In recent weeks first the Treasurer revealed tax receipts were $7 billion below forecasts, then the PM said the number was $12.5 billion and two days later the Finance Minister said the number was $17 billion.

What the **** is going on comrades?  Is Treasury so incompetent that they have issued three new forecasts in three weeks, and two in two days?

Or is the government's tin ear that is responsible?  Or is it the frenzied 'new day, new policy' that has reduced budget preparation to a sick joke?

All will be revealed - possibly, because even Swannie is probably not fully up to speed on all this - next Tuesday and it will not be a pretty sight.  Readers should brace themselves for deficits as far as the eye can see, putting Australia into the same class as other developed nations.  With rate cuts into the danger zone, and more expected, we are in danger of joining the inflationist party of the major central banks.

It has become the rule in Australian politics not to leave anything in the cookie jar for one's opponants.  The Gillard guv'mint has set new standards, imposing a massive debt as well as an empty cookie jar. Here is a slightly satiric account of those at the top contributing personally to the process, from May Day 2013.

Here is a link to the RBA's sober report, which should only be read with a bottle of one's favourite tipple at one's side.

On the politics of the budget, Dennis Shanahan says 'Despite Julia Gillard's successful spiking of ambitions to restore Kevin Rudd to the leadership in March, there are Labor MPs who believe a resentful reaction to the budget and a steady diet of internal polling showing wipeouts will turn cold panic into an active hot panic.

'The Liberal Party is factoring in the possibility, albeit remote, that Tony Abbott could be facing someone else at the election - and not necessarily Rudd'.

Read on here.

Footy'n'stuff

Geelong easily won the battle for the top spot in last night's shootout against Essendon at the oddly named stadium with the roof.  Hawthorn vrs the Swans (no relation to the Treasurer one is quick to note) should be another ripper game and Henry sadly has to wait until Monday night to see Caaarlton! take on the Saints.  This looms as a danger game and one hopes not to be so exhausted from barracking that one is weakened for the budget presentation.

The Great Gatsby - coming soon

'Few will be shocked to learn that Luhrmann’s version of Fitzgerald’s short, spare, near-perfect novel is long, gaudy and flawed' says Tim Walker of the Independent. 'If you don’t care for his previous films, you’ll find little in the way of pleasant surprises here. But if you can abide the Australian’s lurid, hyperactive style, then there is much to admire nonetheless'.

Tim later refers to 'Luhrmann’s stonking lack of subtlety', which must be retained for all Australians abroad, and in Australia for Prime ministers and Treasurers.

A high Treasury official once told a meeting in Paris, the OECD as I recall: 'Let me, in my blunt Australian way, call a spade a bloody shovel'.

His successor with be able to improve on this with: 'Let me, with my native "stonking lack of subtlety" tell it like it is'.

And here is an advertisement including a long trailer.

No! (Yes, its called No!)

Fiona Prior reviews this political thriller.

'If you haven’t seen No and you enjoyed Ben Affleck’s Argo then do make the effort. Similar to Argo, No presents such an unlikely history-driven tale you will delight at the richness of reality’s twists and turns. No celebrates yet another victory of the against-all-odds, slightly insane long shot over what appear to be the most controlled of situations – the political strong-hold of Pinochet’s brutal, right-wing dictatorship in Chile, 1988'.

Image of the week - Prudent budgeter

 Courtesy Telegraph

A reader suggests tht Mr Swan be reminded of Mr Micawber's famous recipe for happiness:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

(Charles Dickens, David Copperfield)

More of the wit and wisdom of Charles Dickens here.

'Australia’s top corporate regulator has warned investors and their lenders that a search for profits triggered by low interest rates could lead to another wave of failed financial investments.

'Australian Securities and Investments Commission chairman Greg Medcraft expressed fears the Reserve Bank of Australia’s record low 2.75 per cent cash rate could lead many investors into attractive-sounding assets that are too sophisticated for them.

“This is the real high-level concern risk – in the search for yield, people invest in products that are probably inappropriate for their needs or they don’t understand,” he told The Australian Financial Review.

“That’s going to be a very, very important thing that we’ll focus on.” Read on here.

The commentariat is finally - finally! - getting agitated about the dilemma inherent in current economic policy settings here and abroad.

This is a matter Henry was worrying like a dog with its bone in Great Crises of Capitalism and more recently in his regular essay on monetary policy published here and in the Australian.

With great respect to the various 'money experts' quoted in the Fin and the Oz, the so-called experts have missed one key point. 'Monetary policy cannot serve two masters'. (M. Friedman.)  Think about this vital dictum from the world's leading monetary economist and ask yourself how it applies to Australia's current situation.  A shaft of light will eventually appear.

Almost to a man, the experts agree with ASIC that further rate cuts take the RBA into dangerous territory.

Vesna Poljac in the Fin reports: 'There's not much the Reserve Bank of Australia can do to weaken the dollar, cutting interest rates to a record low could store up trouble down the track and the Federal budget has got out of control, say Australia's top money managers and strategists'.

Paul Bloxham, the man who said the next change in interest rates would be up, reminds us, also in the Fin, that 'Cheap money is not the solution to all that ails an economy'.

The Oz has brought in one of the big guns, John B. Taylor of 'Taylor rule' fame, though the message is not so clear as those in the Fin.

'THE Reserve Bank's latest salvo into the emerging Asian currency war has failed to dent demand for the Australian dollar, which has clawed back most of Tuesday's losses following a surprise spike in China's trade performance. Leading international economists said artificial attempts to limit the dollar's ascent, underpinned since December by Japan's aggressive monetary loosening, could be damaging and futile.

'It clawed back almost half its losses yesterday, climbing back near $US1.02 following the news that China had posted a surprisingly strong trade surplus last month, suggesting global demand for Chinese goods was strong.

'John Taylor, the economics professor who designed one of the operating templates for modern monetary policy, warned central banks worldwide against the dangers of unilaterally undermining their currencies.

"If everyone tries to undermine the value of their currency with monetary policy, the results will not be good," Professor Taylor told The Australian yesterday.

'He argued that damaging commodity and asset price bubbles would ultimately result'. Right on, brother, but what is the solution for a small open economy that wants to avoid asset bubbles?
 
Clearly plan A has failed, and will almost certainly cause trouble.

Henry's plan B must surely get a run soon.  All spelt out in his 2013 articles on Australia's monetary policy.

But what would Henry know, comrades?

Commentary varies from 'stumbling reluctantly to the truth' about our struggling economy, to 'the economy must be weaker than hitherto thought' to 'the RBA is compensating for poor fiscal policy' and 'the RBA is trying to cut the dollar'.

With further rate cuts likely and a budget still stubbornly in deficit, the overall plan is hard to discern.

Having watched the Mia Farrow version of The Great Gatsby last night, it is clear the we have some way to go before the dancing and drinking reach Gatsby heights.  But we are trying, and it would be wise to recall that Gatsby ended in tears.

Henry's plan to curb the excessively high dollar without easing monetary policy into the Gatsby zone has been ignored by just about everyone here.  (For a lively exception, click here.)

But today we read that China appears to have endorsed Henry's approach.

'SHANGHAI—China's yuan fell sharply against the U.S. dollar on Monday after Beijing unexpectedly introduced new rules intended to curb the flow of foreign currency into the country, which are also expected to slow the yuan's recent appreciation.

'The yuan rose on news that China is taking steps toward internationalizing the currency. The WSJ’s Shen Hong explains what the move means for opening the country’s capital markets.

'The rules appear to have scaled back investors' expectations of further gains by the yuan in the short term by effectively limiting banks' ability to bet against the dollar versus the yuan in China. But analysts say the yuan's longer-term outlook remains bullish because of China's huge trade surplus and sound economic fundamentals.

'On Monday, the yuan fell against the dollar for the first time since April 22, snapping what had been a strong run for the Chinese currency that came despite signs of a slowdown in China's economy'.  Read on here.

Smart people, the Chinese.

Public discussion: Monetary Policy and the Exchange Rate at the End of the Mining Boom: Two Different Views

1.30 – 3.00pm, Friday 24 May 2013 at the University of Melbourne

Two speakers, Professor Ross Garnaut AO and Dr Peter Jonson will each present their views followed by panel discussion and questions.

Venue: Theatre 1, Ground Floor, Faculty of Business and Economics Building, 111 Barry Street, University of Melbourne
Registration: there is no charge for registration, but RSVP is essential. Places are limited to the space available. Please register online through our website. 

The problem needs again to be spelt out.  The many economists I have spoken to about this matter - eg here - agree about the limitation of monetary policy, but there is no agreement about the remedy. Henry's proposed tax on capital inflow is not even mentioned by people who write about the problems of a high dollar strangling industry, fearful I suspect of being labelled as sinning against the modern economist's religion of universal free trade.

This religion of course falls short of recommending absolute free trade, just as few practicing Christians consistently obey the Ten Commandments. In particular, few economists recommend free trade in labor, witness the near hysteria about people arriving in remote locations in small boats and alleged overuse of 457 visas.  Free flows of people across national borders is clearly a policy that would improve global efficiency while maximising opportunities for people in the poverty-stricken nations but, like practicing Christians, economists have their limits too.

Virtually all developed nations are operating with near zero interest rates and 'quantitative easing' (euphemism for printing money). Global investors are seeking yield. Australia is politically stable with mostly sensible economic policies, and yields among the highest in the developed world.  Despite the fall in commodity prices, which previously would cause the Australian dollar to fall more or less in parallel, global investors seeking yield are pouring money into the country.

The net result is a high dollar that is making Australian industry uncompetitive. The official view is that the lack of competitiveness will be solved by firms and individuals working harder or smarter. The official view, propounded recently by RBA Deputy-governor Philip Lowe, is that what doesn't kill you makes you stronger.

One can agree with Mr Lowe and others that the pressure of a high dollar (on top of generally high costs) will make some enterprises stronger, but many others will be forced to downsize or give up. Recent news has included fruit growers bulldozing their trees as the big food retailers have sourced cheaper product overseas. A government or a central bank that endorses such outcomes is simply irresponsible, especially as agriculture is one industry that is notoriously not practising global free trade.

(This comment today from an intelligent Canberran certainly adds to the debate.)

The RBA has at times been tempted to cut interest rates when there is what is regarded as undue pressure on the currency. This writer, whose job in the 1980s (until February 1988) was to advise the board of the RBA on monetary policy, consistently recommended tightening monetary policy (ie raising interest rates) as recovery from the mild recession of the mid-eighties proceeded. (I am unable to be more precise because I have been denied access to the papers written then.)

Every month the board seemed to agree with this advice but in fact interest rates were cut.  The prevailing view of my senior officers (or the Treasurer, as the RBA was not then 'independent') apparently was that the rising dollar needed to be reined in with lower interest rates, but this was not a matter that was debated before the board.

The net result was that easy monetary policy allowed excess demand to get out of hand, leading ultimately to a massive monetary crunch, the 'recession we had to have' and much misery. Read on here.

In coming months and years, Australia risks a repeat performance. The main safeguard is that fiscal policy will need to be tightened substantially.  Several weeks ago, the Treasurer said the promised surplus was undercut by a $7 billion revenue shortfall, then the PM said the number was twelve billion, overnight Penny Wong said $17 billion. Gor Blimey, comrades, whot is going on?

Laura Tingle at the AFR has said:  'The shortfall in forecast budget revenue will be between $60 billion and $80 billion from now to 2016, forcing the Gillard government to dump spending pledges, including $1.8 billion in family assistance'.

Assuming the Labor guv'mint starts the process of getting Australia's fiscal policy into good shape, and the Abbott guv'mint completes the task, there may be scope for further responsible cuts to interest rates. But why in a healthy economy cash rates below 3 % are needed is beyond Henry's paygrade to answer, and this should be explained with unusual clarity should the RBA deem it necessary.

Nonfarm payrolls are estimated to have risen by 165,000 in April and the jobless rate fell slightly to 7.5 %, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs.

Lots of discussion, as usual, in the local press about whether the RBA will cut interest rates further, with a fair bit of money on a cut this month and even more on a cut next month.  (Next we shall be seeing ads for rate cut betting during the evening news reports).

David Uren seems to be in the latter camp with a long article in The Oz today.

The first quarter saw stronger global growth, though (US jobs data apart) there are some signs of weaker performance since then.

Within the Australian economy the picture is mixed, with stronger retail sales and weaker jobs performance the poster statistics for the competing views.

Mr Uren thinks the RBA will be inclined to wait for more data, especially about non-mining investment.

Henry bewails the lack of discussion on the fact that monetary policy cannot serve two masters - ie maintain a stable economy with low inflation as well as manage an exchange rate that is strangling large swathes of industry.  (Background reading here.)

More here tomorrow on that crucial analytic fact.

NSW Labor continues to be regarded as toxic by voters, but there's little evidence that the Independent Commission Against Corruption's inquiry into the last ALP state government is doing any further damage to the party's already moribund standing.

The latest Newspoll shows Labor's primary support is stuck below 30 per cent, while the Coalition's support has hit a 12-month high of 48 per cent.

'Bad policy does not just happen' asserts Henry Ergas - it takes serious economic and political illiterates to achieve the depths plumbed by the Rudd'n'Gillard guv'mints.

I especially liked the various estimates of the 2011-12 deficit. These estimates started at almost $45 billion in the budget of 2009-10, shrank to a low pf $10 billion in the pre-election estimate in 2010, and are now again back where they started. Think about it gentle readers - can this possibly lack political influence? Shame on whichever individual or institution was responsible for this blatant fiddling.

Troy Bramston concludes: 'Epic election rout is just the beginning for Labor'.

'If the worst fears of a range of senior Labor figures across Australia are realised, then the closest comparison will be Labor's 1931 annihilation, rather than the drubbings meted out by the voters in 1996 or 1975. In other words, unless Labor's standing dramatically improves, Julia Gillard is set to lead Labor to its greatest defeat in more than 80 years. That will certainly be one for the record books.

Real house prices

Leith van Onselen of Macrobusiness fame  provides a nice look at movements in real house prices in Australia since the last peak levels, which are mostly in 2010.

Another way of measuring housing values is to compare the total value of the housing stock, as measured by the Reserve Bank of Australia, against Australia’s GDP. As shown below, Australian aggregate home values increased from just under 2.0 times GDP in 1996 to a peak of just over 3.3 times GDP in March 2010 – a real increase of around 70%. Since then, values have fallen to around 2.8 times, representing a real fall from peak of nearly -15% (see next chart).

Courtesy RBA, Macrobusiness

van Onselen concludes: 'For what it is worth, my tip is that Australian housing values will ultimately revert to around 2.0 times GDP – the level that existed prior to the huge run-up in housing values from the mid-1990s – as price growth going forward fails to match growth in GDP (i.e. the “slow melt” thesis)'.  More here.

Darwin's mystery disease

A freind of Henry, Dr John Hayman, has worked out the identity of the mystery disease suffered by Charles Darwin, and his solution has just been published in Genetics.

The abstract succinctly disposes of other possible causes of Darwin's quite serious symptons, which dogged him and many relatives.

The abstract concludes: 'Examination of Darwin’s maternal family history supports the contention that his illness was mitochondrial in nature; his mother and one maternal uncle had strange illnesses and the youngest maternal sibling died of an infirmity with symptoms characteristic of mitochondrial encephalomyopathy, lactic acidosis, and stroke-like episodes (MELAS syndrome), a condition rooted in mitochondrial dysfunction. Darwin’s own symptoms are described here and are in accord with the hypothesis that he had the mtDNA mutation commonly associated with the MELAS syndrome'.

Read on here.

And for long-suffering parents ...

 A man and his wife were celebrating 50 years together. Their three kids, all very successful, all agreed to a Sunday dinner in their honour.

 "Happy Anniversary Mum & Dad" gushed son number one, a  surgeon, "Sorry I'm running late. I had an emergency at the hospital with a patient, you know how it is, and didn't have time to get you a gift." 

"Not to worry" said the father, the important thing is that we're all together today."

 Son number two, a lawyer, arrived and announced "You and Mom look great Dad".I just flew in from Los Angeles between cases and didn't have time to shop for you". "It's nothing," said the father. "We're glad you were able to come."

 Just then the daughter,a marketing executive,arrived. "Hello and Happy Anniversary! I'm sorry but my boss is sending me out of town and I was really busy packing so I didn't have time to get you anything."

 After they finished dessert, the father said, "There's something your mother and I have wanted to tell you for a long time. You see, we were very poor. Despite this,we were able to send each of you to university. Throughout the years your mother and I knew we loved each other very much, but we just never found the time to get married."

 The three children gasped and all said, "You mean we're bastards?" "Yes," said the father, "and miserable ones at that".

Image of the week

  Courtesy The Oz

The new Italian Prime minister made his first visit to Germany's Angela Merkel to plead for an end to 'austerity'. It seems the lady's not for turning.

The Club Med nations of Europe should quit the Eurozone or, better still, invite the Germans to leave. Ambrose Evans-Pritchard makes the case for Spain eloquently.

'The great Spanish nation can end its crucifixion at will by leaving EMU.

'The mind goes numb. Spanish unemployment jumped by yet another 237,000 people in the first quarter to 6.2 million, or 27.2pc.

'This is equivalent to roughly 8.3 million in Britain, or 39 million in the United States. The country is losing 3,581 jobs a day. There are 1.9m households where no member of the family has a job.

'As you can see from this graphic, the rate has reached 36.8pc in Andalusia, Spain's most populous region'.

Courtesy Telegraph

Eurozone stocks rose, demonstrating yet again that equity markets have absolutely no social conscience.

Wall Street joined in, buoyed by the ECB interest rate cut and a US jobless claims report that was better-than-expected.  The DOW up by 0.9 %, the S&P500 by 0.9 %, the NASDAQ 1.3 % and the Russell 2000 +1.7 %. US 10-Yr Treasuries were flat yielding 1.63 %.

'The number of Americans seeking unemployment aid fell last week to seasonally adjusted 324,000, the lowest since January 2008.

'The drop points to fewer layoffs and possibly more hiring.

'The US Labor Department says weekly applications fell 18,000, the second straight sharp drop.

'The four-week average, a less volatile measure, plummeted 16,000 to 342,250.

'Applications are a proxy for layoffs. But fewer job cuts are only one side of the equation: Companies also need to be confident enough to add workers for job growth to pick up and lower the unemployment rate'.  More here.

China's factory production, perversely, fell again to a point just above 'neutral.  More on China's travails here.

Local news included more wretched budget slippage, which should make government ministers cringe at the  fiscal waste but probably will not.

Henry's satiric persona took over re the budget mess on Wednesday.  But the general outlook is not so flash either. We are being told to brace ourselves for a major fall in the (grossly overvalued) dollar and cut in our cost of living.

As Ross Garnaut put it on the 7.30 Report when Leigh Sales asked if we were headed for recession: 'That depends on policy. It depends on how the Reserve Bank manages monetary policy, it depends on how the Government handles fiscal policy, it depends on the community's preparedness to join governments in productivity-raising reform. It depends on whether we can accept restraint all round in the interests of avoiding a recession and avoiding high unemployment'.

Weaker housing starts data yesterday took away some of the Aussie dollar's overvaluation as it raised the odds on a rate cut next week.

Henry will report here, and in the Oz, on Tuesday next week. Previous reports available here.

He reads from his Smart phone, symbol of Australia's smartest Treasurer. 'Last weekend’s multi-mode Morgan Poll shows support for the L-NP jumping to 58 % (up 3.5 % since April 18-21, 2013) cf. ALP 42 % (down 3.5 %) on a two-party preferred basis.

'The L-NP primary vote is 48 % (up 4%) easily ahead of the ALP 30.5 % (down 2%). Among the minor parties Greens support is 11 % (up 0.5 %) and Independents/ Others are 10.5 % (down 2.5 %)'.

'It's over, Boss', Swannie tells Julia. 'The party's over.'  The occasion was notionally to celebrate May Day, but curiously other members of cabinet were otherwise occupied, working to save their seats, or find another career.

"Now Wayne, don't be so defeatist', the Boss replies. 'I'm a feisty wumun and we will prevail.  You agree, Tim, dontcha?'.

Australia's first bloke makes an ambiguous noise, then buries his nose in the Grange.

'It gets worse', Swannie comments, nothing if not dogged. He reads again from his Smart phone. 'The weekly Roy Morgan Consumer Confidence Rating shows Consumer Confidence falling to 118.9 pts (down 4.9 pts since April 20/21, 2013). .... This week’s fall in Consumer Confidence has been driven by decreasing confidence in across all components of the survey.

'Fewer Australians 33 % (down 4 %) expect ‘good times’ economically over the next twelve months for the Australian economy compared to 27 % (up 3 %) that expect ‘bad times’. 

'Bloody bastards, voters, after all we've done for them, saving them from the global crisis, insulating their roofs, improving their kiddies' schools, wiring their homes for high-speed porn downloads, the list is endless'.

'Don't be silly, Wayne', replies Australia's feistiest politician. 'People are never grateful for what you've done for them, only what they think you're gunna do for them'.  Julia sips her Grange, still largely untouched. "And they know you've run out of money, Wayne, and we can't afford too much more largesse'.

'Me run out of money', spluttered the world's greatest Treasurer. 'You suggested most of those things'.

He took a large swallow of Grange. Inspired, he asked: 'Whose idea was it to take the money off the unis?. According to the bloody Australian today, one thousand professors have writen demanding you rescind the cut to their money'.

'Haven't seen the mail yet', Julia responds. 'Tim, didja see anything with a nice Melbourne Uni crest on it when ya sorted the mail today?'

'Used it to start the fire', Australia's first bloke replies. 'That bastard Glyn David has turned on us too'.

'Davis, his name is Davis', Julie rebukes her man.  'He is a mate of Kevin, he's never supported us'.

'And what's Professor Garnaut up to?' asks Julia of no-one in particular. 'We gave him a seat on the climate committee, but now he says the economy's firked.  Has he no sense of loyalty?'

'Well, you'd better do something Boss, or we'll all be rooned' was Swannie's contribution. 'Even the bloody accountants have turned on us.  They've written a book - accountants writin' a book!  Called From Lucky Country to Competitive country.  I'll give 'em competitive.  I'll fix the tax act so people can do their own bloody returns, that'll fix the bloody CPAs.'

Tim threw another log on the fire, plus a copy of a Murdoch biography. 'Noticed the Business Council have got stuck into us again', Wayne started to say, but he was cut off by a visibly angry Boss. 'They say you, Wayne, have lost control of the budget. I sometimes think I should have made Simon Crean Treasurer.  He has a way of soothing the Captains of industry'.

'I'll show the bastards.  It's not too late to double the company tax, that'd fix the bloody budget'.

'Now Wayne, don't panic.  Tim, why dontcha get another bottle of Grange from the cellar.  They tell me '87 was a good year.  No point in leavin' it for Tony Abbott to drink with his boofy blokey ministers and their frumpy wives' ...

'Oh, I nearly forgot', Australia's first bloke said as he poked the fire. 'Bill Kelty wants to see you.  Says its urgent.'

'Put him in for morning tea - and save a half bottle of the Grange'.

The strategic scheming sputtered into silence, and the kitchen cabinet stared morosely into the embers of the dying fire. All were thinking the party's over, but none was yet willing to confess to belief in evidence based analysis.

*************************

Thanks to Bill Leake for his post-budget illustration.

Our slightly intemperate comments on Monday last week seem to have been at least a sign of better intemperate comment to come when we wrote: 'You, Treasurer, say its like being hit by a slegehammer.

'The sense of confusion you feel is most likely due to too many drinks in the front of the aeroplane on the way to some conference of the worthies, all struggling with budget deficits as far as the eye can see.  I guess you would not be totally embraced by the worthies while you were bragging about your budget surplus, but now you have been forced to fess up about that you are revealed as just another boastful colonial yoick descended, as the worthies know only too well, from some of England's finest conmen and criminals. (Did no-one tell you 'finance minister of the year' was like being selected to win a footy match by Lou Richards?)

'So now we all face austerity.  The budget hole will not be closed without both spending restraint and tax increases.  That is why we cannot keep throwing money at worthy causes. Here is a plan. The good news is that this is not being imposed by Australia's paymasters. But if we do not stop the rot, the IMF, China Inc or some similar paymaster will'.

And on Wednesday (24/4)

Paul Kelly advises government not to spend like drunken sailors.

And Australia's AAA credit rating is contingent on satisfactory plans to return budget to surplus.

But last night Herself entered the fray, and it gets worse.  A few short weeks ago, Treasurer Swan said tax receipts were now $7.5 billion below the most recent estimate.  Now Herself says the number is $12 billion - relative to what being unclear, but Henry is often confused by complicated technical matters, which is where today's offering by the editorialist at the Oz reaches new heights of intemperation - assuming that is indeed a word - and helps to explain why these estimates are moving so quickly.

'A WORKING knowledge of Einstein's theory of relativity might be needed to discern a Wayne Swan budget strategy during the past six years. Time and space, mass and energy, surplus and deficit seem to diverge at the speed of light as the government's fiscal narrative struggles to keep up with its changing imperatives.

'Just a year ago, the Treasurer rose to his feet on budget night and said: "The four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy." Transported through time and space to last weekend, Mr Swan braced the nation for deficits as far as the eye can see: "We reject the heartless philosophy of mindless austerity." If fiscal rectitude could be delivered by rhetoric and promises, Australia would be the world's banker. Instead, the challenge is to preserve our standing - and AAA credit ratings.

'The missed opportunity (global financial crisis notwithstanding) has been clear for at least six years. The Australian hosted its first Making the Boom Pay conference in November 2006, where a range of speakers urged both major parties to ensure the revenue windfalls of the mining boom were not squandered. Then treasury secretary Ken Henry warned that if government took the "soft option" of spending the proceeds rather than investing them we would see an "intergenerational tragedy" imposing an unnecessary burden on future generations. Well, here we are'. More in this vein here.

Henry's pal Ross Garnaut has been promoted to the 7.30 Report, after spreading gloom so well on Lateline.

LEIGH SALES: Professor Garnaut, the Prime Minister has described the situation facing the budget as "urgent" and "grave". How would you describe it?

ROSS GARNAUT, ECONOMIST: Oh, it's certainly grave, Leigh. We've been spending the temporary largesse from the resources boom since it began in 2003. That has led to expenditure levels and cost levels in Australia substantially higher than is sustainable in the long-term. In 2004 I described the situation we were in as the salad days. I said that we should be saving two or three per cent more of GDP in budget surpluses or we'd end up in the dog days when the resources boom ended.

LEIGH SALES: Are we headed for a recession?

ROSS GARNAUT: That depends on policy. It depends on how the Reserve Bank manages monetary policy, it depends on how the Government handles fiscal policy, it depends on the community's preparedness to join governments in productivity-raising reform. It depends on whether we can accept restraint all round in the interests of avoiding a recession and avoiding high unemployment.

LEIGH SALES: What do you think are the fiscal policy levers that the Government should pull?

ROSS GARNAUT: The most important levers are actually economic levers. Our cost level is far too high in the aftermath of the resources boom. Our exports of everything other than resources have actually been falling in real terms for a number of years after a very good period of growth before the resources boom. We're not getting any investment worth speaking of in the export industries other than resources. Now that resources is coming off the boil, we've got to get those other engines going again. Amongst other things, that's going to require a big improvement in competitiveness.

LEIGH SALES: We keep hearing about the pressure that the high Australian dollar is putting on the economy. Is there anything that can be done about that?

ROSS GARNAUT: Yes. That's an important part of the story. What matters is the real exchange rate - the value of the dollar and what's happened to our inflation compared with other countries. Taking those two things together, our real exchange rate is way too high. The resources boom did that, or rather spending the income from the resources boom over the past decade did that and then it's been taken to new heights by the exceptional monetary policy in other developed countries as they've sought to drag themselves out of recession themselves.

(Henry adds: Sadly, gentle readers, no mention of Henry's plan to tax capital inflow, covered here in comments in the 2013 articles in this series. Henry detects an inflationist bias in his old mate - dropping interest rates to restore competitiveness is like undoing the belt to allow a second helping of dessert.)

LEIGH SALES: They've done that by having interest rates at extremely low levels. Does Australia need to follow suit in your view?

ROSS GARNAUT: Well, interest rates at extremely low levels and that's been augmented over the last couple of years in the United States and over the last six months in Japan by what's called quantitative easing, special policies to push out into the economy huge amounts of money, which has had the effect of reducing their exchange rates. I think our interest rates need to be lower in current circumstances. That needs to be part of a broad-base strategy to improve our competitiveness.

And in conclusion:

LEIGH SALES: Do Australians need to anticipate a fall in their standards of living, and if so, practically, what does that actually mean?

ROSS GARNAUT: Well I didn't think that we are going to experience a large depreciation of the currency; that's part of what's necessary to improve our competitiveness. But you don't get an improvement of competitiveness - in competitiveness if the dollar falls and incomes rise to allow us to spend in the same ways as before. So we need to all accept that a lower dollar shouldn't be fully compensated in nominal expenditure in the budget or the nominal incomes that we receive. That sort of restraint is very difficult and it's only ever possible if the community as a whole accepts restraint all-round, including recognition that disadvantaged parts of the community need to be considered in that adjustment.

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HENRY: We have all been warned, and nothing is 'off the table' on policy, and this from a guv'mint that a few short months ago delivered its 500 th promise of a return to surplus in 2012-13.

At the economic level the outlook for this initiative is positive and Australia is well placed to take advantage of this stupendous opportunity. While it will be a major task to mobilise the trillion dollars required between now and 2050 to finance the project, it appears there are vast funds available internationally. Foreign investors, pension funds, international corporations and foreign governments are already buying Australian farm land to capitalise on the growing Asian demand.

However, at the cultural level the situation is different, as Australia is afflicted with deeply entrenched anti-development forces. It must therefore re-affirm its national identity as a frontier society, ready to engage in nation-building projects on a continental scale, and prepared systematically to harness the natural and human resources required to develop a thriving, highly productive society. This is a battle that must be won in the realm of culture, and it can no more be ignored than the financial or physical infrastructure requirements of this gigantic project can be ignored. Indeed, it can be seen as involving the installation of the essential cultural infrastructure necessary to support the expansion of Australia’s primary industries as this unfolds over the decades to come.

After all, even a trillion dollars of capital will be of little use in developing our agricultural potential if the cultural and political environment remains unfavourable to the types of massive development that will be required to realise the vision of Australia as a world-class food producer. Ominously, this is a country where radical environmentalists have had a free ride for decades, shutting down innumerable worthwhile projects and strangling many others in “green tape” designed to make their successful completion uneconomical or even impossible. International investors will quickly retreat once they realise that their complex, capital-intensive projects will be slandered, stymied, suffocated and sabotaged by a well-resourced cadre of cosseted vandals (“protesters”) aided and protected by an array of political, legal, judicial, academic and media supporters.
 
Therefore, in order to play the global role that lies before us, Australia must comprehensively strip away this crippling ideological overburden and return to the self-confident and optimistic frontier society ethos and nation-building activism that was sustained for nearly two centuries into the 1980s, as previous generations fought to harness our continent’s natural resources. The alternative is to continue our decline into the depths of de-industrialisation, economic retrenchment, demographic torpor, self-hatred and authoritarianism that has been so successfully promoted by the Greens, much of the ALP, and their academic and media supporters.

Read on here in this fine contribution from Quadrant, May 2013.