Friday, September 5, 2008

The King Is Dead…

The reign of Premier Morris Iemma has come to an end in the most spectacular fashion. The bricks began falling from the fa├žade yesterday with the sudden departure of Deputy Premier John Watkins, precipitating the much anticipated Cabinet Reshuffle. This was the spark which set off the explosion, but the dynamite has been piling up for a long period of time. The list of Government failures over the past few years is lengthy, and Treasurer Michael Costa has been at the centre of many of them.

Before today’s Caucus meeting, Mr. Costa held his own press conference to announce that Morris Iemma had dumped him, and went on to outline the economic challenges confronting the state. With dwindling revenue and increasing costs, the picture he painted is pretty grim. The trouble is that for the last two years he has been the one responsible for it. The fact that Morris Iemma kept him on for so long was one of the factors that ultimately brought down the Premier. But it was not the only factor.

Don’t forget that prior to becoming Premier, Morris Iemma was Health Minister. Regardless of the perceived failings of Reba Meagher, the crisis in the management of the hospitals of New South Wales was presided over by Morris Iemma. The combination of the deterioration of public services and the increasing reliance on the investment of Private Equity Partners was a betrayal of Labor Party principles, and ultimately of the people who elected them.

Now there is a new Premier. A new chance. A new beginning. Except nobody believes that any more because that is the same pup that the people of New South Wales were sold last time around. No matter how talented or capable Nathan Rees and Carmel Tebbutt may be, it is still the same Government which has consistently failed to deliver on its promises.

It no longer matters who is driving the Titanic… the iceberg has already struck and the ship is going down.

Thursday, September 4, 2008

Wealthy Families First

The Federal Budget has just been stripped of $555 million worth of revenue. That was the amount expected to be raised by the increase in luxury car tax. The bill to introduce the tax increase was defeated in the Senate by one vote, the vote of Family First Senator Steve Fielding. It was embarrassing enough when a single Liberal Senator failed to show up for the original vote, allowing the Government to pass the bill. Now, after a motion to recommit, the opposition has prevailed, but only with the support of Senator Fielding. Senator Fielding wanted the Government to provide an exemption to farmers and tourism operators who use such vehicles as tools of trade. The Treasurer, Wayne Swan, failed to convince him to change his mind despite pointing out constitutional difficulties and the simple fact that this exemption would be a compliance nightmare.

Although there is a strong tradition of Aussie farmers driving Fairlanes, Statesmans, and the occasional Jaguar, that doesn’t make those cars a genuine tool of trade. Most utes are priced well below the luxury car tax threshold. As for tourism operators, the vast bulk of rent-a-cars for example are at the mid to lower end of the scale. Yes there would be some impact, but whether it is the devastating impost that some would claim is a less than certain matter.

While it seems that the Senator has missed several important points, the car industry along with customers have welcomed the defeat. At the same time, the Government has lost an opportunity. While a tax on luxury cars sounds as if it would only affect people who won’t miss the money, the fact is that the threshold of $57 180 is not so far above the price of many family cars. It captures not only genuine luxury cars, but also mid range cars with a handful of optional extras. Surely a luxury car tax should apply to actual luxury cars, with a threshold more in the region of six figures.

At the same time, the tax mechanism should be more accurately targeted towards achieving environmental and economic targets. Shouldn’t there be an incentive for people to buy smaller, more high tech environmentally friendly cars? Shouldn’t there be something to encourage people to invest the extra dollars required up front to purchase a hybrid vehicle? Shouldn’t there be an incentive to buy a people mover which carries eight or ten people who might otherwise be carried separately in two or three cars, adding to congestion and fuel consumption?

This is an opportunity for the Government to redraw its vehicle taxation regime to more accurately reflect the aims of the twenty first century. Of course, Senator Steve Fielding has to realize that too. Either that or he could change the name of his party to “Wealthy Families First”.

Wednesday, September 3, 2008

The Rate Cut We Had To Have

It was absolutely no surprise that the Reserve Bank Board decided to cut official interest rates by 0.25% yesterday. It was so widely anticipated that the announcement was only a formality. At the same time, observers were paying careful attention to what the Bank actually said about its decision, hoping for some clues as to the direction of future decisions. What they got was a forecast for economic growth to slow to 2% by the end of the year, while at the same time inflation continues to be a concern. Far from hedging bets, this apparent conflict is a reflection of the so called “two speed” economy which has sprung up from the strength of the resources boom.

The effect of that two speed economy is even more evident today with the release of the latest batch of economic figures. The bottom line is that the economy has slowed by more than expected. The June quarter economic growth figure fell to 0.3%, giving an annualized outcome of 2.7%. More alarmingly, household consumption fell for the quarter by 0.1%. After the widely reported slump in retail sales already reported this year that is no real surprise, although actually registering a negative figure is worse than expected. At the same time business investment remains robust.

On balance, today’s figures are worse than expected, and can be read as an indication that the decision to cut interest rates was the right one. In fact there are still many who believe that the previous increase was one step too far, and they may be right. Despite the ongoing resources boom, and the strength of business investment, the key parts of the economy which affect ordinary Australians in their day to day lives are perilously close to going backwards. After seven years of increasing interest rates, this was the turnaround that we had to have.

That doesn’t mean that from here on out it will be clear sailing. Far from it. If anything the challenge is only just beginning as the economy seeks to find its own equilibrium, and the Reserve Bank attempts to smooth out an otherwise bumpy ride. There’s still a long way to go before the balance between equity and debt, as well as capital and income, is restored.

Tuesday, September 2, 2008

Reputation Is Too Valuable To Risk

Both the management of Qantas and the officials at the Civil Aviation Safety Authority are taking great care to repeatedly tell us that it is still safe to fly Qantas. While the full report from the safety body has not been made public, the announcement that Qantas has been found to be failing to meet its own benchmarks is both alarming, and oddly reassuring. Alarming for the obvious reason that it seems to validate the concerns expressed by many that cost cutting has undermined standards, but reassuring because so far the process of checks and balances seems to be intercepting problems before they become disasters.

The agency has announced that it will follow up this review with a full scale audit of three individual aircraft representing the major aircraft classes in the Qantas fleet. At the same time, CASA has indicated that there are structural issues in the company which hamper internal communications and therefore fall short of best practice. The authorities have carefully avoided referring to cost-cutting, but the message is clear. There are elements within the Qantas corporate culture which have already resulted in a question mark hanging over standards, and could conceivably lead to more serious problems over time.

Clearly, both the Safety Authority and the Airline have a strong interest in not alarming the general public, but the measured tones of the announcement made on Monday should be enough to send a shiver down the spine of the beancounters who have spent years putting profit before all else. Now, even beancounters know that profits will suffer if safety issues destroy the airline’s reputation, but the problem is that beancounters have come to believe that they are better placed to make judgements about operational matters than the people who actually do the work.

That observation doesn’t only apply to Qantas. It is the cancer which has invaded the entire corporate world, and which is evident in such diverse circumstances as the newspaper company that thinks it can publish papers without the unnecessary expense of journalists, right through to the New South Wales government which believes that teachers only deserve a payrise if they can show a productivity gain. It explains why we all have to pay fees to use what should be public infrastructure in order to pay the interest on loans taken out by so called Private Equity Investors, when the reality is that if they actually had equity to invest they wouldn’t need a loan.

The dilemma confronting Qantas of course is that no matter how much the management of the company wants to preserve their safety record, they are competing in a topsy turvy world where other operators are cutting their own costs, and thus lowering the bar. The only solution to that is to recognize the true value of the company’s reputation, which is priceless, and invest accordingly.

Monday, September 1, 2008

Teachers’ Stoppage Punishes Parents

Nobody likes a teachers’ strike. It causes great inconvenience to parents, great disruption to students, and generally doesn’t achieve a great deal. And yet, the New South Wales Teachers’ Federation appears to have no hesitation in calling a stop work meeting when push comes to shove. Given the unpopularity of such action I have to wonder whether it helps or harms the Union’s cause.

This week’s stoppage is about pay levels, and about the plan to allow individual schools to conduct their own recruiting outside the transfer system. These are legitimate concerns and deserve some attention. First, the pay claim. Teachers are seeking a pay increase of 16% over three years, which is ahead of inflation, but below executive remuneration growth, as well as well below the increases for politicians and senior public servants.

The Government insists that teachers, like other public sector employees such as firemen, nurses, and police should have their pay increases capped at 2.5% per annum, well below inflation and in reality a pay cut in real terms. It’s easy to see why teachers, like the firemen, police and nurses, are insulted by the offer. What makes it worse however is that the Government insists that any increase above the 2.5% must be tied to productivity gains.

This might make sense in manufacturing or retail, but how on earth can teachers deliver productivity gains? Do they squeeze more students into each class? Do they score points for every straight A student? It is a complete and utter nonsense because teaching is not an industry, at least not in the same way that a production line is.

Further to that is the frustration that teachers might start out with a decent salary at the beginning of their careers, but after a few years the income levels out and there is little opportunity for advancement. There are very complicated issues of performance assessment and benchmarking that are a part of this debate, but the bottom line is simple to understand: the present structure amounts to what might be described as a dead end.

The question of sidestepping the transfer system also deserves debate. If schools in remote or undesirable locations can’t get teachers, obviously the standard of education available to students in those towns will be under threat. The Government insists that this will not be the case, but the Teachers Federation disagrees. At the moment, there is no debate or negotiation on this point, with the Government simply insisting that its plan should go ahead.

While I can see the legitimacy of these concerns, I wonder if that’s what Mum and Dad will be thinking if they have to miss a day of work because they can’t find anyone to look after the kids. Probably not. But the real question is will they blame the Union or the Government for this stalemate?