Thursday, August 25, 2016

What's wrong with the Reserve Bank target we've got?

Ever been the victim of a poorly specified target?

I used to be, for years, when I had to change trains. The timetable indicated that the next one would arrive a few minutes after the first. And it nearly always did, except that it often sped past without stopping. It had a target to meet.

Hospitals do it with waiting lists. Told to get them down, they find excuses to knock people of the listf, even if they are still waiting. Chief executives do it with share prices. Incentivised to get them up, they bring forward income, skimp on actually looking after their customers, and act surprised when things collapse. Dick Smith  is an obvious recent example. The target - share price - has ended up driving the enterprise rather than what the target sought to achieve.

And the Reserve Bank might be another.

Until the early 1990s it didn't really have a target, just a feel-good vibe in its Act that directed it to work "to the greatest advantage of the people of Australia". To flesh things out, the Act says it has to work towards the stability of the currency, the maintenance of full employment and economic prosperity.

But too many targets means no target at all, so in the early 1990s, as part of a movement that began in New Zealand, our Reserve Bank joined a number of its international cousins and zeroed in on just one numerical target: inflation. Changes in prices as measured by the consumer price index had to be kept to between 2 and 3 per cent per annum on average over time.

When Glenn Stevens took over as governor in 2006 he formalised the target in a written contract or "statement on the conduct of monetary policy" signed by him and the treasurer Peter Costello.

It justified giving pre-eminence to what had previously been just one of several objectives by describing price stability as a "crucial precondition for sustained growth in economic activity and employment".

The words "over time" allowed it to delay adjusting rates to meet the target if it thought that, say, employment really mattered more. But by being placed at the centre of the document and being the only part of it that had a number attached to it, inflation came to be seen as the bank's number one target, in the same way that running on time came to be seen as the number one role of the railways, at least until commuters complained.

It has stayed the number one target because most of the time it has done the job pretty well. If inflation was climbing it usually meant that the economy was overheating and could do with higher interest rates. If it was falling, it usually meant employment was weak and would benefit from lower interest rates.

But not always.

When prices jumped on the introduction of the goods and services tax and then on the introduction of the carbon tax it meant no such thing. The Reserve Bank suspended its inflation target saying it would "look through" recorded inflation to adjust rates only in accordance with what it thought would have happened without the disturbance. It's done the same for changes in the cost of health insurance and the price of bananas. It has maintained fidelity to its target by suspending it, which gives a pretty good indication there's something wrong with it.

There've been five new contracts since the first (usually after each election or when the governor's term has been extended) and each has put inflation first. There's about to be a sixth, to coincide with the appointment of Stevens' successor, Philip Lowe. This time there's a push for something better.

Senate linchpin Nick Xenophon is the front person for a bevy of exceptionally bright economists including Warwick McKibbin, an internationally renowned member of the Reserve Bank board, and Danny Price of Frontier Economics in Melbourne, who want what bigwigs in the US such as former treasury secretary Larry Summers and former Obama adviser Christina Romer want – a target that explicitly acknowledges economic growth.

The best candidate is so-called nominal GDP, which is real growth plus inflation. The bull's-eye would be 5.5 per cent, which is about the long-run average. If real growth was weak even though inflation wasn't, the Reserve Bank would cut interest rates anyway in order to get either it or inflation up. It'd be a single number, as is the inflation target, but it would serve dual purposes.

Right now it would mean even lower official interest rates, perhaps even negative as happens overseas, in order to get businesses employing and consumers spending. During unsustainable booms it would mean higher interest rates than an inflation target alone would produce. As with the inflation target, it would be a goal to be achieved over time, giving the bank wriggle room to ensure the adjustments aren't too dramatic.

All Xenophon wants is a Senate inquiry to at least talk about it before the governor and the treasurer sign on the dotted line. A government genuinely committed to governance would grasp the opportunity.

In The Age and Sydney Morning Herald
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Monday, August 22, 2016

Xenophon leads push to axe the inflation target

Senate powerbroker Nick Xenophon will move next week to upend the traditional contract between the treasurer and the governor of the Reserve Bank, ditching the longstanding inflation target and replacing it with a target for economic growth.

There have been six such contracts between the treasurer and the bank since Glenn Stevens took over as governor in September 2006. His successor, Philip Lowe, takes office on September 18.

Although the wording has varied, each contract has required the governor to keep underlying inflation at an average of 2 to 3 per cent over the business cycle.

When Parliament resumes next week, Senator Xenophon will move that the Senate economics committee investigate replacing the inflation target with one for nominal growth, with the most likely mid point being 5.5 per cent.

Writing in Fairfax newspapers on Monday, Senator Xenophon and Danny Price of Frontier Economics argue that Australia needs nominal economic growth of at least 5 per cent in order to stabilise debt and for businesses and households to feel able to invest and spend more.

Near 10 per cent at the height of the mining boom, nominal growth is now just 2 per cent. The bank feels unable to boost it unless inflation is low, and the steady increases in the prices of electricity, gas and alcohol and tobacco excise give inflation a floor.

 

"Right now we've got economic policy with the blinkers on," Senator Xenophon said. "By being one-eyed about inflation, we are ignoring the money in the pockets of Australians, unless the two happen to coincide."

Supporters of the shift from inflation targeting towards nominal growth include The Economist, former US treasury secretary Larry Summers, Christina Romer, a former chairwoman of the Council of Economic Advisers under President Obama, and Australian economists John Quiggin and Warwick McKibbin.

Professor McKibbin, a former member of the Reserve Bank board, said that before Australia formalised its inflation target in the early 1990s it effectively targeted both prices and growth, cutting interest rates if growth dipped even if prices did not. Since then, inflation targeting worked well enough until about five years ago, when weak productivity growth severed the link between inflation and growth.

"With a debt-laden society, both public and private, you've got to get nominal GDP growth, otherwise your revenue and your balance sheets get hit badly," he said. "You should be willing to risk inflation in order to get nominal growth up, but with an inflation target you get penalised if you try."

Professor McKibbin said inflationary expectations needed to climb to give people and businesses the confidence to lift wages and profits.

Mr Price said replacing the inflation target with a nominal GDP target would mean higher interest rates during booms when incomes were soaring and even lower rates at times, like now, when incomes and profits were stagnating.

Professor Quiggin said if nominal GDP growth rather than inflation had been targeted during the boom, central banks would have come down harder on the asset speculation that led to the financial crisis.

Former Reserve Bank board member John Edwards disagreed, saying nominal growth was driven by export prices, which the Reserve Bank was powerless to influence.

"I don't know how you would offset it, and I don't know why you would want to," he said. "I think it's a silly idea. Until now targeting inflation has worked well."

A spokeswoman for Treasurer Scott Morrison said a new contract would be signed after Mr Lowe took office.

In The Age and Sydney Morning Herald
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Friday, August 19, 2016

We're moving part-time as the jobs market hollows out

An election-driven burst of part-time employment has pushed the unemployment rate down to 5.7 per cent, disguising a continuing slide in the number of Australians employed full-time.

Employment climbed 26,200 in July, according to figures released by the Bureau of Statistics on Thursday, but the jump was the net result of a 45,400 slide in full-time employment offset by an unusually large 71,600 jump in part-time employment.

Full-time employment has slid 64,500 since December while part-time employment has surged 136,600. The net result of 72,300 extra Australians in work reflects a hollowing out of employment rather than a boost in hours. There were scarcely any more hours worked in July than in December.

The international definition used by the Bureau of Statistics requires it to count someone as "employed" even if they work only one hour per week.

"With more than 86 per cent of total net jobs created over the last 12 months part-time, it is clear that Australia is becoming a nation of part-time employment growth with all the attendant negative consequences," said Bill Mitchell, director of the Centre of Full Employment and Equity at the University of Newcastle.

The Australian Electoral Commission employed around 70,000 polling officials for the July 2 federal election, many of whom kept working in the following weeks during the count.

A few weeks later, the Australian Bureau of Statistics employed 38,000 field officers to collect census forms, most of whom will show up in the August employment figures.

BIS Shrapnel economist Kishti Sen said there were other, longer-term, reasons for a surge in part-time jobs that has pushed up the part-time share of employment up from 28 per cent to 32 per cent of total over the past decade.

"Businesses that employ a greater share of part-time workers, including accommodation and food services, retail trade, and arts and recreation are doing well on the back of healthy household spending and a recovery in tourism expenditure," she said. "Part-time employment is also benefiting from a cautious approach by businesses. They are inclined towards taking on part-time workers to have the flexibility to bring workers on and off their books and to contain costs."

Employment minister Michaelia Cash welcomed what she said was evidence of a resilient economy that saw employers continuing to hire at record levels.

The figures show Western Australia and the eastern states swapping places with the state that once had Australia's best labour market recording an unemployment rate of 6.3 per cent, well above the Victoria and NSW rates of 5.9 and 5.2 per cent.

In The Age and Sydney Morning Herald
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Thursday, August 18, 2016

Say no to Western Australia, the prodigal state

prod·i·gal (prŏd′ĭ-gəl)

adj. Rashly or wastefully extravagant: a prodigal nephew who squandered his inheritance.

Western Australia wants the rest of us to bail it out.

Without warning, the GST lifeline it needs to fund its operations has collapsed, or so it says.

Our Treasurer, Scott Morrison, seems to believe it. Here is he on Monday telling radio host Ray Hadley no one saw it coming: "The simple point that the Prime Minister is making is this, no one envisaged that the current way things are done would lead to a situation where Western Australia would just get 30 per cent of the GST that their people paid."

No one envisaged it, apart from Western Australia. Five years ago in 2011, when it got back 72 cents from each dollar of goods and services tax its residents paid to the Commonwealth, its budget papers predicted that by 2014-15 it would get just 33 per cent. In fact it got 38 per cent, a less severe downgrade than expected. A year later it predicted 25 per cent by 2015-16, and got 30 per cent.

You can say what you like about the Western Australians, but you can't say they didn't see this coming.

The Grants Commission distributes the GST pool according to need, and ability to pay. That's why the Northern Territory always gets back far more than it puts in: its highly disadvantaged Indigenous population means its needs are greater. It's why, ever since the start of the GST at the turn of the century, NSW and Victoria have got back somewhat less per person than they've put in: housing Australia's two most important cities and the businesses and real estate within them means they are able to raise more per head from their own resources.

Except that the Grants Commission moves slowly. By the time it has collected its evidence and divided up the pool, as many as three years can have passed, meaning Western Australians are suffering now because of the extraordinarily high revenue-raising ability they had earlier in the decade. But here's the good news: they knew back then it was going to happen and had time to prepare.

So what did they do?

Christian Porter was Western Australia's treasurer at the time. He is now a federal minister and is being talked about as a future federal treasurer, which makes his actions in Western Australia especially worth examining.

He spelled out the problem clearly enough. His 2011 budget said GST revenue would "fall dramatically" from $3.6 billion in 2011-12 to just $2 billion in 2014-15.

His response was to spend even more. He promised spending growth of 7.9 per cent in 2011-12, and achieved 10.2 per cent. And he borrowed more, boosting state government debt from $13.4 billion to $18.2 billion in two years. He borrowed for a new football stadium, a new purpose-built home for the Western Australian Institute of Sport, a new Perth Museum, a new hospital and new schools, and a $270 million Perth Waterfront Project, all in the middle of a construction boom when the cost of building was soaring.

He'd done some thinking about his looming revenue problem, and he'd come up with a plan. He spelled it out on page 64 of his budget paper 3:

"The prime minister has announced a review of the arrangements for distributing GST revenue grants among the states and territories," it said. "The review is likely to significantly alter Western Australia's GST grant share from 2013-14 onwards."

That was it. With one bound he would be free. All he would need would be Julia Gillard's agreement, and the agreement of the other states, and the problem would vanish. The system was "almost certain to change".

The other states laughed. Western Australia knew what was going to happen and had time to cut its coat according to its cloth. In the year that Porter announced his escape plan the Western Australian public service swelled 3 per cent. Public service numbers in the rest of Australia fell. In that year Western Australian public service salaries climbed 4.6 per cent. Even now, they are climbing 3 per cent. In the rest of the nation it's 2.4 per cent.

John Nicolaou runs ACIL Allen Consulting in Western Australia and was previously chief economist at the Western Australian Chamber of Commerce and Industry. He says the talk about changing the GST formula is a sideshow designed to draw attention away from financial mismanagement. During the boom years Western Australia got enough revenue to set it up for good. Instead it sprayed it around, even while it published forecasts of what was to come.

Turnbull and Morrison appear to have sympathy for the prodigal son, at least until after its state election. They shouldn't. Its latest forecasts show its GST share rebounding over the next three years in a delayed reaction to the end of the mining boom. A bailout, of any sort, would send the worst possible message about the views of Turnbull and Morrison and the consequences of governing badly.

In The Age and Sydney Morning Herald
 
 
Related Reading

. GST can’t fix flawed Budgets, Shane Wright, The West Australian

Read more >>

Sunday, August 14, 2016

Wondering whether to end a relationship? Toss a coin, seriously

What's the best thing to do when you are faced with one of those gut-wrenching decisions like whether to quit your job or have a baby or end a relationship?

When I was weighing up whether to leave the Treasury to work as a journalist a few decades back, my mother acted as if it was one of the most momentous decisions I would ever make. My father, who was more relaxed, said it would all be fine.

It turns out dad was right.

The perpetually curious Steven Levitt (best known as the author of Freakonomics) has just published an ingenious study titled Heads Or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness.

Levitt was frustrated that most of the laboratory studies involved small decisions such as whether to take an inconsequential gamble.

So for months he set up his own high-stakes website: FreakonomicsExperiments.com.

His greeting read: Have a problem? We can help. Sometimes in life you face a major decision, and you just don't know what to do. In the end, whatever you choose will essentially be a flip of a coin. Help us by letting Freakonomics Experiments flip that coin for you.

If they went further they were invited to choose a question or write one of their own, take a survey which had buried in it a question about happiness ("How happy would you say you are on a scale of 1 to 10?") then get the machine to toss a virtual coin, and complete follow-up surveys two and six months later.

The most asked question was "Should I quit my job?" followed by "Should I break up?"

As unlikely as it seems, 3869 people used the website to guide them through those decisions. Another 415 asked whether to have a baby  and 22,511 used it in total.

Roughly 63 per cent of those who took part did what the coin said, more than the 50 per cent that would have been expected by chance.

After two and six months the people who had thrown their lot in with the coin were happier than those who had not and must have used some other means to make their decision. And it's not just that they said they were happier. They were also asked to nominate third parties who were asked about their happiness both before and after.

For the really important questions (those about jobs, relationships and babies) the difference in happiness was "especially large – around one full point on a 10 point scale".

Doing what the coin said seemed to really matter. Levitt thinks he knows why. The people who did changed more often than the people who did not. Left to our own devices we've an inbuilt bias against change. Yet more often than we realise it's the best thing we can do. Levitt's no counsellor (he leaves that to his machine) but his advice would be that it's often worthwhile taking a leap into the unknown – far more worthwhile than we think.

In The Age and Sydney Morning Herald
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Saturday, August 13, 2016

Code Red: How the ABS bungled the census

In 2015, at what ought to have been the height of preparations for the 2016 census, its head, Duncan Young, sent his colleagues in the Bureau of Statistics executive a crisis memo.

"As most of you are aware, the census program has alerted its steering committee and board that it has assessed its status as RED," he wrote in February.

He put the word "RED" in capital letters.

"This means that we have assessed that the program will not be able to deliver on the current scope, timetable and/or budget. This status is as a consequence of both budget reductions since program commencement and program delays during 2014."

Young set out five options to shrink the census or save money, each "not taken lightly". One was to ask far fewer questions, another was to reach fewer people.

At the same time the Bureau's newly installed chief, David Kalisch, was war-gaming an even grander solution. Dubbed "Project Archer" after Keith Archer, the Australian Statistician who introduced computers to the ABS in the 1960s, it would make the 2016 census go away, freeing up $200 million to $400 million to upgrade the Bureau's aging computer systems, some of which ran code that was 30 years old.

His predecessor Brian Pink had left at the start of 2014, warning in his final annual report that the Bureau had barely enough cash to "keep the lights on".

When Pink arrived in 2007 the Bureau received $302 million in a non-census year. Seven years of growing expenses and relentless "efficiency dividends" later, it received scarcely any more, $312 million.

Pink had responded by axing or indefinitely postponing some of Australia's most loved surveys. One was the national time-use survey which records how Australians spend every 15 minutes. It hasn't been updated since 2006, before the arrival of the iPhone.

Kalisch was interviewed for the $705,030 job at the start of 2014 but wasn't appointed until December, leaving the Bureau without a leader during a year in which it was meant to be fine-tuning Australia's first predominantly digital census.

Tony Abbott and his treasurer Joe Hockey dithered because they didn't like the look of the candidate the selection committee had first recommended. Project Archer would deliver the census once every 10 years instead of five, directing the savings to buy new computers.

To sell the idea, Kalisch had to diss the census...

"There is a lot of, perhaps, misinformation about the value of census," he told a Senate hearing. "There is a sense in the community that a lot of the information is derived from the census, which is just not true."

The primary purpose of the census is indeed prosaic – it is to count the number of people aged 18 and over in order to determine the shape of electorates. It's why politicians are particularly keen on keeping it, and why cancelling it was always a big ask. The government said no, and gave the Bureau an extra $235 million over five years in order to upgrade its computer system.

But the census itself had to be cut-price, costing more like $200 million than the previous $300 million to $400 million. Work on the questions as good as stopped.

Every five years there's an additional special-interest question. It's incredibly valuable real estate, fought over in the same way as the payload on a mission to space.

In 2001 as Peter Costello was gearing up to replace John Howard as Australia's prime minister, he gave a speech about the "spirit of the volunteer" in an attempt to humanise himself.

As treasurer, he instructed the ABS to make the 2006 special question about volunteering, even though it already collected more detailed statistics on volunteering in another survey.

The Bureau reluctantly complied, and then when the Rudd government left it short of funds in the lead up to the 2011 census, left it in because it didn't have the money to devote to framing another question. By the lead up to this census it was short of money again and desperately short of time. It left in the ill-defined question for the third consecutive census.

Directed to actually conduct the census, and keen to extract some value from it, Kalisch and his team revived an idea categorically ruled out by his predecessor. Pink had said no to retaining names.

"It wasn't going to happen. I can tell you that," Pink said this week.

"I always used to say to my people: you can't kill the goose that lays the golden egg, and the golden egg is the census. In my view, you only need 20 per cent of Australians who are concerned about security and you put the census at risk."

When given the option of having their names and forms retained and stored in the archives for release a century later instead of being destroyed after processing, 39 per cent of Australians had said no. The immediate use of their names might have alarmed them more.

Names had always been retained for a short time in order to eliminate duplicates and establish the relationship between household members, but destroyed after checks, usually well before 18 months.

On October 19, Kalisch convened a meeting of his executive group. It agreed to conduct a privacy impact assessment into the permanent retention of names as well as exact addresses, which had also previously been destroyed after checking.

Whereas in Pink's day the privacy impact assessment had been conducted externally, and had savaged the proposal, this one would be conducted in-house "consistent with our practice with data integration projects and leveraging the experience and knowledge we have built since 2005".

Its publication along with a half-hearted endorsement from focus groups conducted by Colmar Brunton Social Research would be timed "to quickly follow" the release of the regular Trust in ABS survey which always produced impressive results.

Appearing before the Senate economics committee two days later, Kalisch said nothing about the plan to retain names and addresses. He made a short statement to "update the committee about our census preparations". Things were "on track" and momentum was building. A few months earlier he he had told the committee things were coming along "beautifully".

On December 8 the executive group considered the proposal in more detail. The ABS had published a statement of intent on its website on November 17, unreported in the mainstream press, and received just three responses, all negative, from what it termed "concerned private citizens".

The internal privacy impact assessment had given it a tick. The Bureau had sent a minute to the office of the assistant minister to the treasurer Alex Hawke, appointed a few weeks earlier by the new Prime Minister Malcolm Turnbull. A report prepared for the meeting said it had been "noted".

The Bureau wanted to build a reputation as Australia's "premier integrator of government data". If it couldn't retain names and addresses, potential users might see it as "unnecessarily constraining itself and therefore constraining whole-of-government data integration".

"There are many administrative datasets that are likely to have considerable statistical value," the report said. "In addition to the personal income tax data which has already been used in data integration projects, future data integration projects could include the use of welfare payments data, Centrelink unemployment benefits data, Medicare and Pharmaceutical Benefits Scheme data, Australian Immunisation Register, the electoral roll, and other nationally important datasets."

The report envisioned no limit on what the ABS could link and charge for, so long as the names and addresses themselves were kept within the ABS. Information from the census on ethnic or religious backgrounds could be linked to information from the immunisation register to work out what type of families on what types of incomes were the least likely to immunise.

Criminal records could be linked to census records, if permission were given, to see what sort of Australians were convicted of what sort of crimes.

Until that point the Bureau had mainly relied on "bronze" linkage – the rough linking of files using identifiers other than names and addresses. A move to "gold" linkage using names and addresses would get "maximum value for what is already one of the most valuable statistical assets the ABS holds".

On the Friday before Christmas, the Bureau released an eight-paragraph statement deceptively titled ABS response to Privacy Impact Assessment. Once more unreported in the mainstream media, it said the Bureau would retain the names and addresses collected in the census "to provide a richer and dynamic statistical picture of Australia through the combination of census data with other survey and administrative data".

In April, with the census imminent, after reports in Crikey and the Australian Financial Review, Kalisch backed down somewhat. Names would be kept for only four years, but the really useful linkage keys derived from them would still be kept indefinitely.

One of Kalisch's predecessors, Bill McLennan described what was planned as "without doubt, the most significant invasion of privacy ever perpetrated on Australians by the ABS".

"I am appalled that the ABS can think it can use the threat of prosecution to make me provide data that allows the ABS to set up what is, in effect, a statistical Australian Card," he wrote.

As it moved to counter declarations by Crikey reporter Bernard Keane and high-profile politicians including Nick Xenophon that they would either not complete the census or not provide their names, the Bureau emphasised the $180 per day fines. They applied for each day the forms weren't complete, without limit. Although the Bureau was also careful to point out that they applied only after September 23, the main message received was that the forms had to be completed on census night itself, August 9.

By 7.30pm, as millions of Australians tried to get online at once amid what may have been denial of service attacks, the system crashed and was taken down. It had been built by IBM for $9.6 million and load-tested by Revolution IT for $469,000. ABS robots, set up to automatically respond to tweets, encouraged Australians to continue to try to log on.

Kalisch had said just the day before the Bureau was "ready" with the best security features for which "you could ever ask".

The new minister, Michael McCormack, in the job for mere weeks, at first couldn't get through to Kalisch. McCormack had been appointed after an embarrassing interlude in which there seemed to be no minister responsible. Hawke's position had been abolished and neither treasurer Scott Morrison nor financial services minister Kelly O'Dwyer had been given the job. A fortnight after being appointed small business minister McCormack was told it was his.

Before the website went back online late Thursday Prime Minister Malcolm Turnbull promised an inquiry after which he said "heads would roll".

In The Age and Sydney Morning Herald
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Thursday, August 11, 2016

Defenders of banks are the ones who don't get capitalism

Why on earth am I attacking the banks? "They make profits, that's the way the capitalist system works," or so I have been told repeatedly since I questioned their decision to hang on to a good chunk of last week's official Reserve Bank cut in interest rates instead of handing it to their customers.

"It's not the job of government to dictate the margins of business," one of their shareholders told me. "Profits are the basis of free-market capitalism," another wrote.

That second claim is only partly right. And yes, sometimes it is the job of governments to restrain profits.

The founder of modern economics Adam Smith was the first to mount a case for the pursuit of profit.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," he wrote more than two centuries ago. "But from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love."

The search for profits - the search for that extra money that exceeds the cost of production - is what motivates the brewer, the baker and the banker. Without it they wouldn't bother. Yet miraculously, in pursuing profits each of them (Smith believed they were each men) ends up providing almost exactly what we need.

"He intends only his own gain," the author of The Wealth of Nations went on, in the sentence that came to define him. "He is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention."

I'm with Smith, completely (as you would expect from an economics editor). But reread him and you'll see that he isn't actually defending high profits, or even profits at all...

He is defending the pursuit of profits. As the American satirist PJ O'Rourke notes in his excellent book about The Wealth of Nations, Smith thought attempts at super profits would be competed away. That was how the pursuit of profit benefited customers. Unrestrained profits were "always highest in the countries which are going fastest to ruin".

On Wednesday the Commonwealth Bank announced an unrestrained record profit of $9.45 billion. Its return on equity was well above 15 per cent at 16.5 per cent, way in excess of the 11 or 12 per cent typical of companies listed on the stock exchange, and far above the typical return for unlisted companies which is closer to zero.

The figures show the Commonwealth went out ahead of the other Big Four banks in announcing it wouldn't pass on the full cut because its net interest margin (the difference between what it pays for money and what it charges) had slipped from 2.09 to 2.07 per cent. It wanted to build the margin back up.

There was nothing to stop it.

In the United Kingdom a week later, greater competition and a sense of decency obliged all of the big banks to fully pass on the Bank of England's cut. The banks over there get by with returns on equity of less than 10 per cent.

There's something wrong with a culture in which investors expect such obscenely large returns in order to invest. Australian Competition and Consumer Commission chief Rod Sims sees it repeatedly when airports, ports and the like are privatised.

In order to get its sale of the Port of Melbourne over the line, the Victorian government at first offered to lift the rents charged by the port 750 per cent. The federal government got a magnificent price for the Sydney Airport by doubling landing charges, removing the regulation of landing charges and offering the new owner right of first refusal over any second airport. The new owners probably run the facilities better, but from the point of view of their customers, there's scarcely any point.

"I've always felt that commercial enterprises are better off in the private sector," Sims tells me. "But the only way the community benefits from that better operation is if either they are being sold into a competitive market, or if it's not competitive [as with electricity distributors], there's appropriate regulation in place.

Within months of taking over, the new operator of the port of Newcastle raised its fees 50 to 60 per cent. It then revalued the port it had bought for $1.75 billion to $2.4 billion. It did exceptionally well at our expense, but the government that sold the port did not.

Last year University of Queensland economist Paul Frijters and University of NSW economist Gigi Foster examined the make-up of the BRW 200 Rich List. More than half had made their money from property (where rezoning helps), from mining (where leases are granted) or from investments. They concluded most of Australia's richest got there in industries subject to political favours, hardly any by inventing something new.

It's a mentality that's holding Australia back while enriching those lucky enough to be in those industries. It's why shareholders get upset when I talk about our banks. It's why we need real competition, or regulation. To make them work for us.

In The Age and Sydney Morning Herald
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Wednesday, August 10, 2016

Census meltdown just the latest Bureau of Statistics bungle

"Reckless" doesn't begin to describe the new culture at the top of the Bureau of Statistics.

Its most important product apart from the census is the monthly employment survey. Two years ago it decided to modernise. It moved much of it online, accepted a lower response rate and changed the months in which different questions were asked.

Against the advice of ABS veterans, it didn't run a backup survey using the old system.

In August 2014 the number of Australians officially employed jumped an incredible 121,000. The next month, September, it dived 172,000, or it would have had the ABS not pleaded with users to ignore the seasonally adjusted numbers which it no longer trusted.

Without a backup – a parallel employment survey conducted under the old system – it was impossible to tell what was wrong and what was right....

With no leader, treasurer Joe Hockey and prime minister Tony Abbott had left the position at the top unfilled for the best part of a year, the ABS developed grander plans.

It wanted to abandon the 2016 census altogether, moving from five-yearly to 10-yearly, to save $200 million.

Told by the government that would require legislation that would be unlikely to get through the Senate, it decided to get extra value by using the names collected with the census to create permanent linkage keys. Previously destroyed after processing, the names would be kept indefinitely in a separate file and used to link the answers to census questions to the answers to other ABS surveys and data collected from organisations such as the Pharmaceutical Benefits Scheme and the Australian Tax Office. If it could find out whether Australians or certain ethnic backgrounds or family circumstances were more likely to claim certain tax deductions or be prescribed certain medicines it could sell the results.

The only problem was that it had put up the idea before to an independent privacy impact assessment, which had savaged it. So it conducted its own assessment in house, which found no problem. It published the results quietly late last year (there was nothing about in in the mainstream press) and then on the Friday before Christmas announced it would retain every name indefinitely in a press release with the misleadingly bland title of: ABS response to Privacy Impact Assessment.

By April it had backed down. It was going to keep the names for only four years, but it would keep the linkage keys created from them for as long as would be needed, which could be forever.

Woefully unprepared to explain why it now wanted to retain names, it emphasised instead the digital nature of the census. It would save millions by posting login codes to most of the population rather than delivering forms. Had it delivered, or even posted, forms it would have had a backup.

Instead it gave most of Australia only one way to submit census forms, emphasised the importance of the survey it had previously tried to ditch, threatened fines of $180 per day for people who didn't comply, and underestimated either the strain on the system or the security of the system.

At almost every step of the way the government has been hands off. The latest minister (Michael McCormack has been in charge of the ABS for less than two weeks) gives the impression the decision to retain names didn't even go to cabinet.

There's already been an inquiry into the ABS. It found it was not properly ready "to maximise the value of all government-held information". Which might be part of the problem. Until now one of Australia's most trusted organisations, it has tried to catch up too fast. The government has looked the other way.

In The Age and Sydney Morning Herald
Read more >>

Monday, August 08, 2016

Census 'no worse than Facebook': minister

The minister responsible for the census has compared it to Facebook, saying concern about its ability to track people is "much ado about nothing".

Michael McCormack, who also has responsibility for small business, was responding to Senate powerbroker Nick Xenophon, who on Monday vowed to withhold his name from the census and face fines of $180 per day rather than have his name kept on file.

The Bureau has announced that the names collected in this year's census will be retained instead of being thrown away after processing, as in the past. They will be used to create linkage keys, which will allow the personal information in the census to be linked to information gleaned from other surveys to provide a richer picture of those surveyed. The answers could also be linked to medical, criminal, road traffic and educational records.

Although the names will be destroyed within four years, the linkage keys created from the names will be kept indefinitely.

Senator Xenophon foreshadowed legislation to make the provision of names voluntary, which he says he will attempt to backdate to Tuesday night's census...

Mr McCormack said the government would examine Senator Xenophon's proposal "in the fullness of time" but expected him to fill out his census form regardless.

"I think we're making far too much of this, names and addresses and privacy breaches," he said. "Anybody with a supermarket loyalty card, anybody who does tap-and-go, anybody who buys things online, they provide more information indeed probably to what is available to ABS staff."

"I note with some humour really that many people are going on Twitter and Facebook making various comments about the Bureau of Statistics, about the census, and about me as well, when in fact wherever they go, it tracks you, on your Facebook account, so I can't really see what the big deal is. I think sometimes it's much ado about nothing."

Reminded that the census was compulsory, whereas Facebook and Twitter were not, Mr McCormack said the census had to be compulsory "to allow the government and the Bureau to track people, and for governments to get the raw data so that we can provide the sorts of infrastructure".

The Bureau's chief, David Kalisch, said people were more likely to tell the truth if they had to provide their names.

Senator Xenophon said the knowledge that the names would be retained and turned into keys used to track them might make people less likely to tell the truth on census forms. He warned that it could be "financially crippling" for others to follow his lead. He would have to think about whether he went to jail rather than pay the fines.

Mr McCormack said Mr Kalisch had briefed Senator Xenophon late in the day and believed his position had softened.

"I am sure he will be better informed, and I look forward to him filling out the census, like the other 100 per cent of Australians should," he said.

Speaking on his return to Adelaide from Canberra late on Monday, an angry Senator Xenophon said the briefing consisted of him listening on the phone for 15 minutes before catching a plane.

"Listening politely to someone does not mean you agree with their position," he said.

Senators Sarah Hanson-Young and Scott Ludlam will also refuse to provide their names.

Anna Johnston, a former deputy NSW privacy commissioner, writes in Fairfax papers on Tuesday that she won't be completing the census at all because she hasn't been asked for consent to being tracked by her name.

"I know that I could give the ABS misinformation instead," she writes. "But I won't do that, because I do believe in the integrity of the census data. I don't want people to have to give misinformation in order to protect themselves."

Mr McCormack said the decision to retain names was taken by the Bureau rather than the government but that the government approved of it.

ABS census chief Duncan Young said more than 200,000 people had already submitted their online forms. Many more had started to complete them, saved them and not yet pressed 'send'.

In The Age and Sydney Morning Herald
Read more >>

Sunday, August 07, 2016

Census. Your personal details can be used indefinitely

The next time you're surveyed by the Bureau of Statistics it'll know more about you than you think you've told it.

The bureau says it'll be able to "enhance" its future surveys by using answers from the census that it believes are from the same person. So if you tell next Tuesday's census your place of birth or religion or family circumstances the answers might be added to the answers you give to future surveys using a "statistical linkage key" that will be created from the name you submit with the census.

For the first time, your name will be held for four years, instead of being destroyed after processing as has happened in the past. The names themselves will be destroyed within four years, but the linkage keys will be kept indefinitely, meaning the answers to future survey questions can be linked to answers from the census even after the names have been removed.

"There are likely to be some scenarios when it provides a benefit to the people we are surveying," explains the head of the Bureau's census program, Duncan Young. "We won't have to ask for as much information."

Asked whether Australians taking part in door-to-door surveys would be told their answers would be linked to information from their census forms, Mr Young said they might not be told directly.

"That information would be publicly available, but we don't stand at the doorstep and go through every step of our privacy policy with every household," he said. "We make them aware that it's available."

The linkage keys would also be available for use by researchers who wanted to link census records to medical, criminal and administrative records, but the researchers would not be able to see the keys. The bureau would do the linking on their behalf.

"The linkage keys are never released to anyone," Mr Young said. "They will not leave the bureau, even within the bureau we have functional separation which means someone can access names to create a linkage key, someone else can use linkage keys to link data sets together but can't actually access the data sets, and someone else can access the composite data set, so there are three different steps."

Vice chairman of the Australian Privacy Foundation David Vaile said no matter how securely the keys were stored within the bureau, they had the potential to create a focal point for storing information about individuals.

"One of the concerns we had about the proposal to create an Australia Card identity register in the 1980s was not the idea of the card, but the idea of a single key, a unique number that unlocked the whole thing, that enabled a virtual dossier to be pulled together from all sorts of different data collected for different reasons, with different justifications," he said.

Mr Young said the decision to keep names in order to link census data with other data had not been a particularly notable concern of the people who have been ringing the census hotline.

"That's not why the public are contacting us," he said. "The public are contacting us because they want to get a paper form, they want to know whether they can they complete it before census night, they want to know what they should do if they are out of the country, it's nowhere, it's not even in the top list for us in terms of our public inquiries."

However, former Australian statistician Bill McLennan said the census was "without doubt the most significant invasion of privacy ever perpetrated on Australians by the ABS".

The bureau has contracted IBM to run the website interface meaning that that the 68 per cent of people expected to complete their forms online will have their answers sent to IBM data centres in Australia before being sent to the ABS. Mr Young said the answers would be encrypted from the moment they left each computer and could only be decrypted when they arrived in the ABS. IBM would not hold a decryption key.

More than 200,000 Australians had already submitted their forms and IBM had reported that many more had started filling them out and saved their answers for submitting later.

The online forms were being completed 10 per cent faster than in the 2011 census, perhaps because of faster internet speeds or the improved design. This year's forms work out what questions not to ask and refill answers based on earlier answers to avoid retyping, but they don't make use of information the Bureau already has. "The form is in no way prefilled. When you fill out the form we know absolutely nothing about you," Mr Young said.

In The Age and Sydney Morning Herald
Read more >>

Thursday, August 04, 2016

Only a royal commission will stop the banks ripping us off with impunity

Who said royal commissions don't matter? For as long as Labor was holding out the prospect of one in the lead up to the election, the banks behaved themselves.

On the first Tuesday in May, as Labor ramped up its rhetoric about a commission and the Prime Minister prepared to call the election, the big four banks passed on almost every cent of the Reserve Bank's 0.25 point rate cut. Westpac, the Commonwealth and the NAB passed on the entire 0.25 points, the ANZ passed on 0.19.

But with the election out of the way and the Coalition returned (with financial support from the banks that will be revealed shortly) they are once again acting as they would have were their behaviour not about be dissected by a royal commission: they are hanging on to a good deal of the largess the Reserve Bank handed them on Tuesday and using it to shore up their profits instead of helping their customers.

No other Australian businesses, with the possible exception of Telstra, act as if they have the right to maintain their profits no matter what. Most are busy cutting their margins to keep customers.

Westpac has even talked about a "line in the sand" which it is unwilling to cross. Westpac achieves a 14.2 per cent return on equity, the National Australia Bank 14.1 per cent, and the Commonwealth Bank, 17.2 per cent. They are extraordinarily high returns. The banks' shareholders get their money back every seven years. Many other businesses would be lucky to get it back in 12.

The window-dressing that enabled the Commonwealth Bank to pass on only $23 of what should have been a $44 per month cut in the cost of servicing a $300,000 home loan was that it was supporting its other customers by increasing the rate it paid term depositors. It's probably the only time in history a rate cut has been used to justify a rate increase. But in any event, the gift to depositors isn't what it seems. It only applies to term deposits (which are more valuable to the banks than other deposits because the capital adequacy rules mean they need less of them to back each loan) and only to certain types of term deposits. The National Australia Bank increased its rate on only one type of term deposits – those that last eight months, an adjustment so token as to be contemptuous.

Macquarie Equities believes the banks' stinginess on Tuesday will boost their earnings by 2 to 3 per cent. It notes dryly that their gifts to depositors are "likely to be unwound over time with limited impact on profitability".

Given how far Australian and international rates have been falling, mortgage rates ought to be an awful lot lower than they are.

Since it peaked in 2011 the Reserve Bank's cash rate has slid 3.25 points. Yet after a series of grudgingly small cuts including their latest, the banks will have cut their deposit rates only 2.5 points.

Since the global financial crisis the US Federal Funds rate has slid 5.5 percentage points and the Bank of England's base rate 4.5 percentage points. Each is not too far above zero, and many other international rates are negative. Our big banks have been parsimonious in passing on Reserve Bank cuts, not because their cost of funds wouldn't allow them to do so, but because of their determination to shore up their profits in the face of increasing competition from other lenders who've been stealing their customers.

It's an odd approach to losing customers that cost Woolworths dearly when it tried it a year or so back. Instead of competing on price to win them back, it quietly boosted its margins and wound back its service, losing even more as a result.

The banks probably believe they won't lose many customers, or won't lose enough to offset what they'll make by fattening their margins. History suggests they are right. No matter how many times Labor's Wayne Swan implored bank customers to "vote with your feet" and no matter how many bank-switching packages he introduced, about 75 per cent of the money lent for mortgages continued to be lent by banks, down from 85 per cent. What he investigated doing, but didn't, was to introduce a "mobile phone" style switching service where all you needed to do was to give your new lender your old account number and they would switch for you. The banks persuaded an inquiry he commissioned that their computers couldn't handle it.

The banks continue to keep customers because they are trustworthy. They are trustworthy because the government guarantees their deposits. Yet ever since it sold the Commonwealth Bank in 1991 it's been powerless to prevent them from extracting everything they can from the money-making machine it provides.

A government genuinely concerned about rip-offs would set up its own bank. Google "pension loans scheme" and you'll discover the apparatus is already in place. Or it could impose a super-tax on banks as Britain's Conservative government did at the same time as it wound back general company taxes. Until someone does, or until someone actually calls a royal commission, they'll continue to do whatever they want.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, August 02, 2016

Banks short-change mortgage customers

Australia's biggest banks have short-changed their mortgage holders by passing on only a fraction of the Reserve Bank's 0.25 percentage point cut in interest rates, several of them choosing to reward depositors instead by lifting term-deposit rates.

The Commonwealth Bank will cut its standard variable mortgage rate from 5.35 per cent to 5.22 per cent rather than 5.10 per cent, meaning customers on a $300,000 mortgage will get a benefit of only $23 a month instead of $44.

At the same time, it will lift its one, two and three-year term-deposit rates to 3 per cent or higher, in a decision it says considers the "needs of both borrowers and savers".

The National Australia Bank and ANZ banks will be more stingy still, cutting their standard mortgage rate by just 0.10 and 0.12 points to 5.25 per cent. Westpac cut its standard mortgage rate by 0.14 points to 5.29 per cent.

The cuts follow a decision by the Reserve Bank to cut its money-market cash rate to an all-time low of just 1.5 per cent in order to boost employment and economic growth. The Bank will expand on its reasons on Friday in an economic statement that will spell out its concerns about underemployment and a sluggish labour market.

In his statement announcing the cut, Governor Glenn Stevens downplayed concern that it would reignite housing prices, saying the most recent information suggested that housing prices had been rising "only moderately over the course of this year, with considerable supply of apartments scheduled to come on-stream over the next couple of years."

Growth in lending for housing purposes had slowed. "All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished," the Governor said.

The cut is the second this year and the 12th in the five years since the peak of the mining boom in 2011. At the height of the boom, the cash rate was 4.75 per cent and the standard variable mortgage rate was 7.8 per cent.

Watermark Funds Management investment analyst Omkar Joshi estimated the Commonwealth would save itself roughly $400 million by cutting its mortgage rates by 0.13 percentage points instead of 0.25 points. The saving would be offset to some extent by the extra cost of paying more to term depositors.

Treasurer Scott Morrison supported the banks' actions but said it was up them to explain them, rather than him.

"What I am saying is that they have lifted deposit rates and that obviously comes at a cost as well for them in terms of what they pay out, so they've got a package of response to this rate announcement. Now in a very low-rate environment, which we are clearly in, then for the banks to be able to actually say something to depositors, it's not often when you get a cut in the cash rate that depositors actually get a bit of good news," he said.

Asked whether the banks could have passed on the full amount he said there was "no real argument based on cost of funds that would mean that they shouldn't pass those on.

"But I do note that they have actually taken another action and that is to lift deposit rates," he said.

"You've got to look at the deposit-rate increase and the mortgage-rate decrease as a package of response."

The National Australia and Commonwealth banks announced their decisions within two hours of each other, the others following later. In 2011, the then-treasurer, Wayne Swan, introduced special price-signalling legislation, which made it illegal for them to communicate their decisions to each other.

Mr Morrison passed up an opportunity to attack them for their decisions saying he wanted to get away from "the same merry-go-round of all of those sort of opportunistic responses that happen after a rate decision by a bank".

The Reserve Bank's statement gave no guidance as to when it would next cut. Financial markets are pricing another cut of 0.25 points by next May.

 

How the big banks cut

Westpac: 5.29% (cut of 0.14 points)

NAB: 5.25% (cut of 0.10 points)

ANZ: 5.25% (cut of 0.12 points)

Commonwealth: 5.22% (cut of 0.13 points)

Read more >>

Reserve Bank rate cut: Why did banks respond as one?

Our biggest banks move fast. Either that, or they collude. At 2.37pm on Tuesday, within minutes of the Reserve Bank cutting its cash rate to an all-time low, the Commonwealth Bank announced a completely different way of responding. Instead of passing on some or all of the cut, it would only pass on half and hand some of the rest out to customers as higher term-deposit rates.

Less than two hours later, at 4.31, the National Australia Bank had announced its own variant on the idea. Either it had very quickly assessed the Commonwealth Bank's plan and ran a variant of it through all of its decision-making processes, or it had some inkling of what the Commonwealth might do, which would probably be illegal under the anti-signalling provisions introduced into competition law in 2011 by the then treasurer, Wayne Swan, in frustration with a string of coincidences in the way the banks responded to Reserve Bank rate moves.

Of course, there's another possibility, a genuine coincidence. The NAB may have independently made the same tentative decision as the Commonwealth ahead of the Reserve Bank's announcement and had its announcement ready to go.

Glenn Steven's decision needs less explaining. The Reserve Bank governor could see the labour market needed a boost and that knew. Australia's ultra-low 1 per cent rate of inflation didn't stand in the way. Nor did the prospect of a boom in house prices. Although the CoreLogic data series shows home prices climbing 5.6 per cent in Sydney and and 3.5 per cent in Melbourne just the last three months, most other data series don't. The Reserve chose to believe the other series, and the data that shows home loans and real estate turnover slowing.

The Reserve has no plans to cut rates again for some time, certainly not in Glenn Stevens' time. The Governor retires next month, having overseen a tumultuous period in which he drove the cash rate up from 6 per cent to 7.25 per cent and then all the way down 1.5 per cent, a previously unheard-of low.

 

How the big banks cut

Westpac: 5.29% (cut of 0.14 points)

NAB: 5.25% (cut of 0.10 points)

ANZ: 5.25% (cut of 0.12 points)

Commonwealth: 5.22% (cut of 0.13 points)

 
Read more >>

Monday, August 01, 2016

Life expectancy. Why the census wants your name

Until very recently the Bureau of Statistics had next to no idea how long Indigenous Australians lived.

It relied on the data funeral directors produced when they ticked boxes on death certificates. Crudely adjusted for guesses about under-reporting, it showed Indigenous Australians dying an average of 17 years earlier than the rest of the population, the figure quoted by former prime minister Kevin Rudd in his apology to Indigenous Australians in 2008.

But behind the scenes the figure was mocked. It seemed to show Australia performing far worse than other nations with Indigenous populations. So during the 11-month window in which it retained the names on the 2006 census forms, the Bureau tried something better. It linked the names to the names on death certificates.

What it found was shocking, in a good way. Instead of dying 17 years earlier, Indigenous Australians were dying 10 years (women) to 12 years (men) earlier.

Sydney University demographer Richard Madden says his initial reaction was "fear".

"I thought that politicians would say: 'Oh we've got the gap down from 17 years to 10, we don't need to do as much'. Amazingly, that didn't happen. Apart from that, my reaction was delight that we now had a much, much better, more rigorous method of looking at life expectancy."

The rigor was improved in 2011 census in which names were once again linked to death records for a limited time and will be improved further in next week's 2016 census when for the first time names will be kept and linked to other data for four years, enabling a more detailed breakdown of Indigenous deaths by age and gender.

University of NSW demographer Ching Choi says the longer names are kept the better.

"The longer you link deaths, the more deaths you record. The number of Indigenous deaths each year is very small, around 2000 to 3000. If you want to analyse, say, Victoria, you are talking about only a few hundred. So if you keep names for more months you get better quality data."

The Bureau's plans to hang on to the names we provide on Tuesday week has aroused the ire of privacy experts and a former Australian Statistician, Bill McLennan, who says it's "without doubt the most significant invasion of privacy ever perpetrated on Australians by the ABS".

But Australian National University demographer Liz Allen sees it as way to make surveys less invasive.

"If you were to ask people what medication they are taking, most probably wouldn't be able to tell you or would find the topic too sensitive," she says. "But linking the census data to pharmaceutical benefits records can get that data and get it linked to all sorts of other information without the need to go back to people over and over again."

Labor frontbencher Andrew Leigh said the Turnbull government had "botched" explaining the change but urged Australians to complete their forms accurately regardless.

"Extraordinarily, there seems to be some confusion in the government about which minister is responsible for the census," he said. "Treasurer Scott Morrison and Financial Services Minister Kelly O'Dwyer have left the task of explaining this solely to the Australian Bureau of Statistics, which is already busy enough without having to do their jobs as well."

Fairfax Media understands that late last week Small Business Minister Michael McCormack was given responsibility for the ABS, a role previously held by the parliamentary secretary to the treasurer, Alex Hawke, whose post was abolished in the post-election reshuffle.

Dr Allen said the census names would be coded and closely guarded. Under the Census and Statistics Act not even the Prime Minister could demand access.

In The Age and Sydney Morning Herald
Read more >>

Housing no impediment as Reserve Bank prepares to cut

Apparent strong house price growth in Sydney and Melbourne is unlikely to dissuade the Reserve Bank from cutting interest rates on Tuesday, in part because it's not what it seems.

The CoreLogic home price index jumped 3.1 per cent in Sydney and 1.6 per cent in Melbourne after the Reserve Bank cut rates in May, and then a further 1.2 per cent and 0.8 per cent in June sparking fears that the Bank had ignited a new house price boom.

The jumps were inconsistent with other data showing that sales volumes and credit growth were weak.

Now Reserve Bank watchers believe they've cracked the puzzle. CoreLogic changed the way it calculated its indexes in May, adding to the apparent increases in cities whose prices had a history of rising quickly.

Until May it had removed extremely low and high prices from its index using bands defined in dollars. In May it switched to using bands defined by the top and bottom few percent of prices. Bank watchers believe the change pushed up the apparent price rises in Sydney and Melbourne, meaning the actual increases are less alarming.

If Tuesday's Reserve Bank board meeting believes this is so, it'll be left with few reasons not to cut its cash rate.

At just 1.7 and 1.3 per cent the Bank's trimmed mean and weighted index underlying measures of annual inflation are the lowest in records going back thirteen years. The headline rate is 1 per cent, well below the Bank's target of 2 to 3 per cent.

Employment is growing more slowly than new entrants to the labour force. Over the past six months employment has climbed 43,000 while the number of Australians looking for jobs has climbed 51,2000. A switch to part-time jobs means there were fewer hours worked in June than in January.

With neither inflation nor the labour market nor real estate prices an impediment, the Bank is likely to move its cash rate from 1.75 to 1.5 per cent on Tuesday, timing that will allow Governor Glenn Stevens to explain the reasons in the quarterly statement on monetary policy due out on Friday and in his final public speech to the Anika Foundation in Sydney the following Tuesday.

Governor Stevens retires on September 17 to be replaced by his deputy Philip Lowe, who is already a member of the board.

Tuesday's meeting will be the first for economic consultant Ian Harper, a former head of the Fair Pay Commission and chair of the government's competition review. He replaces a Labor appointee John Edwards who worked as an advisor to former prime minister Paul Keating.

Betting on the futures market assigns a 64 per cent probability to a cut on Tuesday, and a 100 per cent probability of a cut by November.

The Australian National University's so-called "shadow board" made up of nine market and academic economists including former Reserve Bank board member Warwick McKibbin believes the board should keep rates on hold, citing improved capacity utilisation, steady consumer and business confidence and slowly growing retail sales. It attaches an 18 per cent probability to a rate cut, up from 11 per cent last month.

Veteran RBA watcher Bill Evans said he thought the Bank was on track for a rate cut on Tuesday but that it would be a "close call".

"In my experience, when conditions are this close the better approach is to forecast what you see to be the best policy and that is another cut.," the Westpac chief economist said.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, March 22, 2016

Revealed. The 56 Australian millionaires who pay next to no income tax:

Paying tax has become optional for 56 of Australia's highest earners.

Newly-released tax statistics show each of the 56 paid next to no income tax in 2013–14, not even the Medicare Levy, even though each earned more than $1 million.

But escaping tax cost the millionaires dearly. The same document shows 27 of the 56 claimed a combined $46.7 million for the "cost of managing tax affairs", around $1.7 million each.

The Tax Office says "cost of managing tax affairs" includes the cost of preparing and lodging tax returns, the fees paid to recognised tax advisors, the cost of court appeals and interest charges imposed in relation to tax disputes.

Combined, the 56 earned $128.6 million, around $2.3 million each.

The claims for the cost of managing tax affairs are so big in relation to their reported incomes as to raise suspicions that at least some had access to extra income they did not report.

Each of the 56 managed to drive their taxable incomes down below the $18,200 tax-free threshold. Fifty-one managed to drive their taxable incomes down below $6000. Forty-three reported taxable incomes of zero. Eight reported combined losses of $19.3 million.

Fifteen claimed a combined $21 million for gifts or donations to charities and political parties, equating to $1.4 million each. Three claimed deductions for uniforms or clothing, amounting to $150 each. Seven claimed deductions for interest payments, amounting to a combined $4 million.

Nine had been unsuccessful farmers, carrying forward previous losses of $6 million. Four had been unsuccessful in other businesses, bringing forward previous losses of $18.1 million. Seventeen had sold assets at a loss, carrying forward capital losses of $28.2 million. Five negatively geared, losing between them $240,000 in rent.

All but two paid no income tax at all. One paid $3603, the other was asked to pay just $4...

>Millionaires weren't the only high-income Australians who managed to bring their taxable incomes down below the tax-free threshold. Another 117 high earners taking home between $500,000 and $1 million managed to drive their taxable incomes below the $18,200 tax-free threshold, paying no tax. They paid a combined $15 million to manage their tax affairs.

Another 2305 Australians earning between $100,000 and $500,000 succeeded in bringing their taxable incomes below the tax-free threshold in order to pay no tax. Between them they made $420 million. After deductions they lost a combined $38.2 million. They spent $47.9 million managing their tax affairs and lost $16.2 million negatively gearing.

A Tax Office spokesman said there were legitimate reasons wealthy taxpayers might escape paying tax in any particular year. Nevertheless wealthy taxpayers that do not pay tax were more likely to attract the attention of the Office and be subject to further scrutiny to ensure they are complying with their obligations.

"It is the Tax Office's role to safeguard Australia's tax and superannuation systems and ensure a level playing field," he said. "A key part of this is working closely with individuals we have identified as being wealthy (controlling assets between $5 million -$30 million) or highly wealthy (controlling more than $30 million)."

The figures show 1.26 million Australians negatively geared during 2013–14, around 1 in every 10 taxpayers. A further 777,000 rented properties for profit. The negative gearers lost $11 billion between them, far more than the $7.2 billion made by landlords who rented for profit.

The average wage or salary income in 2013-14 was $56,690. The highest taxable incomes, averaging $200,015, were found in the Sydney postcode of 2027, which takes in Darling Point, Edgecliff, Rushcutters Bay and Point Piper in the Prime Minister's electorate of Wentworth. The second-highest average taxable incomes of $167,407 were in the Melbourne postcode of 3142, which takes in Hawksburn and Toorak.

In The Age and Sydney Morning Herald

 

 

 

 

Read more >>

Thursday, March 17, 2016

Expect great things from Turnbull’s first budget. No, seriously

While the media has been obsessing about tax, Malcolm Turnbull has been focused on setting Australia up. To do it, he'll need to borrow big sums of money for exceptionally long periods at at extraordinarily low interest rates.

We should have done it sooner. Right now Australia can borrow for 10 years at 2.7 per cent, just a few points above the the Reserve Bank's inflation target of 2.5 per cent, meaning we are able to get money for close to nothing. But it's still unattractive for long-term projects because there's a risk that in a decade's time when the loans have to be refinanced, the new rates will be higher. So Turnbull's looking at borrowing for 30 years.

Australia has never before issued 30-year bonds, although we have been experimenting with borrowing for 24 and 25 years. The US and Britain borrow for 30 years and get certainty for their repayments right through the life of very big projects.

What will Turnbull want the money for? Here's where it gets interesting. He dropped broad hints in a speech in Sydney on Friday.

The mining boom was made possible by investment in physical infrastructure such as mines, railways and ports. Over time it will make Australia rich. Turnbull believes the next boom will also require physical investment. If it's the result of people providing services in fields such as finance, law, health and others not dreamt of, you may think it requires little more than people, a good education system and the phone system or national broadband network to bring them together.

The Grattan Institute finds that workers in the Melbourne CBD (including Docklands and Southbank) typically produce $87 an hour, much more than the Melbourne-wide average of $53. Workers in the Sydney CBD produce $100 an >hour, much more than the Sydney-wide average of $61. The combined CBDs of these two cities alone – a landmass of just 7.1 square kilometres – accounts for nearly 10 per cent of Australia's production, three times what's produced by agriculture.

Turnbull quotes economist Edward Glaeser, who wrote Triumph of the City, to make the point that cities are our greatest invention. We not only work better when we rub shoulders with others, we are also more likely to be hired by them, more likely to hire them and more likely to steal ideas from them.

The fact that people need to work with each other and bump into each other was a point never acknowledged in the screeds of reports Labor commissioned about how the NBN would free us from travelling in to work.

Getting more people into cities boosts the Australian economy, boosts incomes and boosts government revenue. Which is where the budget comes in.

Turnbull's predecessor funded roads more or less as he wanted. He didn't insist on thorough analysis. And despite labelling himself the infrastructure prime minister, Tony Abbott never spent that much money. Turnbull is prepared to spend more, so long as it can be rigorously demonstrated that the project will pay dividends.

In Britain it is done through so-called "city deals". If a city such as Manchester can demonstrate that a road or rail line that gets more people into it will lift incomes, the central government backs it as a long-term investment. It knows it will cream off one-third of the extra earnings in tax. The Melbourne Metro would have passed such a test. The East West Link would have failed it...

As well, Turnbull will insist that the states go further than they have been prepared to in grabbing benefits for themselves. Traditionally when a railway station or a hospital opens in a new location, the nearby businesses and landowners get a windfall. Turnbull wants the states to grab a large chunk of it, perhaps charging the locals a third of the increase in value of their businesses or their homes. Then he'll need to put in less, funding perhaps four major projects for what would have been the price of two.

States talk about capturing value, then chicken out. They don't like offending the locals. Turnbull wants to give them cover. By insisting that they won't get anything unless they grab some of the proceeds for themselves (and perhaps for the Feds) he'll allow them to say he made them do it.

Value capture isn't a new idea, just one that's fallen into disuse. Melbourne's underground rail loop was funded in part by a long-running 1 per cent levy on the value of land held by city businesses and householders. It turned out to be more than worth their while.

Turnbull's major projects minister, Paul Fletcher, will produce a discussion paper outlining how value-capture will work within weeks. It could open the way for all sorts of projects previously regarded as uneconomic or not yet economic, including a Melbourne-Brisbane freight rail line, a railway to the site of Sydney's second airport,  and (perhaps) a Melbourne-Brisbane high-speed passenger line.

At the same time it would close the door on future projects like Peninsula Link, that arguably did little more than allow high-income Melbournians to escape quickly to their holiday homes.

If he is really bold, Turnbull will change the way the budget is presented, showing the income and expenses related to the ordinary running of government on one page (where the deficit is hopefully shrinking) and the borrowing and spending on major projects as well as the projected payoffs on another (where the borrowing will be hopefully growing).

It will take some explaining. But Turnbull, more than any prime minister since Hawke, is capable of explaining good ideas and taking the Australian public with him. The rare coincidence of unusually low long-term interest rates and good ideas with demonstrable payoffs is too good to waste.

In The Age and Sydney Morning Herald
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Thursday, March 10, 2016

Negative Gearing. It's turning us into landlords and serfs

Once we talked about the great Australian dream. Now it's something meaner: "getting ahead".

The great Australian dream meant owning your own home. "Getting ahead" means getting ahead of someone else. It's how Treasurer Scott Morrison sees the Australian dream.

"I think it is great in this country that people want to aspire to do better and provide for their kids, so I don't judge people for actually wanting to get ahead," the treasurer told radio host Neil Mitchell a few weeks back. "That's what this country is about."

It's certainly what negative gearing is about. "The vast bulk of Australians who use negative gearing are just trying to get ahead and trying to get their family in a better position," Morrison says. But negative gearing only gets them ahead if prices climb. The more that people negatively gear in order to get ahead, the more prices climb. The further they climb, the harder houses become to buy. And the harder they become to buy, the more the Australian dream recedes.

This is what has happened. Back before the explosion of negative gearing around the turn of the century, 52 per cent of Australians aged in their mid-20s to mid-30s actually owned their home. At the most recent census in 2011 it was 47 per cent. Before the turn of the century, 70 per cent of Australians aged in their mid-30s to mid-40s owned their own home. It's now 64 per cent.

The negative gearing-driven explosion has made it harder for Australians to buy houses to live in. Here's how Luci Ellis, head of the Reserve Bank's financial stability department, puts it: "It's a truism that if an investor is buying a property an owner-occupier is not."

It gets better, for investors: "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."

Betting on prices going up becomes a self-perpetuating machine. The further they climb out of reach of owner-occupiers, the more the Australian dream recedes and the more renters there are to rent to, which allows investors to bet still more on prices rising.

The man who chaired the inquiry that Ellis spoke to was John Alexander, the Liberal member for Bennelong. He says the changes are turning Australia from a "commonwealth", with huge home ownership, into more of a "kingdom" in which landlords rent to involuntary tenants who pay through the tax system for their acquisitions...

"Some have said we are on track to becoming a kingdom where the Lords own all the land and the biggest Lord will be King and the enslaved serf tenant is paying rent to the Lord to become wealthier," he told the Financial Review. "Is that an over-dramatisation or is it very, very close to the truth?"

A landlord-heavy housing market is inherently unstable. Whereas owner-occupiers aren't that likely to sell if interest rates rise or prices threaten to stop climbing, landlords can run for the doors. The Property Council makes the point dramatically in an advertisement depicting housing as a house of cards.

One way to wind things back would be to gently limit negative gearing. It's an idea endorsed by the Murray Financial System Review and now the Business Council of Australia. It's Labor policy, and despite Morrison's talk about the need to support mum and dad investors (over mum and dad buyers), it might yet be adopted by the Coalition in some form.

Alexander's committee was considering limiting the amount of mortgage interest that could be deducted from wages. At the moment it's 100 per cent. That proportion could be adjusted by an authority such as the Reserve Bank to keep the market stable. And the committee was considering extending to owner-occupiers the concessions afforded to investors.

Right now investors get to deduct interest payments from their income for the purpose of determining tax. Under the proposal owner-occupiers could opt to have a portion of their interest payments treated the same way. If for example they chose to deduct 20 per cent of their interest payments from income they would be taxed on 20 per cent of the eventual gain when they sold. 

Every time a negative gearer sold to an owner-occupier the government's tax position would improve, the housing market would become more stable, and more Australians would be protected from poverty in their old age.

The changes in politics at the end of last year saw Alexander removed as chairman of the committee and another chair appointed who has also since moved. The report was due at the end of last year, but it will now be finalised later this month as soon as another chair is appointed.

Public opinion backs Alexander, just. This week's Essential poll shows 34 per cent of Australians would prefer lower housing prices and 32 per cent would prefer higher prices. Landlords strongly favour higher prices.

For a while, before politics overtook things, it looked as if we would have a sane discussion about what our headlong rush into negative gearing was doing to us. I'm hoping it's not too late.

In The Age and Sydney Morning Herald

 

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Monday, March 07, 2016

Modeller lauded by Morrison once opposed negative gearing

Negative gearing encourages excessive use of debt, lifts overseas borrowings and raises real interest rates, according to the economist whose work on the subject has been lauded by the Treasurer Scott Morrison.

Kim Hawtrey, now with consultancy firm BIS Shrapnel, wrote the words more than 20 years ago when he was an academic at Macquarie University in an article in the journal Australian Tax Forum.

"Deductibility of interest payments on debt creates a tax advantage for debt over equity," he wrote. "Negative gearing ensues by way of combining debt interest deductibility with concessional tax treatment of capital gains, encouraging over-investment in property and related asset inflation sectors."

More than two decades on, Dr Hawtrey says he won't divulge his personal position on negative gearing, saying the work his firm released last week was "technical" and "dispassionate".

"I have not commented on my views and I am not going to comment on my personal views, from a policy point of view, or as a voter or whatever," he told Fairfax Media.

"We were simply given a task and we carried out that task, and no attribution or nothing should be read into that as to any policy preference."

"Any policy issue in Australia, we do reports on both sides of those issues for parties that are on both sides of the political fence, if you like, and we do that impartially and dispassionately as economists, as technicians, if you like"..

Dr Hawtrey said then that negative gearing created a more highly leveraged economy than would otherwise prevail. The study he released last week at the request of an unknown undisclosed client said measures that clamped down on negative gearing would result in higher rents, lower dwelling prices and less home building than would otherwise be the case.

After 10 years, dwelling prices would be 15 per cent higher instead of 22 per cent higher. Rents would be 41 per cent higher after 10 years instead of 34 per cent higher.

"That report is not recommending for or against negative gearing," he said. "It is an if-then report: if this happened, then this would happen. It doesn't pass any judgement about whether the policy is good or bad, about whether the results are good or bad."

On ABC radio last week Mr Morrison described the report as a damning indictment of Labor's policy. "What this report shows is that it will drag growth, it'll send growth backwards and retard grown in the economy," he said. "It has a devastating impact on property markets and people's homes."

Dr Hawtrey said the report made no "judgement one way or the other about negative gearing".

"Our report contains no recommendations about policy, and my personal views about negative gearing as a voter may bear no relationship to the report," he said.

In a survey of 51 leading economists conducted by the McKell Institute last week 90 per cent described negative gearing and capital gains tax concessions as major tax distortions that led to an inefficient allocation of resources. More than 70 per cent thought house prices would continue to grow under Labor's proposed cutbacks.

Labor wants to limit the deduction of losses from investments to investment income and capital gains. They could no longer be deducted from wage income. Existing negative gearing arrangements would continue and would also apply to investments in newly built properties.

The Coalition is considering imposing a cap on the amount that can be deducted from wage income. Mr Morison said last week that a cap of $50,000 per year would affect only 1.6 per cent of the taxpayers who negatively geared.

In The Age and Sydney Morning Herald

 

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