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Changing course

February 24th, 2009

When a car swerves sharply to avoid an obstacle, anything unsecured inside it continues travelling in its original direction, often with unfortunate consequences. We can see something similar happening with the Rudd government’s fiscal policy. The $42 billion stimulus package is as sharp a swerve as you can imagine, justified by the correct expectation that private investment and consumption demand, along with export demand, is about to collapse, leaving government to fill the gap.

Yet the noises coming out of the Budget process suggest that no one has even noticed this. Lindsay Tanner is still talking about spending cuts, as if the emergency measures of the last week can be put into reverse in only a few months time.

And, despite the disappearance of the forward surpluses that were to pay for them, and of any possible economic rationale for aiding high income earners, the government is still promising to proceed with the tax cuts promised in the utterly different world of 2007. Unlike many economists, I supported the government’s delivery of the first-stage tax cuts, on the basis that, while they were bad policy, nothing had changed since the election to justify repudiating a promise. But now, everything has changed. Like Ross Gittins, I hope the government will summon up the courage to say that tax cuts are off the agenda for the foreseeable future.

Update

I spell out the rationale for this a bit more over the fold

Given that tax cuts are generally seen as expansionary, why do I say they should be scrapped? A Keynesian tax cut should be temporary and targeted at those below median incomes, who are mostly likely to spend it, and, if they save it, most likely to need the money to balance their household budgets. The “temporary” point is most crucial. Once this mess is over, higher taxes are going to be needed for a long time, both to service and repay debt and to finance the permanently larger role for government inevitable in the light of the collapse of the financial sector.

By contrast, the tax cuts proposed by the Howard government, and copied by Rudd Labor during the 2007 campaign were permanent and targeted towards those in the top half of the income distribution (under the conventions of Australian politics, this group normally referred to as “middle-income earners”) but polite conventions do you no good when the fiscal ship is sinking.

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  1. Alexander
    February 24th, 2009 at 22:45 | #1

    We can trust Rudd’s Labor Party to stick to its promises. Unfortunately we can’t trust them to make good promises. I would’ve preferred us to have a government with non-core promises that will do the right thing when the unexpected happens. If they won’t do that, then maybe they should call an early election to get a mandate to do the right thing in changed circumstances. Neither party would have the guts to do it, no matter how easy we make it to do the right thing. The Australian electoral cycles promise enough power for long enough, at both state and Commonwealth levels, but the party systems don’t deliver up leaders who will take advantage of that.

  2. observa
    February 24th, 2009 at 23:42 | #2

    ‘In other words, in its last five years, the Howard government brought about a major change in the structure of our tax system, greatly increasing our reliance on company tax and greatly reducing our reliance on income tax…

    This suggests it may be quite a struggle to get the budget back to balance. Chris Richardson, of Access Economics, who has been warning for years about the riskiness of the tax rebalancing, says the new shape of the income-tax scale has taken much of the former bite out of bracket creep.

    He now warns that, after the tax cuts already legislated for (and already included in the budget’s forward estimates), it may take as long as a decade before the government of the day is able to afford another tax cut.

    This is the budget time-bomb John Howard and Peter Costello left for their Labor successors. Not quite the good budget managers they keep telling us they were.’

    Not so sure about that. ‘Starve the beasts’ sounds like pretty good budget management and shouldn’t be too much of a problem for all those ‘we are all fiscal conservatives now’ Laborites in Canberra. Besides it’s not as if they were left with a $96bill unpleasant surprise to start with. Quite the contrary with a fat Future Fund and a healthy budget surplus, so suit-cloth and get on with that core promise of theirs, ‘over the cycle’ of course.

  3. Monkey’s Uncle
    February 25th, 2009 at 07:14 | #3

    There are many reasons why the government’s stimulus packages will not work. Indeed, it is hard to cite a significant example in recent history where large fiscal stimulus has brought about a significant recovery in a developed nation.

    One reason why they won’t work is that much of the money will be saved rather than spent. This simply transfers debt from the private to public sectors, with no net difference to national debt or economic activity.

    The other reason is that if governments go heavily into debt, private investors and businesses realise that this must eventually be repaid through higher taxes. This discourages investment. Remember that much economic activity is not solely based on what is happening now, but on what people expect to happen in future.

    Another reason is that these packages actually damage public confidence, as people realise governments would not be going to such lengths if the situation was not bad.

    All in all, the arguments for the benefits of fiscal stimulus are over-rated and simplistic.

  4. Monkey’s Uncle
    February 25th, 2009 at 07:18 | #4

    Actually, I would think the economic downturn would increase the benefits of tax cuts.

    One way of averting a steep economic downturn would be to support supply-side measures like tax cuts and wage restraint to keep more people in work.

  5. Spiros
    February 25th, 2009 at 08:41 | #5

    “Another reason is that these packages actually damage public confidence, as people realise governments would not be going to such lengths if the situation was not bad.”

    On this logic, the government should be cutting back its spending massively, just so it can fool people in thinking that the economy is going great.

    Unfortunately this runs into the Abraham Lincoln problem

    “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

  6. February 25th, 2009 at 08:42 | #6

    Pr Q says:

    Unlike many economists, I supported the government’s delivery of the first-stage tax cuts, on the basis that, while they were bad policy, nothing had changed since the election to justify repudiating a promise. But now, everything has changed.

    It sounds very much like Pr Q has become a late convert to the Howard-Costello “non-core promise” theory of democratic accountability. (Always assuming that the discovery of Beazley’s Black Hole represented a change.)

    I take a Machiavellian-utilitarian approach to public policy. This means I never take politicians election promises all that seriously.

    Specific policies are tactical moves. I judge by a govt by the strategic success of its general programs. Usually taking more than three years to become evident.

  7. February 25th, 2009 at 08:51 | #7

    Of course Pr Q is correct in his criticism of Rudd-Tanner. But that implies he ought to have cut some slack to Howard-Costello when they faced, what to them was, a serious crisis in public finance.

  8. Paul Norton
    February 25th, 2009 at 09:38 | #8

    “We can trust Rudd’s Labor Party to stick to its promises.”

    Well, not entirely.

    http://www.theaustralian.news.com.au/story/0,25197,25103401-5013404,00.html

    Why universal paid maternity leave should be considered a “non-core” promise whilst the far more expensive tax cuts remain a “core” promise is hard to fathom.

  9. carbonsink
    February 25th, 2009 at 09:38 | #9

    But, but … what about the permanent income hypothesis? Isn’t that the new rationale for tax cuts?

  10. Bruce Littleboy
    February 25th, 2009 at 10:05 | #10

    Re carbonsink 8:
    The widely claimed ‘rationale’ for tax cuts is often based on a misrepresentation of Milton Friedman, who was cited by the Coalition and by John Taylor. As a student of the history of macroeconmic ideas, I wince at the claims made about Friedman’s temporary-permanent distinction. MF (rightly or wrongly) held that tax cuts were useless for counter-cyclical demand smoothing; i.e. useless in the current context. Even a couple or a few years of tax cuts would mostly be saved (he argued) because the cut is perceived as “temporary” and to be reversed later in the cycle. And there’s no great reason to make a tax cut “permanent” even after the reason for the tax cut is long gone and the economy has moved to a boom phase in the cycle.
    MF rejected fiscal policy as a tool of countercyclical stabilisation: it is (he argued) too slow and weak. On the other hand, monetary policy is strong, but too unpredictablle for counter-cyclical use, he argued.
    By the way, the debate about temporary-permanent has been lamentable not only at the level of the history of ideas (getting right who said what) but also analytically, but that is another story.

  11. Bruce Littleboy
    February 25th, 2009 at 11:19 | #11

    Question of clarification for JQ:
    Is your argument that tax cuts shold be cancelled because
    a) there is already enough fiscal stimulus in the pipeline
    b) because preerving the option of raising government spending would be a better idea than giving disposable income away to the well off
    c) because then Lindsay Tanner won’t feel as pressured to (insanely) cut G and thereby keep the deficit ogre in its cage
    d) because cutting taxes now will make it harder to raise taxes later (in the boom phase of the cycle post-recovery) to get surpluses and wind down the debt (I think that Gittins is saying this).

    Or…?

    Is it solely c)?

  12. Spiros
    February 25th, 2009 at 11:46 | #12

    I wouldn’t worry too much about what Tanner is saying. It’s always – but always – the job of the finance minister to talk about cutting spending, regardless of the circumstances.

    Expecting otherwise is like expecting real estate agents not to talk up the property market, or expecting the ASIO not to talk up the terrorist threat and the consequent need for more funding.

    It’s just the way the game is played.

  13. Jim Birch
    February 25th, 2009 at 12:10 | #13

    According to Geoffrer Miller in The Mating Mind: How Sexual Choice Shaped the Evolution of Human Nature this problem of political promises arises from sexual selection. Darwin proposed two distinct types of selection: the first is well-known, natural selection, aka “survival of the fittest”. The basic idea is that the animal that flourishes can produce relatively more offspring. The second type, sexual selection, favours animals who are able to attract more and better mates. While the peacocks tail clearly reduces it’s fitness – like the ability to forage and escape predators – it is extremely attractive to peahens, so is adaptive. At a more fundamental level, the ability to produce the biological surplus required to produce a useless tail may indicate better better genes, but the tail has developed a value of it’s own; the peahen is simply attracted to the tail.

    Miller proposes that sexual selection can explain significant human behaviours that can’t be explained by natural selection, including music, art, humour, rhetoric, philosophy, and morality. Some parts of these may be explainable by natural selection but large chunks require something else. To quote Miller from a recent RN interview:

    I think the interesting thing about human intelligence and capacities for abstract reasoning, and metaphor and analogy, is how very poor most people are at being evidenced based and sceptical. What we love to do is pick up little factoids and half-understood theories and repeat them to others to be interesting. Particularly on first dates. So we try to be interesting, we don’t really much care about the truth of what we’re saying, and scientists have to be extremely self conscious about this: not just to be interesting but to be right. Most humans most of the time though adopt ideologies and beliefs that are there principally to make their minds attractive to others, not because those beliefs actually correspond to the world.

    Doesn’t this sound like political promises? Rudd – and evey other promising politician, not to mention the rest of us – are relying on the fact that we unconsciously find promises sexy. It’s probably something that we can’t do a lot about, we’re peahens to promises, they just sound good. Perhaps we can be on guard, but we can’t really stop it. If we were rational we’d choose the insightful guy who says “When elected I will consider whether reducing taxation is appropriate to the economic circumstances” but it just doesn’t have the same ring.

    The problem seems to arise when reality intrudes, a promise need to be dropped, but acquiescing leaves us face-to-face with with our own desire to be seduced.

  14. Ikonoclast
    February 25th, 2009 at 12:14 | #14

    The plain fact of the matter is that we are heading for the Second Great Depression. All this talk of “confidence” is nonsense. “Confidence” meaning business and consumer confidence is a mythical construct.

    “Confidence” means as much, or rather as little, as the word ‘soul”. Neither are tangible things. They are matters of belief, idealist notions which are thought by some to explain something.

    The fear of mentioning the big “D” word out of dread that it will actually bring it on is superstitious nonsense. The Second Great Depression will happen because of measureable factors. The biggest factor is the exponential debt explosion (as Steve Keen calls it) which has gone on since the 1960s.

    Debt levels world-wide are now higher (in relation to gross world product) than they were at the start of the great depression. It is clear that it is unsustainable when debt which rises exponentially along with asset prices. Even allowing for the corrections to date, real estate prices are still far above anything sustainable in relation to the income these assets could produce sustainably produce.

    The US banks are bankrupt, the US car manufacturers are collapsing before our eyes. Many countries (Japan, Sth Korea, Germany) produced last quarter contractions which if annualised will go well into double figures. That is depression territory. This crisis as a rolling crash and depression is likely to last a minimum of five years.

    After the crash and the accompanying war is played out, we will discover there aren’t enough resources left to properly rebuild. The usual response to a depression is war. The prime candidate areas to ignite another great war are the Middle East and the Korean Peninsular. The rapid collapse of Pakistan to the Taliban may spark something soon.

    We can only hope that the nuclear powers fight these wars with conventional arms and/or use conventionally armed proxies and that our sons (and daughters) won’t end up in the theatre. That’s the best we can hope for.

  15. February 25th, 2009 at 13:08 | #15

    “Unlike many economists, I supported the government’s delivery of the first-stage tax cuts, on the basis that, while they were bad policy, nothing had changed since the election to justify repudiating a promise. But now, everything has changed.”

    By definition, nothing can ever justify that. That is, it is of the nature of honour that one who has it keeps his promises even in adverse circumstances; not to do so announces to the world at large that his promises can only be relied on when he finds it convenient – which is to say, they are of no value. Rather, the wise person reserves certain things when making promises. Of course, that ship has long sailed; politicians have nothing to lose in that respect. Even so, we should not encourage them in it, and always punish them remorselessly and enduringly for their breaches (no temporary repentance and retreat only to benefit from it in the end).

    Notwithstanding all that, even though there can be no justification for repudiating the promised tax cuts in this case, there are more ways to skin a cat. Precisely because the promises related to tax cuts, they only apply to those and things that are taxes in disguise like “fees” on superannuation. Take one step further from that and you are free and clear; there can be no objection – on the grounds of these promises – to establishing a separate Save As You Earn (SAYE) scheme, even one that doesn’t pay interest, provided only that the funds are destined to return to the payers (if a later government should raid it, that would impugn its honour). That would deliver a Fosberry Flop over today’s constraints to be attended to with funding later, in future circumstances. And there are many other possibilities, all of which come down to using the reservations that the wise have in their promises.

  16. Socrates
    February 25th, 2009 at 13:24 | #16

    Of course it is stupid to stick to the promise now, especially as it is aimed at a group (those still in jobs paying over $100K) that need it least. Politicians always find an excuse to do what they need to when they want to. In this case Rudd should be reminded that he will be saddled with comparisons with Keating on debt if he continues down this path. That should motivate him to find the required excuse for making a change.

  17. Michael of Summer Hill
    February 25th, 2009 at 14:50 | #17

    John, some might argue that the Rudd government may be ‘playing with fire’ if the proposed tax cuts go ahead this year ontop of the climate change debacle for as Gittins writes the tax cuts are ‘inequitable’ and ‘biased’ in favour of individuals earning more than $80,000 a year’. Maybe Labor should take some time out and have a kit kat, for it’s not too late to do the wright thing.

  18. February 25th, 2009 at 15:28 | #18

    Pr Q says:

    By contrast, the tax cuts proposed by the Howard government, and copied by Rudd Labor during the 2007 campaign were permanent and targeted towards those in the top half of the income distribution (under the conventions of Australian politics, this group normally referred to as “middle-income earners”) but polite conventions do you no good when the fiscal ship is sinking.

    Peter Martin has a good round up of Howard-Costello’s series of regressive tax-cuts which have en-riched the top quartile of the distribution without doing much for Joe SixPack:

    Figures prepared for tax conference to take place in Canberra today show that average earners hand over in tax about the same proportion of their income as they did two decades ago.

    In 1986 an average earner paid out 21 per cent of his or her income in tax. After this year’s July tax cuts the figure will remain little changed at 20 per cent.

    By contrast high income earners pulling in two and a half times the average wage will be much better off. In 1986 they had to hand over 43 per cent of their earnings. By July this year it’ll fall to 30 per cent.

    The subsequent tax cut penciled in for July 2010 will benefit high income Australians even further…but will again scarcely change the outlook for middle and low income Australians.

    When the group attempts to compare the Australian tax take with those overseas it finds that we are in the low-tax third of OECD countries and also in the low tax third of the nine most important OECD nations. We would need to pay to pay $40 billion extra in tax each year in order to reach the OECD average.

    The group also reports that we are becoming less keen on tax cuts. Back in 1987 two thirds of Australians surveyed said they would prefer tax cuts to increased government spending. By 2006 less than one third said yes to the same sort of question.

    I was wrong, in previous comments, to suggest that Howard-Costello had left the fisc overflowing with treasure. The tax cuts they engineered appear to have left the CW in a fiscal hole. Although things like the GST and amortised public debt have helped matters somewhat.

    Tax-cuts are nice but they have to be paid for by spending cuts. Which this govt (nor the one before it) were much keen on. Must keep on-side with Mr & Mrs Working Family.

  19. Jim Birch
    February 25th, 2009 at 15:35 | #19

    On the contrary, PML @15, shouldn’t the intelligent voter want politicians and a political process that produces good policy, not a morality play.

    Tt is unfortunate that politicians have to make promises (to institute bad policy) to get elected. It’s also unfortunate that that won’t change any time soon. But blame the electors. But to actually implement those bad policies is a genuinely worse outcome.

    For the politician, presumably close to a rational voter maximiser – the choice between getting bad press for not implementing election promises and and getting bad press for implementing bad policy is a tough one. But for smart voter, it’s a no-brainer, good policy is preferable on any substantial matter. We would want politicians to succeed or fail on the quality of their implemented policy, rather than just about anything else. Provided he produces good public policy, I don’t care much who a pollie sleeps with, what religious beliefs he holds, what he says or promises, and so on. These things are possible character indicators, so we might use them in the absence of anything better, but they’re not the end game.

  20. TerjeP
    February 25th, 2009 at 15:35 | #20

    I’m happy for the people to get tax cuts and the government to sink under a mountain of debt. If only it would.

    Some modest tax cuts and an end to the wool board fiasco are the only useful things to come out of the Rudd government.

  21. February 25th, 2009 at 16:14 | #21

    Jim Birch, that’s not a morality play, it’s about where doing the right thing joins the ethical and engineering senses of the term. It’s about not debasing the currency of politics. As for the rest – I already pointed out the wise rather than unprincipled approach to practicality. It’s not the public’s fault either, as the politicians set up and run the system. We cannot even practise “don’t vote, it only encourages them”, because they won’t let us. It is the polticians’ fault that there are no statesmen any more, not ours.

  22. Monkey’s Uncle
    February 25th, 2009 at 16:48 | #22

    Spiros @ 5,

    I said “Another reason is that these packages actually damage public confidence, as people realise governments would not be going to such lengths if the situation was not bad.”

    Spiros says “On this logic, the government should be cutting back its spending massively, just so it can fool people in thinking that the economy is going great.”

    Non-sequiter, reductio ad absurdum. Just because a course of action is potentially harmful, it does not necessarily follow that one has to go to the opposite extreme to negate the harmful effect.

    Just because rapidly increasing spending solely for the purposes of fiscal stimulus is potentially damaging, it does not follow that one has to go further and cut spending that was never part of any deliberate fiscal stimulus.

    Spiros continues “Unfortunately this runs into the Abraham Lincoln problem

    “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.” ”

    Spiros, thanks for providing this quote as it saves me the trouble. When a government declares the economy is more strongly positioned than others to hold up, but then gives the game away by desperately pumping unprecedented levels of money into the economy, by definition the government is trying to fool all the people all of the time.

  23. Monkey’s Uncle
    February 26th, 2009 at 00:12 | #23

    One of the amusing things about Ross Gittins’ columns is that he has a tendency to contradict himself on a regular basis.

    Take these quotes:

    “This is comforting news because, as the economically literate know, what the automatic stabilisers take away now they can be expected in due course to bring back.”

    “That would have been fine had the rise in commodity prices and hence company tax receipts been permanent. But we now know how temporary they proved to be.

    This suggests it may be quite a struggle to get the budget back to balance. Chris Richardson, of Access Economics, who has been warning for years about the riskiness of the tax rebalancing, says the new shape of the income-tax scale has taken much of the former bite out of bracket creep.”

    So Gittins spends all of page one explaining how the Rudd government’s fiscal stimulus is responsible as it will be paid for when the economic cycle improves and returns the budget to strong surplus. He then proceeds in page two to explain why that won’t happen (i.e. the Howard government has wrecked the income tax base, and the temporary windfall from company tax and the resources boom won’t return).

    I sometimes wonder how this guy can be taken seriously?

  24. jquiggin
    February 26th, 2009 at 05:48 | #24

    MU, you’ve misread the article. Gittins point is that, while the stimulus is temporary, the structural budget deficit is not.

  25. TerjeP (say tay-a)
    February 26th, 2009 at 06:42 | #25

    Let’s temporarily abolish income tax. ;-)

  26. Michael of Summer Hill
    February 26th, 2009 at 16:24 | #26

    John, I thought of adding the following here for I believe Pacific Brands is taking everyone for a ride. According to their 2008 half yearly report, the impairment (losses) of $206,443,000 included goodwill, brand names and other assets but essentially it was the result of declining economic outlook in several countries where the Company now operates. Maybe the company should come clean and explain what is really happening within their overseas operations.

  27. Declan Trott
    February 26th, 2009 at 16:45 | #27

    John, could you elaborate a bit on “the permanently larger role for government inevitable in the light of the collapse of the financial sector”?

    Tighter financial regulation (even if needed here, so far we have come off pretty lightly) would not mean higher taxes. One might favour permanently higher enviromental or social spending, but it is not clear how the financial mess makes this more urgent.

  28. Monkey’s Uncle
    February 26th, 2009 at 17:48 | #28

    Declan, I have been wondering the same thing myself. I can’t see any reason why the GFC is a justification for higher taxes or public expenditure.

    If you believe that the GFC was caused by reckless private financial institutions lending excessively without proper risk assessment, then this might well be an argument for some increased regulation of lending (such as tighter restrictions on how much money can be lent to various people or businesses). But it doesn’t follow that this must also necessitate higher taxes and public expenditure.

    Nor does it seem fair that all private businesses and workers deserve to be slugged with higher taxes just because a few Masters of the Universe got carried away with themselves.

    The whole argument seems to boil down to a basic ideological conflict, i.e. your side has taken a hit, so our side gets to impose more of what we want to do.

  29. Monkey’s Uncle
    February 26th, 2009 at 17:57 | #29

    Actually, the GFC is a perfect example of what happens when greed and stupidity coalesce.

    You have stupidity in the form of central banks increasing the money supply too quickly and creating asset bubbles, plus governments exacerbating the problem with various regulatory and taxation measures that distort the economy.

    Then you have the financial industry and investors chasing these unrealistic returns for all they are worth.

    Indeed, greed without stupidity doesn’t do too much damage. And stupidity without greed is mitigated somewhat.

    But greed and stupidity combined produce disastrous outcomes. If no-one else has named this phenomenon, maybe I can call it Monkey’s law.

  30. Ian Gould
    February 26th, 2009 at 23:01 | #30

    Monkey’s Uncle you’re violating the primary rule of discussing the GFC to wit, you’re neglecting to claim that it is either:

    a. exclusively the result of oppressive Big Government; or

    b. exclusively the result of the capitalist oppressors once again swindling the oppressed masses.

  31. observa
    February 26th, 2009 at 23:58 | #31

    ‘Let’s temporarily abolish income tax.’
    As I recall the amount of Obama’s fiscal package would allow the US to do that for a year and getting your gross wage in your hand you’d imagine would be about as stimulatory as it gets.

    However the Rudd Govt does have a golden opportunity here to get out of breaking that ‘core promise’(really a Howard card superbly played in the campaign) and solve their dilemma with those weak CPRS targets and handouts. It has tax reform on the agenda and can easily substitute a carbon tax for income tax to its hearts content. What could Turnbull say if wedged with that policy change but be left arguing over the fine details? Straight carbon taxing always belts the wealthy hardest as distinct from allowing them to buy their way out with spurious offsets, not to mention engage in speculative returns and economic rent from derivatives trading. The alternative is starve or lie beast, while looking weak on CO2 with that emasculated CPRS. Howard would be chuckling over their predicament now.

  32. observa
    February 27th, 2009 at 08:52 | #32

    Actually if you cast your mind back to the election campaign Rudd could have taken the political risk over the Costello tax cut package and ducked the ‘meetoo’ stance for a general statement on rejigging tax in office more for ‘working families’. He didn’t and is paying that price now with a core promise of Costellos. Once he took the safe road he was probably bound to meetoo Costello because it had the benefit of incumbency and detailed Treasury costings, whereas anything else at short notice wouldn’t, with the concomitant risk of black holes, etc That incumbency probably gave him an offer he couldn’t refuse and Howard knowing he would probably lose the election would be comfortable with that legacy. As I pointed out at the time the Libs could leave office with their ‘low tax’ credentials intact, despite the reality of Govt as a proportion of GDP.

    Of course if by some miracle Howard survived the Libs would have been in the same bind now and certainly Costello foresaw stormy seas ahead at the time and plugged the steady hand at the tiller theme. Rudd had fair warning about his safe ‘meetoo’ road choice right then and there. Interesting to speculate where a chastened but surviving Howard/Costello Govt would be now. No sorry, wait and see on Kyoto and no gabfest cost but I’m sure he’d have bailed ABC Learning and probably thrown the greenies some pink batts and the car industry a green stimulus/bailout bone. He’d have kept his powder dry on last year’s handouts and would have rammed through the second tranche of tax cuts buying off NickX similarly, but he wouldn’t have that silly ETS commitment hanging over his head like the sword of Damocles.

    As an aside here the Brotherhood of St Laurence have raised the thorny problem of pensions and the future threat from demographics. Rudd needs to address the problem of house rich, income poor pensioners now and into the future. I’ve had my ear to the ground on that and there’s only one logical solution. The pension assets test must include the value of the home after an exemption for an amount up to the median house price. That’s fair to all particularly as you have to reward pensioners for saving and paying off a house up to a point. After that we need to reduce pension entitlement for RE wealth just like any other, albeit you don’t want to force pensioners out of their traditional home just because it’s in a very desirable area now. The solution is they accrue a lien on the house above the exempt median price a bit like a HECS debt in order not to affect their pension income now. Demographics demands this reform urgently now.

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