Tuesday, March 31, 2015

Tax: go hard on locals, but easy on foreigners

Hidden in this week's tax discussion paper and in the earlier intergenerational report is an inescapable reality – we need more tax.

Income tax and goods and services tax, and taxes on superannuation – the taxes that affect us – will have to climb in order to fund the things we are going to need. At the same time, company tax will have to fall, eventually plummeting towards zero in order to make sure we retain the investment we need.

The trick is to grab more of the money that's bolted down and unable to leave the country, and less of the money that's footloose. It's anything but fair, but tax is about raising revenue more than it is about fairness, and we can't raise revenue we frighten away.

Nowhere is this seen more clearly than in the discussion paper's approach to the fairness measure known as dividend imputation. Trumpeted as a great reform in the 1980s by the former treasurer Paul Keating, it gives Australian shareholders receiving dividends a refund of the tax the company paid on the profits used to create those dividends. Mum-and-dad investors love it. Roughly half of all the company tax paid in Australia is returned to them as credits.

It means that for many companies, those paying dividends to Australian shareholders, our tax take is more like 15 per cent than 30 per cent. But not for others. Those with overseas shareholders are asked to pay the full rate of 30 per cent. Which is exactly the wrong way around.

Most Australian shareholders are in effect effectively captive, as are Australian super funds. They'll buy local shares no matter what. If we are serious about raising money and serious about not frightening away foreign money, we would give a discount to overseas shareholders and charge our local ones the full quid, or at least put them on an even footing...

A few years back, the Business Council of Australia proposed just that, in a paper written by Nicholas Gruen of Lateral Economics. The gift to captive Australian shareholders cost $20 billion per a year at the time. Gruen  reckoned that if if it was removed, the government could afford to cut the overall company tax rate to 19 per cent. Australia would become a much more attractive place to the foreign investors whose money it needs.

Gruen believes the a 19 per cent company tax would push up demand for Australian shares and push their prices high enough to compensate existing Australian shareholders for no longer having imputation. He says the government could use the extra tax it got from the investment surge to cut the company tax rate further, to 15 per cent.

Eventually we will have no choice but to cut it even further, ever closer to zero. As long as just one nation undercuts all the others with a low tax rate, businesses will choose to invest there over other countries. it to invest in over the others. It's why Google will sell you its products in Australia but routes you your money through Ireland, where its profits are taxed at 12.5 per cent.

The man who designed the dividend imputation scheme for Keating can see a zero corporate tax rate beyond the horizon. "The evidence before the Henry review is that cutting the company tax rate is the most helpful thing we could do," said Greg Smith shortly after the Henry Tax Review was released.

Smith served on Keating's staff throughout the tax reforms of the 1980s and later served on the Henry Tax Review. "I have thought seriously about a 15 per cent company tax rate partly funded by the abolition of imputation," he said. "There is an intellectual case for a zero rate. That's the way the world is going, that's the direction in which our competitors are moving."

Our competitors are certainly moving away from dividend imputation. Germany and France abolished it in the early 2000s and Britain wound its system back. That leaves just us, Malta and New Zealand.

Although the case for being harder on ourselves than we are on foreigners has nothing to do with fairness, it isn't as unfair as it seems. The Treasury discussion paper points to Treasury research that says roughly half of the benefit to foreign investors from a lower company tax cut will be captured by their Australian workers through the higher wages that will flow from greater investment.

The income tax and the goods and services tax that we charge ourselves will have to climb. The good thing about wages and consumer spending is that they are more or less locked down. Australians earn and spend pretty much regardless of how they are taxed. Overseas experience suggests our GST could double to 20 per cent without deterring spending. For every one high earner that might move overseas if he or she found our income tax rate too high, tens of thousands more would stay, and even more would willingly come if we upped our let more people in. Fortunately for the government, income tax will rise all by itself through the process of bracket creep as wage inflation pushes us into higher tax brackets. The government can even be seen to give back some of the bracket creep while still pocketing more tax.

The same logic applies to taxes on property. Stamp duty encourages people to stay put rather than move. It's its own worst enemy. But land taxes tax something immovable. The government can charge whatever it likes, knowing it can't be avoided. The ACTustralian Capital Territory is moving in that direction, cutting stamp duties year by year and lifting land taxes.

Tax concessions for compulsory super contributions are in the gun tooas well – not only because they provide the most benefit to the most well off, but also because they give a tax concession to what's already tied down. Compulsory contributions are compulsory. If we need more revenue, and the government says we do, these are the places from where we will need to take the money. they are things we will have to soak.

In The Age and Sydney Morning Herald
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Tuesday, March 24, 2015

Why fix the budget when you can dress it up with lipstick? What to look forward to on May 12

Never have I less looked forward to a budget. The one due in seven weeks is going to make me feel dreadful; not because of what it will do, but because of what it won't do.    

Last year's budget (Abbott's and Hockey's first) genuinely attempted to bring spending and income into line. Sure, it gave away revenue by axing the mining and carbon taxes (fulfilling an election promise) but it also wound back the growth in pension payments, froze family payments and indexed fuel excise so it would grow over time.

Its gaping hole was any action on winding back Australia's gargantuan and expanding network of tax concessions, most of which are for superannuation. The tTreasury's most conservative estimate has the concession for contributions to super funds costing $15.5 billion this financial year, climbing to $18 billion over three years. The tax concession for the earnings of funds costs $12 billion and is set to almost double to $22 billion. By way of comparison, Medicare costs $20 billion.

Abbott and Hockey explained away the hole by saying the measures in their first budget shouldn't be seen in isolation. They would be followed by a second package after they had received their tax white paper. It would tackle the benefits paid to high-income Australians through tax concessions in the same way as that the first package had tackled the benefits paid to low-income Australians through payments.

The discussion paper that was meant to kick off the process was dueexpected in December. At the time, The Financial Review outlined its contents and the number of pages – about 200. But Abbott sat on it because he was in political trouble, promising to release it early in the new year. January, February and then most of March passed without any sign of it. Now Hockey says he'll release it on Monday, just after the New South Wales election and three months late...

After the discussion paper was to come months of consultation and submissions ahead of a final paper due at the end of this year. Unless Hockey extends the deadline, the process will have been severely truncated. If he does extend it, the white paper will be released so close to the next election as to make a bold second package impossible.

In any event, the Prime Minister has signalled there will be nothing bold about this year's budget (and by extension next year's budget, which will be just before the election). It will be "almost dull compared to last year". It is "not going to involve anything like the kind of restructuring that we saw last year".

In Labor's last financial year in office, spending exceeded revenue by 5.4 per cent. This year it will exceed it by 13 per cent. The government says it has a plan to get the excess down, but that plan was struck when the iron ore price was $US90 a tonne. It's now closer to $US50. And it was struck when the government thought it could get most of its measures through the Senate. It now knows it can't. Many measures it won't even put up.

So without the ability or the will to genuinely reform the budget this time round, what's it going to do? It is going to put lipstick on it. It's going to dress it up with measures that look good, even if they do harm.

They are the sort of measures Hockey used to complain about on budget night. He would put out a document printed in red ink outlining the tricks Labor had used to make it look as if the budget position was improving when it was actually getting worse.

This year Hockey and Co are investigating selling irreplaceable real estate. They've contracted PricewaterhouseCoopers to investigate selling the parliamentary triangle buildings that house the Treasury and Finance departments as well as the historic East Block and West Block buildings either side of the old Parliament House and the Anzac Park East and West buildings that flank the view of the War Memorial from Lake Burley Griffin.

Once sold, they would be leased back to the departments of Treasury and Finance and whoever needed to use them. For the next four years (as far out as the budget's detailed forecasts go), Hockey's accounts would look good. He would have raised serious money. Beyond that, his successors would be paying out serious rent.

The Howard government sold the purpose-built Foreign Affairs headquarters to the to the Motor Traders' Association super fund for $217 million in 1998. By 2017 it will have paid out $311 million in rent. Foreign Affairs can't move out, and what dressed up the budget nicely in 1998 will cost $20 million or more per year in rent forevermore.

The charter of budget honesty rules allow this sleight of hand for the sale of buildings but not for the sale of corporations, something Hockey is apparently planning to take advantage of.

Only a government that didn't really care about its long-term finances would use such a loophole, only a government that had given up on doing the hard work it said needed to be done.

In The Age and Sydney Morning Herald
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Tuesday, March 17, 2015

Hockey is right. Eating into super would get home ownership back on track

Can we give Joe Hockey a break?

He says he is prepared to consider allowing us to dip into our super to buy houses. What on earth could be wrong with that? A house is far more useful in retirement than superannuation. Just ask anyone who has tried to survive without one.

When the Harmer pension review examined the question some years ago it found only 3 per cent of home-owning single pensioners were in severe poverty compared up to one quarter of those who rented.

Rent eats income. It's why houses are important in retirement. They relieve us of the need to pay rent.

When renters attempt to earn that income they lose half of it in cuts to whatever pension they are on. Homeowners don't need to earn that income.

Labor is saying silly things about home ownership right now. Its deputy Tanya Plibersek says "you can't eat your family home, you can't pay your electricity bill with it". But you can do those things by saving on rent and you can do them by taking advantage of services that allow you to borrow against your home. Centrelink offers one. You can get up to the full pension fortnightly right up until the day you die taken out of the value of your home, and you'll never be kicked out. Private operators offer similar deals. The Financial Review had a feature on them on Saturday.

Australians are right to want to dip into their super to buy houses. Many do it the minute they can, telling their super fund trustee they've "retired" at the age of 55. They use the payout to pay down their mortgage and get back to work. You can't blame them. It sets them up for retirement better than would super...

It would set them up even better if they were able to use their super to pay down their mortgages earlier, before they grow.

They can't because the present system forces them to save year in, year out at 9.5 per cent even when they should be paying down debt. Like attempting to drive a car by pressing on both the brake and accelerator pedals at the same time, it is possible to save and be in debt simultaneously but wasteful.

That's how Young Labor saw it on the eve of Kevin Rudd's election in 2007. Yes, Young Labor. It proposed what Hockey is now proposing. Australians up to the age of 30 would be able to dip into their super for the deposit on a home.

"What good is having an extra $15,000 in super when you're 65 if you're still renting when you are 85?" asked its then national president Sam Crosby.

Labor's Wayne Swan responded. He came up with a plan for super-like savings accounts, especially to save for deposits.

The contributions and earnings would be taxed like super - at a flat rate of 15 per cent - up to a generous limit. After four or more years they could be withdrawn but only for the purpose of buying a first home.

The plan bombed partly because Swan made the mistake of making explicit the unfairness of the super tax concessions. Treasury told him to tax the accounts normally and achieve an effective tax rate of 15 per cent by making direct contributions, more for high earners, less for low earners.

Invited to submit comments on the treasury website, Australians were appalled.

"I am shocked and utterly disillusioned to find that under the current proposal, the government contribution is twice as much for those paying the highest rate of income tax," wrote one.

Swan modified the scheme somewhat and it died of lack of use.  

The main reason it bombed was that Australians didn't have the spare cash to put the accounts. Nine per cent of their income was going into super whether it was wise or not.

Compulsory super is a one-size-fits-all solution to a problem that hasn't been clearly defined.

It takes the same proportion of wages each year regardless of the calls on income that year and the size of the debt that would otherwise be paid down.

Canadians are able to withdraw up to $25,000 from their super funds to buy first homes on the proviso that after a year than begin paying it back in equal installments over 15 years. New Zealand and Singapore offer similar deals.

It's said that if it happened here it would push up the price of houses, but that's true of any measure that makes houses easier to buy. Denying someone access to their own money in order to deny them access to the housing market is a particularly cruel way to restrain prices.

The best way to hold down prices for first home buyers is to take out the competition. Second and third homebuyers (so called "investors") now almost outnumber owner occupiers at auctions. One out of every seven Australian taxpayers is a landlord.

It can be said in their defence that they provide rental accommodation, just as that used to be said for the far smaller number of foreign investors in real estate against whom the government has taken action. But by elbowing out of the way would-be owner occupiers those landlords are also creating a class of people to rent to, a class of Australians who may never be able to afford their own homes.

Eliminating negative gearing (while allowing it to stay for existing landlords) would remove the competition. Along with allowing Australians access to their own money to buy their own houses it would ensure that more of us had the kind of genuine security in retirement that only a home can give.

Home ownership was once a article of faith of the Coalition. Hockey has at least shown an interest in getting it back on track.

In The Age and Sydney Morning Herald


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Tuesday, March 10, 2015

TPP. We're negotiating for negotiators not for Australians

I get that ordinary Australians don't much like the Trans Pacific Partnership. But businesses?

The deal is being negotiated between the twelve Pacific-facing nations of Australia: the United States, Japan, Canada, New Zealand, Malaysia, Brunei, Singapore, Chile, Mexico, Peru and Vietnam. No-one outside the negotiating teams knows exactly what's in it because the text won't be made public until after it is sealed, quite possibly at a ministers' meeting in Hawaii next month.

Then it'll be too late for Australia to change. That's the way trade agreements work. Our parliament will be able to vote "yes" or "no" to the entire thing, all 20 chapters; but it won't be able to change a word.

Some of the leaks are alarming. They include what British medical journal The Lancet calls an "unprecedented expansion of intellectual property rights that would prolong monopolies on pharmaceuticals and reduce access to affordable and lifesaving generic medicines".

Australia's Pharmaceutical Benefits Scheme spends $1 billion a year on the 10 most expensive of the super-expensive so-called biologic drugs, manufactured from living organisms.

In addition to patent protection, the manufacturers get five years in which the makers of cheaper generics are unable to use their data to prove their alternatives are safe. The US wants to extend the period to eight years. Deborah Gleeson, from La Trobe University, says that would cost the Pharmaceutical Benefits Scheme $205 million a year.

It isn't to facilitate trade. It's a measure to restrict trade. And the TPP is full of them.

In one part buyers of pharmaceutical products (such as Australia's PBS) would be restricted in their ability to offer whatever price they wanted to their suppliers (mainly US-owned pharmaceutical companies), a restriction not normally thought of as advancing free trade. In another, even minor breaches of copyright (such as burning a copyrighted DVD for a friend), would become a criminal rather than a civil offence.

And outside tribunals would be able to adjudicate and impose penalties on Australian governments even after their laws had been found valid by Australia's courts...

It would open the way for alcohol manufacturers to take on Australia over laws requiring labelling, food manufacturers to take on Australia over anti-obesity campaigns and mining companies to sue Australia over environmental regulations, as happens in Canada under the provisions of the North American Free Trade Agreement.

Australian businesses ought to love the TPP. They would get the ability to take on 11 other governments in overseas tribunals, and to the extent that they export intellectual property (Australia is a net importer) they would benefit from the criminalisation of copyright breaches.

But would they actually be able to sell much more product.

It looks as if they wouldn't. The department of foreign affairs and trade said Australia's mega trade deal with the United States, signed 10 years ago, would boost Australia's gross domestic product by $5.7 billion. However, 10 years on, the Australian National University says it has not boosted trade at all. A US Department of Agriculture study says the agricultural component of the  TPP will not boost Australia's GDP at all.

None of which would matter much if agreements such as the TPP weren't so expensive to negotiate and didn't create so much red tape.

The Australian Chamber of Commerce and Industry wants the direct costs of negotiating each treaty reported to parliament. And it wants annual assessments of how they are turning out. Like government spending on roads and on events such as the Olympic Games, there are always plenty of forecasts of the benefits before the agreements are signed, but rarely any follow up.

It also wants the "noodle bowl" of overlapping and conflicting agreements cleaned up. Australia has 12 free trade agreements, each with its own compliance rules. Some involve the same countries, but the superseded agreements are never terminated.

Australia hasn't acceded to the international treaty which would require each of its agreements to be consistent with each of the others. The TPP is the latest which won't be.

An unpublished survey of ACCI members find most neither understand nor use Australia's free trade agreements.  

"In my experience, they have been a waste of time, particularly Thailand. The paperwork to qualify was so erroneous it wasn't worth the effort," said one member.

"I know we have one with the US and I know there is one now with Japan and Korea - is that correct?" said another.

Where they do try to comply, their goods are often stopped at the docks and on the other side charged the full rate of duty because the officials don't know about them. Australia doesn't collect information about how many of our goods get through.

The Chamber's submission to the Senate inquiry into the treaty-making process is damning. It wants the secrecy by which the agreements are negotiated opened up so that community and business groups are taken into the confidence of the negotiators in real time, as happens in the United States.

It's how climate change negotiations are handled. It seems to do no harm.

Its most important recommendation is that the Productivity Commission assess the worth of the agreements as they are being negotiated in real time. It would put a stop to many of the agreements that are being negotiated in our name. It might even put a stop to the TPP.

In The Age and Sydney Morning Herald


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Sunday, March 08, 2015

Why are there so few female chief executives? Why are there so many named Peter?

Fewer big Australian companies are run by women than by men named Peter.

The shocking finding after decades of talk about breaking the glass ceiling comes from a count of the 200 biggest public companies that constitute the ASX200 index.

Thirteen of the top 200 are run by men named Peter; among them Westfield, Woodside Petroleum and Macquarie Roads. Twelve are run by women; among them Coca-Cola Amatil, Cochlear and Harvey Norman.

Companies run by a Peter, a Michael, a David or an Andrew outnumber those run by women four to one.

The idea for the survey isn't original. It comes from the US economist Justin Wolfers who wrote in the New York Times this week that fewer large American companies were run by women than by men named John.

Wolfers is an Australian by birth and a visiting professor at Sydney University, so he'd probably be disappointed to hear that things are just as bad back home. Whereas in the US four chief executives are named John, Robert, William or James for every one who is a woman ("including every woman's name, from Abby to Zara") in Australia there are four named Peter, Michael, Andrew or David for every one who is a woman.

It's unfortunate, not just for women who might want to run organisations, but also for the organisations themselves. That's because there's good evidence that organisations run by women are better run. Really.

The most compelling evidence is brand new. It's from a 15-year study of Luxembourg banks published in January. The researchers compared the representation of women in the senior management of the 264 banks with their quarter-by-quarter financial performance reported to the regulator.

They found a 10 per cent increase in the proportion of women in the senior management ranks of a bank lifted its financial performance by more than 3 per cent per annum.

There's more. The 15-year period included the years of the global financial crisis. During those years, from 2007 to 2009, the effect almost doubled.

Women managed the banks better in the lead-up to and in times of crisis...

It's easy to guess why. Women are less inclined to take stupid risks. It's one of the reasons women live longer than men. Fewer die in accidents.

The study quotes Neelie Kroes, the European Union commissioner for competition during the crisis.

"If Lehman Brothers had been 'Lehman Sisters', would the crisis have happened like it did?" she asks.

"No," she replies. "Generally, women have a better ear to listen, and they are less likely to pretend to know everything themselves. They are team players with less ego."

It's not only attitudes to risk that can make women better at the top, it's also attitudes to women.

Another study finds that the performance of firms with women at the top increases with the share of women workers. Women taking over male-managed firms with at least 20 per cent of women in the workforce lift sales per employee by about 14 per cent.

Women are better at dealing with women.

I am sure you are about to scream that this is a generalisation, not true in every case and perhaps not true of someone you know. But most things about gender are generalisations. Not all women fail to make it to the top. Some (almost as many as men named Peter) do. But taken together women are more likely to fail to make it to the top than men. And taken together women are more likely to run certain types of firms better than men. Taken together that seems to be because women are more cautious and better at dealing with women.

So how do we get more women to the top?

A team led by Dr Danielle Merrett, of the University of Sydney, has come up with the simplest of easy fixes: when selecting candidates for a job (any job) make sure the shortlist contains an equal number of men and women.

Its experiments suggest that doing no more than that can lift the proportion of women chosen to 60 per cent.

It opens up the possibility of a new type of quota - not one that insists on a certain proportion of women being appointed, but merely one that insists on there enough women available so that choosing a woman doesn't look unusual.

What if that's all it takes? What if instead of being chosen from a panel with names like Peter, Michael, Andrew and David the next head of BHP is chosen from a panel where half have names are like Peta, Michelle, Andrea and Davinia. What if it could lift BHP's performance?

In The Age and Sydney Morning Herald






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Saturday, March 07, 2015

Intergenerational report. The truth at its core, and how we'll cope

Beneath all the talk about finances, beneath the spin about which side of politics would handle Australia future better, this week’s intergenerational report contained a disturbing truth: the day is fast approaching when a much smaller proportion of the Australian population will be able to work than we’ve become accustomed to.

The starkest illustration of the change isn’t presented in the report itself but can be derived from the figures buried within it. At the moment there are 2.1 Australians of traditional working age to support each Australian of traditional dependent age - either too young to work or what used to be thought of as too old to work. By 2055 the ratio will have shrunk to 1.7.

The actual number of Australians available to work won’t have shrunk (the report says our population will almost double, to 40 million) but the number available to support each Australian traditionally regarded as needing support will have shrunk by one fifth.

The rise of the machines

We’ll cope in part by substituting machines for people, as we have done for years. Launching the report on Thursday treasurer Joe Hockey said 40 years ago it took 2 hours of work to make what takes 1 hour today. But the biggest fear among the treasury officials responsible for the intergenerational report is that that easy gain has been had. Once we remove the labour from an operation we can’t do it again. We automated telephone exchanges. We can’t automate them again. What we are left with are tasks such as caring for senior citizens in nursing homes, things that can’t be as easily automated.

But the treasurer is optimistic.

“I urge people to go and do an internet search of driverless cars,” he said on Thursday. “There is credible evidence that suggests that by 2040 three quarters of the cars on the road will be driverless.” It’s a future prophesied a half a century ago in the cartoon series the Jetsons, except that those cars were going to fly.

Hockey has a new Holden Commodore. He says he can press a button and it parks itself. If he is correct and three quarters of the cars on the road drive themselves we’ll soon be able to catch driverless taxis and busses, and we won’t need to drive ourselves - something that will help when an unprecedented 2 million of us are beyond age 85, the time of life at which the authorities traditionally make it hard to keep a driving licence.

By 2055 retailing will be mostly online. Corner shops won’t need to employ as many people because most will no longer exist. Newspapers will no longer be home delivered (and will almost certainly no longer be printed) Australia Post will have stopped delivering letters daily...

And yet the treasury believes productivity will only climb by 1.5 per cent per year, about its recent average. Its report doesn’t buy into the treasurer’s optimism.

Working longer, and longer

We’ll also need to keep working. The previous government began lifting the pension age from 65 to 67. This one wants to lift it to 70. A half a century ago men who retired at 65 could expect only another 12 years of life. Now they can expect 19. By 2055 they’ll expect 26. As work becomes easier (these days more of us work in offices than factories) and we find we’ve many more years on our hands it’s entirely reasonable to expect us to work for longer.

Some employers are begging for it. At Teachers Mutual Bank in Western Sydney one third of the workforce is over 50. Liz Dec is 66. She was hired to work there at the age of 58.

“I arrived and discovered everyone I met had been here for ten or more years, some 15, some 20,” she said. “No-one leaves.”

To keep staff and to keep its older staff healthy the bank runs workshops on diet and health.

Ms Dec says before she started work in the bank’s call centre she didn’t know how to read the labels on cans of food.

“And they offer aerobics classes and pilates classes. Last year when I turned 65 I told them I was thinking about retiring. They told me instead I could transition, maybe take off one day a week and then the next year two days. They value older people, and they told me it would be fine to apply for a promotion.”

More and more employers are going to go after older workers and fighting to retain them. The hardware chain Bunnings says one quarter of its workforce is aged over 50. Hockey says he met met a worker there in his mid-80s last week and made the mistake of asking him how many days a week he worked. The answer was five.

Working women

Four decades ago only 43 per cent of working age Australian women made themselves available for paid work. Many of those who left to have children never came back. Now 58 per cent of Australian women are available for paid work, but it’s still well short of the 62 per cent in Canada and New Zealand. Hockey says he has heard that in the Canadian province of Quebec childcare is available for just $5 a day. Getting support for childcare right (as he says the government is labour force.

Australia is also well behind New Zealand in the employment of men. There Hockey thinks the reason is compulsory superannuation. We have it, and New Zealanders don’t - so they have to work longer. While Hockey hasn’t talked about ending compulsory superannuation (although he has talked about taxing it more fully) he is keen to remove whatever remaining barriers prevent mothers and men or any age from turning up for work.

Making Australia bigger

Traditionally we’ve solved labour shortages by bringing in more workers. It’s how we built the Snowy Hydro scheme, how we filled our schools with teachers in the 1970s and how we built mines in remote parts of Australia at the start of the 21st century. Yet curiously, for such a forward thinking document, Hockey’s intergenerational report assumes no increase in immigration whatsoever. It remains stuck at 215,000 per year, each year for the next 40 years during what we are assured will be a time of growing labour shortages. It’s a lower immigration rate than we have today.

“I think palatability has played a part,” says demographer Martin Bell at the University of Queensland. “To remain constant as a share of the population the immigration total has to climb each year, but a steady number looks less alarming.

By factoring in a low and steady rate of immigration in the report Hockey also acted to head off a renewed debate about a big Australia.

Bell says it wasn’t long ago the former prime minister Kevin Rudd courted controversy by speaking out in favour of an Australia of 40 million. At the time most projections were for around 28 million. Yet 40 million is what Hockey’s intergenerational report forecasts. Higher immigration assumptions would have pushed the total even higher.

Yet Bell thinks 215,000 per year might be a reasonable guess. he is more optimistic than many our ability to fill labour shortages ourselves by getting more people into work and eating into the ranks of the unemployed.

Framing Labor

The intergenerational report presents two “sliding doors” scenarios. Had Labor’s policies been continued it says the budget deficit would have hit $534 billion by 2055, around 12 per cent of gross domestic product. It says under those of its policies already passed by the Senate the projected deficit has been wound back to half that. It says if they had all been passed it would be eliminated.

Many of the assumptions behind those conclusions are unreasonable, among them that Labor would have kept to its promise to keep increasing foreign aid each year into the future, that Labor would have never lifted taxes to fund its commitments to schools and hospitals, that the Coalition would continue to underfund hospitals by more each year for four decades, and that either side would remain in power until 2055.

The future is hard enough to predict when you feed in reasonable guesses about what's likely to happen. When you ensure that you don't, the predictions become silly. Many of the predictions in the intergenerational report are silly.

In The Age and Sydney Morning Herald


Related Posts

. Intergenerational report. Why the future will be nothing like as bleak as it suggests

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Friday, March 06, 2015

Intergenerational report. Why the future will be nothing like as bleak as it suggests



The biggest economic challenge facing Australia in 40 years' time will be a shortage of workers. The finances aren't nearly as challenging.

It's true that we will probably have to pay more of our income in tax, but we'll earn a lot more. Adjusted for inflation we'll earn will earn three times as much as we do today. We'll be able to find whatever extra tax is needed.

What we won't be able to find - as easily - is more workers. The intergenerational report says instead of the present 4.5 people of traditional working age for each older Australian we'll have 2.7. It's a dramatic slide, but it overstates the problem.

As we getting older, we will also get less young. That means that as well as having more Australians over 65 to support we'll also have fewer Australians under 16. Putting the two together, the figures in the intergenerational report suggest that whereas at the moment there are two Australians of traditional working age available to support each Australian of traditional dependent age, by 2055 there will be just 1.7.

It isn't a problem we can wish away. But the report overstates it by assuming that the automatic mechanisms for solving it work badly.

As we run short of workers we'll want to import more of them. Yet the report assumes that our immigration intake will remain stuck at 215,000 each year for 40 years without climbing. The implicit assumption is that this government and each of its successors will resist what by then would become a deafening call from employers and consumers of services such as home care to bring in more workers.

It's hard to escape the conclusion the assumption was added either to make the Australian population look less alarmingly big than it will be in 2055 (the report says it will be about 40 million) or to make the budget problem look worse. Migrants pay tax and the more migrants we have the better the budget looks.

The other automatic mechanism that will call forth more workers is higher wages. Whenever there's a shortage of anything its price goes up and more people start supplying it. It's how markets work. Yet the report assumes that most older Australians won't answer the call. By 2035 the pension won't be available until the age of 70 if the government gets its way. Yet the report assumes that only 52 per cent of the men aged 65 to 69 will be available for work, and only 37 per cent of the women.

The figures sound too low to me. I don't know a lot about central planning, but do I know that markets work. If there's a shortage of workers their price will go up and we'll find more of them, whether from overseas or from the ranks of Australians presently not working. The report reads as if it was written by Soviet-era bureaucrats who don't believe in markets. The future won't be as bleak as they think.


In The Age and Sydney Morning Herald


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Intergenerational Report: How Labor was framed

How much worse under Labor? The Intergenerational Report tells us that had Labor's programs continued uninterrupted, the deficit would have hit $534 billion by 2055. The figure is expressed in today's dollars. It would amount to be 11.7 per cent of gross domestic product.

It's an extraordinary projection. The previous Intergenerational Report, in 2010, predicted a deficit of less than 3 per cent of GDP.

Fortunately the Coalition came to office and turned things around, the report suggests. The measures so far passed by the Senate would have cut the projected deficit to around 6 per cent of GDP and the measures not yet passed (some of which the Coalition has since abandoned) would have abolished it altogether.

As the Treasurer Joe Hockey said: "Last year's budget was a budget that tried to do 40 years of work in one year and it did bite off too much."

How it did it is buried in the fine print of the Intergenerational Report. The biggest change was the decision to stop lifting spending on hospitals in line with the costs of running them. Beyond 2017-18 Commonwealth grants to states for hospitals will increase only in line with the population and the consumer price index. But the cost of running hospitals is continuing to climb. Not meeting that cost is unrealistic (unless the states meet it by doing something such as lifting the goods and services tax) but it holds back the projected deficit.

The other big change was the decision to freeze Australia's foreign aid budget in real terms. Under Labor it was to climb to meet the United Nations target and then keep climbing with gross domestic product from then on. The budget measure passed by the Senate has it climbing by just only consumer price index for the next 40 years.

Neither position sounds realistic... It is likely Labor would have imposed a further pause on its program of lifting foreign aid (it's imposed plenty in the past) and it's likely that the Coalition would have relented, but when compounded over 40 years the difference between the two policies gets very big.

Of the measures not yet through the Senate, the biggest are the Coalition's approach to pensions and Gonski.

The Coalition wants to index pensions only to the consumer price index rather than to wages until the budget is back in substantial surplus. Labor wants pensions to continue to climb with male earnings. The Coalition wants to lift the pension age to 70. Labor had only announced an increase to 67.

On the Gonski education reforms, Labor had committed to an expensive formula that would have supported schools on the basis of need. The Coalition guaranteed that funding only for a few years. Again, over 40 years the difference is huge.

Those measures are about all it takes to eliminate Labor's looming deficit according to the report - those measures, plus the lower interest payments on debt that would result.

It's an implausibly big effect in part because Labor would most likely never have spent as much as the Coalition is suggesting and because the Coalition would never have spent as little.

In The Age and Sydney Morning Herald


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Thursday, March 05, 2015

The Intergenerational Report to be right message, wrong time

The economy hasn't had a run as weak as this year's, yet after three straight quarters of exceedingly weak economic growth we are about to be told we've got to tighten our belts.

It's the right message. In order to buy all of the extra health care and aged care and all the other things we'll want over the next 40 years we are going to have to either pay more tax, pay more out of own pockets or scale back what we want.

But it's exactly the wrong time to be saying it. In the past three quarters economic growth averaged an embarrassing 0.47 per cent. If it continued like that for 12 months it would give us an annual growth rate of 1.9 per cent. It's not too far above the 1.7 per cent we endured during the global financial crisis, and well below our potential growth rate of around 3 per cent.

Cutting back on spending now, or raising taxes now, as Thursday's Intergenerational Report will suggest we should, would depress the economy further and smother the "green shoots" of recovery the Treasurer Joe Hockey occasionally tells us are emerging.

The intergenerational report is required by law every five years.

If it had been required a year ago soon after the Coalition took office, its message would have been timely with the economy growing at an annualised pace of 3.8 per cent.

We would have been in a good position to accept the need to lose tax deductions or wind back benefits or to pay more for education and health. We would have felt better about the budget.

We would have been presented with the case for restraint. As it was we were presented with the restraint without the case. It's arriving too late. The government will have to build a case for long-term cutbacks without cutting back right now.

In The Age and Sydney Morning Herald


Intergenerational Report to show Labor's spending was growing out of control

Australia would have needed to lift its tax take by almost 50 per cent to meet Labor's long-term spending promises, Thursday's Intergenerational Report will show.

To be released in the wake of very weak economic growth figures showing income per head barely rising, the report will say that Labor's commitments to hospitals, schools and the national disability insurance scheme would have lifted Commonwealth government spending to an unprecedented 37 per cent of GDP by 2055. It is presently 26 per cent, slightly above government revenue of 23.6 per cent.

On Wednesday, the Abbott government was already signalling it will use the report to ramp up its political attack on Labor while also using the findings to frame the political and economic debate about its next budget.

Prime Minister Tony Abbott told question time debt had been set to "soar" under Labor's policies and in contrast, if the government had been able to get all of the measures in its last budget past a hostile Senate, a surplus would have quickly been delivered "and stayed there for 35 years".

Mr Abbott said the report will show that, even with only some of its controversial budget measures passed, the Coalition's plan "does in fact get close to surplus and ongoing deficits are halved".

Graphs in the report show that the budget measures passed by the Senate have cut the expected spending bill in 2055 to 31.2 per cent of GDP. If they had all been passed, including those now withdrawn, spending would amount to only 24.6 per cent of GDP, allowing a tax take roughly in line with the long-term trend.

"Not only is this government serious about economic reform but we have very significantly and substantially delivered the budget repair that we pledged to deliver," Mr Abbott told Parliament. 

Labor's settings would have resulted in a budget deficit of 12 per cent of GDP by 2055. The measures passed by the Senate have halved that to 6 per cent. If all the measures had been passed the deficit would have been eliminated and the budget would be in a slight surplus.

The report includes a special chapter on what Labor's policy settings would have delivered, the first time such calculations have been included in an Intergenerational Report. It will be used to build the case for further spending cuts in the May budget on top of those introduced as a result of the last budget.

Treasurer Joe Hockey said it would kick-start debate in town halls and on street corners. "We will get the information out but we are not doing it in a way that would be typical for governments to buy those rather droll ads that try and convince people to come this way," he said.

The report assumes an economic growth rate of 2.8 per cent over the next 40 years, down from 3.1 per cent over the past 40 years.

The December national accounts released by the Bureau of Statistics show the economy grew by 0.5 per cent in the quarter, the third consecutive quarter of weak growth. Over the past nine months the economy has grown at an annualised pace of just 1.9 per cent. The annual growth rate, including the higher growth before the May budget, was 2.5 per cent.

Economic growth per person was just 0.2 per cent in the December quarter and just 0.1 per cent in each of the two quarters before that.   

The good news in the accounts was a jump in consumer spending of 0.9 per cent largely funded by running down savings, and a 5.3 per cent jump in spending on home building. Business investment slid a further 0.7 per cent.

The projections in the report are sensitive to the assumptions used. Thursday's report will assume Australia's immigration intake stays constant at 215,000 per year for the next 40 years, resulting in a decline in the immigration rate as the population climbs. A higher rate would have resulted in a better budget outlook. Migration typically boosts the size of the economy and the tax take.

The report assumes population growth of 1.3 per cent per year, down from 1.4 per cent per year in the past 40 years.

It says that by 2055 there will be only 2.7 Australians of traditional working age to support each Australian aged 65 or over. At present there are 4.5. The life expectancy women will climb to 90.5 years and the life expectancy for men to 88.

Although the proportion of the population in work will shrink as the population ages, the proportion of both the working age population in work and the senior population in work will continue to climb.

The release of the report comes more than two months before the federal budget is released, and ahead of major new policy announcements including a families package and others targeting small business and infrastructure.

Labor Treasury spokesman Chris Bowen said the report, which is a month overdue, was being used by Mr Hockey "as a prop to help his flailing campaign to sell his unfair budget".

Australian Greens senator Richard Di Natale has signalled his intention to hold a Senate inquiry into the report.

In The Age and Sydney Morning Herald


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Wednesday, March 04, 2015

Now business wants more open trans pacific partnership negotiations

Australia's largest business organisation has called for the government to open up the negotiation of trade deals such as the Trans Pacific Partnership.

As the Trade Minister Andrew Robb responded to criticism of his actions in keeping the text of the Trans Pacific agreement secret, the Australian Chamber of Commerce and Industry said it wanted negotiations to be monitored in real time by the Productivity Commission and wanted draft texts disclosed to registered community and business organisations as happens in the US.

Criticised for keeping the negotiations secret in a so-called health impact statement released by the University of NSW Centre for Health Equity Training Research and Evaluation, Mr Robb said the text of the agreement would be made public as soon as it was agreed between the 12 nations.

"The text will not be kept secret. Once it is agreed between participants, it will be made public and also subjected to parliamentary scrutiny," he said.

"Since 2011, the Department of Foreign Affairs and Trade has conducted more than 1000 briefings with interested stakeholders, including groups representing health, pharmaceuticals, consumers and unions."

The ACCI wants negotiating drafts to be shown to community and business groups who would then be under an obligation to keep them confidential.

Negotiators would retain their power to conclude deals without reference to the parliament but would be required to "properly consider and balance the merits of civil society's views at all phases of negotiationTrans Pacific PartnerTrans Pacific Partnership

In Australia the parliament can accept or reject but cannot amend agreements negotiated by the minister.

The ACCI also wants the direct costs to the government of negotiating treaties to be clearly identified in future budgets. Its director of trade and international affairs Bryan Clark said the Australian community had no idea how much money had been spent negotiating the Trans Pacific Partnership and so was unable to judge the worth of exercise.

Mr Robb said last month Australia takes 22 specialists to each negotiation backed up by teams at home. The US takes 80.

Mr Clark said Australia collected no data on how trade deals were actually used after they were completed and was unable to quickly support businesses that found the concessions negotiated were not offered when their goods arrived at docks in other countries.

The chamber's submission to the Senate's inquiry into the treaty-making process says Australian negotiators do little to ensure that each new trade treaty is consistent with existing ones leading to a mish-mash of overlapping treaties that interfere with each other.

In The Age and Sydney Morning Herald


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The real story to emerge from Tuesday's board meeting. The RBA fears the economy is even weaker

The Reserve Bank fears the economy is even weaker than when it met one month ago.

Tuesday's board meeting considered new data released since its last meeting showing much lower than expected investment intentions for the third quarter of this year.

After the bank cut rates in February, it published a forecast for economic growth centred on 2.75 per cent for 2015-16.

The investment data casts doubt on that forecast and suggests it will be revised down when the bank updates it in May.

While deciding to keep its cash rate steady in March, the bank issued guidance that "further easing of policy may be appropriate over the period ahead".

The guidance is understood to be the clearest about the future direction of interest rates for about two years.

The governor's statement said "the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak".

The bank is concerned that in the past month investment has slipped more sharply than expected, unemployment has climbed to a 13-year high and that the December quarter economic growth figures (due on Wednesday) are likely to be weak.

Its forecasts already factor in a further rate cut by May. After digesting Tuesday's statement, the futures market factored in a near certain rate cut by May followed by the certainty of another cut by November...

Those two cuts would take the bank's cash rate from 2.25 per cent to 1.75 per cent.

Former Reserve Bank economist Paul Bloxham said Tuesday's meeting was "a nail-biter".

"In the days leading up to the decision, the market had been pricing a 50:50 chance of a cut, so it was a close call," the HSBC economist said.

"The post-meeting statement was fairly short, downbeat, and continued to note that the Australian dollar was overvalued on most measures of fundamental value. Working in the other direction, the statement noted that dwelling prices continue to rise strongly in Sydney."

The only things that could stand in the way of a further cut in interest rates in April or May would be inflated lending to real estate investors or a sharp drop in the dollar.
The bank was "working with other regulators to assess and contain risks that may arise from the housing market".

The Australian Prudential Regulation Authority has warned banks not to lower their standards for investment loans in order to chase business.
A sharp drop in the value of the dollar would boost the economy, making a further cut in interest rates less necessary.

The Australian dollar jumped more than half a cent after the Reserve Bank's decision to leave interest rates on hold. It closed near US78¢.

In The Age and Sydney Morning Herald


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Now business calls on the government to open up the Trans Pacific Partnership negotiations

Australia's largest business organisation has called for the government to open up the negotiation of trade deals such as the Trans Pacific Partnership.

As the trade minister Andrew Robb responded to criticism of his actions in keeping the text of the Trans Pacific agreement secret, the Australian Chamber of Commerce and Industry said it wanted negotiations to be monitored in real time by the Productivity Commission and wanted draft texts disclosed to registered community and business organisations as happens in the United States.

Criticised for keeping the negotiations secret in a so-called health impact statement released by the University of NSW Centre for Health Equity Training Research and Evaluation, Mr Robb said the text of the agreement would be made public as soon as it was agreed between the twelve nations.

"The text will not be kept secret. Once it is agreed between participants, it will be made public and also subjected to parliamentary scrutiny," he said.

"Since 2011, the department of foreign affairs and trade has conducted more than 1000 briefings with interested stakeholders, including groups representing health, pharmaceuticals, consumers and unions."

The Chamber of Commerce wants negotiating drafts to be shown to community and business groups who would then be under an obligation to keep them confidential.

Negotiators would retain their power to conclude deals without reference to the parliament but would be required to "properly consider and balance the merits of civil society's views at all phases of negotiation"...

In Australia the parliament can accept or reject but cannot amend agreements negotiated by the minister.

The Chamber also wants the direct costs to the government of negotiating treaties to be clearly identified in future budgets. Its director of trade and international affairs Bryan Clark said the Australian community had no idea how much money had been spent negotiating the Trans Pacific Partnership and so was unable to judge the worth of exercise.

Mr Robb said last month Australia takes 22 specialists to each negotiation backed up by teams at home. The United States takes 80.

Mr Clark said Australia collected no data on how trade deals were actually used after they were completed and was unable to quickly support businesses that found the concessions negotiated were not offered when their goods arrived at docks in other countries.

The Chamber's submission to the Senate's inquiry into the treaty-making process says Australian negotiators do little to ensure that each new trade treaty is consistent with existing ones leading to a mish-mash of overlapping treaties that interfere with each other.

In The Age and Sydney Morning Herald


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Tuesday, March 03, 2015

Be careful when reading the Intergenerational Report. It's meant to scare you

What does a government do when it's lost all authority? It tries to scare people, big time.

Last week it was national security. Abbott used the word "threat" 16 times in 24 minutes. He used "death cult" 9 times.

He promised to cancel welfare payments and revoke citizenships (as if those things would make a difference) and said the courts had been too quick to grant bail (as if the Commonwealth could do anything about it).

Devoid of much practical import, his speech was designed to scare us, as will be Thursday's Intergenerational Report.

We know it's expected to scare us because treasurer Joe Hockey said so.

"When people see some of the graphs in the Intergenerational Report they are going to fall off their chairs," he told a business briefing last week.

To fine tune its impact, his department has given $380,000 to Hall & Partners Open Mind, a specialist in "measuring consumer engagement". It has conducted 30 focus groups since November. Asked at last week's Senate hearing whether an advertising campaign would follow, the treasury said it was "working through the guidelines".

It's an extraordinary approach to what's meant to be an information document; intended to do to it what the prime minister's statement did to national security - to make it an instrument of fear.

The Intergenerational Report is required by law every 5 years. It assesses the long-term sustainability of the government's policies 40 years into the future. This one will take us through to 2055. It's 2 month's late, although that's not the fault of the treasury. Finance minister Mathias Cormann was keen to tell the Senate that it's a report of the government, not the treasury. It's inherently political. Sensitivities over its immigration projections (and possibly what it will say about climate change) have delayed it as government ministers have tossed drafts back and forth.

My sincere advice when you read it is to stay level headed, no matter how frightening its projections. What is prophesied almost never comes to pass, all the more so when it is focus grouped and fine tuned by a government losing its grip...

Let's have a look at what happened to the projections of the first intergenerational report, released by Peter Costello in 2002. It said that by 2042 the aging of the population and (largely unrelated) extra spending on health would help push up the deficit to $87 billion, around 5 per cent of gross domestic product.

Five years later Costello's second intergenerational report halved that figure, cutting it to less than 3 per cent of GDP. Even by 2047, the end of the new projection period, the budget wasn't to reach 3.5 per cent of GDP.

A lot of things had gone right. Spending on health had grown more slowly than expected, more of the population was working than expected, and higher skilled migration meant the workforce was more productive than expected. Small changes to the important assumptions meant big changes to the projections.

And some of the assumptions were ridiculous.

The first Intergenerational Report said spending on the Pharmaceutical Benefits Scheme would climb from 0.6 per cent of GDP to 3.4 per cent by 2042. Professors Ross Guest and Ian MacDonald from Griffith and Melbourne Universities pointed out that at that rate the PBS would account for one third of GDP by 2100 and all of it by 2126. The projection was toned down in the second report, as the author's took to heart the implications of "Stein's Law".

Named after the legendary American economist Herbert Stein who advised both presidents Nixon and Ford, Stein's law says that: "If something cannot go on forever, it will stop".

It's a warning about the dangers of extrapolation. Problems have a way of solving themselves. If for instance we were on track to "run out of money" to pay for our health, welfare and education systems (as Joe Hockey once said) we would either find more money or spend less on those services. If we were on track to run out of workers to service our aging population, we would either find ways to use fewer workers (new technologies) or bid up their wages and call forth more of them, possibly from the ranks of the aged population itself.

This isn't to say that the Intergenerational Report isn't a useful exercise, merely that it can't be a useful guide to the future. The mere act of publishing it changes that future.

The future changed again by the time of the third intergenerational report, published by Wayne Swan. If found that by 2042 the projected deficit would be a good deal less than 2 per cent of GDP, not 5 per cent as originally claimed. The 3.5 per cent projected for 2047 would also be nearer to 2 per cent, and even by 2050 (the end of the new projection period) the deficit wouldn't hit 3 per cent.

This week's report will project things out to 2055. Whatever its projection of the extra demands on the government by then, they are unlikely to be difficult to fund. Swan's report predicted that GDP per head would be 81 per cent higher by 2050, suggesting Australians would be well placed to fund any extra taxes required.

Swan's report said that by 2050 there would be just one and a half Australians of working age to support each Australians of dependent age, down from 2 at present. It would sound scary if you didn't know that that was the ratio throughout the 1960s. Back then the Australians of dependent age were predominantly young rather than old, but we managed to support them.

With the possible exception of climate change (and there it's too early to tell) the future is rarely as frightening as foretold.

So exercise some skepticism on Thursday. If you read the word "timebomb", turn the page.

In The Age and Sydney Morning Herald


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Trans Pacific Partnership a threat to health, says assessment

A comprehensive review of the proposed Trans Pacific Partnership between Australia and 11 other nations including the United States and Japan has found it is likely to push up the price of medicines, stop some Australians from taking their medicines and make it harder to restrict the sale of tobacco and alcohol.

The so-called health impact statement, compiled by the Centre for Health Equity Training Research and Evaluation at the University of NSW relies on leaked texts of draft chapters of the agreement Australia is preparing to seal within weeks.

More than 20 chapters long, the text won’t be made public until after the the trade ministers shake hands at a meeting in Hawaii set down for next month.

The Trans Pacific Partnership encompasses almost 40 per cent of the world’s economy: the industrialised nations of Australia, Canada, Singapore, Brunei, New Zealand, Chile, Mexico, the United States and Japan alongside the less developed nations of Malaysia, Peru, and Vietnam.

Although its stated aim is to bring down trade barriers and allow mutual recognition of standards, many of its provisions deal with medicines and make it difficult for member countries to move against foreign owned corporations.

The health impact statement follows Commonwealth guidelines for such statement in place for more than a decade. Although such statements are not required for new projects in the same way as are environmental impact statements they are an accepted procedure for establishing the impact of new proposals on health.

Prepared by five health specialists from the universities of Sydney and NSW and La Trobe University the assessment took 15 months, beginning in late 2013 after some drafts texts of were published by Wikileaks...

The report says the US is seeking to prevent signatories from refusing to grant patents for minor variations to existing drugs even when there is no evidence of additional benefit. It says the provision would encourage “evergreening” where manufacturers gain extra patents to extend their monopolies in order to ward off competition from generics.

The US is also seeking to lengthen the period during which generic manufacturers cannot use clinical trial data produced by a manufacturer to obtain marketing approval. Under the Australia-U.S. Free Trade Agreement, Australia already provides at least 5 years of protection. The US is seeking at least 3 additional years of protection for new uses of existing drugs and 12 years for so called biologic drugs and vaccines.

The provisions in the draft healthcare transparency annex of the agreement would outlaw therapeutic reference pricing, a mechanism for ensuring that the prices paid for medicines reflects their clinical benefit and require more consultation with drug manufacturers about listing and pricing decisions.

“In the past, the Pharmaceutical Benefits Scheme has increased patient co-payments in order to accommodate rising costs,” the report says.

“A systematic review of evidence from 1990 to 2011 found that co-payments decrease prescription use, can impact patient medicine use compliance, and can adversely impact disadvantaged populations.”

The report finds that proposed investor-state dispute settlement procedures would make it difficult for governments to legislate in ways that harmed tobacco, alcohol or food manufacturers.

Trade minister Andrew Robb told Fairfax Media last month that many of the critics had only seen proposals, not what would be in the final agreement.

“I am not going to do something that I think is not in the public interest,” he said.

In The Age and Sydney Morning Herald


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