Wednesday, December 10, 2014

Why you'll pay much more for the doctor. The three-card trick that purports to save $3.5 billion

How can a $5 GP co-payment that excludes the young and those on benefits save just as much as a $7 co-payment that applies to everyone?

That's what we'll be asked to believe when the budget update is published next week. We'll be told Prime Minister Tony Abbott's new health package will save $3.5 billion whereas his old package would have saved $3.6 billion.

Part of the trick is that it isn't the co-payment that saves the government money, it's the cut to the Medicare rebate. That cut was always going to be $5 per consultation. If doctors had had the ability to charge a $7 co-payment they would have got an extra $2 in their pockets. Now they won't.

Another part of the trick is that the government will now cut some rebates by much more. Standard so-called Level B consultations of up to 10 minutes currently attract a $37.05 rebate. Under the changes they will classified as Level A and attract $16.95 for the young and concession holders and $11.95 for everyone else.

And the two-year freeze on increasing the amount of Medicare rebates that was going to extend to June 2016 will now become a four-year freeze, extending to June 2018.

Doctors will lose just as much as before, but in different ways and for longer.

At least that's what the budget update will say.

All of the changes but one will be introduced through the back door by regulation rather than by legislation, which requires the approval of Parliament. But regulations can be disallowed by the Parliament after they are introduced. Just last month the Senate disallowed the regulations that purported to water down consumer protection under financial advice law.

There's every reason to think it's prepared to do so again if it doesn't like co-payments, meaning that, while the $3.5 billion saving will be in the budget update, most of it will never be banked.

In The Age and Sydney Morning Herald

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Abbott's GP co-payments aren't dead: it's a tweak not a termination

Tony Abbott has cut the size of the co-payment and he has excluded children and Australians on benefits, but he is insisting on a co-payment, or as he puts it a "price signal".

Like a price signal for pollution (the carbon tax) or a price signal for traffic congestion (road tolls) the theory is that if we are charged for something we'll use less of it.

But visits to the doctor aren't quite like those other things. One of the things we are buying when we go to the doctor is information - information about whether we really needed to go in the first place. We can't know until we go. Doctors and patients have what health economists call an "information asymmetry". And so that makes it entirely possible that co-payments could deter necessary, as well as frivolous, visits.

It's what the giant Rand health experiment in the United States found. It sent some people to the doctor for free, charged others small fees and others big fees. In the words of the Rand report: "Cost sharing did not seem to have a selective effect." Serious as well as trivial visits were equally discouraged and those visits that were discouraged were almost entirely first visits, those that let the patients know whether it's serious or trivial...

His move might help the budget, but it might not help public health, and there's reason to think it mightn't even help the budget as much as he thinks.

If general practitioners do find their work their work slowing down as patients are turned away by co-payments, what are they expected to do? What they are likely to do is to see other patients more intensively - to recommend follow-ups and to make their consultations last longer. They'll get less from the government per consultation (Abbott is cutting the Medicare rebate by $5 for all but young patients and concession card holders) but they are unlikely to put in fewer hours.

And these changes are unlikely to pass the Senate. Most of them are being introduced by regulations rather than legislation bypassing the need for Senate approval, but the Senate still has the ability to disallow regulations, and just last month it showed it was prepared to use it when it was presented with watered-down financial advice regulations. It isn't over yet.

In The Age and Sydney Morning Herald

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Tuesday, December 09, 2014

Want lower interest rates? Attack negative gearing

There's only one thing standing in the way of lower interest rates, and the Abbott government has just been handed a way to deal with it.

When the Reserve Bank board gets back from its summer break on February 3 it will be told that the economy is weak and (on the latest figures) getting weaker.

It will be told that the government is unable to do what's needed to boost it. Hemmed in by the deficit and its talk about the deficit it won't boost spending and, aside from promised tax cuts due next July, it won't cut taxes further. (Credit where credit is due. At least Joe Hockey says he won't cut spending further in next week's budget update. That would be "in the current circumstances quite irresponsible," he says.)

So it's up to the Reserve Bank.

Another cut in its cash rate from 2.5 per cent to 2.25 per cent would boost the economy by giving mortgage holders access to more cash (an extra $51 dollars each month for someone on a $350,000 mortgage) and make it cheaper for businesses to borrow.

And it would make Australia a less attractive place for foreigners to park money, knocking out a support for the high dollar and making it easier for Australian businesses to compete with imports and sell overseas.

Normally it's fear of inflation that holds the Reserve Bank back from cutting interest rates, but not this time. Both price growth and wage growth are disturbingly low.

But not house price growth. Since house prices bottomed in 2011 the typical price has climbed a frightening $100,000. For much of this year prices have been climbing at an annual rate of 11 per cent in Melbourne, 16 per cent in Sydney. Just recently the pace has slowed, with prices actually slipping in Melbourne. The latest annual figures are 8.3 per cent in Melbourne, 13.2 per cent in Sydney...

The Reserve Bank is worried about reigniting what it regards as an unsustainable boom in house prices and pushing them to the point where they collapse and cause financial damage.

It's the only thing standing in the way of it cutting rates.

The Bank's governor Glenn Stevens has been thinking out loud about ways to restrain house prices in order to make get room to cutrate cuts possible. Importantly he has discovered that ordinary homebuyers aren't the problem. In the past year the amount borrowed by personal investors to buy property has climbed at almost twice the rate of the amount borrowed by owner occupiers. Investors now account for $1 in every $3 1 in every 3 dollarsborrowed to buy property. Stevens is thinking about imposing tougher lending standards and capital requirements for lenders to investors but leaving owner occupier loans alone.

And now the Murray financial system inquiry suggests something else...

On Sunday it pointed its finger at the tax system. In its words: "The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".

EverSince the Howard government halved the headline rate of capital gains tax in late 1999, investors have enjoyed a low rate of tax on the profits they make when they sell properties while being able to deduct from their taxable earnings the full interest costs of the borrowing they use to make those profits.

The Murray review calls the tax treatment "asymmetric".

For well-heeled households it has made investing in second, third and even fourth properties a no-brainer.

As Macquarie Bank economist Rory Robertson told his clients at the time, "since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries".

By becoming landlords they have provided renters a useful service, but by elbowing would-be owner-occupiers out of the way in order to buy properties on which to run up interest bills they have also been creating those renters.

Since Howard changed the rules, the proportion of households forced to rent has climbed from 27.2 per cent to to 30.3 per cent.

House prices have run way ahead of household incomes ever since.

Doubling the rate of capital gains tax to make it the same as the tax paid on other income would take the wind out of the investor housing market. If the government wanted to merely do it to new housing investors (leaving existing investors untouched) it would take out the wind slowly. Or perhaps it could do it only to investors who buy existing properties rather than ones built from scratch. The Murray inquiry isn't prescriptive. It wants capital gains tax and negative gearing investigated by the tax inquiry Abbott is expected to announce this week.

Abbott could give the Reserve Bank cover by announcing at the same time as the tax inquiry that he is inclined to act against negative gearing. He could say that when the new rules are decided on they will apply from December 2014, deflating the housing market straight away and making it easy for the Bank to push down rates.

It would help the Bank help him, and quite possibly allow much lower interest rates. And it would rake in more tax as well.

In The Age and Sydney Morning Herald

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Duty calls John Fraser back to head Australia's treasury

John Fraser says he felt he had little choice when approached a few months ago in London about running Australia’s treasury.

A former treasury official who rose to the rank of deputy secretary, he had spent most of the last two decades working in investment banking, much of it overseas with the financial conglomerate UBS.

“This country has been very good to me, and life's been very good to me and I felt I might be able to make a contribution,” he said after the governor general approved his appointment as Australia’s 17th treasury secretary.

“I don't want to sound as if I'm a saint - I am not. But I think all of us, particularly those who have been a bit lucky, have a moral obligation to do something for our country.”

Mr Fraser was jetlagged as the Governor-General approved his appointment. He had arrived from London at 2am and been unable to sleep.

Asked how he’ll run the department differently from his predecessor Martin Parkinson who was forced to resign by the prime minister Mr Fraser said he had no set views and was still learning about how the department had changed.

“Martin has been very helpful in briefing me, and indeed I'll be spending a day with the treasury team before Christmas to go through everything. But no I don't have any thoughts. It’s a broader organisation than when I was there.”

Treasurer Joe Hockey paid tribute to Dr Parkinson who leaves on Friday describing him as a “loyal servant of the Australian people”.

Dr Parkinson was effectively sacked by Mr Abbott shortly after the Coalition took office. Mr Abbott asked him to stay on only until after the May budget. The recently published biography of Mr Hockey indicates the decision was taken without the treasurer’s knowledge. Mr Hockey later managed to negotiate an extension for Dr Parkinson.

“He has utilised his enormous intellect to pursue and affect significant policy change. He is a man of great personal integrity. I wish him all the very best for his future,” Mr Hockey said in a statement.

Mr Fraser said he believed the treasury’s job was to work with rather than for Australia’s political leaders.

In The Age and Sydney Morning Herald

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Thursday, December 04, 2014

Why the Reserve Bank board is poised to cut

After a year of finely judged inactivity, the Reserve Bank is stirring.

The bank's board met for the last time this year on Tuesday and concluded as usual that "the most prudent course is likely to be a period of stability in interest rates".

But after the national accounts it's no longer so sure.

It isn't just that economic growth is weak; it's that it's been weak for two quarters in a row.

In the past six months Australia has stepped down from an annualised economic growth rate of 3.6 per cent to an annualised rate of 1.6 per cent.

Put politically, during the Coalition's first six months in office, economic growth was high; during the past six months it's been low.  There are few signs it will pick up without help.

The Treasurer will do what he can, or as much as he feels he is able to. He says he won't cut spending any further ahead of Christmas.
But it won't be enough.

That's why the Reserve Bank board is considering cutting its cash rate when it next meets on February 3 after a two-month break.

A cut isn't completely locked in and a lot can change in two months. But most of the arguments line up in favour of a cut.

One is that a cut would boost the economy without stoking damaging inflation. Wage and price rises are too low and unemployment too high for inflation to be a concern.

Another is that a cut would help bring down the dollar, which itself would boost the economy. It would help stem the inflow of hot money that's keeping the dollar high.

The only cause for concern is that it might restoke an unsustainable real estate boom. The bank has other measures in mind to deal with that including tougher lending standards for banks that lend to real estate investors.

There's little reason not to cut.

In The Age and Sydney Morning Herald

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Tuesday, July 29, 2014

FOFA. How Palmer was conned. The rotten underbelly of Australia's financial advice industry

Clive Palmer has been conned. In the most exquisite of ironies he has allowed the Coalition to water down financial advice rules without first seeking advice.

"I didn't become a billionaire by listening to advisers," he said after he closed the deal, dismissing concerns the regulations he had endorsed would condemn ordinary Australians to years more of seeing advisers partially on the take from the firms whose products they advised on.

He’d insisted on safeguards. Fees and payments would be out in the open. It would help.

Palmer has probably never sought advice from George Loewenstein. The Carnegie Mellon University professor does cutting-edge research in the netherworld where economics meets psychology.

His examination of this very topic is called “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest.”

Loewenstein says if advisers admit they are getting kickbacks their clients often don’t know how to assess the information. The clients don’t know much about the field. That’s why they are seeking advice. Sometimes it makes them more trusting. If an adviser is going out of his or her way to be honest the client might “place more rather than less weight on the adviser’s advice”.

The adviser on the other hand might feel emboldened, “exaggerating their advice in order to counteract the diminished weight that they expect estimators to place on it”.

His experiments find advisers make more money when they disclose kickbacks and their clients make less (because they receive even more biased advice). They are also keener to help out advisers by buying the products that will give them kickbacks.

If you doubt that Australians are extraordinarily bad at appraising the worth of their financial advisers, consider the results of this Australian Securities and Investments Commission survey, detailed in the interim report of the Murray financial system inquiry delivered on the day that Palmer caved...

Eighty six per cent of the Australian customers surveyed said they had received “good quality advice”.  Eighty one per cent said they trusted the advice “a lot”. But when ASIC examined the advice if found only 3 per cent was good, 58 per cent was adequate and 39 per cent “poor”.

The advisers who renounced commissions were the most likely to provide good advice.

“Unsurprisingly, where advice fees were contingent on a product recommendation there were numerous examples where the advice appeared to be structured towards recommending or selling financial products,” ASIC reported.

The regulations Palmer has agreed to will allow banks to continue to reward advisers for shifting their products. The only constraints are that the advisers must work for the banks, they must style themselves as “general” rather than “personal” advisers, the payments can not be ongoing and they must not be made “solely” because of the volume of product they have shifted.

Payments or in-kind payments not linked to the sale of a particular product are fair game, among them payments for training, promotion, conferences in remote locations, the upgrade of computer systems and direct payments to staff who “execute” trades recommended by advisers.

They are generous loopholes. They would have been illegal had Palmer not caved.

The Murray report doesn’t think much of them. It has suggested banning the use of the term “adviser” in such circumstances, relabeling it “sales” or “advertising”.

The inquiry’s chair David Murray knows about what masquerades as financial advice in Australia. He used to run the Commonwealth Bank.

“Advisers” are allowed to practice in Australia with as little as six hours training, although it’s often more - sometimes six weeks. In Canada, Hong Kong, Singapore, the United Kingdom and the United States would-be advisers need to sit a national exam. Not here. I know of one economist with impeccable finance market credentials who wanted to work as a financial adviser to give something back He was turned away because he hadn’t worked in sales.

Unfathomably, there’s not even a public register of who does and who does not have an adviser's licence. (Palmer is on to this one. He demanded a register as a condition of agreeing to water down the rules.)  If there was a register potential clients could see how long an adviser had been practicing and whether they had ever been struck off.

So limited are the regulators powers that when advisers do get stuck off they simply pop up elsewhere. Murray says ASIC can prevent someone being an adviser but can’t prevent them from managing advice firms, something stuck off advisers often do.

In Britain the Financial Conduct Authority has “product intervention” powers. It can review products or product categories and take them off the market. In Australia ASIC can only warn.

And it can do next to nothing about advisers who sell insurance. Incredibly effective lobbying by insurance providers means that under both Labor’s old rules and the Coalition’s new ones advisers can continue to accept commissions from insurance companies. It’s why advisers often ask: “Would you like insurance with that?”. The commission is often as much as 110 per cent of the first year’s premium. It’s a powerful incentive for advisers to advise their clients to switch, regardless of the consequences.

David Murray is on to it, even if Clive Palmer is not. But there’s hope. The regulations Palmer waved through apply only until December 2015. In November 2014 David Murray presents his final report. Palmer’s no fool. He would probably be horrified at the state of the industry if he took wider soundings. He has 18 months in which to do it.

In The Age and Sydney Morning Herald

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Red tape? You ain't seen nothing yet. 40 job applications per month

Red tape? It’s only just begun. Forcing job seekers to apply for 40 jobs each per month will bombard employers with more than one million applications per day, every working day of every year.

Around 740,000 Australians are unemployed. Even at the peak of the mining boom the total wasn’t much short of 500,000. Forcing most to apply for more than one job per day (while also working for the dole if they are under 50) will see them sending out proforma emails at a pointless rate.

Bendigo has 700 unemployed residents. Making them apply repeatedly to the same pool of employers month after month will drain their ability to apply for jobs they might actually get and drive their would-be employers around the twist.

It won’t be that bad for large organisations with well-resourced human resources departments. They have staff they can assign to worthless work.

But small businesses will have no-one to pass the work to.

“They will be inundated,” says Peter Strong, president of the Council of Small Business of Australia. “It’s an embarrassment for everybody and it’s going to make people angry. The small business person might be having a lousy day and no customers are coming in, but she’ll be getting job seekers. In the hospitality industry most of the time you know straight away whether someone can pour a cup of coffee. You don’t want that person coming back month after month.”

As minister Eric Abetz outlined the new rules on Monday the Business Council of Australia launched a major report stressing the need for businesses to “improve their productivity and strip out costs”...

It’s as if he wasn’t listening. Business Council chief executive Jennifer Westacott says while many aspects of the new model are welcome she is “concerned about the practicality of asking people to apply for 40 jobs each month”.

She is concerned too about how little we are paying unemployed people. Currently just $255.25 per week Newstart will be denied to young people during their first six months out of work and then paid at the lower Youth Allowance rate of $207.20 per week until they reach 30.

Without the resources of the time to properly present themselves for jobs many will miss out.

Peter Strong is surprised. He says usually the government has good ideas about getting people into work and is prepared to talk. He says this is an aberration.

In The Age and Sydney Morning Herald

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