Tackle the debt - IMF tells US

THE International Monetary Fund has called on the US to take "decisive policy action" to bring its government debt under control, warning that it is on track to be almost 100 per cent of GDP by 2020.

In its annual report on the US, released last night, the IMF said the Obama administration and Congress needed to go further to tackle the budget deficit which IMF staff estimate will be between 5 and 8 per cent every year over the next decade.

The IMF's board of directors made it clear that both tax rises a taboo for Republicans and spending cuts would be needed to bring the US budget back anywhere near balance, let alone into surplus.

"A larger than budgeted adjustment would be required to stabilise debt to GDP under the staff's economic assumption, requiring revenue and expenditure measures," it said.

It urged reform of entitlements, such as farm subsidies, pensions and benefits. It also urged the US to aim to cut its debt-to-GDP ratio over the longer term. The US has run just one budget surplus in the past 50 years.

A separate report by IMF staff estimates the deficit this year will be 11 per cent of GDP (compared with 3 to 4 per cent in Australia). That is forecast to halve by 2012, but then rise as the ageing population and soaring health and debt costs inflate spending.

The report tips the 10-year bond rate to average 3.6 per cent this year, but then jump to 5.9 per cent by 2012, and to 6.5 per cent thereafter.

The staff estimate that gross government debt will be larger than the US GDP by 2012.

"The mission saw a key macro-economic challenge as ensuring that public debt is put and is seen to be put on a sustainable path, without jeopardising the recovery," the staff report said.

"Under current policies, federal debt held by the public could rise from 64 per cent to 95 per cent of GDP by 2020."

It suggests most of this will need to be bought by domestic investors, with foreign investors likely to unwind their holdings.

"Over the medium term, higher real interest rates will be needed to encourage the implied portfolio shifts," the report said.

The report lays bare clear disagreements between the IMF team and the US authorities over prospects for the US economy, and hence for returning the budget to some form of sustainability.

In Melbourne yesterday, Harvard historian Niall Ferguson warned that competition between a rising China and a fiscally weakened US could lead to conflict.

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Asia-born population matching local born

AUSTRALIA'S Asia-born population was growing almost as fast as the Australian-born population in the year before the federal government cracked down on immigration rorts, new figures show.

The Bureau of Statistics' annual migration estimates show Australia's migrant population rose by more than a million in the five years to 2009, topping the 808,000 growth of the Australian-born.

In 2008-09 alone, the overseas-born population rose by 271,360 or 5 per cent, the bureau estimates. The Australian-born rose by 185,360 or 1.2 per cent.

In a stunning figure, the bureau reports that two-thirds of Australia's net migration was of people aged 15 to 34 helping significantly to offset the ageing of the population.

The fastest growth was in the Indian-born population, which grew by 44,012, or 17 per cent. The Chinese-born grew by 30,009, or 9 per cent, and the total Asian-born population by 172,050, or 10 per cent.

By mid-2009, the Chinese were the largest non-Anglo community in Australia. Their numbers grew by two-thirds in just five years to 350,979.

The Indians were just behind them, with the size of the Indian community more than doubling between 2004 and 2009 to 308,542.

The figures predate federal government moves to shut the back door through which foreign students in low-level courses have stayed on in Australia as workers. In 2009-10, student visa grants have fallen by 70,000 or 31 per cent, with net long-term arrivals showing a similar fall.

The data comes at a sensitive time, with immigration now one of the key issues of the election campaign. Opposition Leader Tony Abbott has pledged to limit net migration into Australia to 170,000 by 2012-13, without saying how.

The bureau finds that in 2007-08, 31,419 overseas students entered Australia to start vocational education and training courses, but only 4064 former VET students returned home.

In all, 135,165 foreign students started courses of one kind or another, but only 26,423 returned home. Part of that was because the industry was growing very fast, but part was because for many, studying in Australia was a stepping stone to permanent residency.

The Howard government opened up this option in 2001 to encourage foreign graduates with scarce skills to work in Australia. But when it extended this to the VET sector, foreign enrolments exploded in cooking, hairdressing and hospitality courses.

Immigration Minister Chris Evans has now closed off this option in reforms to limit skilled migration to those with higher-level skills.

The British remain Australia's largest migrant group, with 1,188,247 permanent and temporary residents in mid-2009.

New Zealanders are second with 529,178 residents.


OUR DIVERSE NATION

WHERE WEVE COME FROM

BIRTHPLACE GROWTH 2004-09, POPULATION MID-09

000 000

Australia 808 16,139

Overseas 1020 5816

Asia 621 1881

South Pacific 126 664

Africa 85 279

Europe 78 2421

Middle East 62 330

Americas 48 241

Total 1828 21,955

India 168 309

China 140 351

New Zealand 109 529

Britain 67 1188

Korea 44 95

Philippines 42 169

South Africa 40 149

Malaysia 31 130

Vietnam 25 204

Sri Lanka 22 87

SOURCE: AUSTRALIAN BUREAU OF STATISTICS.

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Coalition might increase deficit, debt

THIS election campaign is changing colour more rapidly than Julia Gillards hair. Last week, both parties pledged, hand on heart, this would not be an election spendathon. But if its not that, what do you call it?

On Monday in Queensland, both party leaders pledged roughly $1 billion of new spending, in one day: both pledged about $750 million to build a rail bridge in Brisbane without a benefit/cost analysis, and Abbott pledged another $240 million to build a bypass of Mackay.

Yesterday, Labor took a break owing to certain problems with cabinet leaks, but the Liberals ploughed on.

The spend-of-the-day award indeed, the big spend of the campaign so far went clearly to Tony Abbott, as he pledged to cut the company tax rate from 30 per cent to 28.5 per cent from mid-2013.

This one-upped Labors pledge to cut it to 29 per cent, and neutralised Labors campaign against Abbotts impromptu decision in April to make employers, not taxpayers, pay to lift maternity leave to six months.

That decision, made without reference to shadow cabinet, could now be reversed. Shadow Treasurer Joe Hockey said yesterday the Coalition would have more to say on the issue later in the campaign clearly implying that it would be different to what it has said since April.

Fine, but if so, well be paying for it. And who would pay for his cut in company tax?

Well, we would. Under Labors plan, the cut in company tax would be financed by the mining tax. The Coalitions cut would come out of general revenue.

And its not cheap. The Coalition estimates it at $2.5 billion in year one, settling down then to $2.1 billion a year. On the four-year basis we usually use, thats $8 billion plus easily the most expensive campaign promise yet.

But isnt it financed by their plans to cut spending in other areas?

In theory, yes. In practice, the cuts are far smaller than the Coalition claims, and now run the risk of being overwhelmed by its spending promises.

The Coalition claims $24 billion of spending cuts. But $9 billion of that is pledging not to spend money it wont raise by not having a mining tax. How can you save money you dont receive? Thats phoney.

Are you sure Labor will receive it?

No! It depends entirely on mineral prices, and who knows what they will be?

Analysts Wood Mackenzie forecast that the coal half of Labors tax could raise as little as $7.4 billion over the next five years. If so, the revenue will be well short of the $6.5 billion a year target.

But Labors numbers include some safety buffer. The Coalition has none. Take out that $9 billion, and its claimed savings shrink to $15 billion. But $5.6 billion of that is savings from programs it plans to replace with new spending, so you cant book gains from that.

That leaves roughly $9 billion of real savings over the next four years mostly $4.4 billion from not replacing public servants who leave, and $2.3 billion from cutting climate change programs.

The Coalition tells us it will reduce the deficits and debt. But this way, its in danger of increasing them.

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Relief all round at signs rate pause will last

THE nation breathed a huge sigh of relief at 11.31am yesterday. It came from home owners, from the Labor Party, even from the Reserve Bank offices in Sydney.

The unexpectedly low inflation figures for the June quarter meant home owners were spared another $50 a month on their mortgage bills. The government was spared the problem of having to explain another interest rate rise to angry voters. And the Reserve was spared the unpleasant task of lifting rates in the middle of an election campaign.

Underlying inflation is now clearly within its target zone of 2-3 per cent, and has fallen to its lowest level for three years. The question now is whether it will stay there. Discounting has clearly played a big part. Weak demand in the retail economy is not only holding prices down, but actually pushing them down.

Of 90 sub-categories the Bureau of Statistics uses to calculate its index, 33 recorded falling prices in the past 12 months, including audio-visual and computing equipment (down 8.3 per cent), almost all types of clothing, as well as holiday travel, almost half the food groups, household supplies and phone bills.

Then why is headline inflation up 3.1 per cent? It comes overwhelmingly from just seven areas:

The rise in tobacco taxes, which affects only smokers.

Rising electricity charges, as growing demand collides with years of underinvestment.

Soaring house prices.

Rising petrol prices, reflecting global trends.

Higher bank margins, due to lack of competition.

Higher rents, due to too little housing construction where renters want to live.

Higher medical bills.

Those areas cover roughly half of household spending. In the other half, inflation was negligible. And that is the half that relies most on our discretionary spending.

Most market economists yesterday seemed confident that inflation will rebound soon, and force the Reserve's hand on rate rises. But then, they were wrong yesterday.

The reality is that inflation will stay low as long as households' discretionary spending remains constrained. There is no sign of that ending.

The fiscal stimulus that has propped up the economy for 18 months is winding down. Global commodity prices are coming off their peaks, reducing export income ahead. And the Reserve's six rate rises since October have yet to fully impact on consumer demand.

This rate pause could last quite a while.

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Same same but different: Essay on Australia

SINCE Labor took office in 2007, economic debate has been dominated by the global financial crisis. Labor's proudest boast is that Australia has emerged from it in better shape than almost any other developed country. The Coalition accuses it of reckless spending, and running up tens of billions of dollars in deficits and debt.

Labor's boasts are inflated, but basically true. Australia's national income per head is now back in the top 10 of the developed world for the first time in decades. In a world awash with economic and financial failure, it is seen globally as a beacon of success.

Australia had a mild, brief recession: Europe and the United States a deep, lasting one. There, unemployment is around 10 per cent, growth is feeble, governments in massive deficit, and there is a growing risk of double-dip recession as fiscal austerity replaces stimulus.

Australia suffered scars, but they're healing. Growth is only 2.7 per cent growth per head is just 0.7 per cent but it's secure. There are 300,000 more people unemployed or underemployed than in 2008, but unemployment is only 5.1 per cent. The banks are cautious, but they're lending.

Was our success due to the government's handling of the crisis and if so, how much? Or is it proof that, as the Coalition says, the stimulus was unnecessary, over the top, and will leave us burdened with debt?

The Rudd government's handling of the crisis is the economic issue of the election. The government thinks it deserves re-election for steering us out of trouble by its quick, bold spending and bank guarantees. The Coalition urges us to dump Labor for wasting our money on excessive, badly-targeted, mismanaged programs.

NO ROADS TO REFORM

Both are looking backwards. Apart from the National Broadband Network and emissions trading (if it happens), neither has any real reform agenda to take us forward. Labor's aim under Julia Gillard is to camp in the middle of the middle ground, and feel its way forward only where that seems safe.

Tony Abbott, by nature, is more ideologically-driven. Yet now even he has thrice denied any plans for workplace reform an issue that in the Howard government, he held so dear. The Coalition, too, has no reform agenda. Its energy has gone into campaigning against Labor, not generating policies of its own.

The one forward-looking debate is on how fast the stimulus should be unwound. And the difference between them is more in rhetoric than reality.

On monetary policy, there is no difference. Rhetoric aside, both leave it to the Reserve Bank board to decide our interest rates. What might change is the composition of that board, all of whom come up for reappointment in the next three years including Governor Glenn Stevens.

Stevens and Treasury secretary Ken Henry were both chosen by Peter Costello. Yet in opposition, the Coalition seems to view our two top economic officials as part of Labor's team. If Labor is re-elected, Stevens and Henry can expect reappointment. If the Coalition wins, that is far from certain.

There was once a big difference between the parties on industrial relations, but now it's vanished. That, like Labor's decision to postpone indefinitely its core promise to introduce emissions trading, tells you how difficult it is to carry out hard reforms in a political system as polarised as ours. It is now a roadblock to reform.

But there are differences that matter. On emissions trading, the difference between the Coalition's "never" and Labor's "one day" is not insignificant. There is a sharp divide between the parties on the mining tax, and on the tax cuts for business it would finance.

Labor would make employers pay to lift superannuation contributions to 12 per cent by 2020. The Coalition would make them pay for workers to take six months of maternity leave, topping up Labor's 18 weeks.

The National Broadband Network is the most ambitious infrastructure project since the Snowy Mountains Scheme and one of few big political risks of recent times. Work is now under way to bring high-speed broadband to 93 per cent of Australian homes, at a cost of up to $43 billion. The Coalition would abandon the field to the private sector telcos.

But the central issue is deficits and debt. Were they needed? Are they being wound back fast enough?

The global financial crisis essentially had four causes. First, US banks and other lenders lent too much money to people who were bad credit risks, under terms so onerous that default was inevitable (the sub-prime crisis). Second, Wall Street invented, and invested heavily in financial derivatives so complex that financial firms themselves did not fully understand the risks they were taking on.

Third, US regulators, swayed by the deregulatory Zeitgeist, allowed all this to happen. And fourth, European banks awash with savings invested them in derivatives, sub-prime loans, and risky lending to eastern Europe.

CRISIS AVERTED

Australia's banks were remote from that. The crisis proved their own lending sound, with a few high-profile exceptions. This was partly because of the banks' instinctive caution, partly because the Australian Prudential Regulation Authority was an effective and intimidating watchdog, and partly because they had their own lucrative game borrowing cheaply overseas to fuel our house price boom.

Debt drove Australia's long boom in the '90s and '00s. Between 1990 and 2008, household debt soared from 45 per cent of our disposable income to 155 per cent. As the banks borrowed much of that overseas, their net foreign debt soared from 10 per cent of GDP to 40 per cent. That was clearly unsustainable, yet our leaders, officials and the banks shied away from debate on how to change it.

When the crisis came, our dependence on foreign debt made us vulnerable. If global markets failed, we would be in trouble. And fail they did.

In September 2008, crisis turned to panic after Lehman Brothers collapsed. The markets stopped lending; institutions clung to their cash. Australian banks could no longer roll over old loans for new ones. By October, Suncorp, and maybe Bankwest, were within days of default, and collapse.

The Rudd government moved quickly. It guaranteed the banks their deposits, their old loans, and their future ones. Two days later it delivered a $10 billion package of stimulus spending to shore up the economy mostly as $900 cheques to all but the well-off. The crisis was averted.

Over the next 18 months, the banks raised $160 billion, mostly on global markets, guaranteed by Australian taxpayers. The scheme was designed in haste, and seriously damaged nonbank lenders, so the government then had to rescue them too. Some lenders had to merge, but our financial system survived, in good shape.

These initial interventions won bipartisan support from the Coalition, and widespread praise around the world for the "exemplary" speed and scale of the government's actions. But the bipartisanship faded when Rudd and Wayne Swan produced a second, far bigger stimulus package in February 2009, including $15 billion for school halls, libraries, etc, a second $8 billion handout to households, $6 billion to build 20,000 units of social housing, and $4 billion to insulate the ceilings of houses.

Why did Australia survive the crisis so well? There are several reasons, and economists differ over which mattered most. The banks didn't go broke. House prices didn't collapse. Exports didn't collapse, thanks to stimulus in China. Immigration kept the population booming. And the Rudd government's spending propped up demand especially for construction, usually the biggest victim of recessions.

Few economists would argue, as Abbott has, that no stimulus was needed. Without it, Treasury estimates Australia would have sunk deeper into recession over 2009, even with China buying our iron ore.

But it was excessive. It was a mistake to spend so much on the school halls programs that it became an entitlement impossible to unwind. A lot of money was wasted on poorly run schemes. Too much money was committed to schemes drawn up in too much haste. At the time, ministers and officials, like their counterparts around the world, believed they were fighting to avert a second Great Depression. Some economists disagreed at the time; we now know they were right. Fortunately.

The deficits are now being wound back: from a $55 billion deficit in 2009-10, the budget is forecast to be in surplus by 2012-13. Net debt is now forecast to peak at $90 billion, or 6 per cent of GDP. With the US forecast to owe 86 per cent of its GDP by 2015, and Japan 154 per cent, the ratings agencies, economic officials, the IMF and the OECD all agree: Australia's debt is nowhere near problem levels.

There are many real economic problems out there. Last year 21 per cent of men and women of prime working age had no job at all. We have imported a million skilled workers because we don't train enough of our own. We have borrowed $654 billion because we don't save enough of our own. We need widespread tax reforms. We have a growing inequality of incomes, and outcomes. One could go on. But in this campaign, it's pointless. These are issues the parties are not talking about.


READ MORE

The Great Crash of 2008 by Ross Garnaut and David Llewellyn-Smith (MUP) 2009.

Shitstorm by Lenore Taylor and David Uren (MUP) 2010.

This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S.Rogoff (Princeton) 2009.

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The big projects go where the people and the votes are

YOU cant accuse Auditor-General Ian McPhee of going soft on the government. Two reports issued by his team show the government playing fast and loose with its own rules in allocating money for infrastructure projects.

Report 1, on major infrastructure projects, found the government ignored the criteria set by Infrastructure Australia, and funded projects that failed to meet its benefit/cost criteria, while ignoring others that did including the top project in bang for buck.

Report 2, on the stimulus program to fund shovel-ready local projects, found that by June, when the program was intended to end, only a quarter of the money had been spent. Instead, most was sitting in councils bank accounts.

That might be overlooked in the brawl over the distribution of funding between electorates. The auditors found that while Labor and Coalition seats as groups got roughly their fair share of funding (with a small bias towards Labor), only 18 per cent of applications from councils in Coalition-held seats were funded, as against 42 per cent of applications from councils in Labor-held seats.

The Coalition is screaming unfair, and it has a point. The audit team points out that Infrastructure Minister Anthony Albanese gave no explanation about why he chose 131 of the shortlisted applications, rejected 57 others, and waived the rules to fund six others. You can bet politics played a part.

But the reality is most applications failed, not because of the minister, but because they failed to make the departments shortlist. And a state breakdown hints at why: Victorian councils had twice the success rate of councils in South Australia, Western Australia and Tasmania, where there are many rural councils with few people. Size counts.

The real scandal uncovered by the audit team is that while the projects selected were meant to be shovel ready to provide immediate work in the 2009 downturn, few of them were. By June 30, when the program was to end, $550 million had been allocated, $438.5 million paid to councils, but only $142 million actually spent.

Why? The audit team finds many projects in fact were not shovel ready. Others were planned for a longer time period. And many involved high delivery risks, which have been realised. Most of the money is now planned to be spent in 2010-11.

The audit of Infrastructure Australia highlights a different problem. On one hand, the government pledged that project selection would be based on rigorous analysis of the costs and benefits. But on the other . . . well, infrastructure programs help to buy votes.

Infrastructure Australia found the biggest bang for buck would be delivered by Canberras eastern bypass, the Majura Parkway.

But there are no marginal seats in Canberra. So the government instead allocated $91 million towards Sydneys metro project, which had no cost-benefit analysis. Fortunately, no money was handed over before the metro died in February.

The noble intentions are being trampled in the dust. Yesterday both parties pledged $750 million or so to build Brisbanes Moreton Bay rail link another project yet to pass the benefit/cost test. Tony Abbott also pledged to build a ring road around Mackay, a winnable Labor seat. Your taxes at work, for the politicians.

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A failure of leadership

LAST week, pollster Gary Morgan pulled out some old polls like, really old. In 1952, when the postwar immigration program was starting to transform Australia from an Anglo-Irish nation into a very diverse one, his dad, Roy Morgan, found 52 per cent of Australians wanted the immigration intake reduced while only 43 per cent wanted to maintain or increase it.

Did prime minister Robert Menzies change the policy to satisfy its opponents? No, he kept immigration rolling, and gradually Australians got used to it. By 1959, the Morgan poll found supporters outnumbered opponents 59-34 and, by 1969, 64-26.

Why didnt Menzies buckle? Because the Labor opposition supported the policy, which it had initiated in 1947. My father used to send the results to both Menzies and Arthur Calwell (then Labors deputy leader), Gary Morgan recalls. They were at one on this, so there was no political issue.

Fast forward to July 2010. The latest Morgan poll finds 58 per cent of Australians support the official immigration program of 170,000 or want it higher, while just 40 per cent want it lower. Yet our political leaders are doing backflips to appease them.

Why? Because Tony Abbott, after repeatedly supporting high immigration, swung his party behind a scare campaign against its own former policies. It is a failure of leadership. And its a classic demonstration of our inability to produce a bipartisan policy when it is needed.

Another, still more important, was our failure to agree on a policy to reduce carbon emissions as cheaply as possible. That means putting a price on them a carbon tax or an emissions trading scheme so business and households factor it into their investments and purchases to minimise their costs.

Instead, the latest in our dumbing down of policy is Julia Gillards plan to take $394 million out of programs to develop solar energy or carbon capture and storage so she can give $2000 each to people trading in pre-1995 cars for more fuel-efficient new ones. This, she says, will cut emissions by 1 million tonnes and save buyers $344 million in fuel costs.

Two points of basic arithmetic. First, $394 million spent to save $344 million? Thats $50 million wasted. Second, as prominent economist Warwick McKibbin points out, the scheme will cost us $394 per tonne of emissions saved. Weve been talking about carbon prices of $20 or $30 a tonne. A solar power plant or carbon capture and storage scheme would cost a fraction of this price.

Which is more dopey: this scheme or the citizens assembly Gillard proposes to debate what to do about climate change? Mmm, hard call.

I am one of millions of Australians angry that no political party at this election is offering a climate change policy that would reduce carbon emissions as quickly as possible, as cheaply as possible.

Abbott rules out ever having a carbon price, instead proposing a mix of expensive gimmicks which the Climate Institute estimates will fall far short of meeting the bipartisan target to reduce emissions to 5 per cent below 2000 levels by 2020.

Gillard says we should have a carbon price, but only when there is community consensus for it (that is, no political pain).

The Greens want to reduce emissions to 40 per cent below 1990 levels by 2020 that is, almost halving our emissions in the next 10 years. How could we do that? Wed have to shut down nearly all our power stations, find hundreds of billions of dollars to invest immediately to build energy-efficient but far more expensive ones, which would put energy-dependent industries out of business. Thats not a serious policy.

You see why we need bipartisan policies? The Garnaut report should have gone to all party leaders, who could then have thrashed out a policy they would all own, which would last for decades, and give investors the certainty to invest their money in low-emission technologies.

Back to immigration. The Howard government was the author of the high-immigration policy that Howards heirs are now campaigning against. It saw that Australia would need a lot more skilled workers, and that it was cheaper to attract migrants with the skills than to train Australians in the numbers needed. So it made three profound changes.

First, after an initial cut to the official migration program, it steadily lifted it from 67,100 to 158,630 in a decade. Second, in 2001 it made a momentous change by allowing foreign students with skills to stay here permanently if they could line up a job after graduating. And third, it introduced section 457 visas to allow businesses to bring in overseas workers in areas of skills shortages.

These were sensible moves, and won broad support. The only controversy was over rorting of section 457 visas by unscrupulous employers. But a crisis was building. Net overseas immigration which includes the movements of temporary workers and students, as well as permanent settlers, New Zealanders and Australians rose to 306,000 in the year to March 2009.

That number was swollen by rorts of student and section 457 visas, by a net 30,000 Australian workers returning home, and by a red-hot labour market.

Since then, Immigration Minister Chris Evans has ended the visa rorts, and there are fewer jobs for foreign workers to fill. Net arrivals so far this year are down 31 per cent.

Its not the immigration program thats out of control. Its Abbotts inability to distinguish between opposition and opportunism.

Immigration is one of Australias great success stories. Its a bipartisan success story. Why cant we keep it that way?

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Immigration promise matches reality, not necessarily by design

FIRST Julia Gillard, now Tony Abbott, are leaning on a door that was already closing — and trying to claim the credit for shutting it.

Abbott pledged yesterday to reduce net overseas migration from its peak of 300,000 to 170,000 by the end of his first term. But he didn't tell us that we're already half-way there.

Net overseas migration has plunged to an estimated 240,000 in the year just ended. So far in 2010, net permanent and long-term arrivals (a broadly similar measure) has fallen by almost a third: from 169,000 to 116,000.

Economic consultants BIS Shrapnel predict this trend will continue.

In May, they forecast net overseas migration of just 175,000 this year, and 145,000 in 2011-12.

They might be right, might be wrong. But if they're anywhere near right, the Coalition's policy is simply to promise what's already happening.

Hang on. Who are the people coming here?

Take 2008-09. That year, 530,000 people arrived to live here — either permanently or long term (that is, for more than year). But 231,000 residents left to live overseas, permanently or long term. So net overseas migration was 299,000.

The official migration program set by the government was just 185,000. In round figures, there were 115,000 skilled migrants, 56,500 family members (mostly partners) of Australian residents, and 13,500 refugees. But they were offset by 75,000 Australian residents who left the country permanently to live overseas.

Most of the arrivals were long-term workers and students. Separate immigration figures show that in the year to June 2009, the number of students living here rose by 69,000. The number of long-term temporary workers rose by 24,000, section 457 visa holders by 8500 and New Zealanders by 27,000.

But wait, there's more. The global financial crisis also saw a net 27,000 Australians return home after working overseas. That will shrink ahead.

Why is immigration now falling?

Two reasons. First, the weak job market means there are fewer vacancies for migrant workers to fill.

Second, Immigration Minister Chris Evans has ended the rort of student visas leading to permanent residency, and the rorting of section 457 visas by employers bringing in cheap Asian labour.

What do the latest figures show?

In the December 2009 quarter, after Evans moved on student visas, net migration fell by 28 per cent year on year. For this year, we've only got the net arrivals figures, but they're down by 31 per cent, more than 10,000 a month.

And in 2009-10, offshore student visa grants in 2009-10 also plunged 31 per cent, or by 70,000 — mostly from India and Nepal.

See what I mean? The door is already closing. How narrow do we want to make it?

Australian education is a big export industry: putting limits on student numbers would be ridiculous. So would denying Australians the right to bring in their partners, or closing Australia to Kiwis.

To cut skilled worker migration would hurt industry. To cut our small refugee intake would be heartless.

Demographer Peter McDonald warns that we are blaming migrants for our failure to plan cities properly. I couldn't agree more.


PUSHING ON A CLOSING DOOR

NET OVERSEAS MIGRATION
Financial year level % change

07-08   277,300 +19
08-09   298,900 +8
09-10* 240,000 -20
10-11* 175,000 -27
11-12* 145,000 -17

IN DECEMBER QUARTER

Dec 07 56,000 +11
Dec 08 68,800 +29
Dec 09 49,200 -28

NET PERMANENT/LONG-TERM ARRIVALS
5 months to level % change

May 08 141,550 +26
May 09 168,970 +19
May 10 115,990 -31

SOURCES: AUSTRALIAN BUREAU OF STATISTICS,
* FORECASTS BY BIS SHRAPNEL

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Interest rate rise looms as wild card in election battle

AUSTRALIA'S market economists believe the Reserve Bank could have to raise interest rates next month in the middle of the election campaign, with new inflation figures likely to exceed its forecasts.

On Tuesday, the Reserve forecast that next week's inflation figures will show that underlying inflation fell below 3 per cent in the year to June, falling within its target range for the first time in three years.

But the minutes of the Reserve's July board meeting hinted that if underlying inflation tops 3 per cent, the August meeting would have to consider whether the new figures "materially changed the medium-term outlook for inflation" — and if so, raise rates.

Yesterday, a Reuters survey of 20 financial houses found most think underlying inflation will top 3 per cent on both the measures by which the Reserve has traditionally defined it.

Westpac, Goldman Sachs and UBS are forecasting an average reading of 3.1 per cent, slightly up from the previous quarter. Unless financial markets are in turmoil, that would probably force the Reserve's hand.

But traders from the same financial houses clearly disagree with their economists. The ASX target rate tracker puts the chance of an August rate rise at only 27 per cent. Traders expect the next rate rise is a year away.

The Reserve will also be influenced by global financial markets' reaction to the long-awaited results of stress tests on Europe's main banks, which were released last night.

If the reports fail to satisfy concerns about the banks or the stress test process, analysts warn they have the potential to send a new wave of fear through the global financial system, slowing lending and driving up wholesale interest rates.

The Bureau of Statistics yesterday estimated that soaring coal and iron prices pushed the average price Australia receives for its exports up 16 per cent in the June quarter, the sharpest rise since figures began in 1974.

But import prices rose only 1.9 per cent, with more than a third coming from higher petrol prices. That will have little impact on underlying inflation, or the risk of a rate rise.

On a rough measure, that implies Australia's terms of trade — the amount we get paid for our exports, relative to what we pay for imports — shot up 14 per cent in a single quarter, to be near record levels.

With China putting the brakes on its economy, however, coal and iron ore prices are forecast to fall.

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Balancing the books on education refund promises

THE Coalition's plan yesterday to extend the education tax refund to school fees got both sides hot and excited.

Education Minister Simon Crean accused the Coalition of opening a fiscal "black hole". Coalition finance spokesman Andrew Robb accused Labor of planning to cut access to family tax benefits.

Let's ignore all that to look at the key issues.

OK, start with the real question: which is the better policy?

Sure. Team A offers parents a tax break on the cost of buying iPads, other IT equipment and school uniforms. Team B would extend the tax break to cover school fees and extra-curricular costs, even sporting equipment. Which plan makes more sense?

To me, the Coalition's plan is clearly better, even if both go too far. School fees and tutoring bills at least are genuine education expenses, unlike iPads or sports gear. If you think parents deserve more support, surely this is a better way to give it.

Won't it go disproportionately to parents with children at non-government schools?

Yes, it will, and it's curious that the Coalition's six-page policy paper makes no reference to extending the tax break to include voluntary contributions by parents at government schools.

Perhaps none of them send their kids to government schools. But the two-thirds of Australian parents who do, deserve more than an offhand assurance by Tony Abbott that of course we'll include those payments.

Tony, it's not in your policy. How about giving parents a very clear commitment to that in print? Do it now.

That said, bear in mind that only families eligible for Family Tax Benefit A will qualify anyway, which excludes a lot of AB families — and, I'm sorry to say, a lot of Age readers. It's not welfare for the rich.

And the big question: is the Coalition's proposal fully costed?

Probably not. But there's probably only one person in Australia who knows, and (s)he is keeping quiet. It's really messy. Labor had estimated the plan would provide a bit over $1 billion a year in benefits. But by June, only $606 million had been claimed for year one, a takeup rate of 60 per cent.

Why? First, claims were lodged for only 1.7 million of the 2.1 million students now deemed eligible. Second, only 32 per cent claimed the full amount: $375 for primary students, and $750 for secondary.

So in May, the government quietly cut its estimate of the future cost to about $750 million a year (or $3.1 billion over four years).

Then Julia Gillard extended it to school uniforms, at a cost of $340 million over the four years. That estimate assumed 10 per cent more claims in all, and roughly half the existing claimants getting much bigger rebates.

It looks like the Coalition might have been working off earlier, smaller estimates of the takeup in arriving at its cost estimate.

To me, its costing looks too low. But even if it is, it won't bankrupt us.

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Unlearnt lessons from the financial crisis may spell disaster

JOE Stiglitz has seen the future, and he is worried. He had hoped that the global financial crisis would force reforms to ensure that it never happened again. He had hoped that Western governments would stick to their stimulus spending as long as it was needed to offset the weakness in household spending and business investment. But neither is happening.

One of the world's most eminent economists, Stiglitz has long warned that the West risks a "double-dip" recession next year as the stimulus is removed faster than private spending comes back. He is not predicting such an outcome, but with the US economy still "anaemic" and austerity measures now sweeping Europe in the wake of the Greek sovereign debt crisis, he sees the risks mounting.

"What is almost certain is that growth will slow down markedly," he says. "Whether it will slow down to the point where growth becomes negative is not clear.

"I don't think the markets or governments have taken on board the consequences of simultaneous austerity policies in the UK, Germany and others.

"Some governments have put out rosy forecasts of how little it will hurt. It's as if they

can engage in contractionary policies without getting the contraction.

"When a number of countries take these policy actions together, the effects might be very severe."

Winner of the 2001 Nobel Prize for economics, former chief economic adviser to US president Bill Clinton and chief economist of the World Bank, Stiglitz is one of the few economists who have earned a worldwide following: among economists, for his work on the adverse consequences of market players having different levels of information, and among the broader world of people who think about issues, for his penetrating criticism of the economic shibboleths of free market fundamentalism, and his articulate advocacy of an economics that makes improving human welfare its core mission.

Stiglitz, now 67, spoke to The Age yesterday from Perth, where he has just arrived for a three-week tour that will take him all over Australia, combining holiday sightseeing with 12 lectures, two of them in Melbourne, mostly on the lessons of the global financial crisis and the prospects for recovery.

If you've read his recent bestseller on the crisis, Freefall: Free Markets and the Sinking of the Global Economy, you will know that his views are bleakly pessimistic. He puts the blame for the crisis squarely on Wall Street, and the politicians and regulators who gave it free rein partly for ideological reasons, partly because of its role in financing their campaigns.

"The big question in the 21st century global economy is: what should be the role of the state?" he writes. "Today only the deluded . . . would argue that markets are self-correcting and that society can rely on the self-interested behaviour of market participants to ensure that everything works honestly and properly let alone works in a way that benefits all.

"I believe that markets lie at the heart of every successful economy but that markets do not work well on their own.

"Economies need a balance between the role of markets and the role of government. In the last 25 years, America lost the balance, and it pushed its unbalanced perspective on countries around the world.

"The problem was not so much [former US Reserve chief Alan] Greenspan as the deregulatory ideology that had taken hold."

The financial reforms passed by the US Congress this month will not stop risky lending, Stiglitz warns. While they enshrine four important principles restricting banks from investing in risky activities, forcing derivatives trading into the open, cutting bank fees on debit card transactions, and setting up a consumer product safety commission "every one has a carve-out, a big exception" that will allow the banks largely to carry on as before, he says.

To Australian readers of Freefall, it's hard to believe that two countries so similar could have taken such different approaches to market regulation. In Australia, John Laker and his team at the Australian Prudential Regulation Authority were real watchdogs, keeping the banks from risky lending strategies by warning they would have to put aside more capital to offset the risk. So our banks didn't fail, and our crisis ended up as the mildest recession since World War II.

Finding out why Australia survived the global slump so well is one of Stiglitz's goals here. "Australia is a fascinating country for me to visit, because it shows that you can actually have a capitalism that works," he quips.

Another priority here is to explain an intriguing report last year by a commission he chaired on "the measurement of economic performance and social progress". Commissioned by French President Nicolas Sarkozy, it argued that our usual measure, gross domestic product, is a poor guide to progress. Rather, we need new measures that focus on sustainability, income distribution and quality of life, as well as output.

"It's had a lot of resonance," Stiglitz says. "It's a long-term agenda, and there are a lot of issues. We're now in the process of setting up a unit within the OECD that will take it forward."

It could be one of the lasting legacies of the economist from a midwest steel town, for whom economics is about making ordinary people better off.

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Diagnosing victory no mean feat, in suite of 150 contests

THIS election campaign is a national contest where leaders, parties and advertising geniuses do all they can to persuade us to give them our votes. But it is also 150 local contests, where, seat by seat, MPs, rivals and supporters fight it out on home turf.

Twice in seven elections, the party that won on the votes has lost the election because it failed to win the marginal seats. It happened to Andrew Peacock and the Coalition in 1990, and to Kim Beazley and Labor in the GST election of 1998. It could happen again this time.

The polls agree Labor is the clear favourite to win re-election. The bookies also agree: yesterday Sportsbet and Centrebet were offering just a $1.22 or $1.23 return if you successfully bet $1 on Labor to win, but $4 or so if you successfully punted $1 on the Coalition.

You probably agree, too. The latest Age/Nielsen poll found 64 per cent of Australians expect Labor to win, while just 25 per cent tip the Coalition. Even Coalition voters expect their team to lose the election. But a lot can happen in campaigns. And in the end, the result will depend on those 150 separate contests.

Labor's starting position looks strong. It had a 16-seat majority in the old House of Representatives, and now redistributions in most states have shifted a net five seats in its favour. If we vote on August 21 exactly as we voted in 2007, Labor would win 88 of the 150 seats, the Coalition 59, with three independents.

But 33 of those 88 seats are Labor's by narrow margins. A uniform swing of 1 per cent across the board would shift 11 seats to the Coalition, cutting Labor's majority to four. A uniform swing of 1.4 per cent would mean it lost its majority, cutting it to 75 seats, and giving the independents the balance of power. And a uniform swing of 2.3 per cent would mean the Coalition would win a clear majority.

Most elections are close, and this looks like being the same. The battlefield will be wide, opening up more potential for surprise attacks. But two states will dominate the campaign: New South Wales and Queensland. In NSW last time, Labor won 28 of its 49 seats. The redistribution abolished Lowe, but notionally gave Labor three more from the Liberals: Gilmore (with a margin of 0.4 per cent on 2007 voting), Macarthur (0.5) and Greenway (5.7). So it starts with 30 of the 48 seats, the Coalition 16, with two independents.

But its ally, the NSW Labor government, is a huge liability. Last month it lost the Penrith byelection in a 25 per cent swing. That is the same area as the federal seat of Lindsay (which Labor holds by 6.3 per cent) and is near Greenway. So neither seat is safe.

Seven of Labor's seats have majorities of less than 2.5 per cent, mostly in Sydney's outer suburbs where many voters are battling rising interest rates and flat incomes. The bookies see Belinda Neal's old seat of Robertson (0.1) as a goner. They expect the Liberals to retain Gilmore and Macarthur, and probably pick up the Blue Mountains seat of Macquarie (0.3).

They tip Labor to hold Bennelong (1.4), John Howard's old seat, where his conqueror, ex-ABC journalist Maxine McKew, faces former Davis Cup hero John Alexander. The bookies also see Labor holding the north coast seat of Page (2.4), and the central coast seat of Dobell (3.9), despite claims of misuse of health services union funds by MP Craig Thomson.

Surprisingly, the bookies have Labor as a strong favourite in the nation's litmus seat, Eden-Monaro (2.3), which voted for whoever won government at each of the past 15 elections. I suspect it will end up close. The same is true of Sydney. On 2007 voting, a swing of only 5.6 per cent from Labor to Greens would see Housing Minister Tanya Plibersek lose her seat and that's roughly the size of the swings in the polls.

The Coalition also has marginal seats in NSW that could surprise us: Hughes (0.5), Paterson (0.6) and Cowper (1.2). Malcolm Turnbull's seat of Wentworth (3.9) is never safe. But last time Turnbull increased his majority, and his principled stand on emissions trading is likely to see him increase it further.

In 2007, Queensland saw the biggest swing to Labor under Kevin Rudd: a 7.5 per cent swing, nine seats gained, with Labor winning a majority of the state's votes and seats. But now Rudd has been toppled, Labor's hold in is doubt.

The redistribution created a new Coalition seat, Wright (3.8), but moved Herbert (0.0) and Dickson (0.8) into the Labor camp. In Herbert, veteran MP Peter Lindsay decided to draw stumps. In Dickson, shadow health minister Peter Dutton tried to jump ship to the safe seat of Moncrieff, but was thrown back in the water by the preselectors.

The bookies expect the Coalition to win back the central Queensland seats of Flynn (2.2) and Dawson (2.6). It has a good chance in the outer Brisbane seat of Forde (3.4), and the far north seat of Leichhardt (4.1), where former Liberal MP Warren Entsch has come out of retirement to challenge his Labor successor, Jim Turnour. But Labor is tipped to hold on to its other Brisbane marginals: Longman (1.9), Petrie (4.2), Bonner (4.5) and Brisbane (4.6).

In Victoria, Labor won 21 of the state's 37 seats last time, picking up Corangamite (0.9) and Deakin (1.4). They will be its frontline seats in this campaign, with the Liberals confident former ABC TV presenter Sarah Henderson can reclaim Corangamite.

A third Labor seat is in real doubt. In 2007 the Greens outpolled the Liberals in Melbourne and got within 4.7 per cent of unseating Finance Minister Lindsay Tanner. This time, with Tanner going and the latest Age/Nielsen poll showing a 5 per cent swing from Labor to the Greens, the bookies are tipping the Greens.

Labor could win back McEwen (0.0), where retiring Liberal MP Fran Bailey won last time by just 12 votes. But Liberal MP Jason Wood is tipped to hold on to La Trobe (0.5), and Liberal veteran Russell Broadbent looks fairly safe in McMillan (4.8).

A month ago, amid the furore over the mining tax, Labor was looking at a wipeout in Western Australia. Our polling suggested the Liberals would win all 15 of the state's seats. But since then, the leadership change and back-down on the mining tax seems to have brought WA back in line with the nation.

Labor has two marginal seats in Perth: Swan (0.3), which it notionally gained through the redistribution, and Hasluck (0.9). Brand (6.0), south of Perth, looks safe now. The Liberals face a fight to hold two of theirs: Stirling (1.3) and Cowan (also 1.3), while if Labor picks up ground, Canning (4.4) could be within reach.

South Australia, usually a key battleground, looks quiet. Labor now holds all its usual marginal seats by sizeable margins: Kingston (4.4), Hindmarsh (5.1), Wakefield (6.6), Makin (7.7) and Adelaide (8.5). In 2007 the Liberals survived in Sturt (0.9) and Boothby (2.9) by much tighter margins. But these are usually safe Liberal seats.

Tasmania will be interesting. Labor won all five seats in 2007, and the bookies expect it to do so again. But the big swing against Labor at this year's state election suggests that's doubtful. The Liberals are confident of taking back the Launceston seat of Bass (1.0) and the north-west seat of Braddon (2.3).

On state election voting, Labor could also be in trouble in Franklin (4.0) and even Lyons (8.3). And the state voting figures suggest the Greens have a real chance of taking the Hobart seat of Denison, though they will need a 10 per cent swing.

The two seats in the ACT are safe for Labor, as is the outback Northern Territory seat of Lingiari. But the Coalition could take Darwin's seat of Solomon (0.2).

On the polls, Labor will get back with a reduced majority.

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In search of a friendly Senate

JULIA Gillard's main goal at this election is to win a second term. But she also has a second aim: to return with a less obstructive Senate.

If the polls are right, she will get it. Labor and the Greens between them are likely to win at least three seats in every state. And if that happens, the Greens alone will have the balance of power from next July.

That matters. Kevin Rudd lost office, in part, because he could not get the Senate to pass his emissions trading scheme. And that, in turn, was because Labor suffered an electoral disaster when we elected half of this Senate in 2004.

As a rule, the six Senate seats contested in each state divide 3-3 between the parties of the left and those of the right. The parties won't admit this but, usually, Labor and the Greens compete against each other, and the Liberals compete against independents and smaller parties of the right.

But sometimes Senate elections produce odd results and in 2004 Labor's weak vote created two of them. The senators elected then are the ones now facing re-election.

In Queensland, Labor won just 31.6 per cent of Senate votes, and saw Fishing Party preferences help Barnaby Joyce squeeze through to take the left's third seat, giving the Coalition four of the six seats in the state.

In Victoria, Family First's Steve Fielding polled just 1.85 per cent of the vote, yet then climbed step by step on everyone's else's preferences to take the left's third seat. Labor too directed its votes to him ahead of the Greens, only to find he was not really its type of guy.

Senators serve six-year terms, so those senators are up for re-election this time. And the odds are that the Coalition will lose that fourth seat in Queensland, and barring bizarre preference deals Senator Fielding will go down in Victoria.

In 2004, the Coalition won 19 of the 36 Senate seats from the states, Labor 14, the Greens 2 and Family First 1. But in 2007, the odd results were on the other side: in Tasmania, Labor took the last seat from the Coalition, and in South Australia, Nick Xenophon took another seat off them.

The half of the Senate not up for re-election this time has just 16 Coalition senators, 16 Labor, three Greens and Xenophon. But that won't be repeated this time. Xenophon is not standing, the Liberals have rebounded in Tasmania, and the polls suggest the Greens will erode Labor's vote.Let's look at each state.

VICTORIA split its seats 3-all last time between Labor and the Coalition, but only just. The closest Senate race in the country saw the Greens' Richard di Natale ousted in a three-way contest for the last two seats, losing to Labor by 0.4 per cent, and to the Coalition by 0.8 per cent. This could be his revenge.

Victoria has always split its seats 3-3 between left and right. Labor is sure to win two seats, which will go to Industry Minister Kim Carr and Communications Minister Stephen Conroy. The Coalition is sure of two, which will go to the Liberals' Michael Ronaldson, its shadow minister for integrity in government, and to the Nationals' newcomer Bridget McKenzie, a 39-year-old university lecturer.

Barring an electoral landslide or bizarre preference deals, the real contests will be between Labor and the Greens, and between the Coalition and Senator Fielding.

Dr di Natale will be up against Labor's third candidate, National Union of Workers state secretary Anthony Thow. Senator Fielding will be up against Julian McGauran, who defected from the Nationals to the Liberals after the 2004 poll, and has spent 20 years in the Senate.

NSW also split its seats 3-3 last time between Labor and the Coalition. But the Greens need a swing of just 1.6 per cent from Labor to take the last seat, and if the polls are right, they should get it.

That would give us Bob Brown's least favourite colleague: NSW Greens leader Lee Rhiannon, an ex-communist and the best known face of the Green's left wing.

The Coalition's main threat appears to be the Reverend Fred Nile's Christian Democrats. Last time they were just 2.6 per cent short of the final seat.

QUEENSLAND also split its seats 3-3 in 2007 between the Coalition and Labor. But the Greens needed to win just another 0.7 per cent from Labor to take the final seat.

This time the Liberals and Nationals are running a joint ticket, and should hold three of their four seats.

WA has been predictable for years. The Liberals always win three seats, Labor two, with the sixth seat going to a party to the left: first the Nuclear Disarmament Party, then the Democrats, and, since 2004, the Greens.

Probably the same this time.

SA, by contrast, surprised us all in 2007. The Liberals and Labor each won just two seats, independent Nick Xenophon took the third Liberal seat, and the Greens inherited the seat formerly won by the Democrats.

With no Xenophon in the race this time, the contests are likely to be the same as in Victoria: Labor v Greens for one seat, and Liberals v Family First for the other. SA is Family First's strongest state and, if preference deals go their way, their best chance this time.

Tasmania was the Liberals' weakest state in 2007, and the Greens' strongest. The seats then split Labor 3, Liberals 2, Greens 1, with the Greens just 3.7 per cent short of making it 2 seats all.

The polls and the recent state election suggest a big rebound in the Liberal vote. The odds this time are strongly on the normal outcome: Liberals 3, Labor 2 and Greens 1.

The territories have two seats each, which have always split 1-1 between the major parties. But Liberal support in the national capital is low, and the

ACT always has a chance of an upset, in which the Greens ride on Labor's surplus to top the Liberals.

Last time, former ACT Greens leader Kerrie Tucker ended up just 1.7 per cent short. But that was a high-water mark they might struggle to repeat.

At this stage, no upset looks likely. My tip is that the Coalition will win 20 of the 40 seats, Labor 14 and the Greens 6.

This would give us a new Senate from mid-2011 with 36 Coalition senators, 30 Labor, nine Greens and Xenophon. Labor and the Greens would have 39 of the 76 seats between them, with the Greens holding the balance of power.


THE SENATE

WHATS AT STAKE

Facing Elected Total

election in 2007

(40) (36) (76)

Labor 16 16 32

Coalition 21 16 37

Greens 2 3 5

Family First 1 1

Xenophon 1 1

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Population: focus turns on middle ground

On population issues, both sides are not so much moving forward as spinning towards the middle ground. They're telling us what they know we want to hear.

Last year, Kevin Rudd and Wayne Swan wanted ''a big Australia''. Tony Abbott on Australia Day wanted ''to extend to as many people as possible the freedom and benefits of life in Australia''.

But now the focus groups have spoken. Most Australians don't want to extend the joys of living in Australia to as many people as possible. They fear more migrants might soak up jobs, add to congestion on the roads, trains and buses, and drive housing prices even higher. They want a little Australia, or at least one that's not too big.

Julia Gillard's speech yesterday was all about reassuring them that she's on their side. She defines Australians as loving ''the feeling of space, freedom and opportunity. We reject the idea that we should all live on top of each other, as is commonplace in so many countries across the world''.

Well, it's also commonplace in Docklands, Southbank and Melbourne's central business district, as well as inner Sydney. Developers can't keep up with demand for housing just like that. If you want to allow more Australians to live near the centre of their cities, we will have to build far more of it.

The alternative is for cities to keep sprawling outwards, increasing the congestion the PM says she wants to reduce. Populism can't solve the problems of urban policy. It's about standing still, when we need to be ''moving forward''.

Gillard announced two policy developments. First, three panels of eminent Australians will consider sustainable population growth from the perspective of the needs of communities, the economy and the environment. So far, so good. But they will report after the election - so Labor's policy will be decided after the election.

Second, the Government will redirect $200 million from existing housing programs for 15 regional cities to build infrastructure that could fast-track up to 15,000 affordable homes. Which cities? That too will be decided after the election.

At first sight, the program's goals look similar to those of the Housing Affordability Fund that was part of Kevin Rudd's policy at the 2007 election. So far the program has not met its targets, and maybe this is a sensible way of retargeting it, by offering more money to get councils to commit to bolder schemes. If so, then at least it's moving sideways.

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Benefits from free-trade pacts are merely 'modest'

THE Productivity Commission has damned the government's focus on regional and bilateral free-trade agreements (FTAs) with the faintest of praise. It finds the gains from past FTAs were exaggerated in rhetoric but modest in reality.

In a draft report, the commission proposes big changes to Australia's and the world's approach to free trade negotiations. It urges a shift away from the Doha Round and bilateral FTAs to more flexible, industry-specific deals.

Between 2003 and 2007, the Howard government negotiated FTAs with the United States, Thailand and Singapore. The Rudd government negotiated FTAs with the 10-member ASEAN group and Chile. And the Gillard government is now negotiating FTAs with China, Japan, Korea, Malaysia, regional FTAs with about 20 other countries, and is considering FTAs with India and Indonesia.

But the commission's draft report suggests the negotiating effort going into all this could be better spent elsewhere. It urges the government to consider "alternative measures that could deliver similar or greater benefits at less cost".

The report, co-written by former World Trade Organisation deputy director-general Andrew Stoler, now at the University of Adelaide, found some evidence of benefits for Australian exporters from past FTAs, but only modest ones.

"The commission has found that expectations of the benefits have been optimistic," said commissioner Patricia Scott.

As always, the commission advocated unilateral tariff cuts and trade liberalisation as the best policy. But the report also proposed a new set of approaches to trade reform:

Without abandoning the Doha Round, consider joint moves with "like-minded countries" to reduce trade barriers in specific sectors once a "critical mass" of countries has signed on as when barriers were removed on IT products in the 1990s.

Negotiate simpler mutual-recognition agreements with other countries to liberalise access to services, bilateral investment treaties, and even a services-only FTA with the European Union.

Simplify future FTAs by scrapping side issues such as government procurement, intellectual property where the US FTA took us backwards by extending copyright to 70 years labour standards and competition policy.

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Peoples' Republic will lack workers: Garnaut

CHINA is entering a future where it will run out of workers. Its workforce will peak within five years, says eminent economist and China-watcher Ross Garnaut and the consequences for Australia and the world could be profound.

In a forward look to China in 2030, Professor Garnaut told a Melbourne Institute/Australia-China Business Council forum the next 20 years would be dominated by China's transition from population growth to population decline with its labour force declining first.

The consequences would include a fall in China's savings, a decline in its lending to the world, and hence rising interest rates impinging most on heavy borrowers such as the US and Australia.

Professor Garnaut, a former ambassador to China and now at the Melbourne Institute, said China's population would peak in about 2030 with 1.45 billion people, of whom 400 million would be over 60. But the labour force would turn around first. After growing by 7 million a year over the past five years, it would shrink by 1 million a year from 2016, and by 5 million a year from 2021.

Professor Garnaut said worker shortages had already emerged, pushing up real wages. "Real hourly wages rose 90 per cent between 2001 and 2009, and non-wage benefits rose even faster. That crunch is going to increase."

While savings rates of more than 50 per cent of gross domestic product had driven China's extraordinary growth which the late economics historian Angus Maddison predicted would see it overtake the US in real GDP by 2015 savings would decline as wage share of income rose and that of profits fell.

"Household savings rates in China are 35 per cent, very impressive compared to others," Professor Garnaut said.

"But corporations save almost 100 per cent of their profits and reinvest them. In future, savings and investment rates will be closer, and the current account surplus will decline.

"That will make it more difficult to fund the savings deficits in the world including Australia's large deficit in private-sector savings.

"As China's savings fall, global interest rates will rise and debt will become more expensive to finance.

"The rest of the world will be sorry if it gets what it asked for."

But Professor Garnaut said a shrinking workforce would not necessarily shrink China's growth.

Productivity growth could accelerate as its skilled workforce moved into "more technologically sophisticated and capital-intensive" sectors spreading its competitive pressures to a wider range of industries in the West.

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Mining tax backflip to cost billions Price of Gillard's peace deal revealed

THE federal government has revealed that changes to the mining profits tax negotiated with the big resources companies will cost the budget billions of dollars more than initially acknowledged.

New figures released by Treasurer Wayne Swan show that in 2013-14, the second year of the tax, it is expected to raise only $6.5 billion compared with $13 billion in its initial form.

Over the first two years, the expected take would shrink from $18 billion under the old version to $10.5 billion under the new.

The expected losses to revenue are far greater than the $1.5 billion claimed by the government when it unveiled the revised tax on July 2.

Explaining the discrepancy yesterday, the government said that since the original version of the tax was announced, Treasury had upgraded its expectations for mineral prices and exports.

The government failed to disclose this when it announced the revised version of the tax.

As the real cost of the tax backdown was exposed, the government came under attack over the issue from former Treasury chief Bernie Fraser, who accused Prime Minister Julia Gillard of selling out to the mining giants.

Mr Fraser also criticised Opposition Leader Tony Abbott for wanting to rescind the tax, saying it was amazing that an alternative prime minister could "put the vested interests of big mining companies ahead of the national interests of this country".

The tax controversy overshadowed Mr Swan's news of further improvement in the budget forecasts a boost also driven by higher estimates of commodity prices.

The government released the budget forecasts and mining tax details to help set the framework for the election, expected to be called within days.

Ms Gillard will appear at the National Press Club today and give a speech flagged to be on economic issues.

The new budget forecasts improve the bottom line by $7 billion over five years to 2013-14, mostly through higher estimates of company tax. Treasury says the improvement would have been $12.5 billion but for policy changes essentially to the mining tax.

The forecast budget surplus in 2012-13 has more than trebled from $1 billion to $3.1 billion. In the same year, the forecast peak in the government's net debt has fallen from $94 billion to $90 billion.

"These figures show we are on track to put the budget back in surplus within three years," Mr Swan said. "We will be in surplus before every other major advanced economy."

He emphasised that the surplus did not depend on revenue from the mining tax. "Despite all the uncertainty in the global economy, we can be confident about our future," he said.

But shadow Treasurer Joe Hockey and Coalition finance spokesman Andrew Robb dismissed the statement as "dodgy figures, used to explain a dodgy tax, delivered via a dodgy deal".

"The massive debt and deficit remains largely unchanged, the reckless spending will continue unabated, and the forecast of a surplus is still simply not believable," they said.

The bad news is that Treasury marginally cut its forecast of growth in 2010-11, from 3.25 per cent in the May budget to 3 per cent. Slower growth in consumer spending and housing investment is expected to be offset slightly by growth in mining.

Unemployment is tipped to be 5 per cent in mid-2011, much the same as now, despite the addition of 250,000 jobs.

The improved forecasts came as Westpac and the Melbourne Institute reported a stunning 11 per cent jump in consumer confidence in July. Most of the increase came from Coalition voters, who had previously been pessimistic. Now it is the poor who are most pessimistic.

The losses revealed from the mining tax backdown tend to confirm criticisms by analysts that the changes will cost tens of billions of dollars over a decade.

If mineral prices in coming years fell below Treasury's buoyant expectations, there is a risk that revenue from the tax would be too small to finance initiatives dependent on it company tax cuts, tax breaks for small business and better superannuation benefits.

But Mr Swan said he was confident the revised figures would be proved right. "Prices will go up, they'll come down," he said.

"But everybody can be confident that they will be a higher level [than] the historical average was."

Mr Fraser, who was head of the Reserve Bank from 1989 to 1996 and a former Treasury boss, said Ken Henry's resources tax in its original form was too complicated. "It was over-engineered in a way," Mr Fraser told ABC television.

And the subsequent minerals tax brokered with the big miners was a sellout, he said.

On Mr Abbott's vow to rescind the tax, Mr Fraser said it "amazes me, frankly, how any alternative prime minister or alternative government can put the vested interests of big mining companies ahead of the national interests of this country . . . Whoever has sort of really devised that line really has rocks in his or her head."

Mr Hockey said Mr Fraser's view of the Coalition was dead wrong. "I have never seen a tax that receives so much remuneration and is yet expected to create investment and create more jobs," Mr Hockey said.

Mr Fraser said the government should have been able to win the day on its mining tax plans, as former prime minister John Howard did with the GST.

"If Howard can sell a GST . . . and the government can't sell an RSPT without a great hullabaloo, something is very wrong," Mr Fraser said.

Read more >>

Mining tax revenue is a guessing game - REALITY CHECK

"WHERE is the money coming from?" the Coalition wants to know. How can the government reduce the revenue base for its mining tax so drastically, yet reduce the revenue forecasts so little?

It's a good question. After all, the original tax applied to nearly all minerals, the new tax to just iron ore and coal. The old tax was to take 40 per cent of all profits above a return of 5 per cent or so.

The new tax will take 22.5 per cent of all profits above a return of 12 per cent. And that's not all the changes the miners won.

Sure, there are offsetting factors. The government will no longer have to pick up 40 per cent of mines' losses or pay royalties for miners now outside the tax. But several private analysts estimate the tax take will be far lower than Treasury has forecast.

Who is right? Yesterday's budget update shed some light but left uncertainty. It told us:

Treasury now thinks the prices and volumes of mineral exports will be much higher than it predicted earlier. It now says the original version of the tax would have raised $18 billion in its first two years, not the $12 billion originally forecast.

So the revised mining tax reduced its take in the start-up years from $18 billion to $10.5 billion. The government misled us by not mentioning this when it announced the new version on July 2.

The impact in years one and two of the new tax is stunningly different. In year one, the original version of the tax would have seen many companies claim losses. Under the new version, revenue that year is now forecast to fall by just $1 billion. But in year two, the forecast revenue will be cut in half by the new version of the tax: from $13 billion to $6.5 billion. That's a huge change. And surely, isn't year two the best guide to what will happen in years three, four, five, six and so on?

Not necessarily, says Treasurer Wayne Swan. We don't know what future prices will be.

"Prices will go up, they'll come down, they'll bounce around," he said. "But they will be a higher level [than] the historical average was."

Well, maybe. But that's exactly the point.

If Treasury can revise its revenue forecasts from the tax by 50 per cent in just two months, how can anyone seriously know how much it will raise in two years, four years, let alone 10 years?

Like everyone else, all Treasury can do is guess. The May estimates are guesses. The new estimates are guesses. The forecasts by the Coalition and private analysts are also guesses.

Treasury's forecasts are for the terms of trade to peak in the second half of 2010, then fall slowly. But if they fall fast? Or if companies find ways to avoid the tax? We could easily end up with too little revenue to pay for the tax cuts and new spending it is meant to finance. That's the risk.


THE MINING TAX

OLD AND NEW

REVENUE FORECASTS FOR: 2012-13, 2013-14 TOTAL

$b $b $b

Rudd version

Budget 3, 9 12

Now 5 13 18

New version

Now 4 6.5 10.5

Revenue loss -1 -6.5 -7.5

SOURCE: TREASURY

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Rental houses pushing boom

INVESTORS are driving Victoria's real estate market, taking out almost half of new lending in May to buy existing homes.

The Bureau of Statistics reports that Victoria is the only state where bank lending for housing increased in the 12 months to May but the entire growth is in lending to investors buying rental properties.

In May, investors borrowed a record $2.2 billion from the banks and other lenders to buy existing real estate in Victoria almost matching the $2.4 billion lent to owner-occupiers.

The ABS keeps no statistics on how many properties investors are buying. But the figures imply that investors are buying almost every second house sold in Victoria.

In dollars, lending to owner-occupiers in Victoria was down 1 per cent from a year earlier, but lending to investors was up 47 per cent, from $1.4 billion in May 2009.

Melbourne has been the epicentre of the property boom, largely because it has become the hot city for rental investors.

The ABS figures show that lending to investors to buy in other states grew just 9 per cent year on year with more than half the national growth in investor activity in Victoria.

Total lending to people buying existing homes in Victoria jumped 17 per cent in May from a year earlier, setting a new record of $4.6 billion.

Real estate monitor Residex estimates that the median house price in Melbourne grew 20 per cent in the year to May to a new peak of $582,000, while the median price of units rose 18 per cent to $445,000.

There are signs that the market is cooling, with auction clearance rates last weekend just 68 per cent, down from 85 per cent a year ago. But the growth in prices is expected to slow or stabilise, rather than fall.

Financial markets still expect the Reserve Bank to leave interest rates on hold until 2012. But economists in the same financial houses are predicting another two rate rises this year.

Tax Office statistics show that two-thirds of rental investors claim to be losing money on their investments.

But this does not appear to be deterring more investors flocking in, to claim losses and reduce their taxable income.

The tax statistics show that one in 10 taxpayers is now a negatively geared investor.

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Catch and skill our own

ONE of the fears you hear in the debate over asylum seekers is that Australia is being flooded by refugees. Well, fear not. Australia is being flooded by new arrivals but they're not refugees.

The people flooding into Australia are primarily foreign workers, being recruited here to fill skills shortages. Why? Because it's cheaper to bring in foreign workers who already have skills than to train our own.

Last year 508,000 people arrived to live in Australia as permanent residents, temporary workers or students. Just over 13,000 of them were refugees, or about one in 40. Even if all the asylum seekers arriving by boat were counted, the 2726 of them would make up about one in 200 of the arrivals.

There is a bigger issue here. In my view, it's also a simpler issue than what to do about asylum seekers (which, frankly, I think is one of the most difficult policy issues I've ever come across, with every option breaking one or other principle of good government).

That issue is Australia's policy of relying on importing foreign workers to provide us with the skills we need, rather than doing all it can to ensure that Australians are trained in the skills we need.

It has a parallel with our reliance on foreign capital. Australia is one of the richest countries in the Western world, yet one of the poorest savers. Despite our wealth, every year we are in the bottom half of the OECD in savings rates. That's why our net foreign debt is now $654 billion, and doubling every eight years. As the International Monetary Fund and many others have pointed out, our reliance on foreign borrowing is a risk to our economic future. But our reliance on foreign skilled workers is a risk to something even more important: our social fabric, and our sense of national unity.

For while Australia is importing hundreds of thousands of workers every year, Governments, both Liberal and Labor, have remained silent on the insidious slow growth of men dropping out of the workforce in the prime of their lives.

In the 1960s, the last decade in which we had full employment which, while some economists seem to have forgotten, means that more or less everyone who wants to work can find a job only 2 per cent of men aged between 25 and 54 were outside the workforce. Roughly speaking, 96 per cent of prime age men had a job, 2 per cent were unemployed, and 2 per cent were either unemployable or doing something else.

But in the 1960s, jobs were simple and wages were low. Married women were mostly tied to the home, so men faced less competition for jobs. Heroin was rare, expectations of life were simpler, and fewer people needed psychologists.

Fast forward to 2009. Bureau of Statistics figures show that last year almost 10 per cent of men in the prime of their working lives aged 25 to 54 were not even looking for work. Only 4 per cent were unemployed, but 14 per cent of those of prime age were not working.

Among women the same age, twice as many were not working: 28 per cent of all women aged 25 to 54. But no one asks the questions that would tell us how many of them were not working because they preferred to be full-time mothers, and how many had dropped out for reasons similar to the men. It seems safe to assume that the problem of people outside the workforce is as widespread among women as among men.

You think these are global problems? Yes, but a report released by the OECD last week suggests Australia has been handling them worse than other Western countries.

The OECD's Employment Outlook reports that in 2009, 21 per cent of Australians in that prime working age group were unemployed or outside the labour force. Of the 27 OECD countries the IMF terms "advanced" that is, part of the rich world Australia ranked 20th on that key indicator. Switzerland was top, with only 13 per cent of its prime working age people not in jobs.

Broadly speaking, over the past 10 years, employment rates have risen for older workers, but fallen for men of prime working age. But do you ever hear any minister talk about it? The Treasury? The Reserve Bank? The Productivity Commission? Why is no one in government asking why so many people in the prime of their working life are dropping out of the workforce and what we should do about it?

But that's not the only weakness in Australia's labour market. The OECD says that while Australia's unemployment rate last year was the eighth lowest among its 30 members (not the lowest, as ministers sometimes claim), "overall slack in the labour market is actually higher than the OECD average".

The reason is not only the millions of people not in the workforce, but also the more than 800,000 people the bureau classifies as underemployed part-time workers who want more work, usually full-time work.

"Even before the current downturn, Australia had amongst the highest rates of involuntary part-time employment in the OECD", the report points out. "More than 60 per cent of involuntary part-time workers have no post-school qualifications, and one-third of them are aged under 25."

These are young people falling through the cracks, without the skills to hold down a good job, and many may lack the desire or self-discipline to get them. These are the kids most at risk of joining those who have dropped out of the workforce.

Shouldn't this be the kind of issue our political leaders talk to us about? Shouldn't this be an issue they tackle?

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THE OECD has questioned whether Australia's labour market is in as good a shape as we think, saying a lack of choice and financial incentive is forcing many Australians to make do with part-time jobs.

THE OECD has questioned whether Australia's labour market is in as good a shape as we think, saying a lack of choice and financial incentive is forcing many Australians to make do with part-time jobs.

In its annual Employment Outlook, the Paris-based Organisation for Economic Co-operation and Development says Australia's relatively low unemployment rates the eighth lowest in the OECD last year coexist with poor performance in other areas.

In unusually sharp comments, the OECD highlights a series of flaws in Australia's labour market. It says:

Australia has "a large pool of under-employed workers", who want to work full-time but can find only part-time jobs.

The clawback of means-tested benefits as incomes rise has the perverse effect of locking people into part-time work with part-timers losing up to 70 or more in every extra dollar they earn to the government.

Australia's overall employment rates are worse than the unemployment figures suggest, because 25 per cent of those with jobs are working part-time, and 21 per cent of people of prime working age (25 to 54) have no job at all.

The OECD figures show that Australia's employment rate the percentage of the population with a job ranks only 20th of the 27 rich OECD countries for prime-age workers.

In 2009, 14 per cent of Australian men aged 25 to 54 had no job, and 28 per cent of women.

By contrast, Australia had the fifth-highest employment rate for younger workers, and was a rapidly improving ninth-best for older ones.

But the OECD's main focus is on Australia's very high rate of part-time employment, the third highest in the OECD.

"Despite having a lower than average unemployment rate, overall slack in the labour market is actually higher than the OECD average," the report says. "This includes a large pool of underemployed workers . . . as well as many people who have given up looking for work."

Fifty years ago, only 2 per cent of Australian men aged 25 to 54 had given up looking for work. But last year almost 10 per cent of men in the prime of their working lives had dropped out of the workforce.

"More broadly, part-time workers in Australia often have poor financial incentives to move into full-time work," the OECD says, because all benefits in the welfare system are means-tested, and are clawed back as incomes rise.

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Bookies pick Labor to win

THE bookies rate Labor as a heavy odds-on favourite to win the federal election. Yet the first list of odds for individual seats suggest they think we are heading for a hung Parliament.

Odds for individual seats posted by bookmaker sports bet.com.au imply that Labor stands to lose its majority in the House of Representatives.

Heavy plunges by punters betting on Labor have made Sportsbet shorten its odds for the overall outcome to just $1.22 for a $1 bet, while the Coalition has drifted out to $4.

Yet the odds for the first 41 seats on offer show the Coalition favoured to win 15 seats from Labor, with Labor favoured to take two from the Coalition, a net loss of 13.

But the odds suggest Labor is also likely to lose Melbourne to the Greens, while the middle eastern suburbs seat of Deakin is too close to call.

The odds imply that in the 150-member House, Labor would win 73 seats, Liberals 72, independents 3, the Greens 1, with Deakin in doubt.

Sportsbet has the Liberals favoured to win back Corangamite, south and west of Geelong, where former 7.30 Report compere Sarah Henderson is their candidate.

But it has Labor as favourite to win the ultra-marginal seat of McEwen, on Melbourne's north-eastern fringe, where Liberal Fran Bailey is retiring.

It sees the Liberals picking up three Labor seats in NSW Robertson, Macquarie and Lindsay and holding Gilmore and Greenway, which the redistribution has made notionally Labor. In Queensland, the Coalition would win back six seats Labor gained in 2007 Longman, Flynn, Dawson, Forde, Petrie and Bonner but lose the ultra-marginal seat of Bowman.

It has high-profile Labor MP Maxine McKew a clear favourite to hold Bennelong from former Davis Cup hero John Alexander and also has Labor favourite to hold all its five seats in Tasmania.

Sportsbet's Haydn Lane said the odds posted at the weekend were opening offers which would change constantly as bets came in.

Labor's odds of winning the election had shortened sharply since its change of leadership, he said. "We are actually taking more bets on the Coalition, but all of the big money of late has been on Gillard's Labor."

Centrebet has installed August 28 as odds-on to be the election date.

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Australia lagging on helping unemployed back to work

AUSTRALIA spends less than almost any other rich country to help its unemployed people get back to work, OECD figures reveal.

The OECD's yearly employment report shows the government's spending on programs to help the unemployed into jobs in 2008-09 was equal fourth-lowest of the 26 rich countries surveyed. The report shows that, in this area, the change of government has meant no change in policy despite Labor's rhetoric on the importance of giving young Australians the skills employers need.

In 2006-07 and 2007-08, despite intense skills shortages, the Howard government spent just 0.14 per cent of Australia's gross domestic product on training, wage subsidies and other support to make the unemployed employable. In 2008-09, despite rapidly rising unemployment, the Labor government spent exactly the same. Of the 26 rich countries surveyed, only the Czech Republic, Japan and Slovenia spent less.

The figures came as a survey of employers found one in three says their business is already suffering from shortages of skilled workers, and almost half predict that by 2015 skills shortages will limit their activity.

Bureau of Statistics figures show that even among men of prime working age 25 to 54-year-olds almost 10 per cent have now dropped out of the workforce, one of the largest dropout rates in the Western world.

The OECD report shows while Australia's spending on the Job Network was roughly the same as other countries spent on their job agencies, other OECD countries on average spent three times as much as Australia did on support programs.

Other OECD countries on average spent 0.14 per cent of their GDP on training alone. Australia spent just 0.01 per cent, and that has not changed since Labor took office.

Denmark, widely admired for its "flexicurity" programs a tough-love agenda which means people losing jobs get retraining instead of redundancy payouts spent 0.98 per cent of its GDP in wage subsidies, retraining and incentives for employers to take on the jobless. That was seven times Australia's spending level.

Labor has significantly increased the number of places available for skills training, although the true number has been disguised by taking money from old programs for new ones. But little of this has been targeted on the unemployed.

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Skills shortages still hampering business growth

THE federal government is pouring billions of dollars into training skilled workers. Six hundred thousand Australians are unemployed yet skills shortages have re-emerged as a key problem for business.

Two new reports show the number of trade apprentices taken on last year dropped to a five-year low, while one in three firms say skills shortages will hold back their operations this year.

The National Centre for Vocational Education and Research reports 15,000 fewer people started trade apprenticeships or traineeships in 2009, with slumps of more than 20 per cent in key sectors such as construction, automotive and electronics trades.

And an Australian Industry Group survey found that almost half the firms surveyed believe skills shortages will be limiting their operations by 2015 with many saying that is happening now.

"Skills shortages are set to intensify with a vengeance, and are arguably the number one threat to our economic growth", said Ai Group chief executive Heather Ridout.

"Businesses are seeking to do their share of the heavy lifting by putting on more apprentices where possible. For government, addressing skills shortages needs to be put right at the top of the policy agenda."

Ms Ridout urged the government to lift funding for vocational education and training to allow for 3 per cent growth each year in apprentice numbers, and lock in the temporary bonus for trade apprentices. The good news in the apprenticeship figures was that last year saw a record 46,200 people complete trade apprenticeships, and 91,100 completions in other occupations. The bad news was that commencements plummeted, and dropout rates remained astoundingly high.

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Inflation, rates feeling the heat as jobs balloon

THE job figures continue to amaze. The International Monetary Fund has bumped up its estimate of global growth in 2010 mostly in our key export markets.

Commodity prices are somewhere in the stratosphere, lifting our export earnings. And one survey suggests inflation is now well above the Reserve Bank's target zone.

Could all this lead the Reserve to raise interest rates yet again in August right in the middle of an election campaign?

Until yesterday, the markets were split between those expecting the Reserve to leave rates on hold until 2012, and some punting on a rate cut ahead.

They were focused on the main event in the world economy right now: fears cash-strapped, highly indebted governments may default on their debts.

But the Reserve is focused on what it sees as the main event in the Australian economy: tens of billions of extra dollars flowing in from soaring minerals prices potentially pushing up prices here.

After yesterday's job figures, and the IMF's optimistic new forecasts for global growth, the markets turned around. Most still expect rates to stay on hold, but a minority now tip the Reserve to raise rates a seventh time in August.

An election campaign wouldn't stop it: it made that very clear when it raised rates during the 2007 campaign, embarrassing John Howard. This time it could square up by embarrassing Julia Gillard.

Treasurer Wayne Swan has told the Reserve its job is to keep underlying inflation between 2-3 per cent. It was 3 per cent in March, and Westpac's chief economist, Bill Evans, thinks that if it goes any higher in the June figures due this month, interest rates too will go higher.

Yesterday's job data didn't help, surprising even the optimists. On the volatile seasonally adjusted figures, employment grew by almost 46,000 in June, with almost 200,000 jobs added this year.

Seasonally adjusted unemployment fell to 5.1 per cent, the lowest rate since before the 2009 bushfires.

Even the steadier trend figures show jobs up by more than 300,000 in the past year. And most of them are full-time jobs. Workers who had their hours cut in the crisis are going back to normal.

But are jobs back to normal?

The Bureau of Statistics estimates that in net terms, of the 306,000 jobs created in the past year, only 56,500 went to the unemployed.

The rest went to people formerly outside the workforce migrants, temporary foreign workers, students and others who had been on the sidelines of the job market.

There are still 315,000 more of us unemployed or underemployed mostly wanting full-time jobs but stuck in part-time ones than there were before the crisis. The bureau estimates that 12 per cent of workers are unemployed or underemployed.

Only in Victoria and Queensland are full-time jobs back to their pre-crisis levels. Even Western Australia has fewer full-time jobs now than in 2008. Things are warming up, but hardly hot.

The IMF's forecasts look reassuring. Despite the debt crisis and governments tightening their belts, the IMF has lifted its estimate of global growth this year from 4.2 to 4.6 per cent. It has left its 2011 forecast unchanged at 4.3 per cent. And most of this year's extra growth is in Australia's main export markets.

For Australia, the IMF's forecasts are unchanged at 3 per cent this year and 3.5 per cent in 2011. But it now predicts growth to be 10.5 per cent this year in China (our No. 1 market), 2.4 per cent in Japan (2), 9.4 per cent in India (3), 5.7 per cent in Korea (4), 3.3 per cent in the US (5), 3 per cent in New Zealand (6), 7.7 per cent in Taiwan (7) and an amazing 9.9 per cent in Singapore (8). Wow!

But there's a serious downside. First, that growth is already behind us. The IMF says the global economy grew by 5 per cent in the first quarter of 2010, but will be slower in the second half. And it has sliced next year's growth forecasts for Europe and China alike.

Second, it sees a real risk ahead: unless European governments can persuade markets that they are a safe credit risk, global growth next year could shrink to 2.7 per cent. Europe would sink into a double-dip recession and the US would stagnate.

There is good reason for the Reserve to be wary of getting out even further in front of a world at risk of going backwards. The markets yesterday rated the odds of an August rate rise at just 20 per cent. But the inflation figures could change that.

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