences put Family First's Steve Fielding into the Senate instead of the Greens. They could do it again.

In 2010 it wouldn't have mattered. The Greens' vote hit record levels, and except in New South Wales, they won either a full quota or close to it. Where they got Labor preferences, they didn't need them. But if their vote falls a bit in 2013, Labor preferences could be crucial. If Labor and the Coalition swap preferences, they could limit the Greens to Tasmania and Victoria.

For Labor, the risk is that it could give the Coalition control of the Senate. Ultimately it has to decide which party is its real enemy and which its ally.


Sunday, July 8, 2012

The Age Economic Survey. Coming up roses?

AUSTRALIA is set to do it again. BusinessDay's half-yearly economic survey has found our private sector economists believe the country will grind its way through the 2012-13 financial year to record solid growth, despite risks of Europe's problems deadening the world economy.

Our economists see Australia broadly continuing along its present path, dodging any significant fallout from the eurozone crisis, but divided into two economies travelling at very different speeds. Unemployment will grow.

The panel is hopeful, though far from certain, that the biggest threat to global growth the potential breakup of the eurozone will be averted, or failing that, managed in a way that avoids sparking what Monash University's Jakob Madsen terms "irrational investor behaviour".

Whether Greece remains in the euro or not, most of the panel expects Australia to be largely unaffected by Europe's crisis. Any impact will be swamped by the strength of the mining construction boom, and continued demand for minerals from China and India.

On average, our 22 forecasters predict Australia's gross domestic product will grow by 2.9 per cent in the coming 12 months, within the 2.5 to 3.5 per cent range forecast by the Reserve Bank, although slightly less than the budget forecast of 3.25 per cent as the year average.

They expect global output in 2012 will expand by 3.2 per cent, a bit less than the 3.5 per cent forecast in April by the International Monetary Fund. But many in the panel see global confidence returning in 2013, lifting prices for Australia's mining exports, and reversing the slide in the terms of trade.

Most disregard the forecasts of a further fall in commodity prices, and signals by BHP and Rio that mining projects could be put on hold. They say mining construction work for the next year or two is now locked in, and while prices may have peaked, the peak in mining investment is several years away.

But some warn that mining construction too will peak in 2014 or so, and then will no longer contribute to the nation's growth. While mining exports by then should be growing strongly, policymakers will face challenges in managing the transition to other drivers of growth.

On specific questions, the panel is optimistic about the long-term future of Australian agriculture although not necessarily of farmers but pessimistic about the future of manufacturing.

Most see a brighter future for retailing, but only if it adapts to the dual challenges of online competition and modest long-term growth in spending. AMP's chief economist Shane Oliver warns that over the next decade, online retailing will expand from 5 per cent of sales to 15 per cent, and Australian retailers will have to be innovative to keep their share.

Michael Workman, of the Commonwealth Bank, forecasts increasing competition from "large, category-based overseas groups" entering Australia. NAB's Alan Oster and BT's Chris Caton warn that retailers will have to take on their landlords to force down rents as part of stringent cost-cutting.

For 2012-13, most economists in the financial sector have forecasts similar to those of Treasury and the Reserve Bank. They see business investment and consumer spending as our two growth engines: investment growing 12.3 per cent, and consumer spending by 2.8 per cent, both a tad below the official forecasts.

Inflation will remain under control, with underlying inflation likely to be 2.5 per cent, while unemployment will stabilise at 5.5 per cent.

Half the panel expects the Reserve will make one more interest rate cut, then leave rates on hold for the rest of the financial year. Shane Oliver and Westpac's Andrew Hanlan are in a minority who share the market view that three more rate cuts lie ahead.

Most see the sharemarket rising over 2012-13, but there are mixed views about how much. On average, the panel sees the S&P/ASX200 index climbing back to 4345 by the end of 2012, and to about 4600 by next June.

There are also differing views about where the dollar will go, with forecasts for December ranging from US90? to $US1.10; on average, the forecast is for it to be slightly below current levels at US98?.

The current account deficit will return to haunt us, with the panel expecting it to rebound to $62 billion or 4 per cent of GDP; Paul Bloxham of HSBC puts it as high as $88.6 billion or 5.7 per cent of GDP, which would revive old concerns.

The panel is also divided on how Treasurer Wayne Swan's budget will end up: 10 predict a small surplus, eight forecast a small deficit, and four stayed scrupulously neutral.

Overall, the Commonwealth Bank's Michael Workman is the most optimistic of the market economists. He sees global growth rising to 4 per cent this year, exceeding expectations, low interest rates sparking a housing recovery, and a rebound of confidence lifting global share markets and miners' export prices.

By contrast, Richard Gibbs, of Macquarie Bank, predicts Australia's growth will shrink to 2.3 per cent in 2012-13, as the high dollar, cautious consumers and a deepening housing slump cramp activity outside the minersphere.

He predicts that unemployment will climb to 6 per cent by December; Saul Eslake, of Merrill Lynch, estimates it will be 6.1 per cent by next June. If they're right, that could do Labor significant damage in the campaign.

The academic economists served up the most challenging forecasts. Melbourne University macroeconomist Neville Norman won our Palme d'Or as the best forecaster of 2009-10 for predicting a strong rebound from recession, then won it again in 2010-11 when he warned that the recovery would lose strength rather than gaining it, as most had forecast.

This year Professor Norman has come up with another eye-opener: 2012-13, he says, will be stronger than anyone expects. He predicts growth of 4.1 per cent ahead, with China surprising us by growing 9.6 per cent, the miners bringing in enough workers to lift business investment by 18 per cent, and consumers regaining a bit of their old elan.

This time next year, Professor Norman predicts we'll be in a different world. The Reserve Bank will have hiked interest rates four times to head off rising inflation, returning the cash rate to 4.5 per cent. Share prices will have rebounded more than 30 per cent, lifting the S&P/ASX200 index to 5400.

Across the Yarra at Monash, by contrast, Professor Madsen predicts Australia will be more or less in recession in 2012-13, with growth slumping to just 0.4 per cent. He sees the US going down for a double dip, consumers in Australia saving instead of spending, and housing construction and manufacturing wilting.

On specific questions attached to the survey:


THE panel is almost unanimous in expecting Greece to stay in the euro, at least for now. Saul Eslake sums up the consensus view: "The costs of having Greece leave (and either having other countries leave too, or having to incur more costs to prevent 'contagion') outweigh the costs of keeping Greece in it."

There is also broad unanimity that Australia would suffer little damage unless Greece left in a "disruptive" way. Confidence could be dented, and bank funding costs rise, and mineral prices fall. But we would see either the dollar go helpfully lower, or global investors pour money into Australia in a flight to quality.


MOST agree that minerals prices have probably peaked, but for mining investment, the peak is still two or three years away.

Richard Robinson, of BIS Shrapnel, notes that "a number of mega-LNG, iron ore and coal projects, which have already started, are still in the process of ramping up to their peak construction phase".

Some, however, add that when the boom does peak, it will be a jolt for an economy which has come to rely on it to provide half the nation's growth.

Andrew Boak, of Goldman Sachs, warns that "the capex fade will become an increasingly important headwind to growth from around the first half of 2014".


THE consensus is warily optimistic about the future of retailing, but only if it adapts to the new world of slower spending growth and more online competition. NAB's Alan Oster warns: "Currently, retailers are discounting heavily to encourage shoppers into their stores, but given high operating costs (e.g. rents, wages, etc) this is not a long-term sustainable strategy".


NO ONE is optimistic that manufacturing can reverse its decline, at least while the dollar remains high. Australian Workers Union economist Brad Crofts, who should know, says manufacturing is under pressure not only from the dollar, but from "subsidised imports which are limiting the sector's ability to compete on equal terms", and its inability to pass on costs "including compliance with regulations and reliance on expensive services such as legal and accounting".

Some note that many manufacturers are doing well regardless. "Niche, innovative and productive manufacturers will survive and grow", says Hans Kunnen of the St George bank. Only Brad Crofts advocates a more active industry policy, with many panellists strongly opposing it.


AGRICULTURE is seen as having a bright future, thanks to Asia's rapidly growing demand for high-protein food and two wet years filling the dams and sub-soils. But there are some caveats.

Saul Eslake advises the sector to "focus on supplying things that the growing Asian middle classes want, at the quality and presentation standards they expect". BT's Chris Caton warns that agriculture might thrive while farmers go under. "Every farmer I've ever met is going broke. The small family farm will continue to struggle".

THE year 2011-12 made those in the financial sector work for their money. Nothing turned out as expected. Twice we were facing disaster. The market turned from bull to bear, then part of the way back again. Anyone who saw it all coming is too bright to be working for a living.

Europe was overwhelmed by public and financial sector debts, and slumped into recession. Twice the markets fell into panic, only to pull out short of a 2008-level meltdown. The Reserve Bank slashed interest rates, mining investment grew more than the rest of the economy combined, and jobs growth slowed.

Yet, the forecasts of our panel a year ago weren't too bad. They missed detail, but their key insight was while Australia's economy would be a mix of slow and fast-growing sectors, it would stay on track, to record steady growth. And it did. The panel forecast GDP would grow 3.2 per cent in year-average terms, with unemployment edging down and interest rates edging up. Growth looks to have been about 3 per cent, with unemployment edging up and interest rates down.

Our private sector panel was closer to reality than the Reserve, which forecast 4.5 per cent growth, or Treasury, which tipped 4 per cent. Most of the panel did not see the slide in asset values coming, but they tipped the fall in the terms of trade, and the dollar edging lower.

Normally we award the Palme d'Or to the forecaster of the year but this time no one stood out. Jakob Madsen of Monash University was a contender; he alone tipped that interest rates would go down. Investors should give Professor Madsen a call, but we can't give him the Palme d'Or, because he also tipped Australia would go into a recession.

Many would see Westpac guru Bill Evans as the forecaster of the year, for his call in tipping the Reserve would cut rates by a full percentage point, when everyone else was tipping rate rises. But Bill made that call two weeks after our survey was published, which disqualifies him.

Greg Evans, policy director at the Australian Chamber of Commerce and Industry, topped the panel in forecasting the shifts in global share values, and exchange rates. In a year when most of the panel was as closely bunched as a Tour de France peloton, we're putting the yellow jersey and the Palme d'Or away for next time.


Tuesday, July 3, 2012

Emissions trading. The economists are right

I'VE come to think we should take more notice of economists. You might see them as impractical nerds. But look back over our long debate on how to tackle climate change, and one thing stands out: the economists got it right, the politicians got it wrong.

Last year the Economic Society of Australia surveyed its members on 46 policy issues. On some, it found economists evenly divided: on the merits of the NBN, for example, or whether Australia should promote nuclear power, whether patients should pay more of their health bills, and whether the GST should be lifted so income tax and company tax can be reduced.

But on other issues economic opinion is clear cut. Top of the list is whether taxpayers' money should be spent on big infrastructure projects without an independent publicly released cost-benefit analysis first to check the project stacks up. The survey found 85 per cent of economists want cost-benefit studies to be mandatory. (Who doesn't? Politicians.)

Surprisingly, the second most clear-cut response was on climate change: 79 per cent of economists agreed that price-based mechanisms a carbon tax, subsidies or an emissions trading scheme are a better way to tackle climate change than using direct regulation.

Tony Abbott has an economics degree but, being Tony, I doubt that he's a paid-up member of the union; he probably didn't take part. But after his insistence that the NBN be subject to a cost-benefit analysis, we might have hoped that he would apply the same rule to his own policies. Alas, not so.

On Saturday, Abbott pledged to spend $4 billion of our money on three showpiece road projects, with no requirement that they pass a cost-benefit analysis. His Melbourne project was the East-West Link, which failed a cost-benefit analysis when proposed in 2008.

The Gillard government is now paying for the Baillieu government to try to come up with a business case for a revised plan. If it does, fine. But surely our money should not be used to pay for projects that cost more than they're worth.

Labor's cost-benefit rules are far from comprehensive, but they're better than none. It matters because the start of any new government is a chance to improve the rules or make them worse. Abbott is signalling that, under his government, cost-benefit equations won't matter. Politics will rule.

The start of a carbon price is a rare victory for the economists, and the biggest reform by the Rudd/Gillard governments. It culminates a process that began a decade or so ago when Peter Costello, Alexander Downer and David Kemp took a joint submission to cabinet proposing a price on carbon emissions. John Howard rejected it at the time, but finally took it to the 2007 election as policy.

It should not be a left/right issue and, in most of the world, it isn't. Go to Britain, Germany, Sweden, the Netherlands, South Korea or New Zealand, and you will find Abbott's counterparts there are just as committed to carbon pricing as Julia Gillard is. (Britain's Tory PM David Cameron wrote to Gillard last year to congratulate her on the carbon tax, praising it as "a strong and clear signal" to the rest of the world.)

Abbott will destroy it, but future Australian governments, left and right, will bring back carbon pricing, because it is the cheapest, most effective way to tackle global warming, which, if left unchecked, could do immense damage to our world.

A carbon price works because it gives business and individuals an incentive to cut greenhouse gas emissions. Despite the Coalition's claims, it is not an economy-wide tax if it were, it would be far bigger. Rather, it is a tax on emissions from electricity, gas and emissions-intensive industries. It will cost households $10 a week, $5 in electricity and gas bills if we do nothing.

But the beauty of this tax is that you can avoid it, by using less electricity and gas. Of all the options to cut emissions, it pushes us towards making our use of energy more efficient.

There are many ways to do this: turning the thermostat down a degree or so, or the aircon up; replacing energy guzzlers such as plasma TVs or halogen lights with energy-efficient alternatives; just turning switches off. You pay that $5 a week only if you do nothing to adapt.

It's a decentralised, democratic way to reduce emissions: we choose how to do it, in ways that preserve profits and living standards. Treasury and the Productivity Commission had been nudging the Howard government to do it for years. They were right, and had Howard responded in time, it might have been as uncontroversial here as it was in Europe or New Zealand.

Instead, both sides derailed us into bad policies and point-scoring. If energy efficiency is the cheap way to cut emissions, putting solar panels on our roofs and paying excessive prices for the power they generate is one of the most expensive. We've finally realised that now, but the economists warned us from the start.

The politicians gave us gimmicky programs that cost us heaps, but put off the low-cost solution. Both sides used the issue to divide us, rather than unite us behind making a modest but effective start to tackling this potential crisis.

We didn't listen to the economists then. Let's start listening now.