Wednesday, December 31, 2014

Ridiculous, but they work. Why we continue to make New year's resolutions

New Year's resolutions are ridiculous.

Think about it. People who want to change their behaviours  decide to change their behaviours and then all do so at once at midnight. But if they really wanted to change their behaviours they would do it of their own accord, without waiting.

At least that's what anyone who has ever studied economics has been taught. People are meant to be straightforward, literally single-minded.

But we're not, and the success of New Year's resolutions proves it. That's right, success. Because despite all of the jibes the truth is that New Year's resolutions work, and work far better than alternative of simply deciding to change behaviour and then changing it.

The reasons why give us an insight into what it means to be human and into why many of us are never quite sure who we are.

Here's the evidence, assembled by a US psychologist John Norcross. In the leadup to New Year's Eve 1995 he and a team from the University of Scranton in Pennsylvania phoned hundreds of Americans at random and asked whether they were planning to make a specific measurable resolutions at midnight or whether they weren't but still had measurable goals they would like to achieve.

Half a year later an impressive 46 per cent of those who had made resolutions claimed to be meeting their goals, compared to only 4 per cent of those who had not.

Conceding that self-reported success might be exaggerated, he said his findings should be seen "in a comparative context - compared to what".

"In this case, the success rate of resolutions is approximately 10 times higher than the success rate of adults desiring to change their behavior but not making a resolution."

His findings have been replicated repeatedly: resolutions work.

And they suggest that rather than being single-minded many of us are better thought of as having at least two minds, each fighting for control. One might be the saver, the other the spender; one the worker, the other the shirker; one the dieter, the other the eater.

Economist Richard Thaler had his epiphany when he invited a group of graduate students to his house for dinner. While he was cooking he brought out a bowl of cashews.

"We started devouring them," he later explained. "I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me."

And then it hit him. He was being thanked by graduate economists. They wouldn't be thanking him at all if they really believed human beings were rational. "After all," he recalled in his biography, "if we wanted to stop eating cashews, we could have done that at any time".

Economics has traditionally explained away what appear to be two separate selves by saying each of us is one self with stable preferences moderated by a discount rate. Because we care most about the present we "discount" whatever good or bad things are likely to happen in the future when comparing them to the good or bad things we are facing now. We are said to have a constant discount rate of around 8 per cent per year.

But the explanation doesn't stand up. Rather than being constant, our discount rate seems to climb the closer we get to the choice we have to make.

Ask someone today to choose between working seven hours on April 1 or eight hours on April 15 and that person will almost certainly choose the easier day on April 1. But ask again when April 1 arrives and the same person will almost certainly choose the harder day in a fortnight's time.

The example comes from US economists Ted O'Donoghue and Matthew Rabin who in 1999 published a paper in the American Economic Review eviscerating the traditional idea of a constant discount rate and proposing instead a model of two selves in which the first was concerned only about the present (always wanting to put off anything unpleasant) and the second was concerned about where that would lead.

The two fight it out. There's no single 'self' always in command.

If they are right it explains the success of resolutions - they are a tool the long-term self can use to trap the short-term self into acting.

And it explains why certain types of resolutions are more likely to succeed than others - those that are specific and are made in public and no room for backing out.

John F Kennedy did it most famously in 1962 with his commitment to send a man to moon "before this decade is out" and just as effectively a year earlier declaring that the US would regard any attack on West Berlin "as an attack upon us all".

In both he was influenced by Thomas Schelling, an adviser to President Truman who later won the Nobel Prize in Economics and probably invented the concept of Mutually Assured Destruction, which against all odds has kept the world free of nuclear attacks for seven decades.

His insight was that closing off options can be empowering. The US was formidable when it declared that it would send a man to the moon no matter what, frightening when it declared it would defend Berlin no matter what and terrifying when it declared it would respond to nuclear force with nuclear force no matter what.

His advice for tonight is to eschew vague resolutions and go for absolutes: "Just as it may be easier to ban nuclear weapons from the battlefield in toto than through carefully graduated specifications on their use, zero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration."

And say it out loud. Lock yourself in. You might be surprised at what you can achieve.

In The Age and Sydney Morning Herald

Related Posts

. New Year's 2004. Why Scrooge wouldn't take the cash

. New Year's 2007. When the hand nears twelve...

. New Year's 2014. Sugar: It could be why you can't lose weight


Tuesday, December 16, 2014

Advice for Hockey: Slug super and fix the budget in one hit

Sooner or later Joe Hockey is going to do what's needed.

He is running out of other options. In opposition he said returning the budget to surplus would be easy: "Based on the numbers presented last Tuesday night, we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term," he promised just 18 months before the election.

As the election came closer he became more cautious, refusing to set a date. And then in his first budget, in May this year, he said he would deliver a surplus in 2018-19, a deadline now a mere memory.

Many of the things he thought would be simple turned out to be difficult. He was going to axe 12,000 public service positions before discovering Labor had already set in train processes to axe 14,000. He hemmed himself in with promises not to cut health, education or pensions, each of which he has had to honour in the breach.

Some of his promises made things needlessly hard. Axing the carbon tax (while keeping the associated compensation measures) will cost the budget $7 billion.

And the iron ore price collapsed. It'll rip $14 billion from the budget over the next four years. It's a truly massive problem, yet rather than find a massive fix Hockey has so far used piecemeal measures such as shaving foreign aid, indexing petrol excise, penalising job seekers, giving less to universities and trying to charge for previously free visits to the doctor.

Each doesn't save much, and each arouses so much opposition as to make it scarcely worth his while, even if it gets through the Senate.

What he needs instead is one really big tax hike (spending cuts won't raise enough), but one won't rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year....

Labor's own tax review has already pointed the way, but at the time Labor was too scared to take any notice.

What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.

Instead of being paid by the fund the tax would be paid by the employee at the same time as all their other tax, in the same way as other tax and at the same rate as other tax. Nothing could be simpler.

The Treasury says the present tax arrangement will cost the budget $17.8 billion this financial year, $19.15 billion next financial year and $20.7 billion the following year. The figures exclude the incredibly generous concessions for the income earned within super funds, which needn't be touched. But they do include the tax concessions on extra contributions made over and above what's compulsory. To the extent that they are made merely to avoid tax they will vanish, cutting the benefit for the government to about $12 billion a year – which happens to be about what's needed.

Former Treasury economist Steven Anthony of the Canberra consultancy Macroeconomics has come up with the $12 billion figure, from taxing wages paid as super in the same way as wages paid as wages. He says it's extremely conservative and it would climb each year.

The thing about compulsory contributions is that they are compulsory. They can't be cut. The government would lock in an extra $12 billion per year (and climbing) at the stroke of a pen. It shouldn't dent household spending in the same way as would an increase in income tax, but it might make households more wary of spending, believing they've less tucked away for when they retire.

Which is where Hockey's just-completed financial system review comes in. It's come up with a plan to boost retirement incomes by between 25 per cent and 40 per cent, largely by the simple expedient of cutting the other "superannuation tax" – the fees imposed by fund managers for performance that's usually no better than ordinary.

The plan is wonderfully simple. The market would cut the fees all by itself. All the government would do is conduct an auction every three or so years for the right to manage all new default accounts. With a huge business up for grabs, the fund managers would fight among themselves to bid the fee down. Right now fees range from 0.48 per cent 1.84 per cent. When Chile adopted the scheme it got the fees for new accounts down to 0.4 per cent and customers in other schemes switched over. The Grattan Institute reckons it would save around $10 billion per year, which coincidentally is close the $12 billion extra the government would take from them by properly taxing their super contributions.

As it happens the Coalition is in a good position to blame Labor when it grabs the $12 billion. It is Labor that set up compulsory super in 1992. It is Labor that taxed all contributions at 15 per cent regardless of the taxpayer's rate. It is Labor that was prepared to leave the woefully deficient scheme in place until right near the end when budget pressures forced it to take limited action against high earners – action that it didn't have time to put through parliament.

If anything it is the Coalition that has a better track record. Peter Costello introduced a 15 per cent super tax surcharge for high earners (they paid 15 per cent plus 15 per cent) which he later removed after it led to "enormous complexity and compliance costs".

This wouldn't. There is nothing simpler than taxing all income as if it is income. And the pay-as-you-earn tax system is set up to collect it.

It's over to Joe, and the tax inquiry he is about to commission. He could solve his problems in one hit.

In The Age and Sydney Morning Herald

Related Posts

. How unfair are super tax concessions? Two views

. The Grattan fix. How to stop fees eating up our super

. Treasury: Super costs us three times what it should


Wednesday, December 10, 2014

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

Related Posts

. Abbott: the most radical prime minister since Whitlam

. "A crime", "absurd". Stiglitz on the budget changes to health and education

. Medicare. What would charging for a previously free visit to the doctor achieve?


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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

Related Posts

. Medicare. What would charging for a previously free visit to the doctor achieve?

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


Tuesday, December 09, 2014

Want lower interest rates? Attack negative gearing

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

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

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

So it's up to the Reserve Bank.

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

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

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

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

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

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

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

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

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

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

The Murray review calls the tax treatment "asymmetric".

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

Related Posts

. Is negative gearing responsible for soaring house prices?

. What were they thinking? The tax heists that made us a nation of losers

. Why the Reserve Bank board is poised to cut


Duty calls John Fraser back to head Australia's treasury

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

Related Posts

. Treasury has a problem with women?

. Leigh on the Coalition's hatred of Treasury

. 2011: If he wants me to go, I'm out of here' - Parkinson on being Treasury Secretary under Abbott


Thursday, December 04, 2014

GDP Weak. Rate cut looms

An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.

Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.

"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."

Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."

The bleak outlook is both economically and politically complex for the Abbott government.

While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.

Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...

With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.

"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."

Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.

Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.

The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.

The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.

Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.

On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.

Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.

The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.

Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.

"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."

The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.

NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.

In The Age and Sydney Morning Herald

Why the Reserve Bank board is poised to cut

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

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

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

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

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

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

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

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

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

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

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

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

There's little reason not to cut.

In The Age and Sydney Morning Herald

Related Posts

. July 2013: Inflation is too low. Stand by for a pre-election rate cut

. October 2013: Why there won't be any more rate cuts this year

. February 2014: Steady as she goes. Rates on hold all year


Tuesday, December 02, 2014

Memo to Abbott. Mess with Victoria and you mess with the nation

Here's a tip: Tony Abbott won't make good his threat to rip $3 billion out of Victoria's economy.

Before the election he said the money promised for the East West Link would vanish if an incoming government used it for any other purpose.

"I want to make it absolutely clear to the people of Victoria that the $3 billion the Commonwealth government has committed to this project is for one purpose and one purpose only - and that is to build East West Link," he wrote to both Dan Andrews and Denis Napthine. "If a future government is not prepared to spend the money on East West Link, then that money will not be forthcoming."

Such a decision would shrink what Abbott repeatedly calls the biggest infrastructure investment program in Australia's history. And it would shrink it in the state where he needs to spend the most.

Victoria accounts for more than one-fifth of Australia's economy. No other state, apart from NSW, produces more. Yet in the past six years its output per person has stalled. Victoria produces scarcely any more per person than it did in 2008.

Victoria's construction industry stood still in 2014. Over the year to September it grew just 0.7 of one per cent. No other state performed as badly. The NSW construction industry grew 19 per cent.

To withdraw a promised $3 billion from Victoria's construction industry (half for East West Link stage 1, half for stage 2) would be to deny a boost to the state that needs it the most, and to deny a boost to the national economy in the process. Abbott himself said building the East West Link would create almost 7000 temporary jobs.

There's every reason to believe that Melbourne Metro would create as many jobs. It is the purpose for which the $3 billion was originally intended before Abbott diverted it into roads...

On Sunday his language softened. He said merely he was determined to do what he could to ensure the East West Link proceeded.

Melbourne Metro would do far more for Melbourne than would East West Link. That must be what the cost-benefit statements show, otherwise Napthine would have made them public. When Andrews makes them public in a matter of days Abbott will have to explain why he was determined to lock Victoria in to the least beneficial of the two projects.

He is granting money to every Australian state for a major infrastructure project. In NSW it is WestConnex, in Brisbane it is Gateway Motorway North, in Adelaide it is the South Road upgrade and so on. In every case it is money collected from the citizens of those states via taxes.

It is inconceivable that he would damage the national economy by leaving out the one state that needs it, especially when it was he who dubbed the election "a referendum on the East West Link".

And here's another tip: Abbott and Joe Hockey as good as wrote off Victoria during the campaign in order to salvage their budget. And not in the way you might think.

It would have made political sense to ditch the Medicare fee increases and the bulk of the changes to university funding before or during the election campaign. They weren't likely to get through the Senate.

Instead they, kept them as government policy to tide them through to an event they believed was more important than the Victorian election - the release of the Mid-Year Economic and Fiscal Outlook on December 16.

If those programs are still regarded as government policy Abbott and Hockey can include them in the statement as zombies - neither alive nor dead. They can book the best part of $5 billion they would have raised from them even if it won't come near the budget.

As shadow treasurer, Hockey, every budget night, was keen to distribute a very useful document detailing the accounting tricks Wayne Swan had used to forecast yet another unlikely surplus.

This year he'll be the one using accounting tricks if he persists in booking the income from zombies. He might as well. The Coalition denied Napthine a lifeline so that he could.

It will fool no-one of course. Budget analysts will simply add the best part of $5 billion to whatever deficits he forecasts for the next four years and mark him down for trickery, like they marked down Swan. Even without the zombies the budget update is looking horrific.  

The ABC reports the Treasury will use an iron-ore price of about $60 a tonne. The budget itself was struck when the price was $103. Deloitte Access says even with the zombies this year's income will be $2.3 billion worse than the budget forecast and next year's income $7 billion worse.

Most of it will be due to the impact of a lower iron-ore price on company profits and tax receipts. But not all.

Disturbingly, Deloitte notes that "whereas once the red ink was mostly confined to the profit taxes, the combination of wobbly job growth and an extended period of weak wage gains now looks like being just as big a budget buster". Income taxes are set to fall short of budget estimates by $2.9 billion this financial year and $4.2 billion next financial year.

Victoria's jobs growth is close to the weakest in the nation. In the past year Victorian employment has climbed by less than 0.5 per cent, about half the weak national growth rate of 0.9 per cent.

In The Age and Sydney Morning Herald

Tuesday, November 18, 2014

China is ahead of us on climate change. Let's not belittle its commitment

China must hate the things that were being said about it as it closed its free trade deal with Australia.

Interviewed at the G20 as Chinese and Australian officials were fine-tuning the details of the announcement, Treasurer Joe Hockey belittled its commitment to turn back its tide of rising carbon emissions.

"I mean, you just look at China," he told the ABC's Barrie Cassidy. "China is going to continue to increase emissions Barrie, until 2030, it is going to continue increasing emissions."

Earlier he had told Sky News that: "To put it in perspective we are in the business of trying to reduce our emissions off a base load and China actually is increasing emissions and said in 2030 it will start to reduce them".

The perspective missing from Mr Hockey's account is that Chinese living standards are a fraction of Australia's. China is lifting its emissions because it is rapidly industrialising as its citizens move from the country into cities, something ours did a long time ago.

To slow and stop emissions growth while industrialising would be an achievement of unimaginable proportions.

It has never happened before.

To do it the White House believes China will install an extra 800 to 1000 gigawatts of emission-free technology by 2030 -  "more than all the coal-fired power plants that exist in China today and close to total current electricity generation capacity in the United States"...

China's use of coal for electricity climbed 13 per cent a year as its economy roared into life between 2000 and 2011. Since then it has climbed just 3.25 per cent per year and looks likely to have stabilised in 2014. China expert Ross Garnaut expects its use of coal for electricity to slip 0.7 per cent per year from now on before sliding sharply after 2020.

Mr Hockey said he "didn't hear the United States or the Chinese saying they were going to introduce a carbon tax", but China's vice finance minister Zhu Guangyao mentioned emissions trading in a briefing to journalists on the sidelines of the G20 summit Mr Hockey attended. China has seven pilot schemes in operation and is preparing for a China-wide scheme by 2020. China's vice finance minister seemed serious.

Yet on Thursday Prime Minister Tony Abbott mocked China's plans as "hypothetical" and "down the track".

"It is all very well to talk about what might happen in the far distant future but we are going to meet our five per cent reduction target within six years," he said. "We are talking about the practical; we are talking about the real. We are not

talking about what might hypothetically happen 15, 20, 25, 30 years down the track. We are talking about what we will do and are doing right now."

Aside from any offence caused to Australia's newest free trade partner, the problem with Mr Abbott's statement is that the commitments announced by China and the US on Thursday will force Australia to do much more than five per cent within six years.

And Mr Abbott's preferred mechanism, his "direct action" Emissions Reduction Fund is incapable of doing much more.

That isn't just because the $2.55 billion he has set aside over four years for grants to polluters to cut pollution wouldn't be enough to meet the bigger target (it's almost certainly not enough to meet the present target).

It's also because of something else, something of a dirty secret among proponents of direct action grants:  they are not directly scalable.

The bureaucracy that would be needed to hand out enough grants to get a 5 per cent reduction on Australia's 2000 emissions by 2020 wouldn't be able to handle a 30 per cent reduction by 2025 - and that's what the Climate Institute believes will be required if Australia is to match the US commitment.

The red tape that's tolerable when you are using a system of bookkeeping and grants to achieve something small becomes intolerable when you are attempting to achieve something big.

That's what the Treasury advised the Coalition in the change of government document it prepared in 2010. In its words then, "a market mechanism can achieve the necessary abatement at a cost per tonne of emissions that is far lower than alternative direct-action policies".

It's what Prime Minister John Howard's emissions trading taskforce told him in 2007. It said "by placing a price on emissions, trading allows market forces to find least-cost ways of reducing emissions by providing incentives for firms to reduce emissions where this would be cheapest, while allowing continuation of emissions where they are most costly to reduce".

Once emissions permits are sold or given away it is up to the firms that own them to decide whether to use them or whether to cut their pollution and sell them to firms that need them more. This automatically ensures that the firms that can most cheaply cut emissions cut them first (pocketing income along the way) and that the firms that can't afford to do it cheaply do it last (paying to buy permits).

Emissions trading is "set and forget", and infinitely scalable.

The Coalition's "direct action" system of grants attempts to achieve the same goal but will do it less perfectly because the grants its bureaucrats will administer can't be traded among polluters to ensure that the lowest cost methods of cutting pollution are tried first. And its cost scales up with the size of the task.

The Coalition has said often that Australia will lift its emissions reduction target beyond 2020 if other major nations lift theirs. China is doing so, making an unprecedented promise to cut its emissions growth to zero while industrialising. The US has made a commitment that when applied to Australia would require us to cut our emissions by 30 per cent on 2000 levels by 2025. Last month, European leaders agreed to cut their emissions by 40 per cent on 1990 levels by 2030.

Australia will need to stump up with something in time for the Paris climate change summit due late next year. As Mr Abbott and Mr Hockey well know having just organised Australia's G20 summit, the reality is that Australia will need to show its hand well before the Paris summit.

A bigger commitment is no longer hypothetical, and it's not down the track.

In The Age and Sydney Morning Herald

Tuesday, November 11, 2014

Truth in promises. A policy worth voting for in the Victorian election

Now noone knows where the money is coming from.

Usually governments are restrained in what they offer in election campaigns. Their promises are already in the budget, already accounted for. It's the opposition that appears reckless, making promises that by definition aren't in the budget and aren't funded with savings.

Unless the government is in imminent danger of losing. Then it'll throw out money like an opposition on steroids, announcing unfunded promise after unfunded promise like a squid under attack squirting out ink.

Denis Napthine announced new promises worth $4.2 billion in his 33-minute campaign launch speech on Sunday. Something of a record, it works out at $127 million per minute which is more per voter per minute than John Howard promised in his final desperate pitch to get re-elected in 2007.

Most of it was for trains and trams, which is odd because just two days before, the Prime Minister Tony Abbott defined the election as a "referendum on the East West Link".

When you're facing political death it's wise to cover bases. Which means scrambling to find money.

We don't yet know where he would get the $3.9 billion for public transport, the $100 million to spend on regional cities, the $23 million to give to parents of kindergarten children and so on and nor do we really know how he would find the $8.5-$11 billion he promised in the budget to pay for the Melbourne Rail Link. Most of it is beyond the budget's four-year forecasting horizon...

And we are not likely to know until just before the election. "At a later stage" are the words used by the treasurer's office. If history is any guide we'll be told on the Wednesday or Thursday before the vote; or even on the Friday, election eve. It'll be too late for the Victorians who've voted early (more than half a million are expected to) and effectively too late for debate and discussion about what Napthine has in mind.

It'll be the same for Labor, although at least it has come up with a date. It'll outline the costs of its promises and how they will be funded >on the Thursday before the poll - that's 40 hours before we vote. Labor will outline these promises in a press conference attended by a representative of Moore Stephens, the private accounting firm that has been going over its numbers.

It's an appalling way to treat the people who are meant to be deciding how to vote, not to mention the press which is meant to be giving those people the information they need to decide.

"The big reveal" two or three days before the election can and does result in voters being misled, with no time to check the truth of what they are being told.

In the 2010 federal election the Coalition's treasury spokesman Joe Hockey released 12 pages of costings (with no explanation of how they were derived) late on the pre-poll Wednesday. They were covered by a one-page note from a Perth-based accountancy firm that said it was "satisfied that based on the assumptions provided, costed commitments and savings have been accurately prepared in all material respects".

But the costings weren't accurate, as the Treasury discovered after they were released after the election. Among other basic mistakes the Coalition had booked as a gain the interest it would save by banking the proceeds of selling Medibank Private without booking as a loss the dividends it would no longer receive after selling Medibank Private.

Four years later in 2013 the Coalition delivered an eight-page document that was no more informative. It did it on the Thursday, 40 hours before voting began. This time a post-election review by the Parliamentary Budget Office found it was mistake-free, but voters weren't able to know that at the time, and they weren't able to see the assumptions that lay behind it until after they had voted.

Victoria doesn't have a parliamentary budget office.

The Commonwealth has one, NSW has one, and the Victorian Coalition promised one when it was in opposition. Ideally a PBO works with political leaders to fine-tune and cost their policies and then makes public the final document when the policies are announced. The Commonwealth's has a major flaw. It is not allowed to make the documents public until the leader says so. In 2013 Abbott didn't say so. That meant the Coalition was able to claim the endorsement of the PBO without letting the public see how that endorsement was arrived at.

Victoria's wasn't going to have that flaw and the Baillieu government was going to write it into law on taking office. It didn't, for three years. Then under Napthine it introduced legislation for a cut-down "temporary recurring" PBO. Rather than working all year round it would accept costing requests only for the three months before each election and then shut down. (The NSW office is also temporary recurring but it accepts requests for many more months than three). Opposition Leader Daniel Andrews said he wouldn't cop it and Napthine dropped it.

Now Labor's putting forward a proper model that would work all year round. It would cost $3.3 million per annum. It's the least we deserve.

In The Age and Sydney Morning Herald

Tuesday, October 28, 2014

Crowned. Neither Napthine nor Andrews wants to govern

Daniel Andrews and Denis Napthine are competing for glory without power. Neither really wants to govern.

Napthine signed away his right to make laws that tackled gambling and smoking in an extraordinary deal waved through Parliament days before the election campaign. The law not only restricts the actions of the Napthine government should it get back, but the actions of every future Victorian government for the next 36 years.

Should a future government decide to impose a $1 betting limit on poker machines (as recommended by the Productivity Commission); should it decide to enforce the use of precommitment technology on poker machines; or should it require automatic teller machines to be further away from poker machines, it'll be up for a $200 million payment to Crown. The size of the penalty will climb with inflation. By the time the provision expires in 2050 the penalty will be $480 million.

In the (entirely likely) event that community attitudes to smoking harden in the decades ahead, the government will be unable to remove the exemption permitting smoking inside Crown's VIP rooms no matter how necessary it thinks it is. The legislation says the only way through would be to pay Crown millions for "loss and damage", the exact amount to be determined by a panel of "experts" appointed from independent, internationally recognised chartered accounting firms or investment banks.

It's a right not normally available to firms hurt by government decisions. The government was able to ban smoking inside pubs and restaurants without compensating those firms for "loss and damage". It was able to ban drink driving without compensating alcohol retailers, it was able to ban ATMs within 50 metres of poker machines without compensating either the owners of the machines or the banks. Governments are normally allowed to govern. If most of us suffer "loss and damage" when they put up taxes or hurt our businesses we just have to bear it, or vote them out at the next election...

The restrictions on what future Victorian governments can do are set down in excruciating detail in schedule 11 of the legislation. The only exceptions apply in cases where all of Australia's state and territory governments act together, a get-out clause that further underlines the impotence of the Victorian government we are about to elect.

In return for binding future governments this one gets an upfront payment of $250 million. (The government is spinning it as a payment of $910 million, but it's nothing like that much.  It gets the first $250 million immediately. It gets another cheque for $250 million in July 2033, but assuming a discount rate of 4 per cent, that is only worth a payment which is worth $115 million in today's terms. It also gets plus the right to contingent payments if Crown's gambling revenue exceeds certain targets.)

Put starkly Crown gets the right to impose fines of $200 million per government any time a new government comes in and changes the law to Crown's disadvantage, for the next 36 years.  in return for the government gets an immediate payment of $250 million plus a few lesser payments later.

It's an extraordinary deal for Crown. In addition to "regulatory certainty" denied other businesses it gets an extension of its licence from 2033 to 2050, the right to install another 40 gaming tables, the right to buy another 128 poker machines and the right to continue using the site for the peppercorn rent of $1 per year.

And Labor under Andrews? It voted for it. Andrews was silent during the debate. His treasury spokesman Tim Pallas spoke of the importance of "certainty" for Crown, apparently forgetting its status as a specialist in gambling. Crown employs 8800 people.

Aware that he was voting for a "regulatory time bomb" he said Victoria's hotels and clubs would demand similar assurances in the future. He failed to acknowledge that all sorts of Victorian businesses will demand similar assurances and that Victoria has set a precedent for businesses in other states to demand those assurances similar deals.

The Commonwealth government refuses to allow its hands to be tied. Told that its plain packaging legislation would infringe on the rights of Philip Morris under the terms of an obscure Australia Hong Kong investment treaty it took on Philip Morris in an international arbitration tribunal.

Where it can, it refuses to include so-called investor-state dispute settlement procedures in international agreements.

Overseas they are used to winding back the ability of sovereign governments to legislate in ways that hurt pharmaceutical companies, pesticide manufacturers and mining companies.

Labor rejected them outright. John Howard's government was the only one in the world to successfully resist having them  in its free trade agreement with the United States. This The Abbott government assesses them on a case-by-case basis, including them in its agreement with them with Korea but excluding them from its agreement with Japan.  

Over the weekend ministers from 12 pacific nations have been meeting in Sydney to thrash out the details of the proposed Trans-Pacific Partnership. The US is holding out for investor-state dispute settlement clauses. If the other 11 succumb and sign up Australia's biggest investors and customers will be granted the right to sue our governments in international tribunals for attempting to do what they are elected to do.

Perhaps unwittingly, Napthine (and Andrews) have made it clear that they really don't mind. Elections matter because we are able to elect decision makers to take decisions on our behalf. If we can't, there's no point.

In The Age and Sydney Morning Herald

Monday, October 20, 2014

Reserve Bank flying blind as the Coalition starves the ABS

So contemptuous was the Coalition of the Australian Bureau of Statistics that a few years back it outsourced the provision of its economic statistics to Channel Nine.

In the midst of the 2010 election and just days after the ABS had released the official inflation figures it issued a press release headed "Groceries Rise by over 10 per cent in past year under Labor".

Its source was the Channel Nine.  Nine had "independently demonstrated" that grocery prices have risen by 10 per cent in just over a year.

Whereas the ABS found that the price of a two-litre bottle of milk had climbed 0.1 per cent, the Nine Today Show had found it had jumped 96 cents (a percentage comparison is not available). Whereas the ABS found that the price of food in general had climbed 1.4 per cent, Nine found it had climbed 9.3 per cent.

Never mind that the ABS had personally visited around 10,000 stores to enter prices into handheld computers, never mind that the ABS had surveyed the prices of 100,000 separate goods, never mind that it weighted those prices in accordance with actual spending patterns, Nine had surveyed one basket of goods in one supermarket 12 months apart. Why bother with the ABS?

It'd be nice to think the coalition's attitude changed on taking office.

Yet within months in January its employment minister Eric Abetz was warning of a "wages explosion". He didn't say where he got the data from. It can't have been the ABS. It had wages growing at 2.7 per cent, down from around 4 per cent a few years previously. The rate has since slipped to 2.6 per cent...

The truth ought to matter to the government, especially the truth about the economy. It certainly matters to the Reserve Bank. It meets once a month to make just about the most important economic decision of the lot. Its two most important inputs are the official employment figures and the official inflation figures. And it's increasingly flying blind.

A decade ago the ABS surveyed 30,000 households each month to determine who was working and who was not. It kept going back to them until it got a response rate of 97 per cent. Now it surveys 26,000 households and accepts a response rate of 92 per cent. At the same time it's been fiddling with the way it interacts with those households, switching from phone calls to emails to save money.

As recently as March it was insisting the changes had affected the quality of its figures little. Then came August and a literally incredible jump of 121,000 in the number of Australians officially employed, an all-time record. At face value it suggested Australia had created 27 jobs every 10 minutes right around the clock for an entire month. The September number was an even bigger humiliation. If the figure had been presented normally it would have shown an even bigger collapse in employment of 172,000 people, meaning 40 jobs were lost each 10 minutes.

Something has gone horribly wrong. The ABS has called in outside consultants to help it work out what. In the meantime, the Reserve Bank is increasingly operating in the dark. Had it been less cautious and jacked up interest rates this month on the back of the published all-time jump in employment it would have shifted Australia's entire interest rate structure on the basis of a delusion.

The inflation figures suggest the Reserve Bank shouldn't be pushing up rates, but there's a chance the figures are misleading as well. Just about the entire developed world calculates inflation monthly. The ABS does it only quarterly, even though it has begged the government for the funds to do it more often. When the figures are occasionally misleading (the Reserve Bank points to a "couple of instances of quarterly readings for inflation that subsequently proved not to be representative of the general trend") the mistakes have remained official for an entire three months.

Australia's next inflation figure is out on Wednesday. New Zealand's is out on Thursday. The New Zealand figure will be shiny and new. Every three years it adjusts the "weights" it gives to different categories of spending in accordance with changes in consumer behaviour. Australia's ABS does it only every six years, a deterioration from the previous five years in order to save money. The current weights reflect spending in 2009-10.

The Coalition has been missing in action. It cut another $68 million from the ABS in this year's budget on top of $10 million cut by Labor on the way out, apparently unconcerned about the effect on statistics and its own ability to manage the economy. The head of the ABS bowed out in January and the best part of a year later hasn't been replaced. His last public statement, recorded in his last annual report said he had barely enough money to "keep the lights on".

In The Age and Sydney Morning Herald

Tuesday, October 14, 2014

Don't fall for the election spin. Victoria's job creation record is appalling

Timing is everything when you're trying to stretch the truth.

Launching his six-point plan for jobs last week Premier Denis Napthine boasted there were 100,000 more Victorians employed than when his government came to office in 2010. The figure was correct at the time he quoted it, but it was an admission of failure. It meant the number of Victorians with jobs had climbed just 3.9 per cent at a time when Victoria's working age population climbed 6.8 per cent.

No state other than Tasmania performed as badly. Victoria's Coalition government inherited an unemployment rate of 4.9 per cent and will bequeath to its successor something close to the present 6.8 per cent. Australia's national unemployment rate was also 4.9 per cent when the Victorian Coalition assumed office. But it is now 6.1 per cent, well below Victoria's.

The beauty of Napthine's boast was the timing. He spoke on Monday. Four days later on Thursday the Bureau of Statistics released updated employment figures for September that marked down the Coalition's job creation record to 89,300.  Employment is now only 3.1 per cent higher than it was back in December 2010. Victoria's working age population has climbed 6.9 per cent.

The revised figures are a measure of both how much monthly job figures bounce around these days and of how weak Victoria's job creation record has really been. But it's all right. The premier has a six-point plan. It would be more impressive if much of it wasn't simply a (glossy) reprinting of the things he was doing anyway that have so far had little success.

Not quite the oldest trick in the book, the six-point plan dates back to at least 1976. The former ABC host Stuart Littlemore was working as a media advisor to the Tasmanian Labor Premier Bill Neilson at the time. As Littlemore tells it in his book The Media and Me, polling had established "with embarrassing clarity" the public perception that the Nielson government had achieved nothing...

To counter the perception Littlemore and Labor came up with the "Neilson Plan – a 15-point program to get Tasmania working". "Neilson launched the plan (little more than a repackaging of existing policies with addition of a few items such as a retirement option for state public servants at the age of 55) about three months before he intended to go to the polls," writes Littlemore. "Thereafter he worked 'the Neilson Plan' or 'my 15-point Plan' into most answers he gave to journalists, whatever their questions may have been."

Back then it worked. "The result was that by the time we go into the campaign proper the Neilson Plan was a fixed value. Nobody even questioned its content and the perception of a do-nothing government had been turned around ... because the journalists neglected their fundamental duty," writes Littlemore.

It's unlikely to happen this time, in part because Labor has produced its own jobs plan, released the day before the Coalition's. It has five points.

Labor's plan is the boldest. Daniel Andrews wants to establish a $100 million fund to provide payroll tax relief to companies who hire unemployed young people and long-term and retrenched workers. He'll also set aside $500 million for grants to "drive growth and create high-skill high-wage jobs", plus another $200 million for a Future Industries Fund and $200 million for a Regional Jobs Fund. He is silent on how he would be able to afford it.

Napthine is also talking of big sums, but is silent on how he will afford them and how many of them are rebadging of things he is doing anyway.

The sad truth for both is that there are limits to what state governments can do. More than anything else it's the condition of the national economy that creates jobs. Local factors such population growth, the mix of industries and housing and transport make a smaller difference at the state level.

The latest ANZ forecasts show the Victorian economy growing just 2.3 per cent this financial year. Only South Australia, Tasmania and the ACT will grow by less. The national economy will grow 2.8 per cent, the NSW economy 3 per cent.

Napthine and Mr Andrews can talk as big as they like in the leadup to the November election, but when it's over, jobs will be hostage to whatever Joe Hockey decides in his December economic statement to be delivered a few weeks later. The Treasurer needs to find billions to pay for billions to pay for the Iraq campaign, billions to pay for the measures that were blocked in the Senate, and billions to replace the tax revenue that's vanishing as the iron ore price slips. Andrews is unlikely to be able to put in a good word for Victoria.

And nor is Napthine. So little influence does Victoria's premier have over the Federal government  that in May Hockey cut grants to the states for schools and hospitals by $80 billion over ten years. Almost all of those states were governed by the Coalition.

It's fine to vote on the basis of who'll do the most for jobs, but it's not fine to believe that either will be able to do very much.

In The Age and Sydney Morning Herald

Tuesday, September 02, 2014

The carbon tax isn't dead, just resting. Abbott's RET review points the way

Like John Howard before him Tony Abbott has set in train a series of events that will lead to a price on carbon.

Howard set up his 2006 prime ministerial emissions trading taskforce in order to kill the idea. Fairfax reported at the time it was stacked with miners, bankers and power industry representatives. Its terms of reference required it to advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate.

Note the use of the word "global". Howard said the one thing it couldn't do was recommend a standalone Australia-only emissions trading scheme. Its "sole remit" was to say what shape a global scheme might take.

But once established, the taskforce was beyond his control. Its get-out clause said it could consider "additional steps that might be taken in Australia consistent with the goal of establishing such a system".

It found that it would "be difficult to reach international consensus in the near future". In the meantime, Australia should cap its emissions and should do so "at least cost".  A market-based trading system that put a price on carbon would do it at the least cost.

Howard was about to face an election. He announced the emissions trading system.

Fast forward to another prime minister keen to kill an idea. Abbott appointed a panel to examine the Renewable Energy Target that was predominantly hostile to it. But like Howard's taskforce years earlier it was staffed by public service economists charged with examining the evidence...

Last week the panel found against the RET, but in a way that has again built up the case for an emissions trading scheme. The panel found the RET had two failings. One was that it ensured new solar and wind generators grabbed business from existing (predominantly coal-fired) generators. This wasn't so much a failing as a design feature. The other was that it was an expensive way to cut emissions.

Cost matters, the panel said.

"The cost of abatement is an estimate of the cost of a policy measure in reducing carbon dioxide equivalent emissions, expressed in dollars per tonne of abatement. It is a tool that enables an assessment of the relative cost-effectiveness of different emissions reduction policies."

That tool showed the cost of using the RET to reduce emissions was $35 to $68 per tonne of carbon dioxide or equivalent.

It is, as the panel says, on the high side. But compared to what?

Compared to the carbon tax. Labor's carbon tax cost $24.15 per tonne. Half way through next year the tax was due to transition to a true emissions trading scheme which allowed polluters to buy and sell emission permits and trade them overseas pushing the cost down to around $10 per tonne.

If cost per tonne is the best tool to assess the worth of an emissions reduction scheme, Australia's planned trading system is about the best there is, certainly much better than the Coalition's yet-to-be-detailed "direct action" policy.

Direct Action establishes a fund that will award grants to companies that come up with promising emission reduction schemes.

Using the RET review's favoured measure it looks appalling. In 2010 the Audit Office calculated the cost of earlier grant-based emission reduction schemes. The average was $140 per tonne. One cost as much as $447 per tonne. And their administration was a mess.

Firms were reluctant to devote the time needed to comply with the red tape and the bureaucrats were unable to process applications quickly. The Audit Office found it commonly took two years before approved programs could start. None of the grant-based schemes managed to spend more than 40 per cent of its budget.

In an early recognition of this (and perhaps to save money) this year's budget slashed the four-year total that the Coalition was to have allocated to Direct Action from $2.55 billion to $1.15 billion. Environment minister Greg Hunt says the $2.55 billion will still be there if it is needed, but it may not be if the scheme is riddled with the delays the Audit Office found were typical of such schemes.

An emissions trading system wins hands down on the RET review panel's prefered measure.

As the taskforce that reported to John Howard late last decade discovered, such a system is by design the cheapest possible means of reducing emissions.

It charges big polluters as much for the right to pollute as is needed to achieve the reduction target, no more. Businesses that buy permits they no longer need because they have cut more emissions than expected can cash in by selling their excess permits to another business that needs them more. Businesses that find it expensive to cut their emissions will buy permits rather than pay the cost. Businesses that find it cheap will sell permits and cut emissions. It'll ensure emissions are cut by the cheapest possible means first. That's why the panel of business figures, energy companies and bankers appointed by John Howard fell in love with it.

Cheap is good. Abbott's panel is pointing us back towards cheap.

In The Age and Sydney Morning Herald target="_blank"


Related Posts

. July 2014 The carbon tax is gone. Will prices come down?

. How Tony Abbott made the carbon tax work

. Carbon trading. Clive Palmer has saved the furniture


Wednesday, August 06, 2014

Hockey said higher-income households pay half their income in tax. He really said it

The Treasurer has made a big mistake.

"Higher-income households pay half their income in tax," Mr Hockey told Channel Nine this week while defending his budget.

He said it twice: "Higher-income households pay half their income in tax".

It's a simple enough mistake. Australians on the top tax rate do indeed pay 45 cents in the dollar. The rate cuts in at $180,000. They also pay the temporary deficit reduction levy (another 2 per cent), the Medicare levy (yet another 2 per cent) and the Medicare surcharge where applicable (a further 1.5 per cent). The total comes to 50.5 cents in the dollar.

But the amount of tax actually collected from those Australians is nothing like that much, as a quick workout of the Australian Tax Office calculator makes clear.

An Australian earning $200,000 pays around 36 cents in the dollar including the Medicare levy and the deficit surcharge, far short of the claimed 50. Even an exceptionally high earner on $500,000 pays no more than 44 cents in the dollar.

Typical high earners pay much less. An Australian on $80,000 pays $19,147. An Australian on $120,000 pays $34,747.

The difference between the quoted rates and the actual rates comes about because all Australians - even the highest earners - enjoy a tax free threshold. They pay no income tax on their first $18,200 of income no matter how much they earn. And they pay just 19 cents in the dollar for the part between $18,200 and $37,000 and 32.5 cents for the slice between $37,000 and $80,000...

Only the part of their income in excess of $80,000 gets taxed at their marginal rate (for really high earners $180,000). Most high earners don't take home that many dollars above the threshold.

Bemused number crunchers on Twitter have been trying to calculate how much someone would need to earn to actually pay half of it in personal tax. One came up with $6 million, another with $3 million. Whatever the figure, it's beyond the reach of most high earners.

The Treasurer was making a broader point, that it is "wrong" to say low-income households are the biggest losers from the budget.

"That story is wrong because it fails to take into account a range of things, like the fact that higher-income households pay half their income in tax, low-income households pay virtually no tax," he said.

But those two things aren't in conflict. It would be quite possible for low-income households to be the biggest losers from the budget and for them to pay less tax than high earners.

Calculations of winners and losers - the sort carried out by the Treasury and included in every budget since 2005 until this one - are a measure of who is made better or worse off than they were, not of how well or badly off they are in absolute terms.

Mr Hockey says high-income Australians pay tax in order to support low-income Australians. This is indeed a feature of the tax system. But it is not relevant to a calculation of the change in circumstances that will result from the budget. Separate calculations released under the Freedom of Information Act show the Treasury believes the change will be negative for lower-income  households, less negative for higher-income ones.

The Treasurer's deeper point is that if you wind back benefits you'll necessarily take some away from people who would have got them. He is right. With the outrageous exceptions of the superannuation tax concessions and the negative gearing tax arrangements, high earners don't get anything like as much government support as low earners. That's the way the system is designed.

Cutting into welfare has to mean cutting into benefits. Unless you cut into high-income welfare, which the budget didn't do.

In The Age and Sydney Morning Herald

Related Posts

. Reality check. Working one month just to pay for welfare?

. Middle class welfare, the good news

. Budget reality check. Is $150,000 typical?


Tuesday, July 29, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

Related Posts

. FOFA. Your financial planner is about to send you a letter, but it's not enough

. FOFA. How the Commonwealth Bank got what it wanted, quietly

. FOFA. Why the Coalition thinks weakening Labor's financial advice rules is urgent