Wednesday, March 04, 2015

The real story to emerge from Tuesday's board meeting. The RBA fears the economy is even weaker

The Reserve Bank fears the economy is even weaker than when it met one month ago.

Tuesday's board meeting considered new data released since its last meeting showing much lower than expected investment intentions for the third quarter of this year.

After the bank cut rates in February, it published a forecast for economic growth centred on 2.75 per cent for 2015-16.

The investment data casts doubt on that forecast and suggests it will be revised down when the bank updates it in May.

While deciding to keep its cash rate steady in March, the bank issued guidance that "further easing of policy may be appropriate over the period ahead".

The guidance is understood to be the clearest about the future direction of interest rates for about two years.

The governor's statement said "the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak".

The bank is concerned that in the past month investment has slipped more sharply than expected, unemployment has climbed to a 13-year high and that the December quarter economic growth figures (due on Wednesday) are likely to be weak.

Its forecasts already factor in a further rate cut by May. After digesting Tuesday's statement, the futures market factored in a near certain rate cut by May followed by the certainty of another cut by November...

Those two cuts would take the bank's cash rate from 2.25 per cent to 1.75 per cent.

Former Reserve Bank economist Paul Bloxham said Tuesday's meeting was "a nail-biter".

"In the days leading up to the decision, the market had been pricing a 50:50 chance of a cut, so it was a close call," the HSBC economist said.

"The post-meeting statement was fairly short, downbeat, and continued to note that the Australian dollar was overvalued on most measures of fundamental value. Working in the other direction, the statement noted that dwelling prices continue to rise strongly in Sydney."

The only things that could stand in the way of a further cut in interest rates in April or May would be inflated lending to real estate investors or a sharp drop in the dollar.
The bank was "working with other regulators to assess and contain risks that may arise from the housing market".

The Australian Prudential Regulation Authority has warned banks not to lower their standards for investment loans in order to chase business.
A sharp drop in the value of the dollar would boost the economy, making a further cut in interest rates less necessary.

The Australian dollar jumped more than half a cent after the Reserve Bank's decision to leave interest rates on hold. It closed near US78¢.

In The Age and Sydney Morning Herald


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Now business calls on the government to open up the Trans Pacific Partnership negotiations

Australia's largest business organisation has called for the government to open up the negotiation of trade deals such as the Trans Pacific Partnership.

As the trade minister Andrew Robb responded to criticism of his actions in keeping the text of the Trans Pacific agreement secret, the Australian Chamber of Commerce and Industry said it wanted negotiations to be monitored in real time by the Productivity Commission and wanted draft texts disclosed to registered community and business organisations as happens in the United States.

Criticised for keeping the negotiations secret in a so-called health impact statement released by the University of NSW Centre for Health Equity Training Research and Evaluation, Mr Robb said the text of the agreement would be made public as soon as it was agreed between the twelve nations.

"The text will not be kept secret. Once it is agreed between participants, it will be made public and also subjected to parliamentary scrutiny," he said.

"Since 2011, the department of foreign affairs and trade has conducted more than 1000 briefings with interested stakeholders, including groups representing health, pharmaceuticals, consumers and unions."

The Chamber of Commerce wants negotiating drafts to be shown to community and business groups who would then be under an obligation to keep them confidential.

Negotiators would retain their power to conclude deals without reference to the parliament but would be required to "properly consider and balance the merits of civil society's views at all phases of negotiation"...

In Australia the parliament can accept or reject but cannot amend agreements negotiated by the minister.

The Chamber also wants the direct costs to the government of negotiating treaties to be clearly identified in future budgets. Its director of trade and international affairs Bryan Clark said the Australian community had no idea how much money had been spent negotiating the Trans Pacific Partnership and so was unable to judge the worth of exercise.

Mr Robb said last month Australia takes 22 specialists to each negotiation backed up by teams at home. The United States takes 80.

Mr Clark said Australia collected no data on how trade deals were actually used after they were completed and was unable to quickly support businesses that found the concessions negotiated were not offered when their goods arrived at docks in other countries.

The Chamber's submission to the Senate's inquiry into the treaty-making process says Australian negotiators do little to ensure that each new trade treaty is consistent with existing ones leading to a mish-mash of overlapping treaties that interfere with each other.

In The Age and Sydney Morning Herald


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Tuesday, March 03, 2015

Be careful when reading the Intergenerational Report. It's meant to scare you

What does a government do when it's lost all authority? It tries to scare people, big time.

Last week it was national security. Abbott used the word "threat" 16 times in 24 minutes. He used "death cult" 9 times.

He promised to cancel welfare payments and revoke citizenships (as if those things would make a difference) and said the courts had been too quick to grant bail (as if the Commonwealth could do anything about it).

Devoid of much practical import, his speech was designed to scare us, as will be Thursday's Intergenerational Report.

We know it's expected to scare us because treasurer Joe Hockey said so.

"When people see some of the graphs in the Intergenerational Report they are going to fall off their chairs," he told a business briefing last week.

To fine tune its impact, his department has given $380,000 to Hall & Partners Open Mind, a specialist in "measuring consumer engagement". It has conducted 30 focus groups since November. Asked at last week's Senate hearing whether an advertising campaign would follow, the treasury said it was "working through the guidelines".

It's an extraordinary approach to what's meant to be an information document; intended to do to it what the prime minister's statement did to national security - to make it an instrument of fear.

The Intergenerational Report is required by law every 5 years. It assesses the long-term sustainability of the government's policies 40 years into the future. This one will take us through to 2055. It's 2 month's late, although that's not the fault of the treasury. Finance minister Mathias Cormann was keen to tell the Senate that it's a report of the government, not the treasury. It's inherently political. Sensitivities over its immigration projections (and possibly what it will say about climate change) have delayed it as government ministers have tossed drafts back and forth.

My sincere advice when you read it is to stay level headed, no matter how frightening its projections. What is prophesied almost never comes to pass, all the more so when it is focus grouped and fine tuned by a government losing its grip...

Let's have a look at what happened to the projections of the first intergenerational report, released by Peter Costello in 2002. It said that by 2042 the aging of the population and (largely unrelated) extra spending on health would help push up the deficit to $87 billion, around 5 per cent of gross domestic product.

Five years later Costello's second intergenerational report halved that figure, cutting it to less than 3 per cent of GDP. Even by 2047, the end of the new projection period, the budget wasn't to reach 3.5 per cent of GDP.

A lot of things had gone right. Spending on health had grown more slowly than expected, more of the population was working than expected, and higher skilled migration meant the workforce was more productive than expected. Small changes to the important assumptions meant big changes to the projections.

And some of the assumptions were ridiculous.

The first Intergenerational Report said spending on the Pharmaceutical Benefits Scheme would climb from 0.6 per cent of GDP to 3.4 per cent by 2042. Professors Ross Guest and Ian MacDonald from Griffith and Melbourne Universities pointed out that at that rate the PBS would account for one third of GDP by 2100 and all of it by 2126. The projection was toned down in the second report, as the author's took to heart the implications of "Stein's Law".

Named after the legendary American economist Herbert Stein who advised both presidents Nixon and Ford, Stein's law says that: "If something cannot go on forever, it will stop".

It's a warning about the dangers of extrapolation. Problems have a way of solving themselves. If for instance we were on track to "run out of money" to pay for our health, welfare and education systems (as Joe Hockey once said) we would either find more money or spend less on those services. If we were on track to run out of workers to service our aging population, we would either find ways to use fewer workers (new technologies) or bid up their wages and call forth more of them, possibly from the ranks of the aged population itself.

This isn't to say that the Intergenerational Report isn't a useful exercise, merely that it can't be a useful guide to the future. The mere act of publishing it changes that future.

The future changed again by the time of the third intergenerational report, published by Wayne Swan. If found that by 2042 the projected deficit would be a good deal less than 2 per cent of GDP, not 5 per cent as originally claimed. The 3.5 per cent projected for 2047 would also be nearer to 2 per cent, and even by 2050 (the end of the new projection period) the deficit wouldn't hit 3 per cent.

This week's report will project things out to 2055. Whatever its projection of the extra demands on the government by then, they are unlikely to be difficult to fund. Swan's report predicted that GDP per head would be 81 per cent higher by 2050, suggesting Australians would be well placed to fund any extra taxes required.

Swan's report said that by 2050 there would be just one and a half Australians of working age to support each Australians of dependent age, down from 2 at present. It would sound scary if you didn't know that that was the ratio throughout the 1960s. Back then the Australians of dependent age were predominantly young rather than old, but we managed to support them.

With the possible exception of climate change (and there it's too early to tell) the future is rarely as frightening as foretold.

So exercise some skepticism on Thursday. If you read the word "timebomb", turn the page.

In The Age and Sydney Morning Herald


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Trans Pacific Partnership a threat to health, says assessment

A comprehensive review of the proposed Trans Pacific Partnership between Australia and 11 other nations including the United States and Japan has found it is likely to push up the price of medicines, stop some Australians from taking their medicines and make it harder to restrict the sale of tobacco and alcohol.

The so-called health impact statement, compiled by the Centre for Health Equity Training Research and Evaluation at the University of NSW relies on leaked texts of draft chapters of the agreement Australia is preparing to seal within weeks.

More than 20 chapters long, the text won’t be made public until after the the trade ministers shake hands at a meeting in Hawaii set down for next month.

The Trans Pacific Partnership encompasses almost 40 per cent of the world’s economy: the industrialised nations of Australia, Canada, Singapore, Brunei, New Zealand, Chile, Mexico, the United States and Japan alongside the less developed nations of Malaysia, Peru, and Vietnam.

Although its stated aim is to bring down trade barriers and allow mutual recognition of standards, many of its provisions deal with medicines and make it difficult for member countries to move against foreign owned corporations.

The health impact statement follows Commonwealth guidelines for such statement in place for more than a decade. Although such statements are not required for new projects in the same way as are environmental impact statements they are an accepted procedure for establishing the impact of new proposals on health.

Prepared by five health specialists from the universities of Sydney and NSW and La Trobe University the assessment took 15 months, beginning in late 2013 after some drafts texts of were published by Wikileaks...

The report says the US is seeking to prevent signatories from refusing to grant patents for minor variations to existing drugs even when there is no evidence of additional benefit. It says the provision would encourage “evergreening” where manufacturers gain extra patents to extend their monopolies in order to ward off competition from generics.

The US is also seeking to lengthen the period during which generic manufacturers cannot use clinical trial data produced by a manufacturer to obtain marketing approval. Under the Australia-U.S. Free Trade Agreement, Australia already provides at least 5 years of protection. The US is seeking at least 3 additional years of protection for new uses of existing drugs and 12 years for so called biologic drugs and vaccines.

The provisions in the draft healthcare transparency annex of the agreement would outlaw therapeutic reference pricing, a mechanism for ensuring that the prices paid for medicines reflects their clinical benefit and require more consultation with drug manufacturers about listing and pricing decisions.

“In the past, the Pharmaceutical Benefits Scheme has increased patient co-payments in order to accommodate rising costs,” the report says.

“A systematic review of evidence from 1990 to 2011 found that co-payments decrease prescription use, can impact patient medicine use compliance, and can adversely impact disadvantaged populations.”

The report finds that proposed investor-state dispute settlement procedures would make it difficult for governments to legislate in ways that harmed tobacco, alcohol or food manufacturers.

Trade minister Andrew Robb told Fairfax Media last month that many of the critics had only seen proposals, not what would be in the final agreement.

“I am not going to do something that I think is not in the public interest,” he said.

In The Age and Sydney Morning Herald


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Friday, February 27, 2015

The Bureau of Statistics on the census. It's not that useful after all

The Australian Bureau of Statistics has claimed the census is less useful than widely believed, as a leading trade union launches an online petition to save it.

Defending a push to move the census from once every five years to once every 10, the bureau's chief executive David Kalisch said the census did less than was generally thought.

There is a sense in the community that a lot of information is derived from the census, which isn't true 

While the census was useful for setting electoral boundaries,  infrastructure planning and business decisions, it was "an increasingly modest input".

"We believe there is a different way of configuring our statistical approach that makes use of a census and also makes better use of more regular population surveys," he said.

The bureau has asked the government to relieve it of the legislated requirement to run a census every five years. The next one is due in 2016.

The United States and the United Kingdom each run censuses only every 10 years.

Asked whether there would be a census in 2016 as scheduled, Mr Kalisch said he could not "announce what the government might decide".

Asked whether he wanted to be freed of that obligation to conduct the 2016 census, Mr Kalisch said he shouldn't disclose what he had put to the government.

The bureau wanted to reallocate funding away from the census towards upgrading its technology in order to continue to produce high quality statistics.

"You talk about the people having trust and faith in the bureau," Labor senator Sam Dastyari told him. "How do you build trust and faith when the one interaction that all Australian people have with the bureau is the one thing you've put on the table to get chopped?"

The hearing took place as the trade union United Voice launched an online petition at SaveOurCensus.com.au...

National secretary David O'Byrne said cancelling the census would marginalise his members and vulnerable Australians.

Among the workers United Voice represents are cleaners, childcare workers, restaurant and hotel employees and ambulance officers.

"Our members in childcare rely on the census to prepare for the 308,065 births each year," he said. "Our aged care members need accurate data to provide services for the 3,012,300 older Australians. As the union representing 21,626 baristas and hospitality workers, we need this data to ensure workforce training is adequate."

A bureau spokesman responded that the births figure didn't come from the census, and the each of the other examples could have come from somewhere else.

"This is a good example of what we are talking about. People ascribe a whole lot of stuff to the census that is actually delivered through other vehicles."

"The union is not right about births. Certainly the number of older people and number of hospitality workers does come from the census, but it is also produced by the bureau on a more regular basis through other means."

In The Age and Sydney Morning Herald


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Thursday, February 26, 2015

Super. Greens offer Abbott $13 billion

The Greens are offering the government a $13 billion budget saving. All it has to do is ditch its commitment not to touch superannuation before the next election.

The plan would tax superannuation contributions on a progressive scale rather than the present flat rate of 15 per cent and 30 per cent for workers earning more than $300,000.

Australians on the 19 per cent marginal tax rate would pay 4 per cent on their super contributions, Australians on the 33 per cent rate would pay 15 per cent, Australians on 37 per cent would pay 22 per cent, and Australians on the 45 per cent rate would pay 30 per cent.

As a supporting measure, the policy would also clamp down on "churning" wages through super funds. It will no longer be possible for Australians over 55 to get a tax benefit just for putting their salary into a super fund while drawing an equivalent wage from the same fund.

The change is backed by the Australian Council of Trade Unions, the Australian Council of Social Service, Anglicare and the Australia Institute. It is builds on a recommendation of the Henry Tax Review.

In the election the Coalition promised not to make any "unexpected detrimental changes" to superannuation.

An independent costing prepared by the Parliamentary Budget Office finds it would save $3.4 billion per year... Over the four years the saving would amount to $13.6 billion.

"The Greens are genuine about raising revenue. We can support people on lower incomes and at the same time raise billions to pay for schools and hospitals just by making sure that the rich pay their way on superannuation," said Greens leader Christine Milne.

The proposal would also fix an inequity. At the moment Australians earning less than $19,400 pay no tax on their income but the standard rate of 15 per cent on their super contributions. The proposal would ensure they paid no tax on their super contributions.

It leaves untouched the highly concessional 15 per cent rate of tax on super fund earnings. Dividend imputation means many super funds pay as little as 7 per cent tax on their earnings.

In The Age and Sydney Morning Herald










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Satisfied? Real wage growth is close to zero

Don't even think about asking for that big pay rise.

The latest figures from the Bureau of Statistics show wage growth has never been lower - not since the bureau began collecting accurate figures in the 1990s.

In the 12 months to December wages grew by an average of just 2.5 per cent, around the same as the Reserve Bank's long run inflation target. Four years earlier during 2010 they were growing at 3.9 per cent.

The low rate means that after inflation real wages scarcely grew.

Even in the states in which wages were climbing the fastest - Victoria, South Australia and Tasmania - they grew by just 2.7 per cent.

In NSW they grew 2.3 per cent and in the Australian Capital Territory 2.2 per cent. ACT public sector wages grew only 1.4 per cent.

The Australian government has offered defence force staff just 1.5 per cent per year, much less than inflation and the lowest pay rise on record. Staff in the department of the industrial relations minister Eric Abetz have been offered just 0.5 per cent along with cuts to conditions. Several agencies have offered nothing. The Australian Crime Commission and the Australian Research Council has proposed a rise of zero per cent.

Wages grew the slowest in the industry group the bureau calls professional, scientific and technical services, which services the mining industry. The climbed just 1.9 per cent. Wages in retail trade climbed a weak 2.2 per cent...

The biggest wage rise was 3.4 per cent, in education and training industry.

Commonwealth Securities chief economist Craig James said the low wage rises would restrain consumer spending.

"They are barely covering inflation," he said. "It might mean the Reserve Bank decides to cut rates again next week and then retires to the sidelines. Or the Reserve Bank might keep another rate cut up its sleeves in case momentum in the economy eases further."

This week's ANZ Roy Morgan consumer confidence index showed spending intentions at an eight-month low.

The Reserve Bank board cut its cash rate from 2.5 to 2.25 per cent when it met this month.  Financial markets have assigned a 42 per cent probability to another cut, to 2 per cent, when the board next meets on Tuesday.

In The Age and Sydney Morning Herald


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