Mismanaging water policy can drain a budget

FOLLOWING the report into state finances by an independent committee, we are seeing the hollowness of the previous Victorian government's claim to budgetary competence.

Further evidence of the Brumby/Bracks government's ineptness is coming from a Productivity Commission inquiry into urban water supplies.

Central to Labor's water policy was avoiding a new dam.

Instead it regulated water use and embarked on the disastrous Wonthaggi desalination plant.

The Auditor-General has already estimated that the Wonthaggi capital costs have blown out from the original $3.1 billion to $5.4 billion.  And even at its original price Wonthaggi's water was to cost five times that of alternative supplies from a new dam on the Macalister, the Mitchell or Latrobe.

But, terrified of seeing television coverage of green demonstrators and ever willing to believe propaganda that human actions were drying the clouds, Brumby and Bracks wasted $1000 per Victorian on the Wonthaggi project.  Clearly, they preferred avoiding stress to acting on the basis of objective reviews of options.

Though Australia is a dry continent, only Iceland and Russia have more rainfall per head of population.  But Australia's rainfall variability requires more storage.

That's why Melbourne, like Sydney and Brisbane, has dams that can store more than five years of water demand.

Our requirement for extensive storage is a cost that few other countries need to bear.  And that makes saddling ourselves with unnecessary expenses all the more objectionable.

Victoria presents an unmitigated disaster in water policy.

The backyard tank is even worse than the desalination plant.  After a tank's purchase and maintenance, the water it provides can be twice as expensive as desalinated seawater.

Regulations have forced 26 per cent of Australian households to install these inefficient devices.

Of the non-traditional water augmentation options the only urban stormwater harvesting has promise with water costs on some estimates comparable to those of a new dam.

The Baillieu Government is flirting with this.

However cost estimates are untested and, in any event, the additional supplies urban stormwater can provide are relatively small.

Melbourne's water bills have risen by over 17 per cent in each of the past three years.  But these increased costs are largely due to the over-staffing and other excesses seemingly inevitably incurred by government businesses.

In fact, the water itself delivered to the major cities accounts for only one tenth of the total bill, the rest being pipes and sewerage disposal.

As the desalination contract is in place, bearing down on pipe and operating costs is the best chance of now undoing some of the legacy of the Bracks/Brumby maladministration.

This will require strong incentives and disciplines on managers.

But such rigour is rarely seen in Australian governments.

While managers in business entities see their careers wrecked if they don't succeed, in politics it is different.

Brumby, Bracks and former water minister John Thwaites obtained post-parliamentary positions that appeared to involve little actual work.

Their unsuccessful administrators rarely got the chop.

Acquiescence in failure was a hallmark of the previous government.  Can a Baillieu administration avoid such outcomes?

Depraved UN has no right to preach

THUGGISH despot who slaughters peaceful protesters in the streets, or global guardian of human rights?  The United Nations can't seem to make up its mind where Syrian dictator Bashar al-Assad is concerned.

This week, UN Secretary-General Ban Ki-moon was expressing ''grave concern'' over Assad's decision to set loose his tanks on unarmed pro-democracy demonstrators.  But Ban then declined to intervene in the coming elections at the UN Human Rights Council, where Syria is a shoo-in for a new three-year term.

Scheduled for mid-May, these elections have about as much suspense as polling day in ... well ... Damascus.  As one of the four candidate nations vying for the four open slots allocated to the Asia group, Syria's election to the council is all but assured.

Given its own dubious record, you'd think the council might hesitate before setting itself up as a moral arbiter.  But that is precisely what happened three months ago as it stood in judgment over Australia's human rights record through something known as the Universal Periodic Review.

At the time, the Human Rights Council counted Saudi Arabia, Libya and the world's last Marxist dictatorship -- Cuba -- among its members.  The presence of this rogues' gallery meant the verdict on Australia was written, in part, by some of the most repressive regimes on the planet.

Only in the depraved universe of the United Nations are the world's worst empowered to pass moral judgment on the world's best.  The Universal Periodic Review is nothing more than a politicised kangaroo court that is the equivalent of putting an embezzler in charge of regulating the banks.

I'm in no mood to accept moral critiques from Saudi theocrats whose legal code makes the testimony of a woman worth half that of a man.

But the rhetorical hypocrisies of the UN's human rights machine are merely a casual annoyance when compared with the dark deeds that routinely take place under the United Nations banner.

Three years ago, British charity Save the Children sounded the alarm over rampant child sexual molestation committed by UN staff around the globe.  In a 2008 report titled No One to Turn to, the charity noted:  ''Troops associated with the UN Department of Peacekeeping Operations (DPKO) were identified as a particular source of abuse.''  Even worse was the ''culture of impunity'' that routinely enabled these paedophiles to escape punishment.

A subsequent Save the Children policy brief, published in December 2009, confirmed that sexual predation by UN personnel remained epidemic:  ''In 2008, in Cote D'Ivoire, Sudan and Haiti, we found that nearly 90 per cent of those interviewed recalled incidents of children being sexually exploited by aid workers and peacekeepers.  In Liberia in 2006, we reported high levels of abuse of girls, some as young as eight.

''In 2004, it was reported that many girls and women in war-torn areas of the Democratic Republic of Congo (DRC) traded sex for food and other essentials from UN peacekeepers.  During the UN mission in Cambodia in 1992-93, the number of sex workers, including children, rose from 6000 to 25,000.''

A young Haitian girl quoted by the charity described the culpability of UN staff in particularly stark terms:  ''The people who are raping us and the people in the office are the same people.''

I'm proud to report that Australian troops on peacekeeping duty have never been implicated in such repugnant behaviour.  As a matter of fact, Australians in East Timor almost got into a firefight when they objected to the sexual abuse of small boys by Jordanian soldiers.  Good on 'em!

Of course, the UN Secretariat has responded to this ongoing abomination with the usual declarations of commitment to zero tolerance strategies.  But like nearly everything else related to the UN, the passage of time has revealed those measures to be all bark and no bite.

The NGO Refugees International noted that the UN's unwillingness to enforce an effective policy against sexual abuse meant that ''zero tolerance is meaningless''.  And so sexual predators wearing the sky blue beret continue to prey on the vulnerable victims of war and natural disaster around the globe.

The taint of moral corruption pervades even the pinnacle of the UN's organisational pyramid -- the Security Council, where just three years ago Libya was awarded a temporary two-year seat.  And now Julia Gillard seeks to resurrect Kevin Rudd's quest for Australia to join the Security Council as a non-permanent member.  With apologies to great comedic actor Groucho Marx, I ask:  why should we want to join any club that so recently had Muammar Gaddafi as a member?

By word and deed, the UN has forfeited any semblance of a claim to moral leadership.  Former US ambassador to the UN John Bolton once quipped:  ''The Secretariat Building in New York has 38 storeys.  If you lost 10 storeys today, it wouldn't make a bit of difference.''  But my response to Bolton's witticism is to say:  why stop with only 10?

Hey, big spenders, look at Victoria

A new report on Victorian public finances underscores why state governments require stronger fiscal rules to promote budget responsibility.  The report, commissioned by the Baillieu government and authored by Michael Vertigan, Don Challen and Ian Harper, has found the budget of Australia's second largest state is unsustainable in the medium term.

It suggests lax cost controls have led to operating expenses exceeding revenue inflows during the past decade, wielding significant pressure on the state's bottom line.  Importantly, the report illustrates that the Victorian budget had been propped up by federal government grants, which are counted as part of state revenue.  Victoria's $600 million budget surplus of 2009-10 would have been a $1 billion deficit in the absence of commonwealth support.

This study should make other states sit up and take notice of the risks they face in setting their budgets on a more fiscally sustainable course.  After all, the revenue and cost pressures are being experienced by all jurisdictions.

For a start, important sources of state revenue growth are drying up.  With retail sales remaining weak for some months, there are estimates bandied about that states could lose up to $6bn in expected GST revenues over the forward estimates.  A slowing in house sales and lower employment growth is likely to constrain stamp duty and payroll tax receipts respectively.

However, it is the expenses side of the budget that state governments need to pay closer attention to.  The largest cost pressure for governments are salary and other expenses for growing numbers of public servants.  Last year the states employed 1.4 million workers, compared with fewer than 1.1 million in 2001, with the average rate of public sector employment growth exceeding total employment in all jurisdictions except resource-rich Queensland.

Public sector unions in South Australia and Tasmania are warning against government job cuts to balance state budgets.

Meanwhile, new governments in NSW and Victoria are finding out just how unrelenting public sector unions can be when it comes to salary growth demands over inflation.  With the costs of services such as health and education outstripping general price inflation, the budget process is a tortuous one in which governments battle to keep spending within available income.  Yet much of this budget torture is self-inflicted, reflecting an inability to stick to basic financial management rules.  A desire for political popularity often means yielding to community expectations for more spending.  This leads to governments getting caught out if their narrow revenue bases don't collect as much money as expected.

A stronger regime of fiscal rules, replacing the largely unenforced state legislative provisions and policy guidelines, would be effective in ameliorating these pressures and entrenching appropriate fiscal behaviour.  If states and their local governments maintained limits on their spending growth, with taxpayers rebated for revenues exceeding the spending growth rule, they would have returned between $146bn and $260bn in cumulative rebates since 2000-01.  Residents in NSW, Victoria and Queensland, states that have experienced budget troubles, would have been among the big winners from this reform.

To reinforce this rule, budgets should be balanced on an annual basis and caps on state-local net debts introduced to prevent governments shifting the costs of providing present services into the future.  This fiscal restraint would have had a range of benefits, quite apart from rebating excess revenues back to taxpayers who can more efficiently spend on their own priorities.  Enforceable fiscal rules, including penalties for breaches of the spending limits, would encourage governments to prioritise more attentively between spending demands, rather than spend more on everything today and hope for the best for revenue growth tomorrow.

A crucial part of this would be for governments to restrict their spending to core activities that the private sector cannot provide profitably.  Politicians would also have greater incentives under stronger fiscal rules to eliminate accumulated programs that no longer reflect economic and social circumstances.  Growth in the size of government at the state and local levels would remain within more reasonable limits, in itself an important objective to increase private sector activity and economic growth.

State governments have been active in the past 20 years in improving the transparency of their financial operations.  There have also been some important, if imperfectly applied, attitudinal changes by state politicians to avoid the reckless fiscal experiences of the 1980s.  However, as the Victorian report illustrates, governments haven't completely ridden themselves of the big-spending bug.  With Victoria providing the early warning signs of budget troubles on the horizon, states should take action to institute the next generation of budget reform for fiscal responsibility.

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Morality and humanity in the gambling debate

Opposition to gambling has always been somewhat aesthetic and moralistic.  The character of that moralising has, however, changed over time.

During the Middle Ages, betting was seen as unproductive and idle.  Only knights, clergymen, and monarchs had sufficiently good character to be allowed to play dice for money.

A few hundred years later, Reformation era moralists saw gambling as sin.  It was blasphemous to ask God to decide such trivial matters as dice throws.

Their Enlightenment descendants imagined gambling to be irrational;  contrary to the spirit of the age of reason.  The 19th century saw it as a social disorder;  disruptive, inefficient, and, as a consequence, borderline criminal.

Anti-gambling activists of the early 20th century focused on class.  The lower and upper orders played different games.  Predictably and unfairly, working-class gambling was suppressed, and upper-class gambling left alone.

Today, the vast bulk of anti-gambling opinion has a medical hue.  We now see gambling mostly through the prism of illness and addiction.

Mental health concerns are genuine and serious and do not deserve to be dismissed out of hand -- regardless of whether we think the Government should step in to manage or override people's choices.

But the aesthetic and moralistic critique of gambling has not disappeared.

Certainly it's obvious that opposition to, for instance, poker machines, is not solely based on data revealing the relative incidence of problem gambling occurring on the pokies compared to other games.

A part of that opposition (we can disagree how big a part) is undeniably grounded on how the pokies look 'sad'.  Playing is solitary.  Players appear joyless.  A poker machine seems to be a mechanised and computerised tool of corporate manipulation;  a metaphor of consumer capitalism made real.  ('People cannot seriously enjoy pokies, can they?')

These impressions colour the debate over poker machine regulation.

Nick Xenophon's weekend statements suggest much of the political push against the pokies is motivated not by a belief that the pokies are uniquely dangerous, but by a distaste for gambling in general.

The South Australian Senator is drafting a bill to crack down on online betting.  And he's upset about the very existence of sports wagers.  In comments to The Age on Saturday, he said he wants to ''ban commentators referring to the odds'', ban ''odds being broadcast'' and impose ''restrictions on the maximum bets being able to be played''.

Xenophon would also like advertising of online gambling sites to be banned, having argued in the past gambling advertising should be regulated as heavily as tobacco advertising -- in other words, regulated out of existence.

The reasons Xenophon offers for such restrictions are many and familiar.  He argues gambling poses dangers to sport itself -- match-fixing is inevitable in a world where sports betting is widespread.

'Children -- think of the children!' could be normalised to gambling.  This is left unexplored, but is presumably undesirable;  the implicit argument being that sports betting, while not necessarily harmful itself, is a gateway drug to the RSL.

Then, of course, the aesthetic argument:  ''It's a shame for the great game of cricket that it's been reduced to just another event to have a punt on,'' Xenophon said in 2008.

Whether gambling enhances ''the great game'' or undermines it, preserving the enjoyableness of sporting events should not be a central concern of parliament, let alone the Commonwealth Parliament.

As the social scientist Gerda Reith argued in her 1999 book The Age of Chance:  Gambling in Western Culture, gambling is endemic, historically and in the modern world.  And, as a consequence, has developed great cultural significance.

Through gambling, people engage both the mathematical concept of probability, and the metaphysical concept of chance.  It's a way to make light of risk;  to tame uncertainty.

In other words, gambling is part of human nature.

Given gambling's cultural centrality, it's not clear why the Government should try to wall it off;  to regulate gambling into an isolated and denigrated corner of the Australian consciousness.

Rather than treating gambling as alien and dangerous and not fit for children, why not treat it as a normal part of being and encourage it to be enjoyed responsibly?

Gambling is, after all, just a game.

Bookmakers are running odds on nearly every facet of the royal wedding:  the first dance, the colour of the bride's dress, the colour of Victoria Beckham's dress, whether Prince Phillip will fall asleep during the ceremony, whether chicken tikka masala will be the main course, and whether Prince Harry will drop the ring and be too drunk to finish his speech (25-1, as of a few days ago).  And, unsurprisingly, on the chances of divorce.

These bets do not detract from the wedding, which will be as painful as it would be in a world without wagers.

They do, however, make a game out of it -- transforming the public from spectators to participants.

For moralist opponents of gambling like Nick Xenophon, such engagement only conjures up images of ruin.

But there is no need to be that pessimistic.  The desire to play games of chance is a part of the human condition.  Archaeologists have discovered four sided sticks -- proto-dice -- dating to 6000BC.  In 2011, let's try not be so scared of it.

Taxpayers bear the cost of dumping coal

The Commonwealth's carbon tax hits all Australians by increasing the costs of goods and services.  The Treasury forecasts this cost at $863 a year each household.  This comes on top of other costs to consumers and to business competitiveness.  These include the requirement of electricity retailers to incorporate high-cost wind and solar energy into our bills and losses due to higher fuel prices.

But NSW and Queensland citizens, like shareholders of private coal-fired generators, face an extra loss.  This is because the carbon tax destroys value in the generators.  The additional costs of a tax undermine, and are intended to undermine, the value of these generators in order to encourage generators that emit less carbon dioxide per unit of electricity.

Almost all NSW and most Queensland electricity is from government-owned coal generators.  The value of these and privately owned coal generators has fallen precipitously in Australia due to of fears of a carbon tax and other measures that discriminate against electricity generated from coal.

Thirteen years ago the NSW premier, Bob Carr, tried to privatise the state's generators.  He expected to raise a similar amount that Jeff Kennett got for the Victorian generators, $15 billion in today's money.  The unions, fearful of being forced to shed workers, vetoed this.

The carbon tax was looming by 2008 when the Iemma government tried to sell NSW's generators.  The estimated value had fallen to $8 billion.  Again union opposition thwarted the sale.  It is difficult to estimate the worth of these assets today.  The NSW botched privatisation process leaves the risks associated with a carbon tax largely with the government.  But evidence of further decline in the value of coal-based assets is provided by the valuation in AGL's accounts of its 32.5 per cent share in the Victorian generator Loy Yang.

Based on the estimates of AGL's accountants, the total value of Loy Yang is $866 million.  It remains a relatively modern facility but it is now worth only one-sixth of the $5 billion that it sold for, even without taking inflation into account.  A similar pattern of value destruction is seen overseas.  In the US state of South Carolina, a form of carbon tax and fears of additional impositions has led the state government to attempt to sell the machinery from two new coal plants.

The state's generators are facing rising costs because they are required to reduce their greenhouse gas emissions, a measure that has a similar affect to a carbon tax and has reduced the publicly owned generators' worth to scrap value.

The NSW experience, like that of South Carolina, is evidence that the long-term income-earning value Queenslanders had in their state-owned power stations has fallen considerably.  And this decline in value is present whether or not the facilities are to be privatised.

It reflects the reduced ability of coal to compete with other sources of electricity under a carbon tax .

All this information is ominous for the citizens of NSW and Queensland.  In addition to higher energy costs, a carbon tax -- even the prospect of such a tax -- destroys the value of coal generators they own.

The carbon tax is designed to increasingly reduce the output and profits of coal-based power stations.  Citizens, as the shareholder owners of the states' coal-fired stations, incur this loss.  People in other states within the national electricity market largely avoid this detrimental effect because their power stations are mainly privately owned.

The replacement cost of Queensland's state-owned generators is about $10 billion.  NSW generators, in the absence of a carbon tax, might be worth 50 per cent more.  The prospective carbon tax has stripped most of this value from the assets.  It means a loss in value of perhaps $2000 for every household.  Queensland and parts of NSW have arguably the lowest cost, large coal deposits in the world.  These should make the states magnets for energy-intensive industries and for businesses seeking to generate cheap power.  Yet the actions of the Commonwealth -- and state governments have been complicit -- is both preventing such investment and reducing the value of the existing power stations.

What happened to the meat axe?

Remember when Kevin Rudd said he was ''dead serious'' about bringing back the razor gang to trim the public service?

Two days before the 2007 federal election Rudd said it struck him as ''passing strange that this government that supposedly belongs to the conservative side of politics has not systematically applied the meat axe to its own administrative bloating for the better part of a decade''.

Unfortunately, in the intervening period the only axe wielded in Canberra seems to have been the one used to cut down Rudd and even he has only shifted from one job to another.

In fact, according to the Australian Public Service Commission the number of commonwealth employees rose from 155,421 people in 2007, the last year of the Howard government, to 164,596 last year, an increase of 6 per cent during the period.

And while the share of the 10 largest agencies, including the Australian Taxation Office, Centrelink and Defence, has fallen by roughly 2 per cent from 2008 to 2010 it has been more than compensated by growth in areas in which the commonwealth previously had a lesser role.  The Department of Climate Change, for example, has grown precipitously from 246 staff in 2008 to 1019 last year even though they are largely waiting in abeyance for a carbon tax to be implemented.

And the central agencies that are tasked to bring others to heel on the cost front are finding it difficult to keep a lid on their own hiring.  Staff numbers in the departments of Prime Minister and Cabinet, Treasury and Finance have grown by 15 per cent from 3170 to 3654 in last year.

If Rudd still has a meat axe he hasn't wielded it at AusAID, where there has been a 20 per cent increase in staff from 863 to 1037, and DFAT staff numbers have jumped from 2782 to 3160.  Such is the price of placating an aggrieved ex-prime minister.

Federal health public servants have fallen slightly from 5470 in 2008 to 5232 last year, but not for long.  Labor's health plans, including a national preventative health agency with funding of $872 million over six years, will increase the number of federal health bureaucrats that consume our health budget without providing any medical services.

In Education and Workplace Relations, 6054 staff somehow fill their days even though public education is a state responsibility and private education is, by definition, not run by the government, while the workplace relations arm delves into every nook and cranny of employer-employee relations throughout the country.

The Defence Department employs 15,691 public servants.  Not soldiers, sailors and the like;  this is an army of pen pushers.

What do all these thousands of public servants do?  They develop policies, advise government, manage the media, administer regulations, redistribute funds, monitor state governments in line with intergovernmental agreements, and at least 23 per cent of them deliver no front-line public service of any kind.

Julia Gillard and senior ministers have warned Australians of a horror 2011-12 budget, and to prove their point they are trialling selective spending reduction options in the court of wider public opinion.

Yet the debate over items such as medical research cuts, which would shave only 0.08 per cent off total spending, is little more than a diversionary political exercise when there are much larger sources of expenditure to prune back.

But the big question is whether the government has the constitution to cut back the size of the public service when that could incur the wrath of public sector unions and reverse its own legacy of big spending.

According to Lenore Taylor and David Uren in their book, Shitstorm:  Inside Labor's Darkest Days, in 2008-09 the Rudd government spent an unprecedented $80 billion over the forward estimates.

In that year federal government payments blew out to $316bn, an increase of $44.2bn on the previous year.  This included the extra public servants to oversee the anti-GFC efforts, as well as fulfilling the 2007 election promises.  Adjusted for inflation, this spending outcome was equivalent to a staggering 13 per cent, exceeded only by Gough Whitlam's 1974-75 budget, which raised spending by 20 per cent.

Any illusions that the government would maintain a fiscally conservative stance, as Rudd promised, were greatly diminished as a result of its big spending venture.

The great irony is that now Treasurer Wayne Swan and Finance Minister Penny Wong must reverse fiscal damage largely of their own making if they want to craft a new reputation for being ''downside Keynesians''.

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Why bad policy can be good politics

Why would the Gillard government want to cut an unambiguously popular area of government spending -- medical research?  Because, perversely, it may be good politics.

The Prime Minister has promised to bring the budget back into surplus as quickly as possible.  There is considerable political pressure on her to do so, and (as far as the budget deficit accords with a general perception of her government as hopelessly wasteful) considerable public pressure as well.

So the government needs to talk about tough choices.  And nothing demonstrates toughness than cutting medical research.

The government is apparently considering slicing $400 million off the National Health and Medical Research Council.  The Council looks at things like cancer treatment, trauma psychology, child allergies, cot-death, and genetic heart defects.  It's a pretty sympathetic Commonwealth body.

So if the rumours are true, the government is playing a familiar game.  When cutting against your wishes, cut in the most painful place.  Government bureaucracies do this all the time.  Bureaucrats have a powerful incentive to make budget cuts hard for their political masters.

When in 2008 the Rudd government insisted the Australian Bureau of Statistics take a haircut of $20 million, the ABS's immediate response was slice into two of its most necessary statistical functions -- retail sales data and labour force numbers.  The ABS couldn't have picked more painful and sensitive things.  If those figures aren't reliable, then, for instance, the Reserve Bank would struggle to do its job at all.

Next the public sector union claimed that the census would be next on the chopping block;  that the budget reductions meant the 2011 census would have to be exactly the same as the 2006 census, instead of being updated.  Welfare agencies cut things like taxi trips for children with disabilities.  Education departments close schools, instead of reducing the blossoming ranks of administrators, the paper-shufflers, and the lavish consultancies to friendly specialists in academia.  School closures do not play well in the press.

In 2009, Hawaii's education department was told to make savings.  Instead of cutting jobs, it cancelled school on Fridays.  Similarly, Julia Gillard and Wayne Swan have an incentive to make deficit reduction look as tough as possible.

To paraphrase American journalist and satirist HL Mencken, if the public wants cuts in government spending, they're going to get them good and hard.  And the louder the research community complains, the tougher the government looks.

The government has been accused of wasteful spending at every opportunity.  Tony Abbott has made ''the BER'' and ''pink batts'' into all-purpose symbols of fiscal recklessness.  So Julia Gillard probably welcomes the thought of having taxpayer-funded researchers rally across the country to protest her austerity measures.

There's a very good chance the medical research cuts won't be made.  If the government follows this well-thumbed script, it will back down -- ''saving'' research while simultaneously demonstrating an eagerness to make tough budget calls.

Still, the research cuts put Tony Abbott in a spot.  The opposition leader prides himself on clarity of message.  When opposing a government that cannot shake the impression of hopelessness, simplicity works.  Cutting the debt was point one of the Coalition's ''Action Contract'' in June last year.  Ending the waste was point two.

Yet Abbott gets into trouble when he tries to fill in the detail of what, specifically, he would like to cut to bring the budget back to surplus.  Every government program has a vocal constituency certain that their funding is the difference between refined, advanced civilisation and a brutish Hobbesian state of nature.

Now he's found himself opposing a reduction in government expenditure.  The Coalition's health spokesman, Peter Dutton, said over the weekend that ''The Coalition is going to the barricades over this one.  We won't stand for hundreds of millions being ripped from research.''  It muddies the Coalition's otherwise simple and clear message about reducing spending -- a side-effect which wouldn't disappoint the government at all.

Of course, just because strategic budget cuts might be good politics don't mean they're good policy.  The medical research community is quite upset.  Yet its reaction does raise the question of whether there is such thing as an optimal amount of funds directed towards medical research.

Is all medical research spending the most efficient research spending?  Or can funds only ever increase?  Do we have the right mix of private and public?  Are the incentives for private firms to develop new treatments the best they can be?

Or is it uncouth to ever ask such impertinent questions?  Perhaps so.

Yet our deep reluctance to ask them is why these sorts of cuts are more politically clever than they first appear.  The government wants to look tough on spending.  And nothing's tougher than cutting the development of new cancer treatments.

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Nanny state's thriving on tax harvested from smokers

The latest move by the Federal Government to make smoking a habit of the past is the latest salvo in the rapid expansion of the nanny state.

Recently the Health Minister Nicola Roxon re-announced the government's intention to force tobacco companies to adopt plain packaging for all cigarette brands.

From next year, smokers will be greeted with a standard olive-green packet emblazoned with graphic health warnings screaming that ''every cigarette is doing you damage''.

With tobacco companies looking to exercise their right to legally challenge the potential loss of trade marks that are represented in existing packaging, the recent ministerial announcement is by no means the end of the matter.

According to statistics supplied by the government's own health preventative taskforce, smoking prevalence amongst the adult male population has fallen from 40 per cent in 1980 to 21 per cent in 2007 with smoking rates lower for females.

In seeking to speed up smoking quit rates the government has relied on two general premises that do not stand up to closer scrutiny.

The government has stated that the costs of treating tobacco-related illnesses, such as lung disease, on the public health system are substantial, and that action is needed to reduce these costs.

However, it is incorrect to regard the pecuniary effects of private actions as an externality and thus it is unclear that the fiscal implications of tobacco use should be of concern to government.

In any case, the amount of tobacco excise fees collected by the government is well in excess of even generous estimates of tobacco consumption costs on the health care system.

The second assertion is that since tobacco is addictive smokers have lost their free will to quit, and so governments should do whatever it takes to nudge people away from Winnie Blues, rollies or Havanas.

Apart from the fact that smokers today are very well informed about the health risks, and choose to stick with their habit, a growing portion of non-smokers today were smokers in the past.

Instead of all the energy and expense involved in hectoring people to quit, an obvious question to ask is why governments could not ban smoking altogether?

Growing evidence from Australia and overseas suggests that high tobacco taxes and official restrictions on legal tobacco sales encourages black markets in the sale of cigarettes and other tobacco products.

In other words, promises by government to make smoking ''history'' are largely empty ones given its vested interest in taxing legal tobacco rather than collecting no tax from illegal black market products.

And, as Rex Jory reported on The Punch earlier this week, groups such as the Cancer Council are agitating for blanket bans on smoking in private residences such as apartments.

This comes on the back of reports earlier this year of apartment owners in Sydney's inner west which are looking to ban smoking inside flats and even on breezy balconies.

These ideas flagrantly violate the age-old notion that one's home is one's castle and that anyone who seeks to violate what we do in our own private home space is tantamount to raiding our castle.

While most non-smokers might look dimly on the rights of smokers to indulge their habit, there is a fundamental issue at stake affecting all Australians.

At what point does the government stop interfering with individual rights to enjoy pleasures, even guilty ones that cause individual harm in some cases?

As the economist James Buchanan wrote in 1986:

Let those who would use the political process to impose their preferences on the behavior of others be wary of the threat to their own liberties ... The apparent costlessness of restricting the liberties of others through politics is deceptive.  The liberties of some cannot readily be restricted without limiting the liberties of all.

So, like to indulge in an occasional flutter on the pokies or a punt on Black Caviar?  Enjoy a burger with fries on the weekend?

Governments are increasingly interfering with our choices in these areas, too, which in some instances could never have been contemplated even in the recent past.

Many of us may not agree with the habit of smoking, but there are inherent risks in the majority of us consenting to the fiscal and regulatory exploitation of a minority of smokers.

This is because, just as the economist Buchanan warned over twenty years ago, we just might find nanny governments gradually taking away our rights to choose in many other areas of life.

Totting up carbon tax is anything but a piece of cake

When asked on ABC1's Q&A about the carbon tax we'll pay on a birthday cake Assistant Treasurer Bill Shorten joked he didn't know how many candles there would be on it before blundering through a non answer.

For the government it was a moment, no doubt, uncomfortably reminiscent of former Liberal opposition leader John Hewson's famously botched attempt to explain the effect of the GST on a birthday cake in an interview with Mike Willesee in 1993 on A Current Affair.

But calculating the carbon tax on a birthday cake is no mean feat.  Here's the recipe.

First establish whether individual ingredients come from a company required to report its emissions under the National Greenhouse and Energy Reporting Scheme, which will then be used to issue carbon tax bills.

Despite what you may have heard, ''big polluters'' aren't just electricity generators and mining companies, but include most food and beverage manufacturers, as well as supermarkets.

Each is required to report their emissions from ''scope one'' activities involving the direct consumption of fuels, such as driving a car or burning gas, and ''scope two'' activities, primarily emissions from electricity consumption.

And since one company's scope one emissions are someone else's scope two emissions, their value is discounted to avoid double counting on each company's NGERS balance sheet.

Step two is to calculate the carbon tax the company will pay based on its reported emissions and how it will be distributed through the prices on each good consumers buy.

All the ingredients for our birthday cake -- 225g of White Wings plain flour, 125ml of Crisco vegetable oil, 85g of Cadbury cocoa powder, 250ml of Pauls milk, 350g of CSR caster sugar -- will include the direct cost of a carbon tax because they're manufactured by a big polluter.

As will the 220g of Plaistowe cooking chocolate and 200ml of Pura double cream for the icing.

And assuming the cake is being made in my kitchen in Melbourne's South Yarra, there'll be a carbon tax directly on the 250ml of water from big polluter South East Water I need to boil as well.

But the 1½ teaspoons of McKenzie's baking powder and bicarbonate of soda, two teaspoons of Queen vanilla extract and two Pace Farm eggs don't come from NGERS reporting companies and won't be taxed directly.

Nor will the Australian-owned Alpen pack of 24 assorted birthday candles manufactured in China.

All the locally produced ingredients, however, will include an indirect price increase through carbon tax electricity price rises.

They'll also include the carbon tax that flows through from ''scope three'' emissions, which includes all non-electricity scope two emissions whose cost will be passed through to every good and service in the economy and for which the government won't be compensating households.

For our birthday cake, scope three emission costs will be added to ingredients through the carbon tax paid by wholesale distributor Linfox and retailers Coles, Woolworths or ALDI;  as well as any other carbon tax costs to other companies who help get the ingredients into my pantry.

But it's important to note that scope three emissions don't attract a direct carbon tax bill as they're not required to be reported under NGERS.

Scope three emissions costs only flow through when they are passed on from another company's scope one or two emissions.

Step three is to calculate the carbon tax associated with actually producing the cake.

In this case I won't include the proportionate scope three emissions carbon tax cost from the production of the electric mixer, oven, mixing bowls and dishwasher for cleaning, since they were bought before a carbon tax and were probably made overseas anyway.

However, I will need to include the carbon tax cost from the electricity company's scope one emissions, which are my scope two emissions, for the electricity used to power the mixer, oven and dishwasher, as well as more of the South East Water consumed.

Step four is to light the carbon tax-free imported Alpen candles and directly release the only greenhouse gas in the whole recipe while my friends and I sing Happy Birthday.

Ironically, the candle's direct emissions don't attract a carbon tax because my humble kitchen doesn't meet the NGERS reporting threshold of emitting more than 25 kilo tonnes of greenhouse gases annually.

Step five is to eat the cake while calculating the total carbon tax cost.  But until the government sets the tax rate per tonne of carbon dioxide equivalent gases the cost is impossible to calculate.

The cost would then need to be recalculated each year because the Multi-Party Climate Change Committee agreed the tax would be ''increasing annually at a pre-determined rate'', even during the fixed price phase.

So the carbon tax contribution on a birthday cake increases between a child's first and second birthday.  Indeed, perhaps we could have a carbon tax birthday party each year on the day the tax goes up.

Because the tax increases on a compound basis, by their tenth birthday the carbon tax contribution will be about 50 per cent higher.  By their 21st it will have doubled.

I also haven't calculated my share of J.J. Richards and Sons' carbon tax bill for disposing of the uneaten cake.  Unlikely to be needed anyway.

Nor have I calculated the cost to business of complying with the 1000-odd pages of legislation and regulations required to operate the tax.  Industries are already complaining about the burden to the Productivity Commission's annual regulatory review.

Indeed, compliance will be where Julia Gillard and Climate Change Minister Greg Combet's mystical green jobs are already being created.

At the end of Willesee's interview, he asked Hewson, ''If the answer to [the GST] on a birthday cake is so complex, you do have a problem ... don't you?''

Hewson replied, ''Well, people don't know how much tax they currently pay.''

Australians, however, do know they aren't paying a carbon tax yet, and with this recipe Gillard, Combet or Shorten are unlikely to try to explain it.

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Plain packs pointless when smoke gets in our eyes

When the Rudd government's National Preventative Health Taskforce released a position paper on anti-tobacco measures, they titled it ''Making Smoking History''.

If that was the goal you'd think the government could just ban cigarettes -- a clear, bold, unequivocal stance on what it has condemned as a very dangerous and addictive product.

But the title does help us understand the reasoning behind plain packaging of tobacco, a policy which federal Health Minister Nicola Roxon announced a few weeks ago.  It's punitive.

The nanny state is no longer trying to inform us of the best choices and the risks of unhealthy behaviour.  Now it's just resorted to bullying -- haranguing and punishing people who still make those unapproved choices contrary to nanny's wisdom and despite nanny's best efforts.

Where will this end?  Surely, after decades of anti-smoking education, the presumption eventually has to fall back onto individual responsibility.

You can hate tobacco companies.  You can hate what cigarettes do.  But the government is planning to make Australia the first country in the world to impose plain packaging on cigarettes.  It seems reasonable to ask whether it will work.

Here's what we know:  smokers are influenced by packaging, to a degree.  Lighter colours seem to imply less risk.  One leaked Phillip Morris document admitted as much.  ''Smooth'' and ''silver'' also suggest safer cigarettes.

Hence the government's proposed new packet design -- an unappealing olive green, with unadorned text for the label.  But the literature suggests package marketing only influences the choices of existing smokers.

The government's goal for packaging is to stop people becoming smokers in the first place.  Roxon argues ''catchy colours'' are designed to ''suck in young people''.  Her aim is to ''make sure fewer people start on this dangerous habit''.  And there's no clear evidence packet design inspires non-smokers to start smoking.

The most that reviews of the scholarly evidence can find are surveys in which teenagers are asked to imagine whether their friends could be duped by shiny packages.  You may not be surprised to learn teenagers assume their friends are idiots.

This lack of evidence isn't surprising.  People start smoking because they want to try the sensation of smoking, not try the sensation of holding a well-designed package.  And what about existing smokers?  Let's just say if graphic photos of bleeding lungs haven't inspired you to kick the habit, an olive box probably won't either.

The tobacco companies are upset about plain packaging because it will make it harder to compete for the existing pool of customers.  They focus on packaging design because there's nothing left for them to do.

It's not as if cigarette marketing isn't highly regulated already.  Smokers won't even be able to see the olive-ness of the packets until after purchase.  New Victorian laws mean cigarettes are closeted out of view behind the counter.  Now retailers can only display a sign, provided by the state government, with the words ''We Sell Tobacco Here'' in black on a white background.

Existing laws will undermine the effectiveness of future anti-smoking policies the government might implement.

After all, it's one thing to show that people in an experimental psychology lab think lighter colours mean lighter cigarettes.  But it's quite another to imagine that -- after decades of anti-smoking advertising, warning labels and social disapproval -- the colour of the packet will make a lick of difference to the decision to smoke.

The traditional justification for nanny state-style regulation is that people don't understand the consequences of their choices.

Should people be allowed to manage their own risks:  to conduct themselves in their own way, to abuse or protect their bodies as they see fit?

The answer to that question ultimately depends on your personal values.  But the first health warning on cigarette packets was imposed 38 years ago.

Anyway, we're a long way past the days of health bureaucrats gently nudging us to make better decisions, and moderate sin taxes to recoup the costs to taxpayers.

Budget after budget of tobacco excise increases mean tobacco taxes now far outweigh the burden of smokers on the publicly funded health system.

The government estimates smoking-related illness costs about $300 million a year.  But it collects $5.8 billion each year in tobacco excise duty.

If the very existence of brands causes harm, as the government's plain packaging strategy suggests, then plain packaging for alcohol will no doubt be next.  Eighty per cent of Australians believe the nation has a drinking problem.

Brewers won't be able to get away with fluorescent and sparkling alcopops forever.  They're obviously targeted at younger consumers.  Nobody drinks Bacardi Breezers ''responsibly''.

Prominent text warning labels will come first.  Then graphics.

Seems unlikely?  Well, 10 years ago the idea that the government would eliminate logos from cigarette packs would have seemed pretty unlikely too.

In a nanny state, what first sounds absurd can quickly become the law of the land.

Learning from public policy mistakes of the GFC

In the Financial Times at the end of March, the former Federal Reserve Chairman Alan Greenspan wrote ''With notably rare exceptions (2008, for example), the global 'invisible hand' has created relatively stable exchange rates, interest rates, prices, and wage rates''.

That statement is mundanely true.  But as it came from Greenspan, it was not well received.

Left-leaning blogs have had great fun:  ''With notably rare exceptions, the levees protecting New Orleans have held fast in the face of major hurricanes''.

The Nobel winning economist-turned-polemicist Paul Krugman wrote he ''didn't know quite how to respond''.

The Global Financial Crisis still looms large.

Our understanding of the crisis will shape debate about the role of government and the fragility or robustness of markets for decades.

So it's important to get it right -- to pinpoint exactly what went wrong in the US housing market and what caused it.  The particulars are important.

Those particulars make it hard to shove the crisis into a morality play of deregulation and rampant greed.

We know a lot more about the crisis than we did in 2008 and 2009.

The US government's Financial Crisis Inquiry Commission reported this January.  While its majority report largely fails to interrogate the structural origin of the housing bubble, a dissenting report released as an appendix is much more interesting.

Written by Peter Wallison of the American Enterprise Institute, the dissent rigorously documents the deliberate erosion of lending standards by successive American administrations.

As Wallison writes, in the early 1990s lending standards were seen as a barrier to home ownership for low and middle-income families.

The solution was the Housing and Community Development Act of 1992, which intended to give those families better access to mortgage credit through the government-sponsored enterprises Fannie Mae and Freddie Mac.

Fannie and Freddie had been, until then, conservative and relatively benign, trading mortgages on the secondary market since the Great Depression.  But with the 1992 Act they now had a new mandate, a social mission.

Over the next 15 years the Government ratcheted up the affordable housing goals.

The result of these goals was spectacular.

By 2008, ''non-traditional'' mortgages (loans made to those with blemished credit, or lacking documentation, or with negligible down-payment) made up a massive 58 per cent of the total US mortgage market.

And US government entities -- primarily Fannie and Freddie -- were either directly holding or guaranteeing 71 per cent of those non-traditional loans.

This was a successful program, under its own terms.  It boosted homeownership rates substantially.  But the housing bubble it created eventually burst.

The received wisdom on this boom in non-traditional mortgages has focused on fraud by lenders, the naivety of borrowers, and the greed of investment bankers who packaged them into complex and inscrutable investments.

This tale has been reinforced by bookstores full of hastily-written financial crisis porn, rich with anecdotes about fast-living financiers and lazy lenders.

Yet in a market engorged by government affordable-housing goals, these bankers no more epitomise the ''invisible hand'' than the US Congress does.

So three years after the crisis, the policies which caused the housing bubble are starting to get their due recognition.

As are the mistakes made in 2008, while the bubble was collapsing.

If the erosion of lending standards was the long-term cause of the crisis, then the actions of the US government in 2008 was the short-term one -- badly deepening the crash and impeding the recovery.

Since the 1980s, the US government had slowly built an expectation it would bailout big firms if they got into trouble.  This expectation was never explicit.  You wouldn't want to bet the company on it.  But it was there.

Still, the bailout of the investment bank Bear Sterns in March 2008 came as a surprise.  Sure, Bear Sterns was deeply involved in non-traditional mortgages, but it was only a mid-sized firm.  If Bear Sterns was ''too big to fail'', so were dozens of others.

When the Federal Reserve stepped in to save Bear Sterns, it was massively expanding the government's implied support net.

In retrospect, many participants have blamed the failure to bailout Lehman Brothers in September for the crash.  And it is true that the market only truly sunk after it became clear Lehman would be left to fail, and investors realised government help was not guaranteed.

But Lehman's actions in the week after the Bear Sterns bailout reveal the real problem in 2008.

Bear Stern's near collapse in March should have inspired all participants to stop and reassess the quality of the mortgage-backed securities they were holding.

Instead, Lehman doubled-down, packaging all their riskiest assets into a special fund with one purpose -- as collateral to borrow money from the Federal Reserve.  In other words, instead of limiting their risk, they increased it.

For Lehman and other firms, maximising the chances for a bailout became the main game.  Not cleaning balance sheets and taking a financial hit.  As a former director of the Federal Reserve Bank, Vince Reinhart, has argued, the question becomes less ''how do we get out of this mess?'' and more ''how much money will the government pony up first?''

Expectations changed again in September with Lehman's collapse.  The US economy froze.  The global panic began.  Governments initiated an unprecedented series of interventions and stimulus packages.

And the name of the Lehman Brothers fund specifically designed to take advantage of Federal Reserve largesse and the banking sector's new claim on taxpayer dollars?

The ''Freedom'' fund.

Memory of the Great Depression shaped economic policy in the second half of the 20th century.  The Great Recession will shape the next 50 years.

So let's not let our understanding of its causes slip into a vague haze of myth and cliché.  The crisis was caused not by greed, or deregulation, or neo-liberalism.  It was caused by a web of public policy mistakes -- if well-intentioned ones -- and their unintended consequences.

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Trademark rights to extinguish plain packaging bill?

The content of the government's release on the draft plain packaging Bill offers few surprises.

The government thinks stripping tobacco products of any branding will cut smoking rates as part of a basket of anti-tobacco measures, they've picked the colour (an allegedly offensive olive green), and the already garish health warnings are going to extend from just the lip to most of the front packet.

But amongst the consultation paper is also an admission of something the government has long denied -- plain packaging could acquire the value of trademarks and expose taxpayers to a compensation bill from big tobacco.

At the time of the government's initial announcement both Health Minister Nicola Roxon and then Prime Minister Kevin Rudd dismissed these concerns arguing they have still-to-be-publicly released ''robust'' legal advice supporting no IP violations.

I raised concerns that stripping trademarks from packaging could lead to the acquisition of property rights under the Constitution and lead to compensation on ''just terms''.

But the government's consultation paper now acknowledges property rights risks exist.

Under the banner of ''Constitutional provisions'' the paper on the ''abundance of caution ... provides that if preventing the use of trade marks on packaging of products is contrary to section 51 (xxxi) of the Constitution, the trade marks can be used, but only in accordance with restrictions (for example, on size and placement) that would be imposed by the regulations''.

So far we don't know what the regulations say.

But the clear intent of the provision is if the High Court recognises plain packaging is the acquisition of a value of a trademark logo they can be used in a restrictive fashion without annulling the rest of the Act.

It's the government's long-winded way of saying ''oops''.

But despite this admission concerns that plain packaging may violate Australia's obligations under the World Trade Organisation remain.

WTO intellectual property rules require trademarks not be ''unjustifiably encumbered [such as] use in a manner detrimental to its capability to distinguish the goods or services of one undertaking from those of other undertakings''.

The rules also afford a public health exception ''provided that such measures are consistent with the provisions of this agreement''.

But by limiting the use of trademark logos the government may not be ''consistent''.

Especially since justifiability may require strong evidence of the plan's efficacy.

If you judge them on their words the government claims they are convinced.  But if you judge them on their actions reportedly they last year commissioned a two-year $600K+ plus study to look at the impact of plain packaging on smoking rates.

Documents released under Freedom of Information show that Australia's intellectual property agency, IP Australia, has found there are around 3,000 trademarks for tobacco and tobacco products of which ''a short study shows approximately 1/3 include logos''.

Publicly IP Australia has been wary of opposing the government's plain packaging plan but their internal discussions are telling.

One version of a briefing note states ''IP Australia considers that plain packaging may not be consistent with Australia's intellectual property obligations ... [and whether it] would constitute an acquisition of property is debateable''.

Emails between IP Australia trademark officials show that arguing Australia's international IP obligations would not be violated by plain packaging ''is a long bow''.

Interestingly IP Australia continues to highlight that ''requiring plain packaging would make it easier for counterfeit products to be produced''.

Since Australia is the first country to actually legislate for plain packaging the legal risks are significant.

And tobacco companies have already made clear their fighting intentions.

To date Australia, the United Kingdom, New Zealand, Canada and Lithuania have previously considered plain packaging and rejected it predominantly on intellectual property grounds.

Many countries are now watching what happens in Australia before they decide how they will progress.

There are mixed legal views about whether it violates IP rights and only the High Court and a WTO dispute settlement panel will ultimately decide who's right.

But treading with caution is wise.

The same FOI documents show IP Australia was only advised of the government's announcement days before it was public.

At the time the rushed announcement appeared to be a smokescreen to distract the public from the political hammering the government was taking from dropping its emissions trading scheme.

In light of recent polls perhaps not much has changed.

The only difference is this time the government appears to have acknowledged the very real risks that plain packaging poses to property rights and our international obligations.

This honesty is welcome.

Boot-strapping on a carbon tax

Australia accounts for a trivial share of global emissions.  Abatement action can only be meaningful if it is part of an international movement.

But the likelihood of this is receding.  The US is abandoning its efforts at the federal level.  Individual states, the latest ones being New Hampshire and New Mexico, are reneging on previous emission reduction commitments.  Of other countries, China is targeting only greater energy efficiency, an inescapable corollary of modernization, while Japan has said it will go no further in reducing its emissions.

Carbon tax or alternative action fails to pass a cost:benefit test for the world as a whole and still less for Australia.

For the world as a whole, independent economic analyses provide very different estimates from the 12 per cent income sacrifices forecast by government sponsored studies like that of Garnaut or the UK Stern report.  The dozen or so peer reviewed studies estimate that a doubling of emissions would bring costs over the course of a century in the range of plus or minus 2.5 per cent.  The major costs are associated with the IPCC forecast 20-80 cm increase in sea levels that economic analysts take as given.  Offsetting these claimed negatives are positives in the retreat of permafrost and increased growing seasons.  Many areas, like Russia, would make unambiguous gains from warming.

And when we think of these relatively minor costs (or benefits) we need to recognise that they take place over the course of a century in which real incomes are forecast to double.  Measures which shut-out the cheapest forms of energy would seriously reduce this expected increase in global income levels.

For Australia, greenhouse action to ensure that global emissions are brought to a world average level entails a reduction of domestic emissions by 80 per cent.  Treasury forecasts increases in costs of $860 a year for a $30 carbon tax and this would not take us close to the 80 per cent reduction to bring us to a global average.

It is the consumer, not, as the Government's media infers, corporate Australia, that pays the costs of the carbon tax.  Costs are passed on in price increases or are reflected in lower levels of competitiveness of our industries.

Already we are spending $3 billion a year on promoting climate change and subsidising carbon-reducing technologies.  In addition we have the renewable policy which requires 20 per cent of electricity to come from high cost renewables by 2020.  On conservative assumptions this will cost $2.7 billion a year.  A carbon tax at $30 per tonne levied only on electricity would raise a further $6 billion ($15 billion if it is on all emissions).

Garnaut wants to allocate revenues from the tax mainly to compensating the poor and promoting R&D.  He also advocates some form of cushioning effect on the most vulnerable export and import competing sectors.  But the complexities this entails are enormous in view of overseas producers' vast differences in the carbon intensity of their electricity.

Garnaut opposes compensation for the generators.  It is doubtful the Government will agree, especially since generators severely disadvantaged by a new tax would have a good claim to have been expropriated and seek compensation.

In also claiming the tax, if used judiciously, will raise national productivity, Garnaut, clearly dismisses the views of Winston Churchill who said, ''I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle''.

Churchill's colourful description actually understates the absurdity of a tax as a wealth generator.  Even without other problems, a tax requires the deadweight of a bureaucracy to administer it and to redistribute the funds it raises.  And, if a $26 per tonne enhanced productivity just think what wonders $260 per tonne would do!

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Carbon illusion we can't afford

In implementing its carbon tax the Gillard government is involved in a massive campaign of misinformation.

First there is the fiscal illusion.  It is creating confusion about who will pay the tax in order to disguise the full cost of the policy.

Andrew Leigh -- first-term ALP backbencher and former professor of economics at the Australian National University -- recently said that the policy consisted of big polluters being taxed and money given to households, while the Coalition policy consisted of households being taxed and the money being given to polluters.

On the ABC's Insiders yesterday, Finance Minister Penny Wong said:  ''This is not a tax that people pay;  this is a tax that polluters pay''.  That sounds all very reassuring, until we remember that Treasury thinks that household expenditure will go up by $860 per year for a $30 a tonne carbon tax.

What many people don't know is that the carbon tax will have to be much more than $30 a tonne to be effective.

As both Leigh and Wong know the argument that only the big polluters will pay is nonsense, some might say dishonest.  There are two points to remember.  It is household demand for goods and services that gives rise to carbon pollution.  In any event big polluters will simply pass on the cost to their customers.  So we know the carbon tax will be paid out of the household budget through higher prices and in some cases job losses.

The reality is that while big polluters will have to pay money to government, the burden will fall on people.

Then there is the notion that households will be compensated.  Not all households, mind you;  only low and middle-income households.

People should be worried that the government won't define what middle-income households are until late in the piece.  Many households are going to be unpleasantly surprised.

The idea is to overcompensate low-income households.  This will simply lead to them consuming more carbon intensive goods and services paid for by those higher in the income stakes.

How this would contribute to lowering total carbon emissions remains to be explained.

All sorts of anomalies and confusions are going to arise and this government hasn't shown itself capable of clear communication and explanation.

It is going to be very difficult to compensate households while also protecting trade-exposed industries.  Wong knows this too.  In Shitstorm, their excellent account of the Rudd government, Lenore Taylor and David Uren recount that Wong ''had reached the conclusion the business executives filing through her office were not making ambit claims but were genuinely worried about the potential impact of the plan''.

The government is hoping the introduction of the carbon tax will be similar to the introduction of the GST.  When the GST was introduced there were compensating tax cuts and increased welfare payments.  This compensation has been permanent.  True, the GST raises more revenue than expected, but a whole raft of inefficiencies were eliminated and replaced by a more efficient revenue system.

Consumers very quickly got used to the GST and there is broad acceptance that the GST was a worthwhile and valuable reform.  It is unlikely something similar will happen this time around.  The GST is a tax designed to raise revenue.  The carbon tax is designed to change behaviour:  revenue is a secondary and, if the policy is successful, a temporary consideration.

Yet most of the discussion has revolved around how to spend the revenue.

The policy objective is to cause a substitution from low-cost but dirty energy production to higher-cost but cleaner energy production.  In plain language the policy objective should lead to a permanent increase in household prices and fewer carbon emissions.  But if successful, the revenue will decline, meaning there will be no money to pay compensation.  There just isn't enough money to finance this scheme.

The government is planning to allocate revenue from a windfall gain to permanent spending.  This is a recipe for structural deficits and fiscal irresponsibility.  In the short run this policy isn't revenue neutral and in the long run it isn't budget neutral either.  So rather than being reminiscent of the GST reforms, the notion of carbon tax compensation is more like Paul Keating's L-A-W reform.  It is just not affordable.

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Free market in chains

This week Treasurer Wayne Swan effectively killed the foreign takeover of the Australian Securities Exchange.  He declared it was ''contrary to the national interest''.  This is further proof, if ever it was needed, that Australia is far from a free-market economy.

Cities, countries and companies all have versions of their own foundation myth.  Rome was founded by twins reared by a wolf.  America was founded by the Pilgrim Fathers fleeing oppressive government Apple was founded in Steve Jobs's garage.

The modem Australian economy has its own foundation myth.  It goes something like this:  Until the early 1980s the economy was closed and inward looking, protected by high tariff barriers and fixed exchange rates and subject to extensive government regulation.  Bob Hawke and Paul Keating then began a process of liberalisation, globalisation and privatisation, continued by John Howard.  By the mid-2000s the Australian economy had been transformed into something resembling a free-market one.

The evidence of the power of this myth is not hard to find.  For example, just after last year's federal election, in a speech boasting of her reform credentials, the Prime Minister gave a word perfect recital of the myth:  ''Twenty-five years of hard-won economic reforms ... internationalised our economy ... drove competition in domestic markets and delivered surplus budgets ... Reforms which mean that our open economy's ability to resist global shocks has become the envy of the world.''

The problem with the foundation myth of the modern Australian economy is that, while elements of it are accurate, its central premise is false.  It's true that the Australian economy is more free in 2011 than it was in 1981 -- but that's not saying much.  Tariffs might have come down and the dollar floated, but we still have a car industry existing only at the whim of ministers who impose the taxes that pay for the subsidies to car companies.

We too often ignore the fact that the industry-wide government regulation that prevailed in the 1970s and 1980s has been replaced by specific and targeted regulation often aimed at single sectors of the economy or sometimes even at single companies.  This new form of regulation is more dangerous because it is more arbitrary and more likely to be the outcome of day-to-day political considerations compared with the sort of regulation imposed in previous decades.

A quick rundown of Australia's 10 biggest companies reveals the threats they face.  BHP Billiton and Rio Tinto are No.1 and No.8.  The mining tax was aimed directly at their profits and it was at least as bad as anything Gough Whitlam tried to do.  And the way those two companies and the government negotiated in secret to have their tax reduced was likewise straight out of the 1970s.

The big four banks take up the second to fifth spots.  It's hard to know where to begin when it comes to talking about what the government wants to do to the banks.  At No.6 is News Corp.  For politicians media regulation is more than a hobby, it's an obsession.  At No.7 is Wesfarmers, which is having to face a federal parliamentary inquiry because it is selling its products too cheaply.  At No.9 is Woodside Petroleum, which is facing a carbon tax.  At No.10 is Telstra, which has been savaged by government and government regulators for years.

And the list could go on.  If it were extended to Woolworths at No.11 we could discuss how the poker machines it operates are the subject of a single independent member of parliament holding the federal Labor government to ransom.  And yesterday, the Health Minister, Nicola Roxon, revealed legislation to introduce the plain packaging of cigarettes -- which even she admits is the most draconian regulation of tobacco products in the world Wesfarmers and Woolworths sell cigarettes.  All of these companies employ workers.  They all have to deal with the country's industrial relations system, which is arguably more regulated than at any time since Keating was prime minister.

The scale of government regulation over these companies demonstrates it is now impossible for any large public company to ever give an honest opinion on any public issue -- big business is now simply too compromised by its relationship with government.  We believe the myth of Australia as a free-market economy because it's convenient to believe it allows politicians to think the hard work of reform finished some time around 2004, and now all they need to do is tax and spend the proceeds of the resources boom.

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Three wise men must end GST's ''groundhog day''

The arcane world of Commonwealth-state financial relations is, in many ways, like the 1993 movie Groundhog Day.  The question as to how GST revenue should be shared among jurisdictions is relived over and over again.

In Australia, a federal statutory agency called the Commonwealth Grants Commission recommends to the Treasury the appropriate GST entitlement for each state.  The GST intake is split between the states on the principle of ''fiscal equalisation''.

This is meant to ensure that each jurisdiction has the same capacity to provide government services, regardless of the cost of those services or the ability of each state to raise its own revenue.

As it stands, every few years, the commission reviews its own methodology of calculating the share of GST for each state.  In between quadrennial reviews.  it provides annual updates based on the latest available demographic, economic and social data.

However, these in-house reviews are usually insufficient to quell the concerns of the eight states and territories.  The richer donor states, such as NSW, Victoria and, more recently, Western Australia, complain vehemently about being unfairly squeezed out of their fair share of GST, while poorer recipients such as Tasmania and the Northern Territory claim that not enough is being siphoned out of the large jurisdictions.

This widespread dissatisfaction process invariably leads to political pressure for more navel-gazing reviews of the equalisation process.

In 2003, the larger states commissioned economist Professor Ross Garnaut to suggest improvements to the way in which GST is shared.  In 2005, the Commonwealth and state heads of treasury undertook their own review to simplify the commission's methodology of calculating the state-by-state GST split.  A year later, the NSW government appointed economist Professor Neil Warren to compare Australia's federalism arrangements, including fiscal equalisation, with other comparable federations.

Now, Prime Minister Julia Gillard has announced that former premiers Nick Greiner and John Brumby, with businessman Bruce Carter, undertake something of a ''root-and-branch'' review of fiscal equalisation.

It is fair to suggest that, based on the numerous studies already available, the problems surrounding the commission's slicing and dicing of GST are well known, even to the point of being grudgingly acknowledged by supporters of the current equalisation process.

Perhaps the most telling criticism of this process is that the formula applied by the commission effectively penalises states that either achieve economic success or undertake reforms that so happen to yield a ''growth dividend'' of extra government revenue.  As noted most vocally by West Australian Premier Colin Barnett, the growing loss of his state's GST share, due to the mining boom filling state coffers, can have implications for the West's ability to fund the necessary infrastructure to accommodate looming capacity constraints.  It is cold comfort that the West Australian mining boom benefits the entire nation by improved terms of trade flowing through to real income gains.

Western Australia is enjoying economic growth, yet the commission's formula implies the state must be effectively ''penalised'' through a lower GST share.

More importantly, as the late Victorian Treasury secretary, Ian Little, once explained, if a state grows its economy through tax reform or cutting government costs, then the equalisation model will tend to redistribute more GST to other, possibly non-reforming states.  The equalisation system promotes an attitude of mendicancy among the states, as the GST redistribution formula is centred upon jurisdictions actively submitting claims of disabilities in collecting revenue and delivering services to the CGC adjudicator.  This presents another roadblock to active economic reform at the state level, particularly for the smaller states which tend to have relatively large, efficiency-draining public sectors.

Another perennial complaint is that, while grounded on the basis of promoting equity by ensuring a reasonably standard level of services throughout the country, the equalisation formula spectacularly fails to achieve such an objective.

For example, most of the GST funds redistributed to the Northern Territory, the main beneficiary of the present system, are spent in Darwin and its surrounds as opposed to in remote areas for the benefit of indigenous populations.

It would not be of any surprise if Greiner, Brumby and Carter find that the current system of distributing grants is long overdue for wholesale reform.  The crucial question is what should be implemented in its place?

Ultimately, the best formula is the simplest one, which removes any taint of perverse incentives inherent in the funding formula.  This suggests a system whereby states receive grants according to the amount of GST revenue generated within each jurisdiction.

Transitional arrangements, say over a 10- to 15-year period, could be put in place to help states adversely affected by such a change to radically simplify the GST distribution methodology.

Despite the defenders of the status quo colourfully suggesting that the commission and fiscal equalisation is the ''glue of federalism'', the fact remains that the present system originated as a political solution to a perceived problem in state public finance.  After all, the commission itself was established in 1933 as the ultimate fix to discourage Western Australia seceding from the federation.

With the western state once again growing restive for change, it remains to be seen whether Gillard and Treasurer Wayne Swan have the stamina to prevent future groundhog days by acting on any fix proposed by the newly appointed three wise men of intergovernmental relations.

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Multiculturalism is a useless word

Multiculturalism is one of the least useful words in Australian politics.

It owes all its power to ambiguity.  It is divisive because it is vague.

Recall that multiculturalism refers not to the policy of letting in migrants and refugees, but to how we deal with them when they get here.  Multiculturalism is the opposite of ''assimilation'', not the opposite of discriminatory immigration settings.

If multiculturalism is a positive program, a deliberate, imposed set of policies and laws, then those policies are few and not easy to pin down.

Interpreters, multiple languages on government documents, and a few scattered cultural grants do not make a policy revolution.  A female-only swimming session does not constitute a threat to the Commonwealth.

The political rhetoric about multiculturalism is vastly disproportionate to the number of policies which multiculturalism has apparently inspired.

But if, alternatively, multiculturalism is an ideology, it is an ill-defined and unclear one.

Sure, ideas have consequences.  Yet it is hard to see how stating that ''every person should be able to maintain his or her culture without prejudice or disadvantage'' (in the influential formulation of the 1978 Galbally Report into migrant services) leads to migrant crime, one of the many claimed consequences of multiculturalism.  Or how it causes new arrivals to prefer to settle in suburbs near other new arrivals -- an entirely reasonable preference, as one person's ethnic enclave is another's comfort in numbers.

Attributing the misbehaviour of some young migrants to vague philosophical statements made in bureaucratic documents gives government too much credit.  Politicians are just not that influential.

And it is too simple to blame law and order problems on migration levels or ethnicity, rather than under-policing and skewed police priorities.

The basic idea of a liberal democracy is that individuals can live their own lives according to their own preferences under a neutral legal and political framework.

Rights in a liberal democracy are held by individuals, not by groups.  Nobody has more or different rights than another by virtue of their cultural origin.

No substantive policy imposed in Australia under the banner of multiculturalism has undermined these basic principles.  Sure, there's been a lot of academic waffle about cultural relativism and the superiority of non-Western thinking, but that waffle has not been translated into law.

Australia has done settlement policy pretty well.

Several European leaders have made recent statements damning multiculturalism, and Australian critics have claimed these statements are just as applicable to our circumstances.  They are not.

For one, the European economy is vastly different.

It's no coincidence that the biggest social problems with multiculturalism occur in European countries with sluggish jobs markets.  Or in those countries with extremely generous welfare schemes.

Nothing impedes integration like unemployment.

Other specific policies can exacerbate the natural, well-known, but manageable challenges of mass immigration.

Germany's Chancellor Angela Merkel said late last year that multiculturalism has failed.  But this is in no small part due to the legacy of Germany's post-war guest worker program, which was so poorly designed as to entrench a disaffected Turkish underclass.

In the 1960s and 1970s, Turkish guest workers were meant to be temporary.  The government deliberately encouraged to them live outside German society -- they were housed in dormitories near the factories where they worked.

But the two-year rotation for guest workers was extended for another two years, then for four decades.  All the while the workers expected to be sent back.  One Turkish migrant told Der Speigel last year that ''Some of our friends kept their packed suitcases under the bed or on top of a closet for 10 or 15 years, so that they could leave at a moment's notice.''

No wonder Germany has had integration problems.

We've avoided these sorts of policy mistakes.  Australia has strict walls around welfare, and a comparatively dynamic labour market.

As has the United States.  Last week in the conservative National Review, the law professor Eugene Volokh pointed out that the US was also a successfully ''multicultural'' nation.  Volokh argued that the success of this policy relied on a few basic principles like economic liberty and freedom of speech.

None of this is to deny the tensions when migrants enter countries that value individual liberty and the right to free association.

But it does give us a guide to minimise those tensions.  Social integration comes after economic integration.  Secure employment helps migrants build roots and communities.  Migrants engaged in peaceful commerce feel more connected to their adopted country than those on welfare or unable to find work.

During his exile in England in the early 18th century, Voltaire observed that in the centres of trade, ''representatives of all the peoples gathered ... There, the Jew, the Muslim, and the Christian deal with each other as if they shared the same religion and give the name 'infidel' only to those who go bankrupt.''

Multiculturalism means vastly different things in different countries.  Let's stop obsessing over this useless word, and talk about specifics.

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Deregulation can save the taxi industry from itself

The regulation of Melbourne's taxi industry was a mess from the beginning.

Taxis were new, smart and efficient when they were introduced in 1908, but they were a threat to the existing horse-drawn hackney cab lobby.  As The Argus newspaper said, ''once the Melbourne public has ridden in a taxi-cab it will ride on one always, in preference to the horse-drawn vehicle''.

The mechanical competition was an ominous challenge to the hackney cabs, so when the city council considered the new taxis, the hackney cabmen had demands.  First they said the cars might scare the horses, and should not be let on Melbourne's streets.

Then they said motorised cabs should share the ranks with the horses-drawn ones.  That way customers wouldn't have a choice as to whether to take the new cars or not.  They could only take the next one in line.

The politicking between hackney drivers and the new taxi company meant it took the city council until October 1910 for the cars to get licences to ply their trade.

More than 100 years later, vested interests, and the outdated regulations those interests rely on, are still a serious impediment to taxi services in Melbourne.

If Ted Baillieu is searching for a serious reform to hang his hat on -- and he should be -- he's found one with taxis.

The Premier has announced an apparently wide-ranging inquiry into Melbourne's taxi system, headed by the former federal competition regulator Allan Fels.

Transport Department research suggests Victorians have more complaints about taxis than trains.  And we hate trains.

But the real problem with Melbourne's taxi fleet isn't their lack of cleanliness.  Or the poor language skills of drivers.  Or their low salaries.  Or that some drivers don't know where they're going -- something which could, you would think, be resolved with a GPS unit.

The problem is there's not much reason for taxi operators and owners to make them better.

State governments have artificially limited the number of taxi licences, virtually eliminating competition and with it the incentive to provide a better service.

The licensing system is one of the few remnants of our old, stale, highly regulated economy -- a relic that should have been discarded when we discarded egg marketing boards and laws limiting how far you can transport bread.

But on it has trundled, until today, when the market price of a single taxi licence has blown out to $500,000.

That extraordinary figure should be all the evidence needed to suggest something is wrong with the system -- half a million dollars for the privilege of driving drunks home at 4am.

Taxi journeys are expensive, yet driver salaries are low.  Much of the difference between the two is the cost imposed by the limits on taxi licence numbers.

To compound all that, taxis have strictly regulated fares, which further reduces competition.

It's not a system unique to Melbourne -- taxi licences are limited and highly regulated in most places in Australia and around the world.  And there's an overwhelming consensus that this doesn't work.

A few countries have bucked the trend.  New Zealand has deregulated its taxi industry.  So has Ireland, the Netherlands and Sweden.  Darwin, too.

A comprehensive survey in 2006 by economists Adrian Moore and Ted Balaker concluded that taxi deregulation would be successful.  And not just in theory -- every case study Moore and Balaker canvassed found that deregulation worked.

Allan Fels said this week effective taxi licence reform could cut the cost of a ride by a third.  The experience from overseas suggests this is not just possible, but likely.

Considering that the poor, the elderly and those with disabilities (in other words, people who cannot drive or afford a car) are disproportionately large users of taxis, reducing the price and improving the service would seem like an important task.

But taxi regulation has never been set by impartial governments seeking only the best thing for consumers.

Current licence owners have a lock on taxi policy.  They will no doubt aggressively lobby against any attempt to eliminate licence limits.  That's understandable, because they bought licences in good faith, and paid a premium.  Licences will have to be bought out or, at least, the limits phased out predictably over time.

That challenge should not be seen as an excuse to avoid reform.

Back in 1908, the frustrated manager of the new taxi organisation complained far and wide that ''public convenience'' was being ''subordinated to the interests of hackney coach owners''.

The situation is not so different today.

No reform will be worthy of the name unless it tackles -- for good -- the archaic limited licence system which increases costs, reduces quality of service, and is rigged to favour just a few wealthy licence holders at the expense of drivers and consumers.

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Do you know what I want, what I really, really want?

The annual report of the Victorian Competition and Efficiency Commission demonstrates the regulatory burden imposed by the State Government increases every year.

In an attempt to get benefits from new or changed regulatory proposals, the Government requires a Regulatory Impact Statements (RIS).

In practice, these reports are often whitewashes that justify the prejudices and regulatory preferences of politicians and bureaucrats.

This is clearly the case with an RIS into Victoria's Energy Efficiency Target regulations.  The key component of VEET is a tax penalty on energy retailers, which is passed on to consumers in higher prices.

This can be avoided if the retailers persuade or pay customers to use low-energy lighting, shower heads, cookers, water heaters etc.  PriceWaterhouse Coopers conducted the review of VEET for the Primary Industries Department.

Central to the report's advice were estimates of the cost of the regulations to Victorian customers above the Commonwealth's proposed carbon tax.

Though renowned for its accountancy expertise, PWC turned itself into an alchemist in its review of energy efficiency.  From the dry dust of regulatory measures it claims to have found gold.

According to the study, the higher the tax in Victoria the better off we'll all be.

The most important source of these benefits are said to come from reduced spending on electricity.

This is like regulators claiming they would be doing us all a favour if they forced us to save on petrol by buying a Toyota Prius rather than Commodores or even Fiestas.

On the same basis, it could be argued that if car ownership were prohibitively expensive and we all had to use public transport, we'd be even better off.

After all, regulatory proponents could claim we'd save on petrol costs and depreciation and could use the extra time it takes to get from A to B by reading a novel or chatting to our fellow passengers.

Regulatory advocates like to pretend all they are doing is providing people with what they really want.

To justify overriding consumers' wishes a magic phrase, ''bounded rationality'', is used.  ''Bounded rationality'' means consumers don't have the wisdom to make the appropriate spending choices for themselves.

So those folk at PWC and in the Primary Industries Department, who are more clever and better informed, take the decisions for us.

Electrical products have long been covered by energy efficiency regulations.

These were introduced decades ago because experts claimed the world was running out of energy.  Such concerns are irrelevant to coal-rich Victoria but the greenhouse scare gave the energy saving regulations a new lease of life.

Building on existing regulatory measures, the Bracks government introduced the VEET as an extra Victorian carbon tax because the Howard government was said to be doing too little.

This was always garbage, especially after Canberra introduced a costly requirement for 20 per cent of electricity to come from wind and solar.

Australia has 300 different carbon emission restraint programs, including hugely expanded Commonwealth regulations and subsidies.

Victoria's VEET measures are unnecessary and should be allowed to lapse.

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