Tuesday, July 29, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald


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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald






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Sunday, July 27, 2014

Abbott and infrastructure. Nation building, one elephant at a time

We're on the road to Utopia. Unfortunately.

The team from Frontline and The Hollowmen is at it again.

This time their angle is “nation building – one white elephant at a time.”

Entitled Utopia their new program is “a satire about the difficult process of taking grand, uncosted, inadequately planned and fundamentally flawed schemes - and passing them off as nation building”.

But it’s not the sort of thing you would see in real life is it? Certainly not repeatedly, deliberately, at the hands of the Coalition.

Here’s the ABC publicity blurb: “Set inside the offices of the Nation Building Authority, a newly-created government organisation responsible for overseeing major infrastructure projects, Utopia explores that moment when bureaucracy and grand dreams collide.  It’s a tribute to those political leaders who have somehow managed to take a long-term vision and use it for short-term gain.”

It couldn’t be happening right now, when we are forever being told the budget is tight...

Tony Abbott has his heart set on becoming Australia’s Infrastructure Prime Minister. Whatever the state of the budget he is determined to spend massive sums building the “Roads of the 21st Century,” NorthConnex, WestConnex and the East West Link and so on.

The one saving grace in the election campaign was his promise that all Commonwealth infrastructure spending worth more than $100 million would “subject to analysis by Infrastructure Australia to test cost-effectiveness”. It was reassuring, until he ditched it.

Two weeks ago Labor tried to force the Coalition to make good its promise moving in the Senate that the reward payments made to states that privatise assets and use the funds for new projects be subject to Infrastructure Australia cost benefit analysis.

It rejected the proposal of hand.

Cost benefit analysis by the Commonwealth on top of whatever the states did was “red tape with no additional benefit”. It would “stand in the way of the government building a stronger more prosperous economy,” minister Mathias Cormann told the Senate.

On climate change the Coalition’s detractors accuse it of being anti-science. On roads they could accuse it of being anti-numbers.

And of providing material for Utopia.

That’s how Infrastructure Australia itself sees it. It has titled its latest report on road spending: “Spend more, waste more”. On the cover is a roulette wheel...

“Australia has a true gambler’s addiction to roads, the money spent is not a rational investment,” it writes in the draft that was leaked to Fairfax Media. “Unlike almost every other agency imaginable."

“Highway funding for example is not predicated on any nationally accepted standard related to the current quality of that highway, to a safety rating or to traffic flow levels.”

“No one community has any ability of knowing whether ‘their’ highway upgrade is more deserving than that of another. Under these arrangements, political success in roads is likely to be reduced increasingly to simply outspending one’s political rivals - regardless of how inefficient or ineffective these spending patterns might be.

“This problem is probably insoluble in the absence of measuring roads against national standards.”

It’s an approach endorsed by the Coalition in opposition then eschewed in government. The $3.5 billion to be spent on highways leading to a yet-to-be-built second Sydney airport is the standout example of a project that wouldn’t pass muster if it had to be graded alongside other more immediately worthwhile contenders.

Conceding that its assessment is “challenging” Infrastructure Australia says Australian politicians routinely prioritise roads over rail.

“Australia is the 12th largest economy in the world, and one of the most dependent on freight efficiency given the wide dispersal of its economy across big distances. Most casual observers would presume that for a freight task of such magnitude a core intercontinental heavy rail freight sector would be the dominant freight mode – as is the case in Europe, Canada, the United States and Russia,” it says.

Yet “road agencies continue to plan and undertake regular expensive upgrades of the highways that are the direct competitors of major commercial rail projects. It would be hard to imagine a way in which commercial rail could be further disadvantaged.”

In the cities Infrastructure Australia says inflated estimates of road congestion are routinely used to direct money away from public transport and into roads.  It has asked the government for more realistic forecasts but hasn’t got them.

It says we need better. Utopia isn’t enough.

Utopia premieres Wednesday August 13 at 8.30pm on ABC TV.

In The Age and Sydney Morning Herald











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Wednesday, July 23, 2014

HECS. Why the new university rules hit low income earners the hardest

Life Matters Wednesday July 23, 2014

Imagine this. Two students, both going to university at the same time, both charged the same fee and both graduating together, but one has a manageable debt - perhaps 50 or 60 thousand dollars - and the other ends up paying $100,000.

New calculations about the effect of the government's higher education changes suggest it's possible, and the student who ends up paying the most will be the student on the lowest income....

15 minutes, play or RIGHT CLICK to download mp3




Reading:

. Poor graduates to pay about 30 per cent more than rich under Abbott government's university interest rate fee changes

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. Overview of Higher Education Budget Changes


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Productivity Commission. Childcare is worth getting right even without an economic payoff

Ask the minister responsible to explain Australia’s present system of support for childcare and she can’t.

“It's impossible to explain,” she told ABC radio on Tuesday. “The current payments are so complicated.”

Sussan Ley isn’t alone. Curtin University Professor Alan Duncan is an econometrician.

When he ran the National Centre for Social and Economic Modelling he asked his programmers to produce graphs of the circumstances in which childcare support peaked and troughed. At first they couldn’t. He says they eventually produced a three-dimensional graph with contours “something like nose cone on a spacecraft”.

The Productivity Commission wants to simplify the graph. Instead of two overlapping benefits its wants one; means tested and related to the number of hours in care rather than what’s charged. Its preferred option would cost an extra $800 million a year. It would help out families on up to $60,000 with 90 per cent of the deemed cost, families on up to $300,000 with 30 per cent.

What it doesn’t do is to pretend its suggestion will much help the economy...

Despite all the talk about how many more women would work if only they could afford childcare it says the likely outcome is tiny, an extra 47,000 workers. As a point of reference an extra 20,000 Australian women gained jobs in the past two months. The claimed one-off benefit of 47,000 is minute.

Remarkably the Commission says it is worth doing anyway. To pay for it it suggests plundering the Abbott government’s proposed paid parental leave scheme. It too promises tiny economic benefits.

But the suggested tradeoff misses the point. Each scheme is worth doing in its own right. Neither is justified on the basis of economics. Paid parental leave at full salary is intended to become a workplace entitlement along the lines of sick leave and bereavement leave. The extra cost would be funded by a levy on big employers. Affordable childcare is intended to ensure that low and middle income Australians get reasonable returns from work. Some things are worth doing even without an economic payoff. Affordable childcare and paid parental leave are two of them.

In The Age and Sydney Morning Herald


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Tuesday, July 22, 2014

MH17. Why planes and financial systems crash

What does the crash of Malaysia Airlines flight MH17 have to do with the global financial crisis?

One was destroyed by a surface-to-air-missile, the other came about because huge numbers of American housing loans became worthless at once. Enabling each was a bet that the unlikely wouldn’t happen.

It’s usually a good bet.

Qantas, Korean Air, and Taiwan's China Airlines weren't prepared to take it. They rerouted their flights to avoid the Ukraine months ago. Their caution cost them fuel, travelling time and profits.

Airlines such as Malaysia, Singapore and Lufthansa took a punt.

“What logic, what lack of sensitivity, and what lack of basic decency influenced Singapore Airlines and Malaysia Airlines and others to expose their passengers to these risks?” asked aviation journalist Ben Sandilands on his blog Plane Talking.

The logic was that the unlikely probably wouldn’t happen, or at least wouldn’t to them. Being slaughtered while flying well above a war zone is what experts call a low-probability, high-impact event.

Coldly risking something catastrophic in the knowledge that it almost certainly won’t happen (at least not to you) is a way to deliver superior financial returns, right up the point when it is not. And it’s rife in the finance industry.

Fund managers get paid for performance. Well ahead of the financial crisis in early 2008 two academics from Oxford and Pennsylvania universities demonstrated that it was possible for a fund manager to consistently deliver superior performance by betting the fund that an unlikely catastrophic event wouldn’t happen.

If, as was highly likely, the catastrophe never occurred the bet would pay off and they would be rewarded for their superior performance. If it eventually did occur they would have already received their bonuses and could leave the fund to collapse, moving on to a new job.

Because fund managers keep their methods secret professors Peyton Young and Dean Foster said it was “virtually impossible to set up an incentive structure that rewards skilled hedge fund managers without at the same time rewarding unskilled managers and outright con artists”.

As they put it, “anyone can cobble together a car that delivers apparently superior performance for a period of time and then breaks down completely”. Airlines can do it, privatised electricity suppliers can do it by not investing in maintenance as Victoria has discovered to its cost during brownouts, and state governments can do it by continuing to allow building in flood prone locations as Queensland did before its most recent devastating flood.

The entire world can do it by acting as if climate change won’t be too serious (although that’s probably better described as a medium to high probability high-impact event).

And the manufacturers of financial products can do it...

In the leadup to the global financial crisis they created products sprinkled with loans that could never be repaid if housing prices fell. But they bet that prices wouldn’t fall, not all at once. Compliant ratings agencies produced estimates of how unlikely such an event was. When it happened the products and the financial institutions that created them became worthless. The government rescued the important ones and much of the world slid into recession.

There’s no quick fix to stop it.

Part of the solution is better regulation, something the world’s financial authorities are on to after the global financial crisis. But regulation usually only closes a door after a crisis. Then a different unforeseeable event occurs creating another crisis creating another regulation.

As strange as it seems rewards for performance are probably a bad idea. They are what encouraged reckless practices in the United States. If Qantas schedulers were paid bonuses for speed they might have been keener to flirt with danger.

On the other hand real ownership could help. Paying employees in shares that couldn’t be cashed in for years would encourage them to be careful, as would requiring maintenance engineers to engrave their names of the fuselage of the planes they repair - a practice that is said to take place in Japan.

The best antidote is probably a rigorous cost benefit and risk analysis performed by someone whose pay cheque doesn’t depend on the next month’s profit.

The Coalition embraced such an idea in its September election policy. All Commonwealth infrastructure spending exceeding $100 million was to be “subject to analysis by Infrastructure Australia to test cost-effectiveness and financial viability”. Even state government projects only partially supported by the Commonwealth were to face Infrastructure Australia scrutiny.

No longer. On Thursday the government rejected a Senate resolution that would have given effect to its own policy. Labor moved that the reward payments made to states that privatise assets and then use the proceeds for new projects be subject to Infrastructure Australia cost benefit analysis. It would have covered the Metro Rail project and anything else funded by the sale of right to use the Port of Melbourne.

The Coalition said no.

Commonwealth cost benefit statements were “red tape with no additional benefit”. They risked delaying “the delivery of critical infrastructure”. They would “stand in the way of the government building a stronger more prosperous economy and investing in new infrastructure,” according to the finance minister Mathias Cormann.

But when lots of money or lives are at stake, delay is often a good idea. There’s a lot to be said for caution.

In The Age and Sydney Morning Herald


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Thursday, July 17, 2014

The carbon tax is gone. Will prices come down?

The good news is that without the carbon tax you won’t paying $100 for a Sunday roast.

But you never did.

Ahead of the carbon tax in 2009 the present minister for agriculture Barnaby Joyce said the carbon tax would be “the end of Australia’s sheep industry”.

“I don’t think your working mothers are going to be very happy when they are paying over $100 for a roast,” he added.

In parliament this week asked whether he had found a $100 leg of lamb Mr Joyce dodged the question. At Woolworths this week a leg of lamb was on special for $15.10. It normally sells for $20.38.

As it happened the Treasury modelled the price of lamb when it modelled the carbon tax. It said the price would rise by 0.4 per cent, suggesting the price might have climbed 20 cents.

It’s impossible to tell what did happen, because for food the expected movements were so small as to be difficult to notice.

In the first consumer price figures released three months after the carbon tax the Bureau of Statistics says the price of lamb fell, sliding 2.3 per cent. It has since fallen a further 10 per cent, making any movement of 0.4 per cent difficult to discern.

This isn’t to say that lamb isn’t slightly more expensive than it would of been had there not been a carbon tax. It is merely to say to say that the effect is impossible to measure.

The Australian Competition and Consumer Commission had some power to restrain price rises attributed to the introduction of the tax. It could take action against false, misleading or deceptive claims linking price increases to the tax.

It has no such power over most prices on the way down. It can merely monitor.

Will the price of a leg of lamb come down by 20 cents because of the removal of the carbon tax? So long as the retailer doesn’t make any claims about the carbon tax it can charge whatever it likes. Last minute amendments to Clive Palmer’s carbon tax amendments make sure of that...

Insisted on by Liberal Democrat senator David Leyonhjelm and Family First senator Bob Day, they restrict penalties to just to just 60 or major energy suppliers.

“They are big enough and ugly enough to look after themselves,” Senator Day told Fairfax Media.

But the treasury expected the electricity and gas component of the carbon tax impost to add just add just $4.80 per week to a typical household budget ($3.30 for electricity, $1.50 for gas).

Total costs would climb $9.90 per week. Although big, the electricity and gas component didn’t account for the bulk of the $9.90. What did account for it was a multitude of small price changes. The treasury counted around 80, many of 0.4 per cent.

If the bulk of the price burden was made of adjustments too small to notice on the way up it will be impossible to notice on the way down. Whether or not retailers pass on lower costs will be up to them, and most of their customers will be none the wiser.

Electricity prices should come down by about 10 per cent, gas prices will be about 9 per cent lower than they would have been, except that the price of gas is unlikely to come down at all. Last week the NSW Independent Pricing and Regulatory Tribunal approved gas price rises of between 14.6 and 18.1 per cent.  A new processing complex at Gladstone in Queensland will allow eastern Australian gas to be sold at world prices for the first time. Eventually our gas price could double.

The prime minister says the saving per household from axing the tax is likely to be $550 per year. It’s more likely to be $250 or less, mostly on electricity. And don’t expect cheaper petrol. Petrol and the fuel used to produce and move it was carbon tax exempt.

In The Age and Sydney Morning Herald


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Wednesday, July 16, 2014

Superannuation. The financial system inquiry is talking about a revolution

And there were those who said it would favour the banks

The financial system inquiry has proposed a revolution in Australia’s superannuation system that would vanquish high fees and force Australians to take more super as income rather than lump sums.

Unveiling what are officially called “options” rather than recommendations, inquiry chairman David Murray raised the prospect of a 40 per cent cut in fees across the entire sector.

Such a cut would deliver a saving to members of around $7 billion per year. It would boost the average retirement payout by $40,000.

“I’ll take some flack for suggesting this, but it’s too important not to,” Mr Murray told the National Press Club.

Australian fees are twice as high as those in countries with similar sized systems. Superannuation itself is much more heavily weighted to riskier assets such as equities.

The report suggests banning borrowing by super funds and slowing down the process by which members can switch funds which it says encourages providers to hold more short term assets than they should.

Its most radical suggestion is that Australia follow the lead of Chile and auction off the right to be the nation’s default super fund. The firm offering to charge the the lowest fee would become the default provider for all new accounts until the next auction. Chile used the system to cut default fund fees by 65 per cent...

The inquiry also wants some sort of restriction on the ability of Australians to take and spend super lump sums knowing they can fall back on the age pension. It’s most extreme option would mandate the setting aside of a portion of lump sums for so-called deferred annuities which would pay out only after the age of 85 should the retiree live that long.

It is caustic in its findings about superannuation tax concessions observing that most go to the top 20 per cent of earners, people “likely to have saved sufficiently for their retirement even in the absence of compulsory superannuation or tax concessions”. It is likely to recommend changes to the system of super tax concessions that could form part of the white paper on tax reform to be developed next year.

Mr Murray refused to be drawn on whether if super fees come down there would still be a need to lift Australia’s compulsory super contributions from 9.5 of salary to 12 per cent as is presently legislated, saying the inquiry would be happy to receive submissions on the topic before it prepares its final report to be released in November.

Set up by treasurer Joe Hockey to to update the 1997 Wallis inquiry in light of the global financial crisis, the Murray inquiry finds the financial system is at risk from the perception that Australia’s big four banks are too big to fail and would be rescued by the government.

It floated several options to deal with what it calls “moral hazard” one of which is ring-fencing crucial bank functions such as taking deposits and writing home loans from other activities.

Although a former chief executive of the Commonwealth Bank Mr Murray is harsh in his criticism of the banks’ systems for rewarding their financial planners.

“The thing we have been very clear on is our view that conflicted remuneration can weaken advice,” he told Fairfax Media.

“There's not much we can do at the moment. The government is in the middle of having this voted on in parliament. But there is an information asymmetry between an advisor and a client, one we will be addressing in our final report.”

The interim report suggests outlawing the term “general advice” and replacing it with “sales” or “product information” if the people providing it continue to receive payments from the providers of financial products.

A spokesman for Mr Hockey said the treasurer would not be commenting on the report. It was Mr Murray’s and it was up to him to outline it. Labor’s treasury spokesman Chris Bowen said he would give it due consideration.

In The Age and Sydney Morning Herald


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Monday, July 14, 2014

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

Expect letters. If you’ve had a financial planner steer you into a product in the last few years, that person is about to write to you. He or she will have to, even if they haven’t been in touch. He or she has been taking your money.

The first letter (due on the birthday of you accepting their advice) will do more than simply tell you how much the planner has been taking from your accounts. It’ll also ask if you want the withdrawals to continue. If you don’t you merely need to do nothing. The withdrawals will stop. If you do want your accounts continually drained you’ll have to send back a form. It’s called “opting-in”.

That’s what financial planners and the organisations that employ them have been engaged in a last-ditch battle to stop. Living off ignorance and amnesia, they’ve been desperate to ensure their long-forgotten clients don’t remember what’s being taken from their accounts and can’t easily stop it.

The Coalition has been backing them rather than us under the guise of stopping red tape. So keen has it been to do their bidding rather than ours that it waited until the parliament wasn’t sitting to introduce a regulation that would smother the requirement. The requirement had been due to become mandatory on July 1.

Then, when parliament resumed last week it delayed tabling the regulation. What’s not tabled can’t be disallowed. On Thursday it refused a formal request from the Senate to table it forthwith. Labor ended up tabling the government’s regulation itself and on Monday moved a motion to disallow it.

The disallowance motion is likely to pass. The Coalition’s attempt to appease financial planners will pass into history. Asked by the Australian Financial Review last week what he thought about its rear guard action Clive Palmer replied: “They can stick it up their arse and you can quote me on that.”

The Coalition meanwhile fulminates against “retrospective fee disclosure requirements,” even though the fees that will be disclosed aren’t retrospective, they’re ongoing. And it makes the - correct - claim that any investor who really wants to know what was being taken out of their accounts can look...

The payments are noted in the fine print of the annual statements for each product provider.  But for someone who has multiple annual statements (it is quite common to be signed up for multiple products) it’s quite a bit of effort to look up each one and then ask the provider to stop. One simple “opt-in” box removes the red tape. The Coalition says it’s against red tape, but it’s really against red tape for planners rather than their clients.

Older clients get no relief from red tape whatsoever. Before making explicit payments to planners from their clients’ accounts financial institutions used to pay implicit - hidden - payments known as upfront and trailing commissions. The planner typically received upfront 2 per cent of the amount to be invested and then a further 0.6 per cent per year for as long as the money stayed with the product provider. It provided a powerful incentive to advise in favour of the product paying the money and an even greater incentive not to recommend the client leave it.

Although the upfront part sounds bigger, it isn’t. Rainmaker research reckons that over the past five years upfront commissions have accounted for 8 per cent of annual commission payments, ongoing trailing commissions 67 per cent.

Most of the old trailing commissions aren’t disclosed to the clients. They don’t appear on their annual statements. The product providers say they don’t have the computer systems to recognise them (although curiously their systems recognise the planners to who they are being paid). Labor’s legislation ignored old fashioned ongoing trailing commissions. It applied only to new-fashioned explicit payments.

And the worst part is that many of those payments may be going to no-one at all. They are being taken out of accounts in order to reward long forgotten planners, but the planners themselves may have died or shut up shop.

Institutions remove the commissions, hang on to them and pay them to no-one. More often than not those institutions are owned by banks.

They are called “orphan commissions”. Rice Warner actuaries believes the old-style commissions untouched by both  the Coalition will cost consumers $6.1 billion over the next eight years. A staggeringly high proportion may be orphans. The financial institutions won’t tell us. Mortgage Choice found last month that 89 per cent of us “do not currently have a financial plan in place that was created by a financial planner,” suggesting that most commissions are orphans.

Neither side of politics has had the courage to tackle them. Industry Super has. It wrote to the Australian Securities and Investments Commission last month asking for an urgent investigation to at least determine the extent of orphan commissions.

The government’s financial system inquiry releases its first report on Tuesday. If it is serious about making the financal system work for us it’ll stamp out orphan commissions and stamp out commissions altogether, including the old ones. Anything less will suggest it works for the banks.

In The Age and Sydney Morning Herald


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Carbon tax going, but don't expect big savings

The carbon tax will be repealed within days after a breakthrough in talks between the government and cross bench senators who were concerned at what they believed were draconian provisions in the repeal bill.

An amended bill will be presented to the Senate and the House of Representatives as soon as Monday.

Liberal Democrat senator David Leyonhjelm and Family First senator Bob Day told the government on Friday they were prepared to walk away from the bill if it continued to include provisions that penalised small businesses that didn’t pass on any savings.

“No-one wanted the carbon tax gone more than I did,” Senator Day told Fairfax Media. “But we couldn’t have had those provisions in there. They would have been worse than the tax.”

Describing the penalties as “way over the top” and “just draconian” Senator Day said environment minister Greg Hunt agreed to remove them on Saturday.

“He sent the amendments through and they are fine. The penalties will now only apply to the 60 or so major energy suppliers. They are big enough and ugly enough to look after themselves.”

Mr Hunt said he had had “electronic engagement” with the crossbenchers over the weekend and had offered “some minor edits” to ensure any unintended consequences for businesses were removed.

“I know from my discussions with the Palmer team that they don't want to put impositions on small business,” he told Fairfax radio.

“I expect that by the end of the week it will done and dusted and everybody will have lower electricity bills from Friday onwards.”

A source close to Mr Palmer said although the amendments looked fine it would be up to Mr Palmer himself to approve them. He is holidaying in New Zealand. Independent senator Nick Xenophon said he would read them carefully before deciding how to vote.

The legislation is backdated to July 1, meaning some customers will get partial refunds on their electricity bills.

But they are unlikely to save anything like the $550 claimed by the prime minister Tony Abbott at the Queensland Liberal National Party convention on the weekend.

“It’s adding 9 per cent to your power bills, it’s a $9 billion handbrake on our economy and it’s costing average Australian families $550 a year,” Mr Abbott said, referring to the carbon tax. “So it must go.”

The $550 figure comes from Treasury modelling ahead of the introduction of the tax in 2012. But only $250 of it came from electricity and gas prices. The rest came from much smaller imposts on items such as food ($46), clothing ($29) and rent ($23). Many of the items modelled by the treasury had price impacts described as “less than 10 cents per week”...

The latest iteration of the legislation will include no penalties businesses who don’t pass their energy savings on, making a one-off saving of $250 per household more likely.

“I think that’s an overestimate,” Climate Institute chief executive John Connor said on Sunday. “Gas prices are climbing sharply for reasons unconnected with the carbon tax, so it’s unlikely there will be any cut in the gas price”.

Australia’s largest supermarket chain Woolworths has said that because it avoided price rises when the carbon tax was introduced there would be little room to remove them when it came off.

Coles says it is “working with suppliers to understand the implications of the change and if we identify any savings attributable to the tax changes we will pass them back to our customers”.

Qantas has removed the carbon surcharge on domestic flights but says market conditions do not allow it reduce its standard fares.

Mr Connor said there should be a review, before repeal, of the real price impacts and benefits. It should be conducted by the independent Climate Change Authority chaired by the former head of Reserve Bank Bernie Fraser.

A bill to abolish the Climate Change Authority also comes up for debate on Monday along with an amendment from Palmer United senators that would enable it to recommend a move to an emissions trading scheme when enough other countries came on board.

In The Age and Sydney Morning Herald





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Sunday, July 13, 2014

One day we'll laugh about how we used to use notes and coins...

Australia Post was always going to wind back mail deliveries. Think about the absurdity of it... thousands of trucks and bikes traversing the country in order to move something slowly that can be delivered quickly and cheaply by computer.

It’s the same for the newspaper you’re reading right now. Printing it and delivering it by trucks is enormously expensive compared to sending the text by computer.

And it’s the same for video, music and book stores. Why set up a network of trucks and warehouses to deliver something slowly that can be delivered instantly and near costlessly?

The only reason we’ve set up these hideously expensive systems in the past is that we didn’t have computers to do it for us.

But they are not the dated technologies facing obliteration at the hands of computers.

The next big one is so obvious it’s hard to see. It’s under your nose, or in our pockets.

It’s money itself, represented by cash.

If you think cash is costless you haven’t thought about it. It gets to bank branches and ATMs via trucks, warehouses and guards with guns. You might not notice that you’re paying for it because banks burying the costs in fees and retailers bury them in their prices. One of the reasons it’s rare to see a discount for cash is that cash itself is expensive, even compared to credit card fees which are exorbitant.

We ought to be able to do to cash what we are in the midst of doing to printed newspapers and record stores.

But we mightn’t be able to rely on the banks themselves to do it. In the early days of the internet Telstra resisted embracing DSL technology because it wanted to keep making money by renting out extra dial-up phone lines. It and the other phone companies are continuing to overcharge us for text messages when anyone who has ever used a smartphone knows that the real cost of sending a short message through the air is close to zero.

The solution might have come from outside. As unlikely as it seems, it might come from Africa...

Kenya has leapfrogged much of the so-called developed world because it never got too bogged down in banking. With only 6 bank branches per 100,000 adults (Australia has 32) cash is hard to come by in Kenya. It can involves travelling long distances and often getting mugged.

So Vodafone set up m-Pesa. The M stands for mobile, and “pesa” means “money” in Swahili. Villagers pay real money to an agent at a store, get their phone topped up and then hundreds of kilometres away use it to buy and sell produce with neighbours who also have m-Pesa on their phones. About half of Kenya’s population are said to have used it.

It has since spread to Tanzania, South Africa, the Democratic Republic of the Congo, Mozambique, Lesotho and beyond Africa to India, Fiji, Egypt and Romania.

Its anonymous, requiring no bank account, no identity documents and no permanent address.

We’ve already made our big transactions cashless, unless we’ve something to hide.

I confess to being not particularly squeamish about the privacy concerns of the Australians who use briefcases full of high denomination notes to buy houses and cars. And there must be a lot of them. An astounding 92 per cent of all the cash on issue is in the form of $50 and $100 notes. They are not often used for transactions by people I know and I have a feeling I am paying more tax than I should because the people use them are pay less.

In a submission to the financial system inquiry former Reserve Bank official Peter Mair suggests doing away with high denomination notes altogether. They would be given a use-by date. Anyone who didn’t hand them in within, say, five years would get nothing in return.

After that it would pretty easy to abolish small change. Many of us already top up parking meters or buy drinks from vending machines with a wave of our phones. It’s where privacy does matter. I’m not keen the bank or the police knowing where I’ve been minute by minute. But there’s no reason they should. Kenya has shown us how to keep mobile transactions anonymous.

Axing cash ain’t radical. A leading United States conservative economist Kenneth Rogoff has argued the case twice in recent months producing one study entitled Costs and Benefits to Phasing Out Paper Currency and another entitled Paper Money is Unfit for a World of High Crime and Low Inflation.

In The Age and Sydney Morning Herald


Of course it's been said before...



HT: @Don Arthur


Reading:

. Izabella Kaminska, Negative interest in cash, or goodbye banknotes, FT Alphaville, May 20 2014

. Kenneth Rogoff, Costs and Benefits to Phasing Out Paper Currency, NBER Working Paper 20126, May 2014

. Kenneth Rogoff, Paper money is unfit for a world of high crime and low inflation, Financial Times May 28, 2014

. Chartered Alternative Investment Analyst Association, The End of Paper Money, June 8, 2014

. Ken Banks, The Invisible Bank: How Kenya Has Beaten the World in Mobile Money, National Geographic, July 4, 2012 


Related Posts

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. Why do we have so many $100 notes?

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Saturday, July 12, 2014

2014-15 BusinessDay economic survey. Dollar dive ahead

The Australian dollar is set to dive to its lowest level in half a decade.

This year’s BusinessDay economic survey has it hitting 86 US cents by June 30, a fall of 8 per cent from its recent range of 93 to 94 US cents.

In another welcome result none of the BusinessDay panel expects particularly weak economic growth. On balance they expect the unemployment to stay at 6 per cent rather than climb to the 6.25 per cent forecast in the budget.

But they expect somewhat slower economic growth than the budget and weaker consumer spending as the economy continues to navigate away from mining investment to new drivers of economic growth.

The BusinessDay forecasting panel is made up of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations. It includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of individual member.

The panel expects Australia’s terms of trade to slip 4.9 per cent during 2014-15. It appears to be a better outlook than the budget’s which expected a slide of 6.75 per cent, but much of that slide was delivered almost immediately as iron ore prices plummeted 9 per cent between budget night and June 30. The panel’s average forecast masks wide differences in individual expectations. Steve Keen expects a slide of 10 per cent in 2014-15. Gareth Aird, of the Commonwealth Bank, expects a slight increase, the only panel member to do so.

China’s economy is expected to grow at its present pace, advancing 7.3 per cent, as is the United States and the global economy at 2.2 per cent and 3.3 per cent.

Growth in household spending will be anemic, climbing just 2.6 over the year, much less than inflation and population growth combined. The weakest forecast, from Bill Mitchell of Newcastle University, is for spending growth of just 1.8 per cent. Independent economist Stephen Koukoulas is the most optimistic predicting 3.25 per cent, nowhere near the likely combined rate of inflation and population growth suggesting that inflation-adjusted spending per capita will continue to fall.

After falling for a year real wages will mark time, barely climbing. The panel expects inflation of 2.6 per cent and wage growth of 2.9 per cent, well below the rates of 3 per cent that were common this decade and 4 per cent in the last half of the last. Paul Bloxham and Jakob Madsen are the most optimistic, predicting wage growth of 3.5 per cent and Steven Keen and Bill Mitchell the most pessimistic, expecting 2 per cent.

Tom Skladzien, of the Australian Manufacturing Workers Union, ought to have a good handle on wages. He plumps for 2.5 per cent, beneath his forecast for inflation, which is 2.7 per cent. By contrast Julie Toth, who works for employers at the Australian Industry Group, expects wage growth of 3 per cent, well above her inflation forecast of 2.5 per cent.

The lowest forecast for headline inflation is 1.8 per cent from Tim Toohey of Goldman Sachs. But his forecast for underlying inflation is a more standard 2.5 per cent, suggesting he believes the one-off removal of the carbon price to affect the headline but not the underlying number. Shane Garrett of the Housing Industry Association has the highest headline inflation forecast, 3.1 per cent. But he expects a tamer underlying result of 2.8 per cent. The panel member forecasting the worst underlying inflation is Gareth Arid, who predicts 3.1 per cent.

The average unemployment forecast of 6 per cent hides diverging views....

Saul Eslake, of Bank of America Merrill Lynch, expects the unemployment rate to climb to 6.6 per cent by June 2015. Stephen Koukoulas expects it to fall to 5.5 per cent.

Housing investment is set to climb a healthy 7.4 per cent in the view of the panel, but the range of forecasts is extraordinarily wide from a low of 1.4 per cent from the HIA's Shane Garrett (who ought to know about housing) to a high of 15 per cent from Peter Jones, of Master Builders Australia, (who also ought to know about housing).

The entire panel expects business investment to continue to slide, as did the budget. The budget went for a slide of 5.5 per cent. The panel goes for 5.8 per cent  but with wide variation. The most optimistic, Neville Norman of Melbourne University, expects a further fall of just 1.3 per cent. The most pessimistic, the National Australia Bank's Alan Oster, expects 10.2 per cent.

It adds up to historically weak, but not disastrous GDP growth of 2.8 per cent. Steve Keen who this time last year expected growth to go backwards (a recession) is this year happy to forecast 2 per cent suggesting that the worst that is likely won’t be that bad.

But nominal GDP growth (the amount of income generated unadjusted for prices) will grow by just 4.1 per cent, well below the heady rates of 8 to 10 per cent a few years back when the rest of the world was prepared to pay over the odds to grab Australian resources. Weak growth in nominal GDP means weak growth in government revenue, but the panel seems to believe that has been fully accounted for in the official forecasts, opting for a budget deficit forecast little different from the government’s own. Jakob Madsen is by far the least trustful of the official line, predicting a blow out to $65 billion in 2014-15, more than double the government’s forecast. Events in the Senate this past week are making his forecast look more likely by the day. Stephen Koukoulas is the most optimistic, expecting a slide in the deficit to $15 billion in line with his generally rosy view of economic growth.

Most of our panel expect the Reserve Bank to sit on its hands for the rest of this year, leaving the cash rate at 2.5 per cent. In the first half of next year most expect an increase, with two increases to 3 per cent the most popular pick. Commonwealth Bank's Gareth Aird is out on his own, expecting one increase this year and a further two in the first half of next year taking the cash rate to 3.75 per cent undoing two years of cuts.

Most expect an increase in the Commonwealth bond rate as unusually low worldwide rates vanish.

The Aussie dollar is set for a big fall. Only Gareth Aird expects it to climb above its present 94 US cents with Chris Caton, Alan Oster, Stephen Anthony and Shane Garrett expecting 82 US cents and Stephen Koukoulas and Peter Jones expecting 80 US cenPeter Martin is economics editor of The Age

It would be a silver lining to an otherwise manageable but unspectacular year.

In The Age and Sydney Morning Herald










Who got things right, and where did our team get 2013-14 wrong?

This time last year they were far too optimistic about business investment, on average expecting it to stay steady. When the figures are in it will have slid 4 per cent. That mistake probably derived from another one. They expected the Aussie dollar to slide to 89 US cents. Instead it climbed to 94.20.

And the budget blew out in a way none of them foresaw.

This time last year the treasurer Wayne Swan predicted a budget deficit of $18 billion. Our forecasters went for $20 billion. The wildest forecast was for $32 billion. The reality, confirmed by treasury in this year's budget papers, will be close to $50 billion. Our panel are entitled to complain that it is difficult to forecast something that couldn’t have been foreseen. Within weeks of taking office late last year Joe Hockey blew out the deficit by $9 billion in order to top up the Reserve Bank’s reserve fund.

A lot of other things the panel got pretty right. The panel forecast economic growth of 2.75 per cent in the year to June. The most recent figure for the year to March is 3.5 per cent, but the June quarter is expected to be weaker putting the final outcome in the ballpark of the forecasts. The panel got the cash rate exactly right. It expected 2.5 per cent and got 2.5 per cent. It was also spot on about the 10-year bond rate, expecting 3.5 per cent. The final rate was 3.57 per cent.

The ASX 200 climbed broadly as expected, although moved somewhat higher than the panel predicted, finishing at 5395.70. The panel picked 5235.
The hardest task in forecasting is being right where others are wrong. Several of our team were right about business investment where others were wrong, and several were right about the dollar where others were wrong. But only one was right about both. Step forward Professor Jakob Madsen. He picked a slide in business investment of 5 per cent and an Aussie dollar of exactly 94 US cents, both bang on the money.

He says his secret is not to use an economic model.

“I don't believe in models. There is no model in this world that can predict the exchange rate with confidence,” he told BusinessDay from his office at Monash University.

“We can make a guesses, but they are guesses about emotions because the exchange rate is partly driven by emotions.”

Coming from outside of Australia (he used to prepare forecasts for a Danish bank) Madsen was able to think about how Australia would be perceived by foreigners.

“If you would put your money somewhere last year, where would you have put it?  It would have to be somewhere with sound economic prospects,” he says.
He attributes his correct forecast of a dive in business investment to a gift for the obvious. “I couldn’t understand why the others forecast steady investment,” he says. “Investment is sensitive to the business cycle. It was turning down.”

His final tip is to ignore the newspapers. “No offence,” he says. “But if you are always focusing on what’s just happened you are unable to consider what’s happening underneath.”

In The Age and Sydney Morning Herald


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Friday, July 11, 2014

FOFA. Cormann's Instant Karma



The Coalition is reaping what it sowed.

It has repeatedly treated the Parliament with contempt in its effort to neuter parts of Labor's financial advice laws before they had full force on July 1.

Rather than put changes before the Parliament as an amendment to Labor's act, it introduced them by regulation when the Parliament wasn't sitting. It was aware of legal advice from Arnold Bloch Leibler that they would not survive a challenge in the High Court. Regulations are meant to assist the implementation of acts, not to nullify them.

Labor alleges that Treasury sent a copy of the regulations to the Senate tabling office on July 1 and then attempted to withdraw them, saying it didn't want them tabled until the last possible date, next Tuesday, July 15. What is not tabled cannot be disallowed.

Directed by a vote of the Senate to table the regulations immediately, the Minister, Mathias Cormann, refused. Cynics suggest he was trying to delay the process long enough to get through to the five-week parliamentary break and then accuse the Senate of creating uncertainty when it tried to exercise its rights.

Then Labor's Senator Sam Dastyari pulled a stunt, one worthy of Cormann himself.

He read from the regulations and had a Labor senator demand that he table the document he was reading from.

In the confusion the motion passed with the help of the Greens and a handful of independents. On Monday Labor will give notice of a motion to strike the regulations down. If it succeeds, consumers will be protected in the way Parliament originally intended. It will have got around the workaround.


In The Age and Sydney Morning Herald





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Thursday, July 10, 2014

How's your financial literacy? Young Australians aren't bad

What’s better value for money: loose tomatoes at $2.75 per kilo or boxed tomatoes at $22 for a ten kilo box?

A surprising one in ten Australian 15 year olds can’t answer that question or give vague or incorrect answers such as “bulk buying is better” or “you get more for less”.

The Organisation for Economic Co-operation and Development classifies those students as merely being able to differentiate needs from wants and perform single basic calculations.

But its first ever global survey of financial literacy finds Australian students better off than most. In the United States 17 per cent of students would have failed the question, in France 18 per cent, and in Israel 22 per cent.

It isn’t because Australians are especially good at classroom learning. The OECD says Australian students perform “better than might be expected” based given their performance in maths and reading. And nor is it because a lot of school time is devoted to financial literacy. Eight out of ten Australian 15 year olds get fewer than five hours of special financial tuition per year.

Just as important is what happens outside of school... The OECD says the number of books and cultural possessions in a students home is the most important socioeconomic predictor of financial literacy. As is banking. Eight out of ten Australian 15 year olds hold a bank account, putting Australia behind only Slovenia, New Zealand and Estonia among the 18 countries the OECD surveyed.

Australia comes forth out of the 18 overall, behind only Shanghai, the Flemish region of Belgium and Estonia. With an average score of 526 Australia is well behind Shanghai with 603 points but well above Israel and Italy with 476 and 466. Australia is comfortably ahead of the United States on 492 points.

The most difficult question in the two hour test required students to compare repayments and repayment speeds on two loans, each for different amounts with different interest rates. Around 30 per cent of the Australian students got the correct answers, compared to only 19.5 per cent in the United States and 9 per cent in Italy. In Shanghai 63 per cent of students knew the correct answers.


Test yourself: Are you game?


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Wednesday, July 09, 2014

Everyday Economics. Going cashless?

Life Matters Wednesday July 9, 2014

Searching around in your pockets? Looking for cash?

You might need it for a parking meter, for small change for the school lunch or to buy a quick cup of coffee.

It would be easier if we abandoned cash altogether, as several states have for road tolls.

But are you ready?

Cash has a hold on us. We'll abandon it for some things, but could we ever be ready to abandon it altogether?

The idea's been given a push along by a new paper from the US National Bureau of Economic Research entitled "Costs and Benefits of Phasing Out Paper Currency".

A recent article about it asked whether our grandchildren would one day look at us and ask "“…are you serious? You used to use bits of paper as money?"

Are we ready...

12 minutes, play or RIGHT CLICK to download mp3




Reading:

. Izabella Kaminska, Negative interest in cash, or goodbye banknotes, FT Alphaville, May 20 2014

. Kenneth Rogoff, Costs and Benefits to Phasing Out Paper Currency, NBER Working Paper 20126, May 2014

. Kenneth Rogoff, Paper money is unfit for a world of high crime and low inflation, Financial Times May 28, 2014

. Chartered Alternative Investment Analyst Association, The End of Paper Money, June 8, 2014

. Ken Banks, The Invisible Bank: How Kenya Has Beaten the World in Mobile Money, National Geographic, July 4, 2012 



Related Posts

. Why do we have so many $100 notes?

. The grey economy. Might pensioners have those $100 notes?

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Change at the top. Gruen to leave Treasury

The Commonwealth Treasury is to lose its two top officials within months.

Deputy Secretary David Gruen will leave to head the Australian Bureau of Statistics. His boss, treasury secretary Martin Parkinson leaves in December as part of an agreement with the government to stay on until the G20 international leaders meeting in November.

The departures will leave a void at the top of government’s chief economic adviser along with considerably thinned ranks at the bottom.

Dr Parkinson told a Senate hearing in June that when was appointed secretary in 2011 he had 1053 staff. He has since removed one third of them.

That is one in three staff,” he told the hearing. “...without any reduction in the span of responsibilities. He said there was a risk the Treasury would “end up doing the job worse than we have in the past.”

Three weeks ago he wrote to Treasury staff saying the latest round of voluntary redundancies has fallen short and that that he would need further involuntary redundancies in order to save 30 full time salaries.

Colloquially known as Treasury's chief economist, Dr Gruen is equal number two in the Treasury hierarchy alongside the heads or the fiscal policy, markets, revenue and policy groups. His formal title is Executive Director (Domestic) Macroeconomic Group.

With the then treasury secretary Ken Henry he crafted the economic stimulus measures Kevin Rudd introduced in response to the global financial crisis.

Originally a biophysicist he took up economics later in life emulating his father Fred Gruen, one of Australia’s academic economists who worked as an advisor to prime minister Gough Whitlam in the 1970s.

The Bureau of Statistics has been without a chief for six months...

Shortly before leaving in January Gruen’s predecessor Brian Pink warned that it’s capital budget was barely adequate to “keep the lights on”.

The ABS moved to cut 100 staff earlier this year and has culled many of its surveys. It is trying to conserve what money it has in order to modernise its 30-year old computer systems in order to prepare for Australia’s first predominantly on-line census in 2016.

Dr Parkinson’s departure was announced shortly after the Abbott government took office along with those of other departmental secretaries who left immediately. He was permitted to stay on until the May budget and then had then had that term extended until the conclusion of the G20.  He will not seek a further extension.

The departures provide an opportunity for the Coalition to remake the top echelon of the Treasury, although the only formal role it will have will the appointment of the Secretary.

Names mentioned as candidates include Philip Gaetjens, secretary to the NSW treasury and a former chief of staff to treasurer Peter Costello; and Peter Boxall, also a former chief of staff to Peter Costello in opposition. He ran the finance department under John Howard and headed the department of employment and workplace relations during the introduction of WorkChoices.

Other names include Mike Callaghan, head of the G20 Studies Centre at the Lowy Institute and a long-serving treasury official who was also chief of staff to Peter Costello.

In The Age and Sydney Morning Herald


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Tuesday, July 08, 2014

Tony Abbott: the most radical prime minister since Whitlam

I and many others got the Abbott government wrong. It’s turning out to be more like Whitlam’s than Howard’s, perhaps the most radical in Australia’s history.

My first mistake was to think his first budget would be a typical first budget, full of cutbacks to be followed later by generosity nearer the next election.

It’s been the other way around. The immediate impact of his first budget is close to nil. That’s not how Abbott sells it and it’s not how Shorten sells it, but it’s how the governor of the Reserve Bank sees it. Here’s what he said at the Economic Society conference in Hobart last week: “Over the next couple of years the estimated impact of the budget is not very different from what we had previously been assuming”.

The cutbacks are “actually not particularly large” in the governor’s words.

But that’s just in the here and now. In the longer term the changes will be profound if the newly-installed Senate approves them. The only prime minister in living memory to have put forward such a far-sighted a program is Labor’s Gough Whitlam. And just as many of Whitlam’s measures became part of the social fabric and almost impossible to undo, Abbott’s changes will stick.

If you doubt that he is governing for the long-term rather than the electoral cycle, consider the timing. Almost all of his measures build up slowly, beginning to have an effect at or just beyond the next election.

Pensions. Whitlam announced that pensions would climb until they hit 25 per cent of average male earnings. Abbott has announced that they will fall relative to male earnings without limit, being indexed only by the consumer price index from 2017.

Whether or not you think that’s a good idea (I do, I can’t see why pensions should have had first call on the proceeds of economic growth) you would have to agree that it’s farsighted. It’ll change society in long term rather right now. It’s also far reaching. It’s difficult to imagine a new government rolling it back. A new government would face its own budget pressures and would have other priorities. CPI adjustment would become the norm.

The Commission of Audit recommends much the same thing for minimum wages. They would increase by CPI minus 1 per cent for the next ten years after which they would settle at a new permanently lower level relative to other wages.

States. Whitlam took responsibilities from the states. Howard took more. Abbott is shoving them back. If they want to maintain their hospitals and schools in the future they will have to do it themselves. He will lift grants to hospitals only in line the consumer price index and population even though medical costs are rising rapidly. All he will offer them is the ‘opportunity’ to lift the GST. White papers on both the federation and the tax system are due before the election. If they take the opportunity to lift the GST schools and hospitals will become their problem from then on, not the Commonwealth’s.

Medicare. Whitlam made it easy for doctors and medical providers to pro vide services without charge. His successor Fraser undid Medibank and his successor Hawke reinstated it as Medicare. With one brief exception the option of free medical care been sacrosanct ever since, until now. Once fees are in and the reward for waiving them is removed it’ll be hard to go back...

Universities. For as far back as anyone can remember bright students have been able to get into university for free. The method used to be the Commonwealth scholarship, then it was free education under Whitlam and after that a loans scheme under Hawke where the debt didn’t accumulate in real terms if you were unable to pay it off. Abbott’s proposals allow universities to charge what they like (up to an international ceiling) and require students to repay loans at a rate well above the rate of inflation. For students who move quickly into good jobs that won’t be a problem. For those that do not the debt will build and build toward a crippling burden making university an attractive financial option for people with poor financial prospects. Future governments will be unable to reverse the decision to charge a real interest rate because fees will be by then so expensive the cost will be prohibitive.

Financial advice. Independent advisers want to ban  kickbacks and the misery they have caused. That’s what the previous government did and what would have come into force on July 1 had not the Coalition sneaked through regulations that will continue to allow kickbacks for “general advice” so long as the kickback is not solely for that purpose and so long as the adviser is affiliated with institution handing over the money. It’ll allow “general advisers” to set up in competition with genuinely independent personal advisers stifling the best chance the industry ever had of turning professional. And the general advisers will win. The kickbacks will make their conflicted service cheaper.

Regulation. The Australian Securities and Investments Commission is about to lose 12 per cent of its budget. It’ll have to adopt a lower-cost model of catching corporate crooks notwithstanding a damning Senate report about how little it was able to do with the budget it had. Neither corporations nor charities are universally honest. Labor’s Charities and Not-for-profits Commission was the best chance Australia ever had of subjecting non-profit organisations to the same sort of scrutiny as companies. And the good ones loved it. It was a one-stop shop. If it is abolished as Abbott intends it’ll be hard to restore.

Energy. We are in the middle of a life or death struggle between coal and gas fueled electricity generation and renewable energy led by wind. Only one side will win. The Renewable Energy Target has tipped the scales in favor of wind. If it stays coal-fired power station are likely to close. If it goes we’re likely to have seen our last big new wind farm. Abbott is siding with his coal. If the Senate lets him remove the target we will wear the consequences a long time.

It’s said that when you change the government, you change the country. That wasn’t true of Howard and it wasn’t true of Rudd or Gillard. It’s only true of governments with plans. We live with them for decades.

In The Age and Sydney Morning Herald


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