Friday, May 17, 2013
Why Abbott will have to clean up Labor's super tax mess
Here's my advice, written before I knew he was thinking along similar lines.
Accepting the bulk of Wayne Swan's budget cuts will only get Tony Abbott and Joe Hockey so far. Within their first term if elected they will have to confront the one truly enormous and growing budget cost Swan has barely tackled..
The cost to tax of the staged increase in compulsory superannuation contributions from 9 per cent of salary to 12 per cent was to have been funded by the mining tax.
Now scarcely functioning (and set to be abolished by the Coalition) the mining tax will raise just $200 million this year and a total of 5.5 billion over five years if it survives.
By contrast the existing super tax concessions cost $32 billion per year according to the Treasury figures in the budget. That figure is disputed by some in the superannuation industry, but what is not disputed is that it is set to grow.
The budget papers show it climbing from $32 billion to an astonishing $50 billion per year by 2016-17, an extraordinary increase of 60 per cent.
By then super tax concessions would cost more than the pension ($48.5 billion) and more than Family Tax Benefits and Medicare combined ($21 billion and $23.6 billion).
And the ramping up of the costs will have only begun...
The first increase in compulsory super contributions from 9 per cent of salary to 9.25 happens in July. It will be funded by employers, most probably out of wage increases they would have otherwise paid.
But that's not a cost to the budget. The cost to the budget is that those contributions will be taxed at only 15 per cent, instead of the standard rate for wage increases. For middle earners subject to the Medicare levy the standard rate is 34 per cent. (Only Australians on salaries in excess of $300,000 will be slugged more than 15 per cent, and one year after announcing the hike to a still-generous 30 per cent the government still hasn’t produced the legislation.)
The first increase in compulsory super will be followed by a second, to 9.5 per cent in July 2014. The increases won't stop until July 2019 when the lightly-taxed total reaches 12 per cent of salary. Only then, at the end of the decade, will the budget cost level off.
The government hasn't said how much compulsory super will cost the budget by the end of the decade but it if it asked, Treasury would give it an answer.
It'll fall to Abbott and Hockey to wind back what will then be the largest cost to the budget other than grants to the states. The simplest solution, suggested by Melbourne University tax expert John Freebairn is for employers to deduct tax from super contributions at pay-as-you-go rates just as they do for wages. The earnings of super funds and the payouts could be untaxed, for even greater simplicity.
It's a bold solution that should be easy to sell. Something like it will become necessary for whoever is in charge of the budget after the September election.
In The Age
Recommended Reading:
Future Challenges: Australia's Superannuation System Martin Parkinson, November 28 2012
"With the Commonwealth budget coming under increasing pressure over the next few decades, the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny. This scrutiny will be even more important to the extent that existing concessions are seen to favour some at the expense of the majority."
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Wednesday, May 15, 2013
Budget 2013-14. Will we hit the debt ceiling?
Probably. The next Treasurer will have to lift it.
Me on RN Drive, May 15, 2013
13 minutes, play or RIGHT CLICK to download mp3
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Me on Life Matters, Wednesday May 15
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Swan's numbers. Why he is cautious, this time
BELIEVE ME THIS TIME
FROM THIS:
Projected outcomes, May 2012
2012-13 $1.5 billion surplus
2013-14 $2 billion surplus
2014-15 $5.3 billion surplus
2015-16 $7.5 billion surplus
TO THIS:
Projected outcomes, May 2013
2012-13 $19.4 billion deficit
2013-14 $18 billion deficit
2014-15 $10.9 billion deficit
2015-16 $0.8 billion surplus
2016-17 $6.6 billion surplus
In the face of enormous pressure to return the budget to surplus quickly, Wayne Swan has run the other way.
Extra spending this financial year and the next will boost the 2012-13 deficit by a further $2.4 billion and the 2013-14 deficit by $720 million.
Only in the following two years will the cuts in the budget overwhelm the extra spending, pushing down the 2014-15 deficit by $6.2 billion (to a small projected surplus) and pushing down the 2015-16 deficit by $12.3 billion (to a substantial surplus).
The Treasurer has adopted what he calls this "sensible, calm and responsible approach" in part because of a fear the economy could not take a sharp shift to surplus, a concern shared by shadow treasurer Joe Hockey, who told an investment conference last month the Coalition would not "go down the path of austerity simply to bring the budget back to surplus".
Mr Swan puts it this way: "Just because the global economy took an axe to our budget does not mean we should take an axe to our economy."
Changed economic conditions have ripped $60 billion from the four-year total of expected tax collections since the last budget update in October.
The budget papers include a graph making the point that if tax collections had remained as high as in the final year of the Howard government (23.7 per cent of gross domestic product), the budget would still be roughly in balance.
Swan is clawing back two-thirds of the missing $60 billion by making $43 billion of savings, most of which increase over time instead of biting now when the economy is weak.
Emblematic is the freezing of the thresholds beyond which Australians can't get the family tax benefit. The freeze will hurt no one in the coming financial year but then will raise $207 million in 2014-15, $400 million in 2015-16 and $609 million in 2016-17. The $94,316 cut-off for the family tax benefit part A seems generous now, but it will seem less generous over time as income growth pushes more and more people beyond it.
The decision to increase tobacco excise in line with average weekly earnings rather than the much slower growing consumer price index is another measure where the impact will start low and then grow.
The extra Medicare levy, to be locked in a fund labelled DisabilityCare Australia, won't bite at all in the coming financial year. But from mid-2014 it will take $3.3 billion from incomes, then, two years later, $4.2 billion. Set at 0.5 per cent of incomes, it will climb as incomes climb.
The phasing out of the net medical expenses tax offset as recommended by the Henry tax review will save only $175 million in its first year. But it will save $510 million per year by 2016-17.
So much do the measures Swan has put in place grow over time that he reckons he can fund 10 years' worth of the national disability insurance scheme and the schools improvement program with them.
But the projections aren't worth much coming from a Treasurer who, more than most, is acutely aware of how much things can change in just one year...
The budget documents make clear that any numbers produced beyond the next years are "projections" rather than forecasts. The difference is that "projections" assume standard rates of economic growth rather than forecast what it will be. By definition, "projections" don't encompass the possibility of recessions. If Australia did manage to last another 10 years without a recession, on world-record 21 it already lasted, it would indeed be a world-beating economy and would certainly able to afford DisabilityCare and the Gonski education payments.
Much depends too on an assumption that as mining investment fades mining production will ramp up to fill the gap. Investment detracts from tax collections, production builds them. But it is a guess about what will happen assuming demand from China remains high.
The projections assume an Australian dollar "around US103 cents".
This was where it was when the budget was being finalised, but it isn't where it is now. It fell below US100 cents on Tuesday and may well stay there, highlighting how difficult it is to forecast a week ahead, let alone a decade into the future.
And some of the measures involve guesswork. Tightening the tax rules to prevent multinational corporations shifting profits offshore and related tax measures are said to raise $4 billion over the next four years. But the assumption is multinationals will agree to pay the extra tax and won't find new ways not to.
If all goes as planned, government debt will peak at $192 billion, instead of the previously forecast $145 billion. The total is 11 per cent of GDP, instead of the previously expected 9 per cent. Net debt would be eliminated in 2021-22, one year later than previously expected.
In The Canberra Times, The Sydney Morning Herald and The Age
Australia's economic future is strong but uncertain, according to the Treasurer. The massive resource investment boom is shifting to a boom in production and exports. The rest of the economy is "transitioning towards broader sources of economic growth".
But while the opportunities are "great" and the future "bright", the transition "will not be seamless".
The prices Australia gets for its exports have slipped 17 per cent in the past 18 months when expressed as a proportion of the prices the nation pays for its imports, the budget papers say.
The Treasury is expecting only a small further decline in the year ahead - just 0.75 per cent in 2013-14, followed by 1.75 per cent in 2014-15. It isn't particularly confident in the forecast, observing that the prices of key non-rural exports remain "highly volatile".
One scenario modelled on worse-than-expected export prices has employment growing at 1 per cent instead of 1.5 per cent.
The economy would grow at 2.75 per cent instead of 3 per cent and tax collections in 2014-15 would be $5.6 billion lower.
This time last year, Treasury forecast an unemployment rate of 5.5 per cent. Now it is forecasting 5.75 per cent, an outcome in part reliant on those "highly volatile" assumptions.
The department is hoping investment in housing surges in the year ahead to fill some of the gap left by mining investment.
After sliding in 2011-12 and growing at just 0.5 per cent in 2012-13, a 5 per cent improvement is expected in 2013-14. Business investment will not be of much help. Treasury expects its growth rate to slide from 10.5 per cent this financial year to 4.5 per cent in 2013-14.
Inflation, which had been a deep concern for the Treasury this time last year, and had been forecast at 3.25 per cent fuelled by the carbon tax, is now just 2.25 per cent.
That's the figure the department is targeting for the next two years, punting on the dollar staying high and underlying household demand being weak enough to force retailers to continue to discount in order to shift goods.
Business profits should remain very weak in 2012-13, slipping 0.75 per cent before recovering to record 4.75 per cent growth in 2013-14 and 5.5 per cent in 2014-15. Even after the recovery, profits will rise at much less than their historical pace of about 7 per cent a year.
The Treasury blames the high dollar, which it says is having "an acute and enduring effect on profits" as companies "squeeze margins to remain competitive".
The department's central forecast is the economy will muddle through. Economic growth will be 3 per cent this financial year, 2.75 per cent in 2013-14, and 3 per cent in 2014-15.
But it makes a point in the budget papers of saying the forecasts can turn sour - they are "always subject to a margin of error".
It says its biggest forecast errors last year concerned business and housing investment.
Ratings agencies Moody's and Standard and Poor's reaffirmed Australia's AAA credit rating on Tuesday night, saying the budget made only slight changes to previous projections and the country's debt level remained low.
In The Canberra Times, The Sydney Morning Herald and The Age
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Tuesday, May 14, 2013
BUDGET 2013-13 Where to find stuff
I'll surface at 1930 AEST
. National Times live video coverage from 1920 AEST
. Budget documents from 1930 AEST
. ABC News 24 from 1930 AEST
. ABC Metro Radio from 1930 AEST
. ABC NewsRadio from 1930 AEST
. Me, this time last year
Sunday, May 12, 2013
Not rich? Why we've no idea what we actually earn
Sunday column
Michael was outraged. Earlier in the week I had written that anyone earning more than $210,100 a year was ultra-rich, in the top 1 per cent.
“How exactly does one draw the conclusion that earning $210k a year makes you ultra-rich, especially as I am assuming this is before tax?” he asked.
“This equates to approximately $140k net after tax as income.”
“Assuming a $600k mortgage (appropriate to this level of income) and two children in private schools plus additional outgoings this leaves a balance of only $21k for holidays and other incidentals and/or saving.”
I wrote back assuring him that, however difficult his circumstances, 99 per cent of Australians earned less than he did in 2010-11, the most recent year for which the Tax Office has figures.
Compared to them he was indeed income-rich.
Most of us seem to know next to nothing how we are really doing compared to everyone else.
Here is a test. What do you think was the average income reported to the Tax Office in 2010-11?
I’ll make it easier. You can exclude all the (mainly) low earners who don’t pay tax.
The average income earned by the Australians who did pay tax was $66,720.
If it seems as if almost everyone you know earns more than that, that could be because you don’t get out enough.
Labor MP for the Hunter Joel Fitzgibbon doesn’t get out enough. He infamously claimed a few weeks back that families on $250,000 were ''struggling''.
''Coal miners in my electorate earning $100,000 $120,000 $130,000, 140,000 a year are not wealthy,” he said.
In fact the same Tax Office statistics show the average income for the postcodes in his electorate centres around $60,000 - way below those of the people he mixes with.
And those averages hugely overstate what most people actually earn.
Astoundingly, roughly three quarters of Australian taxpayers earn less than the average. That’s less than the average. Only one quarter earns more.
The true midpoint, the income above which half of us make more and below which half make less, is $45,212.
Why do most of us take home so much less than the average? Because the average is an artifact - it is pushed up by a few truly enormous incomes at the very top.
(Think for a minute about Gina Rinehart, the world’s richest woman. Her income boosts our average income but not our typical income. If she moved overseas our recorded average income would slide but our typical income would not.)
It’s actually not that fair to single out Joel or John. None of us get out enough.
We tend to live near people who earn something near what we are earning. If they earn slightly more than us we think we’re behind. If they earn slightly less we think we’re ahead. But we don’t look far beyond them.
It’s not only that we live in suburbs where people tend to earn the same as each other. The average income in Rushcutters Bay is $203,270. The average at Ruse in Campbelltown is $46,700. It’s also that Sydney’s high-income suburbs are clustered together. Near the city and harbour are Sydney’s high earning suburbs. Further away in the south and west are the low-income ones. Those of us who live near the centre don’t even need to drive through the further flung suburbs to get to work.
In the United States it is often the other way around. The low-income suburbs are near the city, meaning that high-income Americans at least need to drive past them as they go in to town.
At work we are also likely to be closest to the people who earn the sort of wage that we do.
Surgeons earn an average of $341,600 according to the Tax Office. They associate with other surgeons. Hairdressers earn an average of just $27,600 (many are part time). They too hang around with other hairdressers.
They are also increasingly likely to marry each other. The Productivity Commission reported this year that two-thirds of Australia’s high earners were married to other high earners. A decade earlier the proportion was 50 per cent.
It’s even worse when you consider aspirations. Believing we might one day move up a notch or two we are keen to defend the interests of those above us. The shadow treasurer Joe Hockey nailed it two years ago when he attacked a budget measure with the potential to hurt very high earners.
“$150,000 a year for a family is certainly not rich Australia,” he said. “Besides I want people to aspire to earn $150,000 or more.”
That’s the problem. We think others earn more than they do, we aspire to earn more than we do, and many of us have no idea how well off we are.
In today's Canberra Times, Sydney Morning Herald and Age
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What'll be inside the budget. Pain, and yet another attempt at a surplus
Whether that's wise or not
Good news will be scarce on budget night, but there will be something - at least for smokers.
Wayne Swan and Penny Wong had been considering a further 25 per cent rise in the tobacco excise that would have raised an extra $1.25 billion a year. Recommended by their National Preventative Health Taskforce it would have pushed the price of a pack of 30s above $20. But the government that famously took on big tobacco late last year in a war over plain packaging got cold feet. In the leadup to the budget it decided it had offended smokers enough, some of whom might still vote for it.
That means there won’t be another run of the infamous headline: “Beer up, Cigs up,” in part because the government has also rejected a plea from the Foundation for Alcohol Research and Education for a flat tax on alcohol that would have raised an extra $1.5 billion per year.
Just about everything that is in the budget will hurt, except perhaps for the lower interest rates that will almost inevitably flow from a raft of unpopular decisions.
Rates
A decade ago John Howard launched a reelection campaign from a lectern that read “Keeping Interest Rates Low”. He won, despite starting behind in the polls.
“Keeping interest rates low” is about the only slogan left for Swan and Wong as they try to sell Tuesday night’s budget. There will be no money for handouts (in fact they are grabbing money back) and they won’t be able to promise a surplus, at least not until the final year of their four-year set of financial projections.
But they will be able to promise a set of conditions that will as good as guarantee a further rate cut and perhaps a series of further cuts well into the life of the next government.
The banks will most likely get into the act themselves by cutting off their own bat, just as they did shortly after the last Coalition government was elected in 1996. They did it then not because they liked the change of government (although they probably did) but because upstart competitors such as Aussie Home Loans were stealing their customers by offering cheaper deals. The global financial crisis removed Aussie and its ilk (it is now owned by the Commonwealth Bank) but the conditions are ripe for new competitors to attack the banks again. The Reserve Bank believes they are charging more than they need to. As soon as a competitor comes in with something better, they will cut in order to compete without waiting for the Reserve. As a sign this is getting close on Friday the ANZ cut its standard mortgage rate by 0.27 points, more than the Reserve Bank’s 0.25 point cut. That hasn’t happened in years.
The Reserve Bank itself believes the resource investment boom is about to peak. “Once it has passed, the decline in mining investment – and the effect of the still high level of the exchange rate and ongoing fiscal consolidation – will weigh on economic growth,” its assistant governor Christopher Kent said recently.
The Reserve is desperate to find something, anything that will take the place of resource investment in driving growth and providing jobs. The high dollar has been making it hard for non-mining businesses to take up the slack.
That’s where “ongoing fiscal consolidation” comes in. It’s code for budget cuts. Dr Kent says it will “weigh on economic growth.”
The Bank has only one lever to boost the economy when something weighs on economic growth and it’s ready to use it.
That’ll be even further good news for the one-third of Australian households with mortgages. When Labor came to power the typical standard variable mortgage rate was 8.30 per cent. It’s now 6.20 per cent making a householder on a $300,000 mortgage an extraordinary $456 per month better off. Two more interest rate cuts in the months ahead would push the total gain well north of $500 per month.
It’s not the easiest of ways to sell a budget full of pain but Swan and Wong will try.
The levy
Never in living memory has a government gone into an election flourishing a bipartisan agreement to lift a tax. Tuesday’s budget will lift the Medicare levy from 1.5 per cent to 2 per cent of income from July 2014 with the grudging support of the opposition. The National Disability Insurance Scheme was to have been funded out of higher general tax revenues, but they are increasing nowhere near as fast as they would need to.
The increase will raise $3.3 billion per year, nowhere near enough to fund the $6 billion or more the scheme will cost the Commonwealth, and possibly a good deal more over time, but it’s a start.
It’ll cost an Australian on an average income an extra $250 per year, but only from mid-next year.
The missing FTB boost
From mid this year the government had been planning to boost the Family Tax Benefit Part A by up to $300 for families with one child and $600 for families with two or more. It was to be part of a $3.6 billion“Spreading the Benefits of the Boom” package funded by the mining tax.
It will be be withdrawn now that it is clear the mining tax isn’t raising anything like what was expected...
The government is hoping the 1.5 million families the withdrawal will hurt don’t miss what they never quite got, but they will be left with less to spend than they otherwise would have, a prospect that led Myer boss Bernie Brookes to dub the proposed hike in the Medicare levy “not good for our customers,” an epithet for which he later apologised.
But this measure will hit his customers one year earlier.
The missing tax cut
The carbon tax might have hurt, but many Australians were handsomely compensated. From or before July 2012 pensions were boosted, income tax was cut, family tax benefits and the tax-free threshold were lifted and extra payments were directed to low-income Australians.
A bit extra was due in 2015 to when the tax-free threshold was to climb further to compensate Australians for an expected increase in the price of carbon as the scheme linked to Europe’s
But European carbon price has collapsed. Instead of the expected $29 a tonne it is now less than $5, meaning there is unlikely to be an increase to compensate Australians for.
We’ll miss out on the extra $1.59 a week from 2015. But in return the carbon component of our electricity prices will fall.
And the Coalition wasn’t going to give it to us anyway. It has promised to scrap the carbon price and all of the compensation that isn’t set in stone within months of taking office.
More cuts
It won’t be enough. Swan and Wong will need to cut still further to make room for the National Disability Insurance Scheme and Gonski education reforms and contain the deficit. Not all of the unpleasant news is out there.
We do know about a tightening of so-called thin capitalisation rules will limit the ability of multinationals to borrow in Australia to in order to make more lightly taxed profits overseas. It’ll net Swan and Wong a bit over a billion per year.
The baby bonus and the child care rebate may also be back for another trim. A year ago Mr Swan announced that second and third children would only attract a bonus of $3000, instead of $5000. Complaints quickly died down despite the opposition's unfortunate reference to China's one-child policy.
Also in the gun are the generosity of Medicare and the Medicare Safety Net, and the public service which is certain to be slugged with another “efficiency dividend”.
The changes already announced to Superannuation were and the government says it will go no further. It is also giving every sign it will keep the Schoolkids Bonus although logic would suggest it should go because it was partly funded by the mining tax, and the Coalition plans to remove it anyway.
An ever-receding surplus
A year ago Wayne Swan rose to his feet declaring “the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies”.
He won’t be saying that this year. The money’s not there. Whether it hurts the economy or not we are about to pay the price.
In today's Canberra Times, Sun Herald and Age
BUDGET 2013
Swan’s vanishing surplus. How he’ll share the pain:
From mid 2013
A planned boost to Family Tax Benefit A axed. A family earning up to up to $78,000 with two children under 12 would lose $600.
From mid 2014
An extra Medicare levy lifting the total from 1.5% to 2%. An Australian on $50,000 would pay an extra $250.
From mid 2015
A planned boost to the tax free-threshold axed. It was to have been worth $83 for incomes up to $65,000.
Also at risk
. Tax rules for multinationals
. Access to the Medicare Safety Net
. Access to the Baby Bonus
. A public service “efficiency dividend”
Wayne Swan will deliver his sixth budget at 7.30 pm Tuesday night
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Wednesday, May 08, 2013
Memories. Keeping interest rates low
When Howard left office the average standard variable mortgage rate was 8.30%
The stubbornly high Aussie. Why the RBA cut and will cut again
Deep concern about the high Australian dollar drove the Reserve Bank to cut its cash rate to the lowest level on record Tuesday, a cut quickly passed on by all but one of the big banks.
The board acted without waiting to know what was in next week’s budget after being told that the mining investment boom might have peaked and there was insufficient activity elsewhere in the economy to take its place. Information supplied to the Bank by mining companies suggested the peak “may well be upon us.”
Instead of sliding with minerals prices as would have been expected, the Australian dollar has remained high during a year in the price of Australia’s resource exports has slipped 9 per cent.
Denied the chance to become more internationally competitive, non-mining businesses have failed to invest as the Reserve Bank wanted. The Bank has also found that mortgage holders banked most of its two most recent rate cuts by boosting repayments rather than borrowing more.
The cut in the cash rate from 3 to 2.75 per cent takes it below what the government dubbed the “emergency levels” it fell to during the global financial crisis. The rate is lowest since the bank began publishing its cash rate at the start of the 1990s. An older series of records suggests it is the lowest since 1959 - when Elvis Presley was in the US army, John Lennon and Paul McCartney had not yet named their band The Beatles and Robert Menzies had just started his record run as Australia’s prime minister.
Financial markets expect further records to tumble. Futures trading late Wednesday predicted another cut of 0.25 points within three months.
Treasurer Wayne Swan rejected as “grossly inaccurate” the suggestion rates were now at lower than emergency levels.
Wider margins mean the rates charged to bank customers are still well above those that prevailed during the 2008-09 crisis.
The standard variable mortgage rate hit a low of 5.75 per cent during the crisis. Even after Tuesday’s cut the lowest standard bank rate will be 6.13 per cent, offered by the National Australia Bank within minutes of the Reserve Bank’s cut in full.
The only big bank not to pass on the 0.25 per cent cut in full was the ANZ whose rate committee meets on Friday.
The cut will slice a further $47 from the monthly cost of servicing a $300,000 loan, taking the monthly saving since 2007 to $456...
Shadow Treasurer Joe Hockey said it would only be good news for the economy if it kick-started credit growth.
“This has been undertaken by the Reserve Bank not because the economy is doing well but because the economy is not doing well,” he said.
“The Bank has taken this leadership position because the budget is in chaos and the government is not providing leadership.”
Governor Glenn Stevens highlighted the stubbornly high Australian dollar in a statement accompanying the cut saying it had been “little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”.
Demand for credit remained “relatively subdued”.
The Bank will watch closely official data on business investment, wholesale prices and employment during the next month as well as assessing the impact of the budget before deciding what to do next.
In today's Sydney Morning Herald and Age
Standard rates this morning
NAB: 6.13% (down 0.25 points)
Commonwealth: 6.15% (down 0.25 points)
Westpac: 6.26% (down 0.25 points)
Bank of Queensland: 6.26% (down 0.25 points)
ANZ: 6.40% (rate committee meets Friday)
Bendigo Bank 6.51% (under consideration)
MORTGAGE SAVING PER MONTH
$20,000 $3
$40,000 $6
$60,000 $9
$80,000 $12
$100,000 $16
$150,000 $23
$200,000 $31
$250,000 $39
$300,000 $47
$350,000 $54
$400,000 $62
$450,000 $70
$500,000 $78
$600,000 $93
$700,000 $109
$800,000 $124
$900,000 $140
$1,000,000 $155
Assumes 25 year 6.20% variable mortgage
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