Thursday, January 18, 2018

Sugar's tobacco moment as voters call for new tax

Imagine a tax that Coalition voters actually wanted. They certainly don't want more income tax (only 12 per cent do, according to an Essential poll), they certainly don't want more company tax (they want less) and they will cop an increase in GST only if it brings down other taxes.

But then there is sugar. This week's Essential poll reveals the sort of disdain for sugar there is for tobacco.

An extraordinary 57 per cent of Liberal and National Party supporters say they want a special tax on sugar-sweetened drinks. That's more than the 54 per cent of Labor voters that want it.

It is sugar's tobacco moment. When the tobacco question was asked two years ago a massive 70 per cent of Coalition voters wanted higher taxes on it along with 67 per cent of Labor voters. For both tobacco and sugar, it's the university-educated Coalition voters who want the higher taxes the most.

What has sugar done to get lumped in with perhaps the most despised legal substance on the planet?

Nothing it hasn't been doing for decades. It is just that it is doing more of it and we are learning more about what it is. The industry would like us to believe that obesity and the tragic diseases that follow are simply a matter of "energy in and energy out". Those are the words it uses.

Put less into your mouth, do more exercise, and you won't get as heavy.

Here's Geoff Parker, chief executive of the Australian Beverages Council: "All kilojoules matter, it doesn't matter where those kilojoules come from."

It is what I call the "federal budget" approach to maintaining weight. If only the government spent less and taxed more it would bring down the deficit. It sounds true only because it ignores feedback loops.

When countries such as Spain and Italy imposed austerity programs after the financial crisis, they did indeed cut spending, but they also plunged their economies into deeper recession, losing even more revenue.

Sugar sets off the same sort of feedback loop.

It is true that heavy people eat more than others and exercise less, but the causation is not all one way.

It is easiest to see in children. They eat more during growth spurts, but it is not right to say their growth spurts are caused by the extra eating. It is truer to say that whatever it is that brings on their growth spurts does it by bringing on their extra eating.

Here's another example. Someone with an aggressive tumour will eat more in its early stages. That is because the tumour grabs the incoming nutrition for itself, making the host heavier but weaker and hungry for more food. It is as true to say that the extra weight brings on the extra eating as it is that the extra eating brings on the extra weight.

For sugar, the budget analogy misses the point. The point is that our bodies respond to sugar with insulin.

Rosalyn Yalow won the 1977 Nobel Prize for tracking what insulin does. When it is released, our fat cells start to pack in fuel in the form of fatty acids, and close their walls to prevent them escaping. It is why, bizarrely, we often feel weak or hungry after taking in sugar. The energy we expect to get is rendered inaccessible until the insulin dissipates.

And so we are likely to take in more sugar, triggering another flood of insulin, and so on. If we are especially unlucky, the repeated floods of insulin build up our resistance and encourage our bodies to produce more and more insulin until they exhaust their capacity, meaning we need to take it intravenously.

It is worst for refined, dissolved sugar. It is relatively new in terms of human biology and it hits our bodies instantly, which is why soft drinks are being taxed on a worldwide scale not seen since cigarettes.

Twenty-six countries including Mexico, Portugal and Thailand already have in place a punitive tax on soft drinks. Five more will put one in place by April, including Britain.

Introducing the the legislation in 2016, Conservative chancellor George Osborne warned that within a generation, half of all boys and 70 per cent of girls would be overweight or obese.

"I am not prepared to look back at my time here in this parliament, doing this job and say to my children's generation: 'I am sorry, we knew there was a problem with sugared drinks, we knew it caused disease, but we ducked'," he said.

The British tax is ingenious. It will apply at two different rates. Drinks with less than 5 per cent sugar won't face it at all. There is a pay-off for getting concentrations below 5 per cent. Schweppes lemonade has already done it.

In Mexico, sales of sugared drinks dropped by 5.5 per cent in the first year and then 9.7 per cent. In Berkeley, California, which imposed a city-wide tax, sales dived 9.6 per cent.

Our Prime Minister is on record as saying: "if you want to have less of something, you increase the tax on it". His side of politics wants him to do just that.

In The Age and Sydney Morning Herald

Sunday, January 14, 2018

The gang crisis our leaders help create

What is it about the African gang crisis that's so disturbingly familiar?

In case you haven't been paying attention, Melbourne is supposedly in the grip of a crime wave. Not on the basis of statistics, which show arson, property damage, burglary and theft down (sexual offences and robbery are up), but on the basis of a series of front page articles over summer in the Herald Sun and also The Australian about African gangs, most of them South Sudanese.

Victoria's opposition wants to recall Parliament.

Federal minister Greg Hunt, whose day job is Health Minister and who last year had to apologise to the Supreme Court for calling it soft, says African gang crime is "out of control". Prime Minister Turnbull says he is alarmed by "growing gang violence". And Home Affairs Minister Peter Dutton says people are scared to go out to restaurants "because they are followed home by these gangs".

It's feeding on itself. A nationalist group says it's planning a rally on Sunday in order to "take a stand on the streets". African Australians are being harassed and worse by vigilantes who are suddenly emboldened. Police say a Daily Mail photographer helped create the latest "flare-up" by taking close-up photos of a group of Africans socialising.

"The teenagers had been doing nothing of public interest prior to the photographer's decision to move in," a memo reported by The Guardian says. The Mail labelled the scuffle that it helped create "the latest gang flare-up" and boasted that its pictures were "exclusive".

It is familiar because it happened in Sydney with Lebanese Muslim youths (remember the Cronulla riots?) and before that with "Asian gangs" in Cabramatta. In Adelaide a decade ago it was the "Gang of 49". There never was a Gang of 49, but The Advertiser coined the term to describe 49 mainly Aboriginal youths the police said they were looking for.

The catchphrase had incredibly unfortunate consequences. Former police say it created gangs. Dispossessed, often homeless, youths started saying they were part of Gang of 49 and stealing cars and doing ram-raids to prove it.

"It hypes them up, they think they are famous, it's them against the police," a grandmother of one of the self-described members told the ABC. Very young Aboriginals, too young to be part of a gang, started romanticising the idea and looking forward to the day when they could.

It happened after Melbourne's Moomba riots in March 2016, which the media were quick to attribute to the "Apex Gang". More a grab bag than a gang, it grew swiftly as all sorts of petty criminals started scrawling the word "Apex" wherever they had been. The more it was talked about, the bigger it became.

That's why on Wednesday Police Commissioner Graham Ashton rubbished the idea of a gang and referred instead to low-level crime. It was "complete and utter garbage" to suggest, as our leaders have, that Victorians aren't safe.

"The sort of concept that somehow it's unsafe to go out to dinner, how long since you've been out to dinner?" he asked.

Big cities have had aggravated burglaries and home invasions for years, less so in Melbourne in the past two quarters. The perpetrators are overwhelmingly Australian-born. Although Sudanese youths are over-represented in minor crime statistics (as might be expected given high socio-economic disadvantage) and are involved in many more armed robberies than before (98 in 2016-17, up from 20 in 2014-15) the perpetrators of serious assaults are 25 times more likely to be born in Australia or New Zealand than in Sudan or Kenya.

Talk about gangs has probably always created gangs, at least as far back as the Mods and Rockers in the UK in the 1960s. But it's worse now. Would-be gang members can find each other on social media. Words can do even more damage, all the more so when they are used carelessly by newspapers and "leaders" to fill space and score points.

In The Age and Sydney Morning Herald

Friday, January 12, 2018

Axe negative gearing, boost GDP - RBA conference paper

Axing negative gearing would lift home ownership to as much as 72.2 per cent of households, cut home prices by just 1.2 per cent and lift rents "only marginally", a study shown to the Reserve Bank of Australia has found.

Preliminary results from the economic modelling exercise, believed to be the first of its kind in Australia, were presented to a RBA workshop last month and released on Friday.

Melbourne University researchers Yunho Cho, Shuyun May Li and Lawrence Uren conclude that eliminating negative gearing entirely would lead to an overall welfare gain of 1.5 per cent of GDP, making three quarters of the population better off.

The figure compares to a Treasury prediction of welfare gain of 1.2 per cent from Turnbull government's plan to cut the company tax rate.

Speaking after the release of the paper, Dr Uren stressed the research was incomplete and said it was possible the size of the lift in home ownership could be revised down. But he said the directions of change and magnitudes were unlikely to change much.

An ownership rate of 72 per cent would be the highest since 1991, before 1999 when the Howard government cut the headline rate of capital gains tax making negative gearing more attractive. It currently stands at 66.7 per cent.

During the 2016 election campaign Prime Minister Turnbull said a Labor plan to wind back but not eliminate the negative gearing tax concession would "smash up home values", and "pull the rug out from under the property sector".

The claims were at odds with advice to the government at the time released on Monday under Freedom of Information laws that characterised the likely impact of Labor's proposals as "relatively modest".

Negative gearing allows investors in housing and other assets to deduct investment losses from their wage incomes for the purpose of calculating taxable income. The losses can be recouped later when the asset is sold for a profit, which is taxed at only half the rate of wage income.

Treasury found the arrangement predominantly helped high income families, with more than half of the benefit going to the top 20 per cent of earners.

Dr Uren said his modelling examined only what would happen after a transition process that might take several years.

Renters and owner-occupiers would be the biggest beneficiaries. Landlords, especially young, high earning landlords, would be the biggest losers.

Renters would benefit because although rents would climb by 2.4 per cent, the government would be in a position to compensate them and others with the extra $2 billion it would make in increased tax revenue.

"We are comparing two small changes," Dr Uren said. "One would be a small price change for renters and the other would be a small increase in transfers."

Young owner-occupiers would benefit from the lower house prices "as they can move up a housing ladder more easily".

Landlords who rely on borrowings would be "driven out of the market for investment properties".

Most are "young, but rich enough to afford the downpayment requirement for their investment". Other landlords would also scale back their holdings.

Thirty per cent of rental properties would be freed up and bought by Australians who would have otherwise rented. Almost every income group and every age group would increase its home ownership rate.

Acting Treasurer Kelly O'Dwyer disparaged the paper as "preliminary and incomplete", prepared by university academics.

She said Labor should not boast about a finding that house prices would go down and rents go up. It should "be of concern to every Australian, whether they're a prospective first home buyer who rents or they own their own home".

Labor Treasury spokesman Chris Bowen said it supported the direction of Labor's reforms and showed they would boost home ownership.

In The Age and Sydney Morning Herald

Thursday, January 11, 2018

Coal is now the biggest threat to energy security

Worried the electricity system won't keep up over summer? Worry about coal. Seriously.

One of the four giant units at Victoria's ageing Loy Yang A power station broke down on Tuesday night at 11.05, taking out 230 megawatts, and then at 1.10 on Wednesday morning after being partially restarted, taking out what by then was 161 megawatts.

When demand soared during Sunday's heatwave, the Eraring plant on Lake Macquarie in NSW lost 275 megawatts. A few minutes later, Loy Yang A lost 264 megawatts.

On New Year's Day, unit 1 of Millmerran in Queensland stalled, taking out 156 megawatts. On December 28, unit 2 of Tarong in Queensland stalled, taking out 314 megawatts. On Boxing Day, unit 4 at Loy Yang stalled, taking out 528 megawatts. On Christmas Day, unit 1 at Gladstone stalled, taking out 230 megawatts, then unit 1 at the Tallawarra gas plant in NSW, taking out 187 megawatts. And so on, back to the start of summer.

When unit 3 at Loy Yang shut down without warning on December 14 taking out 560 megawatts and imperilling the entire system, the new Tesla battery 1000 kilometres away in South Australia sprang into action ahead of the coal-fired power station that was contracted to restore stability. It proved to be "dispatchable" in a way coal-fired power stations are not.

Age, heat and the steady encroachment of renewables are destroying the only advantages coal-fired power stations ever had.

When Treasurer Scott Morrison stood up in Federal Parliament and waved around a lump of coal in a stunt unworthy of his office, he said coal was an important part of ensuring a "more certain" energy future.

But he was speaking about the past.

Coal-fired power stations didn't used to get critically hot as often as they do now. The February 2017 heatwave that took out 2438 megawatts in one day in NSW might have once been a once-in-500-year event. Now it's a once-in-50-year event and perhaps soon a once-in-five-year event. The calculations are by the Australia Institute's Mark Ogge and Hannah Aulby in a study of the risks to energy security entitled Can't Stand the Heat. Ogge is the person who has been keeping a record of power station outages.

When temperatures in control rooms get as high as 50 or 60 degrees the electronic control systems buckle and the boilers leak. Failures are inevitable, although unfortunately not predictable.

Wind power and solar power are in large part predictable. Yes, they are intermittent, but it is usually possible to tell a day or two ahead of time when and where the wind will blow and the sun will shine. There's time to put batteries, hydro and gas on standby.

But in summer it's becoming impossible to know when and where coal-fired power stations will blow. They are becoming unpredictably intermittent, all the more so each year they age.

And standby power is costly. Tony Wood of the Grattan Institute helped run Origin Energy for 14 years. He says the industry standard is to have as much back-up as the biggest independent unit, so that if it drops out it can be instantly replaced. But the biggest independent coal units are huge. They require big back-up.

The biggest wind and solar farms are much smaller. While they require storage and gas peaking plants to fill in overnight and when the wind's not blowing, they don't need anything like as much back-up for when mechanical problems knock them out of service.

There are caveats. Independent turbines can stop blowing at once, and sometimes unpredictably. That's because most are located together in South Australia and Victoria, where the wind systems are synchronised. It would be better to have more wind farms in NSW, where the weather cycle is different. At times cloud cover is also unpredictable.

A future without coal-fired power stations is inevitable, and entirely manageable. Wind accounts for 40 per cent of South Australia's electricity supply, 8.5 per cent of Victoria's supply, and 2.8 per cent of the NSW supply. One of the many reasons no new coal-fired power stations will be financed or built is they are not well-suited to filling in gaps.

They are good at providing always-on baseload power, but that's not needed in the middle of the night when the wind is blowing a gale and providing all of a system's need for virtually nothing. They are not as good at turning on or ramping up quickly when the wind stops blowing. If they are used repeatedly to do that, they break down sooner.

The Turnbull government's proposed national energy guarantee would require retailers to ensure that a certain amount of the electricity they line up is dispatchable. Critics took this to be a code word for coal, but it can't be, not unless Turnbull wants to misuse the word. Battery storage, pumped hydro, molten salt solar plants that can fire up overnight, and gas peaking plants are far more dispatchable.

And they are more reliable. The more we move away from coal the more secure our power system becomes.

In The Age and Sydney Morning Herald

Wednesday, January 10, 2018

What a job? Move to NSW

It's the easiest to find a job since the mining boom.

The latest count from the Bureau of Statistics shows there were a record 216,000 job vacancies in November and 661,400 Australians out of work, the lowest total since 2012.

The ratio of 3.1 means there were roughly three job seekers for each vacant job, a step up from November 2016 when there were 3.7.

In NSW, the state with the best odds, there were only 2.2 job seekers for each vacant job, one of the lowest ratios ever recorded. A year earlier there were 2.7.

While Victoria has recorded the biggest improvement, the odds remain nowhere near as good as in NSW. There were 3.1 unemployed Victorians trying to get each vacant job in November, down from 4.2 a year earlier.

In Queensland the odds improved from 4.5 per vacant job to 3.9, in South Australia from 6.1 to 5.7, in Western Australia from 4.7 to 4.3 and in Tasmania from 7.9 to 5.7.

In the Northern Territory the odds remained little changed at about two unemployed per vacancy, and in the Australian Capital Territory they slid from 1.6 to just 1.3. But the ACT figures are unrealistic because they are biased downwards by the number of ACT workers living outside of the territory and the number who come from interstate for jobs.

The better odds in every state reflect both a surge in the number of vacancies, from 69,000 to 81,500 in NSW, and from 45,400 to 57,500 in Victoria, and also a drop in the number of Australians identifying as unemployed.

A near-record 383,300 more Australians have found work in the past 12 months, almost all of them full-time.

Construction vacancies have jumped 22 per cent, manufacturing vacancies 46 per cent, retail vacancies 14 per cent, and hospitality vacancies 16 per cent.

Vacancies in Australia's biggest industry group, health care and social assistance, jumped 18 per cent.

The bureau surveys employment door-to-door. It surveys vacancies by submitting questionnaires to businesses. Its vacancies count is regarded as more reliable than those of other organisations because it includes all vacancies, whether advertised or not.

Over the past year the unemployment rate has fallen from 5.8 to 5.4 per cent. Commonwealth Securities senior economist Ryan Felsman said he expected it to slide further toward 5 per cent in the year ahead.

Business Surveys suggested employment growth of about 20,000 per month, well above the 14,400 needed to merely keep unemployment steady.

In The Age and Sydney Morning Herald

Monday, January 08, 2018

Why Treasury told Turnbull about negative gearing

Malcolm Turnbull knew or ought to have known that the claims he made about Labor's housing policy during the election were likely to be wrong.

The Treasury pointed it out in the lead-up to the campaign.

Ramping up his rhetoric in order to win the election, Turnbull said Labor's plan would "devalue every home, every property, in Australia".

It would "smash up home values", "pull the rug out from under the property sector".

It was "a big sledgehammer" aimed at the property prices.

Except that the Treasury didn't think so, and had spelled out its reasoning in a memo delivered to treasurer Scott Morrison as Turnbull was sharpening his lines.

Far from disowning the memo, the Treasury has spent much of the past two years arguing that its contents reflected its genuinely-held opinion.

Fighting to prevent its release to the ABC under the Freedom of Information Act, it told the Office of the Australian Information Commissioner that publication would harm its "ability to provide candid and confidential advice to ministers in the future".

Here is that candid and confidential advice. Labor wanted to limit negative gearing to newly-built homes. Losses from investments in other homes and shares could still be deducted from income, but only from investment income. Existing investments would be unaffected. And the capital gains from those investments would be taxed more heavily, at three-quarters rather than half the income tax rate.

Treasury said the changes would have a "relatively modest" effect on prices.

Returns for investors would fall. But owner-occupiers, unaffected by the changes, would be "likely to limit the extent to which is an impact on prices".

"Overall, price changes are likely to be small, though the composition of ownership may shift away from domestic investors," the candid assessment concluded.

Labor's policy, or cut-down versions of it, has been supported by the Property Council, the Business Council, the head of the Abbott government's Commission of Audit, the head of its review of the financial system, the Reserve Bank governor Philip Lowe, the Institute of Company Directors, and the Committee for the Economic Development of Australia.

Treasury, but not Turnbull, thought they were on the right track.

In The Age and Sydney Morning Herald

Sunday, December 24, 2017

Of course Christmas is inefficient, it's why we love it

Who'd can Christmas?

A few years back the Australia Institute produced research suggesting that as many as 6 million of us get gifts we don't want and sometimes give away.

Worse still, the gift givers know it. One in four said they knew that at least some of their gifts would end up wasted.

There were "millions of unused foot spas", as much as $800 million in waste, according to the institute's Richard Denniss, who's still at it. His new book, Curing Affluenza, is built around the proposition that we buy too many things. My colleague, Ross Gittins, picked up on his ideas this week.

The idea that this is wrong was made famous in one of the most downloaded economic papers of all time. It's called The Deadweight Loss of Christmas. It says the best gift a giver can buy with, say, $20, is exactly the one the recipient would have bought for him or herself. Because the giver usually won't hit that target, the gift he or she does give will nearly always leave the recipient worse off than if he or she had just been given the cash and spent it on his or herself.

It's an old idea.

In the late 1800s George Bernard Shaw raged against the notion that "we must be drunken because it is Christmas, we must be insincerely generous; we must buy things that nobody wants and give them to people we don't like". All because businesses "depend on a week of licence and brigandage, waste and intemperance, to clear off their outstanding liabilities at the end of the year."

But Denniss, Shaw, Gittins, and also the late Christopher Hitchens who declared that his life's ambition was "to write an anti-Christmas column that becomes fiercer every year", miss the point. Christmas isn't about avoiding waste. That's what the rest of the year is for. It's about celebrating waste, just once a year, in order to be truly human.

Real life economists have little time for The Deadweight Loss of Christmas. Asked whether giving presents is inefficient, an overwhelming majority say no. In the US, when the question was asked of Nobel Prize winners and fellows of the American Economics Association, only 17 per cent said yes. Fifty four per cent said no, among them this year's Nobel Prize winner Richard Thaler, who replied: "To test theory, try a cash gift next Valentine's day."

Australian economists are even less enamoured of it: 17 per cent agree, and 73 per cent disagree. "Gifts can be useless, but the institution of gift-giving may be very valuable," says one. "Through choosing a gift, the giver demonstrates an understanding of the interests and needs of the recipient, thereby indicating regard, perhaps even love," says another. "It ignores the benefit the buyer can get from putting thought into buying a personal gift, and the benefit the receiver gets from knowing that," writes another.

Splurging, wastefully, is empowering – all the more so if you don't have the money to do it. The poorest of the world's people splurge on special occasions in order to remind themselves that life's worth living. In A Christmas Carol, Bob Cratchit earns just 15 bob a week, but he buys presents for his children to show that he can.

Presents are all about symbolism, as is Christmas itself. It has little to do with Christ, especially these days. It's the one time of the year when friends and family can be certain they can get together, about the only one the Fair Work Commission still regards as sacrosanct.

In Australia, it symbolises the end of the working year, the beginning of the holidays, the beginning of summer. It's the one time of the year we can show ourselves to be our best, to truly value our fellow humans. It's precious. Make the most of it.

In The Age and Sydney Morning Herald

Monday, December 18, 2017

MYEFO. Nowhere near enough to fund tax cuts

Scott Morrison wants you believe the budget's strong enough to fund tax cuts.

It isn't, and the update makes that clear.

As it is required to do, it spells out the stated aim of the budget - what the Coalition has pledged to achieve since its election - on page 31.

The aim is to "deliver sustainable budget surpluses, building to at least 1 per cent of GDP, as soon as possible, consistent with the medium-term fiscal strategy".

That's a surplus of 1 per cent of gross domestic product, as soon as possible, consistent with quality spending and economic growth.

After a boost to the budget of about $10 billion over four years, what has it been left with?

A budget surplus of just one half of one per cent of GDP by the end of the four year projection period.

It's an improvement. The May budget pencilled in 0.4 per cent. But it's nothing like the 1 per cent of GDP the Coalition itself adopted as a target to be reached "as soon as possible". And beyond those four years the graph in the update shows the surplus staying put at half a per cent of GDP right out to 2027.

Weakening that budget position by giving some of it away, as the Prime Minister and Treasurer are hinting they will in next May's budget, would be a further abrogation of a pledge the Coalition hasn't come near fulfilling ever since it made it in 2014.

Improving the budget, certainly improving it by the billions that would be needed to fund reasonable tax cuts, is hard. Almost all of the $10 billion improvement this time came came from (generally mining-related) higher company profits and superannuation earnings, as well as lower than expected payments to Australians who are out of work. Government actions improved the outlook by about half a billion. It won't be enough.

In The Age and Sydney Morning Herald


Fresh push for company tax cuts as economy lifts budget $10 billion

Treasurer Scott Morrison has signalled a fresh push to get the government's $50 billion package of company tax cuts through the Senate, saying that US President Trump is forcing his hand and that the changing composition of the Senate gives him a chance.

Higher than expected company tax receipts helped improve the budget position by $10 billion in the update released on Monday, improving the outlook for 2017-18 by $5.8 billion.

"The Trump tax cuts are coming," Mr Morrison told a Parliament House press conference. Allowing Australian rates to stay high while others fell would kill the goose that laid "the golden egg".

Australia's Senate has passed only $24 billion of the government's $50 billion package of company tax cuts, cutting the 30 per cent rate for small businesses but not for big ones. President Trump is within days of cutting the US rate to 21 per cent.

"When you have the United Kingdom going down to 17 per cent and many jurisdictions, even France now going to 25 per cent, we can't leave Australian workers behind," Finance Minister Mathias Cormann told the press conference.

"The future of job security and the future career prospects and wages growth of Australian workers depend on the Senate passing the government's company tax cut."

The government needs the support of 10 crossbench senators. Resignations and disqualifications since the July 2016 election mean that next year six of them will be new.

Senator Cormann said the $10 billion boost was so big that after this financial year the government would no longer need to borrow to fund day-to-day business.

"That's a year earlier than anticipated at the time of the budget," he said. It would be the first time since the global financial crisis.

The fastest jobs growth in decades meant less was being paid out in Newstart and other benefits. Measures taken in the Coalition's first budget to slow the growth in welfare payments were bearing fruit.

Key measures in the budget update include longer waiting times before newly arrived migrants can access payments, including paid parental leave and family tax benefits.

From July 2018, the two-year waiting period for these payments will be extended to three, though some exemptions will apply for vulnerable groups and New Zealand citizens living in Australia. The measures will save $1.2 billion.

Savings from the university sector of $2.8 billion have been dumped after being blocked by the Senate. Instead, a series of measures including a freeze on Commonwealth payments to universities will deliver a net saving of $2.1 billion.

And $400 million will be saved over four years by withholding family tax benefit lump sums from people who have outstanding social security debts.

In what Victoria's treasurer Tim Pallas is describing as a slight, the update cuts Victoria's share of infrastructure funding from 10.3 per cent to 9.4 per cent. Victoria has 26 per cent of Australia's population, and 37 per cent of Australia's population growth. The NSW's share has climbed from 44.6 per cent to a mammoth 45.5 per cent. 

"The Prime Minister of Sydney has struck again," Mr Pallas said. "He continues to shortchange Victorians, while sending more money to his home state of NSW."

The update forecasts wage growth of just 2.25 per cent this year, down from the 2.5 per cent predicted in May. It forecasts 2.75 per cent in 2018-19, down from 3 per cent.

Offsetting this, the government is expecting better than previously forecast employment growth, with the unemployment rate expected to be 5.5 per cent by June 2018, followed by near full employment of 5.25 per cent in mid 2019.

The economic growth forecast has been shaved by a quarter of a per cent, down from 2.75 to 2.5 per cent. Consumer spending is forecast to grow by 2.5 per cent rather than 2.75 per cent.

"We had much lower-than-expected consumption growth in the September quarter, just 0.1 per cent, said Mr Morrison. "There was, rightly, a lot of concern about what was happening with household living costs. That's why the National Energy Guarantee and other measures have been put in place. We would hope to see  better consumption figures going forward."

Even so, the growth was forecast to climb to 3 per cent in 2018-19 on the back of a lift in private and public sector investment, both of which hade been revised higher.

Shadow treasurer Chris Bowen said he was happy to debate taxes with Mr Morrison because his priorities were "all wrong." 

"The reason the budget is still such a mess is because Malcolm Turnbull and Scott Morrison continued to shower the biggest tax concessions on the people in our community, the millionaires and multinationals, who need tax breaks least, as well as jacking up taxes on people who work in middle Australia," he said. 

In The Age and Sydney Morning Herald

Thursday, December 14, 2017

The jobs boom is real. Government can take the credit

The Bureau of Statistics has produced some shockers – wildly inaccurate employment statistics it has had to disown. But not this time.

An apparent employment surge in one month might be a statistical fluke, the result of a dodgy sample or flawed bad seasonal adjustment. But not a near-record surge that goes on for month after month, 14 of them in a row.

Over the past year a near-record 383,300 more Australians have been funnelled into employment, all but 87,700 of them full-time. In the past month (acknowledging the usual caveat) 61,600 were funnelled into work, all but 19,700 of them full-time.

We won't get the detailed breakdown until next week, but a look at the latest detailed breakdown we do have, for the year to August, shows that almost all of the jump in employment of 324,900 was in two industries: 'healthcare and social assistance' (130,600) and construction (104,400).

On Monday, Victorian Treasurer Tim Pallas said the state was in the midst of a construction boom not seen since Premier Henry Bolte in the 1960s and 1970s. It's getting hard to find the right workers and hard to find steel and cement.

Much of it is the result of government road and rail projects, as in NSW. Much of that is due to the previous Australian treasurer Joe Hockey, who in 2014 awarded incentive payments to states that "recycled assets", selling roads and other things they owned in order to build new ones. Victoria and NSW started early, recycling some of their assets before the Commonwealth incentives.They made use of the riches that had been flooding in to their treasuries as Sydney and Melbourne property prices pushed stamp duty takings sky high.

Once it was thought that government investment "crowded out" the private sector. Not at the moment. It's because of the government investment programs that the private sector is investing too, building projects on contract, handing them over to state governments (which will later sell them) and then starting on the next one. The known pipeline stretches out beyond 2027.

It's not the same as widespread employment growth (employment in the finance sector and in administration went backwards) but it's worth having.

It's centred around Melbourne. More than half of those 61,600 extra workers found their jobs in Victoria. Over the past year more than one-third found their jobs in Victoria, 35 per cent when measured on a trend basis. Thirty per cent found their jobs in NSW.

Population figures also released on Thursday show Australians and foreigners pouring in to Victoria. In the past year its population has swelled 2.3 per cent. The rest of the country's has swelled 1.4 per cent.

Victoria's employment growth, as well as Australia's, reflects much more than more people. In the past year its employment-to-population ratio has climbed from 61.8 to 62.5 per cent. The NSW rate has climbed from 60.4 to 61.3 and the national rate from 61 to 61.9 per cent.

But Victoria's faster population growth has left it with a higher unemployment rate than NSW; 5.5 per cent instead of 4.6 per cent.

So good is that NSW 4.6 per cent figure, that Commonwealth Securities senior economist Ryan Felsman says it could be effectively considered "full employment". It's rare for an unemployment rate to stay below 5 per cent for long.

Australia's national rate is 5.4 per cent, heading down into territory not seen since the Gillard government and the second of Australia's two big mining booms.

Malcolm Turnbull is wrong to say that what's happening is "a direct result" of his government's policies, just as Gillard and John Howard were wrong to say that the earlier mining-related jobs booms were a result of their policies. But he might be more right than they were. What we are seeing is in large measure a government-related jobs boom. Turnbull and his Treasurer Scott Morrison owe Hockey a lot.

In The Age and Sydney Morning Herald

Low wage rises have become routine. Here's why

An entire year without a pay rise? Prepare for another one, next year.

Wage rises used to be an annual phenomenon. The Bureau of Statistics says on average we got one every year. But since 2012 the length of time between them has almost doubled. The average has become once every 1.75 years. For every person that gets a wage rise more often than that, there will be someone who gets one less often.

And when the increases are delivered, they are smaller. If you get one after waiting almost two years, it is more likely to be 2 per cent than the average of 3.6 per cent that prevailed when they were handed out annually.

Back then three in 10 wage rises exceeded 4 per cent. Now it's less than one in 10. And the wage rises that are over 4 per cent are smaller: typically 5.75 per cent, down from 7.5 per cent.

It's an understatement to say it's caught the experts unawares. The employment minister has an entire department to proffer advice. Within months of taking office in as Tony Abbott's employment minister, Eric Abetz warned of a wages explosion. In Abbott's first budget and his next, and in Turnbull's first budget and his next, the Treasury forecast a wages takeoff. Not only did wage growth not climb as forecast, it fell further in each of those four years despite repeated predictions to the contrary.

And it did something remarkable. It's not unusual for the budget to forecast one thing and for reality to deliver another. A lot can happen over two years. But it is highly unusual for the budget to forecast the present and get it wrong.

The budget is delivered each May. The budget forecasts are finalised a few weeks earlier. The forecasts for the wage growth cover the year ahead to the next June quarter, and the year to the June quarter after that. As a point of reference, they also include a forecast of growth in the year to the present June quarter, the one the budget is in. In other words, they forecast the present.

Extraordinarily, in three of past five years the budget has got the present wrong. Wage growth was lower than the printed forecast, even while the forecast was being printed.

So concerned has been Treasurer Scott Morrison that he ordered a special report from the Treasury, one released only this month after Labor submitted a freedom of information request. It says while wage growth has dived in the mining industry (as would be expected, after the boom) it has also plunged everywhere else, as well as overseas. The dive can't be explained by lower productivity growth. It's been pretty stable at about its long-term average for the past five years meaning employers are getting as much extra out of workers as they used to.

Nor can it be fully explained by low inflation. There's scarcely any so-called "real" growth, above inflation.

And it certainly can't be explained by a low demand for workers.

Employers took on an astonishing 355,700 extra workers in the year to October, close to an all-time record. In the past three years they've taken on 766,000.

But the kind of jobs they are offering is changing. Bricklayers, machinery operators and retail workers typically perform "routine" tasks, no matter how skilled. In contrast, much of the work of nurses, engineers, managers and security guards is non-routine. They have to respond to emergencies.

The Treasury says automation and competition from overseas is eating away at routine jobs, both blue collar and white collar, especially those enjoyed by middle-income workers. It's the non-routine ones that are growing.

Some are highly paid. Others, such as security work and child care, are very poorly paid.

And we've produced so many university graduates that they are no longer protected. Until 2010, graduates got bigger wage rises than school leavers. Since 2010 their wage rises have been lower. And they are doing work below what used to be their station, in jobs that are increasingly just as under threat as other jobs.

It helps to work for a company whose workers are highly productive (which usually means a company that doesn't employ many workers or is growing rapidly). But don't expect to share in much of what it makes. The Treasury found that although workers in Australia's most productive companies typically produced 7.1 times as much as other workers, they were typically paid only 1.6 times as much.

Some of it is due to the fading power of trade unions. As recently as 1980, half of all Australian workers were in unions. By the time John Howard took office in 1996, it was 31 per cent. After years of measures aimed at promoting individual rather than collective bargaining (remember WorkChoices) it has slipped to 15 per cent. Not that it's all Howard's doing. Much of it is due to the rise in non-routine jobs. They've always been less unionised.

What can you hope for next year? One Monday the Treasury will release its mid year budget update. It's likely to forecast a pickup, like it usually does.

In The Age and Sydney Morning Herald

Monday, December 11, 2017

Mega projects mean shortages, Treasurer says

So big is Melbourne's infrastructure boom that Treasurer Tim Pallas fears Victoria will run low on the specialist skills and resources such as gravel needed to make it happen.

"We've known for a while that the technical and the specialist skills required for transport projects, particularly rail projects, have been hard to get," he told The Age. "The more projects you start the harder it gets. We've only a handful of rail signallers in the entire state to manage not only the existing network but also the upgrades planned and under way.

"That's just one illustration. We are also hearing of shortages in project management, finishing trades, commercial advisory skills, industry analysis, systems engineering and tunnelling. For high-end skills, it's obvious, but its also a problem for entry-level skills."

"Only on Friday I was meeting with the extractive industries representative body, and everybody around that table was saying there is so much demand for raw materials, quarry materials, cement and sand and so on that suppliers are choosing which jobs they bid on.

"You've got to expect pressure on price."

Mr Pallas said that at $9.6 billion per year, Victoria's infrastructure spending program was unprecedented. As a proportion of the state budget it was the biggest since that of the Bolte Liberal government in the 1960s and 1970s that began construction of the Melbourne Underground Rail Loop.

Victoria's $9.6 billion per year program was in competition for resources with the NSW $12.1 billion per year program, also the biggest on record. Other big projects in Queensland and New Zealand meant that the market for skills along the east coast was tightening, as it had in Western Australia during the mining construction boom.

"We are having to get people from further away and pay them more than we thought," Mr Pallas said. "Ultimately we have to pay what the market is prepared to offer."

"Look at what happened with Sydney's Westconnex. The entire industry in NSW put in one single consolidated bid that put the state government at a disadvantage. Here, we are facing the same sort of thing with the North East Link. You can only bring so many people in from interstate. You get to a point where you hit bedrock in terms of imported skills."

Mr Pallas said it wasn't yet clear that the pressure on skills and resources would delay or push up the price of any of the major projects.

"We are not seeing substantial blowouts. The Melbourne Metro should be on time, we are pretty confident about that," he said.

The government's Major Projects Skills Guarantee ensured that at least 10 per cent of the work on major projects was undertaken by apprentices, trainees or engineering graduates.

"There are plenty of young people looking for work," Mr Pallas said. "Youth unemployment is still 13 per cent. But what we don't have is a skills base. We need to demonstrate to industry that this pipeline of work is here to stay, that it's not 'here today, gone tomorrow'. We need to make it clear that we are building to a plateau of projects, not a peak."

Asked why Victoria didn't simply proceed with fewer major projects so that it wasn't competing with itself for resources, Mr Pallas said that if it did, the resources would go to NSW.

"In my own electorate of Werribee we get 100 kids born every week. That's a primary school every seven weeks. You don't get a choice about these things," he said.

"There is a capacity across this nation that will either get spent here or somewhere else. We are in something of a war for resources. If I were to say we starting to get nervous about this, it wouldn't be clear we had the pipeline of work and the resources would go elsewhere."

Melbourne had an advantage over Sydney in attracting workers because its housing costs were 20 to 25 per cent lower. A guaranteed pipeline of work was attracting former mining construction workers from Western Australia.

"The pace is a bit frightening, but it's also a bit thrilling," Mr Pallas said. The buzz and the congestion we are getting on our rail and road network is a direct consequence of all the work we are doing, and also all the work private firms are doing as a consequence. It is building on itself."

"We've got problems but they are problems I would prefer to have than those associated with the downturn and malaise Victoria had just four years ago. In February 2013 your newspaper declared that the state was at a standstill. We've gone to the other extreme."

"From my perspective I can't take my foot off the accelerator at a time when the community is demanding improvements in their material circumstances."

In The Age and Sydney Morning Herald

Private schools get 100% of needs from Gonski 2.0

Catholic and independent private schools are set to get more than 100 per cent of their needs from governments under the Turnbull government's new 'Gonski 2.0' plan, official documents released under freedom of information show.

Obtained by the Australian Education Union and processed by the convenor of the Save Our Schools campaign, Trevor Cobbold, the Education Department documents spell out the the amount of government funding expected for each school sector in each state in 2018.

In the ACT, Gonski 2.0 will see ACT public schools funded at 117 per cent of the so-called schools resourcing standard from governments, the highest rate in Australia and making the territory one of only two jurisdictions receiving more than 100 per cent. 

Independent schools will receive 113 per cent of the standard, while Catholic schools will receive 102 per cent. 

Currently nine private schools in the ACT receive more than 100 per cent of the standard from the Commonwealth and territory governments, dropping to 14 schools in 2018. 

 By 2027 when the Gonski arrangements are fully implemented the total will be 15 schools. 

In NSW 110 private schools are expected to receive more than 100 per cent of the so-called schools resourcing standard from governments, up from 65 schools in 2017. By 2027 when the Gonski arrangements are fully implements, 212 private schools will receive more than their total needs from governments.

In Victoria, 38 private schools will receive more than the resourcing standard from governments, up from 33 in 2017. When Gonski 2.0 is fully implemented 74 will receive more than all their needs from governments.

The Gonski 2.0 package will eventually give each private school 80 per cent of the resourcing standard in Commonwealth grants. It will give public schools 20 per cent of the standard.

Since the creation of the freedom of information documents, South Australia has promised to boost funding for the entire Catholic and independent school sectors from 19.7 per cent to 22 per cent of the resourcing standard.

The Gonski 2.0 formula will result in a loss of income for some very well funded private schools, but will increase the number of overfunded private schools.

In most states public schools are funded at less than 80 per cent of the resources standard by the governments that operate them, meaning that Gonski 2.0 lifts Commonwealth funding to 20 per cent they will continue to get less than 100 per cent of the standard. NSW public schools would get 91 of the standard, Victorian schools would get 86 per cent.

The private sector would get 107 per cent of the standard in NSW and about 100 per cent in Victoria, according to Mr Cobbold's calculations.

"Gonski 2.0 is the best special deal that private schools have ever had," he said. "The overfunding will cost taxpayers many millions of dollars over the next decade and will divert funds from where they are most needed."

"No funding model that increases the number of overfunded private schools while failing to adequately support public schools can be considered fair. Public schools enrol the bulk of disadvantaged students."

Education Minister Simon Birmingham said states were free to boost funding to their own schools and cut funding to private schools.

"Our reforms are a line in the sand for the cost-shifting and blame game," he said.

"Our plan means every student will get their fair and consistently calculated share of federal support. The new independent National School Resourcing Board will ensure education authorities are held to account for the way they administer federal taxpayer investment."

Gonski 2.0 increases Commonwealth funding for both public and private schools. The legislation sets an "ambition" that state and territory governments fund at least 75 per cent of the resource standard of their own schools, taking the total funding under Gonski 2.0 to at least 95 per cent.

In The Age and Sydney Morning Herald

Sunday, December 10, 2017

Olympics Bettered. The benefits of same sex marriage

How on earth could same-sex marriage deliver 10 years' worth of economic benefits? And why on earth do 18 of Australia's leading economists expect it to?

The experts were surveyed this week by the Economic Society of Australia. Thirty answered this question: "Will changing the law to allow same-sex couples to marry generate net economic benefits for the nation as a whole over the next 10 years?"

Eighteen thought it would. Only seven thought it would not.

Almost always whenever someone claims something will benefit the economy they are wrong. Look at a graph of GDP either side of the Sydney Olympics and you won't see anything other than a drop in GDP during the Games. Tourism flatlined then fell after the Games. It didn't start growing strongly again until 2004. Even the Olympic Stadium, which we were told would be a lasting legacy, is, according to the premier, so clapped out it ought to be torn down.

KPMG, which wanted work associated with the Games, produced a much-hyped study for the NSW government saying the Olympics would boost economy growth by $7 billion. A decade later, an examination of what actually happened found it had clipped economic growth. Like countless expressways, stadiums and mega projects before and after it, it had cost more to create than it could ever produce in benefits.

One of the reasons the spruikers almost always get it wrong is that they add up the costs of the project (that's the easy bit) and then subtract them from the project's benefits. For sports events, those benefits include extra spending as people pour into Olympic Park or into Melbourne Park for the tennis. What the spruikers forget, often, is that the people who spend at big events would have spent something anyway, perhaps in their own suburb or at another sporting event or at the theatre. They forget to subtract the spending that won't be done in order that the spending at the big event can be done.

It's a trap for people expecting benefits from same-sex weddings. Professor Kevin Davis from Monash University put it this way in response to the Economic Society survey: "There may be more expenditure on weddings etc, but there is no obvious reason this would not be at the expense of other expenditures."

There can be a localised benefit in a country town. A really big wedding or special event can draw people into the town who never would have spent there. But the gain to that town will be a loss to the region or town from which those people have come.

So why are the experts so sure there will be benefits from permitting same-sex marriage?

Partly, because it's cheap. Passing a law costs nothing compared to building a stadium.

And partly because there will necessarily be benefits.

Here's how Lin Crase of the La Trobe University puts it: "Constraints that impinge on individuals' full participation in society necessarily reduce economic welfare. It follows that removal of those constraints should lead to some gains."

This would be true even for people in same sex relationships who decided not to take advantage of the opportunity to marry.

Professor Mardi Dungey of the University of Tasmania says that when we remove impediments to improving people's ability to satisfy their wants, with no material harm to others, we necessarily improve people's welfare.

And Curtin University's Professor Margaret Nowak identifies broader benefits: reduced health costs, especially in the area of mental health, reduced suicide rates among youth, and reduced discrimination in the workforce "resulting in more optimal allocation of workers".

For what it's worth, married couples also spend more. Dr Gigi Foster from the University of NSW says married heterosexual couples invest more in the kind of things that shacked-up couples don't. And she says something else.

Legalising same-sex marriage will allow politicians and the public to move on and focus on other things that could produce further economic benefits. There's a chance.

In The Age and Sydney Morning Herald

Thursday, December 07, 2017

Now they can afford a tax cut?

So now they can afford a tax cut?

Just months ago, in the May budget, Scott Morrison and Malcolm Turnbull pushed tax rates up. That's right, up. They lifted the Medicare levy from 2 to 2.5 per cent, beginning in 2019. It'll net them $4 billion a year, money they said they needed to fund the National Disability Insurance Scheme.

And now they can afford a cut?

Maybe they didn't really need the extra money for the National Disability Insurance Scheme after all. And there's an extremely flimsy argument that they didn't.

The mid-year budget update, due within the fortnight, is likely to show the budget is slightly better off. Unexpectedly strong company tax revenue in the first four months of the financial year has put the budget almost $5 billion ahead of target.

Much of it flows from a better than expected run up in commodity prices, which we now know didn't last. But that wouldn't stop an optimistic forecaster or an optimistic government from acting as if it would last and handing out permanent tax cuts of up to $5 billion per year.

The most successful private sector budget forecaster is Deloitte Access Economics, whose senior staff used to prepare the official forecasts when they were in Treasury.

Deloitte says that by the end of the financial year, revenue will be only $2.7 billion ahead of the budget and only $0.9 billion ahead in the following year. It produced a ready reckoner to enable us to calculate what kind of a tax cut those boosts could buy if it was permanent, which it almost certainly will not be.

Three billion could buy a lift in the $18,200 threshold to $19,200 and a lift in the $37,000 threshold to $38,000. That's all.

One billion, a more realistic, though still inflated, guess as to how much extra the government might have long term, couldn't even buy the lift from $37,000 to $38,000. Deloitte director Chris Richardson says it would buy a small sandwich or a small milkshake.

Unless the proposed tax cut applied to hardly anyone, which is a trick they've pulled repeatedly. Lifting the $87,000 threshold by $1000 costs only $110 million per year; lifting the $180,000 threshold costs only $30 million.

It's something to keep in mind if we once again get tax cuts skewed towards the top. It mightn't be so much a case of the Coalition helping out high income mates as making a gesture it can afford.

Middle earners are about to get clobbered. The government's own figures, spelt out by the Parliamentary Budget Office, show the average tax rate faced by middle-income Australians on $40,000 to $50,000 is about to climb 3 percentage points. Within four years.

Instead of handing over 14.9 per cent of their income after low starting rates and the tax-free threshold, middle earners will find themselves handing over 18.1 per cent. Within four years. It's the result of bracket creep, and the increase in the Medicare levy. And the projected return to surplus in 2020-21 depends on it.

The only ways to deliver serious tax relief are to push out further the projected return to surplus (just as it has been pushed out repeatedly by treasurers dating back to Wayne Swan), to fund the needed tax cuts with big spending cuts (something this government and the last have been incapable of, even in non-election years), or to fund the tax cuts by lifting other taxes.

Or by hoping something comes along.

And there's the magic pudding.

Here's how Finance Minister Mathias Cormann put it in a speech to the Business Council last month:

"Something that we keep pointing out again and again, but which doesn't ever seem to be appropriately well understood by analysts or commentators, is that our budget revenue forecasts are based on an assumption imposed on our forecasting model that tax revenue as a share of GDP is not allowed to exceed 23.9 per cent."

"Future tax cuts are already reflected in our revenue forecasting methodology."

He is right. Already baked into the budget projections are tax cuts from 2022-23 when the tax share of GDP is due to hit 23.9 per cent, which is the average take in the years between the introduction of the GST and the global financial crisis.

Five years into the future though those baked in tax cuts will be, they could be delivered as income tax cuts. Except that they mostly won't be, not if the government gets its full company tax cut through the Senate.

The Parliamentary Budget Office says if that happens, the company tax cut will do most of the heavy lifting needed to keep the tax to GDP ratio at 23.9 per cent, leaving little room for cuts in personal income tax, which will "continue to rise as a per cent of GDP".

There's not likely to be a magic pudding, unless the government prioritises personal tax cuts over company tax cuts or gets hit by another mining boom.

Treat sceptically proffered income tax cuts in the months beyond Christmas. They'll be either unaffordable or alarmingly small.


In The Age and Sydney Morning Herald

Wednesday, December 06, 2017

Worst since 2008: Bill shock shuts wallets

Bill shock – or the fear of it – shut wallets across the country in the three months to September as alarm about rising energy prices drove people away from shops, healthcare, hotels and cafes.

Spending on almost every discretionary purchase was down in the September quarter, as spending on almost every unavoidable expense increased, led by electricity and rent. The outcome was a net increase in household final consumption of just 0.1 per cent, the weakest result since the 2008 global financial crisis.

Household saving climbed for the first time in five quarters.

"This isn't surprising given the cost of living pressures on essentials," Treasurer Scott Morrison told a Canberra press conference.

"Concerns around electricity prices were at the front of mind in the September quarter and remain there. We saw large price increases from July 1 and the Turnbull government responded."

An apparent rebound in retail spending in October gave the Treasurer grounds for cautious optimism about the December quarter.

Offsetting extraordinarily weak consumer spending in the September quarter was a 2 per cent bounce in private spending on buildings and other capital equipment and a 7 per cent surge in government capital investment. The economy grew by a weaker than expected 0.6 per cent in the quarter and 2.8 per cent through the year. GDP per capita, a measure that adjusts for population growth, climbed just 0.2 per cent.

"The news on business investment is good; the mining investment decline has nearly finished and non-mining investment is improving," said AMP chief economist Shane Oliver. "But consumer spending is being dragged down by low wages growth, slowing wealth accumulation, poor sentiment, high debt levels and rising energy costs."

"Until now consumers have dipped into savings to increase consumption. Solid gains in wealth from strong home price growth in Sydney and Melbourne have given them confidence, but it's doubtful they will want to keep running down savings as those price gains fade."

BIS Oxford chief economist Sarah Hunter said extremely weak consumer spending was a sign that many households were struggling with anemic wage growth and rising prices for essentials.

But it wasn't all bad news. Rapidly growing employment had pushed up the wage bill 1.2 per cent in the quarter, even though wage rates climbed by nowhere near as much.

Labor treasury spokesman Chris Bowen said businesses were feeling good, but households weren't.

"The lowest household consumption growth since the global financial crisis suggests that cost of living pressures and record household debt are weighing on spending habits," he said.

"This is not surprising given workers are struggling to get a decent pay rise and the Turnbull Government is cutting their penalty rates, and their debt levels are rising faster than their incomes."

Victoria was Australia's top-performing state when measured on a trend basis in order to smooth out quarterly fluctuations. Victorian state final demand climbed 1 per cent in the quarter, compared to 0.5 per cent in NSW and Queensland, 0.8 per cent in South Australia, 0.7 per cent in the Northern Territory, 0.4 per cent in the ACT and Western Australia and growth of zero in Tasmania.



Mr Morrison said much of what happened in the December quarter would depend on Christmas spending. In the new year he would be in a position to talk about tax relief.

"I would hope that Australians are feeling in a position where they can go out and celebrate this Christmas and holiday season," he said.

"I am sure their kids are hoping that they will be spending, too."

In The Age and Sydney Morning Herald

Fast-growing job-generating companies harder to find

Just 9 per cent of Australian firms generate half of all net new jobs, fifteen per cent generate two thirds of net new sales.

Until now it's been hard to identify those highly-valuable so-called high-growth firms and find out what makes them special.

Now new cutting edge research from the Department of Industry has identified them and tracked them over time, using unique identifiers created from Tax Office business activity statements and pay as you go records. Linked to Bureau of Statistics survey data they paint a picture of what makes high-growth firms and what happens to them over time.

The most-important finding in the study released on Wednesday is that the 11,000 firms are typically younger than other firms (8 years old compared to 11) and much the same size and in most of the same industry sectors as other firms. They are not overwhelmingly high tech startups.

The firms whose high growth was in turnover spent more than others on research and development. The firms whose high growth was in employment spent less on research and development. While R&D had an ambiguous effect, the effect of innovation was clearly positive.

"Firms that are innovation-active are more likely to grow their revenue and profits, and they're more productive," said Department of Industry chief economist Mark Cully. "This association stands after controlling for a range of other factors, and we were also able to test and establish that the causality runs from innovation to growth."

"Introducing a new product or a marketing innovation had the greatest impact on a firm's revenue, boosting it by 3 and 4 percentage points. For high-growth firms these numbers were greater still. A focus on innovation as a business strategy increased their revenue growth by almost 10 percentage points, all else equal."

After four or so years, most high growth firms grow more slowly. The study concludes that high-growth firms are not a specific type, but "a phase that some firms go through during their life cycle".

Its most disturbing finding is that there are fewer such firms. It defines them as firms with an annual turnover of at least $75,000 employing at least five people with average annualised growth in sales or employment of more than 20 per cent a year over three years.

It says the number and persistence of high-growth firms has deteriorated since the global financial crisis, although in the last few years it seems to be stabilising. They are also growing more slowly.

Slower high growth rates.

Mr Cully said said it wasn't clear whether the slower growth was caused by the slower-growing economy or was a cause of it.

"It is higher in years when the economy is growing strongly, and lower in years when growth is weaker," he said. "The proportion of high-growth firms declined between 2005 and 2014, coinciding with the trend slowdown in Australian GDP growth after the global financial crisis."

In The Age and Sydney Morning Herald

Tuesday, December 05, 2017

Sydney accounts for half Australia's growth

Sydney has become Australia's economic powerhouse, accounting for almost half of Australia's economic growth.

The extraordinary figure of 41.2 per cent is the highest since Victoria led the nation into recession in the early 1990s.

New calculations show that Sydney and Melbourne combined accounted for more than two-thirds of Australia's economic growth during 2016-17, a concentration rare on a global scale.

The capital city GDP estimates prepared by Terry Rawnsley of SGS Economics and Planning show Sydney's economy grew 3.3 per cent during 2016-17, easily surpassing Melbourne's 2.8 per cent.

The economy of regional NSW grew 1.5 per cent; the economy of regional Victoria grew 5.8 per cent.

A rough measure of living standards, GDP per capita grew 1 per cent in Sydney while slipping 0.1 per cent in Melbourne.

GDP per capita shrank 0.6 per cent in Brisbane and 4.7 per cent in Perth.

Mr Rawnsley said economic activity was gravitating to Sydney and Melbourne, even though Melbourne's living standards were slipping.

"It's getting economic refugees from Perth and Brisbane, whose living standards are slipping faster," he said. "Melbourne is more affordable than Sydney. If you want a big city with a vibrant economy but you don't want to pay Sydney prices, you go to Melbourne."

Sydney is Australia's hottest capital city economy. SGS suggests that to rein in Sydney's economy the Reserve Bank would have to push up its cash rate from 1.5 per cent to 3.5 per cent. To rein in Melbourne's it would have to push it 2.25 per cent. In Brisbane, Perth and Adelaide, the cash rate would have to be pushed down to 0.25 per cent.



Sydney and Melbourne were set to become even more dominant.

"The knowledge-intensive industries in which we are globally competitive are best located in big dense cities with good access to highly skilled labour," Mr Rawnsley said.

"Australia is unique in having a population of 25 million people and two cities of roughly 5 million each. Those cities are likely to become ever more important at the expense of the other capitals and regional centres like Bendigo and Ballarat or Orange and Wollongong."

Financial services is by far Sydney's most important industry, accounting for 15 per cent of its economy, up from, 11 per cent in 1997. The next most important is professional services at almost 10 per cent, up from 6 per cent in 1997. Construction accounted for 6 per cent of Sydney's economy in 2016-17, and manufacturing 5 per cent, putting Sydney within spitting distance of Australia's traditional manufacturing centre Melbourne, where it accounted for 5 per cent.

The official GDP figures, to be released on Wednesday, don't break down GDP by state. The Bureau of Statistics does this once a year, in November. Shortly afterwards Mr Rawnsley estimates capital city and rest-of-state GDP. Before joining SGS he calculated statewide and national GDP for the Bureau.

In The Age and Sydney Morning Herald


Melbourne living standards slip, as manufacturing slides to record low

Melbourne is no longer Australia's manufacturing capital.

New calculations of so-called capital city GDP show Melbourne's economy growing 2.8 per cent in the past financial year, well below Sydney's 3.3 per cent.

Had manufacturing not collapsed in the wake of the closure of the Ford car plant in 2016 and the closure of Holden in October this year, Melbourne's GDP would have been 0.6 points higher, eclipsing Sydney's at 3.4 per cent.

The capital city and regional GDP estimates are prepared each year by urban economist Terry Rawnsley of SGS Economics and Planning, who used to produce the national and state estimates for the Bureau of Statistics.

Manufacturing now accounts for only 6 per cent of Melbourne's economy, down from 16 per cent in 1997, just pipping Sydney's 5 per cent.

Victorian Treasurer Tim Pallas said that statewide, manufacturing remained Victoria's third biggest employer providing 278,000 jobs across 13,000 businesses.

"More than 266,000 jobs have been created since we were elected in 2014, with around 60,000 in regional Victoria," he said. "That's more than anywhere else in the nation for that period."

Financial services is now far and away Melbourne's most important industry, accounting for 12 per cent of economic output, followed by professional services, accounting for 9 per cent. The next most important industries are healthcare and construction, each worth 7 per cent.

The biggest contributors to Melbourne's economic growth during 2016-17 were the professional, scientific and technical industries, construction and wholesale trade, and healthcare and social assistance.

Adjusted for Melbourne's extraordinarily high population growth, GDP per capita fell in 2016-17, slipping 0.1 per cent. GDP per capita is a rough measure of living standards. It has fallen in six of the past 10 years. Brisbane, Perth and regional Western Australia were the only other parts of the country in which GDP per capita went backwards.


"Melbourne is in transition," Mr Rawnsley said. "Car plants have been closing while professional services and healthcare are growing. The good news is that manufacturing is levelling out. Things should improve from here on."

Asked why Australians should be flocking to Melbourne when living standards were falling, Mr Rawnsley said they were falling faster in Brisbane and Perth.

"They are economic refugees, and Melbourne is a lot more affordable than Sydney," he said. "If you want a big city with a vibrant economy, but you don't want to pay Sydney prices, you come here."

"People are coming for the lifestyle and jobs, even though the income they generate is failing to match population growth."

Melbourne's economy is Australia's second-hottest after Sydney. SGS suggests that to rein in Sydney's economy the Reserve Bank would have to push up the cash rate from 1.5 per cent to 3.5 per cent. To rein in Melbourne's it would need to push it 2.25 per cent. In Brisbane, Perth and Adelaide, the cash rate would have to be pushed down to 0.25 per cent.

Regional Victoria had a bumper year, recording economic growth of 5.8 per cent. A strong wheat crop and good year for other products including cheese boosted agricultural production almost 20 per cent. Manufacturing climbed on the back of related work at Shepparton canneries.

Combined, Australia's two biggest cities now account for 42 per cent of Australia's economic output, and a near-record two thirds of Australia's economic growth.

Mr Rawnsley said Sydney and Melbourne were likely to become even more dominant.

"The knowledge-intensive industries in which we are globally competitive are best located in big dense cities with good access to highly skilled labour," he said.

"Australia is unique in having a population of 25 million people and two cities of roughly 5 million each. Those cities are likely to become ever more important at the expense of the other capitals and regional centres like Bendigo and Ballarat."

In The Age and Sydney Morning Herald

Monday, December 04, 2017

By award. 'Fair work' gives women less than men

The Fair Work Commission is itself responsible for much of the gap between male and female wages, a landmark study has found.

The typical wage gap is 18 per cent, much of it due to decisions by employers paying men and women above the minimum wage. But a substantial gap – up to 10 per cent – is due to the minimum wage itself, which varies for different occupations and years of experience.

"At first glance, one might expect the gender pay gap to be zero among minimum-wage workers, since by definition they are all being paid the minimum wage," said Barbara Broadway, one of the authors of the Melbourne Institute study, to be released on Monday.

"However, there are in fact many different minimum wages in Australia. There are currently 122 federal awards, covering a variety of industries and occupations, and with each specifying numerous different minimums depending on things like the tasks and duties of the job and the qualifications and experience of the employee.

"This, combined with the fact that men and women differ considerably in the types of jobs they do, means that it is still possible for a gender pay gap to exist among minimum-wage workers."

The examination of 37,000 records from the Household, Income and Labour Dynamics survey finds that men hold 91 and 95 per cent of Australia's construction and road transport jobs respectively. Those paid the minimum typically get $22.58 and $20.43 an hour.

In contrast, women hold 79, 82 and 84 per cent of the retailing, accommodation and social services jobs. Those paid the minimum get between $15.67 and 18.27 an hour.

"Unlike market wages, the gap among minimum-wage workers cannot stem from employer discrimination, superior negotiating skills of men, or higher productivity of men, since everyone is being paid the minimum permissible rate of pay," Dr Broadway said.

"But is not immediately clear whether this job-femaleness penalty can be interpreted as discrimination.

"In principle, the job-femaleness penalty could result from the commission taking into account factors other than the required skill level, such as 'dirtiness' and 'danger'.

"However, this argument seems less compelling in a comparison of, for example, the average wage for truck drivers ($21.65) with that of hospitality workers ($15.97), where the latter group of employees would often perform physically demanding work in hot and/or loud environments."

The study concludes that the most likely explanation for the apparent discrimination is that the commission has been indirectly influenced by historical perceptions of what is "appropriate".

"Male-dominated fields might have benefited from a long history of strong unionisation that led to higher average wages – a history not shared by service jobs," the study says.

Nevertheless, it finds that the Fair Work Commission's decisions are far fairer than those made outside the commission. For jobs that require university education, the commission appears not to discriminate at all.

Some of the discrimination against women subject to Fair Work awards isn't the result of the awards themselves.

Men are more likely to be paid above the award – 87.6 per cent compared with 81.5 per cent – and the women forced to rely on it are likely to have had better education and more work experience than the men who rely on it.

"Women might be 'pushed' on to award wages, whereas comparable men are more likely to receive an individually or collectively negotiated (and higher) wage," the study says.

Awards are also structured so that wages increase faster for each year of experience in male-dominated jobs than in female-dominated jobs.

Virginia Haussegger, director of the gender equality initiative 50/50 by 2030 Foundation at Canberra University, said the figures confirmed what many women already knew.

"It shows the gender pay gap is entrenched, multi-factorial, and is not easily bridged," she said. "Fixing it involves looking beyond the numbers in awards to the weightings given to work itself."

The female penalty

Accommodation (82 per cent female): Average award wage $15.67 per hour

Retailing (79 per cent female): Average award wage $16.61 per hour

Social assistance (84 per cent female): Average award wage $18.23 per hour

Residential care (90 per cent female): Average award wage $19.82 per hour

Road transport (5 per cent female): Average award wage $20.43 per hour

Construction (9 per cent female): Average award wage $22.58 per hour

Source: Probing the Effects of the Australian System of Minimum Wages on the Gender Wage Gap, Barbara Broadway and Roger Wilkins, Melbourne Institute Working Paper, December 2017

In The Age and Sydney Morning Herald