Category: Economy

  • Back from the brink of disaster. John Menadue

     

    Many people and particularly women will be disappointed that our first female Prime Minister has been forced out. She has been most unfairly treated by the media. Things have been said about her by Tony Abbott and others that would not be said about a male Prime Minister.

    But my view is that a change to Kevin Rudd was desirable for several reasons.

    • Under Julia Gillard’s leadership the electoral prospects for the ALP were catastrophic. Tony Abbott’s majority could have been so large that it would take two and possibly three terms to turn it around.
    • The Australian public had stopped listening to Julia Gillard. Even excellent policy was not getting a hearing.
    • There will now be a real choice at the next election that will reassure many people who are genuinely concerned about the prospects of Tony Abbott as our next Prime Minister.
    • Kevin Rudd will be a much more effective opponent of Tony Abbott.

    I said in a blog recently that the ALP was increasingly looking like a suicide cult rather than the most successful political party in Australia’s history. The ALP has turned back from the brink. The ALP caucus has behaved rationally in forcing a change. The 11th hour changes will at least minimize the government’s losses at the next election.

    Kevin Rudd has certainly been a destabilizing influence since he was deposed three years ago by Julia Gillard and others. But it was a litany of her own political mistakes that in the end brought Julia Gillard down.

    • Getting rid of an elected Prime Minister in 2010 was certainly going to cost Julia Gillard a lot in public trust.
    • It was exaggerated, but she broke a promise given explicitly on the carbon tax, although she was not the first Prime Minister to break a promise. We all remember John Howard’s distinction between core and non-core promises. The media hammered her unmercifully over this issue.
    • Together with Wayne Swan she locked the government into an unnecessary commitment to a budget surplus this financial year.
    • She mishandled the announcement of the date of an election and there was confusion over ministerial resignations.
    • But the biggest political mistake in my view was her backing away from the reform of the ramshackle ALP organisational structure. She failed this test of leadership. The reform of the party machine still remains unfinished work.

    Her policy achievements have been considerable.

    • Despite the rage and angst of Tony Abbott, the “hung parliament” has been successful in passing key legislation and giving a voice to Independents and backbenchers. Tony Abbott has been the key figure in attempting to wreck the parliament. I wrote about this in my blog of June 2. In the hung parliament she proved herself a very good negotiator with the Independents.  The Independents were not impressed by Tony Abbott.
    • We have had six years of uninterrupted economic growth, even through the global financial crisis. Partly by good luck and partly by good management, we have one of the best performing economies in the world.
    • Economic growth is strong and inflation and unemployment are low.
    • Net government debt is lower at 12% of GDP than almost any other country. In Japan it is 134%, US 88%, France 84%, UK 83% and NZ 26%.
    • We are building a first class communication system in the NBN.
    • Superannuation is being progressively extended.
    • The National Disability Insurance Scheme and the Gonski Education Reforms will be historic achievements of the Gillard Government.

    The Gillard Government’s problems were overwhelmingly political and of its own making.

    We will have to wait a few days to see what Kevin Rudd does on some key policy issues, particularly on carbon pollution and asylum seekers.

    Hopefully on the latter, he can give us the leadership to move away from fear and xenophobia. It will not be easy with Tony Abbott intent on inciting fear and exaggerating the problem. But I believe Australians will respond to strong moral leadership.

    The key to improved policies for asylum seekers is first to take action in source countries such as Afghanistan and Pakistan to provide alternatives for people facing persecution so they will not have to take dangerous voyages by boat. The second is action with Indonesia and Malaysia, in full and active cooperation with UNHCR, to provide a regional framework for the holding and processing of asylum seekers.

    But whatever we do, desperate people will not necessarily play by our rules. The desperate asylum seekers in Syria for example won’t wait for government policies. They will act to save the lives of themselves and their families.

    The number of refugees in the world is increasing significantly. We must be realistic about that and accept greater responsibility. We cannot retreat into our shell.

    The Gillard Government ran for cover on this issue. Hopefully the Rudd Government will give us humanitarian leadership, even if tinged by some political pragmatism.

  • Beware the debt and deficit trap and the European mistake. John Menadue

     

    The Europeans may at last be breaking free of the debt and deficit trap that has caused so much social and economic damage across Europe. Even the IMF is at last challenging the austerity mindset that took hold in Europe. There is a lesson for Australia in this.

    The Australian Government has allowed itself to be manipulated into a debt and deficit trap set by the Coalition. To head off Coalition and media criticism, it foolishly decided that it must get the budget into surplus this financial year. It succumbed to this pressure despite the fact that Australia does not have a serious debt and deficit problem.

    There is a risk that if the Coalition becomes the Government in September we will have established a mindset that favours austerity. That same austerity mindset has got Europe into a terrible bind with unemployment across Europe at over 11%. Youth unemployment, for people under 25 years of age, is double that general rate. In some countries youth unemployment is appalling – Spain 56%, Portugal 38%, Italy 38% and Cyprus 32%. These levels of unemployment amongst young people not only bring great personal hardship but also present the possibility of major social and political upheaval. At this stage, most of that social and political resentment has been directed against foreign workers, Muslims and outsiders. We have seen it particularly in the UK in recent days with anti Muslim clashes.

    The austerity drive, bringing with it the disillusement of the young is undermining liberal democracy and spawning a whole range of populist, nationalist and neo fascist parties across Europe; the Golden Dawn in Greece, the anarchist Five Star movement in Italy, the anti Arab National Front in France and the europhobic United Kingdom Independence Party.

    A great deal of this push for austerity in Europe has been supported and underwritten by conservative economists.  Rogoff and Reinhart, American economists sold us a bill of goods that once debt exceeded 90% it would trigger major economic collapse. It turned out that Rogoff and Reinhart made some major errors in their methodology, but conservative economists supported them and indulged their political ideology to try and rebut the Keynesian thesis that the boom is the time for austerity and not recession.

    The right wing of the Republican Party in the US joined in the clamour for austerity. Their argument was supported by ideologues who asserted that booms encouraged moral laxity and that it was necessary to ‘purge the rottenness from the system’ as President Herbert Hoover was advised in the lead-up to the Great Depression in the US. That moral judgement is fine for people who have little to lose. But many people suffer badly..

    Tony Abbott and the Coalition have been continually telling us about the perils of debt and deficits. With the Australian economy weakening as the OECD has just warned there is a risk that the Coalition will seek to imitate the austerity drive of the Europeans. That austerity drive has not reduced deficits and it has caused untold personal and social harm.

    There is a clear lesson to be learned from Europe about obsessions with debt and deficits in times of recession or a weakening economy. Beware on the austerity mindset.

     

     

     

  • It’s the tourism product stupid – not marketing! John Menadue

    The Australian tourism industry tells us often that we need to spend more in marketing and publicity and that the tourists will come. I have always been sceptical; believing that what matters most is the tourism product itself.

    Marketing didn’t work with the Oprah Winfrey circus despite the government tipping in $5 million. On top of that, Australian tourism agents provided accommodation and support for 300 of the fans who accompanied Oprah. The Australian dollar was certainly strong at the time but the net result of Oprah’s visit seems to have been a drop in tourist numbers not only from the US, but also from the UK and Canada where the Oprah circus was televised.

    A myth was also created years ago about Paul Hogan with his ‘shrimp on the barbie’. The growth in tourist numbers at that time came from Japan, not the US. It was achieved by increasing the flights on the Japan-Australia route from 4 to 25 per week over three years. It was not marketing. As CEO of Qantas, I kept Paul Hogan and his ‘ocker’ type of commercials as far as possible from Japan.

    Tourism numbers have certainly grown but a lot of the growth comes from hopping from one market to another – Japan, Korea and now China. But we don’t get enough repeat business. Our tourism product has not been good enough to encourage more tourists to return.

    I was not surprised that in its submission to the Henry Enquiry about Australia and the Asian Century the Australian Tourism Export Council said “one of the great challenges for the Australian tourist industry is its ability to provide a quality product that meets the needs of the Asian travellers.” It is true of all travellers.

    We have had success in encouraging more airline services, but there are still many product improvements that we need to focus on. I would suggest the main ones are as follows.

    • The quality of service at our international airports is poor. For the first time since 2008, The Australian Competition and Consumer Commission in its latest report did not rate one of our airports as ‘good’… Sydney airport, our main gateway was the worst in performance. With their quasi monopoly position our airports are providing poor service and reaping large profits. Prices are up and service is down. Parking is a rip-off. One can hardly walk to the departure gates without going through an annoying labyrinth of duty-free stores.
    • Sydney badly needs a second international airport that is curfew free… Commonwealth and state governments and the tourism industry have been avoiding this key issue for 40 years. It must be resolved.
    • Our taxis are amongst the most expensive in the world. But it is not the taxi drivers who are reaping the benefits. Government regulations protect the licence plate-owners.
    • In Sydney we have very good seafood at the Sydney fish market, but the infrastructure and parking is a shambles.
    • Australia will always be a more expensive destination for a holiday because of distance, but tourists would get better value for money if we had more 3-4 star accommodation.
    • With few exceptions, what is the tourism industry doing to improve our inferior customer service in such areas as language, signage and catering? Are we really responding adequately to the new China market and the Indian market that will follow?

    The Oprah Winfrey and Paul Hogan spectaculars divert our attention from the real issue – improving the tourism product.

    John Menadue

     

  • The Miners’ Lament. John Menadue

    It is only a matter of time before the miners start lamenting that they did not seriously negotiate with Kevin Rudd over his Resources Super Profits Tax (RSPT).

    The mining industry has always favoured rent/profit taxes instead of royalties. What the mining industry really disagreed with was the rate of the Resources Super Profits Tax.

    The GST Distribution Review Report of October 2012 said the following.

    “Well designed rent-based taxes are likely to be more economically efficient than royalties, particularly in periods of low commodity prices or high costs. . .Other factors, such as the size, variability and timing of the return received by government, as well as administration and compliance costs, are also important considerations when choosing between alternative resource charging regimes. .. The commonwealth’s design of the Mineral Resources Rent Tax [MRRT] and the Petroleum Resources Rent Tax [PRRT] has created an opportunity for states to seek to increase their revenues at the expense of the commonwealth – an undesirable and unsustainable situation, which needs to be resolved.”

    Consider the ways that the mining industry now faces problems because of its failure to embrace the RSPT.

    • As the world economy and particularly China slows, export prices for Australian minerals are falling. The GST Review report mentioned above notes that since May 2012 “the spot prices for iron ore and … coal have fallen between 15% and 33%.” This trend has continued. There will be an increase in the production volume because of the increased capacity that the miners have installed. Because of this the miners are caught in a double whammy- export prices are falling which which will reduce income, but through an increased volume and value of sales there will be increases in royalties.
    • With the states squeezed for revenue, they will look increasingly to mining royalties to help their budgets. These increases in royalties are well under way. The royalty take of the states has increased five-fold from about $2 billion p.a. in the early 2000s. These royalty increases are likely to continue.
    • A lot of the recent high profits of the mining companies have ended up in dubious investments that are now being written off. Rio Tinto alone has written off $US35 billion since 2007 with more to come. BHP has also written off substantial investments. The high profits of the miners that were not effectively taxed also resulted in wage and cost blow outs that the miners will now have to wind back. Many of the large resource projects are de unionized. Yet that is where the big wages/cost blowouts have occurred. Managers must bear the responsibility. If they had been paying a super profits tax in the boom years, they may have been much more prudent. Some must have thought they were dealing in monopoly money.
    • An important part of the Henry RSPT package was that in return for the super profits tax on miners in boom times, there would be a reduction in the company tax rate to 25%. All businesses, including the miners, have missed out on this and continue to pay at the rate of 30%.

    The miner’s “victory” is likely to prove pyrrhic. At some point, they will have to return to   the table and negotiate tax changes.  Hopefully the federal government will handle it much better next time. All the key players will need to be involved.

    • The commonwealth government, which has a pre-eminent role in revenue raising on behalf of the community.
    • The state governments who depend heavily on mining royalties.
    • The mining industry that supplies the capital and expertise, and
    • The community which is the owner of the minerals and has a legitimate interest in ensuring that the whole community benefits over the long term from the extraction of its resources.

    .

    A recent Deloittes-Access report to the Mining Council of Australia which can be found online pointed out that because of falling commodity prices the mining sector would have done better under Kevin Rudd’s RSPT than under the present bowdlerised tax, the MRRT. The report said

    “Our analysis finds that the first two quarters of 2012-13 were indeed ‘bad times’. A slow-down in China hit commodity prices for six. That’s why the MRRT raised only $126 million over this period. However, had the RSPT been in operation, we estimate it would have generated negative net revenue of the order of $0.9 billion.”

    The miners seem to have already kicked an ‘own goal’. In the period mentioned by Deloittes they would have been better off under Kevin Rudd’s Resources Super Profits Tax.

    If commodity prices keep falling and the ineffient state royalties keep rising the miners may need to start praying for the Resource Super Profits Tax. What a tasty dish!

  • Myth-busting. John Menadue

    One after another, the opinion polls tell us that the Liberal and National parties are much better economic managers than the ALP. This is despite Australia having one of the best performing economies in the world by almost any measure; debt, economic growth, employment and inflation.

    Unfortunately for the Liberal and National parties and John Howard and Peter Costello in particular their records as economic managers have recently been taking a beating.

    First the International Monetary Fund.

    In January this year, as reported by the SMH on January 11, 2013, the IMF

    “identifies only two periods of Australian ‘fiscal profligacy’ in recent years, both during Mr Howard’s term in office – in 2003 at the start of the mining boom and during his final years in office between 2005 and 2007. The stimulus spending of the Rudd Government during the financial crisis does not rate as profligate because the measure makes allowance for spending needed to stabilise the economy. … The key finding is that Australia has few examples of economic recklessness compared to other developed states like Canada and Japan.”

    Joe Hockey attempted to rebut the IMF report. Perhaps he misunderstood what a ‘structural deficit’ is.

    Second, the Parliamentary Budget Office.

    In its just-released ‘Estimates of the structural budget balance of the Australian Government 2001-02 to 2016-17’ it outlines first what a structural budget balance is. It says

    “The structural budget balance (SBB) is a partial measure of the sustainability of the budget. It shows the underlying position of the budget after adjusting the actual budget balance for the impacts of major cyclical and temporary factors. The SBB reflects the impacts of underlying budgetary trends and discretionary fiscal policy decisions.”

    It then goes on to crunch the Howard Government’s economic performance. It says

    “Over two thirds of the five percentage points of GDP decline in structural receipts over the period 2002-03 to 2011-12 was due to the cumulative effect of the successive personal income tax cuts granted between 2003-04 and 2008-09. A further quarter was the result of a decline in excise and customs duties as a proportion of GDP. Significant factors driving this trend included the abolition of petroleum fuels excise indexation in the 2001-02 budget and the decline in the consumption of cigarettes and tobacco over the period.”

    Treasury reported very much the same on the structural deficit but Joe Hockey suggests that Treasury has become political and it cannot be relied upon for the figures it presents. So I have highlighted independent reports by the International Monetary Fund and the Parliamentary Budget Office.

    As Laura Tingle put it in the AFR on 23 May this year

    “All up, these reviews put the blame for much of the budget deterioration on the Coalition in government and credit at least some of the forecast improvement on savings Labor has implemented in office. As such, they don’t sit comfortably with many of the critiques of Labor’s budget management, nor does the Parliamentary Budget Office endorse the view that Australia’s debt position is of major concern.”

    Despite the evidence, the partisan business commentators and the opinion polls continue to tell us that the coalition is a better economic manager. The evidence is just not there to back up that view.

    The myths continue.

     

  • Truth, Trust and the Media. John Menadue

    Our mainstream media is in a downward spiral. Its decline is driven by new technology and a growing sense by readers that we can no longer trust the media.  We have a lot of spin, but very little well-informed debate. Ken Henry has commented that he can’t recall a time when public debate was so bad.

     An Australian election study 1997/2010 rated trust in the following institutions as follows:

    • Armed forces – 91%
    • Universities – 80%
    • Police – 79%
    • Banks and financial institutions – 56%
    • Major Australian companies – 54%
    • Political system – 53%
    • Public service – 41%
    • Trade unions – 29%
    • Television and newspapers – 17%.

    The survey found that the least trusted in the media was talk-back radio.

    In June last year, Essential Research reported as follows.

    “The ABC retains its undisputed title as Australia’s most trusted media. Trust in ABC television news and current affairs grew two points to 74%, its fourth straight rise, and ABC radio lifted two points to 69%. … The Age (76%) and the SMH (69%) are the most trusted of the major newspapers. … The Australian suffered a 9% fall in trust, down to 60%. The Herald Sun in Melbourne fell to 51% as did the Courier Mail in Brisbane which fell 14 points to 51%. The Daily Telegraph is the least trusted at 59%.”

    Nothing surprising there.

    In March this year, Essential Research found that only 30% of Australians trust TV news and newspapers. The High Court, Reserve Bank and the ABC were trusted by over 60% of respondents.

    Reading our media this week about the budget, one could not possibly avoid the conclusion that we are on the verge of economic and financial collapse. Yet we have one of the best performing economies in the world – solid growth, low inflation, low unemployment, low debt and a AAA credit rating by the three world rating agencies. John Howard commented only a few days later that “our resilient economy is in better shape than most… We are still fortunate with our unemployment rate…and that the Australian economy was better than Japan, US and Europe”.

    The Australian Financial Review has become a barracker for business rather than a reporter about business.  The headlines on two successive days this week were ‘End Budget chaos – business’ and then ‘Labor, business at war’.

    Supported by business commentators, the BCA has been conducting an incoherent and partisan campaign against the government. If it tried it could not do more to damage business and consumer confidence. But perhaps as a proxy for Tony Abbott, damaged confidence is just inevitable collateral damage.

    Crikey reported Paddy Manning a business reporter on the AFR as saying that there was a “contract” between the AFR and business for “high level access in return for soft coverage” He was sacked for saying what many people  would regard as  obvious.

    The Minerals Council with the aid of business journalists helped corrupt the debate about a profit tax on large mining companies. How ironic it is that the Minerals Council with its obsession with the Labor Government didn’t keep its eye on the inefficient state mining royalties that have increased five-fold since the early 2000s. A real own-goal kicked by the Mining Council.

    The media and particularly News Corporation which lost its moral bearings long ago have been campaigning to get rid of the ‘hung parliament’. But the parliament will see out its three years and with a considerable legislative program to its credit.

    The media and again, particularly News Corporation, has been part of a misinformation campaign about asylum seekers. Obsessed with boats and pictures of boats, the media has continually misinformed us about the small number of asylum seekers coming to Australia compared with other countries and that more asylum seekers come to Australia by air than by boat. The Australian Press Council drew attention to the misinformation by News Corporation publications, over use of the term ‘illegals’ and its inflammatory language.

    The media, including notably the ABC facilitated the dog whistling over the miniscule problem of boat arrivals. The dog whistling in the run up to the next election will be about deficits and debt despite Australia having one of the lowest net debt ratios in the world. Where will the media be in ensuring an informed debate? I will not be holding my breath.

    With its whimpish attempts to curtail abuse of power by the media, the government was subject to an extraordinary tirade of abuse dressed up by the media as the public interest. Minister Conroy was depicted in News publications as a new Stalin or Pol Pot.

    Filled with revenge that he was not made Prime Minister after the 2010 election, Tony Abbott decided that if he couldn’t get his own way he would do his best to wreck everything. The media let him do it and in the case of News Corporation, encouraged him to do so.

    There is public concern about truth in public life as surveys show. The delicate fabric of our society depends on trust and telling the truth. Our society will break down without a general acceptance of what is honest, fair and reasonable.

    Truth is a bedrock issue and the media is not helping us to know the truth or is particularly trustworthy itself. No-one should be surprised that so many readers, viewers and listeners are losing trust in the “old media’ and going online.

    Truth is being eclipsed in public life. The media is a major contributor to that eclipse. It is getting quite dark.

  • Are wage rates to blame? John Menadue

    We have read a lot recently from retailers and restauranteurs about high wage rates particularly at weekends that are said to be a major burden for business. But is this the full story? There are several factors that we need to consider.

    • Do we have too many retailers and restaurants? Restaurants seem to be opening every second day, driving out mixed-businesses, green grocers and butchers from our shopping streets. Has the proliferation of retail outlets and restaurants reduced profit margins and put pressure on business rather than wages?
    • Our lives are being driven by the 24/7 craze. Do we really need to keep shops and restaurants open like this? What has happened to the desire of many who still value the weekends for family and recreation? Sunday is no longer ‘a day of rest’. But I am probably old-fashioned! I recall that the union campaign for an 8-hour working day featured ‘recreation’ as a key objective. It is now largely forgotten.
    • Retailers have failed to respond adequately to online shopping and the concerns many of us have for the lack of service in retail outlets. The retailers’ case was not helped recently by the managing director of Myers telling us that the levy to pay for the disability scheme would mean less money to spend at Myers.
    • The household savings rate in Australia declined steadily from about 10% in the mid-1970s and falling to below zero by the mid-2000s. This private spending and debt binge couldn’t last and Australians are wisely saving more.  Retailers and restaurants should not have expected that the spending and debt binge would continue.
    • Some retailers and restaurants pine for the US model of flexible and low wage-rates. In the US this has resulted in great inequity and very low wage rates for the working poor. Fortunately we have not gone down that path.

    With the softening of the mining boom and restructuring of the economy, there will need to be restructuring including in retail and restaurants. But we should not point the finger at wage rates alone.

    John Menadue

  • Is the ALP a political party or a suicide cult? John Menadue

    Friends overseas are amazed that with a world class economy such as ours, the Australian Government faces a rout. I try and explain that the government’s difficulties are self-inflicted; that it is tone-deaf on many political issues; that the Prime Minister is not being listened to and the public will not accept what she did to Kevin Rudd.

    How could Australia’s longest-established and most reputable political party be behaving like a suicide cult? Where are the wise men and women in the ALP to stop the Party going over the cliff?

    Australians are genuinely concerned about the prospect of Tony Abbott as Prime Minister. If he wins it would be by default. He has proved himself an effective political wrecker, but credible policies are hard to find.

    The government’s policy performance is far from ideal, but it has a lot going for it.

    • We have had six years of uninterrupted economic growth, even through the Global Financial Crisis.
    • The pre-eminent international mining advisory consultancy, Behre Dolbear, has rated Australia as the top country in the world for investment in mining and mining activity.
    • The roll-out of the NBN in more expensive, but it will give Australia a top-ranking technology compared with a fourth-ranking technology that the Coalition offers.
    • The carbon price which will be followed by an Emissions Trading Scheme is superior to the direct action and “soil magic” which the Coalition proposes.
    • The government continues to improve superannuation. The coalition opposes
    • It has launched the National Disability Insurance Scheme.
    • The Gonski school reforms are underway which the Coalition opposes.
    • The overall cost of living is growing at a slower rate than inflation. The National Centre for Social and Economic Modelling tells us “right across the board our research shows Australian households on average are better off. We really are a lucky country”

    The main policy disappointments of the government have been in health where we continue to muddle through and on asylum seekers where the government has failed to show courage and act decently.

    But it is not only policy differentiation. There is also the quality of the rival front benches.

    Beyond the present leaders, the Government has a very strong front-bench; Combet, Shorten, Butler, Clare, Wong and Dreyfus. Compare that with Brandis, Joyce, Bronwyn Bishop, Andrews, Abetz, Pyne and Morrison. By comparison it is talent-free at best and in some instances, a very ugly front bench.

    Is the ALP prepared to disappoint so many of its supporters and allow Tony Abbott to win by default?

    John Menadue

  • An Excel coding error with tragic consequences. John Menadue

     In 2010, just after the Greek financial crisis, two respected conservative Harvard economists, Reinhart and Rogoff, published a paper ‘Growth in a time of debt’ that said that once debt exceeded 90% of GDP, economic growth drops off sharply. Their thesis added great weight to those urging austerity on such countries as Greece, Spain and many others.

    Paul Krugman in the New York Times of April 18 has drawn attention to a major flaw in their ‘tipping point’ theory for national debt. According to Krugman, Reinhart and Rogoff, allowed researchers at the University of Massachusetts to examine the spreadsheets that helped produce this precise 90% ‘tipping point’. The researchers found that some data had been omitted, they highly questioned statistical procedures that had been used, but most importantly of all they found that Reinhart and Rogoff had made an Excel coding error.

    After corrections were made for these mistakes there was confirmation that there was a relationship between high debt and slow economic growth, which almost all economists agreed with, but there was no confirmation of the 90% ‘tipping point’.

    Unfortunately the Reinhart and Rogoff thesis has been influential in the conservative case for governments, particularly in Europe, to enforce more and more austerity on the public. Greece now has an overall unemployment rate of 27% and a rate of 59% for young people aged 15-24. In Spain the unemployment rate is 57% for the same 15-24 age group.

    Hopefully the flaws in the Reinhart and Rogoff analysis and thesis will force a rethink by the ideologues who keep espousing austerity to reduce deficits and debt, regardless of the tragic consequences for millions of people. There is surely no particular virtue in a government surplus or deficit. In some situations a deficit is more appropriate; in other circumstances a surplus is more appropriate. Surpluses and deficits are means to an end, particularly full employment and stable prices.

    But the conservative economists and commentators will surely think up other reasons for austerity at the expense of vulnerable people.

    John Menadue

  • The blame game over schools: a way through the impasse. John Menadue

    The Commonwealth and the States will blame each other for failure to agree on Gonski ‘light’. It is a pattern we have seen so often over many years, particularly in health.

    Federalism is just not working for us. It has become an obstacle to good government. The Commonwealth financial dominance will continue. The States are poor but proud and reluctant to concede jurisdiction.

    Kevin Rudd threatened to hold a referendum in association with the 2010 election to give the Commonwealth power to fund and run State public hospitals. But he was persuaded not to persist as it was very likely that a referendum would fail. The Government’s health ‘reforms’ have since turned out to be a continuation of the muddle or a ‘dog’s breakfast’ as Tony Abbott used to describe divided responsibility and the blame game in health.

    But I suggest a compromise is possible that would improve the funding and operation of schools in Australia. We should establish a Joint Commonwealth/State Schools Commission in any State where the Commonwealth and a State Government could agree. It would require the political agreement of the Australian Prime Minister and at least one State Premier to get the ball rolling in a particular State. With political will such a Joint Schools Commission (JSC) would be relatively easy to establish. Hopefully with success in one State/Territory, others would follow.

    In my view, a Commonwealth takeover of Commonwealth funding and management of all schools in Australia would be the best course, but it is just not politically possible.

    The key features of a Joint Schools Commission in any State would be:

    • The JSC would consist of say three Commonwealth and three State representatives with an independent Chair from outside the State who would be appointed by the Federal and State Ministers for Education.
    • The JSC would pool all school funding from both the Commonwealth and State Governments. There would in effect be a single funder in the State.
    • The JSC would have a clear governance role in the coordination of all school funding, its distribution and oversight  within the state
    • Existing providers-public, private and Catholic – would continue to operate and provide services within the JSC state wide plan.
    • The administrative funding for the JSC would be kept to a minimum consistent with the JSC’s essential but limited responsibilities. The small increase in bureaucracy must be strictly contained. It would however be a small price to pay for improved state-wide funding, governance and performance monitoring of schools.
    • The JSC would be guided by principles agreed by the Commonwealth and the State Minister for Education, e.g. equal opportunity for all children, social solidarity and subsidiarity whereby administration would be as local as possible  consistent with State-wide standards.
    • There would be maximum transparency in the work and reporting of the JSC in order to involve public comment and public confidence in the process. There would need to be agreed dispute resolution procedures.

    Under such a proposal we would still have separate JSCs in each State/Territory. But it would be a significant advance on the divided responsibility and blame-game that dogs federalism in Australia

    With political goodwill between the Australian Prime Minister and at least one State Premier, I suggest that these bilateral type arrangements are the best and perhaps the only way forward to improve governance and funding for all our school children within a particular state.

    The Commonwealth Government should not provide any additional funding to the States except through an agreed JSC.

    Six years ago, I proposed a similar arrangement to address the blame game in health . I called my proposal a ‘Coalition of the Willing’.   (See publish.pearlsandirritations.com, Click on ‘health’, March 2007)  That proposal could be updated and applied in a Joint Schools Commission in any State where there is political agreement.

    John Menadue

  • Where has the Business Council of Australia been? John Menadue

    The BCA President, Tony Shepherd, was at it again on Wednesday 17 April at the National Press Club attacking the Government for many failures – a lack of focus, the need for politicians to sacrifice their jobs for the national interest and that old perennial of his, reform of the labour market. His comments were loudly supported by the Australian Financial Review which now reports on behalf of the business sector rather than about business.

    In my blog on March 14, (‘Productivity and Skills’ see below) I drew attention to the failure of the BCA to make its case on productivity and labor market reform. I also highlighted that whilst the BCA wanted to upskill the Australian workforce, it didn’t think that it should upskill itself, having in mind that there is hardly a senior executive or board member of BCA’s top 100 companies who can fluently speak an Asian language.

    It is true that the Government has not been performing well in recent months. Most of the problems are self-inflicted.

    There are policy problems ahead, but Tony Shepherd is wide of the mark in much of what he says.

    • Our partisan mining industry would not agree, but only a few days ago Behre Dolbear, a century-old and well-respected mining advisory firm based in the US, ranked Australia as the top country in the world for mining investment and activity. As the top-ranked country Australia was ahead of Canada, Chile, Brazil, Mexico and the US in that order. On the seven criteria that Behre Dolbear used for its ranking, Australia ranked equal first on its ‘economic system’; equal second on its ‘political system’; top on ‘social issues’; top on least ‘delays’ in decision-making; equal top on least ‘corruption’; equal top on ‘currency stability’ and an also-ran on ‘tax regime’. Overall it was a strong endorsement of Australia as the best place in the world for mining activity. I wonder if Tony Shepherd has read it!
    • Three separate rating agencies – Standard and Poors, Fitch Ratings, and Moody’s – have all ranked Australia in the top eight countries with a triple A rating.  Fitch Ratings was particularly complimentary about Australia’s economic management, a strongly performing economy, low public debt, a floating exchange rate, liberal trade and labour markets and with Australian banks among the strongest in the world. There are certainly reservations about rating agencies but Australia could hardly do better than the ratings most recently achieved
    • Under the Rudd/Gillard Governments we have had six years of uninterrupted economic growth even through the Global Financial Crisis.
    • Some of Tony Shepherd’s own member companies have not been performing well. The giants BHP Biliton and Rio Tinto have been badly managed, with world record write-offs of failed investments. Has Tony Shepherd taken them aside and told them to lift their game? What has he said to his colleagues about executive salaries and the need for sacrifice in the national interest?
    • Interestingly the IMF reported in January this year that the most wasteful Government spending in Australia came in the Howard years. It was not during the governments of Whitlam, Hawke, Keating, Rudd or Gillard. Has Tony Shepherd read the IMF report?

    In Japan last week I heard from many people their admiration about the strength of the Australian economy, particularly compared to their own. What the Japanese couldn’t understand was how the Australian Government was in political trouble.

    Last month Ken Henry criticized the quality of public debate in this country. I am sure Tony Shepherd’s contribution would not have changed his mind.

    We could do with a lot more rigorous policy analysis by the BCA

    John Menadue

  • Privatisation on the wane. John Menadue

    From the days of Maggie Thatcher, Ronald Reagan and John Howard, the assumption has been that the private sector will grow in relation to the public sector because it is more efficient and contributes more to the public good. The political correctness of the political Right assumed that privatisation would carry all before it.

    But not any more. The market failures of many key players in the private sector are clear. It is not just Wall Street, but our own local giants, BHP, Rio Tinto and others, who have lost tens of billions of dollars in shareholders’ funds in recent years. There has been clear company overstretch and management failures.

    Campbell Newman, the Premier of Qld, has rejected the proposals of Peter Costello to privatise Qld energy and ports. He is clearly hearing the views of all Queenslanders who disliked the privatisation program of the previous Premier, Anna Bligh. As Campbell Newman put it recently ‘Queensland hearts are not in (privatisation) … it is a political reality’.

    Only last month, Essential Research reported that the public believed that the following industries would be better run by governments. (In all cases there was a significant “don’t know” response)

    • Electricity – 52% of respondents
    • Water – 69%
    • Trains/buses/ferries – 64%
    • Motorways – 66%
    • Community services like child protection – 75%
    • Hospital and health services – 71%
    • Schools – 68%
    • Prisons – 73%
    • Universities – 81%
    • Ports – 60%

    The evidence seems quite clear that the public does not want more privatisation without a very good case being made.

    Essential Research also reported recently that the three most trusted institutions in Australia are public institutions – The High Court, ABC and Reserve Bank.

    Some public institutions are much more efficient that their private sector counterparts. Because of scale, Medicare has administrative costs about one third of those of BUPA.  If we compare like with like, public hospitals are just as efficient as private hospitals according to the Productivity Commission.

    The Hawke and Keating Governments also took us down the privatisation path. But in retrospect, what has the privatisation of the Commonwealth Bank brought us in terms of public benefit. It now sits cosily alongside the other three major banking groups with little variation in the products it offers to the public.

    As CEO of Qantas, I was a reluctant supporter of privatisation because I came to the view that the government was not a good shareholder. Paul Keating deliberately set out to starve Qantas of equity in order to force privatisation. Has privatisation of Qantas been a success?

    Has the privatisation of Telstra by the Howard Government brought the benefits we were led to expect.

    I cannot see that Maggie Thatcher’s privatisation of British Airways has been successful. BA is a very ordinary performer. To make a financial and political success of BA’s sale,the Thatcher Government entrenched the market dominance of BA, helped get rid of competitors like British Midland, gave route advantages to BA particularly on the Atlantic and strengthened its control of gates at Heathrow. Aviation in the UK would have been advantaged much more if the market had been made more competitive.

    In the modern economy, we need to get the balance right between the public and private sectors. The community is quite clearly of the view that the balance has swung too far in favour of privatisation and private companies.

    Competitive markets are more important than ownership.

    John Menadue

     

  • Productivity and Skills. John Menadue

    For months, the Business Council of Australia and senior business executives have been banging on about the need to increase labour productivity. To achieve this, they have emphasised the need to amend the industrial relations legislation, ‘Fair Work Australia’ as essential to lift productivity. Many have seen it as an attempt by employers to rebalance the industrial relations framework in their favour and has little to do with productivity. Others would see it as political identification with the Coalition

    But this campaign by employers was not based on fact. Ross Gittins in the SMH 11 March 2013 has drawn attention to the most recent national accounts which showed that ‘Labour productivity in the market sector … (has) been improving at the rate of 0.5% or better for the last seven quarters … That represents an annualised rate of 2% a year … which compares with an average rate of 1.8% over the past 40 years.’

    The ABS has also released figures that show that labour productivity had improved 3.5 % in 2012 compared with 0.9% in 2011. The strong dollar appears to have forced many businesses to restructure and increase productivity in order to overcome rising costs

    More has to be done to lift productivity, but recent performance has not been too bad. Hopefully our major companies who spent so recklessly in the mining boom will continue to improve productivity by expanding output and reducing costs – starting with executive salaries. Marius Kloppers, the terminated CEO of BHP received a $75 m exit package!

    I have also spoken recently about the failure of Australian business executives to skill themselves and their companies for our future in Asia. At the most, there would be a handful of chairpersons or CEOs of any of our major companies who can fluently speak any of the key Asian languages. This failure is stark. It is obviously too late for them now, but it is not at all clear that they are recruiting executives for the future with the necessary skills for Asia. A recent survey by The Business Alliance for Asian Literacy, representing over 400,000 businesses in Australia, found that ‘more than half of Australian businesses operating in Asia had little board and senior management experience of Asia and/or Asian skills or languages.’

    Senior Australian business executives speak correctly about the need to upskill the Australian workforce. But they should start by setting an example by up skilling themselves.

    John Menadue

  • Sport and Markets. Guest blogger: Ian McAuley

    We are all suitably shocked by Justice Minister Jason Clare’s announcement of the findings of the Australian Crime Commission’s investigation into the use of prohibited substances and links to organized crime in sports. I heard his solemn announcement as I was driving home, past our local croquet club, and wondered if any code was exempt.

    Sport in Australia has never been entirely clean. Most people of my age have enough stories from the racetracks to bore our dinner guests for hours. But we also recall an era when league football was an outlet for suburban tribalism, when a player for Collingwood or Port Adelaide actually lived in Collingwood or Port Adelaide, when white-clad cricketers played on green grounds surrounded by white fences, and when the only signs of commercialism were the vendors of Four’n Twenty or Adams Pies.

    Over the years, however, sports have transformed from community activities to market activities. They have become part of the entertainment “industry”. In fact, government regulators, lawyers and insurers have done their best, through liability requirements, to make life hard for those who are old-fashioned enough to think sport is something that comes together through voluntary activity.

    With the financial stakes so elevated, is it any wonder that corruption has been attracted to sport?

    In 1944  the Austrian economic philosopher Karl Polanyi, in his work The Great Transformation, warned that the postwar era could see a change in the relationship between markets and society. Throughout history markets had been contained within society, subject to society’s norms, and often confined to certain physical or temporal domains. The transformation he warned about was the reversal of that order, when we would come to live in a “market society”. That transformation, which gathered pace with the election of the Reagan and Thatcher Governments, is now well advanced.

    Will our politicians see the sport corruption problem in this broad context – a context which would require them to think about the expansion of financial incentives throughout our society?

    Whatever our politicians do, I think the local croquet club will come through clean. The cars parked around their ground are modest. No one has bought advertising space on their white dresses. And no health insurance firm has bought sponsorship rights to interrupt spectators’ enjoyment.

    Ian McAuley