Monday, November 30, 2015

No surplus in sight: Deloitte says budget billions worse as revenue crumbles

The Australian budget is facing deficits $38 billion worse than forecast and on present settings will never return to surplus, an authoritative new analysis has found.

Released just a fortnight before treasurer Scott Morrison officially updates the budget in the mid-year review, the Deloitte Access Budget Monitor finds this year's deficit will be about $40.3 billion rather than the forecast $35.1 billion, the next year's $34.1 billion rather than $25.8 billion, and the deficits in 2017-18 and 2018-19 $11.3 billion and $12.7 billion worse.

It comes days after Treasury revised down its long-term economic growth projections, a downgrade not fully reflected in the Deloitte Access report.

"That line on the budget graph that shows the deficit disappearing, it never gets there on our projections," Deloitte Access partner Chris Richardson said.

Declining Chinese economic growth and sliding commodity prices are set to drag down company tax collections with receipts $4.4 billion less than expected in 2015-16 and $7 billion less in 2016-17.

Superannuation tax collections will be $2.2 billion less than forecast. At $7 billion in 2015-16, they will be only slightly more than half the $12 billion collected in 2007-08 before the financial crisis.

Historically low interest rates will keep interest income "subdued", and a surge in deductions related to negative gearing will hold back net rental income...

Record low wage growth will cut pay-as-you-go tax collections by $2.1 billion in 2015-16 and $2.6 billion in 2016-17. The report says the low wage growth is a "double disappointment" because it will also blunt the effects of bracket creep, meaning fewer workers than expected will move into higher tax brackets and push the budget back towards surplus.

On the positive side, rapidly growing real estate prices will boost capital gains tax receipts and the lower dollar will boost customs duties through higher import prices.

Deloitte Access expects the economy to be 2.5 per cent smaller than forecast by Treasury by 2018-19, a loss of $48 billion.

"You may think we paint a grim picture of the remaining task of budget repair," the report says. "But you would be wrong. Among the wildly optimistic assumptions underpinning our own figuring are that the Senate passes in full the savings still before it within a year from now, the states roll over on the cuts they face and sing kumbaya, and that the Beatles get back together. Oh, wait …"

If the Senate does not pass the stalled budget measures the deficit will be another $67 billion worse than expected during the next 10 years.

Mr Richardson said while he wouldn't describe the budget repair task as urgent, both sides of politics had "strikingly mismanaged" Australia's finances and repair kept getting harder.

The forecasts came as the BIS Shrapnel consultancy released a report predicting further big declines in mining investment. The report says after sliding 11 per cent in 2014-15, mining investment will slide 25 per cent this year and a further 25 per cent next year.

"This sharp fall in investment is occurring at a time of weaker prices, forcing the high-cost producers to rethink their mine plans and the nature of operations," it says. "This paradigm shift is not expected to be temporary. Some high-cost producers were forced to place their operations in care and maintenance while low-cost producers pushed forward to carve out a greater share of the market."

BIS Shrapnel says the industry will lose a further 20,000 jobs during the next three years on top of the 40,000 direct losses since the investment peak.

Treasurer Scott Morrison said the government would continue to make progress in cutting the deficit "despite the significant headwinds of falling commodity prices and the transitioning of our economy from the strong investment phase of the mining boom".

"We are not in denial about the challenges that we face globally or at home," he said. "We are just getting on with the task of strengthening the budget and growing our economy."

"Had we stayed on Labor's spending path the budget would be almost $80 billion worse off over this budget year and the forward estimates. "

Labor treasury spokesman Chris Bowen said Mr Morison had been wrong to claim that the budget "did not have a revenue problem".

Deloitte's forecast of $38 billion in additional deficits came on top of a doubling of the budget deficit in the past year.

The government will finalise the numbers for its mid-year update in the next two weeks after the release of the September-quarter national accounts on Wednesday. The mid-year update is not expected to include major changes to taxation, which will be held over until the green paper and the white paper to be released in the new year.

In The Age and Sydney Morning Herald




Sunday, November 29, 2015

Just a nudge. Why Malcolm Turnbull is embracing behavioural economics

There's something odd about the urinals at the Netherlands airport. Each one has what appears to be a fly embossed in the porcelain right at the point designers want men to hit.

Normally pretty bad at aiming with precision, men can't resist trying to hit it and wash it away. So much so, that adorning the urinals helped reduce "spillage" 44 per cent.

Cass Sunstein loves telling the story. In Australia to help prime minister Turnbull launch his own behavioural economics unit, Sunstein used to run the US office of information and regulatory affairs under President Obama. It was known as Obama's 'Nudge Unit', for good reason. Sunstein co-authored the book Nudge, and is an expert in using behavioural economics to change behaviour.

Three years ago Australia's present cabinet secretary Arthur Sinodinos ridiculed the idea in a press release entitled "Nanny state wants to nudge you!". But that was when Gillard was in power. Turnbull likes nudges. Their best selling point is that they are cheap.

Sunstein explained on Monday that in the US poor children were eligible for free school meals so long as their parents signed up. But whether because many were too busy or too embarrassed millions of children missed out.

So the authorities allowed schools to automatically enrol any child they thought might be eligible. Parents who wished could still take their children out.

The result was an extra 12 million children obtaining meals to which they were legally entitled...

>"It was just a nudge," he said. "We switched the default."

Sunstein also tackled low college enrolments among low-income students by sending each a text message just before the deadline. Low-income enrolments jumped 5.7 per cent.

The ideas don't just come out of his head. They are the result of incredibly large real world trials. When the US Internal Revenue Service wanted to increase the honesty of businesses reporting sales it tried adding an extra signature box to the top of the form. Reported sales boomed.

Critics say that nudges engineer outcomes, but so too do badly designed forms, such as ones that don't have signature boxes at the top. It's just that they do it thoughtlessly.

In Australia the Tax Office has been doing it thoughtfully for half a decade.

If you are late paying your tax this year you'll get a letter that says: "When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia's way of life."

The words weren't chosen at random. They were the result of real time experiments trying out different combinations of words on millions of taxpayers.

This year the letters are in different coloured inks: first blue, then amber (signalling a warning) then red. Cheryl-Lea Field, the deputy commissioner in charge of debt recovery, says this simple change has pushed up the number of recipients paying within 30 days from 30.3 to 36.8 per cent. The number making partial payments has jumped from 44 to 50 per cent.

And she's sending reminder texts to perennial late payers. The most effective include the taxpayer's name ("Peter") and arrive just before the payment is due. Last year an extra 65,000 paid by the due date, at a cost of only 9c per text.

The office has even has discovered the power of "thank you" texts. Late payers feel their effort has been appreciated and pay more quickly next time.

Her phone staff no longer use inflexible scripts. They used to have to ask "can you pay today" even after the caller had made it quite clear they couldn't. Now they are allowed to listen and help draw up payment plans.

There's even an online calculator to help late payers draw up plans themselves. And it'll soon come with gentle warnings, pointing out where, in the view of the software, the plan could be too optimistic.

In September President Obama signed an executive order requiring all US agencies to make use of behavioural insights. NSW premier Mike Baird has set up his own behavioural insights unit using staff and ideas borrowed from the British PM David Cameron. And now Malcolm Turnbull's on board. On one level they are doing no more than requiring agencies to think about how they interact with us. On another they are asking agencies to manipulate us.

It's something we're used to: advertisers have done it for years. Turnbull wants to even the score.

In The Age and Sydney Morning Herald

Tuesday, November 24, 2015

They're not going to push up the GST. Super is where the action is

It's getting near the time when Scott Morrison and Malcolm Turnbull will need to make decisions about tax, and I'm not talking about the GST.

The big GST decision, on whether to lift it to 15 per cent, is already as good as made. The Treasurer and Prime Minister won't do it. Nor will they extend the goods and services tax to food, to health or to education, although they might yet extend it to financial services.

Extending it to health and education would be unfair. People such as me who use public schools and public hospitals without charge would pay no extra tax, while others already paying dearly would be asked to pay an extra 10 per cent. And, in all likelihood, the government would feel obliged to further fund private schools and the private health system to compensate. Extending the GST to fresh food was never going to happen. It would hit low earners the hardest, and these days it's almost impossible to compensate them.

When the GST was introduced in 2000, most low earners paid tax. But not now. In the past 15 years, the tax-free threshold has tripled to $18,000. And most self-funded retirees no longer pay tax. It's no longer possible to compensate them by cutting tax rates. And because many of them don't receive cash payments (that's why they are called "self-funded"), it's not possible to compensate them by boosting payments either.

Lifting the GST to 15 per cent or fully taxing food would be incredibly difficult if they wanted to compensate the least-well off, and Australians insist on it. New Zealand lifted its GST from 10 per cent to 12.5 per cent in 1989 without compensation, but it couldn't happen here.

And they'd be doing it for the states. Under existing laws, the GST flows to them. But the states aren't even agreed they want more GST. With NSW in favour, and Victoria against, and the money not flowing to the Commonwealth in any event, there's little reason for it to go out on a limb putting the case for collecting more...

Except for financial services. They weren't properly taxed when the GST was introduced, because they were hard to define. The financial service is the margin the bank adds to a product such as a mortgage, rather than the mortgage itself. If Australia managed to do it, it would raise an extra $4.7 billion a year without the need to compensate low earners (financial services are disproportionately used by high earners).

And it could use the promise of extra money for the states to persuade them to phase out some of their truly objectionable taxes, such as those that single out insurance and commercial property transactions.

Morrison and Turnbull's big decisions concern superannuation. Right now, most wage earners pay just 15 per cent on their contributions, even if they are on the top marginal tax rate and earning $200,000-plus. (At Labor's last gasp, it introduced an extra tax for the small number of Australians on $300,000-plus, taking their rate to a still-concessional 30 per cent.)

The best way to tax contributions would be to tax everyone at their marginal rate. Very low earners would pay nothing, very high earners would pay 45 per cent, and so on. It would rake in an extra $15 billion a year, an amount that would climb over time.

If they were feeling generous, they could give some of it back, perhaps a flat 10 or 15 percentage points up to a limit, through a rebate paid into funds.

But they would have to go further. Earnings, as well as contributions are lightly taxed, a benefit that accrues overwhelmingly to high earners with large balances. The standard rate is just 15 per cent, although funds are able to roughly halve it by the way they structure their investments. When the fund is used to pay out retirement benefits, the tax rate on earnings drops to zero. Not only are the payouts not taxed, no matter how big, but the earnings used to generate those payouts are completely untaxed, no matter how much is under management.

Unless Morrison fixes it, the hole will get bigger and bigger as more and more Australians retire and enjoy completely untaxed investment earnings.

Fixing it will make him enemies. Neither the big institutions that control the private funds nor the unions and employers that control the industry funds will want to pay more tax, and retirees will claim that taxing their investment earnings is retrospective.

But there's a way out. It's the one the government has already used to push up the pension age. Rather than declaring that the investment earnings of retirees will be taxed now, Morrison could declare that the investment earnings of future retirees will be taxed in, say, 15 years. Nothing would be retrospective. Anyone who had already retired could keep their zero tax rate until they died. Future retirees would have plenty of time to prepare.

Squibbing this decision will condemn Australia to an ever-widening hole in its tax system and show that Morrison and Turnbull aren't serious about fixing it.

I think they are.

In The Age and Sydney Morning Herald




Tuesday, November 17, 2015

Immigration: The economic case for open borders

This is about the worst time to write that we should open our borders.

One of the suicide bombers who took part in the Paris attacks was a refugee, or at least had the passport of someone who was let in as a Syrian refugee.

The assistant speaker of the NSW Parliament has called on the Prime Minister to close our borders to Islamic refugees, at least until we have a better idea of who we are letting in. Yet, the case for opening our borders, as part of a staged process, in concert with other countries, is extraordinarily strong.

Worldwide, the best guess is that if all borders were opened and people could move where they liked, global income would double. By way of comparison the gains from removing barriers to trade such as tariffs amount to only a few per cent of global GDP.

Harvard economist Lant​ Pritchett says even if the barriers to immigration were loosened just a bit (enough to boost the US labour force by 1 per cent) global income would grow by more than all the world's official foreign aid combined. US economist Alex Tabarrok​, writing in the October issue of the The Atlantic, describes immigration as the greatest anti-poverty program ever devised. 

But what would freer immigration do for us, at the receiving end? We can take it as read that it would improve the lives of those who moved here. That's why they'd do it.

In a draft report released on Friday, the Productivity Commission presented the preliminary results of modelling it is conducting on the effects of immigration on income per head. It said that without any further immigration, Australia's real income per head would climb 42 per cent by 2060. With immigration, continued at its present rate, income per head would climb 50 per cent.

Immigration makes us richer. Without further immigration the proportion of the population aged 65 and older would swell from 14 to 28 per cent and the number of workers would shrink. Continued at present levels, immigration would hold the proportion at 22 per cent.

Australian National University professor Bob Gregory believes the government's first intergenerational report got immigration wrong. It said that immigration was of little use in stopping the population from aging, because immigrants themselves aged. Gregory says while this is true in the very long-term, from decade to decade the effect is enormous...

Immigrants are typically young, but not too young, between the ages of 18 and 40 – exactly the age range in which they are the least likely to use government services and most likely to pay for them.

So big has been the economic boost from increased immigration over the past decade that Gregory compares it to the mining boom. He says it eclipses the potential boost from lifting productivity, except while the mining boom came and went, the boost from increased immigration will last.

It is already beyond our control. Immigration soared way beyond what planners expected in the first half of the last decade, and then dived at the start of this one, making a mockery of the former prime minister John Howard's famous declaration that we would decide who came here and the circumstances in which they came.

New Zealanders can move here without limit under an agreement signed decades ago. In better times, 45,500 a year moved here. Now, with the New Zealand economy looking better and ours worse, it's only half that.

An astounding 345,600 foreign students live here with the ability to work (down from 434,000 when times were better), 188,000 workers live here on temporary 457 visas (down from 202,000), and 143,900 work here while on holidays.

All of these programs are uncapped, all give the people who use them the inside running on permanent migration, and all eat away at the fiction that we control our borders. Loosening control further is likely to help, rather than harm us, so long as it boosts immigration.

It's true that immigrants put a greater strain on our cities and on our environment, but we have scarcely begun to manage those things properly. Charging for road use and carbon emissions would be a start. And by contributing to Australia, immigrants give us the resources to build more infrastructure and protect our environment, if we have the will to do so.

Immigration boosts incomes because it allows people to move to where they can reach their full potential. Imagine a world in which the citizens of Ballarat were walled in and prevented from taking advantage of the opportunities in Melbourne. Imagine that the citizens of Melbourne gave them aid and bombed their enemies, telling them they would do anything to help them, other than letting them in.

Even worse, imagine that we locked up the citizens of Ballarat who tried to reach Melbourne, preventing them working, deliberately wasting the greatest resource on earth.

When the father of modern economics, Adam Smith, wrote The Wealth of Nations, he was referring not to wealth in the form of gold or silver, but to the wealth embodied in people able to exercise their full potential.

Yes, we would need to free up immigration slowly in concert with other countries, perhaps as part of trade agreements, and yes, we would need to be on the lookout for terrorists and criminals, just as we need to be on the lookout at home.

But the benefits of freeing up immigration dwarf those of anything else imaginable. In time, I think we'll see these benefits.

In The Age and Sydney Morning Herald



Recommended reading

. The real benefits of migration - Tim Harford, Financial Times, October 27, 2015

. The Case for Getting Rid of Borders—Completely - Alex Tabarrok, The Atlantic, October 10, 2015

. If People Could Immigrate Anywhere, Would Poverty Be Eliminated? - Shaun Raviv, The Atlantic April 26, 2015

. Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? - Michael A Clemens, Journal of Economic Perspectives, Summer 2011

. Let Their People Come: Lant Pritchett, Center For Global Development, Washington 2006

. What makes a terrorist? - Alan B. Krueger, Vox, 11 September, 2007

. Open Borders: The Case website