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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

. Helping more Victorian firms get into export markets.

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

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

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

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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.

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Gillard caves to states. Green tape deal

JULIA Gillard has given some ground to win agreement from the premiers to cut green tape, specifying when Canberra will intervene in approvals rather than leave a broad definition of "high risk" projects.

The agreement to streamline approvals for economic developments in environmentally sensitive locations came at a Council of Australian Governments meeting in Canberra, which despite opening with hostility and political posturing, ticked off a skills package worth $1.75 billion and a national partnership on mental health.

Yesterday's COAG also included the vindication of a 15-month campaign for an inquiry into soaring construction costs by Victorian Premier Ted Baillieu.

COAG asked the heads of federal and state treasuries to report in a month with an analysis of the issue, with a view to possibly referring it to the Productivity Commission. "Reality has prevailed," Mr Baillieu told The Saturday Age. "Momentum is building now. The Business Council produced estimates yesterday that the costs of construction are 40 per cent higher in Australia than in the US. Our paper estimated that they have escalated at twice the rate of inflation over the past 10 years.

"Escalating construction costs are pricing us out of infrastructure. When a grade separation is costing $250 million to $300 million, then it's a huge cost. We've got to get to all the factors that have gone into these escalating costs."

Victoria is, however, continuing to hold out against a national system of occupational health and safety laws viewing the proposal as harmful to business. Going into the talks, the Queensland and New South Wales premiers were threatening to scuttle Julia Gillard's proposal, endorsed by business leaders, for less cumbersome environmental approvals.

But despite the fighting words including a demand from Campbell Newman to approve developments in Queensland's World Heritage areas they agreed after a relatively minor concession from Ms Gillard.

Thursday's proposal gave Canberra final approvals for developments in World Heritage areas and "high risk" projects. Yesterday's amended proposal said the Commonwealth would approve in World Heritage areas, and all "nuclear actions, defence development, and developments affecting Commonwealth waters".

COAG discussed Canberra's proposal for a national disability insurance scheme and the premiers also emerged with a specific time frame for the release of a report on the future carve-up of GST revenues.

The meeting agreed the document would be released before the May 8 budget.

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Victoria slumpig. So it's budget cuts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Victoria on brink of recession; SA, Tasmania in it

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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It's a cold bath, for most of us

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

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

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

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

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

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

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

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

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

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

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Victoria to receive $800m windfall in GST refund

THE Baillieu government will receive a windfall of more than $800 million over the next four years after the Commonwealth Grants Commission decided to return almost half the money it took from Victoria last year.

The commission, which distributes GST revenues between the states, lifted Victoria's share of the revenues from 22.5 to 23 per cent, in a redistribution of Western Australia's mining royalties to other states.

It will give Victoria an extra $192 million in 2012-13, with the amount rising in future years. But Victorians will still subsidise smaller states and territories by almost $1 billion a year.

That pales, however, beside the subsidy to other states from WA. The West next year will subsidise other states by $2.4 billion, or more than $1000 per head, with the WA government getting back just 55? for every dollar of GST paid.

The money will go mostly to the Northern Territory, which gets $5.52 for each $1 paid, Tasmania ($1.58) and South Australia ($1.28).

Victorian Treasurer Kim Wells hit out at the commission, saying Victoria would receive no more than it had assumed in its mid-year estimates published in December - when the government announced it would cut 3500 jobs to ensure the budget stays in surplus.

''There is no financial benefit to Victoria in the figures released today'', he said. ''Under this flawed and inequitable formula, Victorians will subsidise the rest of Australia to the tune of $171 per person in the 2012-13 year.''

''For every dollar of GST paid by Victorians, we get only 92? back.''

On the assumptions used in the mid-year outlook, however, the commission's determination will give Victoria about $200 million more over the next four years than the government had assumed in December, and more than $800 million more than its estimate in last year's budget.

In a budget spending $50 billion a year, that improvement is relatively minor. It could allow the government to soften its planned 3500 job cuts, however, if it chooses to do so.

But in a potentially embarrassing revelation, the commission figures show Victoria's gains would have been $80 million higher had it not been for the low wage rises for Victorian public sector workers.

The commission revealed in 2012-13 it will distribute $592 million a year away from Victoria because it pays teachers, nurses and public servants less than their counterparts in other states.

When services are cheaper to provide in one state, the commission concludes that the state needs less money.

Victoria's low wages end up benefiting NSW, WA and the two territories.

The commission's report reveals that in all, it cut $4.3 billion from Victoria's annual GST grants, mainly because, relative to other states, it has few Aborigines - assumed to be costly to service - a population that is young, large and concentrated in cities, low public-sector wages, strong housing sales, and many privatised services.

But that was offset by $3.3 billion added to Victoria's share, mainly to compensate for the state's lack of mining royalties, but also to offset the poor deal it gets from the Commonwealth in specific-purpose payments, and the costs of rapid population growth.

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COLUMN: Mining states bake while the rest shiver

YOU know the old joke about statisticians. If you've got one foot in boiling water and the other in a bucket of ice, they will tell you that, on average, your temperature is normal.

It's a bit worrying when any economist takes that approach in the real world. It's seriously worrying when the economist is someone as bright and as influential as Treasury secretary Martin Parkinson, for whom I have a very high regard.

It makes you worry that, after their growth forecasts have repeatedly overshot the mark, Treasury and the Reserve Bank still do not understand the strength of the headwinds the economy faces from the combination of high debt, high interest rates, and a dollar at record highs.

I hope they're right. But in three of the past four years they've been proved way too optimistic. If they've got it wrong again, then it's game over for Labor, whoever leads it.

Last Friday, Parkinson told the Senate economics committee the economy was growing at about trend pace and underlying inflation was in the middle of the Reserve's target zone.

''If you look at those two macro aggregates, you would think things are tracking along in a fairly sweet spot,'' he said.

''[Yet] there is an overwhelming negative sense about much of the national discussion and debate. I do think the whole mindset is a bit overdone … [we are] in the grip of unjustified economic gloom. Yes, there are challenges but the opportunities ahead of us are the sort we've never seen before.

''It's almost as if most Australians tend to think we live in Greece. We don't. We actually have an incredibly bright future in front of us.''

Hold on: let's test that against reality. Two days earlier, the Westpac-Melbourne Institute index of consumer sentiment, on which 100 means optimists and pessimists are evenly balanced, came in at 101.1.

I suspect that is far, far higher than it is in Greece.

A day earlier, the National Australia Bank's business survey reported a similar finding.

Business confidence and actual business conditions were both in positive territory in January, if only marginally.

Small business is pessimistic. The Australian Chamber of Commerce and Industry reports its confidence is now at the lowest point since March 2009.

But then so are its business conditions and, more or less, its profitability. Debt tracker Dun & Bradstreet reports small business failures in the December quarter jumped 48 per cent year on year and 128,000 firms are likely to experience ''financial distress'' in 2012. Does small business know something Treasury doesn't?

Australians don't think we live in Greece. But nor do we think we live in a ''sweet spot'' where all the economic fundamentals are going well.

And when Treasurer Wayne Swan, the Treasury and the Reserve Bank try to tell us how good things are, we sense that their whole mindset is, indeed, a bit overdone.

And since they make the big policy decisions, that is cause for concern - except for the Liberal Party, which has reaped the benefit of past policy errors.

First, let's check those fundamentals. In the year to September, seasonally adjusted GDP grew by 2.5 per cent, or roughly 1 per cent per head; that's a bit below trend. Job growth, which was fundamental when I was a kid, has slumped from 344,000 a year ago to just 22,000. Unemployment is still just 5.1 per cent because, for reasons that are unclear, people without jobs have left the workforce rather than look for work.

None of those figures are world-beaters. Of the 34 advanced economies, Australia ranks just 14th on growth in GDP. It is in the bottom half on growth in GDP per head. It has only the equal 10th-lowest unemployment rate.

But there is a more serious problem, which Parkinson freely concedes. If GDP growth is close to trend, it is because one part of the economy is really hot - mining investment - while the rest is becoming colder.

The geographical divide is stunning. In the year to September, domestic demand (that is, spending) grew by 4.2 per cent, much faster than GDP, because so much of the new spending was on imports. But that was an average of two very hot states and four cold ones.

The trend measure shows demand grew by 13 per cent in Western Australia and 8.2 per cent in Queensland. But in all other states, it grew by between 0.1 and 1.7 per cent. Outside the mining states, spending per head was virtually flat.

The bottom line is that 77 per cent of the trend growth in spending over the year was in WA and Queensland, which have 30 per cent of the population. Only 23 per cent was in the rest of Australia, which has 70 per cent of the population.

Since the start of the GFC, Australia has added 92,000 jobs in mining and 62,500 in construction. But by November it had lost 127,000 jobs in manufacturing, almost as many as in the entire 1990-91 recession.

On current trends, there will be a lot more jobs lost in the cities where Australians live, where their partners work, their kids go to school, where they have their homes, their families and friends.

As Liberal senator Arthur Sinodinos and Labor's Doug Cameron emphasised to Parkinson, the ''structural adjustment'' that costs them their jobs has to generate new jobs where they live, not on the other side of the continent.

I think that's why most Australians are wary of Treasury's optimism.

They live in the real Australia, not in a statistical average.

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National tax pain set to be Victoria's gain

WHO wins, who loses from the West Australian government's decision to end a $2 billion loophole in its iron-ore royalties? WA wins in the short term probably. Victoria and other states stand to win big in the medium term. The miners will get off scot-free, thanks to Canberra's pledge to pay their royalties.

And that means the Commonwealth will be the loser but an angry loser, with many ways to get even.

The WA royalties won't kill off Wayne Swan's budget surplus. On Treasury estimates, there would still be surpluses of $3 billion to $5 billion each year from 2012-13 to $2014-15. And Labor will find ways to get back its losses.

The key result will be to heighten WA's bitter complaints over the split up of Commonwealth grants by pushing the system to breaking point.

WA Treasurer Christian Porter says that under current rules, the Commonwealth Grants Commission eventually will take the new revenue off WA so that by 2014-15 it would receive just 33 cents in every $1 that WA taxpayers pay in GST.

For decades, Victoria and NSW have subsidised other states (including WA), but never on that scale.

We now face a new reality. One state can raise far more revenue than the rest. WA estimates its iron-ore royalties will grow from $305 million in 2003-04 to $4.75 billion in 2013-14. It's a colossal windfall. It would be like Victoria seeing an extra $10 billion fall from the sky.

But WA has one problem: the Grants Commission. Its job is to distribute GST money to even out the differences in state revenue capacities. That means, over time, it takes all that extra money off WA to give to other states including Victoria.

It's happening now. Before the resources boom, WA was always subsidised by NSW and Victoria. But next year the Commission will give $1.5 billion of WA's GST revenue to poorer states and territories. WA projects that by 2014-15, it stands to lose $4 billion almost all the money it raises in iron-ore royalties.

There is not space to explain the technicalities. But Swan is right: over time, WA stands to lose all its new royalties, and more. It could even lose them next year, although it is likely to keep them for a few years before the commission's formulas claw them back.

Resources Minister Martin Ferguson says the Commonwealth will honour its pledge to pay the miners' royalties when it brings in its own mining tax. It will continue existing infrastructure projects in WA. But WA could lose the rest of the $2 billion of infrastructure projects promised with the mining tax.

So why did WA do it? I suspect it's a deliberate strategy to change the Grants Commission formulas, by raising the stakes so high that they become politically unworkable.

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Federalism's fatal fiscal flaw

STATE government was much bigger yet simpler in 1955, when Henry Bolte became premier. The role of the states was clear. They ran the hospitals and schools, public transport and the police, and anything else that wasn't spelt out as a federal responsibility. They built and ran the roads, the dams, and public housing. They oversaw planning, local government, rivers, and most areas of business. They provided our electricity, gas and water. The money was in Canberra, but most of the power over our daily lives was in Spring Street.

That meant that we knew where the buck stopped. If you thought state services were inadequate, you knew who to blame. It's a very different world now.

Australia's founding fathers gave us a federal system with a fatal flaw: they failed to give the states adequate revenue sources to match their responsibilities. Instead, Canberra was given far more revenue sources than its responsibilities required. As Alfred Deakin put it, the states were left "legally free, but financially bound to the chariot wheels of the central government".

The result is that, today, a federal government loaded with money intrudes into many areas of state politics. Even where the states remain clearly in charge, the services they can provide are limited by the size of the grants Canberra gives them. And for Victorian voters unhappy with those services, it is no longer clear where the buck stops.

Take hospital waiting lists. In the Whitlam years, the Commonwealth agreed to pay 50 per cent of the costs of running public hospitals. But, as the demands grew, the Commonwealth welshed on its share of the deal. The Howard government's decision in 2003 to cut $1 billion from hospital funding if you doubt it, you can find it on page 54 of budget paper 2 that year was only the most obvious way in which it dropped its end, leaving the state to carry most of the load.

The state government now pays 60 per cent of hospital costs, and they are rising at a rate of knots. In 1999-2000, when Labor took power, Victoria spent $3.8 billion to run its hospitals. Last year, 10 years later, it spent almost $9 billion, up more than 130 per cent in a decade. Yet hospital waiting lists continue to grow, emergency wards keep getting overcrowded, and Victorians are understandably angry.

Why have demands on hospitals grown so rapidly? There are some very good reasons, the best of which is that fewer of us are dying. In that decade, from 1999 to 2009, the death rate of Victorians across all ages fell by 16 per cent. Neonatal death rates were cut by 29 per cent, death rates of people aged 65 to 69 fell by 25 per cent, death rates of those aged 75 to 79 fell by 24 per cent. That is very good news, in which our health system can take pride.

But it costs money. Those who might have died a decade ago now spend more time in hospitals, whether as inpatients or outpatients, and the state government has to pay the bill. Many have been saved by expensive new equipment, for which the state has to pay the bill.

Back in Bolte's time, everyone had their own GP, and if your child got sick at night, the family GP would come over to see her. It doesn't work like that now. Hospital emergency wards have become the GP of the night, and they're crowded and overworked, and the state is paying the bill for that, too.

Financing state governments was also simpler in Bolte's time. The state made sure its revenue covered its operating expenses and a bit over, and borrowed the money it needed for new infrastructure. Bonds issued by state governments and their agencies were guaranteed by the Commonwealth, the banks were required to hold plenty of them, and mum-and-dad investors also held their share. The state's net debt totalled more than 50 per cent of gross state product (GSP), but that was no problem.

Now, the states compete in global markets for their money, and we have developed a political culture that insists that our debt must have a top-drawer AAA credit rating. You only keep that if you don't have much debt. In the past two years, the Brumby government has stepped up the pace on infrastructure spending, lifting state debt to 5 per cent of GSP, which is forecast to reach 8 per cent by 2012. That's only a fraction of what it was in Bolte's time, and the ratings agencies aren't worried not yet but if it went much higher, they would be.

So what does a state government do? Build less infrastructure, and let the unmet needs escalate? Or find ways to get the private sector to do it, often at greater cost such as the Brumby government's desalination plant, which the Auditor-General says will cost us the equivalent of $5.4 billion over the 27 years of the contract? Or take on more debt, and try to get Canberra to share the cost? Governments are hemmed in from every side.

Australia is now a high-wage, low-tax country, and new infrastructure is prohibitively expensive. To me, the most stunning figure in this campaign was Labor's estimate that putting the railway line under the road at St Albans will cost $165 million. When you look at how Asian cities such as Singapore, Kuala Lumpur and Taipei are rolling out state-of-the-art metro systems, it breaks your heart that we can't do the same.

In Singapore, I wandered up to a metro building site and saw a notice to workers in Bengali. Singapore built its metro by importing cheap workers from Bangladesh, and sending them home after the job was done. That's not our way but it works and ours doesn't.

State government is about trying to meet limitless needs with very limited resources, to satisfy a public whom nothing will satisfy. I salute those brave souls who offer to do it.

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A tale of two economies: it's all in the figures, Guv

"Yes, I think it is going to be a two-speed economy . . . I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance. The relative price of resources is high, that of manufactures is low. There are structural adjustment implications of this for our economy . . . they will, I think, probably intensify in the years ahead."

- Reserve Bank governor Glenn Stevens, February 19

"While some events can lead to a divergence in economic conditions across Australia, overall these differences have not been especially large in recent times . . . What is remarkable, in fact, is that the differences are not, in the end, larger."

- Reserve Bank governor Glenn Stevens, September 20.

IN MY next life, I want to be a central bank governor. People fawn on you, whatever you say is taken as gospel, and others rarely challenge it.

In Shepparton on Monday, Glenn Stevens had two messages. The first was to restate the Reserve's big-picture view of the future: a "fairly robust" mining-driven upswing ahead, requiring monetary policy action, better known as interest rate rises.

No argument there. Far more striking is the blunt language in the minutes of the Reserve board's September meeting, declaring that if that big picture is right, "it was likely that higher interest rates would be required". That means soon.

But his second message was more tendentious. The Reserve chief played down the risk of that resources boom dividing Australia into a two-speed economy. Indeed, he tried to persuade his audience that this hadn't happened, and wouldn't happen.

The only evidence he presented was a handful of graphs demonstrating that over a 10-year or 15-year time period, movements in prices and unemployment rates had differed less in the six Australian states than in the 50 states of the US or the 27 countries of the European Union. You don't say. I wonder if that might have something to do with the fact that states are always more alike than countries. Or that six units of anything offer less scope for differences than 27 or 50.

The Guv's choice of time frame also missed the point. We were not a two-speed economy 10 or 15 years ago. This emerged in the past five years, as mining investment and export revenues grew exponentially, the Reserve responded by driving up interest rates, which drove up the dollar, which made significant parts of our manufacturing, agricultural and tourism industries uncompetitive.

That is why the two-speed economy became an issue. It is why we in Victoria fear the consequences of an even larger mining boom, and an even higher dollar, ahead.

It is why Stevens himself warned just seven months ago that the problems of a two-speed economy "are likely to re-emerge with a vengeance" and "will probably intensify in the years ahead".

Look at the data for the past five years, as shown in the adjoining table, and you see why. Inflation, on average, was within the Reserve's band of 2 to 3 per cent in NSW, Victoria, South Australia and Tasmania. Only in the resource states was it over the Reserve's limit, yet that dictated interest rates for us all.

Or look at where the demand pressures on the economy were generated. In round figures, demand grew 45 per cent in WA, but 18 per cent in Victoria and NSW, and even less in SA and Tasmania. The overheating the Reserve feared did not happen here, yet the Reserve's response to it higher interest rates and a higher dollar pushed businesses here to the brink. Or take average weekly earnings: growth in WA over the past five years was almost double the growth in Victoria. The overheating was not happening here.

Take industry growth: over the five years to 2009-10, manufacturing output actually fell, albeit marginally, while growth in the hotels and restaurants sector averaged just 0.1 per cent a year. That's the real cost of a mining boom, and it's what people fear ahead.

Remember: the slowdown in the Australian economy began in the first half of 2008. It was not a consequence of the global slump: it began as our export revenue soared to a new high. It was the consequence of the Reserve's interest rate rises and the higher dollar they created.

Our fear is that is going to happen again now, with a vengeance, and intensify as Glenn Stevens forecast in February. The new Glenn should listen to the old one.

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