Chasing the xenophobic vote

Tony Abbott must be feeling a little like Victorian opposition leader Ted Baillieu this week.

For the last 12 months, Baillieu has been trying to identify issues where the Coalition can make headway against John Brumby's government.  More cops, abolishing suspended sentences, an anti-corruption commission -- those sorts of things.

The Victorian government has responded by ostentatiously adopting those policies as its own.

Tony Abbott made population a key plank of the Liberal Party Federal Council this weekend, claiming an Abbott government would link population growth to infrastructure investment, and saying he would make sure "immigration does not out-strip environmental and economic sustainability."  (It's in his "Action Contract", just above his signature, so you know he means it.)

So Julia Gillard's announcement that "Australia should not hurtle down the track towards a big population" may have taken a little wind out of Abbott's sails.

Like many other things in Australian politics these days, one reason we are now debating population is because Kevin Rudd got overexcited.  For many people, Rudd's noble but politically inept claim last October that he believed in big Australia and "makes no apology for that" was a helpful reminder that Australia's politicians rarely take the train to work.

With his October speech, Rudd managed to take personal responsibility for decades of state government failure to invest in transport infrastructure, and personal responsibility for the refusal of those governments to release more land for housing.

Remember when Rudd was described as a political genius?

Abbott capitalised on this when he won the Liberal Party leadership.  Rudd had to back away from defending population growth.

But now the primary reason the two parties are talking population is because of asylum seekers.  Under Kevin Rudd, the Labor Party was losing votes on all sides.

On the left, Rudd's ban on refugee claims from Afghanistan and Sri Lanka was pushing voters to the Greens.  On the right, the ALP was losing votes every time a new boat full of refugees arrived.

Getting tough on "population" pleases both these camps.

Green voters seem to love the word "sustainable".  It's like tomato sauce:  everything tastes better with sustainable on it.

Having a sustainable population implies asylum seekers can come to Australia, but no-one else.  You may flee your third world country to Australia if there's a war on, but not if you're starving.  That, after all, would be bad for the environment.

Yet on Twitter yesterday, the now Minister for Sustainable Population Tony Burke said "This is the first time I've heard any commentators describe talking about environmental sustainability as a 'lurch to the right'."  He is being stunningly disingenuous.

A quarter of Australians think asylum seekers make up 25 per cent or more of Australia's total migration intake, according to an Essential Report poll earlier this month.  The real figure is less than one per cent.

Those Australians must believe every new boat person is another seat on the train they miss out on.  Or another bidder at suburban house auctions.  Refugees apparently have deep pockets.

But the Labor government has been losing votes to the Greens, so directly going after asylum seekers, Liberal-style, would only add to the government's electoral problems.

So population has to be the proxy.  Just because it's badged as "sustainable" population, doesn't mean the government is only thinking about plants and water and clean air and koalas.  Gillard isn't talking about salinity levels in the Murray Darling Basin when she talks about making sure Australia gets the "right kind of migrants".

Of course, the Coalition lacks even that subtlety.

In his Federal Council speech on Sunday, Tony Abbott claimed population growth should be tamed because it is putting pressure on infrastructure.  But at the same time, he claims his paid parental leave scheme will be "good for our economy because it will increase population."

In other words:  grow local.

(Tony Burke might notice the opposition also uses the phrase "sustainable population", although no doubt he would be comfortable casting the Coalition's policy as right-leaning.)

Obviously, in population, Tony Abbott found a powerful message which resonates with voters the ALP would like to retain.  Gillard used to work as John Brumby's chief of staff.  Like her former boss, she has no reluctance simply copying her opponent's policies.

Abbott and Gillard can dress it up all they want.  They can talk about infrastructure and the environment, about the hard decisions, about their deep personal desire for migrants to find new lives in Australia, and about how their own parents brought them to this country.

But it's all pretty transparent.  With population, both the Labor government and the opposition are now trying to chase the xenophobic vote.

ADVERTISEMENT

Coup is good news for Whitlam

Julia Gillard has a lot to thank Kevin Rudd for.  The failure of Rudd's personal leadership style gave Tony Abbott a fighting chance at changing the government.  But it is that very failure which should allow Gillard to hold power against the Coalition.  Assuming nobody dies from an overpriced school hall.

The rot that set in to Rudd's prime ministership hasn't really infected the Labor government he led.  Rudd announced every major policy personally.  He pushed his ministers to the side, and claimed personal responsibility for every policy breakdown.  Rudd's desperation to make it about him buffered the government from its own fiascos.

The sole minister to pay for the government's hasty policy making is poor old Peter Garrett -- taking the fall for a rushed stimulus he had little part in devising.  Even then, Rudd assured the country he himself was to blame for the insulation debacle.

Prancing about no man's land as a lone soldier in an executive government, it was no wonder the PM drew all the fire from the opposition.

Rudd and Gillard are neither the socialists they are described as, nor the conservatives they claim to be.  But Rudd's centrism was defined by bursts of manic, uncontrolled energy.  Each of those bursts would eventually end with deep lows.

Nothing shows this pattern more clearly than the mining tax.  We got the resources super profit tax because Rudd wasn't quite sure what to do with the 138 recommendations of the Henry tax review.  We got the tax review because Rudd wasn't quite sure which of the 900 ideas of the 2020 Summit to choose.  And we got the summit because Rudd wanted to demonstrate he had single-handedly ended the culture wars.  Robert Manne and Cate Blanchett were to symbolically slay the Howard dragon with the sword of intellectual harmony, offered up by the new prime minister.  Think that metaphor is overdone?  Well, overdoing things was Rudd's style.

Climate change was the "biggest moral challenge" of our time, which would have surprised war, third world development, state tyranny, racism, and poverty.  The global financial crisis was of "truly seismic significance", and he would "move heaven and earth" to keep Australia out of it.

The crisis was actually quite mild, causing problems only in countries with deep economic and budget issues already.

One big bluster after another and eventually we're in 2010.  The prime minister who made world headlines on the first day of parliament by saying sorry for the actions of previous Australian governments has spent the past six months apologising for the actions of his own.

Rudd's personal failure leaves Gillard in a strong position.  Rudd's "clearing the decks" in April of all outstanding loose ends before the election season (abandoning the emissions trading scheme, freezing applications from Sri Lankan and Afghan asylum seekers, passing the education stimulus rorts to a committee) was a dismal failure.

Yes, Gillard has been a senior member of the government that made all these disastrous decisions, as Abbott quickly pointed out.  But with the four-person kitchen cabinet now halved (Lindsay Tanner has gone too), Gillard can reasonably claim this is an entirely new executive, if not an entirely new government.  So now would be the time for Gillard to do some deck-clearing of her own.

First of all:  there can be no ETS without a global agreement.  This should be a no-brainer.  With the climate change issue cleansed of Rudd's bombastic moral rhetoric, perhaps now we can focus on whether the government's policy will or will not meaningfully impact global emissions levels.

Without international agreement, Australia could shut every industry in the country and not change the temperature a nano-degree.  A "price on carbon" is utterly pointless if Australians are the only ones paying it.  Make Rudd special envoy for climate change.  If he can get China and India on board, we'll talk again.

Drop the internet filter.  Nobody seriously thinks it will work.  Communications Minister Stephen Conroy is tying himself in rhetorical knots pretending it can.

Scrap the ludicrous freeze on accepting Afghan and Sri Lankan refugees.  It's another relic of Rudd-era policy panic.  And it has that air of awkward machismo which would normally be funny, except that barring asylum claims from specific countries is just a teensy bit racist.

Gillard may do none of these things.  She'll probably still be better at selling and enacting bad policies than Rudd ever was.

If nothing else, the Gillard coup has been good for Gough Whitlam.  What was once called Whitlamesque can now be called Ruddesque.  Being the first prime minister to be bumped before serving a single term is pretty poor.  Even Mark Latham, who has complained about being the bipartisan bogyman of Australian politics, now might be able to catch a break.

Gillard, Latham, Whitlam:  This week, they'll all be muttering their thanks to former prime minister Kevin Rudd.

ADVERTISEMENT

Gillard's first clue on carbon stance a worry

Under its climate change proposals, Canberra proposed an energy tax, rising to more than $18 billion a year -- $900 per person.

Lower carbon dioxide emissions could only work if it includes the entire world, but ALP policy is a go-it-alone carbon tax.  This is despite other countries rejecting Australia's economic hari-kari tax approach at last December's Copenhagen Conference.

The carbon tax has been deferred because sanity prevailed and the Liberals rejected it in the Senate.

However, legislation was passed requiring massive increases in renewable energy.  Hazelwood Power boss Tony Concannon estimates this will cost 20-fold the price of conventional electricity.

Deferring the carbon tax left Canberra's Department of Climate Change with little to do other than to continue churning out propaganda and attending international meetings.

So DCC, ever optimistic about its ability to discover silver bullets, persuaded then prime minster Kevin Rudd to get it to recommend energy efficiency measures.

Those proposing the new inquiry may not have told Mr Rudd that he had just received a report (the Wilkins Review) from an energy review he had previously set up.

Nor that only four years ago the Productivity Commission reported on the same matter and that many other energy efficiency reviews are ongoing.

So the PM's Task Group on Energy Efficiency was born and its report is now due.  As well as industry input, it was advised by a clutch of green zealots including the Climate Institute, the World Wildlife Fund and the ACTU's Sharon Burrows.

The task group wants information on "step changes" incorporating previously unknown efficiency measures.

Obviously nobody in government has been monitoring the gargantuan volume of reports on this that hit public servants' computer screens every day!

Those reports cover everything -- buildings, energy production, appliances, transport -- with schemes ranging from the mundane to the bizarre.

Unsurprisingly, the PM's task group also seeks out suggestions on how to "build capacity".  That's code for more taxes to hire more activists to show ordinary people how to save money on energy.  It represents the contempt government and its officials have for people's abilities to decide how best to run their own lives.

Many business submissions to the task group, like that of the Australian Energy Market Operator, were concerned that it would recommend measures destructive of Australia's superb wholesale energy market.

This underlines a risk with all these sorts of reviews.  They are costly for taxpayers and the businesses which have to respond to them, but their real danger is if half-baked concepts get adopted.  We saw that happen with the proposed mining super tax.

The task group could prove valuable if it devised sensible ways to rationalise the dozen or so Australian energy efficiency regulatory schemes already in operation.  But this is an unlikely outcome from people who have promoted a succession of costly energy regulations.

Stopping further proposals that threaten economic harm by imposing new obligations on business will be an early test of new Prime Minister Julia Gillard's credentials.

Unfortunately, Ms Gillard's opening remarks as PM indicate a continued policy favouring carbon taxes, renewable energy regulations and other costly energy measures.

ADVERTISEMENT

Expediency spelt his exit

If you act like a NSW Labor premier, you get treated like one.  In the end Kevin Rudd came to be perceived by the electorate as concerned only with spin, media management and the next day's headlines.

Whatever policy beliefs he had, he was willing to sacrifice to political expediency.  This is exactly how voters in NSW have come to regard their last couple of premiers.

And when the popularity of those premiers collapsed, they were dispatched with ruthless efficiency by the Labor Party machine.

Pretty much the same thing happened to Rudd yesterday.  Probably the only difference is that NSW Labor MPs had more sympathy for Morris Iemma and Nathan Rees than federal Labor MPs had for Rudd.

It's ironic that a political party founded on the male mateship of the union movement so often turns to women to fix its problems.

Recently there have been Anna Bligh, Kristina Keneally and now, of course, Julia Gillard.  Before that there was Carmen Lawrence and Joan Kirner.  The women who have been premiers have all come from the ALP.

Much of the analysis of what's happened this week will focus on the fact that much of Rudd's political failure was self-inflicted.  And indeed it was.  For example, he has only himself to blame for the exaggerated and moralistic language he was so fond of.

However, Tony Abbott shouldn't be forgotten in all of this.  Abbott has now brought down two leaders.  One of those was from his own party.

And there's one thing Turnbull and Rudd's downfall have in common.  It is the emissions trading scheme.  Last year Turnbull was overthrown by his Liberal colleagues because he supported the immediate introduction of an ETS.  Yesterday Rudd was overthrown by his Labor colleagues because he did not support the immediate introduction of an ETS.

The ETS won't go away and the way Gillard danced around the issue at her press conference after she won the leadership demonstrates she knows just how difficult the issue is.

Her form of which stressed the need for community consensus on climate change action is a recipe for delay.  If anything, community consensus on the need for an ETS is declining, not increasing.

With Gillard as Prime Minister, Abbott's job has become harder.  That's certainly what the bookies think too.  The odds of a Coalition victory substantially lengthened yesterday morning.

Gillard is a better politician than Rudd and she's not going to make the same women mistakes he did.  The proof of this was clear to see at her press conference yesterday.

She was brazen enough to say that the government would stop its taxpayer-funded advertising in favour of the resources tax on condition that the resources industry stopped its own advertising.  And BHP Billiton took only a few minutes to comply.

Some might call it intimidation.  Others might call it just clever politics.  Whatever it is, Rudd didn't do it and Gillard did.

Gillard will also realise that cabinet is there for a reason.  If Rudd had ventured to consult cabinet about the mining tax he would have been told in no uncertain terms that it would never work -- either practically or politically.

 Rudd presented his policy decisions to cabinet as a fait accompli and, of course, it eventuated that the resource tax was far -- very far -- from the fait accompli Rudd thought it was.

Until yesterday the contours of the federal election campaign were forming in a bizarre way.  Rudd thought he could win by saying he wasn't Abbott.  Meanwhile Abbott thought he could win by saying he wasn't Rudd.

Each leader's campaign was based around what they were not going to do.  Rudd promised a vote for Labor was a vote to stop Work Choices coming back.  Meanwhile Abbott promised a vote for the Coalition was to stop the resource super profits tax.  We never got to find out what Rudd's second-term agenda was going to be.

One half of that equation has now changed.  Gillard can still claim she's no Abbott, but Abbott can't claim the same thing about Rudd.  Gillard is popular, Rudd wasn't.  Popularity allows politicians to cover a multitude sins.

The Coalition's small-target strategy (or, more precisely, its no-target strategy) worked against Rudd because his government was imploding.  A similar strategy might not work against the new Prime Minister.

ADVERTISEMENT

Speak out, Robert Manne: Ken Henry silences dissent

If Australian bureaucrats were bound by baseball rules, Treasury secretary Ken Henry has had his three strikes, and it's time to go back to the bench.  Australia's bureaucratic tradition mirrors that of Westminster.  Mandarins are supposed to sit atop impartial process driven mounds dedicated solely to implementing the policies outlined by their ministers.  And Kevin Rudd's Canberra would probably be Sir Humphrey's wet dream.  Especially if he were Ken Henry.

Henry was first appointed secretary to the Treasury in 2001 under the guidance of the then Treasurer Peter Costello, who had been in the job five years.  And whether Henry liked it or not, Costello was no Jim Hacker.  But it would be hard to argue that's the case for Ken Henry during the Rudd government.

Instead of being a policy facilitator, Henry has been the fount of economic and tax wisdom in a government whose politicians are sufficiently economically illiterate that they think you can consistently be an economic conservative and oppose conservative economic reform.  And because of his new status, Henry has gone from public servant to media spokesperson.

This transformation is clearly enjoyed by the actual Treasurer, Wayne Swan, as he has struggled to shake off the Treasurer training wheels because they are re-attached every time he confesses to a packed media conference that he needs a pesky economic acronym explained to him.  And in the absence of their own economic reform agenda, Rudd and Swan have adopted Henry's policy recommendations that they like and even allowed him to publicly sell them.

But with such an important job comes criticism.  And Henry isn't coping well.  According to his foreword in the 2007 book, Silencing Dissent, La Trobe University academic Robert Manne argued the preceding Howard years were a neo-Dark Ages, absent ''spirited, honest and intelligent debate''.  Manne's claim is that Howard's ''faithful followers'' pursued ''systematically silencing significant political dissent''.  And following the enlightenment of the Rudd government's election, the same voices hypocritically called for the new government's critics to be cleansed from the airwaves and opinion pages of newspapers.

To cope with his critics, Henry is now channelling similar sentiments.  Following a speech to an ATAX conference in Sydney this week, Henry called for economists and tax experts to ''put down their weapons'' and impose self-censorship when they are spirited to scrutinise Henry's government adopted policies.  Reportedly, he laments the lack of ''consensus position'' on anything economic and finds the public debate about the merits and failings of government policy ''unbelievably frustrating, incredibly frustrating'' because of a ''handful of academics who will contest it''.

But what's surprising is that he feels the need to silence anyone.  The dissenters aren't exactly an extensive well-organised opposition.  Admittedly, since the stimulus plan's implementation, the number of critics has risen, including Henry's Reserve Bank Board colleague, Warwick McKibbin, who this week declared Treasury ''an arm of political policy'' responsible for a ''panicked'' package.

But during the global financial crisis, Henry attracted less than a handful of economic opponents, led by RMIT's Sinclair Davidson and Steven Kates and Griffith University's Tony Makin.  To be fair to Henry, his critics have been particularly effective.  On an economics blog normally catering to those excited about debating the pros and cons of fractional reserve banking, Catallaxyfiles.com, Davidson bas caught the Treasury misleading the government and the public.  Following the delivery of the 2010-11 Budget Papers, Davidson exposed a concocted Treasury graph designed to give political cover to the government regarding the effectiveness of its stimulus package.  The graph designed to show a correlation in DECO countries between expansionary fiscal policy and GDP growth during the financial crisis excluded unhelpful countries that didn't support the Treasury's thesis.

Armed only with relevant OECD and IMF data, Davidson secured a humiliating climb down from the Treasury as it admitted the inaccuracy and replaced the graph with a new one that excluded data from only four relevant countries.  While the Treasury had an explanation for keeping these countries -- Greece, Hungary, Iceland and lreland -- out of the data set, the most likely reason is that because when they are included, the Australian Treasury's standards start to resemble that of Greece in managing its debt levels.

Not that dodgy graphs are the only legacy of Henry's tenure.  During the debate to make Australia a world leader in ritual suicide through the introduction of an emissions trading scheme, Henry's Treasury modelled its economic impact to back up the government's agenda.  But an analysis by former ANU academic Alex Robson found that the Treasury's conclusions required the reader to believe in Santa Claus and the Easter Bunny.  Robson found that in supporting the government's policy, the Treasury didn't model the actual design of the government's emissions trading scheme but relied on ''unrealistic but crucial assumptions''.

The assumptions?  That an international climate change agreement that wasn't delivered in Copenhagen will be implemented.  That every other country in the world will adopt an equivalent emissions trading scheme.  That mitigation technologies that barely exist would be diffused and widely used.

Even by political standards these aren't assumptions.  They're a fairytale wishlist.  Henry may not be personally responsible in all cases.  But they have all occurred on his watch.  And in his own review into Australia's Future Tax System, Henry was caught red-handed misleading Australians by using an
out-of-date academic paper by PhD candidate Kevin Markle and his professor to claim resource companies are only paying a tax rate of about 17 per cent.

And even Henry's former boss has joined the fray.  In a recently published opinion article, former Treasurer Peter Costello argued that ''Treasury is not seen as independent and trustworthy on this tax'', highlighting that under Henry the Treasury has been using ''misleading'' evidence to support its arguments.

Creating dodgy graphs and ETS modelling:  that's two strikes.  But being exposed using an out-of-date academic paper in your own review should amount to three strikes for Henry as he's shown the Commonwealth Avenue-facing front door.  But none of this criticism appears to bother him.  Following recent commentary from the IPA and the federal opposition, he claimed criticism no longer causes him ''grief'' and that his ''scar tissue has hardened sufficiently after 25 years''.

But Henry's future doesn't look bright with a faltering government.  In a budget reply speech to the National Press Club, shadow treasurer Joe Hockey was asked about Henry's future if the opposition snares government from Rudd's clutches later this year.  Rather than giving a definitive answer, Hockey waffled that he's ''always got on very well'' with the Treasury secretary.  But tenure in politics doesn't lend itself to such niceties.  And the risks to Henry aren't likely to come only from the opposition.

He's the bureaucrat responsible for offering up and supporting many of the Rudd government's major policy bungles.  Even if Rudd wins the election, Henry is a political liability.  And his future may be blowing in Canberra's cool spring wind.

ADVERTISEMENT

No more frank and fearless

On Treasury's conservative estimates, the super profits tax on miners, as well as foreclosing new projects, is a grab on profits of existing investments amounting to over $9 billion a year.  In present value terms that's a $50 billion confiscation from the mining companies' shareholders.

This added to a trifecta of reckless, costly and unprecedented policy excesses that the Rudd Government has embarked upon in its short two years of government.

It follows the $43 billion plus for a new nationalised telecommunications system, and the $11 billion bribe to Telstra to sign a no-compete clause and to mollify the firm's shareholders.  It was subsequent to Prime Minister Kevin Rudd trying to catapult Australia into a unilateral carbon emission reduction policy costing $20 billion a year.  And it was hard on the heels of the ill-conceived $40 billion economic plus stimulus package.

But unlike the other measures, the mining super tax directly threatens businesses with expropriation, and they cannot simply allow proceedings to pan out.

How could such policy errors have been made in such a short period of time?  Why has no previous government dealt itself such a destructive hand?

The answer appears to lie in the nature of decision-making.  Rudd and his inner Cabinet are probably no hungrier for votes and buying cash than previous administrations and all governments have some hopes of developing and fulfilling grand designs.

But there are major differences.

The Rudd Government's key advisers in his own and other tumescent ministerial offices have massively increased influence compared to their peers of earlier years.

In addition, until recently departmental officials were seasoned bureaucrats.  Those in Treasury dominated policy-making and did so with a loyalty that was first and foremost aimed at protecting revenues and the nation's economic integrity.  In the post-John Stone era, Treasury Secretaries Bernie Fraser, Chris Higgins, Tony Cole and Ted Evans were all open or closet ALP supporters.  Yet they owed a far stronger loyalty to the Treasury view than to a political party and indeed, one of them Cole may have paid the price for being too obstinate in the face of the then Treasurer's spending preferences.

John Howard and Peter Costello could live with partisan public servants.  They used the public service for confidential advice, and as a buffer against ideas that might backfire.

Unfortunately, the Rudd ascendancy has changed all of this.  It has done so in various ways.  One is in having many matters resolved outside of Cabinet's collective decision-making that was previously a cornerstone of government.  In addition, Rudd has created a public service that is no longer detached from the political government.

Treasury in particular has jettisoned its role as the praetorian guard against excesses in spending and policy development.  Ken Henry would be the first Treasury chief to tell a Government confronted with an economic crisis to combat it by spending money it did not have, still less to spend it on stimulating consumption.

Treasury has promoted outsiders into senior positions who share the prime minister's contempt of ''neo-liberalism''.

And this goes well beyond the Treasury.

With Rudd being the most messianic Prime Minister since Whitlam, this bureaucratic capture has created an explosive brew.  In particular the Treasury can no longer be trusted to give ''frank and fearless'' advice unless this accords with ministerial interventionist inclinations.  In its ''modelling'' for the carbon tax, it showed a willingness to promote the Government's policy by conjuring up predictions based on technology forecasting, about which it is inexpert, and demand and supply reactions to price shocks outside of any previous experience.  Under the Westminster system, a neutral bureaucracy is essential since, unlike in the US system, there is no independent legislature to act as a check on government proposals.  It may be impossible to unscramble the partisan policy omelette created in these past two years.  This presents an ALP Government with serious issues about how it gets neutral advice and presents even bigger headaches for a Coalition government.

ADVERTISEMENT

The pursuit of economic growth

The financial crisis must be over.

Whenever the economy crashes, wise men and women say we need governments to manage the financial world for everybody's benefit.  Capitalism, left by its lonesome, can't make everybody rich.

But when the economy is growing, those sages complain that being rich is no good anyway.

Take one of the keynote speakers for this year's Alfred Deakin lecture series.  Tim Jackson, a professor of sustainable development and author of Prosperity without Growth?, claims that the era of economic growth is over.  Jackson writes:  ''Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries.  But question it we must.''

Sounds brave.

French President Nicolas Sarkozy wants nations to abandon their ''fetishism'' for growing their gross domestic product (perhaps easy to say if you're the president of a country whose economy has had a sluggish few decades).  And luminaries like Nobel Prize winning economist Joseph Stiglitz also believe we have to drop growth and focus on well-being.

This message has its appeal.  There is only so much coal, copper, tin, iron and uranium buried in the ground.  We're richer, but we seem more stressed.  We have more choices, but they're complicated and confusing choices.  We have better hospitals, but we have fatter stomachs too.  And then there's the environment.

Nevertheless, the growth sceptics couldn't be more wrong.

We can mock all the trivial inventions and gadgets which make up modern life.  (Although I believe the invention of the flat-bottomed taco shell is a worthwhile innovation.) But economic growth is about more than iPads and tooth-whitening solutions.

Growing richer means getting healthier.  People in wealthy countries live longer -- this graph, which compares GDP per capita with life expectancy demonstrates that clearly enough.

In the first world, only steadily-increasing personal wealth will make expensive health technologies affordable.  In the third world, basic public health requires strong economies.  To eradicate malaria you have to drain swamps.  It's expensive.

Then the big one:  a wealthy country is a clean country.  That's counterintuitive, sure.  But the same policy settings which fuel economic growth -- property rights, individual liberty, and the rule of law -- are a powerful incentive to protect the environment.  The drive for wealth involves the drive for competitive efficiency.  There is nothing less efficient than waste and pollution.

Electricity generators in the first world are cleaner than those in the third.  Priuses cost money.

And it is only desire for profit which leads entrepreneurs to develop and commercialise green technology.  If we powered down to a motionless ''stable'' economy, as growth sceptics believe we should, we'd be discarding our biggest incentive to invent green things.

Yes, many natural resources are limited, but our capacity to innovate -- given the incentive to profit -- is unlimited.  The economist Julian Simon wrote a book called the Ultimate Resource.  He was referring to humanity's ability to adapt to changes and invent new ways of doing things.

We've all heard the trite quip the Stone Age didn't end because we ran out of stone.  But we've been abandoning finite resources in more recent times.  We used to light our homes with whale oil and heat our homes with Europe's ancient forests.  Now trees are mostly farmed in plantations and whales are only used for scientific purposes (I'm sure).

In Prosperity without Growth? Jackson writes economic growth has ''failed the two billion people who still live on less than $2 a day''.  This is tragic.  But it's still an improvement on past performance.  The developing world might be poor, but it's wealthier than it was.  And healthier.  With good governance, stable legal systems, and secure property rights regimes, there is no reason to believe the poorest parts of Africa and Asia couldn't be future boom economies.

Those countries will need that economic growth if they are to adapt to natural and unnatural climate change.

It is fantasy to believe through careful planning and clever coordination we could get the inestimable benefits of economic growth without having the growth itself.

And it's a weird sort of hubris to imagine we are the generation who will see the multi-millennia project of economic growth suddenly stop.

We want growth because we want our children to live better than we do -- to be richer, with all the health, education, and lifestyle benefits wealth can bring.  We want the poorest members of our society to be richer than we are now.  We want the developing world to be infinitely richer.  We want the Bangladeshis of tomorrow to be twice as rich as the Australians of today.

To pursue economic growth is to believe progress -- better living standards, better health, and a better environment -- is possible.

ADVERTISEMENT

PM's economic shambles

The government of Prime Minister Kevin Rudd has not lived up to its early promise.  Rudd is not an economic conservative;  the surplus is gone, and public debt is rising.  To be fair, there was an economic crisis and the Rudd government likes to point to that crisis in explaining its poor performance.

Research by Alberto Alesina of Harvard University suggests that tax cuts are better at stimulating economies than spending increases.  Similarly, cutting spending is better for reducing debt and deficit than tax increases.  The Rudd government has been doing the exact opposite;  it needed a good story to justify itself.

The federal budget papers included a graph that showed that those economies that had enacted large and timely fiscal packages subsequently outperformed growth expectations.  So the policy the Rudd government adopted appeared to have worked well.  If correct, this graph could vindicate the decision to ''go early, go hard, go household''.

But the graph was not correct.  In Senate Estimates hearings on June 2, David Gruen, executive director of the Treasury Macro-economic Group, read a prepared statement admitting that the graph and the explanation to it contained errors.  The graph showed data for just 11 of the G20 economies.  The original data source provided data for 19 economies and when all 19 economies are included there is no statistical relationship between the size of stimulus packages and subsequent growth expectations.

In the profession we call this data snooping -- only reporting the data that supports a desired result.  It looks like Treasury fiddled the numbers.  Treasury officials deny this, they claim a coding effort led to an erroneous conclusion.  They then truncated the sample, with the same result, and published that in the budget papers.  A subsequent quality control check failed to pick up the coding error, although checking for so-called outliers should be standard practice.

This isn't a debate about the meaning of the numbers, or even whether the research method is appropriate.  Treasury was unable to accurately transfer data from a database to an econometrics package, and its quality control process didn't pick up such a basic and obvious source of error.  How many other errors has its quality control process failed to pick up?

The budget papers, now known to contain erroneous information, were issued by Treasurer Wayne Swan and Finance Minister Lindsay Tanner, who have not accepted responsibility for the error nor made any statement to the Parliament to clarify it.  The budget papers contain false information that would be of immense political benefit to the government.

This is just one of many mistakes.  In the past month we discovered the Rudd government doesn't know how much tax the mining industry has been paying.  It was caught quoting an American working paper out of context.  What is most surprising is that nobody thought to ask, How come mining firms only pay 13 per cent in tax?  Nobody picked up the phone to ask the Tax Office if those numbers were correct and if so, why?  When challenged, Treasury secretary Ken Henry made the ridiculous argument that taxable income wasn't an appropriate measure for calculating how much tax is paid and that some vague measure of ''economic income'' should be used.

Before that we saw a graph in the Henry tax review purporting to show that tax revenue from mining had fallen -- yet that graph excluded corporate income tax.  Then there are the pie charts in the Treasurer's ''economic note'' that nobody wants to claim ownership of.  The list goes on.

Economic management is in a shambles.  The rot set in early with a very confused narrative about inflation genies.  Then we saw the over-the-top response to the global financial crisis.  Cash handouts transformed private debt into public debt.  The school building program has been underwhelming and expensive.  The home insulation scheme has turned homes into fire hazards.

Economists will debate for years to come whether the fiscal responses to the financial crisis were appropriate.  Early evidence suggests that a lot of money has been wasted.  Government simply cannot spend large sums of money both quickly and wisely.  Taxpayers have good reason to be concerned about that waste and expect a better justification than a dodgy graph.

ADVERTISEMENT

Ruddtopia: fool's gold

In October 2006 Kevin Rudd published his now famous Brutopia essay in The Monthly magazine.  One paragraph in particular stands out.

There is a danger that John Howard's form of political statecraft will become entrenched as the national political norm.  The prime minister's now routine manipulation of the truth poses significant problems for the long-term integrity of our national institutions, including the great departments of state.  As time goes by, all are in danger of becoming complicit in protecting the political interests of the government rather than advancing the national interest of the country.  There must be a new premium attached to truth in public life.  That is why change must occur.

The unkind will suggest that Rudd has become a Howard ''mini-me'' because that warning is even more appropriate now than it was nearly four years ago.

The Rudd government faces an economic quandary.  It has squandered the national treasure in an orgy of reckless spending -- ostensibly to stave off recession.  The wastefulness of that spending is now becoming apparent as each house-fire begs the question as to involvement in the Home Insulation Scheme and every school parent can see how little value for money the Building the Education Revolution delivered, while kids still wait for their computers.  Rudd needs money fast to bring the budget into surplus and has been sold on the Resource Super Profit Tax (RSPT) as the solution to his problems.

The problem for the Rudd government, however, is that there are no free lunches.  But as they desperately want to believe in free lunches they didn't ask any of the tough questions that needed asking.  Wayne Swan admitted to Four Corners that he had read the Henry Review at the beach.

I spent a lot of time at the beach at Maroochydore reading the report of the independent review which Dr Henry chaired ...

What I saw in Henry was compelling evidence that we had not been receiving a fair return for our mineral resources.  The figures there are compelling.

Swan would have seen two pieces of evidence supporting the argument that ''we had not been receiving a fair return for our mineral resources''.  The first piece of evidence related to an American academic working paper that appeared to show that mining companies in Australia only paid 17 per cent in tax.  The Treasury officials who had inserted that ''evidence'' into the Henry Review and subsequently into government policy didn't understand what they had been looking at.  This was made clear by the authors of the working paper.

The purpose of our paper is not to study specific industries in specific countries.  Nor is it to precisely calculate rates of tax that are paid.  Our paper is intended as a broad comparison of effective tax rates across countries.  All numbers in the tables in the paper are appropriately interpreted on a relative -- rather than absolute -- basis.

So Treasury officials didn't understand a working paper written by a US PhD student and his professor.  These things happen;  but that nobody thought to ask the Australian Tax Office how much tax mining companies paid is simply astonishing.  Perhaps Swan didn't have his mobile phone at the beach.

The second piece of evidence goes beyond not understanding econometric analysis.  Here the Henry Review presented a graph showing that ''Total mineral tax and royalties as a share of mineral profits'' had fallen since 2001 while ''Mineral profits'' had risen.  This graph, however, did not include corporate income tax as part of the ''total'' when calculating mineral taxation.  In other words, it was highly deceptive and designed to mislead.  Furthermore the term ''Mineral profits'' is a Treasury construct that nobody has been able to understand or replicate.  One would imagine that definitions consistent with ATO definitions and the Tax Act would be appropriate when debating taxation issues, yet the Henry Review felt no such constraint on its deliberations.

The bottom line is that there is no evidence that ''we had not been receiving a fair return for our mineral resources'' as Swan claims he had discovered while reading the Henry Review at the beach.

This leaves Treasury in a rather awkward position.  They have designed an ''elegant'' tax system that is predicated on their own lack of understanding of existing empirical research out of the US and on a very dodgy graph that leaves out the corporate income tax.  They won't, or can't, release their calculations for so-called ''minerals profits'' and anyone can access the ATO website to work out how much tax the mining industry (and any other industry) pays each year.

Right now we have the Treasury and the government relying on each other for credibility.  The basis for the RSPT is a lack of understanding about econometric results -- something Treasury should be good at -- and a dodgy graph.  This isn't the only dodgy graph doing the rounds right now.  The quality of economic advice coming out of Treasury right now is poor.  Sloppy mistakes are being made.  What is extremely troubling is that the government doesn't seem to have noticed.

ADVERTISEMENT

Taking liberties

It should be clear by now that the Rudd government is not a government full of civil libertarians.

Sure, there's less to the government's intention to force internet service providers to retain users' browsing history than was first reported.  A spokesman for the Attorney General told The Age the reality of the proposal is more benign.  Instead, they're thinking of introducing something like the European Union's data retention directive.

The EU scheme requires internet service providers to record enough information to identify the originator and recipient of emails, and the time they were sent, and the time, duration and date of phone calls.  They are not required to record the content of those emails, or everybody's browsing history.

Nevertheless, that's a pretty extensive database itself, and it's still a rather substantial invasion of the privacy of every person with a phone and internet connection in Australia.

More than one person has pointed out the government's hypocrisy -- going after Google for doing accidentally what they now apparently plan to do with bureaucratic enthusiasm.

But there's a bigger story here than government hypocrisy.

The head of internet service provider Exetel described the idea as ''the nanny state gone totally insane''.

A potent combination of enthusiasm for regulation, an obsession with security, an aging health and welfare system, and unlimited political faith in technological solutions to public policy problems are undermining privacy and eroding civil liberties.

You need only look at Britain to see what happens when this trend is left unchecked.  A decade of New Labour has left the UK with a vast array of limitations on individual liberty.

One prominent British civil liberties organization, the Joseph Rowntree Reform Trust, has dubbed the UK as ''the Database State'', for the extraordinary number of databases operated by the public sector which breach privacy, are questionably effective at fulfilling their basic functions, and have big security problems.  And of the 46 government databases the Trust surveyed, as many as a quarter were illegal under British data protection or human rights law.

Take one of the most controversial databases, ContactPoint.  On paper, this seems like a good idea -- a national database of all British children, shared between government agencies, to identify those children who are vulnerable or otherwise at risk.

The potential problems should be obvious.  ContactPoint gives at least 390,000 British public servants access to the name, birthdate, address, parents, gender, school, doctor, and the details of government services they may be using, of every child in the country.

It's easy to see how collating all this data into one widely accessible, central location could put children at risk, rather than protect them.  There have been at least 70,000 incidents of ''inappropriate'' access to this information honey-pot -- public servants stickybeaking into the database for their own gratification.

The new government has sensibly decided to scrap ContactPoint.

Then there's the National DNA Database.  This holds the DNA profiles of nearly four million people, taken from crime scenes, from suspects, and, controversially, from people who are only witnesses to crimes.  The civil libertarian group Big Brother Watch estimates up to one third of everybody added to the DNA database is never found guilty of a crime.  The government keeps their DNA profiles anyway.  Just in case.

Add to this the four million plus CCTV cameras dotted around Britain, the 1,043 separate laws which give bureaucrats the power to forcibly enter private property, and an amazing list of kooky nanny state regulations.  (One Manchester council is now fining dog owners for leashes which are ''too long''.)

Australia is not in as bad shape as the United Kingdom.

But when Kevin Rudd won the 2007 federal election, there was much speculation about what a Labor government would look like in the 21st century.

The proposal to monitor all internet communication seems to indicate that, as the Rudd government ages, it could very easily become an authoritarian one in the British style.  The UK is a vision of where we definitely don't want to be.

After all, Tony Blair had a pretty nonthreatening first few years as Prime Minister.  Yet by 2006 Blair was saying he could see no reason why his government should not keep DNA profiles of absolutely every British citizen, regardless of whether they had ever committed a crime, been near a crime, had heard about a crime, or were aware that there is such thing as ''crime''.

At the moment, many Australian government ministers would rightly think Blair's attitude is creepily Orwellian.  But remember:  we're just about to get a rather draconian internet filter, and now the government is thinking of recording the details of every email we send and phone call we make.

We could be much further down the British path than we realise.

ADVERTISEMENT

Forcing prices up: The impact of the ACT government's supermarkets policy and implementation

EXECUTIVE SUMMARY

Grocery prices will always be controversial, especially when government policy is artificially inflating their price.

The ACT government commissioned John Martin to complete a review into the ACT government's supermarkets competition policy.  Following the Review the ACT government developed an Implementation Plan designed to centrally direct which supermarkets could bid for operation on different sites.

Despite favouring no cap on the market share of different participants, by introducing restrictions on which chains can bid at different sites the government is effectively imposing a market share cap by stealth.

The key consequences of the government's implementation of its supermarkets policy at Kingston, Dickson, Casey and Amaroo will be to:

• Require the price of groceries at these news supermarket sites to be between $6.52 and $13.45 more expensive than the cheapest ACT supermarket site.
• Increase the price of the mean ACT basket of groceries to $8.02 compared to the cheapest basket available in the ACT amounting to a mean price nearly ten per cent higher than necessary.
• Increase the price of the mean basket of groceries in the ACT by $1.05 or 1.18 per cent adding an additional third increase on top of inflation.

Increases in prices needn't be the case.  The ACT government can use its power to reduce grocery prices, by:

• Using its planning powers to increase the amount of available land zoned for new supermarkets to cut the cost of market entry.
• Allowing the market to decide which supermarkets will operate at each site, thereby encouraging operators with lower cost structures to enter the marketplace.
• Temporarily or permanently cutting taxes for new market entrants to remove cost barriers to entry.

Instead of being a policy to promote lower prices, the ACT government's supermarkets policy appears to be a form of industry protection for Chief Minister Stanhope's preferred Supabarn.  But as the ACT Treasury's own data shows, the cost of that protection will be felt through higher grocery prices for supermarket shoppers.

1.0 INTRODUCTION

The price of groceries will always be controversial, especially when government policy can contribute to rises and falls of their prices.  Grocery prices are also controversial because they make up such a large component of the disposal incomes of Australian households.

Currently, the average Australian household spends up to 14 per cent of their income after tax on standard grocery items. ⁽¹⁾

In the lead up to the 2007 Federal Election the increase in the price of groceries were a significant political issue because it was a tangible example of the financial stress Australians felt they were under.

Upon their election the Rudd government requested an Australian Competition and Consumer Commission inquiry into grocery prices.

Following the ACCC Inquiry the ACT government commissioned a related inquiry, the Martin Review, to assess the ACT government's own policies and how they can be used to promote competition.

And following the release of the Martin Review the ACT government released and acted on its Supermarket Competition Policy Implementation Plan.

In light of the Inquiry, Review and Implementation Plan, this paper will review the process of the ACT government's changes in supermarket policy and its impact for consumers.

2.0 2008 AUSTRALIAN COMPETITION
AND CONSUMER COMMISSION INQUIRY

Following the 2007 Federal Election and the Rudd opposition's commitment to work to lower grocery prices, the newly elected government requested the Australian Competition and Consumer Commission to investigate grocery prices.  And in July 2008 the ACCC reported on its inquiry into the competitiveness of retail prices for standard groceries, assessing the structure and supply chain of the industry, the competition in the industry, the pricing practices by the industry, barriers to more efficient pricing as well as allied industry concerns. ⁽²⁾

In its final report the ACCC made a series of findings, importantly:

• That the groceries market is generally competitive with only limited factors promoting further price competition including the cost of entry into the market, the lack of incentives for price competition amongst the majors and from independent stores.
• Low cost competitor, ALDI, has injected competition that has increased competition and required the majors to respond.
• A lack of competition has had a nominal impact on inflation of food prices. ⁽³⁾

The ACCC also found that the problem associated with competition was related to competition amongst wholesalers, and that ''while small independent retailers provide a competition alternative, they do not significantly contribute to price competition.  And that ''most of these stores are smaller stores, which largely compete strongly on the basis of convenience, service and local community ties rather than on the basis of price''. ⁽⁴⁾

Following the conclusions of the ACCC inquiry, the ACT government requested a review into the ACT's supermarkets policy.

3.0 THE 2009 MARTIN REVIEW

In June 2009 the ACT Chief Minister, Jon Stanhope, commissioned consultant, John Martin, to complete a review of the ACT's supermarkets policy.  In his brief Martin was required to report on the adequacy of the existing policy in light of the outcome of the ACCC Inquiry, the current and future dynamics of the sector, how government can support competition in both retail and wholesale, and frameworks, policies and procedures to promote competition. ⁽⁵⁾

Importantly, the brief did not include policies that would result in cutting the price of grocery items, only competition.

The review concluded with fifteen recommendations about how the ACT government could address supermarket competition through policy.  Many of the recommendations mirrored those made by the ACCC in its Inquiry and principally focused on how government could foster competition for both grocery retailers and wholesalers, specific recommendations of which stores could be set up in growth areas and specifically recommended that ''any form of cap on the market share of participants should be rejected''. ⁽⁶⁾

However, the Martin Review attracted criticism from ACCC Chairman, Graeme Samuel.  Mr Samuel raised concerns that sections of the Martin Review were in conflict with the conclusions of the ACCC Inquiry and principles of the Trade Practices Act. ⁽⁷⁾

4.0 A.C.T. GOVERNMENT'S
POLICY RESPONSE AND ACTIONS

Following the completion of the Martin Review the ACT government released its ACT Supermarket Competition Policy Implementation Plan.  According to the Implementation Plan the ACT government developed a new framework to support supermarket competition, including supporting new entrants and larger and independent full line supermarkets to operate, supporting more wholesale competition, flexibility in zoning provisions, no cap on the market share of participants, inter-departmental coordination on policy and regular industry consultation.  Importantly the implementation plan included proposals for land release assessments for new supermarkets based on weighting criteria to support market outcomes. ⁽⁸⁾

Following the release of the implementation plan on the 6th of May the ACT Chief Minister Stanhope announced the government's first implementation response to its new supermarkets policy.  As part of its announcement the ACT government decided that in:

• Kingston, a car park would be converted to develop a new Supabarn supermarket without the opportunity for any other supermarket chains to bid.
• Dickson, a large format supermarket site would be available for all players, except Woolworths, to bid for the development of a new store.
• Casey, sites would be released for an ALDI and Supabarn store.
• Amaroo, a site would be released for a large format supermarket that would be exclude Woolworths and Coles. ⁽⁹⁾

The government is now in the process of implementing its proposals, and has claimed that ''importantly for Canberra shoppers there should, over time, be greater choice, lower prices and improved service''. ⁽¹⁰⁾

Table 1 | Impact of ACT Supermarkets policy on grocery prices



Location	Supermarket	Cost of basket
Existing ACT Treasury Sample Data
Central Belconnen	Coles	$82.32
Woden	Woolworths	$82.33
Central Belconnen	Woolworths	$82.45
Dickson	Woolworths	$82.48
Holt	Woolworths	$82.85
Gungahlin	Woolworths	$83.08
Jamison	Coles	$83.10
Weston Creek	Woolworths	$83.14
Condor	Woolworths	$83.20
Hyperdome	Woolworths	$83.27
Kambah	Woolworths	$83.81
Calwell	Woolworths	$84.33
Manuka	Coles	$84.68
Waniassa	Woolworths	$85.03
Hyperdome	Coles	$85.15
Charnwood	Woolworths	$85.29
Chisholm	Coles	$85.40
Queanbeyan	Woolworths	$85.41
Gungahlin	Coles	$86.00
Woden	Coles	$86.14
Wanniassa	Supabarn	$88.47
Civic	Supabarn	$89.21
Kaleen	IGA	$96.82
Civic	IGA	$96.88
Yarralumla	IGA	$97.31
Richardson	IGA	$97.76
Fraser	IGA	$104.86
Hawker	IGA	$107.30
Waramanga	IGA	$110.08
Lyneham	IGA	$110.64
Mean		$89.29
Additional Sample Data resulting from Supermarkets policy
Kingston	Supabarn	$88.84
Dickson	Non-Woolworths 1	$92.08
Casey	Supabarn and ALDI 2	$88.84
Amaroo	Non-Woolworths and Non-Coles 3	$95.77
Mean		$91.39
Consequences of Supermarkets policy
Revised Mean 4		$90.34
Difference		$1.05
Percentage increase 5		1.18%
Inflation rate		2.9% – 3.0%

Sources:  ACT Treasury data sourced from Kretowicz, E., 2010, ''It pays to shop around for groceries'', Canberra Times, Canberra, Australia, Author's Calculations and Reserve Bank of Australia

Notes:

¹ Based on the mean price of a basket of groceries from available data for non-Woolworths stores

² Data for ALDI is not available

³ Based on the mean price of a basket of groceries from available data for non-Woolworths and non-Coles stores

⁴ Mean of all supermarkets included in the table

⁵ Increase of the revised mean on the ACT Treasury's mean price for a basket of groceries

It is also clear that reducing prices was also the objective of industry.  Following the Chief Minister Stanhope's supermarkets policy announcement Managing Director of Supabarn, Eric Koundouris, said ''competition means lower prices''. ⁽¹¹⁾

However the claims that the government's implementation will result in lower prices is highly contestable, evidenced in its own data.

Earlier this year the ACT Treasury released data based on the cost of a 29 item supermarket basket for most ACT supermarkets.  The data is provided as Table 1.  According to the ACT Treasury data the twenty cheapest baskets were all found at Coles and Woolworths stores, which are predominantly the stores locked out of bidding for new supermarket sites following the introduction of the ACT's supermarkets Implementation Plan.

But the impact of the Implementation Plan is not to lower prices, but to increase them.

Based on calculations using the ACT Treasury's data of the mean cost of a basket of groceries for those chains entitled to bid at the Kingston, Dickson, Casey and Amaroo sites the impact of the ACT's competition model is to:

• Require the price of groceries at these news supermarket sites to be between $6.52 and $13.45 more expensive than the cheapest ACT supermarket site.
• Increase the price of the mean ACT basket of groceries to $8.02 compared to the cheapest basket available in the ACT amounting to a mean price nearly ten per cent higher than necessary.
• Increase the price of the mean basket of groceries in the ACT by $1.05 or 1.18 per cent, adding an additional third increase on top of inflation.

5.0 THE BENEFITS OF COMPETITION
IN THE A.C.T. SUPERMARKET SECTOR

There is no argument about the enormous benefits of competition.  Competition is absolutely vital to keep enterprise honest and stop exploitation by business of the consumer.  In his seminal work, An inquiry into the nature and causes of the wealth of nations, Adam Smith, deals directly with the benefits of competition in grocery prices.

The quantity of grocery goods, for example, which can be sold in a particular town, is limited by the demand of that town and its neighbourhood.  The capital, therefore, which can be employed in the grocery trade cannot exceed what is sufficient to purchase that quantity.  If this capital is divided between two different grocers, their competition will tend to make both of them sell cheaper, than if it were in the hands of one only;  and if it were divided among twenty, their competition would be just so much the greater, and the chance of their combining together, in order to raise the price, just so much the less ... It can never hurt either the consumer, or the producer, on the contrary, it must tend to make the retailers both sell cheaper and buy dearer, than if the whole trade was monopolized by one or two persons. ⁽¹²⁾

And the principles outlined by Smith regarding grocery competition remain today.  In principle, the greater the number of market players competing, the more likely there will be a reduction in prices for the consumer and also a decreased likelihood of collusion between market players.

Rightly, the ACCC Inquiry, the Martin Review and the ACT government's Implementation Plan all argue in favour of having a market framework that supports competition.

Table 2 | Market participants and their floor space to turnover share

Group	Floor space	Turnover	Turnover to floor space ratio
ALDI	7.5	8.7	1.16:1
Coles	21.0	20.6	0.98:1
Supabarn	7.0	7.7	1.10:1
Woolworths	39.2	51.6	1.32:1
IGA and other smaller independents	25.3	11.4	0.45:1

Source:  Martin Review and author's calculations

But it is important to understand that not all competition is driven by price.  As the Martin Review concluded ''the successful independent's competitive advantage derive from excellent personal service, utilising local suppliers, meeting special customer needs in terms of products not supplied by the major chains and links to local community activities''.  And as a consequence regulating in favour of the introduction of more supermarket chains, especially those with a history of higher prices, is unlikely to cut the price of groceries.

Data included in the Martin Review found that of forty major indicators for consumer tastes and preferences for individual supermarkets, Woolworths won almost all categories shortly followed by Coles.  The only differentiating supermarket chain was ALDI because of value and price.  And as Table 2 identifies, ALDI's affordability doesn't necessarily equate to higher consumer preferences.

Instead of being a policy to promote competition the ACT's supermarket Implementation Plan increasingly looks like a form of industry protection.  In media statements, Chief Minister Stanhope appears to like commending the benefits of his policy for ''locally-grown independent chain Supabarn'' and states his policy will ''complement Supabarn's entry into fast-moving wholesale competition in the ACT''. ⁽¹³⁾

But, as with all industry protection, the cost is born by consumers because of decreased competition and the loss of entry of more competitive players.  And the data provided in Table 1 evidences that outcome for ACT supermarket shoppers as a result of the ACT government's policy because Supabarn is a more expensive.

6.0 CUTTING GROCERY PRICES

It is widely accepted in the reviews completed that a key problem with supermarket competition is the high cost of entry.  The high cost of entry is driven by many factors, most notably the purchasing or leasing of sites for development, development and fit out costs, and the cost of initial stock and other resources.  The higher the costs of entry the more likely entry points will favour established operators, notably the two majors, who have good access to capital and are likely to be able to outbid smaller or unestablished competitors, like entrepreneurs setting up an independent store.

There are two key instruments that the government can employ to address these problems:

1. Planning regulations
2. Taxation powers

6.1 PLANNING REGULATIONS

Land for a large format supermarket will always be expensive because of the physical amount of land required and the alternative competitive uses of that land based on its location.  However restrictive zoning laws that limit the land available for commercial purposes generally, and the development of supermarkets, restricts potential competition.

Increasing the volume of land available for the development of supermarkets is likely to decrease the costs of entry.  In part, the ACT has adopted this approach by increasing the number of available sites for supermarkets.  But the government is offsetting the gains of increased sites by then deciding which market players are then allowed to bid to operate at different sites.  And based on its behaviour to date, it is favouring high cost operators, not lower cost operators who will have the effect of increasing the mean price of groceries.

6.2 TAXATION POWERS

The ACT government has modest taxation powers to collect sufficient revenue to support its activities.  But any business tax adds as a cost barrier on the establishment of new, or operation of existing, enterprises.  Reducing business taxes such as stamp duty, land tax or payroll tax for new entrants will reduce the costs of entering the marketplace for the non-majors.  Cutting these taxes for a temporary or permanent period of time would remove a barrier to entry for market players irrespective of their size and access to capital.

7.0 CONCLUSIONS

The potential impact of the ACT government's Implementation Plan is significant.

Despite favouring no cap on the market share of different participants, by introducing restrictions on the chains that can bid at different sites, the government is effectively imposing a market share cap by stealth.

And the cost is likely to be passed onto consumers.  According to calculations based on the ACT Treasury's own supermarket survey data the Implementation Plan would:

• Require the price of groceries at these news supermarket sites to be between $6.52 and $13.45 more expensive than the cheapest ACT supermarket site.
• Increase the price of the mean ACT basket of groceries to $8.02 compared to the cheapest basket available in the ACT amounting to a mean price nearly ten per cent higher than necessary.
• Increase the price of the mean basket of groceries in the ACT by $1.05 or 1.18 per cent, adding an additional third increase on top of inflation.

Without engaging in central planning the ACT government can introduce policies to reduce grocery prices, by:

• Using its planning powers to increase the amount of available land zoned for new supermarkets to cut the cost of market entry.
• Allowing the market to decide which supermarkets will operate at each site, thereby encouraging operators with lower cost structures to enter the marketplace.
• Temporarily or permanently cutting taxes for new market entrants to remove cost barriers to entry.

8.0 REFERENCE LIST

• Australian Bureau of Statistics (ABS Cat. No. 6530.0) found in Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries'', Commonwealth of Australia, Canberra, Australia
• Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries'', Commonwealth of Australia, Canberra, Australia
• Department of Land and Property Sales, 2010, ''ACT Supermarket Competition Policy Implementation Plan'', ACT Government, Canberra, Australia
• Kretowicz, E., 2010, ''Woolies, Coles in planning shut-out'', Canberra Times
• Martin, J., 2009, ''Review of ACT Supermarket Competition Policy'', Martin Stone Pty Ltd for the ACT Government, Canberra, Australia
• Samuel, G., 2009, ''Presentation to the Senate Economics Legislation Committee Estimates'', Parliament of Australia, Canberra, Australia
• Smith, A., 1998, Sutherland, K. (Ed), ''Wealth of Nations'', Oxford University Press, United Kingdom
• Stanhope, J., 2010, ''Boost for supermarket competition'', Media Release, Australian Capital Territory Government, Canberra, Australia
• Stanhope, J., 2010, ''New Supabarn warehouse supports greater choice'', Media Release, Australian Capital Territory Government, Canberra, Australia
• Stanhope, C., 2010, ''Supermarket plan to deliver choices, cheaper prices'', Business and Industry Development, ACT Chief Minister's Department, ACT Government, Canberra, Australia

---

ENDNOTES

1.  Australian Bureau of Statistics (ABS Cat. No. 6530.0) found in Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries'', Commonwealth of Australia, Canberra, Australia

2.  Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008'', Commonwealth of Australia, Canberra, Australia

3.  Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries'', Commonwealth of Australia, Canberra, Australia

4.  Australian Competition and Consumer Commission, 2008, ''Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries'', Commonwealth of Australia, Canberra, Australia

5.  Martin, J., 2009, ''Review of ACT Supermarket Competition Policy'', Martin Stone Pty Ltd for the ACT Government, Canberra, Australia

6.  Martin, J., 2009, ''Review of ACT Supermarket Competition Policy'', Martin Stone Pty Ltd for the ACT Government, Canberra, Australia

7.  Samuel, G., 2009, ''Presentation to the Senate Economics Legislation Committee Estimates'', Parliament of Australia, Canberra, Australia

8.  Department of Land and Property Sales, 2010, ''ACT Supermarket Competition Policy Implementation Plan'', ACT Government, Canberra, Australia

9.  Stanhope, J., 2010, ''Boost for supermarket competition'', Media Release, Australian Capital Territory Government, Canberra, Australia

10.  Stanhope, C., 2010, ''Supermarket plan to deliver choices, cheaper prices'', Business and Industry Development, ACT Chief Minister's Department, ACT Government, Canberra, Australia

11.  Kretowicz, E., 2010, ''Woolies, Coles in planning shut-out'', Canberra Times

12.  Smith, A., 1998, Sutherland, K. (Ed), ''Wealth of Nations'', Oxford University Press, United Kingdom

13.  Stanhope, J., 2010, ''Boost for supermarket competition'', Media Release, Australian Capital Territory Government, Canberra, Australia

Privatisation is not enough

State governments cannot seem to rein in spending so it matches their revenues.  The upshot is skyrocketing debt levels.  The NSW and Queensland governments see selling assets through privatisation as a solution.  Privatisation of government-owned businesses improves efficiency.  But it should not be seen as a means of achieving the necessary fundamental reform of state finances.

With its revolving door for state premiers and ministerial scandals, NSW is widely seen as the worst-run Australian state.  Yet NSW has been less profligate in its spending than other states in the past decade, though no state government has lived within its means.

Between 2000-01 and the coming financial year, the Queensland government will have taken the prize for extravagance among the bigger states.  In real terms its spending will have increased by 55 per cent.  This compares with 50 per cent for Western Australia and 40 per cent for Victoria, with an ostensibly parsimonious NSW having seen its spending increase by less than a quarter.

As a share of total spending within each state, government spending in Queensland has reached 15.5 per cent compared with 12.7 per cent in NSW and 11.5 per cent in booming WA.

Government extravagances during the past decade have led to mounting levels of state debt.  By the end of next year, overall state debt will total $120 billion, having increased from only $33bn in 2001.  Victoria was close to debt-free 10 years ago after the frugal Kennett administration, but Labor has managed to rack up $20bn.  Queensland has gone from the astonishing position of having negative debt four years ago to owing more than $30bn and NSW debt continues to rise and will top $40bn this year.

These are disturbing trends because ALP governments rarely show an ability to cut spending.

Privatisation proposals by the governments of NSW and Queensland are aimed at reducing state debt.  Queensland Premier Anna Bligh has announced she plans to get $16bn from selling port, rail and forestry assets.  NSW Premier Kristina Keneally has her state's electricity retailers on the auction block and is hoping to realise $8bn from this and from the rights to build new generators.  Queensland has already sold its electricity retailers and the state's generation supply is partly privately owned.

Both states have resisted privatisation of their poles and wires.  This is largely because of opposition from unions, but the governments also claim electricity poles and wires should remain in public ownership because they are natural monopolies.

Victoria and South Australia, however, have privatised this part of the electricity supply industry.  The natural monopoly characteristics of poles and wires mean they must operate under regulatory controls whether or not they are government-owned.

The regulatory approach sets price ceilings and reliability standards.  These protect consumers while giving incentives for the supply businesses to improve their profits and cost savings.

In the course of their oversight duties, regulators also assemble data that allows comparisons of different utilities' performance.  In Australia this data shows privately owned poles and wires businesses are more efficient than their government-owned counterparts.  A fortnight ago a report by the Australian Energy Regulator corroborated findings that had been published in work by former British regulator Stephen Littlechild and Australian consultant Bruce Mountain.  According to the AER, depending on the measure used, the Victorian businesses spend between 20 per cent and 50 per cent less than their government-owned counterparts in NSW and Queensland in operating and maintaining their lines.

The private companies' cost savings have not been at the expense of supply reliability.  Though one-off events such as bushfires mean it is difficult to make short-term comparisons, across the long term, reliability in the Victorian, NSW and Queensland businesses has been similar.  Regulatory control ensures the cost savings get passed back to consumers as lower prices, but the lack of savings in the government-owned businesses prevents such benefits.

The message for the NSW and Queensland governments is their electricity consumers would see lower prices if the state-owned poles and wires businesses were privatised.  This would also allow debt retirement.  In the case of NSW, sale of these businesses is likely to raise $15bn, approaching half the state's present debt.

However, such a windfall should be a platform for achieving balanced budgets and not be used as an opportunity to defer spending restraint.

ADVERTISEMENT

It's alive, after a fashion

Tony Abbott is a strange person to run an anti-tax, anti-spending election campaign.  Sure, Abbott got the leadership on the back of a simple phrase -- "great big new tax" -- liberally applied to the government's emissions trading scheme.  He's picked up Malcolm Turnbull's theme of careless waste in education and insulation, and run with it hard.

His budget reply speech in May sung loudly with "this reckless spending must stop".

But it was quickly revealed that the night before his reply Abbott had asked his shadow cabinet to approve a pretty reckless piece of spending of his own:  a quick cash payment of $10,000 for stay-at-home mothers.  This idea was quickly shut down by his colleagues.

That was to be on top of the opposition's proposed paid parental leave scheme, which had been announced in March, supported by a $2.7 billion tax imposed on businesses.  It would give Australia parental leave to rival Sweden's.

(As an aside, for decades we've been told Australia should be like Scandinavia.  So why Abbott's policy has been so enthusiastically laughed at by those who believe we should be playing policy one-upmanship with Pippi Longstocking is beyond me.)

Anyway, now the opposition is back condemning great big new taxes.  Abbott claims increasing the tax paid by the mining industry would be like digging out the heart of the economy and sending it, still beating, to Guangdong Province to work the rest of its life making iPad knock-offs.

Putting aside the merits (and demerits) of the mining tax, there's a reason for this barrage of mixed messages.

It's that Abbott's small government identity doesn't quite fit him properly.

One of the most common claims made about the Opposition Leader is that his ideas are little more than nostalgia for John Howard -- to elect Abbott is to give Lazarus another triple bypass.  It's an understandable view.  When in 2003 he was asked if he could think of anything he disagreed with Howard on, Abbott responded:  "No.  No.  I can't."

But Abbott isn't exactly Howard.  Abbott represents strongly just one side of the Howard legacy, a side that became more and more dominant as the Howard government got longer in the tooth -- big government conservatism.

That's the best description of the Howard government's mix of modest social conservatism and giving the middle-class as much welfare as they can stomach.

Howard was much more like a progressive leftie than anybody gives him credit for.

Under Howard, the rich got taxed more, and the poor got taxed less.  In 1996, the top 25 per cent of income earners paid 60 per cent of the Commonwealth's total tax revenue.  By 2007, they were paying 67 per cent.  That's a big increase.

On the other side of the city, the bottom 25 per cent of earners were paying 3.4 per cent of the total revenue in 1996.  Eleven years later, that number had dropped to 2.5 per cent.

Yet Howard had made his way in the 1980s as an economic dry.  He was supported by the rump of free marketeers in the Liberal Party who believed Australia needed to privatise the big, lumbering bureaucrat-run businesses, deregulate and destroy the cosy government cartels (the government's official Egg Marketing Board, for instance), lower taxes, cut spending and generally get off the economy's back.

Let's just call them neo-liberals.  Everybody else does.

In government, Howard spent heavily and regulated heavily, but he did come good on some of the neo-liberal agenda.  Telstra was fully sold, the GST implemented, media markets deregulated, and so on.  Small steps, but enough of them to keep the free marketeers on side.  Howard still got to call himself a neo-liberal, and everybody else got to damn him as one.

Howard was a neo-liberal on Mondays, Wednesdays and Fridays, and a big government conservative on Tuesdays, Thursdays and Saturdays.

Neo-liberalism in Australia is primarily an economic agenda.  And Abbott's lack of interest in economics is famous:  "I have never been as excited about economics as some of my colleagues;  you know, I find economics is not for nothing known as the dismal science."

Much more than Howard, Abbott sees the economy as simply an engine to produce money for governments to spend.  A good economy is important.  But mainly so governments can fund social programs:  "You can't run a decent society without a strong economic base."  The word "run" is crucial.  That's hardly a vision of a neo-liberal, dry-as-dust, no-such-thing-as-society Brutopia.

All signals suggest an Abbott government would continue to bump up taxes in order to fund lavish subsidies to the middle class.  Like Howard.

But unlike Howard, Abbott's interest in neo-liberal reform seems limited to WorkChoices.

So there was considerable disquiet within the Liberal Party when the parental leave scheme was announced.  Not just with the way it was announced, but the very idea of levying a big new tax on business.

Former treasurer Peter Costello wrote in The Age:  "I have been to a lot of Liberal Party meetings in my life and I can honestly say I have never heard a speech in favour of higher tax."

After all, many in the party still harbour an intuitive resistance to tax increases, let alone whole new taxes.  Howard and Costello knew what they were doing.  Their later budgets invariably had some sort of tax cut, no matter how piddly or token.

Any leader will do if you're winning.  (That's politics.  If you're losing, no leader is good enough.)  The Opposition Leader has made big gains.  But iron-man Abbott will have to work out harder if he's going to fit into the clothes of an anti-tax, anti-waste warrior.

ADVERTISEMENT

States look beyond the power of one supplier

Fifteen years after Victoria privatised its electricity industry, New South Wales is dipping its toe into those same waters.

But its focus is on electricity retailing, which accounts for under 5 per cent of total supply cost.

Previously NSW has considered privatising its state-owned electricity generators.  The unions prevented this, fearing private owners would seek greater efficiency by replacing some of their members with non-union contractors.

There are no privatisation plans in NSW (or Queensland) for the supply system's poles and wires, which bring electricity to our homes, shops and factories.  Poles and wires account for about half the costs of electricity.

Victoria has five of these businesses.  SP Ausnet provides the transmission spine while Citipower, Powercor, Jemena and United Energy provide the local distribution.

Pole and wire businesses are natural monopolies and therefore operate under regulatory controls.  The controls are similar whether the companies are private, as in Victoria and South Australia, or government-owned as in NSW and Queensland.

The regulatory approach used is based on a system pioneered in England 20 years ago.  It sets price ceilings and reliability standards designed to protect consumers while giving ample profit incentives for the supply businesses to seek cost savings.

All this was supposed to be very simple.  The first English regulatory decision ran to just three pages.  Last week the Australian regulator put out draft proposals for Victoria's pole and wire businesses' prices comprising a horse-choking 2500 pages.

Regulatory intrusion has clearly become excessive.  The costs to the regulator itself are amplified by costs required of the regulated businesses to supply information.

Such excesses are especially irksome when, as was the case with the latest Victorian draft, the massive and detailed analysis simply resulted in price recommendations that merely maintained existing trends.

However, the outcomes of the various regulatory reviews also reveal a superior performance of privately owned businesses.  Depending on the measure used, the Victorian businesses spend 20 to 50 per cent less operating and maintaining their lines than their government-owned counterparts in NSW and Queensland.

Unlike the government-owned businesses, the Victorian companies have tended to spend less than their regulated prices permit.  As private businesses, they have incentives to make savings to allow increased dividends for their shareholders.

This gives the regulator a yardstick for reducing future allowable spending by the supply business, thereby passing on the efficiencies gained to customers.

By contrast, the government-owned companies have no real shareholders and are inclined to spend whatever they can, even when some spending yields no real value.  This denies regulators the evidence to justify holding down future spending levels and therefore customers face higher prices.

The private companies' cost savings have not lowered reliability levels.  Infrequent events such as bushfires make comparisons difficult but, over the long term, the Victorian, NSW and Queensland businesses have similar reliability.

All of this holds two messages.

Firstly, Victorians continue to benefit from the former Kennett Government's privatisations.

Secondly, the Queensland and NSW governments could reap similar benefits by privatising their state-owned pole and wire businesses.

For NSW, this may raise $15 billion, allowing the elimination of half the state's debt.

ADVERTISEMENT