Friday, November 30, 2012

Too much economic news? Too much for our own good?




Former RBA governor Ian Macfarlane thinks so.

He has been listening to Nate Silver

Here is his Charles Goode Oration at the Melbourne Business School Thursday night:





Tonight I want to ponder on a few thoughts that came to me in my previous
occupation, and have developed further in my more recent work in the
investment community.

Specifically, I hope to answer two questions and make one historical
observation. The questions are:

• Do our media concentrate too much on short-term economic news,
and do they do so more than in other countries?

• Does it make us happier and better able to do our jobs and invest our
savings?

• And finally I want to make an observation abou some really important
long run price developments and their implications for Australia.

(1) Do we get too much economic news?

People with jobs like I had have always been at the receiving end of a lot of
economic information, most often from official sources like the Australian Bureau
of Statistics, but increasingly now from private providers of survey information.
Over the past couple of decades the general public has also been inundated with
this type of information.

The newspapers and magazines are full of economic news, as is radio and
television, where there are special programs devoted to it. This is a world-wide
phenomenon, and you can turn on a television set in a hotel in the US, Europe or
Asia and hear someone holding forth on the latest movement in exchange rates,
share prices or bond yields at any time of day or night.

While it is a world-wide phenomenon, it is more pronounced in newspaper
coverage in Australia than elsewhere. I have often heard foreign visitors or new
arrivals express surprise at how much economic coverage there is in Australian
papers, particularly on the front page.

We did a comparison at the Reserve Bank a few years ago of how much coverage
was given to a particular piece of economic news, namely central bank monetary
policy decisions. We looked at it in Australia and the UK and the US (the latter two
being the financial capitals of the world). We took three comparable newspapers
in each country; in the UK, the Financial Times, the Times and the Independent:
in the US, the Wall Street Journal, the New York Times and the Washington Post;
and in Australia, the Financial Review, the Australian and the Sydney Morning
Herald (The Age would have been similar).

We added up the number of articles in these papers in the three days surrounding
two successive monthly monetary policy meetings. Our findings were as follows...


In the US, 35 articles;

In the UK, 46 articles;

In Australia, 131 articles.

Then we looked at how many of these articles were on the front page. The
results;

In the US, 1 article

In the UK, 1 article

In Australia, 14 articles.

Why is there so much more coverage in Australia than elsewhere?

One explanation I have heard is that there is not as much other news to report.
We are not an international power or trouble spot, we are not engaged in major
wars, we do not have racial riots, civil insurrections, or sectarian violence, and
the private lives of our politicians are not as lurid as British one (or a recent
American president). So instead our newspapers are taken up with recent figures
on employment, interest rates, the CPI or the Budget.

With the media competing so strongly against each other, there is inevitably
a bias towards sensationalism. While Australia has a few experienced and
thoughtful economic commentators who are world class, it also has a multitude
of eager beavers who are mainly concerned with tomorrow’s headlines. They
try to extract the maximum amount of coverage out of each ephemeral piece of
news – monthly or even daily figures are invested with a significance well beyond
their actual information content.

Interest rates do not merely rise, they ”soar”, the exchange rate “dives”
or “plunges”, Budgets “blow-out”. The reader is left with the impression of
constant action and turmoil. The recurring television image is of people in dealing
rooms or on the floors of futures exchanges shouting at each other.

Another feature is the tendency to concentrate on pessimistic news. It is the
nature of all journalism – not just economic – that its practitioners seek to expose
a disaster or a conspiracy. No one ever wins a prize in journalism by pointing
out that things are proceeding relatively smoothly and uneventfully, hence the
tendency to find bad news, mistakes in policy and to label every minor glitch as a
crisis (the most over-worked word in journalism).

At the margin I believe all this news tends to make us less confident, less secure
and less happy than if we had less of it.

(2) Does all this economic news make us better at doing our jobs or investing
our savings?

The normal first response would be to say of course it must. More information
must be better than less, that is what the whole information revolution is about.
It is hard to argue with this point of view in terms of most of the decisions we
make in everyday life. Certainly a broad range of information is better than a
narrower one. But is more frequent information about a particular economic
variable better than less frequent information?

Is it possible that if we are inundated with more information than we need, we
may not be able, as the old saying goes, to see the wood for the trees? Or another
way of saying this is that we may be on top of the detail but lose perspective, or
as T.S.Eliot said rather more eloquently:

. “Where is the life we have lost in living?

. Where is the wisdom we have lost in knowledge?

. Where is the knowledge we have lost in information?

I am not sure what the first line means, but the latter two are pretty clear.

Another way of expressing this thought is given by Nate Silver in his recent
book – “The Signal and the Noise” where he warns “We face danger whenever
information growth outpaces our understanding of how to process it”

Another reason we should question the value of frequent information is that
it is subject to a distortion known as the “narrative fallacy”. This is the need to
be able to tell a story as to why a movement in an economic variable occurred,
even if it is a very short-term movement. Every day the exchange rate changes,
so does the share price index, and every day you will be told why they changed,
i.e. what caused them to rise or fall even if they only moved by a few tenths of
one percent. Do we really know the reasons behind these small daily moves, or
do we just make up a story because we can’t bear to say that we don’t know why
they moved? It is often just random noise, but we can’t say that. Similarly, each
movement in a monthly statistic such as retail sales, employment or business
confidence has to be explained by some other economic or political development,
although in many cases the movement is just due to sampling error. Incidentally,
not only do we think we can explain past events that we can’t, but we also think
we can forecast future ones that we can’t, but that is another story for another
day.

I want to now turn to the question of whether more frequent information
enables us to become better decision makers, in particular whether it makes
us better or worse investors. Let me start by mentioning that several financial
advisors I worked with told me that, among their clients who run self-managed
super funds, those that spent the most time tracking daily movements in their
portfolio achieved worse investment results than those who reviewed theirs’ less
frequently. This is, of course, only hearsay, but it sounded plausible to me for
several reasons. Let me elaborate.

It has been established from a lot of experimental research that most investors
exhibit “loss aversion” That is they experience more unhappiness from losing
$100 than they gain in happiness from acquiring $100 (approximately twice as
much according to the evidence). So the more often they are made aware of a
loss the more unhappy they become.

If the stock market rises by 6 per cent per annum, that, plus dividends is a
reasonable return and should not be a cause of unhappiness. But given the
variability of daily movements, on average about 47 per cent of days the
market would fall, and on 53 per cent it would rise. Since we experience more
unhappiness from the falls than happiness from the rises, this daily flow of
information would result in a net fall in happiness. If we reviewed the market
on a monthly basis, there would be a smaller proportion of losses, and a larger
proportion of gains, so we would be happier. What this shows is that more
frequent information makes us less happy, but it does not necessarily mean we
become worse investors.

However there is a body of research in behavioural finance conducted by
experimental psychologists that shows that it also makes us worse investors.
This is because we tend to suffer from myopia (reading too much into short-
term movements) and loss aversion (already described). This research concluded
that ”investors who got the most frequent feedback (and thus the most
information) took the least risk and thus earned the least money.” This is very
serious research. Economists usually don’t like being lectured to by psychologists,
but the two who conducted this research – Kahneman and Tversky were the only
two non-economists ever to win the Nobel Prize in Economics (unfortunately
the latter died before he could receive it). These experiments are done with real
people and real money, and I will give a brief summary of how they worked.

In the experiment the subjects are able to invest in two asset classes – one, which
we may call equities, which has a higher average return, but more short-term
variability, and one, which we may call bonds, which has lower return and lower
variability. The investors in the experiment who receive daily information avoid
short term losses by buying more bonds and less equities than those who receive
monthly or quarterly information, and so as a result earn a lower return over the
long run.

A similar finding results even if the subjects are confined to investing in equities.
Those who receive daily information are inclined to act on it and over- trade. The
resulting increase in transaction costs lowers their return relative to those who
receive less frequent information.

So I think we can conclude that too much information, or more correctly, too
frequent receipt of economic and financial information, reduces the recipients
happiness and leads them to make inferior investment decisions.

(3) What of the Long-run?

I would now like to shift away from the problems of the short-run to look at some
really long run changes – changes that take decades, generations or centuries.
This is mainly of historical interest as it is probably impossible for an investor to
make money out of such changes.

Have you ever wondered how it was possible a century ago for so many
magnificent homesteads to be built in rural Australia (the National Trust has
produced several excellent books on the subject). Why were some farmers a
century ago able to build these mansions? The answer is that the price of wool
was so high that the owner of a large sheep station could afford to build a
mansion and to staff it with servants.

It turns out that changes in the prices of what we produce can explain a lot about
how economies and countries evolve. The example I gave above is a relatively
small one; there are other much bigger ones that almost defy comprehension.

• In 1667, under the Treaty of Breda, the Dutch government gave up
their claim on Manhattan to the English in order to retain the island of
Run (how many people know where that is – it is in Indonesia). Why
did they prefer the island of Run? Because it was the world’s main
source of nutmeg, which was highly-prized in Europe and extremely
expensive. (I wonder how many of you have consumed nutmeg in the
last week – you can buy a thirty gram jar of it at Woolies for $2.50).

• In the late eighteenth century, France had only enough armed forces
to protect one of its two major possessions in the Americas. It had to
choose between Canada and Haiti. It chose Haiti. Why? Because the
price of sugar was so high that more wealth could be extracted from
Haiti than the whole of Canada.

What is the significance of this sort of long run development for Australia? We
touched on it before when we observed the magnificent rural homesteads of the
late nineteenth century. Unfortunately that type of wealth did not last because
the real price of wool fell (like the real price of sugar and nutmeg).

From about 1900, the trend of prices for what we exported – mainly agricultural
and mineral products either fell, or at least did not rise as fast as the prices of
the goods we imported – mainly manufactures. This was because the supply of
agricultural and mineral products could easily be expanded by bringing new areas
on stream or by raising productivity. In economic parlance, Australia experienced
a trend fall in its terms of trade, and this made the country less wealthy than it
otherwise would have been.

Now as we all know from our daily papers, that has all changed. The terms of
trade have risen to an all time high, the mining sector is booming and agriculture
is looking up. Is this just a cyclical event, or has something more fundamental
changed that means it is more permanent. A famous investor said the four most
dangerous words in investing are “it’s different this time”. Is he right and should
we expect to return to the old pattern, or is it different now?

Well I think it really is different now. The long decline in the terms of trade ended
in about 1985, and a hesitant upward trend commenced. Then, over the past
half dozen years, notwithstanding the financial crisis, the terms of trade have
gone through the roof. Why has the downward trend of eighty years been so
comprehensively reversed? Essentially it is because of the emergence of the
developing countries as a major economic force. First it was Taiwan, Korea, Hong
Kong and Singapore, then Malaysia, Thailand and Indonesia. And finally the big
one – China, followed by India. Now it is the price of manufactured goods which
are falling as it is easy to expand their supply by bringing into production the
massive rural populations of China and India. This simultaneously provides us with
cheap manufactured goods to buy, and increases the demand for our exports as
inputs into their manufacturing processes.

Of course, it could all fall apart, but I don’t think that is likely. It is relatively easy
for countries to keep growth going when starting from a low base and being able
to adopt technology that has already been invented by others. Besides a world
where China and India play a major role is not really new: it is a return to earlier
times. Until the industrial revolution in the late 1700s, China and India accounted
for most of the worlds GDP, and their incomes per head were similar to those in

Europe. Looking back in a hundred years’ time, we may view the 1800s and the
1900s as an aberration when some countries with relatively small populations in
Europe and North America outpaced their larger rivals for a time.

I want to conclude now by asking where does all this leave Australia? In a very
favourable position I would say. It doesn’t mean that we won’t see some future
falls in export prices – that is already occurring – but on average they should
still remain high by historical standards. It also doesn’t mean that the current
expansion will continue indefinitely – the business cycle will re-assert itself at
some point. But, by the standards of other developed countries, we will remain in
a favourable position.

Just as all the short term economic data I talked about earlier reduced our
happiness and confused us as investors, this long term change in the world’s
centre of gravity should be a source of satisfaction to us. It has opened up many
opportunities already, and will open up many more in future years. That is why
I have been more optimistic than most observers despite the still remaining
damage caused by the 2008 financial crisis.




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'Compelling' case for Newstart boost

There is a “compelling” case for boosting the $245 per week Newstart unemployment allowance according to the man who chaired the Senate inquiry, but he decided against recommending doing it.

Western Australian Liberal Chris Back, one of three Coalition senators on the six-person inquiry, said he held back knowing the Coalition might itself soon be the government.

“I am confident it may soon be our role,” he said after releasing the report. “We would have to fund what we recommended.”

“It would have been easy to say - let’s beat up on the government, let’s make them look like fools and say Newstart has to rise, but as the alternative government we have to be responsible.”

The two Labor members of the inquiry recommended an increase in Newstart. The one Greens member recommended an increase of $50 per week.

“It’s put the government in a happy position,” said Senator Back. “It’s a recommendation of their own senators that there should be an increase, and they are the ones who hold the purse strings. They can cut other spending or run up more debt in order to do it.”

Australian Council of Social Service chief executive Cassandra Goldie said her members were “obviously disappointed” that the committee had failed to recommend an increase, but pleased it had agreed Newstart was too low.

“We understand the budgetary constraints, but stopping people languishing on unlivable payments should be a priority,”she said.

Senator Back said he had repeatedly asked witnesses where the money would come from...

“Around 35 per cent of government spending is on social security. We asked continually where, within that, did witnesses think we could make savings to lift Newstart, and nobody was able to assist us. I put the question about the 16 per cent of the budget that is spent on health and the 8 per cent spent on education, and there was agreement from witnesses - nobody wanted them touched.”

“There is no doubt the evidence we received was compelling. Nobody want’s to see a circumstance in which a family isn’t able to feed its children, no-one wants to see that in Australia. But we can’t fund these things by running up debt.”

The committee has recommended lifting the the amount Newstart recipients can earn from work to the equivalent of six hours per fortnight at the minimum wage. The concession would be paid for by finding savings within the social security budget.

Another recommendation would make it easier for Newstart recipients to obtain seasonal work and still stay on the benefit. Recipients who lost the benefit when they took up work would stay on the government’s computer system for a year to “keep their place in the queue” for assistance finding in finding jobs.

In today's Age


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Wednesday, November 28, 2012

Sounds big, isn't that big. Abbott's new jobs target

It isn't extraordinary:



Of course whole idea of such a target is silly (as Labor well knows, having missed its last few) but the target itself is far from out of the ordinary.



THE COALITION’S JOBS PLEDGE

The next Coalition government will create a strong and prosperous economy and a safe and secure Australia.

Our policies will deliver more jobs, higher wages and better services for Australian families. We will achieve this through lower taxes, more efficient government and more productive businesses.

Today, I am committing a future Coalition government to creating one million new jobs within five years and two million new jobs over the next decade.

My confidence in this pledge is based on my confidence in our policies and in the competence and experience of my team. Sixteen members of the Shadow Cabinet were ministers in the Howard Government which delivered a golden age of prosperity.

The last Coalition government created 2.4 million jobs, oversaw a 21 per cent increase in real wages and resulted in Australian households experiencing a near tripling in net household wealth.

We have done great things for our country in the past and we can do it again.

The next Coalition Government will create one million jobs in five years and two million jobs in ten years by:

. Abolishing Labor’s job destroying carbon tax. On the government’s own figures, eliminating the carbon tax would add a cumulative $1 trillion to GDP by 2050;

. Scrapping the mining tax and restoring Australia’s reputation as a safe place to invest;

. Removing $1 billion a year of red tape costs from business and implementing our Deregulation Reform Agenda to lift national productivity;

. Ending Labor’s waste and bringing the Budget back under control, taking needless pressure off taxes and interest rates;

. Tackling lawlessness in workplaces by restoring the Australian Building and Construction Commission;

. Removing export bottlenecks by investing in the major infrastructure that Australia needs

Establishing a one-stop-shop for environmental approvals;

. Lifting workforce participation through a fair dinkum paid parental leave scheme and reviving work for the dole;

. Strengthening relationships with the growing Asian region through greater emphasis on foreign languages in schools and a new two way Colombo Plan;

. Establishing a Prime Minister’s Business Advisory Council and ending Labor’s anti-business rhetoric.

In 2013 the Coalition will make further detailed announcements with policies that will strengthen the economy, encourage investment and create jobs.

Employment growth under the Howard Government averaged 2.2 per cent a year. Under Labor, this rate has fallen by almost one third.

Our pledge is achievable given our record and policies.

28 November 2012



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Expect two more rate cuts, starting now - OECD


Neat interactive graph:



The Reserve Bank is set to cut interest rates two more times - once in December and once near the start of next year - taking its cash rate to 2.75 per cent, a new all-time low.

The new forecast from the Organisation for Economic Co-operation and Development has the cash rate staying at the new floor until halfway through 2014. If fully passed on the cuts would bring the standard variable mortgage rate to near 6 per cent, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.

The OECD credits budget cuts with its forecast of two further rate cuts, saying the government’s determination to achieve a surplus will “dampen demand”, forcing the Reserve Bank to act to shore up the economy.

It says the Bank will be able to act in December because inflation is “contained”, an achievement reached “despite the introduction of a carbon tax in July”.

The OECD forecast of rate cuts exceeds that of the market. Interest rate futures contracts assign only a 55 per cent probability to a rate cut next month. The OECD draws up its forecasts after consulting closely with the Treasury and Reserve Bank. The Treasury has a representative stationed at the OECD headquarters in Paris.

The OECD’s economic forecasts are broadly consistent with those in the Treasurer’s mid-year budget update. It expects Australia’s economy to grow by 3.7 per cent this year, 3 per cent in 2013 and 3.2 per cent in 2014.

It has downgraded its forecasts for global growth to 3.4 per cent in 2013 and 4.2 per cent in 2014, most of which will be driven by China and other emerging economies. The biggest risks to the outlook come from the so-called euro zone which should be in or near recession until well into next year and the possibility of a “fiscal cliff” in the United States when scores of tax cuts and spending measures expire at the end of this year.

The report paints a picture of an uneven economy with mining investment expected to “expand vigorously in 2013 on the basis of announced plans” while job creation slows, unemployment hovers at around 5.5 per cent, and the rest of the business climate is “challenging, particularly in construction”...

The Australian dollar has remained higher than would be expected in the face of lower export prices, holding back exporting and import-competing businesses.

The government’s determination to return the budget to surplus has held back the economy, although not by as much as “would first appear”. Much of the apparent turnaround is the result of shifting spending between financial years and “changes in the accounting treatment of unclaimed financial assets” as well as cuts in defence spending and foreign aid which will have a “limited impact on domestic demand.”

Should economic conditions deteriorate significantly the OCED says the government should delay its planned return to surplus, advice also offered by the International Monetary Fund in its report on Australia earlier this year.

Treasurer Wayne Swan welcomed the forecasts saying since last November official interest rates had been cut five times bringing mortgage rates well below the 8.5 per cent that applied when the government changed hands.

“A family on a $300,000 standard variable mortgage is saving around $4500 a year in repayments compared to what the Liberals saddled them with when they left office,” he said.

In today's Canberra Times, Sydney Morning Herald and Age





Australia OECD November 2012



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Saturday, November 24, 2012

Conformity. The candid camera experiment


Here's the experiment:





Broadcast in 1962, it was designed by psychologist Solomon Asch.

It's just the start of some shocking truths about ourselves. Such as why, when grouped together in meetings, we make shocking decisions.

In this public lecture Tim Harford outlines how to avoid the trap.

Here's the key bit. I liked it.

10 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Tim Harford is the author of Adapt, a book I have recommended before.


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Thursday, November 22, 2012

Our new economic landscape: Western Australia, then daylight



Gross State Product per head

Western Australia: $100,100

Australian Capital Territory: $87,500
Northern Territory: $80,400
Queensland: $61,500
Victoria: $58,100
NSW: $62,000
South Australia: $55,300
Tasmania: $47,400

International comparisons

Luxembourg: $US115,800
United States: $US48,300
United Kingdom: $US38,800

ABS 5220.0


A decade ago each Western Australian produced little more than did each resident of NSW and Victoria. Official figures released Wednesday describe a nation transformed with each West Australian now producing 61 per cent more than each resident of NSW and 72 per cent more than each Victorian. If Western Australia was a nation its GDP per head would be exceeded only by Luxembourg.

The state accounts produced by the Bureau of Statistics show Western Australia now makes up 16 per cent of the Australian economy, up from 11 per cent a decade earlier. NSW has shrunk from 35 per cent of the national economy to 31 per cent and Victoria from 25 to 22 per cent. The combined share of Australia’s two biggest states is now just 53 per cent, down from 60 per cent a decade earlier.

The mining industry is responsible for around half of Western Australia’s economic growth, for only one eighth of NSW growth, and for none of Victoria’s. In the past year the financial services industry has contributed the most to NSW growth, and professional services the most to Victoria’s growth.

The new league table has the Western Australia growing by far the fastest of the states at the blistering annual pace of 6.7 per cent, followed by the Northern Territory at 4.4 per cent and Queensland at 4 per cent. In the slow lane are NSW (2.4 per cent), Victoria (2.3 per cent), South Australia (2.1 per cent) and Tasmania (0.5 per cent).

Western Australia now produces $100,100 per head, well above the $62,000 per head total in NSW and $58,100 in Victoria. Only the Northern Territory and the high-wage Australian Capital Territory come close producing $80,400 and $87,500 per head. Queensland produces $61,500 per head and Tasmania $47,400.

The gross state product figures are calculated only once each year and provide a more reliable guide to the economic performance of each state than the state final demand figures released quarterly.

International Monetary Fund calculations show only the tax haven of Luxembourg ahead of Western Australia with a GDP per head of $US115,800 in 2010... The international runners up, coming behind Western Australia, are Qatar ($US98,100), Norway ($US97,600) and Switzerland ($US83,100).

In terms of sheer economic size Western Australia would now be the world’s 40th biggest economy if it was a sovereign nation, ranked between Portugal and Israel.

The figures show that dispute Australia’s 21 continuous years of economic growth, every state other than Western Australia has slipped in terms of production per capita at some time in the last few years. NSW, Victoria and Queensland went backwards during the global financial crisis in 2008-09. Victoria and Queensland also went backwards in 2009-10. South Australia’s output per head slipped in 2009-10 and Tasmania’s in 2009-10 and 2010-11.


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Google paid just $74,176 in Australian tax

Our government wakes up

Me on ABC 891 Wednesday November 28, 2012:

15 minutes, play or CLICK THEN CLICK AGAIN to download mp3




The government is preparing for an assault on companies such as Google that funnel their Australian income through low-tax countries such as Ireland and Singapore.

Assistant Treasurer David Bradbury will outline the plan at a conference in Sydney Thursday.

His speaking notes refer specifically to Google and to a technique known as the the “Double Irish Dutch Sandwich” which involves routing income between Ireland and the Netherlands.

“This is not just about dealing with illegal activity. This is about how the drivers of new business models in the information age are presenting great challenges for governments trying to make sure that companies are paying their fair share,” he will tell the Institute of Chartered Accountants national tax conference.

“The way people do business is changing and we need to ensure tax systems keep pace because it's not fair if a multinational company pays much less tax than an Australian company.”

“This is a challenge for other nations as well, as we have seen from recent revelations in the United Kingdom where a parliamentary committee is looking into the issue. That means we need to continue our global cooperation to make sure that there is global consistency with the way we tackle this issue.”

Mr Bradbury will ask Treasury to start work on a scoping paper outlining the challenges posed by multinational corporations who use foreign subsidiaries to collect Australian income.

He will convene a specialist reference group made up of business leaders, tax experts, academics and community representatives to examine measures to combat the practice...

“We do not want to see a future where hard-working Australian families and businesses are having to pay disproportionately high taxes because multinational corporations are not pulling their weight,” he will tell the conference.

"We need to make sure that we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age."

Company documents filed with Australian, European and Asian authorities show the Australian arms of Apple, Google and eBay are part of complex networks of subsidiaries held by their US parents through intermediary companies located in tax havens.

In April the Tax Office Apple with a $28.5 million bill for back taxes. Google Australia declared a loss of $3.9 million last year, and paid just $74,176 in Australian tax.

In today's Canberra Times, Sydney Morning Herald and Age



David Bradbury MP

Assistant Treasurer

TOWARDS A FAIR, COMPETITIVE AND SUSTAINABLE CORPORATE TAX BASE

ADDRESS TO ICAA NATIONAL TAX CONFERENCE HILTON, SYDNEY

THURSDAY, 22 NOVEMBER 2012


Today, I would like to discuss the importance of securing a fair, competitive and sustainable tax base for the future prosperity of the nation.

Tax is the price we pay for a civilised society.

It is a central element of the social contract. In return we expect that Governments will deliver the public goods and services we require — like world class health and education systems, a strong social safety net and public infrastructure.

Against this backdrop, we have set out our vision for a tax system that enhances productivity and lifts growth; that encourages participation and provides reward for effort; and a system that is fair and sustainable.

Pressures on the Corporate Tax System

Today I want to talk about some emerging structural changes occurring in the global economy, such as what some call the ‘digital disruption’ — and how these changes present challenges that, if left unchecked, threaten to erode Australia’s corporate tax base.

While our economy is now around 11 per cent larger than it was when we came to office and economic activity has returned to trend growth, tax revenues have been slower to recover. This can in part be attributed to the use of accumulated losses, incurred during the GFC, to offset tax payable on income in the last few years.

Of greater concern are some of the emerging threats to the corporate tax base posed by some of the structural changes in the global economy, which are being exacerbated by some of the more recent tax planning practices of many Multinational corporations.

Effective Tax Rates of Multinational Enterprises

One of the ways of assessing pressure on the corporate tax system is to estimate the effective tax rates of companies. That is, to compare the actual tax paid with the underlying income earned.

At its simplest, when taxable income is the same as the underlying income, then the effective tax rate will equal the statutory tax rate.

There are also situations where Governments will explicitly decide to provide preferential tax treatment and, in these cases, this will mean that the effective tax rate will be less than the statutory tax rate.

However, other explanations for low effective tax rates are not so benign.

In particular, where low effective tax rates reflect the ability of companies to shift income to low or no tax jurisdictions.

Internet, Knowledge Capital and the Corporate Tax Base

It is not my usual practice to mention companies by name or to publicly canvass the tax position of particular taxpayers. Nor is it my normal practice to publicly discuss strategies employed to minimise corporate tax. However, I will be departing from my usual practice today as I believe there is a strong public interest in drawing attention to practices that have the potential to undermine the future sustainability of Australia’s corporate tax base.

I must stress that all of the material used in this speech today has been sourced from the public domain.

I also want to be clear that I am not suggesting that these companies are in breach of the law as it stands.

Many of you would have seen media reports on the level of tax paid by Google Australia.

Earlier this year it was reported that Google Australia’s annual income tax bill may have been as little as $74,176. The same article reported that a spokesman for Google asserted that the correct figure was $781,471.[i]

Even if the higher figure is correct, I can understand why many in the community would be perplexed to learn that this figure is so low for a company whose annual advertising revenue from Australia has been estimated by media analysts to be over $1 billion per annum.[ii]

It has been reported that this is the outcome of an arrangement called the “Double Irish Dutch Sandwich”.[iii]

While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google.

It is then argued that the source of this income – and therefore the taxing rights under our tax treaty – would be with Ireland rather than Australia.[iv]

Despite Ireland’s relatively low company tax rate of 12.5 per cent, we have just started to build the sandwich.

The next step is to route a royalty payment from the Irish operating subsidiary of Google to a Dutch subsidiary of Google, which is then paid back to a second Irish holding company subsidiary of Google that is controlled in Bermuda, which has no corporate tax.

That completes the sandwich – now for the tax treatment.

The first Irish subsidiary receives a tax deduction for the royalty payment to the Dutch subsidiary, substantially reducing the income subject to the 12.5 per cent Irish company tax rate.

Under Dutch law, and because EU member countries do not charge withholding taxes on transfers within the EU, the transfers to and from the Netherlands are essentially tax free.

And under Irish tax law, the second Irish resident subsidiary is not taxed on the royalty payment because it is controlled by managers elsewhere.

The profits from the sale of advertising to an Australian firm then sit in a tax-free jurisdiction – possibly indefinitely.

The point of all of this is not to single out Google for criticism. Google is an important innovator and plays a significant role in our economy, and they have engaged with the Government constructively on many issues — most recently through the Digital Economy Forum.

The media usually attributes the origins of this technique to Apple,[v] who reports earlier this year indicated had around $100 billion in cash, with about two thirds of that sitting in offshore accounts.[vi]

Nor is it my point that this structure is the only pressure facing the corporate tax system.

Rather, the point is to highlight how the digital disruption brought about by the internet and changes in technology have transformed the way economic activity is occurring — and these changes are putting pressure not only on businesses but also on the corporate tax system in Australia and around the world.

In turn, this challenges some of the concepts that form the building blocks of our current international tax architecture – source, permanent establishments and residency.

Increasingly, Governments are discovering the lack of effectiveness in the digital age of international tax concepts created for the industrial age.

This has been highlighted by the compelling evidence revealed by the UK Public Accounts Committee examination of the Taxation of Multinational Corporations.

Media reports of the Committee’s hearings state that Amazon paid no tax in the UK despite £3.3 billion in sales by routing transactions through Luxembourg, where it faced an effective tax rate of 2.5 per cent.[vii]

And now we see that the weaknesses that technology companies have exposed in the international tax architecture are spreading to other industries and activities.

The UK Public Accounts Committee was told that Starbucks had paid no taxes in the UK for three years, despite sales totalling £1.2 billion – in part due to royalty payments for the use of the brand.

What is being done about this?

I think some executives of multinational enterprises have been taken aback by the response to these reports from the broader community.

I have to say that it is no surprise to me that these reports have sparked community concern.

Many in business reject the notion that paying a fair share of tax forms part of a broader social compact, instead believing that it is just another cost of doing business.

On this point, I vehemently disagree.

These businesses benefit from operating in an economy built on social and economic institutions — our markets and regulators, the rule of law and our judicial system — not to mention physical infrastructure and human capital that is funded or supported by the taxes paid by others.

Where some multinational businesses enjoy the benefits of these public goods but refuse to pay their fair share, they are free riding on efforts of others.

Whether it is a domestic company put at a competitive disadvantage because it is paying tax on all of its profits.

Or whether it is Australian families that are expected to pay higher taxes or accept fewer Government services.

Losing sight of this perspective risks a community — and consumer — backlash, particularly at a time when the rest of the community is being asked to make sacrifices in the interests of fiscal sustainability.

Nevertheless, having laid out these issues, the natural question to me as Assistant Treasurer is “what are you, the Government, going to do about it?”

False responses

Some might argue that the solution is to cut the corporate tax rate and reduce the incentive to shift profits.

But when multinational companies can achieve effective tax rates of a few per cent – or even zero – trying to compete with these rates is no different to abandoning our corporate tax base.

This kind of international ‘race to the bottom’ is not protecting the sustainability of the tax system — it’s just cutting out the creativity required to avoid paying company tax in Australia.

If enormous multinational corporations aren’t paying their fair share of tax on economic activity in Australia, then that’s not fair game.

We do not want to see a future where hard-working Australian families and businesses have to pay disproportionately high taxes because multinational corporations are not pulling their weight.

Australian Government Initiatives


Faced with the choice of abandoning the corporate tax base or protecting it, the Gillard Government chooses to protect it.

We will continue to take action where necessary to ensure the integrity and sustainability of the tax system, including our corporate income tax base.

And we are doing this by reforms to two of the key integrity regimes in our tax laws — our transfer pricing rules and the general anti-avoidance rule known as Part IVA.

Transfer Pricing

Australia’s transfer pricing rules play an important role to ensure that multinational firms pay their fair share of tax on profits in Australia - based on an amount of income which reflects the economic activity attributable to Australia.

As I'm sure you know, in November 2011, the Government announced its review of Australia’s transfer pricing laws.

The review has been aimed at more closely aligning our rules with international best practice as set out by the OECD.

Our first task was to ensure that the law continued to operate in a manner consistent with the Parliament's long-held understanding and widely disseminated ATO guidance material that treaty transfer pricing rules apply to provide assessment authority in treaty cases.

These amendments received Royal Assent on 8 September 2012.

I know that there are strong held views about those changes — and that applying the amendments back to 2004 was controversial.

The Government makes no apologies for protecting the significant revenue that would have been at risk from taxpayers seeking to exploit uncertainties about Australia’s revenue base.

We are now turning our attention to a wholesale modernisation of Australia’s transfer pricing regime, which will align our laws with the most recent benchmarks of international best practice as set out by the OECD.

Today, I am releasing for consultation an exposure draft containing the amendments necessary to modernise our domestic transfer pricing laws.

Previous discussions with stakeholders have indicated that there is general support to reform our transfer pricing rules making them more effective and relevant to the modern environment in which multinationals operate.

I encourage industry and the wider community to engage with Treasury on these important reforms.

General Anti-Avoidance Rules

Last week, I also released for public comment exposure draft legislation and explanatory material to protect the integrity of Australia's tax system by amending Part IVA of the income tax laws.

The amendments will ensure that Part IVA can apply to taxpayers who enter into arrangements with the sole or dominant purpose of avoiding tax.

The amendments focus on the definition of 'tax benefit'. They will not affect taxpayers unless they have obtained a tax advantage from an arrangement entered into with a relevant tax avoidance purpose.

For example, the amendments could play a role in countering multi-nationals who seek to defeat Australia’s taxing rights by artificially altering the source or character of profits they generate from economic activity in Australia.

The amendments will ensure that such enterprises are taxed on the reality of their Australian activities — they will not be able to argue they did not get a tax benefit simply because they would not have invested in Australia had they known, in advance, that they would have to pay tax here.

I encourage you to participate in the consultation process.

Multilateral Initiatives

We need to make sure that we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age.

More importantly, Governments all around the world need to rethink many of the key rules of international taxation, which are not keeping up with the changing business models and tax planning arrangements of many multinational companies.

Rethinking key aspects of the international tax architecture, by definition, requires international cooperation, as difficult as that may seem.

While I understand the degree of difficulty involved, we should also recognise that the G20 and the Global Financial Crisis have changed the dynamics of international relationships.

G20 & Global Forum on Transparency and Exchange of Information for Tax Purposes

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) was established in the early 2000s as a vehicle for OECD economies to promote greater transparency — particularly with regard to access to information held in secrecy jurisdictions and tax havens.

This followed work by the OECD on harmful tax practices that focussed on “unfair” competition by low or no tax jurisdictions, as well as the exploitation of bank secrecy and lack of international co‑operation to hide tax avoidance or evasion activity.

The idea is that effective international co-operation and information sharing can help to tackle tax avoidance and evasion.

In turn, this improves the integrity and sustainability of the tax base of all countries.

The April 2009 G20 Leaders’ meeting in London put the work of the Global Forum firmly on its agenda, stating that:

“We agree to take action against non-cooperative jurisdictions including tax havens. We stand ready to deploy sanctions to protect our public finances and financial system. The era of bank secrecy is over.”

This crystallised the implementation of commitments and encouraged all members to translate these into action.

Critically, all major financial centres have become deeply engaged in this process.

The Global Forum has made significant progress in ensuring international cooperation in the exchange of information.

The work of the Global Forum is changing international practice as member countries and jurisdictions respond to the recommendations of peer review reports.

More than 800 agreements that provide for the exchange of information in tax matters have been signed by various jurisdictions.

Australia has signed 30 of our 33 Tax Information Exchange Agreements with low tax jurisdictions in the last 5 years.

Through our membership of the G20, the OECD, and particularly, as Chair of the Global Forum for the past three and a half years, Australia has been at the forefront of the development and implementation of the international standard for exchange of information.

While Australia will shortly pass on the role of Chair of the Global Forum to South Africa, we will continue to be actively engaged in the work of the Global Forum.

G20 & OECD work on Base Erosion and Profit Shifting

These international efforts are not just about increasing transparency.

The G20 has also been arguing for the need for greater international co-operation to prevent base erosion and profit shifting. This has also enabled the OECD to give priority to this issue.

The international tax treaties system has served us well in preventing double taxation, and therefore promoting cross border trade and investment.

There is an increasing recognition that rules designed to prevent double taxation have in some cases resulted in double non-taxation instead – where income is not taxed in any jurisdiction.

This situation is unsustainable – it not only weakens the tax base of individual countries but also weakens the international tax system.

As the Chair of the OECD’s Committee of Fiscal Affairs, Mr Masatsugu Asakawa has said:

“International tax policies must therefore be adjusted to the current business environment, in a way that ensures a level playing field and a fair allocation of taxing rights among both developed and developing countries.”[viii]

As you would expect, Australia is actively involved in the OECD’s work to address the important challenges of intangibles and hybrid mismatch arrangements.

Although there is a long way to go, it is clear momentum to address these issues is building and that the focus of multilateral attention is now squarely on addressing situations of “double non-taxation”.

What else could be done?

As important as these initiatives are, the reality is that countries around the world with corporate income tax systems will continue to be challenged by those who seek to shift income to low or no tax jurisdictions.

Greater Transparency on Tax Paid

One response to criticisms of low corporate effective tax rates is to criticise the basis on which the calculations are made.

It is true that these calculations often require a number of simplifying assumptions – and there are many traps for the unwary in comparing tax and accounting data.

It is also true that reports comparing income tax paid with gross sales revenue are to some extent comparing apples with oranges.

But if these criticisms are valid, I would have thought that the better response would be for companies operating in Australia to be more upfront on the revenue they derived from sales in Australia and the income tax contribution they make to the Australian community.

Exploring the problem further

To deepen our understanding of these issues, I have also asked Treasury to develop a scoping paper, to be led by the head of Revenue Group, Rob Heferen.

The discussion paper will set out the risks to the sustainability of Australia’s corporate tax base and look at the potential solutions.

The Treasury analysis will be informed by a specialist reference group, made up of representatives from business, tax professionals, academics and the community sector.

This follows the Government’s efforts since it came to office to increase consultation and the involvement of the community in the tax design process.

Conclusion


I would like to conclude on a positive note.

Despite the challenges facing Australia’s corporate tax system that I have outlined today, it remains the case that $66.6 billion in company income tax was paid in 2011‑12.

So our company tax system is far from broken.

My message today is simply that there are some looming threats to the corporate tax base and that we would be negligent not to consider them and work towards developing effective and appropriate responses.

The Gillard Government is committed to a fair, competitive and sustainable corporate tax base.

The Government is taking action to improve the integrity of Australia’s income tax laws, through modernising our domestic transfer pricing regime and ensuring Part IVA works as intended.

Australia is also actively engaged in multilateral efforts to improve international cooperation on tax issues and address fundamental problems in the international tax architecture.

And the Government continues to engage with the Australian community on how to get the balance right in addressing these issues.

Thank you.


[i] David Ramli, “Google Australia Tax Bill Slashed by 90pc”, The Australian Financial Review, 3 May 2012, available at: http://www.afr.com/p/technology/google_australia_tax_bill_slashed_vC6kGkvcxjOYB1THc6fWUN.

[ii] David Ramli, “Google Australia Tax Bill Slashed by 90pc”, The Australian Financial Review, 3 May 2012, available at: http://www.afr.com/p/technology/google_australia_tax_bill_slashed_vC6kGkvcxjOYB1THc6fWUN; other reports estimate the figure to be as high as $2 billion. See for example, Ben Butler and Georgia Wilkins, “How Savvy Multinationals Curb Their Tax Bills”, Sydney Morning Herald, 17 November 2012, available at: http://www.smh.com.au/business/how-savvy-multinationals-curb-their-tax-bills-20121116-29hhm.html.

[iii] See for example, Jessie Drucker, “Google’s Recipe forTax-Rate Cut: Double Irish and a Dutch Sandwich”, The Washington Post, 31 October 2010, available at: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/30/AR2010103000034.html; Mike Seccombe, “Google: Don’t Be Evil, Don’t Pay Tax”, The Global Mail, 7 June 2012, Available at: http://www.theglobalmail.org/feature/google-dont-be-evil-dont-pay-tax/261/.

[iv] Of course, any income earned by Google Australia for services provided to the Irish subsidiary would still be taxable here, and would be subject to transfer pricing rules.

[v] See, for example Charles Duhigg and David Kocieniewski, “How Apple Sidesteps Billions in Taxes”, The New York Times, 28 April 2012, available at: http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?_r=0.

[vi] Chris Nuttall, “Apple’s $100bn reserve ripe for spending”, Financial Times, 26 January 2012, available at: http://www.ft.com/intl/cms/s/2/2c1c3c1a-47f0-11e1-b1b4-00144feabdc0.html#axzz2CjFXRdhU.

[vii] Rajeev Syal, “Amazon, Google, Starbucks Accused of Diverting UK Profits”, The Guardian, 12 November 2012, available at:

http://www.guardian.co.uk/business/2012/nov/12/amazon-google-starbucks-diverting-uk-profits.

[viii] http://www.oecd.org/ctp/WCRVol6Issue2_BEPS.pdf




Recommended Reading:

. Google: Don’t Be Evil, Don’t Pay Tax - Mike Seccombe, Global Mail

. How savvy multinationals curb their tax bills, Ben Butler and Georgia Wilkins



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Wednesday, November 21, 2012

Miners complaining about high costs? Spare us. Henry



Australia's big mining companies have created the high-cost culture to which they are now objecting, former Treasury Secretary Ken Henry says.

They are complaining that Australia's costs are increasing at the same time as they pushing them up, he told an audience at the Academy of Social Science Tuesday night.

“Business people talk a lot about Australia being a high-cost low productivity country, but the fundamental reason labour costs have been increasing at the rate that they have is the mining boom, he said in answer to questions.

“Miners and energy producers are paying more for labour, because they want to.”

“In order get labour to work in the mines they have to pay handsome wages to attract the labour out of the places from which it has been attracted.”

“That's the fundamental reason why costs have been increasing in the sector. I'm not saying its the only reason, but it is the fundamental reason – strong demand for Australia's minerals and energy.”

“What can we do about it? We can find ways of boosting labour productivity without it flowing through into increased wages. We did this in the second half of the 1980s. It was a pretty unique period in Australian history.”


In today's Canberra Times and Sydney Morning Herald



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You'll no longer be able to rely on government bonds - Robb

The Coalition will ask investors to prepare for a world with far fewer government bonds in an address in Melbourne Wednesday, saying as it acts on its promise to cut net government debt to zero there will be a “commensurate reduction in the issuance of government bonds”.

In their place it will commit itself to develop a retail market in corporate bonds to rival the share market, saying it makes “no sense” for investors to have easy access to equity yet almost none to lower-risk corporate bonds.

“In March 2009 Tabcorp issued a 5 year retail senior bond - the first vanilla retail bond since Telecom Bonds in the 1980s and 1990s,” finance spokesman Andrew Robb will tell the Melbourne University economics faculty.

“Since then there have been less than five large, quality issues. At this rate a deep and liquid market will never be developed.”

Mr Robb will quote NAB wholesale banking executive Rick Sawers as saying: “If I arrived from outer space this morning I could probably buy shares online by 5pm today, but it is much more difficult to buy a bond.”

“The Coalition understands that until there is a comparable market, government has not fulfilled its role and once there is, government should allow the market to function,” Mr Robb will say.

“In dollar terms, Commonwealth government securities were our second biggest export in 2011-12 at $58 billion."

“Our determination to start paying off Commonwealth net debt will of course see a commensurate reduction in the issuance of government bonds"...

Australia’s banks should be particularly keen to buy corporate bonds as the supply of government bonds winds down and they are forced to comply with Basel III liquidity regulations. Overseas bonds are expensive.

In today's Sydney Morning Herald and Age


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Turnbull and Abbott in lockstep?

Tony Wright on ABC Adelaide 891 this morning

6 minutes, play or CLICK THEN CLICK AGAIN to download mp3




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Monday, November 19, 2012

Shock. Republicans (briefly) speak the truth about copyright

From arstechnica:

On Friday afternoon, an influential group representing conservative Republicans in the House of Representatives released a shockingly sensible memo calling for sweeping reforms of the nation's copyright laws. But less than 24 hours later, the group's executive director, Paul Teller, issued a statement saying he was recalling the memo because it had been "published without adequate review."

It's here:

Three Myths About Copyright Law and Where to Start to Fix It

HT: Dr Rimmer



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Sunday, November 18, 2012

Why does Elton do it? Intellectual property question


Tight. Flawless. Incredible sound. That was Elton John, at the Canberra Stadium Wednesday.

I don't often go to concerts, but two things surprised me.

1. There was attempt whatsoever to stop people making their own videos (maybe that's impossible these days).

2. As we left the stadium listening to the car radio we heard the concert replayed on Mix 106.3. Really. The very same concert. The "brought to you by" radio station had taped the whole thing straight from the mixing desk and was playing it back, song by perfectly-mixed song, ad lib by ad lib.

It made the concert experience richer, thicker, more long-lasting. For my daughter, who has grown up during the digital age, it validated the experience - made it more real.

Clearly Elton doesn't mind bootlegs. He probably sees them as advertisements, gathering an audience for his next concert.

It's light years from the days when academics would give lectures in the dark so students couldn't take notes (believing that if notes were in circulation students wouldn't pay to go to lectures) and when movie studios forbade the release of their songs on records (believing that if people could hear the songs on records they wouldn't pay to hear them at the movies).

Oh yes. And in 1970 Australian record companies forbade the playing of their records on commercial radio, apparently believing that if they weren't heard on radio music lovers would rush to buy them.





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Thursday, November 15, 2012

It's inside information, even if it's wrong

If information is wrong, can it really be information?

The High Court ruled Wednesday that it can. Information doesn’t need to be correct in order to be inside information, and anyone who trades on the basis of it can be guilty of insider trading even if they’ve beeen fed lies.

Perth business identity John Kizon and his financial adviser Nigel Mansfield were fed whoppers. Pornography king Malcolm Day is alleged to have told Mansfield that his publicly listed company AdultShop.com was preparing to report a profit of $11 million for the 2002 finanical year, up from $3 million the year before. Turnover was said to have more than doubled. He is alleged to have told Kizon that “Packer” (described in to the court as a well-known businessman) had bought 4.9 per cent of AdultShop.

Neither of these things were true. The profit hadn’t climbed and “Packer” hadn’t bought 4.9 per cent of AdultShop. (Although interests associated with the Packer family had briefly at an earlier time owned 1.5 per cent.)

Kizon and Mansfield bought into AdultShop and were charged with insider trading by the Australian Crime Commission which tendered secretly recorded telephone calls in evidence to the West Australian district court.

In defence Kizon and Mansfield said they had been duped. They couldn’t have conspired to commit insider trading because the information they had been fed was untrue, and therefore wasn’t “information”.

The trial judge agreed finding that in order to be be “information” something had to be “a factual reality”. The prosecution appealed and won, leading Kizon and Mansfield to petition the High Court.

All five judges found against Kizon and Mansfield, finding for the broadest possible of the definitions of “information” in the Oxford English and Macquarie dictionaries....

Macquarie defines information as "knowledge communicated or received concerning some fact or circumstance”.

Justice John Heydon found that if Kizon and Mansfield were correct it make sense to use the phrases “correct information” and “false information”. But he said the phrases were often used in litigation. An example was the claim: “You gave me some information during the negotiations; I acted on that information, but it was false information”. He said the claim had meaning because we do not always expect “information” to be true.

As a practical matter working out whether inside tips were true would place a heavy burden on the prosecution. It would involve “an assessment of criminal guilt in hindsight” leaving accused persons “unsure whether or not at the time they traded in securities their conduct was or was not lawful”.

Kizon and Mansfield will face a retrial.


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Tuesday, November 13, 2012

Better the devil you know. Why the Tax Office should grab our accounts.

Handling lost and inactive super accounts over to the Tax Office will be good for their owners, Treasury has told a Senate committee. It the accounts stay with the super funds the fees and charges taken out will “typically exceed the likely earnings” pushing them backwards.

Treasury retirement incomes specialist Paul Tilley told the inquiry that under the changes due to start in January the Tax Office would pay interest on the inactive accounts it sequestered at the rate of the consumer price index, which is usually around 2.5 per cent. If they stayed with the the funds they would face “erosion”.

From January unidentified balances of up to $2000 will be transferred to Tax Office after one year without contributions. The previous limit was $200 and it had to stay untouched for five years.

While the change will improve the government’s short-term budget position, accounting for around one third of this year’s forecast $1.5 billion surplus, Mr Tilley said it made sense from the point of the account holders.

“A 30 year old facing typical account fees and earnings would be $1000 better off over five years,” he told the committee...

Representatives from the Institute of Superannuation Trustees, the Financial Services Council and the Association of Superannuation Funds all said they supported the legislation.

The Australian Bankers Association objected to the timing of a separate measure that would transfer unidentified and inactive bank deposits to the Securities and Investments Commission after three rather than seven years. Chief executive Steven Munchenberg said the banks would have to wait until the new year to adjust their computer systems in order to avoid disruptions in the leadup to Christmas.

In today's Age






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Who says RBA forecasts are hopeless?


The Reserve Bank says so.

Me on ABC NightLife, Wednesday November 14


9 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Me on ABC Adelaide 891, Wednesday November 14

6 minutes, play or CLICK THEN CLICK AGAIN to download mp3




Who says most Reserve Bank forecasts are hopeless?

The Reserve Bank itself says so in a research paper released Monday.

To be strictly accurate, the paper is by two of its economists Peter Tulip and Stephanie Wallace. Released by the Bank, it is prefaced by the usual warning that its findings “do not necessarily reflect” those of the Bank. Nevertheless Tulip and Wallace find Reserve Bank forecasts explain only 15 per cent of the variation in unemployment in the short term and beyond that are “less accurate than a random walk”.

The Bank’s forecasts for GDP growth aren’t likely to be accurate at any time. Even in the very short-term the historic mean provides a better guide. For the year to December 2013 the Bank is forecasting economic growth of somewhere between 2.25 and 3.25 per cent. Tulip and Wallace say a more likely range is somewhere between 0.9 and 5.7 per cent.

The Bank’s forecasts for inflation are pretty good (better than those of the market) but only for one year ahead. After that they also are also no better than random. Tulip and Wallace say the best longer term predictor of inflation is 2.5 per cent, which is the centre of the Reserve Bank’s target band. The finding makes sense. The Bank is good at hitting its target

And what about market forecasts of the RBA’s own decisions? Tulip and Wallace say the judgements backed with money and baked into the yield curve predict short-term interest rates “only slightly better than a random walk”. Sorry.

In today's CBD




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Friday, November 09, 2012

Good news, and bad news. You're more likely to outlive your super


A decade ago an Australian man who had just turned 50 could expect to live another 29.9 years. Today the official figure is 32 years. Even the past year has made an enormous difference. A year ago a man turning 50 could officially expect an extra 31.7 rather than 32 years.

The extraordinary jump in longevity detailed in the new Bureau of Statistics life tables is playing havoc with Australia’s superannuation system. Australians who get their super in a lump sum are increasingly likely to exhaust it before they die, and even Australians who take it out gradually at recommended rates are facing the same fate.

Michael Sherris, professor of actuarial Studies at the University of New South Wales says financial planners don’t understand the risk.

“They’ll sell people what they call superannuation accounts because they let people draw down what they need, but they typically last fifteen, maybe twenty years. While twenty years is what the tables say retirees have left, longevity is improving all the time in a way not fully recognised in the tables and there’s enormous variability about the central figure.”

The life tables released Thursday say a girl born today can expect to live 84.2 years and a boy 79.7 years, but if they survive the first few relatively dangerous decades the figures and higher. Professor Sherris says generational changes and improvements in medicine mean a girl born today is quite likely to live to 100, with about half the girls born this year likely to live beyond 100.

“When their super runs out these people fall back on the pension. For some it’s a sudden drop in income. But they won’t buy lifetime annuities - so called longevity insurance - in part because the annual income it gives them is small.”

Jeremy Cooper who chaired the government’s inquiry into superannuation in 2010 is now an executive at Challenger Limited, one of the few firms selling lifetime support. He says most Australians prefer the “Holden Kingswood” - a product that pays them what they want, until it runs out.

“What they hell do you do when you turn 87?” he asks... “You are still spritely and you think you’ve been frugal, but the money’s just not there.”

“It isn’t so bad for Australians who grew up during the war - they are used to hardship. But for the next wave of retirees it’ll be an awful shock.”

“It’s the biggest problem in our superannuation system. We’re pretty good when it comes to accumulating money, but we mess it up at the end.”

Professor Sherris thinks one of the reasons Australians shy away from longevity insurance is that they get upset at thought they mightn’t live long enough to get what they could. “It’s an odd attitude. When we insure our cars we don’t much mind if they are not damaged and we don’t get a payout, but when we insure our lifetime income we seem to feel cheated if the insurance company keeps the money rather than our families.”

The figures show men born in the Australian Capital Territory likely to much longer than those born elsewhere with a boy born in Canberra facing an even chance of reaching 81 compared to 80.3 in Victoria and 79.8 in NSW. The difference is much less marked for women, with girls in most states likely to live between 84 and 84.5 years.

Indigenous Australians are more than twice as likely to die at any age as non Indigenous Australians. Australians in cities are the least likely to die suffering only 5.6 deaths per 1000 compared to 8.2 per thousand in very remote locations.

In NSW the death rate is the highest in Bourke, Brewarrina, Wellington and Central Darling local government areas. In Victoria, the worst areas are Ararat, Central Goldfields and Nurrindindi.

In today's Canberra Times, Sydney Morning Herald and Age


TECHNICAL NOTE: The ABS life tables are likely to underestimate actual life left in two ways.

1. They ignore cohort effects. They are prepared using death rates for people who have just been a certain age. But the next group of people to be that age will be from a younger cohort and likely to have a lower death rate because of changes in medical technology etc that have already taken place whether or not there are any further improvements in medical technology etc from here on.

2. There may be further improvements in medical technology etc from here on. (Or there might not be. There might even be outbreak of disease that sets things back, but there are usually improvements.)




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A win for Nate. A win for reality.


@jsmooth995


And boy has there been an assault on reality.

In his Andrew Olle lecture Friday night ABC broadcaster Mark Colvin described what's been happening this way:


"I'm talking about the way people can create their own reality stream.

It's particularly far advanced in America, because a quarter of a century ago they abandoned the fairness doctrine, a federal regulation which mandated a degree of balance on the airwaves.

So now you can run a creationist channel that rigorously excludes Darwinists from the airwaves - you can say again and again that Barack Obama was born in Kenya, and refuse even to look at the documentary evidence, and so on.

In 2004, the writer Ron Suskind wrote a famous piece in which he quoted a Bush aide - reliably believed to be Karl Rove - as follows:

"The aide said", wrote Suskind, "that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality judiciously, as you will we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors;and you, all of you, will be left to just study what we do."

I imagine most of us here tonight would categorise ourselves as the reality based community, but we too are beleaguered."



New York Times data geek Nate Silver was feeling beleaguered.

A few days back Paul Krugman took up his story:


"For those new to this, Nate is a sports statistician turned political statistician, who has been maintaining a model that takes lots and lots of polling data — most of it at the state level, which is where the presidency gets decided — and converts it into election odds. Like others doing similar exercises Nate’s model continued to show an Obama edge even after Denver, and has shown that edge widening over the past couple of weeks.

This could be wrong, obviously. And we’ll find out on Election Day. But the methodology has been very clear, and all the election modelers have been faithful to their models, letting the numbers fall where they may.

Yet the right — and we’re not talking about the fringe here, we’re talking about mainstream commentators and publications — has been screaming “bias”! They know, just know, that Nate must be cooking the books. How do they know this? Well, his results look good for Obama, so it must be a cheat. Never mind the fact that Nate tells us all exactly how he does it, and that he hasn’t changed the formula at all.

This is, of course, reminiscent of the attack on the Bureau of Labor Statistics — not to mention the attacks on climate science and much more. On the right, apparently, there is no such thing as an objective calculation. Everything must have a political motive.

This is really scary. It means that if these people triumph, science — or any kind of scholarship — will become impossible. Everything must pass a political test; if it isn’t what the right wants to hear, the messenger is subjected to a smear campaign."




Nate - for the most part - failed to strike back, or back away from his assessment (one arrived at by calculations rather than judgments by the way, like in Moneyball).

The end result? Darn near exactly what he predicted:




Reality (specifically, data) triumphed over people who preferred to choose their reality.

As Jon Stewart said last night: "This was the historic election between arithmetic, and belief. And belief wasn’t going down without a fight."

Watch the full eight minutes. It's worth it.








Essential reading:

. The war on Nate Silver, the after-action report - Brad DeLong


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