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Good evening. Welcome to 'Lateline'. I'm Ali Moore. All eyes are on US markets tonight as they get
their first chance to react to the historic downgrading of America's triple A credit rating. Tens
of billions of dollars in shareholder wealth off local stocks today and Asian markets also suffered
losses as wor rees about the US and the massive sovereign debt problems in Europe sparked talk of
another meltdown. With the global uncertainty, the Australian Government is coming under increasing
criticism over its determination to deliver a budget surplus.

I think what's important here is that we don't stick to this belief that a budget surplus by 2013
is anything other than a political promise. The economics of that is in this crisis, we should let
the automatic let spending go up and we should let taxes go down and we shouldn't prevent that
process because it helps to against the nature shock.

Our guest tonight is Warwick McKibbon a member of the Reserve Bank board until last month. We'll
also be crossing to Philip Williams to check on European markets. The Productivity Commission
recommends an overhaul of the aged-care sector. London rocked by street riots and looting and the
Saudi king demands an end to the bloodshed in Syria while the

Government confident of Malaysia deal going ahead

ALI MOORE, PRESENTER: The Government will press the high court to fast-track its hearing on the
validity of the Malaysia deal, saying it's confident the arrangement will survive the legal
challenge.

Although an injunction until the next court hearing will prevent any asylum seekers being sent to
Malaysia from Australia, the minister has confirmed Malaysia will send the first of its refugees
for resettlement here this week.

Political correspondent Tom Iggulden reports from Canberra.

TOM IGGULDEN, REPORTER: On a wing, and a prayer; the planes are on the tarmac and the 16 asylum
seekers who were supposed to board them for Malaysia have a glimmer of hope that they can stay.

DAVID MANNE, ASYLUM SEEKER LAWYER: Our clients, these very vulnerable people, are asking the court
to rule on whether under Australian law the Government really has the power to expel them to
Malaysia, a country where they fear that they will not be afforded proper protections or human
rights standards.

SARAH HANSON-YOUNG, GREENS SENATOR: We know that this policy is wrong; the question is now whether
it's actually legal.

CHRIS BOWEN, IMMIGRATION MINISTER: We're arguing the case and we believe we're on very strong
ground.

TOM IGGULDEN: Today's dramatic court action, launched on the eve of the first plane-load bound for
Malaysia, puts at least a temporary end to all planned transfers.

CHRIS BOWEN: We'll respect the interim injunction, but all the necessary preparations and work will
continue.

TOM IGGULDEN: And he says two weeks is too long to have his policy in limbo.

CHRIS BOWEN: The Commonwealth is considering its options for seeking a more urgent hearing, because
I think the - any uncertainty around this issue of course has the danger of playing into people
smuggler's hands.

TOM IGGULDEN: More than 50 asylum seekers arrived by boat yesterday, putting still more pressure on
the Government to turn its deal with Malaysia into a reality.

One aspect of the deal is still alive, however. The first few families of refugees from Malaysia
will arrive for resettlement in Australia this week.

CHRIS BOWEN: They'll be arriving over the course of the week and they'll be settled in capital
cities across the nation.

TOM IGGULDEN: The Opposition's questioning if the Australian Government will ever be able to keep
its side of the bargain.

SCOTT MORRISON, OPPOSITION IMMIGRATION SPOKESMAN: So what we've had is the High Court twice in two
days send a very clear message I think about some serious issues with this policy.

TOM IGGULDEN: A key issue in the case will be whether the Immigration Minister's properly
discharging his duties as the legal guardian of unaccompanied children who were to be deported.

DAVID MANNE: They're in Australia, they have a heartbeat and any move to expel them to Malaysia we
say would constitute a fundamental abandonment of his basic responsibilities to these unaccompanied
children, instead of allowing them to stay in Australia and seek refugee protection here.

CHRIS BOWEN: I also as minister have responsibility to ensure that the best interests of, in my
view, unaccompanied minors in Malaysia are considered and that those people have a chance for
resettlement in Australia.

TOM IGGULDEN: The case will also challenge the strength of guarantees made in the agreement with
Malaysia to protect the human rights of asylum seekers sent there from Australia.

DAVID MANNE: A number of these asylum seekers have very strong claims of fear of religious
persecution in Malaysia. And there's also real concerns that they may be subject to detention, to
beatings and indeed even deportation to danger in their homeland.

TOM IGGULDEN: But the Government says it's not ruffled by the legal challenge.

CHRIS BOWEN: As I recall, the Nauru option was ruled invalid by the Federal Court at one stage
before that was overturned on appeal.

TOM IGGULDEN: There are similarities with previous legal action against offshore processing, but
the asylum seekers' lawyer says there's a significant difference too: never before has the
deportation of children under the Immigration Minister's care been put to the test in court.

Tom Iggulden, Lateline.

Markets react to American credit rating downgrade

ALI MOORE, PRESENTER: It's been another bleak day on the Australian stock market as shares fell to
their lowest level in almost two years.

Fear is the order of the day, according to analysts, with the ASX200 closing almost three per cent
down on top of last Friday's heavy losses.

And there are predictions of more to come overnight, as the United States share markets react to
the historic downgrading of its credit rating.

Hamish Fitzsimmons reports.

HAMISH FITZSIMMONS, REPORTER: A mid-morning rally on the Australian Stock Exchange was short-lived,
as local shares again lost ground when markets in Asia opened with heavy losses.

DAVID BIRRELL, EXECUTIVE DIRECTOR, UBS: We have sold off quite hard, probably slightly harder than
we expected over the weekend.

HAMISH FITZSIMMONS: The ASX200 closed 2.9 per cent down. One hundred and eighty six of the top 200
companies ended the day lower. How long the volatility will continue is the great unknown.

ALAN OSTER, NATIONAL AUSTRALIA BANK, CHIEF ECONOMIST: That's the million-dollar question. The short
answer's: no-one really knows. What we've got are people basically fearing a global recession.
They're worried about Italy and Spain, and the reason that they're important than, say, a Portugal
and Ireland is they're much bigger.

HAMISH FITZSIMMONS: Now the European Central Bank has indicated it will intervene and buy up
Italian and Spanish government bonds to try and avoid a potential Europe-wide economic meltdown
over their debt issues.

All eyes are now on Wall Street to see how it will react to Standard & Poor's downgrading of the
US' national credit rating on the weekend.

ALAN OSTER: I think the reality is they'll probably be negative, however at some stage, you know,
the real economy's going to come back. And payrolls actually on Friday night was better than most
people expected, but that sort of got shot away in the other news.

HAMISH FITZSIMMONS: But some are speculating the worst might be over, in the Asian markets at
least.

FRANCIS LUN, MANAGING DIRECTOR, LYNCEAN HOLDINGS: I think the reaction in Asia's been much better
than expected. I think it's rather muted. That's really because last Friday we had one of the
biggest falls in years of between four to five per cent in most Asian bourses. But this - but
today, we still have one to about three per cent.

HAMISH FITZSIMMONS: And just days after talk of interest rate rises to keep Australia's inflation
in check, there are some predictions of an interest rate cut.

But National Australia Bank chief economist Alan Oster says Australia's economic fundamentals are
strong, meaning that despite those market predictions a cut shouldn't be on the bank's radar.

ALAN OSTER: The markets are pricing in a 50 basis points by next meeting and 75 basis points by the
end of the year. Now, I think that would come as quite a surprise to the central bank.

So, again, the markets are reacting as if the Australian economy's just fallen into a recession. I
think the chances of that are almost zilch.

HAMISH FITZSIMMONS: We'll know after the Reserve Bank meets again in September.

Hamish Fitzsimmons, Lateline.

The only certainty is volatility: Williams

ALI MOORE, PRESENTER: With the latest developments on the European markets we're joined in London
by Europe correspondent Philip Williams.

Well, Phil, it's early afternoon. How's the London market reacting?

PHILIP WILLIAMS, EUROPE CORRESPONDENT: Well it's been volatile, it's been down, then up and down
again, and currently I can give you the rough numbers: the FTSE is about 1.5 per cent down, the
German market's 2.19 and the French market about 1.72.

So, around that 1.5 to two per cent down, roughly in line with what's happened in Australia and in
the rest of Asia. But there was a little optimism earlier. That's been dashed, and so we're now on
the downward trajectory.

ALI MOORE: Indeed, but at least I guess the falls so far haven't been as bad as they could have
been, as bad as they were at the end of last week.

PHILIP WILLIAMS: Absolutely, and I think the ECB's announcement about their intention to purchase
the Italian and Spanish bonds has really put a floor under that market, and that's worked well.

That side of the story is good, in that the bond yield has gone down from about 6 per cent to just
above 5 per cent. So that's made it - taken the pressure off those governments and of course all
the European countries that would be asked to help bail them out if that had gone haywire. So, from
that point of view, the ECB's move has been very successful.

ALI MOORE: So is anyone taking a punt on where European markets are likely to end this session?

PHILIP WILLIAMS: I think you'd be a very brave person to take a punt on any market anywhere in the
world at the moment. I'm certainly not going to. All I can guarantee is volatility.

ALI MOORE: Indeed. You and everyone else, I think. Phil Williams, many thanks.

PHILIP WILLIAMS: Thank you.

Europe should split the currency: McKibbin

ALI MOORE, PRESENTER: A short time ago I spoke to Professor Warwick McKibbin, a former member of
the Reserve Bank board and now director of the ANU Research School of Economics and senior fellow
of the Brookings Institution.

Warwick McKibbin, welcome to Lateline.

WARWICK MCKIBBIN, ANU COLLEGE OF BUSINESS & ECONOMICS: Evening, Ali.

ALI MOORE: It's the US markets which haven't yet had a chance to react to the debt downgrade in the
US. What do you think will happen when the Dow opens shortly?

WARWICK MCKIBBIN: Well the Futures market is predicting it'll be a down day, at least start that
way, and I think that is probably gonna be the outcome.

ALI MOORE: And how badly down?

WARWICK MCKIBBIN: I don't think predict these things; I just know that there are certain policies
that are needed and we're not seeing them in the markets and so the market will keep falling until
the policies are changed.

ALI MOORE: Well let's look at those policy requirements. I guess first of all, do you agree with
the Standard & Poor's downgrade? I mean, is the US ability to repay its debt actually worsened? We
have to point out of course that the price of bonds has actually gone up a little, which if
Standard & Poor's is right, would seem, you know, rather perverse.

WARWICK MCKIBBIN: Well there's a number of different shocks occurring in the world simultaneously.
There's the crisis in Europe and then there's the issue in the US. If you look at US debt, it's
approaching 100 per cent of GDP in gross terms. Deficit's at 10 per cent of GDP. Under any
plausible set of interest rates and growth rate projections, that's not sustainable, and the US has
to undertake a fairly significant future fiscal consolidation for all the pieces to come together.

ALI MOORE: And Europe?

WARWICK MCKIBBIN: And Europe has that problem. It also has a problem where several countries in
Europe are technically bankrupt. They need not only to have their debts written off, but they also
need to have about a 30 per cent depreciation of their exchange rate.

This won't happen inside the Eurozone, so the policy approach is to deflate by 30 per cent, which I
don't think is politically or economically sustainable in countries like Greece or Ireland or even
Portugal. And if you bring in Italy and you bring in Spain, that is not a sustainable situation.

ALI MOORE: So, let's stay on Europe for a minute. What happens then? I mean, we've had the ECB now
commit to buying the bonds of Italy, we've had all the G7 leaders say that they will do whatever it
takes. Is that anywhere near enough?

WARWICK MCKIBBIN: Well, this is a form of economics that I'm becoming increasingly used to, and
that is the idea that if you believe it will happen, it will happen.

Look at the facts. The facts are that the amount of debt in Italy that they need to roll over in
the next 12 months is probably of the order of 350 billion euros. The European financial stability
fund, which was voted on several weeks ago, is still not financed, but the governments have agreed
to put it their parliaments. It's about 440 billion euros.

So Italy alone will chew up all the money that's on the table from the European governments,
largely the German government. So, the numbers don't add up. What they need in Europe is a major
adjustment both to their economies and to the exchange rate mechanism.

ALI MOORE: And some sort of central - pool the debt, if you like, all take responsibility for it?

WARWICK MCKIBBIN: Well that's one of the options on the table. Some would argue in Europe that the
best thing is to create a euro bond where you take the poor fiscal positions of the southern
countries and combine them with the good fiscal positions of the northern economies.

That brings the debt-to-GDP ratio down to about 90 per cent and the deficits down to close to
balance. What that does though is it transfers an enormous amount of resources from the German and
French taxpayers to the southern Europeans. I don't see that as politically viable. And all of this
just to save the idea of a common currency.

The alternative I think, which is more plausible, is to split the currency into two -the Premier
League and the First Division, and have France and Germany in the Premier League and let the others
be in the First Division and depreciate by 30 per cent.

That way, with a depreciation of that extent, you can start to get the economies to grow again and
that's what you need to have sustainability in the fiscal position.

ALI MOORE: But that's an admission of failure, isn't it, of the Eurozone?

WARWICK MCKIBBIN: Well, again, it's an admission of the failure of the common currency, but there's
more to Europe than just the common currency.

We had the European community created. That was a good idea; it reduced barriers to trade between
economies, it got rid of certain distortions. The gamble that was made in early '90s to create a
euro by the year 2001 was the idea if you centralise the currency, all the institutions in Europe
have to converge, and so the fiscal institutions have to converge, the employment labour
institutions have to converge.

It was a calculated gamble which actually unfortunately hasn't paid off because the adjustments
haven't occurred in these economies.

ALI MOORE: So, you paint a fairly dire picture. I mean, you started off by saying that some of
these countries are technically bankrupt. Do you think that Europe will be able to fix its
problems?

WARWICK MCKIBBIN: I think they can if - and I've done a report recently for the World Bank as part
of an input into the G20 process where we used our global economic models.

Very, very simple tools, but looked at whether or not credible fiscal consolidation can be used as
a tool of reducing uncertainty and stimulating investment in the short run, and we find for the
European economies if they change their exchange rate mechanism and they undertake serious fiscal
consolidation in the southern European economies, they can, after several years of weak growth,
grow their way out of this situation, but it requires fairly significant commitment to very
unpopular policies.

ALI MOORE: And if they don't?

WARWICK MCKIBBIN: And if they don't, my guess is that some of those countries will ultimately,
through social disarray, spin out of eurozone. Once one country leaves the eurozone, most likely
Greece or Ireland, then we're in very uncertain environment.

Far better for this to be an organised, co-ordinated reassessment of the situation, understanding
of problem and then an understanding of the solution.

ALI MOORE: And the US? Are we staring down the barrel of another recession?

WARWICK MCKIBBIN: Potentially, because if you think again of what the shock was, going back to the
2007 - actually the period from 2001: we had a massive misallocation of capital in the US and in
parts of Europe.

This needed to be resolved not through just pumping government spending into the economy, but by
actually rebalancing the balance sheets of the household sector and some of the banking sector in
the US. This didn't happen.

We had a transfer of wealth to - from taxpayers to the banks and the financial system. And in the
end we end up with a fiscal position which is unsustainable under its current settings. We need to
have a rebalancing, we need to have - it's very different to a typical business cycle.

This is very much like the Great Depression, where a rebalancing of balance sheets was required.

ALI MOORE: So where does all of this leave Australia? Of course the Treasurer has said almost like
a mantra that we're in the right place at the right time, our economic fundamentals are strong, but
that certainly hasn't I suppose made investors feel at ease in the last few days.

WARWICK MCKIBBIN: Well again, the shock that we face is quite different to the shock that the
Americans and the Europeans are facing, as it was in 2008-'09.

We have a system in this economy where markets can adjust, the exchange rate fortunately is
flexible, the central bank is independent and has a very clear policy goal. The Government
fortunately had reserves that they could bring in terms of fiscal stimulus, which was partly the
right decision in 2009.

In this crisis, however, a fiscal stimulus is not the right decision because the problem in the
world economy is a fiscal crisis. So we have to rethink the policy response in this country, but
with the flexibility of the economy and the appropriate policy settings, Australia then relies very
much on what happens in China, and I'm fairly optimistic that the China story can continue for
many, many decades.

ALI MOORE: Do we have the right policy settings now?

WARWICK MCKIBBIN: I think we shouldn't have had such a big budget deficit, and I said that when I
testified against the scale of the stimulus package in 2009. I would've liked to have seen the
second package to be half as big, which means by now we would be in a fiscal surplus position.

But, again, surpluses are not the be all and end all of policy. It's good to have in reserve
resources that you can bring to the table.

What we should've done is created a sovereign wealth fund back in the early 2000s under the Howard
administration and had those resources sitting offshore so we can bring them back at the time of
need.

And so far we've had two of those - or one - second one possibly coming in a decade. So I think
that sort of investment in the longer term risk management of the economy is something that is well
overdue.

ALI MOORE: You say you're optimistic about China, so do you think Australia is in for any sort of
shock?

WARWICK MCKIBBIN: Oh, definitely. We're facing a shock in the global economy depending on how the
fiscal problems are resolved. The China situation in the longer term is a very, very good news
story for the world. Millions - hundreds of millions of people coming out of poverty, growth,
productivity, investments in new technologies in China - very, very optimistic.

However, the adjustment of China and the way it's impacting on the world is part of the adjustment
problem that the Europeans and the Americans are facing. They're not handling it very well and
these transitions of economic and political power globally have never been handled very well. In
fact only once successfully, and that was when the US took over from the UK.

ALI MOORE: So how are Australians going to feel this?

WARWICK MCKIBBIN: I think you'll see a lot of volatility, a lot of uncertainty, and when people are
uncertain, they don't spend as much and investment will be weaker than otherwise.

But having said that, a lot of the investments that are driving the Australian economy at the
moment are longer-term investments in our resource sector. As long as China remains strong and as
long as the policies in China are adjusted appropriately, and that includes an appreciation of the
Chinese currency, then I think we'll be well-protected from the global wave which is heading
towards us potentially.

ALI MOORE: Of course though, the Reserve Bank has already slashed the forecast growth for 2011 by a
whole per cent. What does that do to the budget bottom line?

WARWICK MCKIBBIN: Well it reduces revenues and it potentially increases outlays and that means that
the budget moves more into deficit, and I think what's important here is that we don't stick to
this belief that a budget surplus by 2013 is anything other than a political promise.

The economics of that is, in this crisis, we should let the automatic stabilisers adjust. That
means we should let spending go up and we should let taxes go down and we should not prevent that
process because it helps to buffer against the major shock.

ALI MOORE: Well the Government's sticking to that right now. If they continue to stick to it, could
it actually be damaging?

WARWICK MCKIBBIN: Well it would be - if revenue's falling and spending's rising - if spending's
rising and revenue's falling and you decide you want to cut spending, that has a negative impact on
the economy.

And so the credible fiscal policy is to have a very clear response to negative economic shocks. And
that doesn't mean you do the opposite, that doesn't mean we have a massive big stimulus again this
time, because the nature of this shock is different.

But we should be in the middle, letting it very clearly be known to the financial community that we
have an automatic stabiliser fiscal stance, we have low debt, we have good, robust institutions and
we have an independent central bank and we have a flexible exchange rate. And that all helps; it
doesn't eliminate the shock, but it certainly takes the rough edges off.

ALI MOORE: What about the two-speed economy which we hear a lot about and we know quite a lot
about? We've seen retail conditions, for example - retail confidence at decades - its lowest point
for decades. How weak do you think the non-mining sectors of this economy are right now?

WARWICK MCKIBBIN: Well I think they're very weak and it's not just the multi-speed economy that's
causing this. It's also a loss of confidence in conditions globally. We've seen a re-rating of the
US government.

But we've also seen before that very, very unsure outcomes in the global markets. We've seen a
revision of US GDP, we've seen very weak and anaemic growth, as you would expect when you have a
re-leveraging going on in - or a de-leveraging going on in major economies.

That offshore negativity automatically impacts on Australian consumers. And we are - consumers are
60 per cent of the economy.

ALI MOORE: But I guess the question is: are the right policies in place to deal with that? I note
that Glenn Stevens himself made the observation just a couple of weeks ago that productivity growth
has been "quite poor" in this country since the mid-2000s.

Productivity was identified by the Productivity Commission in terms of labour laws as one of the
big issues facing retail. Are we addressing the sorts of questions that need to be addressed to fix
productivity to help those non-mining sectors?

WARWICK MCKIBBIN: There are two points here which I think are worth making. One is that we aren't
addressing those issues. If you look at a graph of Australia's income per capita over the last
decade, it has been rising as it has the decade before yet we've got the biggest terms of trade
improvement in our history.

Why is it that Australians aren't much wealthier? And that's because our productivity has been much
lower, and the two have cancelled each other out.

The second point to make is that we have put in place a fiscal framework where we've got outlays
being committed very, very clearly, but the revenues are actually highly uncertain. And you see
this whether it's in the carbon pricing system, whether it's in the NBN-style decisions - decisions
where the outlays and the revenues are not consistently - are not aligned with each other in a
world of high volatility.

And that's the risk: that we're going to have to revisit some of these issues if in fact the world
economy does end up in a different place than the forecasts said it would be two years ago.

ALI MOORE: And if we don't, productivity will continue to decline?

WARWICK MCKIBBIN: Well that's a different issue. The productivity is more about reform of markets
and re-regulating or de-regulating depending on the particular markets. I think the labour market
reforms have been a problem for flexibility in this economy. You don't notice it until we get a
turning point, and if we get a turning point then we can test the hypothesis. But ...

ALI MOORE: And we've got that now though. I mean, do you think in retail we're starting to see that
in terms of loss of flexibility?

WARWICK MCKIBBIN: I think that's right; I think those parts of the economy are very weak. Having
said that, the economy is still projected to grow at roughly two per cent in the next 12 months and
the year after very strongly.

So, what's needed here though is an understanding that policy's not about making a prediction about
the future and then setting policy, it's about understanding the uncertainty, which is enormous,
and designing the policies on both - on the fiscal side so that the revenues and the expenditures
can move together, rather than having one locked in with great certainty and the other one highly
vulnerable to any negative shocks.

ALI MOORE: Which is, you would argue, the current situation with many government policies?

WARWICK MCKIBBIN: In a number of key ones, the very big ones. And I think the climate change is one
of the key issues. We have the idea that we're going to have a revenue source, which is fairly
predictable out to 2015, that's a carbon tax that Australian corporates pay.

After that, we're in a global trading system, if there is one, and the revenue then potentially
could mostly go to foreign suppliers of permits, in which case the expenditures have been
committed, but the revenue base has gone offshore.

ALI MOORE: You've just left the board of the Reserve Bank after 10 years. You've been the academic
economist, if you like, on the panel and as such I guess you've also been a thorn in the
government's side.

We've just heard some of the policy areas that you haven't been in complete agreement with the
government on. Were you ever rebuked by either Ian Macfarlane or the current governor Glenn
Stevens? Did the government or the treasurer ever pick up the phone and say, "Zip it"?

WARWICK MCKIBBIN: Um, I had a couple of interesting conversations with Ian, just to make it clear
that I should be careful what I say because I did have a responsibility as a government - as a
central bank official and it was an important set of advice.

The best advice that Glenn Stevens gave me was when I told him I was testifying to the Senate
inquiry on the stimulus package. And he said, "I don't mind that you testify," which was fairly
controversial of course, but he said, "Please write it down," which I did and that was very helpful

ALI MOORE: As in clarify your thoughts?

WARWICK MCKIBBIN: Write it down and speak to what you've written. Because I have a tendency to say
what's on my mind rather than what should be said at the appropriate time.

ALI MOORE: How important do you think it is to speak out? Because the former head of Treasury Ken
Henry of course famously urged academics to "put down their weapons", and that was a direct quote.

Recently the Government is said to have urged business to try and put aside some of their
differences. Do you think that our leaders have become scared of really open policy debate?

WARWICK MCKIBBIN: Again, a very good question. I think it's dangerous for academics to keep quiet.
And I think it's equally for senior bureaucrats to think that they are the founts of all wisdom. In
fact they don't think that.

What they think is that there is perfection in one corner and then there's the political compromise
that needs to be made to get policy to the Parliament. And my view is that we shouldn't compromise
principle under any circumstances, but apparently in the space of formulating real policy with real
politicians, you do have to sacrifice in many dimensions.

I think that's dangerous for society, it's dangerous for the economy and a badly-designed policy is
more likely to collapse than a well-designed policy. And that's the risk you face by putting it on
the table when it's half-baked.

ALI MOORE: Well now the shackles are off, Warwick McKibbin, we look forward to learning more from
you, perhaps even what you haven't written down before you speak. Many thanks for joining us.

Aged care system faces major overhaul

ALI MOORE, PRESENTER: The stretched aged care sector is set to undergo the biggest shake-up in
decades.

The Productivity Commission says the aged care system is challenged by increasing numbers and
expectations of older people.

It's recommended an overhaul of aged care funding, with a new set of user-pays options.

The commission also wants the sector opened up, with more beds, services and independence for older
Australians.

Karen Barlow reports.

KAREN BARLOW, REPORTER: Eighty eight-year-old Tom Stewart has been living in his suburban Sydney
home for 60 years. It was his late wife's childhood home before that, and now that he's house-bound
with complications from type 2 diabetes, he doesn't want to be anywhere else.

TOM STEWART, COMMUNITY CARE USER: Well, I feel a bit emotional at times, but it means memories. A
lot of them and they're all pleasant. I could tell of wonderful events, you know, that's happened
here and how the family have grown and I've been so proud of the lot of them.

KAREN BARLOW: Tom Stewart receives community care for food, cleaning and social activities.

TOM STEWART: I can honestly say I can't fault the help I've got. I get a lady that turns up while I
shower to be around in case I have a fall. That's my great worry: that I have a fall.

PATRICK MCCLURE, AGED AND COMMUNITY SERVICES AUSTRALIA: This is too important, it's not a fringe
issue, this involves all Australians, all older Australians.

KAREN BARLOW: And the challenge is growing. By 2050, 3.5 million Australians are expected to need
aged care.

JULIA GILLARD, PRIME MINISTER: People are looking for more options now. Overwhelmingly people want
to live independently hopefully to the end of their lives.

KAREN BARLOW: The Productivity Commission is recommending greater independence, choice and control.
It wants older Australians to have the option of receiving care at home and be able to make their
own choice of provider. And aged care funding has been recommended for an overhaul, with the
Productivity Commission recommending users pay for part of aged care services on a means-tested
basis.

At the moment, many older Australians have to sell their homes to pay for an aged care place. The
Productivity Commission says no-one should be forced to do that.

It says places could be paid for with some of the equity in a home.

The elderly would have the option to effectively borrow money from the Government using part of
their home's value as security.

Or older people could sell the home if they want to. The money would go in a new Australian aged
pensioner's savings account and money could be drawn as needed.

LIN HATFIELD DODDS, UNITED CARE AUSTRALIA: The report proposes a very clever and intelligent series
of recommendations to allow people to access the value of the family home without impacting their
pension and without having to sell the home.

KAREN BARLOW: The Productivity Commission says the Government's limit on the number of beds or care
packages should go.

IAN YATES, CODA AUSTRALIA: The outcomes for older Australians will be that we will have much
greater choice in care in the home than we have at the moment.

KAREN BARLOW: The federal Opposition has accused the Government of dragging its feet.

CONCETTA FIERRAVANTI-WELLS, OPPOSITION SPOKESWOMAN: What we are concerned about is that this
government has had review after review, there have been productivity commissions, there have been
Senate inquiries into the need for reform in this sector.

KAREN BARLOW: But the Government is not ruling any recommendation in or out until it's reviewed the
report. It'll now hold another round of consultations before providing a response.

Karen Barlow, Lateline.

Tottenham riots revive old memories

ALI MOORE, PRESENTER: London is reeling after two nights of violence. More than 160 people have
been arrested and 35 police officers injured in the mayhem, with looters smashing shopfronts and
police under attack from rioters.

The unrest was sparked by the police shooting of a man in the London suburb of Tottenham. The
resulting violence has revived memories of similar troubles more than 20 years ago.

London correspondent Philip Williams reports.

PHILIP WILLIAMS, REPORTER: For the second night, mayhem, only this time it was copycat violence;
the first outbreak here in Enfield in North London. Again it appeared to be more about looting than
protest, opportunists taking advantage of a police force stretched to the limit.

When police did intervene, it was a repeat of the previous night's battles, mainly young people
using rocks and bottles, police responding with baton chargers and dogs.

In South London, more trouble. Here in Brixton, stores were looted, and again more shops were set
on fire.

Many arrests were made, but it didn't stop the contagion spreading to several other suburbs.

What started a day earlier in Tottenham as a peaceful protest over the death of a local man shot
dead by police, ended with this.

For hours the battles raged. At times the police lost control of the streets, then regained the
initiative. Police cars were attacked and torched, a double-decker bus set on fire.

ADRIAN HANDSTOCK, COMMISSIONER, METROPOLITAN POLICE: We kept a dignified response to that to allow
that protest to take place. However, once that extreme violence - and it was violence that could
not be anticipated on that scale - occurred, we moved the appropriate level of resources in.

PHILIP WILLIAMS: And while police were trying to regain control, in nearby areas looters simply
took what they wanted.

The morning light revealed more damage. This is what remains of the bus. Many local residents have
lost their businesses and their homes. A large supermarket destroyed.

DAVID LAMMY, BRITISH LABOUR MP: We now need restraint and calm. And I say to those who wanted to
come to Tottenham to cause violence and disturbance, to stay away. We don't need you. We don't want
25 years of rebuilding community and trust destroyed because of mindless nonsense.

PHILIP WILLIAMS: Twenty six years ago, the area was blighted by riots triggered by the death of a
local woman during a police search. In the violence that followed back then, a policeman was
killed.

Political and community leaders have all condemned the attacks, which have left the entire
community in shock.

Eventually the wreckage will be cleared from the streets, the shattered buildings rebuilt. What
won't be so easily restored is a sense of confidence in a community that had already been doing it
tough.

Police are on high alert for even more trouble. There are concerns what's been a London problem
could spread to other British cities.

Philip Williams, Lateline.

Arab League condemns Syrian violence

ALI MOORE, PRESENTER: Saudi Arabia has recalled its ambassador from Damascus and the Arab League
has for the first time publicly condemned Syria's actions after a dramatic escalation of violence
in the eastern centre of the country.

More than 80 people have reportedly died in fresh assaults on key Syrian cities.

50 residents of Deir al-Zor, among them a mother and her children, are believed to have been killed
when soldiers backed by tanks stormed the city during the dawn call to prayer.

In the city of Idlib, two funeral processions are shown coming under attack by security forces,
reportedly leaving eight mourners dead.

And a 10-year-old boy is said to be among 26 other deaths in the town of Hula. The assault's defied
a direct appeal from the United Nations to president Bashar al-Assad to stop attacks on civilians.

al-Assad to stop attacks on civilians. Now to the weather. That's all from us. If you want to look
back at tonight's interview with Warwick McKibbon or review any of our stories or transcript, you
can visits our web sites and also follow us on Twitter and Facebook. I will see you again tomorrow.
Goodnight.