Submission to the Senate inquiry into Stimulus Packages

WHAT I SAID IN FEBRUARY 2009

In my submission to the Senate Inquiry in February of this year I indicated that the second ($42 billion) stimulus package was flawed.

In summary, it is my view that the Senate should reject the fiscal stimulus package in its current format.

• The package contains a lot of spending and little actual stimulus.
• The proposed spending is poor quality expenditure of Federal funding.
• Discretionary fiscal policy has a poor track record of success.
• While the government needs to respond to the current economic down turn in a timely manner, there is no immediate urgent need to rush the package.  Rather a better quality package should be designed and implemented.

I want to emphasise two points.  First the "little actual stimulus" and second the "poor quality expenditure".  Nothing since February has caused me to revise my opinion.  The Australian newspaper has performed a fine function in reporting the quality of the spending that the government has undertaken as part of its stimulus package.  To be blunt the spending quality has been worse than I expected.  Not only has the government spent money on projects with little additional economic return, it has done so in a very wasteful manner.  Of course there would be teething problems in any project, yet the almost daily revelations of extraordinary waste go far beyond "teething problems".  To remind ourselves of the underlying logic of the stimulus I quote again from my February submission.

Professor John H. Cochrane, of the University of Chicago, has summarised the argument for stimulus spending as follows:

The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this:  We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods.  The government must step in force us all to borrow and spend more.  This diagnosis is tragically comic once said aloud.

It is easy to "Australianise" this comment, "Australians have not been borrowing and spending enough on alcohol, pokies and tobacco and there are not nearly enough plasma televisions around.  The government should borrow and spend more to ensure that more consumer spending occurs".  I invite Senators to read that statement out loud and wonder whether it sounds plausible or responsible.  The fundamental problem with a lot of spending stimulus packages is that it consists of government spending a dollar, any dollar, on any project.

Unfortunately the media spent too much time concentrating on the view that the money may be spent on alcohol, pokies and the like and did not see the underlying argument;  government would be borrowing and spending money in order to sustain consumption.  The important point is the "government spending a dollar, any dollar, on any project".

Furthermore, there is unfinished business from the Stimulus package.  In February I wrote,

It also needs to be pointed out that Australia has just experienced a catastrophic failure in economic policy making.  While the root causes of the current economic crises are non-Australian, nonetheless both the Treasury and the Reserve Bank of Australia failed to anticipate the impact of the crisis which commenced in mid-2007.  The government has already spent $10.4 billion in a previous stimulus package and now proposes to spend an additional $42 billion.  An inquiry into how and why the official economic government agencies failed to warn or forecast the local impact of the crisis needs to be undertaken.

HAS THE STIMULUS WORKED?

The argument is favour of the stimulus having worked appears to be very powerful.  Australia is the only OECD economy that has not officially entered into recession.  Here in Australia a recession is defined as two consecutive quarters of negative GDP growth.  That definition is arbitrary and some commentators have argued that other definitions be considered.  There is merit in that suggestion.  Nonetheless there is also community acceptance that the arbitrary definition we currently have is appropriate.  It is not clear that exchanging one arbitrary definition for another, especially during a period of economic turbulence, is necessary or appropriate.

Our RMIT colleague Steve Kates has shown that two of the three component parts of the GDP calculation have experienced two consecutive quarters of negative growth, but that the measure most likely to be distorted by government spending has not. ⁽¹⁾  The increase in that measure has ensured that the overall GDP figure has not experienced a decline in two consecutive quarters.  To the extent this argument is correct Australians have actually experienced recessionary conditions, while a recession has not actually been declared.

The figure shows a scatter plot of GDP growth and size of the various stimulus packages.

FIGURE ONE:  ECONOMIC GROWTH AND STIMULUS

Source:  Size of Stimulus OECD, GDP Growth Australian Financial Review 3 September, pg. 10

Australia is one of seven economies with a stimulus package of three percent of 2008 GDP or more.  Yet Australia is the only economy that has not experienced negative GDP growth.  This is a fine economic achievement, but it is not clear that this is due to the stimulus package.  To argue that the package itself is the cause of Australia's performance, the government would then need to explain why the other six economies with similarly large stimulus packages failed to produce similar economic growth.

IS THIS THE GREATEST CRISIS SINCE THE GREAT DEPRESSION?

No.  The often repeated comment that the current economic crisis is the greatest crisis since the Great Depression is misleading.  It is especially misleading for Australia.  It is misleading in two senses.  First it suggests that the current crisis is similar to the Great depression in magnitude and severity, and secondly -- for Australia -- it suggests that the current economic crisis has had an effect on the Australian economy greater than the recession in the early 1990s and early 1970s.

At his blog site Donald Marron (US economist) has shown a graphic displaying US data for crises since the Great Depression.  This graphic has subsequently been republished at Gregory Mankiw's well-known blog site.  The argument that this is the greatest crisis since the Great Depression is barely true in the US.  It is certainly not correct in the case of Australia.

FIGURE TWO:  US ECONOMIC DOWNTURNS

Source:  http://dmarron.com/2009/08/02/still-not-the-great-depression-2-0/

Australian trade union unemployment (the only ABS unemployment data available for the pre-war period) was 10.8 percent in 1928, by 1932 unemployment had increased to 29 percent.  In human terms this is a catastrophe.  In the current crisis, the government is forecasting unemployment to rise to 8.5 percent.  According to the OECD the Australian annual rate of unemployment was 4.2 percent in 2008 -- it is now at 5.8 percent -- a level last seen in October 2003.  To be sure it is preferable that individuals do not become involuntarily unemployed, nonetheless this increase is in no way comparable to the increase observed in the 1930s.

Angus Maddison has calculated historical GDP figures for the world economy and selected economies.  According to his calculations the Australian economy performed poorly from 1927 through to 1937.  GDP fell every year from 1927 until 1932.  It was only in 1937 that GDP exceeded its 1926 level.  By contrast Australia has experienced only one quarter of negative GDP growth in the current crisis.

ASSESSING THE DATA

RETAIL SALES

The Retail Sales figures released by the ABS have become closely watched over the course of the year.  In particular some have argued that an increase in retail sales indicates that the stimulus package has worked.  Figure one replicates a figure from the ABS.  In that figure the ABS show a trailing two-year period indicating the seasonally adjusted Retail Sales figures and also the truncated Trend figures for Retail Sales.

FIGURE THREE:  RETAIL SALES (SEASONALLY ADJUSTED) APRIL 2007–MAY 2009

Source:  ABS 8501.0 Retail Trade, Australia

An observer might look at a figure such as this and conclude that if the ABS Trend line had persisted on its current path (or something very similar) that a massive increase in Retail Sales had occurred.  That would be an easy conclusion to draw;  after all the ABS Trend line is much flatter in the post-October 2007 period than before and a flattish line can be expected to remain flat.

Indeed that type of analysis was undertaken by Tony Meer of Deutsche Bank and reported at Peter Martin's blog. ⁽²⁾  Peter Martin is the Canberra based economics correspondent for The Age.

FIGURE FOUR:  TONY MEER -- DEUTSCHE BANK ANALYSIS

Source:  http://petermartin.blogspot.com/2009/04/so-retail-spending-is-down.html

Based on this type of analysis, Peter Martin (2009b) wrote in his The Age (2 April 2009) column

A Business Day comparison of recorded spending with what would have been spent had the pre-December trend continued suggests that Australians spent an extra $370 million more in February, an extra $780 million in January and an extra $710 million in December.

The combined $1.8 billion in extra spending accounts for a sizable proportion of the $8.7 billion handout, some more of which would have spent in ways not measured by the retail statistics and still more of which is likely to be spent in coming months.

Looking at this type of analysis those figures are plausible.  The point of contention, however, is the counter-factual.

We approach this problem from two angles.  First we calculate trends in seasonally adjusted Retail Sales and compare them to reported seasonally adjusted Retail Sales.  Unfortunately, the Australian Bureau of Statistics (ABS) has stopped calculating its own Retail Sales Trend figures (see ABS 2009a).  Their argument being that the increase in federal government spending could distort the Trend estimate.  We provide updated estimates of the ABS trend figure together with an alternate trend figure and compare them to the ABS Retail Sales (seasonally adjusted) figures.

We also attempt to answer "what would spending have been?" by conducting a small forecasting exercise.  Specifically, we fit a typical time series model to the Retail Sales data spanning April 1982 to April 2008.  From this model we generate a set of forecasts for the period May 2008 to April 2009.  We present these forecasts as a proxy for "what would spending have been" and hence gauge the impact of the government spending by comparing them to the actual observations.

In summary, we find no evidence that Retail Sales have been significantly impacted by the federal government's spending.

Extending the ABS trend estimates is a straightforward exercise.  ABS trend estimates are calculated by applying a symmetric Henderson weighted moving average to the seasonally adjusted Retail Sales data.  As the data is monthly the number of moving average terms is 13.  The symmetric characteristic means a set of surrogate filters must be used for the last six observations of the series.  According to the most recent release of retail trade data (2009b Cat. 8501.0), the surrogates are based on end parameter weight of 3.5.  This weighting scheme is outlined on page 62 of the ABS guide to interpreting time series (2003 Cat. 1349.0).

In addition to updating the trend estimates of the ABS trending method we estimate a commonly used trending method.  This is a general function that can be referred to as a Local Polynomial Regression.  We denote this trend estimate as "Poly-Trend". ⁽³⁾  The Poly-Trend is based on an algorithm which fits a polynomial to a neighbourhood of points.  The algorithm fits a quadratic surface weighted by least squares.  The weighting mechanism is designed to insure the local points are most influential (Venebles and Ripley 2002, page 423).

The results of the trend exercise can be seen in the figure below.

FIGURE FIVE:  RETAIL SALES TRENDS

There is nothing unusual about the recent increases in Retail Sales.  The seasonally adjusted figure for Retail Sales is at the long-term trend levels of Retail Sales.  Based on the type of analysis reported by Peter Martin we conclude that irrespective of how the trend is estimated the sum of money relative to the government spending on households is a very small sum indicating that the money has not lead to additional spending.  The summed net difference between the seasonally adjusted Retail Sales figures and the trend figures is $382 million for the ABS Trend estimate and $1.6 billion for the Poly-Trend estimate.

It is possible that the stimulus package has distorted the trend estimates.  Consequently we perform a forecasting robustness test.  We forecast what Retail Sales data would have been if we were in April 2008.  With the knowledge we might have had in April 2008 what would our expectation of retails be going forward?  At this time there was no suggestion that the Rudd government would increase spending or undertake a stimulus package.

In order to undertake this analysis i.e. what would Retail Sales have been if the stimulus packages were not administered, we fit the Holt-Winter's model to all the data except the most recent 15 observations.  We then generate forecasts for the 15 periods we excluded;  we then use these forecasts as a proxy of "what spending would have been".  By comparing these forecasts to the actual values we can gauge the size of additional expenditure.  The Holt-Winters model ⁽⁴⁾ has the general form

y_t = l_t−1 + b_t−1 + s_t−1 + e_t,
l_t = l_t−1 + b_t−1 + αe_t,
b_t = b_t−1 + δe_t,
s_t = s_t−1 + γe_t.

The terms y_t, l_t, b_t and s_t denote the observation, level, slope and seasonal component at time t.  The error term is denoted by e_t and is assumed to be normally distributed with a fixed variance and a zero mean.  The unknown parameters α, δ, and γ are estimated using maximum likelihood estimation (Hyndman et al 2002).

FIGURE SIX:  PREDICTED RETAIL SALES

The solid black line represents the actual Retail Sales figures, the broken green line is our mean forecast and the red lines represent the 95% confidence intervals.  Notice that the black line tends to remain within the confidence intervals.  After November 2008, the Retail Sales figure also tends to be very close to our forecast.  In other words, in April of last year we could have produced a very accurate forecast of Retail Sales.  Yet we are told that Retail Sales were affected by the large amount of government spending in the stimulus package.  In order for our forecast to be so accurate we must either have had foreknowledge of the stimulus package, or the package itself must have been so finely calibrated so as to ensure Retail Sales remained stable.  Neither of these two possibilities is likely to have been the case.  It is far more likely that the stimulus package had no overall impact on Retail Sales.

We know that the stimulus to Retail Sales could not have been finely calibrated simply because it was implemented without any formal modelling by Treasury.  The Hansard on Wednesday 22 October 2008 records the following exchange between Senator Barnaby Joyce and Dr David Gruen (at pg. E52).

Senator JOYCE -- I want to go back to the $10.4 billion package.  Did you do any modelling on the effect of that package, or did anybody in your department do any modelling on the effect of that package?

Dr Gruen -- No formal modelling was done of that package.  Certainly, analysis was done of that package, but it was not formal modelling.

Senator JOYCE -- So we have spent half of the nation's surplus without a formal modelling of the package, is that correct?  We have spent half of the nation's surplus without a formal modelling of the effects of the package?

Senator CAMERON -- These guys just do not believe there is a crisis.

Senator JOYCE -- I am asking a question.

Senator CAMERON -- They do not support the package because they just do not believe anything is going on.

CHAIR -- Can we let Dr Gruen answer?

Dr Gruen -- I can confirm that the package was $10.4 billion and that no formal modelling was done.  I can confirm that no formal modelling was done.

Senator JOYCE -- Do you believe that is prudent?

Dr Gruen -- Yes, I think it goes to what I tried to lay out in my opening statement about the nature of the environment that the Australian economy has been facing over the last few weeks.  We are dealing with a situation of very substantial disruption in credit markets.  With the best will in the world, it is extremely difficult for formal models to come to terms with such events.  We have a qualitative understanding of the sorts of impacts that such disruptions have on the economy, but, as I said, we are dealing in the nature of changing balances of risks, and it is a situation which calls for judgment.  What came out of formal modelling would depend on what you put into the formal modelling.

UNEMPLOYMENT

Did the stimulus package prevent unemployment from going through the roof?

Prime Minister Kevin Rudd has argued that without the government's stimulus package that the unemployment rate would have gone through the roof.  The government can point to the "scoreboard" for confirmation of this story.  In fact Mr Rudd recently indicated that US unemployment is now 9.7 percent and Canadian unemployment is 8.7 percent.  But what Mr Rudd didn't say is that the Canadian stimulus package (4.1 percent of 2008 GDP) is almost as large as the Australian package (4.6 percent of 2008 GDP) and the US package is larger at 5.6 percent of 2008 GDP.  In other words the favourable employment outcomes here in Australia cannot only be due to the stimulus package, unless we are happy to believe that the Australian stimulus has been better targeted.

An OECD report published on 3 September 2009 indicates that unemployment has not risen much at all across 29 economies.  Some economies like Spain have seen a massive increase in unemployment as has the US and Canada.  The increase here in Australia is the eleventh highest out of 29 countries.  So we"re not quite in the top third but 60 percent of OECD economies have experienced a lower increase in unemployment than did Australia.  To be sure they were starting from a higher base than we were, but many OECD economies routinely experience higher rates of unemployment than do the US, Canada and Australia.

FIGURE SEVEN:  INCREASE IN OECD UNEMPLOYMENT

Source:  OECD What is the economic outlook for OECD countries:  An interim assessment (3 September) pg. 19

To claim that our low rate of unemployment points to the success of the stimulus package ignores the experience in other OECD economies.  Many of those economies have experienced massive declines in GDP growth and have experienced (so-called) technical recessions, yet the increase in unemployment has not been that large.

In the graph we have plotted the increase in the unemployment rate (relative to 2007) and the size of the stimulus (as a percentage of 2008 GDP) -- Australia is the large red dot.  The data are all collected from the OECD.

FIGURE EIGHT:  UNEMPLOYMENT AND STIMULUS SIZE

As can be seen the increase in unemployment is much less than the size of the stimulus package would suggest.  If our unemployment rate had grown in line with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent.

So it is not clear that stimulus spending has saved Australian unemployment from going through the roof.  It is far more likely that our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government and is not simply due to governmental quick fixes.  To believe that the stimulus has brought about the excellent economic performance Australian is currently enjoying would be to believe that the Rudd government had developed the perfect stimulus package.  We know, however, that the package was put together hurriedly and that the implementation has been poor.  Let"s rather give credit where it is due.

HOURS WORKED

Much has been made of the decrease in hours worked.  In this section we investigate that decline.  The decline in Aggregate Monthly Hours Worked appears to be quite marked.  This, of course, is not at all unusual given that economic growth in the economy has declined.

FIGURE NINE:  RECENT AGGREGATE MONTHLY HOURS

Source:  ABS

When we plot that same time series making use of the entire series from July 1985 through to the present and add a trend line, we observe that the series has simply returned to trend. ⁽⁵⁾  This return to trend suggests that hours worked prior to the crisis was above trend.  This is borne out by the data.  It is possible that the above trend hours worked was due to WorkChoices or perhaps the so-called mining boom (we do not necessarily endorse the view that the performance of the economy was due to a "mining boom" -- this suggests that the economic performance has somehow been due to luck and factors beyond Australian control).

FIGURE TEN:  AGGREGATE MONTHLY HOURS AND TREND

SAVED OR SPENT?

The Australian Treasury relied on an unpublished study by Christian Broda and Jonathan Parker to support their argument that the tax rebate announced as part of the federal government stimulus package would be spent and not saved. ⁽⁶⁾

This particular study investigates the 2008 US$950 tax rebate by comparing spending in households that had received the rebate to spending in households that were eligible to receive the rebate but had not yet actually received the rebate. ⁽⁷⁾  The econometric test determines whether or not consumption is higher in those households that have received the tax rebate compared to those households that have not received the rebate.  It does not test whether the entire tax rebate has been consumed or saved.  The study finds that those households that had received the rebate consumed more than those that have not.  Unsurprisingly, they find that low income households and liquidity constrained households that had received the rebate spend more than similar households yet to receive the rebate.  (They claim that their test shows that low income households have spent more than higher income households, but it is not clear from the reported table that this is the correct interpretation of their results.)

It is important to note that they have found that some of the tax rebate is spent.  Of course nobody is suggesting that some of the tax rebate wouldn't be spent.  The debate is about (1) how much would be spent and (2) was this the best way for the government to stimulate the economy?  Indeed, Broda and Parker could very easily expand their econometric analysis to determine how much of the US$950 was in fact spent, but do not do so.  Rather they provide survey evidence of additional spending.  The survey results indicate that US$448 was spent in additional purchases -- approximately 48 percent of the US$950.  That implies the other 52 percent was saved (at least temporarily).  They concluded that "the stimulus payments are initially being spent at significant rates".  This is, of course, true;  it is also fair to say that the Economic Stimulus Act of 2008 has not succeeded.

A recent paper by Sumit Agarwal, Chunlin Liu and Nicholas Souleles, published in the Journal of Political Economy, investigates credit card transactions to analyse the response to the 2001 US tax rebates. ⁽⁸⁾  They report that consumer initially save some of the rebate and then increase expenditure

For consumers whose most intensively used credit card account is in the sample, spending on that account rose by over $200 cumulatively over the nine months after rebate receipt, which represents over 40 percent of the average household rebate.

It is interesting to reflect on that statement, 40 percent of the rebate was spent over nine months.  Presumably the other 60 percent was either saved or consumed via other means.  A previous paper by Nicholas Souleles (joint with David Johnson and Jonathan Parker), looking at the same 2001 rebate, also found that individuals initially saved the rebate (spending only a third of it in the first three months) and later increased spending. ⁽⁹⁾  Overall about two-thirds of the rebate was spent over six months.  The overall conclusions of the two papers are similar, yet the differences between them which lie at the heart of the current debate are not reconciled in the later paper.

Professor Andrew Leigh of the Australian National University has conducted a survey to determine what had happened to the cash component of the second stimulus package. ⁽¹⁰⁾  Overall he found that 60 percent of the cash had been saved or used to pay-off debt.  He argues that this is twice the rate at which Americans had spent similar tax rebates in 2001 and 2008.  This may well be true -- yet nonetheless a very large portion of the cash component of the stimulus package was not spent quickly as was advertised.  Of particular concern is that the Leigh study relies on individual accurately recalling what they had spent money on and then truthfully answering the questions in the survey.  Economists tend to be suspicious of survey results and usually prefer revealed preferences to stated preferences.  The macroeconomic data do not support the Leigh view that substantial increased spending has occurred (neither does our forecast of Retail Sales support that hypothesis).  The figure shows data from the ABS showing Gross Disposable Household Income and Household Final Consumption Expenditure, as can be seen there is no unusual change in consumption expenditure.  This figure is very similar to one produced in the US by Professor Taylor (except it is quite clear that consumption expenditure has fallen in the US). ⁽¹¹⁾

FIGURE ELEVEN:  HOUSEHOLD INCOME AND HOUSEHOLD EXPENDITURE

Source:  ABS cat. 5206.0

AUDITING THE BUDGET ASSUMPTIONS

A critical assessment of the Federal Government's recent budget is presented in this section.  In particular, we assess the projections of the growth rate of GDP and unemployment.  We conclude that the projections are too optimistic.  Our conclusion is based on two principles, previous macroeconomic experience and economic modelling.  In this section it is important to note that we are not providing a macroeconomic forecast of the Australian economy, we are auditing the underlying assumptions in the Budget Papers.

The consequence of the overly optimistic projections is that public debt is under estimated by approximately $35 billion over the period 2009-10 to 2012-13.  We believe this difference will be significantly greater as the horizon lengthens.  We stop short however of providing predictions post 2012-13 as the level of information provided by the Department of Treasury (Federal Government) post June 2013 is too sparse for comprehensive review.

Figure twelve shows the evolution of net public debt and the underlying budget cash balances from 1970-71.  As can be seen the underlying budget balances recover slowly from deficits and once the Commonwealth begins accumulating debt it takes a long time the reduce that debt level to zero.

FIGURE TWELVE:  AUSTRALIAN GOVERNMENT NET DEBT

Source:  Budget Papers

In May 2009 the Federal Budget was released.  The budget together with a series of (pre budget) press announcements outlined a $42 billion stimulus plan.  A large proportion of this has already been administered.  We do not challenge the various spending incentives here;  however we strongly believe the figures presented on May 12th 2009 are implausible and consequently are misleading.

Table One replicates Table 1-7 of the Budget documents which outlines projections of the key macroeconomic variables relating to the Australian economy.

TABLE ONE:  TABLE 1-7 FEDERAL GOVERNMENT DOCUMENTS

	2008-09	2009-10	2010-11	2011-12	2012-13
Real GDP	0	-0.5	2.25	4.5	4.5
Employment	-0.25	-1.5	0.5	2.5	2.5
Unemployment rate	6	8.25	8.5	7.5	6.5
CPI	1.75	1.75	1.5	2	2.5
Nominal GDP	5.75	-1.5	3.75	6.25	6.75

At first the numbers in Table One seem fairly innocuous, however close inspection suggest an implausible view of the "recovery" phase of the economy (2011-13).  We disagree with Treasurer Wayne Swan's assertions that these projections are "extremely realistic and conservative".  We also have great difficultly with statements that suggest that these forecasts are as "plausible as any other" (though like all such forecasts, they are only "best guesses"). ⁽¹²⁾  Statements like these are likely to mislead the public.

GDP

Figure Thirteen illustrates the annual growth rate in GDP spanning June 1961 to June 2008.  The pink line corresponds to 4.5%, the growth rate projected in the budget documents for 2011-12 and 2012-13.  According to Figure Thirteen, only 12 times in the last 47 years has real growth in GDP reached 4.5% or higher.  In the past 25 years this has occurred only twice, 1983/5 and 1997/9.

FIGURE THIRTEEN:  GROWTH IN REAL GROSS DOMESTIC PRODUCT

Source:  ABS Cat. No. 5206030 (Diamond markers indicate 4.5% or higher)

UNEMPLOYMENT RATE

According to Table One the Federal Government projects the unemployment rate to peak in 2010-11 at 8.5 percent.  For modelling purposes we accept the peak and its timing;  however we believe the projected decreases in the unemployment rate are implausible.

Overestimating the decrease in the unemployment rate directly affects estimates of the operating deficit on both sides of the ledger.  Specifically, tax revenues are over estimated which mean that the Treasury projections of Government Revenues are inflated.  The effect of debt is compounded as social security payments and hence Government Expenses are underestimated.

Figure Fourteen presents the quarterly unemployment rate for since March 1980.

The values clearly demonstrate that the average quarterly decrease ranges between 0.08 and 0.19.  Annually this implies a range of 0.3 to 0.8.  Importantly, the average decrease over a comparable range is at most 0.16 percent per quarter or 0.6 percent per annum.  The implication of the Federal Governments too optimistic projections is that unemployment in Jun 2013 is likely to be 7.4 percent considerably higher than 6.5 percent.

FIGURE FOURTEEN:  DECLINES IN THE QUARTERLY UNEMPLOYMENT RATE

Having shown that two of the projections are implausible we present estimates of the Net operating balance ($b) that realistically reflect the debt position for the period 2008-09 to 2012-13.  We consider two different estimates which we refer to as scenario 1 and 2.

Both scenarios are estimated using the Global model of the Oxford Economic Forecasting (OEF) software package.  Oxford Economics describe this model as being a "mainstream approach" characterised by "Keynesian" features in the short to medium term. ⁽¹³⁾  They refer to their formulation as a macroeconometric approach combining the best of purely econometric alternatives, such as vector autoregression (VAR), and economic driven specifications, such as computable general equilibrium (CGE) models.  They indicate that their model is theory consistent and statistically robust.  They state the main advantage of their approach is that it provides both a good forecasting and policy analysis tool.

Reports by Oxford Economics include "Valuing the effects of Great Barrier Reef bleaching" (http://www.oef.com/samples/gbrfoxford.pdf) for the Great Barrier Reef Foundation and "An assessment of the impact on the US economy of trade and investment with China" (http://www.oef.com/samples/oefchinatradeinvestment.pdf) for the US-China Business Council.  Oxford Economics has a very prestigious client list:

Institutions

IMF, World Bank, US Treasury, US Government, OPEC, Bank of England, ADB, Ministries of Finance Italy/UK/Japan.

Industries

Airbus, Unilever, IBM, Intel, Microsoft, BMW, Boeing, BP, British Airways, Daimler, General Motors, Renault, Shell.

Finance

Goldman Sachs, Morgan Stanley, Fidelity, Citigroup, Bank of America, Credit Suisse, UBS, Deutsche Bank, HSBC, Barclays.

Others

IEA, The Economist/EIU, The Institute of International Finance (IIF), McKinsey, Ernst & Young, KPMG.

RMIT University is the only Australian University to have access to the Oxford Economics modelling package.

In the first scenario we fix the unemployment rate so that it matches Table One, but allow the GDP to be determined by the model.  In other words what rate of economic growth would be necessary to generate an unemployment level consistent with the government's forecasts?  Table 2 below presents the GDP projections in Table One together with a set of key indicators using OEF estimates of scenario 1.

TABLE TWO:  SCENARIO 1 KEY INDICATORS

	2008-09	2009-10	2010-11	2011-12	2012-13
Real GDP (Gov)	0	-0.5	2.25	4.5	4.5
Real GDP (Scenario 1)	0.9	0.1	2.8	4.5	3.3
Unemployment rate (Scenario 1)	5.67	8.25	8.51	7.51	6.47
CPI (Scenario 1)	1.46	2.51	1.38	1.66	2.1

Across all years the OEF has estimated GDP growth to be slightly higher with the exception of 2012-13.  This increase in GDP growth, however, generates differences in the Net Operating surplus for those years, as indicated by Table 3.

TABLE THREE: NET OPERATING BALANCE ($B)

	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
Budget Documents	23.6	-28.5	-47.6	-49.7	-35.6	-25.3
Scenario 1	23.6	-24.5	-50.9	-66.7	-36.8	-38.7

Table Three indicates that the budget figures from 2009-10 onwards underestimate the true size of the deficit.  This is particularly the case in years 2010-11 and 2012-13.  In total the net deficit position from 2008-09 to 2012-13 is $217 billion compared to the budget is $186 billion, a difference of $31 billion.

FIGURE FIFTEEN:  NET OPERATING BALANCE TO REAL GDP

Figure 3 presents the Net Operating Surplus balance to GDP ratio which is comparable to Chart 1-3 of the budget documents.  Again, relative to the Budget numbers the first scenario suggest that current budget estimates are overly optimistic.

In the second scenario we moderate the decrease in the unemployment rate to be consistent with expectations based on historical reasoning.  Table Four presents the statistics of the key economic variables relating to scenario 2 and the budget estimates.

TABLE FOUR TABLE 1-7 COMPARISON

	2008-09	2009-10	2010-11	2011-12	2012-13
Real GDP (Gov)	0	-0.5	2.25	4.5	4.5
Unemployment rate (Gov)	6	8.25	8.5	7.5	6.5
Real GDP (Scenario 2)	0.89	0.08	2.84	4.49	3.29
Unemployment rate (Scenario 2)	5.7	8.2	8.5	7.9	7.4
CPI (Scenario 2)	1.5	2.5	1.4	1.7	2.1

As before the estimates of GDP are relatively more positive for all years except 2012-13.  The unemployment rate has been moderated such that it decreases consistent with historical experience.

TABLE FIVE NET OPERATING BALANCE ($B)

	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
Budget Documents	23.6	-28.5	-47.6	-49.7	-35.6	-25.3
Scenario 2	23.6	-24.5	-50.9	-66.7	-37.5	-42.9

The net debt position indicated by the Table 5 is $222.5 (b) in June 2013.  This is approximately $40 billion more than the estimate indicated by the Federal government.

The net debt of Australia for the years 2007-08 to 2012-13 is presented in Figure 4.  It shows that the implausible projections have understated the Net debt by nearly $40 billion.  This translates into a debt per capita over $10,000.  This is significantly higher than the Budget estimates of $8,500.

FIGURE SIXTEEN:  FORECAST NET DEBT

Once we relax the unrealistic assumptions contained within the Budget Papers it is clear that the Net Debt position will be somewhat worse than the government has already indicated.

WHY HAS AUSTRALIA PERFORMED WELL?

Australia has experienced a generation of economic reform.  The Australian economy is much more resilient to economic downturns now than it has been in the past.  For example the Australian economy did not enter into recession during the Asian crisis in the late 1990s, nor did it go into recession in the early 2000s.  At some point we should recognise that this is not simply "the lucky country" being lucky.

During the current crisis, the shock absorbers of the free market have operated to insulate the economy from some of the worst effects of the crisis.  For example, the exchange rate depreciated (and has subsequently appreciated) and the stock market has fallen in value.  A deregulated labour market has allowed employers and employees to renegotiate employment conditions to reduce hours worked and to job-share and the like.  At the same time the Reserve Bank of Australia -- a Commonwealth agency -- has lowered interest rates by over four percent.  In the lead up to the crisis Australian regulators took a very conservative approach to regulation and Australian financial institutions themselves have been reasonably conservative.  All this implies that many of the weaknesses that plagued foreign economies were not evident in Australia.  This is not an accident.  The institutions -- both public and private -- of the economy worked well.

Of course our economy is somewhat vulnerable to international events and we do not suggest that Australia is immune from international crises.  It is important to maintain a clear perspective of the strengths of our economy.  It is not luck, it is not "China", and it is not the "mining boom".  It is the hard work of the Australian people and the economic reforms and leadership of the Hawke, Keating and Howard governments that have worked to fireproof the Australian economy.

---

ENDNOTES

1.  Steve Kates, Read the data:  it was a recession, The Australian, September 14, 2009, pg. 16.

2.  See http://petermartin.blogspot.com/2009/04/so-retail-spending-is-down.html

3.  The Poly-Trend was estimated using standard in-built functions in the statistical program R 2.8.1.

4.  This model was fitted using the ets command in R, R Development Core Team (2009).

5.  It is important to note that this type of analysis does not take into account the size of the labour force -- we are assuming here that the growth rate in the size of the labour force is constant.  We are currently engaged in additional research to further evaluate this variable.

6.  http://petermartin.blogspot.com/2009/02/so-why-does-treasury-believe-well-spend.html

7.  http://faculty.chicagobooth.edu/christian.broda/website/research/unrestricted/Stimulus%20Payments%20and%20Spending.pdf

8.  Sumit Agarwal, Chunlin Liu, and Nicholas Souleles, 2007, "The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data", Journal of Political Economy, 115:  986–1019.

9.  David Johnson, Jonathan Parker, and Nicholas Souleles.  2006. "Household Expenditure and the Income Tax Rebates of 2001", American Economic Review 96:  1589–1610.

10.  Andrew Leigh, 2009, How Much Did the 2009 Fiscal Stimulus Boost Spending?  Evidence from a Household Survey, Unpublished Paper, http://econrsss.anu.edu.au/~aleigh/

11.  John Cogan, John Taylor and Volker Wieland, The stimulus didn't work, Wall Street Journal, September 17, 2009.

12.  An open letter authored by 21 economists, published in the Australian Financial Review, made this claim.

13.  In the long term it has more neo-classical properties, however for the purposes of this analysis only short to medium term analysis was performed so therefore the analysis presented is consistent with a Keynesian philosophy.

Alcohol is good -- so let's drink to that

Australia's relationship with alcohol is "calculated hedonism", according to the latest of many reports into drinking commissioned by the federal Health Department.  This presumably is a Bad Thing.

The report, released last week, argues the intentional pursuit of pleasure is getting in the way of productivity, which is a shame.  But what if alcohol is, on balance, good?  Alcohol, and the social practices that have developed around it, is a key part of human society, and even human civilisation.

My point isn't to downplay the very real negative consequences regular excessive drinking can have.  Or to ignore the damage some drunk idiots can do, like drink-driving or street-fighting.

But Australian public health activists and the Health Department have decided the small minority of chronic alcoholics or our inadequate late-night policing isn't the problem -- it's our drinking culture in general.

Traditional Australian mateship rituals like shouting a round of drinks are now seen as a form of peer pressure, and allowing staff to go out for after-work beers is seen as employer negligence.

So the Preventative Health Taskforce and the report leaked out of the Health Department argue workplaces are potential "alcohol harm-intervention settings", key battlegrounds for the Government to change our drinking culture.  They recommend enacting workplace alcohol education, introducing health checks for employees, and making alcohol prevention strategies a part of industrial relations awards.

What's interesting about these proposals is what they reveal of the health community's beliefs about the sort of lives Australians should be leading.

A philosophical watershed was reached in February this year when the Health Department updated the Australian alcohol guidelines to describe the consumption of more than two standard drinks on any given day as risky drinking.

A bottle of wine contains more than seven standard drinks.  So if you are one of those couples who like to spend their Saturday evenings with a serve of fettuccine marinara, a DVD box set of SeaChange, and a bottle of Clare Valley Riesling, you are now part of Australia's booze problem.

Sure, the harmful drinking guidelines are just that -- guidelines -- but they fly so dramatically in the face of normal human behaviour they are almost completely meaningless.  All they reflect is the steady ratcheting-up of claims about how we're drinking, eating and smoking towards our demise.  Never mind the fact that on practically every measure we are much healthier than our ancestors.

The vast majority of people have an overwhelmingly positive relationship with alcohol.  Drinking is an important social lubricant.  All this discussion about the harmful impact of drinking seems to forget alcohol is a key part of almost every adult social engagement held after 5pm.  And for good reason.  We enjoy alcohol's effects and how it helps us relate to others.  In almost every situation where alcohol is consumed -- even consumed above what the health department has declared as risky -- the effects of drinking are benign and, well, pretty enjoyable.

People very quickly learn how to manage their own drinking.  Health officials might not always agree with our choices about alcohol consumption -- bureaucrats will be bureaucrats! -- but they should start to recognise these choices are nevertheless deliberate and informed.

After all, alcohol has played a fundamental role in the history of human civilisation -- drinking has been tightly enmeshed with religion, nutrition, medicine and, above all, pleasure.

Compared to coffee and tobacco -- regional delicacies that only achieved their global popularity a few hundred years ago -- brewing, distilling and fermenting has been a major part of almost every culture for thousands of years.

In their new history of drinking in Australia, Under the Influence, Ross Fitzgerald and Trevor Jordon note Australians are nowhere near the booziest people on the planet, contrary to our self-image.  Perhaps we deserve governments that treat us with the same relative moderation we treat alcohol.

ADVERTISEMENT

We need to wait for low-cost energy options

The Government's climate change policy adviser, Professor Ross Garnaut, said last year that the coming Copenhagen Conference would bring an agreement on global measures to reduce carbon dioxide emissions.

The objective is stabilisation of global carbon dioxide levels.

This requires annual world emissions below three tonnes a head.

For countries such as Australia and the US, with annual emissions of more than 16 tonnes a head, this means a four-fifths cut.

Most other rich countries emit about 10 tonnes a head.

Even France, with its nuclear and hydro-based electricity supply, is at six tonnes.

India emits less than 1.5 tonnes a head, but China's emissions already exceed four tonnes a head.

No authority now considers a meaningful agreement at Copenhagen possible.

Stabilisation requires developing countries, which are now responsible for almost half global annual carbon dioxide emissions, to participate in cuts.  They refuse to do so until their living standards have reached the levels enjoyed in Western countries.

Attempting to impose cuts on them, as the French Government advocates, would unravel trade agreements that are vital to living standards.

Carbon dioxide emissions are inevitable outcomes of coal, gas and oil use.  As energy consumption fuels living standards, carbon dioxide emissions tend to be higher for richer countries.

In many countries, recession has led to declines in production -- and hence carbon dioxide emissions -- but, providing recovery takes place, this will only be temporary.

Countries such as Australia, with access to cheap coal and the capabilities to convert it efficiently to electricity, emit more carbon dioxide than others.

However, this does not mean we are an irresponsible "polluter".

Aside from doubts about whether carbon dioxide emissions will increase temperatures, such claims ignore the reasons for different countries' emission levels.

Low-cost energy suppliers such as Australia are major exporters of energy-intensive products like aluminium.

Other countries are therefore sub-contracting some of their energy use and carbon dioxide emissions to Australia.

Some countries have low carbon dioxide emissions in relation to their levels of income because they have access to considerable hydro-electricity resources or have adopted nuclear power.

Ironically, in Australia the most vocal proponents for lower emission levels become apoplectic in the face of calls for more hydro power and demonise nuclear power.

Instead they promote wind power, which costs three times as much as conventional sources and, if used extensively, would impose even higher costs and cause blackouts.

They also argue the merits of new technologies that may be carbon-lite but are yet to be invented.

And they line up for campaigns like "Switch off Hazelwood".

Such campaigns, if successful, would bring about the dismantling of the low-cost electricity that forms the backbone of Victorian industry's competitive advantage, as well as delivering the world's cheapest electricity to households.

Hopefully sense will prevail.

This requires the Australian Government to avoid actions like closing down our existing sources of cheap electricity -- actions that would undermine the economy.

Instead it should await development of low-cost alternatives, which it claims will be available soon.

ADVERTISEMENT

Big government no answer

A BBC poll released on Sunday indicates Kevin Rudd's approval rating for the way he's handled the financial crisis is the second highest in the world 8 per cent of Australians are satisfied with the actions he's taken to address the crisis.

Only the Chinese gave their leaders a higher rating than we gave our Prime Minister.  After the Chinese and Australians, those most satisfied with what their leaders were doing were the Egyptians, Brazilians and Indonesians.

In the United States only 49 per cent of people were satisfied with Barack Obama's administration and in Britain 35 per cent of people approved of Gordon Brown's response to the crisis.

The BBC also asked about attitudes to things like government regulation.  The results are stark:  67 per cent of Australians want more of it.  We're up there with the French and the Germans as the most enthusiastic supporters of government control of the economy.  In France, 67 per cent want more regulation and in Germany the figure is 65 percent.

The figures for those opposing additional regulation are revealing.  In Australia only 26 per cent object to further regulation of the economy, compared with 45 per cent in the US and 37 per cent in Britain.

So much for the supposed great "neo-liberal triumph" of the past two decades.  If neo-liberalism did indeed triumph there's not much to show for it -- at least in terms of public support for it.  In 1986 John Howard pronounced "the times will suit me".  And they did.  In 2009, in the wake of the global financial crisis, the times suit Rudd.  All the opinion polls tell us Australians seem to welcome a former state government bureaucrat who regards micro-managing the Australian economy as not very different from micro-managing a premier's office.

Until 12 months ago, reform meant reducing the role of government and allowing competition and markets to operate.  These days when ministers talk of reform they mean more regulation, more rules and more government.

Last week the Prime Minister said he wanted to "apply the tradition of reforming centre" in the areas of education, infrastructure, communications and tax.  But in each of the first three areas his recipe for reform has nothing to do with deregulation.  Rather, his aim is to put the government back in the middle of education, infrastructure and communications.

In education, for example, a major plank of the "education revolution" is a federal government-imposed, Canberra-approved curriculum for every school in the country.

In infrastructure a government appointed committee decides what is going to be built and how.

In communications, in the government's own words, "the biggest reform in telecommunications in two decades" is setting up a broadband network owned and operated by the government at a cost of $43 billion.  To support the promised broadband network, the government announced this week it would-in effect require Telstra to split itself in half.

Regardless of the merits of structural separation, it must be remembered the government no longer owns Telstra.  Telstra is a public company with 1.5 million shareholders.  (The equinaminty with which Australia's boardrooms appear to have greeted the government's decision is astounding.  Presumably, corporate leaders assume what's happened to Telstra will never happen to them).

Tax is the final province of Rudd's "reforming centre".  The problem is his track record of reform doesn't inspire much confidence.  We don't really know the principles guiding the government's review of the tax system.  The requirement that the review "should make coherent recommendations to enhance overall economic, social and environmental wellbeing" is so vague as to be almost meaningless.

There's no indication the PM has any intention of cutting the government's overall tax take.  What we're most likely to get is some sort of reshuffling of the tax burden because, in the face of a potential decade-long budget deficit, there's little scope to reduce tax.  If the Treasury gets its way and cuts the corporate tax rate, we'll end up with a different tax system, but not real reform.

Tax and cutting tax gives Opposition Leader Malcolm Turnbull the chance to talk about something that isn't Work Choices or the emissions trading scheme.  As the BBC survey shows, it will be no easy task convincing the electorate that government has grown too big, and should stop growing.  But at the very least the electorate has to be given an alternative.

ADVERTISEMENT

Revolution was three Rs for all

We are promised an education revolution in Australia.  If it arrives, it will be a jubilant day.  But will it arrive?  The answer is no.  We can hope for progress but not for a revolution.  To ask for a revolution is almost to ask for the moon.  A revolution is a once-only event.  It rarely happens.  We have experienced one mighty education revolution in Australia.  Its effects far exceeded what we can expect if Kevin Rudd and Julia Gillard do improve our huge system of education.

Australia's real education revolution came late in the 19th century.  Victoria led much of it.  The landmark was the introduction of compulsory education here at the start of 1873.  It was free and it usually lasted until age 13 or 14.  It was a wonderful event in a land where many people could not read and write or could read only with difficulty.

Victoria, South Australia and NSW especially were soon well ahead of most nations in Europe in primary education.  This step was also revolutionary because it was virtually a law against child labour.  If children were compelled to go to school, they could not work full time in factories and on farms.

The building of new primary schools, mostly in remote places, and the hiring of teachers called for a huge expenditure.  In terms of the real cost for each child, it was more expensive than the present stimulus package for schools known as Building the Education Revolution.  This education revolution was the real one.  It affected most children.  But it did not reach most Aboriginal settlements, especially in the outback, until the 20th century.  There, by 1970 it was generally effective.  Since then, primary education has retreated in many Aboriginal regions.  In that sense the real education revolution of the 1870s is still uncompleted.  If the Rudd government could succeed in revitalising primary schools for Aboriginal children, especially in remote places, and if it could entice children to attend regularly, that would be a wonderful achievement, it would be great, no matter how much it cost.

It is known, from research in India and other lands, that a reasonable level of education for girls makes them more effective as mothers and more protective of their babies' health.  Here is a simple path towards improved health for indigenous children.  From the end of World War II there was a great growth in secondary education in Australia.  It was not a revolution.  It affected a far smaller proportion of the population than did the primary school revolution.

In the past 50 years there also has been a dramatic growth in universities.  While impressive, it hardly can be called a revolution.  Even today, primary education is the important field, in my view.  A lot can be done to help but it will consume much money and thought.

There is another reason we can't expect another education revolution on a grand scale.  A vast area of education today is outside the control of educators.  Radio, television, cinema, the internet and computer games are educators.  The home is, too.  These competing educational forces can be stronger than the school room.  Sometimes they are harnessed by schools.  Sometimes they have favourable effects, sometimes not.  Sometimes their effect is anti-educational.  In the 1870s, when the real education revolution began, most of these competing educational forces did not exist.  The church and the newspaper existed.  But newspapers had a low circulation in aggregate.

A revolution will require a huge packet of money.  It will mean higher taxes or public debts.  Will the voters accept that?  If they see value for money they probably will accept it.  We will wait and see.

Today's stimulus package of $15 billion mainly for school buildings is bold.  It is designed as much to stimulate the economy as to stimulate education.  Per capita it is larger than US President Barack Obama's education package, which he announced first.  But the Australian special sum is not huge, on my calculation, if spread across three years, and if compared with the national education budget, it is equal to about five weeks' additional expenditure a year.  Moreover, it may not be money spent with maximum impact.

What if the leading education authorities in Australia had been given one year's notice to answer this question:  "Here is this grand sum, how should we spend it?"

It is doubtful whether these leaders would have spent it in this way.

While impressive, it is just a bucket let down in the educational ocean.  Five times the amount of this stimulus package easily could have been spent on school buildings and equipment.  But even that grand sum would still not provide anything like an education revolution.

I have sympathy with Canberra's act of crying aloud for an education revolution.  It is a confession that something is really inadequate in preschool, primary, secondary and university education in Australia.

But so far the federal government has not indicated how much it will spend and what exactly it will transform in, say, the next five years.  And how will it educate and attract the talented people needed?  Above all, how will it finance this brave adventure?  The phrase education revolution should be quietly buried.  It is unrealistic.  It is still more a slogan than a blueprint.

Schools and universities are more than buildings.  What goes on inside is the heart of education.  Teachers, at every level, are all-important.  How do we galvanise or renew teachers rather than parts of the building?

ADVERTISEMENT

A tale of two different rail cities

The differences between the public transport systems in Australia's two largest cities have been graphically highlighted recently.

In Melbourne, the details of the contracts with new private train and tram operators were made public.  These contracts confirmed that the mix of value-for-money spending and service improvements which have characterised ten years of privatisation will not only continue, but be further enhanced.

The following day, Sydney also had a transport announcement, which was that three construction consortia had been asked to bid to build Stage One of the Sydney Metro.  This sounds like good news, but with a price tag of $4.8 billion, the first stage of the metro will be largely duplicating other public transport services, at enormous cost, while doing nothing to solve Sydney's real transport problems.

While traditionally having the highest proportion of journey to work trips made by public transport of any Australian city, Sydney has now been the laggard in patronage growth for many years.  By contrast, Melbourne has led the way nationwide with double digit increases in patronage for several consecutive years.

Twenty years ago Melbourne's public transport was clearly worse than Sydney's, a six-week union tram blockade of city's streets symbolising just how dysfunctional the system had become.

A key reason for Melbourne's public transport renaissance since then, and its recent ability to attract more people to public transport, has been the Kennett government's decision to privatise the operation of Melbourne's trains and trams.  While it has not all been plain sailing, since the original contracts with private operators were let in 1999, the existing rail operator, Connex, and tram operator, Transdev TSL, trading as Yarra Trams, have both delivered significant improvements for commuters.

Sometimes, the operators became victims of their own success as the patronage boom they induced caused problems such as over-crowding which, in turn, led to operational delays.  They were not helped by the fact that the Victorian Government was slow to respond to the patronage boom and often seemed prepared to let the operators carry the can for problems that were really issues for government under the terms of the contracts.

The new operators, Metro Trains Melbourne (MTM) and Keolis Downer EDI (KDR), will both bring new perspectives, strong international expertise, and ambitious plans to Melbourne's trains and trams respectively.  MTM is a joint venture including MTR Corporation, which operates services to more than 99 per cent punctuality in Hong Kong.

The continuing involvement of the private sector in the provision of public transport services will achieve the impressive double of keeping costs under control for the eight-year time span of the new contracts and deliver several new customer service initiatives.  Where new money is being invested it is in the key area of maintenance which will ensure that some of the remaining practices from the days of government-operation are finally eradicated.

The contrast with New South Wales could not be starker.  Sydney's rail system has still not seen the sort of efficiency measures undertaken in Melbourne in the 1990s.

A benchmarking study, undertaken last year, found that by retaining train guards and keeping staff at low patronage stations the NSW Government is paying $130 million more than it should to operate its metropolitan rail system.  As well as those potential savings it is also clear that similar efficiency gains could be made by adopting more efficient maintenance practices for both rail infrastructure and rolling stock.

Yet, despite the obvious need, the NSW Government shows no sign of pressing for these gains.  By contrast, in the 1990s in Victoria, the Kennett Government removed train guards and tram conductors, reduced the number of station staff, and streamlined maintenance practices in a comprehensive reform agreement that the public transport unions ended up accepting without strike action.  These gains were then entrenched by privatisation.

Rather than facing up to the difficult task of real reform designed to make the current service less of a drain on taxpayers and more reliable for commuters, the NSW Government is pressing ahead with the sexy idea of the metro.

Now, it should be pointed out that the Victorian Government also has a metro proposal in its Transport Plan and has, in recent days, called tenders to undertake feasibility studies.  Not only is this a more cautious approach to a metro, but because they have a much more efficient existing network, Victorian taxpayers can more easily afford major new capital works.  Further, judging by the first round of Infrastructure Australia spending, Victoria is also more likely to attract Commonwealth funding to its more realistic proposals.

If the Sydney metro project proceeds, it will just add to the amount of money that has been wasted in the past decade by the nation's worst performing public transport system.  To its credit, the NSW Opposition has opposed the metro, but if the Government is able to stick to its timeline, contracts will have been signed, and construction commenced, before NSW voters finally go to the polls in March, 2011.

The need to pay for the metro will only add to the necessity for the Opposition to include privatisation as a key element of its Transport Policy.  Given the experience with electricity, one might not be optimistic, but the fact that the NSW Government and Opposition are now both supporting the privatisation of NSW Lotteries, may be a hopeful sign that privatisation of public transport services is a realistic hope.

If it isn't, NSW taxpayers and commuters will continue to be big losers compared to their Victorian counterparts.

ADVERTISEMENT

Tax Cuts -- Not Stimulus Spending

HOW LARGE A TAX CUT COULD YOU GET FOR $97 BILLION?

Over the course of the 2008-09 financial year the Australian Government took a series of significant fiscal policy decisions which were designed to act as an economic stimulus.  This paper asks the following simple hypothetical question:  if those policy changes had instead been implemented as a one-off tax cut, how large would that tax cut have been?  To answer this, we need to answer the following two questions.  First, how large were the government's fiscal policy decisions last financial year, relative to the baseline of no policy change?  Second, what is the equivalent size of the tax cut that this would have "bought"?

HOW LARGE WERE THE GOVERNMENT'S
FISCAL POLICY DECISIONS, RELATIVE TO
THE BASELINE OF NO POLICY CHANGE?

Relative to a baseline of no policy change, what will the policy decisions that the government actually took over the course of 2008-09 (including on Budget night, May 2009) amount to over the period to 2011-12?

Table 1 below is from this year's Budget Paper No. 1, page 3-11.  It shows the Commonwealth's projected fiscal position in last year's May 2008-09 Budget, relative to the new updated projected position that was presented in this year's Budget (12 May 2009).

Table 1:  The Budgetary Effect of the Government's Policy Decisions in 2008-09.

	2008-09	2009-10	2010-11	2011-12	Total
2008-09 Budget	21,703	19,669	18,996	18,870	79,238
MYEFO Policy Decisions MYEFO Parameter Variations	-11,093 -5,244	-1,634 -14,440	-966 -15,390	-810 -11,371	-14,503 -46,445
MYEFO Bottom Line	5,365	3,595	2,640	6,689	18,289
UEFO Policy Decisions UEFO Parameter Variations	-18,037 -9,816	-18,365 -20,753	-11,655 -25,314	-5,435 -26,937	-53,492 -82,820
UEFO Bottom Line	-22,487	-35,524	-34,330	-25,683	-118,024
2009 Budget Policy Decisions 2009 Budget Parameter Variations	-4,254 -5,373	-11,961 -10,108	-5,993 -16,727	-6,952 -11,901	-29,160 -44,109
Total Policy Decisions Since Last Budget Total Parameter Variations Since Last Budget	-33,384 -20,433	-31,960 -45,301	-18,614 -57,431	-13,197 -50,209	-97,155 -173,374
2009-10 Budget Bottom Line	-32,114	-57,593	-57,051	-44,535	-191,293
Turnaround from 2008-09 Budget % Turnaround Due to Policy Decisions % Turnaround Due to Parameter Variations	53,817 62.03% 37.97%	77,262 41.37% 58.63%	76,047 24.48% 75.52%	63,405 20.81% 79.19%	270,531 35.91% 64.09%
% Deficit Due to Government Decisions	103.95%	55.49%	32.63%	29.63%	50.79%
Budget Balance Without Government Decisions	1,270	-25,633	-38,437	-31,338	-94,138

Relative to the projected position in May 2008-09, the figures show a cumulative deterioration or turnaround in the Budget bottom line of $270.5 billion over four years (see the last column in the row labelled "Turnaround from 2008-09 Budget"), relative to what was expected in May 2008.

This cumulative deterioration is a combination of deliberate "policy decisions" ($97.1 billion) that were taken over the course of 2008-09, and of expected "parameter variations" ($173.4 billion).  The latter are meant to be those changes in the fiscal situation that are not directly controlled by the government.  Note, however, that a government could in principle reduce and even eliminate the size and budgetary effect of "parameter variations" by choosing not to spend and tax as highly as they do.  In the extreme case, a government that decided not to tax and spend at all would face no "parameter variations".  Similarly, a government that chose not to subsidise unemployment benefits (which are countercyclical) would face a different set of "parameter variations" than a government that did pay such subsidies.

Moreover, parameter variations are due to changing estimates by the Government (through Treasury) of various economic factors which may be influenced by the policies themselves.  In other words, a particular spending decision might negatively (or positively) affect a parameter to amplify (or reduce) the net cost of the policy decision.  Second round effects of the policies are also not costed, but appear later as parameter variations (this would in principle include the marginal excess cost of taxation).  Thus, "parameter variations" are not completely outside the government's control.

Note that in 2008-09 most of the projected deterioration is due to policy decisions, not parameter variations.  Indeed, if the government had taken no policy decisions, the 2008-09 Budget would have been in surplus.  Putting it another way, the fact that there was a budget deficit in 2008-09 is entirely due to government policy.  Most of the deficit in 2009-10 (55.5%) could also have been avoided, but for the government's decisions.  It remains to be seen, of course, whether the actual parameter variations turn out to be as significant for 2008-09 as originally expected.  We may get a better idea later in the year when the 2008-09 Final Budget Outcome is released.

HOW MUCH OF A TAX CUT COULD YOU GET FOR $97 BILLION?

Suppose that instead of the policies that were actually announced and partially implemented throughout the course of 2008-09 (and which are scheduled for implementation long after the need for any kind of stimulus has passed) the government had instead decided to give Australians a one-off income tax cut in 2008-09 that "cost" the same amount as the decisions it actually took -- i.e. $97 billion of foregone revenue (noting, of course that the government's actual policy decisions will be implemented over four years rather than a single year).  Suppose that after this one-off cut, tax rates were then returned to their previous levels in 2009-10.

Basic economic theory suggests that as a "stimulus" measure designed to get people to spend, this may not be very effective.  Consumers tend to increase consumption in response to changes in permanent income rather than temporary income.  The permanent income effect of such a temporary tax cut would relatively small (although obviously it would not be trivial and the economic effect could easily be larger than the effect of an equivalent increase in government outlays).  However, such a income tax cut would have effects on intertemporal labour supply decisions, inducing individuals to increase their labour supply in the year of the tax cut, as well as encouraging employers to hire more workers in that year as the wedge between employer willingness to pay labour and employee willingness to supply labour would fall.

Note, however, that it is the short term spending effects of policy rather than the short term supply side and efficiency effects that have been emphasised by the government.  Indeed, the entire policy strategy of the government's temporary cash handouts was built around the belief that individuals would spend the money as soon as it was received.

For the purposes of this paper, we are willing to accept the government's argument on this point;  thus, we assume that our temporary income tax cuts would boost spending, and we ignore the supply side effects.  Note also that the effect on government debt -- around 10 per cent of GDP -- would, according to the government's own logic, be relatively trivial.  The government has told Australians that increases in public debt of this magnitude are easily manageable and are well below other OECD economies.  Our alternative policy involves a large budget deficit of just under 10 per cent of GDP in 2008-09, but again, according to the government's own logic this is also no problem.  Indeed, large deficits during such economic circumstances are exactly what standard Keynesian theory requires (in fact, according to the Prime Minister, deliberately running large budget deficits during downturns is an integral part of "conservative" economic management).  Note also, however, that our alternative policy involves much lower budget deficits after 2008-09 as economic activity recovers -- again, exactly as standard textbook Keynesian theory prescribes.

In this spirit, we can also calculate the "multiplier effect" of our alternative one-off tax cut "stimulus" using the same multiplier estimates that have been used by the government.  Table A on page 4-6 of Budget Paper No. 1 (reproduced below) publishes the OECD's estimates of multipliers for personal income tax cuts. ⁽¹⁾

The government, citing the OECD's figures, says that every dollar of income tax cuts could increase economic activity (GDP) by up to $0.40 in the first year, and by up to $0.80 in the year following the tax cut.  Thus, using the government's own estimates, a one-off $97.1 billion tax cut in 2008-09 would have increased GDP by up to $38.8 billion in 2008-09, and by up to $77.7 billion in 2009-10.  In other words, according to the OECD's own estimates, our alternative fiscal stimulus package would have roughly increased GDP by up to 3.5 per cent relative to the no-policy baseline in 2008-09, and by up to 7 per cent relative to the no-policy baseline in 2009-10.

Table A:  OECD and IMF estimates of fiscal multipliers

	OECD - Australia		OECD - US		IMF - G-20
	Year 1	Year 2	Year 1	Year 2
Spending measures     Infrastructure     Government consumption     Transfers to households	0.9 0.6 0.4	1.1-1.3 0.7-1.0 0.7-0.8	0.9 0.7 0.5	1.1-1.3 0.8-1.1 0.8-0.9	0.5-1.8
Revenue measures     Personal income tax cuts     Indirect tax cuts and other	0.3-0.4 0.2-0.3	0.4-0.8 0.3-0.5	0.3-0.5 0.2-0.3	0.5-0.9 0.3-0.5	0.3-0.6

Source:  OECD 2009 and IMF 2009a.

We can also calculate the one-off tax cut which, in percentage terms, would have been equivalent to the government's actual policy decisions.  Table 6 on Page 5-22 of 2009-10 Budget Paper Number 1 provides Treasury's projections of individual income and other withholding tax revenue for the same four years as the previous table.  This table is reproduced below.

Individuals income and other withholding tax revenue

Table 6:  Individuals income and other withholding taxation revenue

	Actual	Extimates			Projections
	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
Individuals and other withholding taxes     Gross income tax withholding     Gross other individuals     less:  Refunds	114,700 31,036 19,601	117,680 31,210 23,200	119,000 28,350 24,640	122,630 27,690 23,780	132,590 29,440 24,840	144,075 32,180 26,815
Total individuals and withholding taxation	126,135	125,690	122,710	126,540	137,190	149,440
Fringe benefits tax	3,796	3,470	3,460	3,590	3,790	4,050
Total individuals taxation	129,931	129,160	126,170	130,130	140,980	153,490

Source:  Table 6, Page 5-22 of 2009-10 Budget Paper Number 1

The table shows that in 2008-09, total individual and withholding taxation (not including fringe benefits tax) was expected to be $125.7 billion.  Thus, in one-off terms, the government's policy decisions of $97.1 billion over the next four years would have been roughly equivalent to a one-off reduction of 77.25 per cent of individual and withholding tax revenue in 2008-09.  Note that this estimate ignores any possible labour supply effects, and is also on top of the permanent tax cuts that were passed in early 2008, some of which took effect from July 1 2008.

Suppose that this policy was implemented by reducing taxes by 77.25 per cent for every individual Australian taxpayer.  What does this equate to for a taxpayer on average weekly ordinary time earnings (AWOTE) in 2008-09, which according to the ABS was $1174 (or $61,042 annually)?  According to the ATO tax calculator, the annual amount of individual income tax owed by this hypothetical individual in 2008-09 (not including Medicare Levy or deductions) would have been $12,912.60, or $248.32 per week.  Thus, if the government had instead implemented its 2008-09 policy decisions as a one-off tax cut and reduced the tax bill by the same amount in proportional terms for all Australian taxpayers, the average earner would have paid 77.25 per cent less than what he actually paid in taxes.  This means that the average earner would have paid only $56.50 in tax per week in 2008-09 -- a tax cut of $191.82 per week.

An alternative calculation is to compute the average size of the tax cut.  According to ATO data there were 11.8 million individuals who lodged tax returns in 2006-07.  Dividing $97.1 billion by this number of individual taxpayers, we arrive at an average tax cut of $8228.81 per individual taxpayer, which is equivalent to $158.24 per week.

Finally, there is another way that our alternative policy could have been implemented.  According to the Australian Tax Office, in 2006-07 the top 3 per cent of all taxable income earners paid 24 per cent of the total personal income tax revenue.  But 24 per cent of expected revenue is just about what the government would receive in revenue under our alternative stimulus plan (actually, it is slightly more than the 22.75 per cent that would be left over after our plan).  Thus, an alternative stimulus package that would have been equivalent to the government's fiscal policy decisions in 2008-09 would have been to give all Australian taxpayers except the richest 3 per cent a 100 per cent tax cut in 2008-09!

---

ENDNOTES

1.  These estimates can be found on page 138 of the OECD's March 2009 Economic Outlook Interim Report, in Chapter 3, entitled "The Effectiveness and Scope of Fiscal Stimulus".

Geographic price discrimination

Submission to the Senate inquiry into Trade Practices Amendment (Guaranteed Lowest Prices -- Blacktown Amendment) Bill 2009

EXECUTIVE SUMMARY

This paper argues that the proposed amendment to the Trade Practices Act not be adopted.  There are a number of problems associated with legislating against geographic price discrimination.  In this paper I concentrate on two problems.  The first is the practical problem of cost differentials across geographic space.  Successful implementation of this legislation would require the ACCC undertake extensive cost analysis in order to determine whether or not a violation of the Act has occurred.  The second problem is philosophical -- prices are not just determined by costs, but rather by market conditions.  Consumers do not benefit from low costs per se, but rather from profitable businesses.  This legislation would effectively constitute a form of price control that would not ultimately benefit the Australian community.

INTRODUCTION

The bill is designed to end the anti-competitive practice of geographic price discrimination, which can potentially drive independent retailers out of the market or deter them from cutting prices.  The bill will require large retailers such as major supermarket chains and the oil companies to charge the same price at any location that is within 35 kilometres of another of their sites.

Geographic price discrimination is not an economic problem, even though it generates substantial press and is widely viewed as being somewhat immoral.  The case against geographic price discrimination seems somewhat intuitive;  the view being that corporations discriminate against the disadvantaged or employ some form of market or monopoly power.  This type of argument, however, ignores the economic reality of competition in the market place and enshrines a theoretical construct of competition into law.  This type of policy making is likely to lead to inefficiencies and higher prices for consumers.  Despite being dressed up as competition policy, this is essentially a subsidy to small business.  The consumer ultimately suffers through less choice and higher prices.

Policy concerns about geographic price discrimination are not new.  Indeed, for many years this type of discrimination was explicitly illegal in the United States.  The regulation economics literature deals with issues relating to geographic price discrimination and it is this literature that I wish to highlight in this submission.

PRICE DISCRIMINATION

F.M. Scherer defines price discrimination as "the sale (or purchase) of different units of a good or service at price differentials not directly corresponding to differences in supply cost".  ⁽¹⁾  Scherer describes three forms of price discrimination:

• Personal discrimination -- discrimination based on the personal characteristics of the customer.
• Group discrimination -- discrimination based on the group or market segment characteristics of the customer.
• Product discrimination -- discrimination based on the characteristics of the product.

Modern economic theory, however, uses somewhat different definitions of price discrimination:

• First degree discrimination -- discrimination based on the customers' willingness to pay and broadly conforms to Scherer's personal discrimination definition.
• Second degree discrimination -- discrimination based on bulk discounting and does not comfortably sit within any of Scherer's definitions.
• Third degree discrimination -- discrimination based on market segments and is consistent with Scherer's group discrimination definition (and possible his personal discrimination definition).

Geographic price discrimination is a form of third degree price discrimination.  Corporations regularly segment their markets by geographic location.  Accordingly, business costs are likely to vary by location and price differentials simply reflect that variation.  In order to successfully introduce legislation that requires price conformity over a large geographic area, the parliament will need to recognise that price differentials can likely be explained by cost differences.  In the USA, the Congress did recognise this point and introduced the "cost-justification defence".  This becomes a practical concern -- costs are likely to vary over geographic space and this can contribute to price differentials.

As Robert Bork has written:  ⁽²⁾

Persistent price differences in markets with rivals, therefore, are not price discriminations.  They necessarily reflect differences in the cost of doing business with different customers.  Such differences arise from a variety of factors, including the amounts customers purchase, selling costs, service costs, the performance of distributive functions by the customer, and so on.  This fact means that the law should never attack price differentials of this sort.  Not only is enormous pressure put on the cost justification defense -- which, if it worked perfectly, would succeed in all such cases -- but the mere threat of litigation and the expense of establishing the defense, which can be considerable, will inhibit sellers from giving full recognition to cost differences.  This handicaps more efficient modes of doing business and reduces or removes incentives for creating them.

There is an additional philosophical problem.  The notion that price discrimination is harmful is based on the economic fallacy that prices are only determined by costs.  To be sure, cost recovery is an important component of any pricing exercise.  Prices, however, are determined by supply and demand in a competitive process.  A particular problem is that economic costs, particularly opportunity costs, cannot be observed easily, if at all.  Post accounting costs can be observed, yet we know that accounting costs are easily restated and manipulated through accounting conventions and assumptions.  Any congruence between accounting reality and economic reality is at best after the fact and probably unlikely.  Entrepreneurial decision making is forward looking while accounting is backward looking.  This is not to denigrate the role of accountants and accounting, but rather to point out that the accounting function is very specific.  We now know that accounting is not well suited for regulatory compliance purposes.  Cost recovery may well be an appropriate objective for bureaucratic organisations (such as government), but it is not at all clear that this is an appropriate objective for profit-maximising organisations.

WHAT ABOUT THE CONSUMER?

The biggest problem with this type of legislation is that it is anti-consumer whilst being pro-small business.  There is nothing wrong with promoting small business if the government wishes to do so.  The current regulatory burden on small business is a distraction and probably adds no value to their business operations or society at large.  Government could usefully reduce that burden.  It is not appropriate, however, to promote small business by requiring large organisations to potentially charge higher prices.  In no way does this enhance consumer welfare.

In effect, this policy is a form of price control.  The great Austrian economist Ludwig von Mises warned against this type of intervention (emphasis added). ⁽³⁾

A government that sets out to abolish market prices is inevitably driven towards the abolition of private property;  it has to recognize that there is no middle way between the system of private property in the means of production combined with free contract, and the system of common ownership of the means of production, or Socialism.  It is gradually forced towards compulsory production, universal obligation to labour, rationing of consumption, and, finally, official regulation of the whole of production and consumption.

Any prohibition of geographic price discrimination must either be so blunt an instrument that it causes great injustice, or it must be so extensively crafted that the regulatory requirements and the subsequent burden be so great so as to massively expand the role of government in setting prices at the suburban level.

Government simply does not have the ability to implement a policy such as this without generating enormous unintended consequences.  We have already observed the failure of government to inform consumers about something as simple as daily petrol prices.  This policy requires government to not only know prices on a day to day basis, but also to determine whether those prices constitute price discrimination and then to act on that discrimination in a manner that will benefit consumers.  In his analysis of the US experience, Dominick Armentano has described the Robinson-Patman Act as "an economic and civil liberties nightmare". ⁽⁴⁾  Armentano also describes in detail some of the US court cases that have considered this type of discrimination.  He sums up the experience with the terms "economic nonsense" and "economic nightmare". ⁽⁵⁾

Consumers do not necessarily benefit from low prices.  Consumers do benefit from profitable business though.  Profitable corporations are able to lower prices while maintaining quality or increase quality while maintaining price.  This is in the long-term interests of consumers.  Competition policy needs to operate to ensure that this process occurs.  Again it worth looking to Ludwig von Mises:  ⁽⁶⁾

Profits are the driving force of the market economy.  The greater the profits, the better the needs of the consumers are supplied.  For profits can only be reaped by removing discrepancies between the demands of the consumers and the previous state of productions activities.  He who serves the public best, makes the highest profits.

CONCLUSION

This legislation will not enhance consumer welfare in Australia will act as a very blunt instrument to assist small business.  If the government does wish to assist small business there are far more appropriate actions it could undertake.  This legislation will impose huge costs on the Australian community with little or no benefit.

---

ENDNOTES

1.  F.M. Scherer, 1970, Industrial Market Structure and Economic Performance, Rand McNally College Publishing Company, pg. 253.

2.  Robert Bork, 1978, The Antirust Paradox:  A Policy at War with Itself, The Free Press, pg. 388-389.

3.  Ludwig von Mises, 1980, The Theory of Money and Credit, Liberty Fund, pg. 281.

4.  Dominick Armentano, 1990, Antitrust and Monopoly:  Anatomy of a Policy Failure, second edition, The Independent Institute, pg. 171.

5.  Armentano, as above, pg. 192-193.

6.  Ludwig von Mises, 1949, Human Action:  A Treatise on Economics, fourth revised edition, Fox & Wilkes, pg. 809.

Rudd's stimulus package is far from perfect

Kevin Rudd said yesterday that without the government's stimulus package that the unemployment rate would have gone through the roof.

This is good politics as we can never really know what would have happened.  We'll certainly be hearing that line a lot over the next several months -- especially if unemployment does not rise to the forecast 8.5 percent that the government was expecting at the last budget.

Much has been of Treasury minute leaked last week;  especially the view that withdrawing the stimulus package now would lead to greater unemployment.  So not only has the stimulus package prevented an unemployment catastrophe but it continues to do so.  The government can point to the "scoreboard" for confirmation of this story.  In fact Mr Rudd told us yesterday that US unemployment is now 9.7 percent and Canadian unemployment is 8.7 percent.

But what Mr Rudd didn't say yesterday is that the Canadian stimulus package (4.1 percent of 2008 GDP) is almost as large as the Australian package (4.6 percent of 2008 GDP) and the US package is larger at 5.6 percent of 2008 GDP.  In other words the favourable employment outcomes here in Australia cannot only be due to the stimulus package.

An OECD report published last week (3 September) indicates that unemployment has not risen much at all across 29 economies.  Some economies like Spain has seen a massive increase in unemployment as has the US and Canada.  The increase here in Australia is the eleventh highest out of 29 countries.  So we're not quite in the top third but 60 percent of OECD economies have experienced a lower increase in unemployment than did Australia.  To be sure they were starting from a higher base than we were, but many OECD economies routinely experience higher rates of unemployment than do the US, Canada and Australia.

To claim that our low rate of unemployment points to the success of the stimulus package ignores the experience in other OECD economies.  Many of those economies have experienced massive declines in GDP growth and have experienced (so-called) technical recessions, yet the increase in unemployment has not been that large.

In the graph below I have plotted the increase in the unemployment rate (relative to 2007) and the size of the stimulus (as a percentage of 2008 GDP) -- Australia is the large red dot.  The data are all collected from the OECD.

As can be seen the increase in unemployment is much less than the size of the stimulus package would suggest.  If our unemployment rate had grown in line with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent.

So it is not clear that stimulus spending has saved Australian unemployment from going through the roof.  It is far more likely that our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government and is not simply due to governmental quick fixes.

To believe that the stimulus has brought about the excellent economic performance Australian is currently enjoying would be to believe that the Rudd government had developed the perfect stimulus package.  We know, however, that the package was put together hurriedly and that the implementation has been poor.

Let's rather give credit where it is due.

ADVERTISEMENT

No beer, no pies, no fags -- the future of Australia?

If the National Health Preventative Taskforce has its way, by 2020 Australians should be beer-refusing, meat pie-avoiding non-smokers.

Bottle shops will be increasingly rare across our cities because the government will have addressed the cultural place of alcohol.  Teachers will be routinely inspecting lunchboxes for fatty and sugary snacks.  Advertisements for popular foods will be rigorously vetted by government regulators to prevent them being appealing to children.

Vast new bureaucracies will be established with just one thing in mind:  To stop you from eating, drinking and smoking anything the government disapproves of.

This scenario is indeed a bleak vision for the future, yet is being fervently advocated by a band of public health academics, nanny state paternalists, medical activists and frustrated doctors.  Many of these coercive utopian ideas were canvassed at the 2020 Summit.  Instead of being locked in a vault never to be seen or heard of again, the Federal Government's National Preventative Health Taskforce has resuscitated the idea that governments control what we put into our bodies.

Nanny statism has a poor record both here and overseas -- remember the failure of US alcohol prohibition from 1920 to 1933?

Undeterred, proponents of paternalistic policies continue to march on by using new arguments to fit the same old policy prescriptions.

It is argued that governments need to get involved in people's consumption choices because of potential health problems that are borne by taxpayers through the health system.  There have been anecdotal reports both in Australia and overseas of medical professionals refusing to treat overweight people or smokers.

This argument runs the risk of degenerating into slippery slope arguments for even more prescriptive controls over individual choices.  For example, should individuals not drive cars any more so that public hospitals do not bear the costs of treatment if car accidents befall them?  The health system exists for people to use, and should be separated as far as possible from questions of individual choice.

New developments in economics, studying the psychological and cognitive underpinnings of behaviour, have also breathed new life into the nanny state push.  It is argued that governments should intervene to correct behavioural biases, like self-control problems or excessive discounting of the future costs of action.

However, there are real limits to governments being able to successfully push individual consumption in the supposed right direction.

Government health bureaucrats, like other people, have their own biases, and their knowledge of the preferences and circumstances of individuals are extremely limited.  These limitations raise the risk that nanny state policies have ineffective or even counter-productive results, where the costs of government policy errors are spread across society.

Fundamentally, people are best placed to make choices affecting their state of health every day, through the foods and drinks they consume and the legal substances they inhale.  On the other hand, the taskforce does not appear to appreciate any limits to government interference in individual choices.

If, by 2020, Australians can still drink alcohol, smoke tobacco and consume the foods of their choice, then we will know that our precious liberties will have been left intact.  Until then, it is almost certain that nanny statists will run with the Preventative Health Taskforce final report to agitate for bigger government in health, at our expense.

ADVERTISEMENT

Higher, faster, costlier: the price of Olympic gold is too great

Malcolm Fraser opened the Australian Institute of Sport in 1981 by saying we were "no longer going to let the world pass us by".

Since then the performance of Australian sportspeople on the world stage has been not just a matter of pride, but an essential matter of government policy.

Just this week the Rudd Government announced plans to allow foreign athletes to fast-track (I daren't say "queue-jump") our laborious citizenship process so we can claim them as our own as quickly as possible.  For all the Government's lyricism about the romance of becoming a citizen of this great, wide, red-brown land, it is happy to toss aside its sacred citizenship rites so we can clock up one or two more medals at the next Olympics.

Indeed, Australia's relatively weak performance in Beijing -- Australian passport holders came a dismal sixth place on the gold medal tally -- has panicked senior sports apparatchiks.  The $220 million the Federal Government gives each year to the Australian Sports Commission is an embarrassingly small amount of money, according to athletics officials, and risks Australian athletes being trounced by better-resourced foreigners.

So maybe it is better we import athletes rather than hand the Australian Institute of Sport the extra few hundred million bellowed for after Beijing.

Australia is a sports-obsessed country, according to Lonely Planet.  That's fine.  But all this political energy, tax money and policy directed towards the four-yearly achievement of a few medals by Australian athletes has to make you wonder -- why bother?

It's anachronistic, for one thing.  When Fraser directed the government to mine Olympic gold, he was responding to a Cold War fear that free countries could not compete with socialist ones.  Having watched the success of Russia and East Germany at the 1976 and 1980 Olympic Games, Australia's athletics bodies were convinced they needed state central planning if they were ever going to win medals again.  (Not a bad theory, perhaps, if you believe the superiority of your political system can be demonstrated only in a water polo pool.  Of course, we now know that a key part of the Eastern Bloc's sporting plan was performance drug binges.)

It's been 20 years since the Berlin Wall came down.  Now might be a good time to abandon the state-subsidised jingoism embodied in elite sports funding.

Perhaps we could start thinking of sport like we think of any other industry.  Competitive sport is like a competitive market.  We import things which are uneconomical to produce in Australia.  So too we could appreciate the skill of -- and morally support -- athletes from around the globe.  The political insistence that our national honour is tied up in our domination of sporting contests is quite similar to the belief that we must have a home-grown Silicon Valley or green manufacturing industry if we're going to have a self-respecting economy.

After all, globalisation has changed irrevocably our sporting allegiances.  Many Australian soccer fans are just as likely to be interested in the fortunes of Real Madrid as they are in the Socceroos.  Cricket fans might be more eager to watch the Rajasthan Royals compete in the highly competitive Indian Premier League than watch the Victorian Bushrangers.  The traditional Australian constellation of swimming and tennis on the world stage, and football and cricket at home, is being undermined -- in a good way -- by our increasingly diverse ethnic make-up, as well as the accessibility of international sport on pay television and online.

These multicultural sports surely hold more appeal than the millions of dollars we spend on highly subsidised, niche elite sports such as volleyball.  Most people care about volleyball for only 10 minutes every four years -- and even then only if the sport rises above the din of other Olympic events.  (Can anybody name an Australian volleyball player?)

Popular sports can afford to support themselves, and sports that are unpopular do not necessarily deserve to be propped up by taxpayers' money.  Australian athletes will continue to dominate many international competitions.  As consumers of sport, we will be drawn to their success.  Let's leave it there.  Why subsidise Cold War-style nationalism?

ADVERTISEMENT

Build a port before bragging your ship's come in

This week saw encouraging figures on the Australian economy.

Australia's June-quarter gross domestic product figures suggest national production in 2009 will be similar to last year, though lower export prices mean reduced earnings.

No other developed country has fared so well.

For 2009, European GDP will fall by more than 4 per cent, the US slightly less, while Japan is down 6.4 per cent.

Unsurprisingly, Kevin Rudd and Wayne Swan are claiming the credit for Australia's performance.

They say the accomplishment was due to Canberra's $100 billion-plus of new spending initiatives.

Expenditures on these initiatives is planned over a four-year period.  They include $10 billion in handouts to the less well off, $42 billion on so-called "infrastructure", and the National Broadband Network which could top $40 billion.

However, a careful examination of how this new spending is panning out deflates the Government's own claims to glory.  That's because the bulk of the $100 billion-plus is yet to be spent.

Indeed, of the sizeable developed economies, Australian Government emergency spending injections incurred to date have been among the lowest.  Only Canada has spent less and, like Australia, is also experiencing a relatively mild recession.

We are told that recovery in the US and Europe is occurring, while key Australian markets such as China and India have continued to boom through the world downturn.

These developments remove any case for further government spending injections.

However, the Government maintains that if the spending spigot is turned off, unemployment will climb.

This is a disturbing analysis, especially since economists Henry Ergas and Alex Robson have established that Canberra's "infrastructure" spending represents poor value for money.

They show that double counting of benefits was necessary to justify spending on the two major projects -- the National Broadband Network and the $8 billion rail link upgrade to Melbourne from Geelong and the west.

And these at least represent genuine infrastructure, unlike the hastily arranged school building programs, which offer even less value for taxpayers' money.

Many people disregard such concerns, arguing that any increase in spending is good for the economy since it means increased demand and more jobs.

But a nation, like a business, can only spend what it earns or borrows.  And borrowings have limits and have to be repaid.

Spending money you don't have can only be justified if it pays for itself in future earnings.  If it doesn't, the result is a shrinking level of income.

Where a nation differs from a company is in its ability to finance spending by lowering interest rates and printing money.

With money supply growing at an annual rate of 12 per cent we have seen some of this.  But eventually it results in stagflation, as Australia learned in the 1970s.  And the Reserve Bank has now started to warn about higher interest rates.

Poorly performing government infrastructure, financed either by debt or printing money, diverts savings from more productive investment, thereby reducing income growth.

Government spending and creation of money out of thin air may provide a temporary boost to the economy but cannot continue.

ADVERTISEMENT

Nanny knows best

Rather than being a nudge towards a healthier society, the Preventative Health Taskforce's report is a government shove on how average Australians should live their lives.

One of the objectives of the report is to influence markets to achieve preventable health outcomes.  And it recommends doing so using measures that are popularly grouped as "nudge" policies.

American academic Cass Sunstein's nudge theory is that governments should direct people in the preferred direction without limiting their choices.  Recently Finance Minister Lindsay Tanner argued in favour of the nudge theory because it "holds enormous potential for reforming government and regulation" towards more desirable societal outcomes.

But the taskforce report's nudges are really more like shoves.  The report argues that those most vulnerable to obesity, tobacco and alcohol-related health problems are "those Australians with less money, less education and insecure working conditions".

Following the nudge brief, the taskforce recommends imposing heavy sin taxes that will increase the price of food, alcohol and cigarettes.  But these tax increases are unlikely to have any additional effect on existing taxes, advertising bans and horrific warning labels about the consequences of smoking.  They are likely to act as a regressive imposition on the least well-to-do in our community.  The only beneficiary is likely to be government coffers.  Increasing taxes as a deterrent has a poor record of success.

Since 2001 Australia has had a "fat tax" called the GST.  The GST acts as a fat tax because it applies to all cooked and processed foods but not to fresh food.  If tax increases are supposed to nudge Australians into a healthier lifestyle, then they have spectacularly failed.  Processed foods have had an additional 10 per cent tax over fruit and vegetables for the same period that the taskforce has argued obesity rates have been rising.

The argument that additional taxes need to be collected to support the consequences of an unhealthy lifestyle also go up in a puff of smoke when you look at the facts.

Traditionally governments have argued that increasing taxes on cigarettes is necessary to help offset the additional costs of those who contract cigarette-related illnesses such as lung cancer.  But according to the Cancer Council of Victoria's Tobacco in Australia report in 2004-05, total state and federal government revenue from tobacco-related products exceeded tobacco-attributable costs by more than $3.5 billion.  In other words, smokers already pay far more in tax than they cost in healthcare.

Recommending that the price of a packet of fags should be taxed until it costs $20 or more will only exacerbate the imbalance.

Another recommendation is for the government to end the act governing cigarette advertising to require that they cannot be sold "except in packaging of a shape, size, material and colour prescribed by government".  Family First senator Steve Fielding has already introduced a bill to this effect.

In the taskforce's discussion on food, it recommends that within three years there should be "standard serve-portion size(s)" in restaurants.

These measures are designed to stop us going to a fast-food restaurant and, if we do, to realise that we should not order a large combo meal when our stomachs cry upsize.

People may make decisions about what they consume and do that government does not like, and there may be legitimate measures that can be taken to stop people making the poorer choices.  But to bring Australians along, public health activists need to learn to treat us as grown-ups.

The 26 potential pieces of legislation, 18 new programs and frameworks, seven new bureaucracies and 71 other recommendations by the taskforce do not communicate respect for the individual's choices.

Australians can make rational, informed decisions and still smoke, eat fast food and binge-drink beyond the technical standard of three glasses of booze without destroying our health, as long as we are encouraged to take responsibility for our lives.

Instead of encouraging responsibility, the taskforce is trying to shove us into thinking it can make those decisions for us.

The necessity to implement the report's recommendations is being sold with predictable alarmism.  Health Minister Nicola Roxon has argued that "we are killing people by not acting" and taskforce chairman Rob Moodie has argued that "sitting on our hands is not an option".

The real decision facing the government isn't about whether to accept the report's recommendations.  It is about whether government thinks its role is to ensure consumers can take the responsibility to make informed choices or to decide for them.

Unfortunately, the taskforce's report is recommending the latter, not the former.

ADVERTISEMENT

Dark ages is the real deal

If you ever wanted to know the impact of Kevin Rudd's industrial relations policies there are easy ways of finding out.  You could read the decision on Wednesday of the Australian Industrial Relations Commission, which declared that "award simplification" will simultaneously cut employee wages and increase costs to business.  Or you could go to the web site of Fair Work Australia and read some of that organisation's recent decisions.

You'll see for yourself how Australia runs the risk of returning to the industrial relations dark ages.  And you'll also see what the Rudd government delivered to the unions in exchange for the ACTU helping get the ALP elected.

Fair Work Australia began on July 1 and administers Labor's Fair Work Act.  The legislation requires employers and unions to bargain in "good faith".  Even though good faith bargaining is a new principle in Australian law the unions knew exactly what they were doing when they demanded the ALP include good faith requirements in the Fair Work Act.

At the Fair Work Australia website you can study the decision of National Union of Workers v Defries Industries Pty Ltd (B2009/10439) made a fortnight ago.  Defries Industries is just the sort of business Kevin Rudd would like.  Some might say it is a bit of an Australian manufacturing industry success story.  Based in Melbourne, it is a family owned company with more than 100 staff, making and exporting medical products ranging from surgical forceps to wound dressings.

Throughout July the company had been in discussions with its employees about an enterprise agreement.  The company had planned its staff would vote on the agreement at the beginning of August.  On July 7 the National Union of Workers served a log of claims on Defries on behalf of those 40 per cent of the company's employees who were union members.

After two meetings in July between the union and the company tile union went to Fair Work Australia and complained Defries wasn't bargaining in good faith as required by the Fair Work Act.  On August 10 Fair Work Australia agreed with the union and ordered the vote on the enterprise agreement be cancelled and directed the company to negotiate with the union.

What's interesting is that the views of the majority of Defries employees who were not union members and who may have wanted to vote on the enterprise agreement appear not have to been considered by Fair Work Australia.  Further, Fair Work Australia declared the company was not allowed to communicate with the 60 per cent of its employees who were not union members because the union, which represented 40 per cent of employees, was not given the chance to tell the company what the company should say.

According to Fair Work Australia, Defries was not bargaining in good faith because its two meetings with the union had been too short and the company refused to negotiate with the union on issues that Defries had decided were non-negotiable.  The first meeting between the company and the union lasted 10 minutes and the second was 15 minutes.  It didn't seem to occur to Fair Work Australia that the reason the meetings were so short was because the union wanted to negotiate, on precisely the things the company had said were non-negotiable.

What's happening at Defries Industries is not an isolated case.  As industrial relations lawyer John Pesutto explains in a forthcoming research paper, it's becoming obvious that good faith bargaining is the vehicle by which unions will regain and expand their influence.  While only 14 per cent of private-sector employees are union members, a union doesn't need to have the majority of a company's employees as members to achieve its aims -- as the experience at Defries demonstrates.  Good faith bargaining requirements give unions an array of opportunities to delay and frustrate employers so that in the end some employers will find it easier to simply capitulate.  In July Fair Work Australia ordered the Queensland Tertiary Admissions Centre to cancel its employees' vote on an enterprise agreement because the centre had not had a meeting with the relevant union to discuss the agreement -- even though the union had not indicated it had ever wanted a meeting.

The shape of the industrial relations regime under Kevin Rudd and Julia Gillard is becoming clear.  And all those business lobby groups who sat on their hands while Work Choices was abolished and the Fair Work Act introduced in the hope they would somehow get a better deal can now see exactly what their strategy achieved.

ADVERTISEMENT

Privatisation has public transport on track

The details of the new franchises for Melbourne's public transport, released this week, provide a ringing endorsement of privatisation.

The contracts show that the involvement of the private sector in the provision of public transport services, as a form of public-private partnership, controls costs for taxpayers and provides better services for commuters.

Also, the fact that new operators with ambitious plans are replacing the incumbents strongly validates the decision to award new franchises by a competitive tendering process, rather than by negotiation.

This crucial decision was a close-run thing.  There were powerful elements within the Government that advocated negotiation with incumbents, rather than testing the market.  Fortunately, the Government chose the more courageous option of going to tender, the first time this had been done since the initial contracts were let in 1999.

Competitive tendering has achieved the impressive double of keeping costs under control for the eight-years of the contracts while delivering several customer service initiatives.  Where there is investment, it is in the key maintenance area, which ensures that some practices and attitudes that remain from Public Transport Corporation days are finally eradicated.

The new operators, Metro Trains Melbourne and Keolis Downer EDI (KDR), will bring new perspectives, and strong international expertise, to Melbourne's trains and trams respectively.  Given the focus on trains in recent years, MTM probably has the bigger challenge.  It is a joint venture between MTR Corporation of Hong Kong, and locals John Holland and UGL Rail (a division of United Group Limited).

The fleet that MTR operates to more than 99 per cent punctuality in Hong Kong contains rolling stock that has a life expectancy of 40 years and that raises the hope that even the older components of Melbourne's fleet can be utilised efficiently.  MTM has also committed to ensuring that air-conditioners on Comeng trains will be able to operate in temperatures up to 45 degrees.

Anyone who stands at Flinders Street in the evening peak also knows that there is scope to radically restructure train platform movements, which remain essentially as they were designed by VicRail bureaucrats when the City Loop opened in the early 1980s.

New contracts have also given the Government the chance to amend the performance regime, which often meant that operators could be fined for the consequences of their success in increasing patronage in Melbourne at a rate faster than almost any other city in the world.

Unfortunately, the Government was slow to respond to the patronage boom delivered by the private operators but was often prepared to have the operators carry the can for problems that were beyond their control.  For years, the Government had the best of both worlds, taking credit for improvements and blaming operators for problems.

Privately, Premier John Brumby must be happy the privatisation of the public transport system was completed just days before the 1999 election.  Given that the Government, when left to its own devices, managed to turn an $80 million regional fast-train project into one costing more than $1 billion, one shudders to think what it might have spent on the metropolitan system.

Without privatisation, it would probably look more like Sydney's system, which has had no patronage boom, costs taxpayers far more to operate and performs worse.

Melbourne entered the 1990s with its streets blockaded with trams as a result of what were regular strikes that had destroyed confidence in public transport.  Fares were increasing at a rate way above inflation, the system had inefficient work practices and patronage was about half its present level.

Two decades of reform, privatisation and a patronage boom provide the new operators with the opportunity to finally bring home the bacon for Melbourne's commuters.

ADVERTISEMENT

Health Taskforce wishes you all a long, dull life with nanny

Yesterday's National Preventative Health Taskforce's report is a monument to why elites think the average Australian needs a nanny to hold their hand through daily life.

The three core chapters of the report analyse the great sins of our time -- obesity, alcohol and smoking -- and recommends Australians need help to stop making the wrong choices about what they put in their mouths.

The problems and solutions are entirely predictable.  According to the taskforce, people get fat because they eat too much and don't exercise enough.  The taskforce's solution -- the government needs to make sure people eat less and exercise more.  I could go on, but you get the picture.

Any taskforce member would be rightly offended if another Australian recommended they needed many of the measures they included in their report.  But it hasn't stopped them paternalistically arguing that we don't know to exercise or eat chocolate responsibly.

For example, the taskforce has recommended that the government should legislate to introduce healthy workplace programs and phase out vending machines that dispense afternoon treats.

The taskforce could have been creative, but instead they are just rehashing the same measures for food and alcohol that were used to attack cigarettes -- advertising ban and tax increases.

And by recommending tax increases on alcohol and tobacco, the taskforce is clearly on the same wave length as our parliamentarians.  After the report's release, some Opposition MPs argued that volumetric taxes should be introduced so a magnum of champagne opened for a family celebration attracts a higher tax rate than those piccolos that people drink on the train on the way to the horse races.

But if the taskforce has its way, tobacco won't just face tax increases, but the removal of all forms of advertising, including on the packets.

The taskforce's recommendations steal the thunder of Family First Senator Steve Fielding, who recently introduced the aptly titled Plain Tobacco Packaging (Removing Branding from Cigarette Packs) Bill 2009.  The Bill stipulates the exact size of a cigarette pack -- 69-72 millimetres wide x 87-90 mm high x 21-24 mm deep -- and also requires the removal of any branding images and that a pack can only be wrapped in a wholly transparent plastic.  That stops pesky cigarette companies putting branding on the plastic surrounding it.

But the most absurd measure in Fielding's Bill is that a plain packet cannot even be white.  It has to be Pantone 154 -- known in layman's terms as poo brown.

Considering the Australian Parliament isn't known for its gym-junkie, teetotalling MPs, it seems a bit rich that they are now going to legislate to make sure we are.

Understandably, the report isn't being sold because of its economic benefits, but that its recomendations could help save up to 800,000 Australians from an early death.  The taskforce has clearly decided it would be better if we all had long, dull lives, rather than somewhat shorter, but more interesting ones.

But the real shortcoming of this report isn't what it recommends.  It is what it doesn't.  Rather than 316 pages of nanny-statism, it could have had one simple recommendation -- Australians should take responsibility for their choices and should accept the consequences.  But that'd be too hard for the Government to legislate.