Wednesday, May 11, 2022

Stand by for the oddly designed Stage 3 tax cut that will send middle earners backwards and give high earners thousands

The Reserve Bank is pushing up interest rates to take money out of our hands.

The first increase in the current round will add about A$65 a month to the cost of paying off a $500,000 mortgage.

The second will add a bit more. If, as the bank’s forecasts assume, there are another four such increases this year, that’s a further $275 a month, and so on.

The point, in the words of the Reserve Bank Governor Philip Lowe, is to “slow the economy, to get things back onto an even keel”.

In a helpful video, the Governor explains that rate rises take money out of mortgagee’s hands directly, make it harder to borrow, make people “feel less happy”, and hit the prices of houses and other assets so people “don’t feel as confident and they don’t spend as much”.

Which is fair enough, if the Governor decides that’s what’s needed.

So why on earth are we scheduled to do the opposite?

As the RBA takes, the government will give

From mid-2024 the government will put an awful lot of money in to people’s hands. Stage 3 of the income tax cuts will cost $15.7 billion in its first year.

By way of comparison, that’s almost as much as the $16.3 billion will be spent on the Pharmaceutical Benefits Scheme that year, and more than the $10.5 billion that will be spent on higher education.

That it is mistimed ought not be a surprise. Stage 3 was legislated in 2018.

The treasurer at the time, back in the year Grant Denyer won the Gold Logie, was Scott Morrison, who said he was legislating Stages 1, 2 and 3 of the tax cuts all at once (and Stage 3 six years ahead of time) in order to provide “certainty”.

A tax switch settled years ahead of time

So uncertain was the treasury about the future back then that it only forecast the economy two years ahead, and produced less reliable and more mechanical “projections” for the following two years, neither of which extended to 2024.

At the time the Reserve Bank had been cutting interest rates (12 times in a row), at the time inflation was 1.9%. It looked as if the economy could do with a bit of a boost, albeit a boost which wouldn’t be delivered for six years.

In saying that things have changed, it’s fair to also acknowledge that things might change back again. We can’t be sure what will be needed in 2024, although we can be a good deal more sure than we were back then.

Backed by Labor

The Stage 3 tax cuts were opposed by Labor at first, but are now backed by Labor treasury spokesman Jim Chalmers after “weighing up a whole range of considerations”.

They are overwhelmingly directed at high earners.

Of the $184.2 billion the parliamentary budget office believes Stage 3 will cost in its first seven years, $137.9 billion is directed to Australians on $120,000 or more.

Part of Stage 3, the part that cuts the rate applying to incomes over $45,000 from 32.5 cents in the dollar to 30 cents, will benefit most taxpayers.

The bigger part extends that low rate all the way up to $200,000, abolishing an entire rung of the tax ladder paid by the highest earners.

For those very high earners, the part of their income that was taxed at 37 cents will be taxed at 30, as will part of the rest that was taxed at 45 cents.

A politician, on a base salary of $211,250, will get a tax cut of $9,075. A registered nurse on $72,235 will get a tax cut of $681 according to calculations prepared by the Australia Institute.

More broadly, a typical middle earner can expect $250 a year, whereas a typical earner in the top fifth can expect $4,230 according to a separate analysis by the parliamentary budget office.

The fate of the middle earner will be made worse by the loss of the $1,000+ middle income tax offset which wasn’t extended in this year’s budget, sending the middle earner backwards.

The typical female earner will go backwards too after the loss of the offset, getting half as much as the typical (higher earning) male, according to the budget office.

A tax switch that’ll send some backwards

The logic is (or was) that middle and higher earners would need big tax cuts to compensate them for bracket creep (which is wage rises pushing them into higher tax brackets), though there’s been a lot less of that than expected.

Were it not for the fact that Labor supports and will implement it, Stage 3 would provide a stark contrast with Labor leader Anthony Albanese’s approach unveiled on Tuesday of asking the Fair Work Commission to lift the minimum wage to compensate for inflation.

Such an increase would go to low wage earners first, and flow through more slowly to award wages. It would give the greatest help to those who needed it the most when they needed it, rather than years in the future when things might be quite different.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, May 04, 2022

Why the RBA should go easy on interest rate hikes: inflation may already be retreating and going too hard risks a recession

One of the stranger things about the Reserve Bank’s announcement of why it’s lifting interest rates by 0.25 percentage points is that it suggests inflation will come down by itself.

“A further rise in inflation is expected in the near term,” the RBA says, “but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2-3%.

So why raise rates now, for the first time in more than a decade? The bank says it is about "withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”, which is fair enough.

But our latest burst of inflation is weird, and resistant to rate hikes. If the Reserve Bank isn’t careful, too many more rate hikes like this might help bring on a recession.

Labor’s Anthony Albanese is as good as correct when he says “everything is going up except your wages” – not completely correct, because wages are going up, by a minuscule 2.3% per year on the official figures; but essentially correct, because when it comes to prices, almost every single one is going up.

Every three months the Bureau of Statistics prices around 100,000 goods and services. They account for almost everything we buy, the exceptions including illegal drugs and prostitution, where pricing would be “difficult and dangerous”.

Among the types of bread the bureau prices are rye, sliced white, and multigrain, from all sorts of stores in every capital city. Where the bureau doesn’t price a type of loaf, it is a fair bet its price moves in line with the loaves it does price.

Then it groups these 100,000 or so prices into “expenditure classes”, 87 of them. “Bread” is one, “breakfast cereals” is another. Furniture and rent are two others.

Rarely do the expenditure classes move as one. Typically, only 50 or so of the 87 climb in price. But in the March quarter just finished, an astounding 70 climbed in price; according to Deutsche Bank economist Phil O'Donaghoe, that’s the most ever in the 72-year history of the consumer price index.

And the prices that climbed most – by far – were the ones we had little choice but to pay.

Necessities up, treats not as much

The bureau divides the 87 classes of goods into “non-discretionary” and “discretionary”.

It classifies bread as non-discretionary, biscuits as discretionary; petrol as non-discretionary, new cars as discretionary, and so on.

In the year to March, non-discretionary inflation (the price rises we can’t avoid) was a gargantuan 6.6% – well above the official inflation rate of 5.1%, and the highest in records going back to 2006.

Discretionary inflation – the price rises on the treats we splurge on if we’ve got the money – was only 2.7%.

Not since 2011 has the gap been that wide, which makes this inflation unusual.

While price rises are extraordinarily widespread – because most things need diesel to move them, and we were hit with floods, COVID-linked supply problems and the invasion of Ukraine all at once – they don’t seem to be the result of splurging.

These price rises are more like a tax.

The usual response to the usual hike in inflation is to hike interest rates. It’s a way to take away access to cash and push up mortgage and other payments so people have less money to spend and push up prices.

But this hike in inflation is doing that by itself, as the government recognised in the budget by handing out $250 cash payments to compensate.

These price rises are like a tax

If the big price rises are beyond our control and making us poorer, hiking interest rates to make us poorer still, in the hope we will splurge less on things whose prices we can influence (and whose price rises are small) might not achieve much.

Done repeatedly, the Reserve Bank could push up interest rates because inflation is high, discover inflation is still high, push interest rates higher in response, notice inflation is still high, push interest rates even higher in response… and so on, until it had brought on a recession.

A recession is already a risk with these sorts of price rises. If big enough, they can force consumers to cut other spending to the point where the economy stagnates and creates unemployment in the face of inflation – so-called “stagflation”.

Another response would have been to wait. Seriously. The floods, invasion and supply problems pushing up prices in recent months are likely to pass, pushing down inflation and pushing down a lot of prices.

Inflation might have already fallen

It might have already happened. The oil price has fallen 11% from its peak, down 2.5% in the past two weeks alone. And inflation has fallen – on one measure, to zero.

The official Bureau of Statistics measure of inflation is produced every three months, but for 13 years now the Melbourne Institute of Applied Economic and Social Research has produced its own simpler monthly measure, which tracks the official rate pretty well.

Although missing a lot (tracking fewer types of bread, and a national rather than a city-by-city measure) it is produced quickly and more often, providing a better insight into prices in real time.

The latest, released on Monday, points to an inflation rate of zero in April.

That’s right. While some prices continued to rise as always, enough prices fell to offset that. The high inflation in the lead-up to March stopped or paused in April.

Rate hikes need only be mild

It’s different in the United States. There, inflation is supercharged by wage growth averaging 9% and the Federal Reserve is about to lift interest rates aggressively.

Here, wage growth in the year to December was just 2.3%. We’ll get the figures for the year to March in a fortnight. There’s a good case for future rate hikes to be a good deal less aggressive.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, April 27, 2022

The 4 economic wildcards between now and election day

There are four economic wildcards between now and the election, and we know exactly when each will be played.

The first is this Wednesday at 11.30am eastern time, when we get the official update on inflation. We’re likely to see a figure so large it will take many of us back to the 1990s, to a time before anyone under 30 was born.

With the exception of a short-lived blip following the introduction of the goods and services tax in 2000, inflation has scarcely been above 5% since 1990.

After a series of extremely large interest rate hikes in the early 1990s succeeded in taming inflation, it has been close to the Reserve Bank target of 2-3% ever since – so much so that even those of us who remember the 8% inflation of the 1980s and the 18% in the 1970s have come to regard fairly steady prices as normal.

When ABC Vote Compass asked voters to name the issue of most concern to them in the 2016 election, only 3% picked “cost of living”.

Only 4% picked “cost of living” in 2019. With inflation so low it had dropped below the Reserve Bank target band, and a good deal below slow-growing wages, there was nothing much to be concerned about.

Suddenly, the cost of living matters

That was until the last few months. Suddenly, the latest Vote Compass finds “cost of living” is voters’ second biggest concern, behind only climate change.

This election, 13% of voters – one in eight – regard the cost of living as the most important concern of the lot, ahead of accountability, defence, health, education and COVID.

It has happened because prices are climbing like they haven’t in years. The official inflation rate for December (the most recent we’ve got) had prices climbing at an annual rate of 3.5%.

Led by petrol and food, they climbed an awful lot more in the lead-up to March, with the figures to be released on Wednesday likely to show annual inflation approaching 5%.

While that’s some way short of the 6.7% inflation in Canada, the 6.9% in New Zealand, the 7% in the United Kingdom, and the 8.5% in the United States, each of these countries has begun increasing interest rates as a result, some quite aggressively.

A high inflation rate on Wednesday will confirm what the public suspects: that prices really are climbing at a pace without modern precedent, and that for those who rely on wages, it is sending their living standards backwards.

It will also encourage the Reserve Bank to begin to push up interest rates in line with its contemporaries throughout the English-speaking world, eating into the living standards of Australians on mortgages.

The second wildcard: rising interest rates

That’s when the second election wildcard gets played, next Tuesday May 3, at 2.30pm eastern time, after the Reserve Bank board’s May meeting.

If inflation is especially high, there’s a chance the bank will announce it is pushing up rates, lifting its cash rate from its present all-time low of 0.10% to 0.25% or to 0.50%, and holding an afternoon press conference to explain why.

If fully passed on, an increase to 0.50% would add an extra $100 to the monthly cost of paying off a $500,000 mortgage.

The increase, and the explanation that it was much higher prices that brought it about, would be crushing for a government campaigning on what it is doing to address the cost of living. It would help Labor, which has made the cost of living a key plank of its campaign.

There ought to be no doubt that if the bank decides it needs to raise rates at its meeting next Tuesday, it will do it then, rather than wait a month until the campaign is over. It pushed up rates during the 2007 campaign, three weeks before John Howard was swept from power.

But if inflation isn’t ultra-high but merely high, and not necessarily sustainably high, the bank is likely to wait for another piece of evidence before acting.

After its last meeting it said it wouldn’t lift rates until it saw “actual evidence” that inflation was “sustainably” within the 2-3% target range.

The wages wildcard – 3 days before polling day

To get that evidence, the board would need either very high inflation, or evidence that wage growth was high enough to sustain what might otherwise be short-lived high inflation, caused by a spike in the oil price (which has since retreated 16%).

That official word on wages is the third economic wildcard, arriving at 11.30am eastern time on Wednesday May 18, three days before voting day.

To date wage growth has been frustratingly low: at 2.3% in the year to December, well below what is needed to maintain living standards in the face of inflation, and well below what would normally be needed to make high inflation self-sustaining.

High official wage growth in the year to March could make a post-election interest rate hike all but certain, if rates haven’t already gone up ahead of the election.

Continued demonstrably weak wage growth – which is probably more likely – will officially confirm that prices are racing ahead of wages, just before polling day.

The poll-eve jobs wildcard

Which leads on to the fourth economic wildcard, to be delivered the next day, two days before polling day on Thursday May 19 – about the only piece of economic news ahead that’s likely to play well for the government.

Ultra-low interest rates and massive government stimulus, originally designed to keep people in jobs during COVID but continued beyond that, have delivered an unemployment rate that rounds to 4% but is actually a touch below it at 3.95%, the lowest since November 1974, almost 50 years ago.

There’s every chance the April unemployment rate will be even lower, perhaps the 3.75% the treasury expects later in the year. If it is, the Coalition will deserve and will claim a lot of the credit. Labor will be left to talk about the cost of living.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, April 20, 2022

This model tipped the last 2 elections. It’s pointing to a Coalition win

This election will be won by the Coalition and Prime Minister Scott Morrison if the economic models perform as expected – and they usually do.

A model refined in 2000 by then Melbourne University economists Lisa Cameron and Mark Crosby found that most federal election results in records going back to 1901 can be predicted pretty well by just two economic indicators.

And they are not the indicators that might be expected.

The growth in real wages in the year leading up to the election appears to have no effect on the governing party’s chance of being returned to power. (Which is just as well for the Coalition, because the buying power of wages has been shrinking.)

Similarly, GDP (which is shorthand for gross domestic product, the measure meant to encompass almost everything known about the state of the economy) turns out to be “not robustly correlated” with support for the incumbent government in Australia, although it is in the United States.

The only two economic variables that do matter, and they seem to matter a lot, are the rate of inflation and the rate of unemployment, each in a different way.

For inflation, the higher it is, the more the incumbent suffers, as you might expect.

For unemployment, what turns out to matter is not the rate itself. High rates and low rates appear not to be sheeted home to the party in power. What is sheeted home, big time, is the change in the rate.

Voters reward lower unemployment

A government seen to have cut the unemployment rate gets rewarded, while a government seen to have pushed up the rate gets punished.

Cameron and Crosby find a one percentage point increase in the unemployment rate cuts a government’s vote share by 0.58 percentage points.

And they find a wrinkle. In swinging seats, Coalition governments are likely to be punished if unemployment rises, whereas Labor governments are likely to be rewarded. They say their findings are “consistent with voters having the perception that the Labor party is more committed to lowering unemployment”.

In 2005 economists Andrew Leigh (the one who later became a Labor politician) and Justin Wolfers applied a slightly different model to the 2004 election. They found it got the result right, but under-predicted the size of the Coalition victory.

The model usually gets it right

In the latest edition of the Australian Economic Review, University of Queensland economist Hamish Greenop-Roberts applied the Cameron and Crosby model to the past four elections, the one Labor won in 2010 and the ones the Coalition won in 2013, 2016 and 2019. He found it picked the result three times out of four, putting it on a par with the polls and betting odds, which also got the result right three times out of four.

The crucial difference is the economic model got the results right in each of the past two elections – something the others conspicuously failed to do.

Asked this week what the economic model would predict for the current election, Greenop-Roberts notes that on one hand, unemployment is much lower than it was at start of this government’s term (and far lower than was expected), which the model says should help it get re-elected.

On the other hand, inflation is unusually high, which the model says would hurt.

What matters for predicting the outcome is the size of each move and how much the size of each move has turned out to matter in the past.

And it’s no contest. The effect of the dramatic cut in the unemployment rate (from 5.2% to 4%) is so big it more than outweighs the effect of the 3.5% rate of inflation, “setting the stage for the Coalition to be returned”.

Unemployment trumps inflation

So big is what has happened to unemployment that Greenop-Roberts says an inflation rate of at least 8% to 9% would be required to flip the prediction.

Whatever Australia’s official inflation rate is in the lead-up to polling day (there will be an update next Wednesday) it will very possibly above its present 3.5% but still be way short of 8-9%.

Or perhaps the model will be wrong when it comes to inflation. Greenop-Roberts points out that since the early 1990s, an entire generation of voters has entered adult life without experiencing serious inflation, and might either be alarmed by it or not understand the concept. This election might provide a test.

And it is possible this will be one of the rare elections in which the state of the economy fails to predict the outcome. Opinion polls did badly in the last election, but they might recover and they are suggesting a Labor victory. Betting markets did badly too, and are only just suggesting a Labor victory.

Polls, experts and even the model can be wrong

Experts often get it wrong. Greenop-Roberts points to a poll of 13 experts published two days before the 2019 election.

Twelve predicted a Labor victory. The only expert who didn’t predicted the Coalition would be forced to govern jointly with independents, a prediction some way short of the result, which was a comprehensive Coalition victory.

The reality is that this election will be fought seat by seat, and Greenop-Roberts has identified a new metric that might help predict those outcomes.

His Australian Economic Review paper compares the electorate by electorate results of the 2017 same-sex marriage poll with the electorate by electorate swing to the Coalition in 2019.

He finds the electorates that swung most to the Coalition in 2019 (shown below) were those most opposed to same-sex marriage.

‘No’ vote in the 2016 same sex marraige poll versus 2019 swing to Coalition

Forecasting Federal Elections: New Data From 2010–2019 and a Discussion of Alternative Methods, Hamish Greenop-Roberts

The statistically significant link better predicted voting intention than income, education or unemployment.

It might again, or we might not yet have perfected the science of predicting what will happen, which might be just as well. What’ll happen in this election is up to all of us.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, April 13, 2022

Forget the election gaffes: Australia’s unemployment rate is good news – and set to get even better by polling day

When Labor leader Anthony Albanese couldn’t say whether the unemployment rate was 5% or 4% on Monday, he might have had a point.

It’s 4%. But for a decade – the entire decade leading up to COVID – it never strayed too far from five-point-something per cent.

Melbourne University labour market specialist Jeff Borland points out that in March 2010, Australia’s unemployment rate was 5.4%. Ten years later, before COVID changed things in March 2020, it was 5.3%.

In the years between, it briefly dipped to 4.9% (three times), climbed slowly as the mining boom wound down, edged above 6% in 2014 as the newly-elected Coalition government cut spending, and then fell back slowly towards what the Treasury then regarded as the long-term sustainable rate of 5%.

For much of Albanese’s time in parliament, from 1996 to now, it has been 5-6%.

And a case can be made that it is 5% right now.

Independent economist Saul Eslake says what he calls the “effective” rate of unemployment is indeed 5%. To the 607,900 officially unemployed Australians in February 2022 (the lowest slice of the population in decades), Eslake adds the historically high:

  • 72,000 people who were counted as employed despite working zero hours, for what the Bureau of Statistics called “economic reasons” including being stood down or because there was insufficient work

  • 59,000 people who were counted as employed despite working zero hours for reasons “other than economic”, including being on leave

The result is an unemployment rate of 5%, which doesn’t count as unemployed the 221,000 employed Australians who worked zero hours due to illness or injury – twice as many as before COVID.

The figures point to something real

But even Eslake’s effective rate of 5% is lower than before COVID.

The massive 26,000-household survey of employment conducted each month by the Bureau of Statistics is pointing to something real.

To get an idea of the scale of the bureau’s survey, compare it to the Essential and Newspoll surveys used to indicate how people are going to vote in the election. Essential surveys 1,000 people each time, Newspoll about 1,500.

The bureau surveys 26,000 households every month to obtain information on the employment status of about 50,000 people aged 15 and over. The scale of the operation is exceeded only by national elections every three years and the census every five years.

Australia’s biggest survey

The survey asks first whether those surveyed worked in the previous week, then whether they were employed but away from work because of holidays, sickness or another reason. Then it asks about hours. Less than one hour (unless it was due to time off) counts as not working.

It is this definition (one hour a week = work) that generates so much of the mistrust of unemployment figures.

The bureau uses one hour per week as the cutoff because it has to use something and because every other comparable country has used it, since 1982.

Some of the questions asked in the ABS labour force survey

Fewer than 50 of the 50,000 people surveyed each month report working only one hour, meaning the cutoff makes little difference.

If the bureau used a different cutoff, such as three hours per week, its employment numbers would be moving in the same direction.

It defines being unemployed as not being employed and looking for work. If you are not looking, you are “not in the labour force” and not counted as unemployed.

This is a problem when times are tough and people don’t bother to look (or can’t easily look, such as during lockdowns) and can mean that genuine unemployment is higher than the figures suggest.

More jobs on offer than ever before

But that isn’t a problem at the moment. So many jobs are on offer (423,500 – far more than ever before) that people who want work know it is worth looking.

More of the population aged 15 and over is in work than ever before. And almost all of the new jobs are full-time.

As would be expected given the shift to full–time work, casual employment (defined by the bureau as employment without paid leave) has fallen in recent years, rather than climbed as the opposition leader’s material suggests.

Women have benefited more from the improved jobs market than men, getting 240,000 of the 395,000 new places created over the past year. Every age group up to 65 has more work than it did before.

We will get an inkling as to whether things will keep getting better on Thursday when the bureau releases the employment figures for March, and again just two days before the May 21 election, when it releases the figures for April.

The Treasury and the Reserve Bank are cautious, expecting unemployment to settle at 3.75% before (in Treasury’s case) gradually climbing back to 4.25%.

But private forecasters are bolder. Westpac is forecasting an unemployment rate of 3.25% by year’s end. Citibank is forecasting 3.3% by the end of this year and an extraordinary 3% by the end of 2024 – which would be a 60-year low not seen since 1974.

How to keep creating jobs with reopened borders

It is tempting to say what has happened with unemployment is the result of closed borders and slower population growth during COVID (more jobs per worker than there would have been). But the banks making those bold forecasts know the borders have been reopened.

New Zealand has enjoyed faster (although still slowed) population growth than Australia over a year in which its unemployment rate has slid to 3.2%.

What New Zealand, Australia and the other nations now enjoying unusually low unemployment have in common is out-sized government spending and record low interest rates during COVID to keep the economy afloat.

Spending and ultra low rates create jobs. If we keep them in place right up to the point where we create worrying inflation, we will be able to get even more Australians into jobs and, all being well, keep them there.

It’s the most important thing to grasp from what’s happened. More important than the exact rate of unemployment.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Monday, April 11, 2022

One issue matters more to top economists than any other this election: climate change

Offered a menu of issues to choose from as the most important in the May 21 election, Australia’s top economists have overwhelmingly zeroed in on one.

Three quarters of the 50 top economists surveyed by The Conversation and the Economic Society of Australia have nominated “climate and the environment” as the most important issue for the incoming government and the most important in the election.

The 74% who nominated climate and the environment is more than twice the proportion that nominated the four substantial runners up: housing availability and affordability, health, tax reform, and education.

None of the 50 surveyed nominated “lower taxes” as important for the election or the incoming government, and only 8% nominated support for business.

The economists chosen for the survey are recognised as leaders in fields including economic modelling and public policy. Among them are former IMF, Treasury and OECD officials, and a former member of the Reserve Bank board.

Many noted that their priorities were at odds with those of both major parties.

Guyonne Kalb of The University of Melbourne observed that Australia was especially vulnerable to climate disasters, and that the population seemed to recognise this more than the government. Being the last nation to use outdated technologies was “never wise if it can be avoided”.

Young Economist of the Year Stefanie Schurer said Australia had fallen so far behind the richer countries on measures to reach net zero it ranked “dead last” according to the Climate Council. It was not only embarrassing, but “incredibly shortsighted” given Australia’s exposure to extreme weather events.

Flavio Menezes of The University of Queensland said the needed transition was massive. To achieve net-zero by 2050 (a target accepted by both sides of politics) Australia would need an 800% increase in large-scale wind, solar and hydro generation, as well as a corresponding increase in the transmission capacity.

The current government’s motto of technology not taxes was “an empty slogan”. Much of the needed spending would have to be funded by taxes.

A carbon tax would help

The University of Queensland’s John Quiggin described the campaign as the most depressing he had seen in more than 50 years of paying attention. Neither major party was offering anything substantive.

Several participants noted that a carbon price (or tax) of the kind Australia had between 2012 and 2014 would provide a permanent incentive for every sector of the economy to find new ways to cut emissions, but was “not on the table”.

Consulting economist Rana Roy said Australia actually had several types of carbon price in place, but their rates varied widely, with emissions in some sectors untaxed, while emissions in other sectors (such as petrol) were overtaxed.

The third of the economists surveyed who nominated tax reform as an important issue said it would be needed to deal with the other issues identified as important: housing affordability, health, and education.

Saul Eslake said in an ideal world both sides of politics should be having an intelligent conversation about the least damaging ways of raising the extra one to two percentage points of GDP in tax revenue that will be needed to fund priorities including aged care and the national disability insurance scheme.

Tax reform would help

The University of Melbourne’s Kevin Davis said next year’s planned stage three tax cuts directed at higher earners (and costed by the Parliamentary Budget Office at $76.2 billion over four years) should be scrapped on equity grounds alone.

Superannuation tax should also be reformed, and capital gains tax concessions reduced or axed. The “massive” tax concessions offered to home buyers and buyers of investment properties were among the chief reasons for high prices.

Curtin University’s Rachel Ong ViforJ said changes that moved tax away rewarding the ownership of non-productive assets toward rewarding work would be needed to address the intergenerational transmission of debt.

Higher roductivity would help

The University of Sydney’s Nigel Stapledon said neither side of politics seemed focused on the emerging risk of 1970s and 1980s-style inflation.

The idea that the government could drive real wages growth without productivity improvements and not feed inflation was dodgy economics and risky policy.

Melbourne University’s John Freebairn said productivity growth had been below world’s best practice for a decade, making it hard to lift incomes and collect tax.

Tax reform itself could raise more tax by boosting productivity and cutting inequality, as could better regulations and less wasteful government spending.

Former OECD official Adrian Blundell-Wignall said Australia didn’t have a plan that offered less dependence on digging holes. Research and development and a highly educated population were the keys to driving sustainable growth.

But there’s little optimism

None of the 50 members of the panel was optimistic about either side of politics offering what was needed, at least during the campaign.

Eslake (a Tasmanian) said he was more likely to “tread in thylacine-poo on my front lawn of a morning” than to see the intelligent conversations that were needed between now and voting day.

Individual responses:

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, April 06, 2022

The super giveaway that gives more to the already-wealthy, tax-free

One of the strangest, certainly one of the hardest to justify, measures in last week’s budget was called “supporting retirees”.

A better title would have been “supercharging the wealth of those retirees who already have more than enough to live on”.

It flies in the face of the findings of the government’s own retirement income review and legislation it introduced partly in response earlier this year.

It happens not to support the living standards of retirees at all. It will enable some to spend less on themselves than they would have, while enabling those with serious wealth to accelerate the accumulation of even more, tax-free.

What the measure does is extend a temporary COVID relaxation of the rules requiring retirees to actually withdraw a minimum amount from their super each year, introduced in March 2020 when financial markets were in free-fall.

All retirees are required to withdraw a minimum amount from super each year in order to ensure it isn’t simply used as a vehicle to accumulate tax-free savings that aren’t used.

Retirees have to withdraw a minimum per year

For retirees aged 65-74 the regulated minimum is 5% per year, for those aged 75-79 it is 6% per year and so on, up to retirees aged 95 and over, who are required to withdraw at least 14% per year.

Nothing stops retirees withdrawing more than the regulated minimum, but the review found that in practice the typical withdrawal rate is just above the minimum, because people use it as an “anchor” or guide to what to do.

It identifies the most common misconception about super being that

“the minimum drawdown rate is what the government recommends”

It says another is: “I should only draw down the income earned on my assets, not the capital”. Both set up retirees for a much lower standard of living than they could get.

The review finds that if a middle earner drew down an optimum amount rather than the minimum required, his or her super income would be 20% higher.

Instead, most retirees “die with the bulk of their wealth intact”. One fund told the review its members who died left 90% of the balance they had at retirement.

Most die with most intact

It’s at odds with the purpose of super, defined by the government as to provide “income in retirement”. In February the government legislated to help make sure this is what funds did. From July they will be required to present to their members with an income strategy, for which bequests “should not be an aim”.

Things changed when the Australian share market collapsed 30% between mid-February and mid-March 2020 as coronavirus took hold.

As a “temporary” measure, Treasurer Josh Frydenberg halved the drawdown requirements, in order to enable retirees to better build up their balances after the storm passed. A similar measure was introduced during the global financial crisis.

The storm passed quickly. Markets began climbing back the day the treasurer made the announcement, and then kept climbing. SuperRatings says in the past year the median balanced super fund has grown 13.4%.

Yet oddly, the government extended the measure in May last year when the market was soaring to new heights, in order to “make life easier for our retirees” and then extended it again on budget night in order to “recognise the valuable contribution self-funded retirees make to the Australian economy”.

It is as if the government has junked the idea that super should actually be used to provide income to the people who accumulate it.

As it happens there is nothing in the drawdown requirements that forces retirees to spend on themselves (and nor could there be). All they do is force retirees to withdraw a minimum amount from the generally tax-free environment that is retiree super, and have it treated like other people’s investments and savings.

Earnings in retiree super untaxed

If retirees aren’t forced to withdraw a minimum, in the words of the retirement income report to the treasurer, large amounts will be held in super “mainly as a tax minimisation strategy, separate to any retirement income goals”.

The only justification offered in budget papers (a weak one) refers to “ongoing volatility” and the need to “allow retirees to avoid selling assets”.

But markets are generally volatile, and it is usually super funds that sell assets, not retirees. It’s as if the measure is directed at self-managed super funds, some of which are rich beyond most of our wildest dreams, certainly far too rich to need to pay out anything but a tiny percentage of their holdings to their members.

A freedom of information request by the Australian Financial Review has revealed that 27 such funds hold more than A$100 million each. Its best guess is they are owned by Australia’s wealthiest families.

Of course, most retirees have much lower balances, and are reluctant to withdraw funds for another reason. Perhaps surprisingly, studies examined by the review find that main reason isn’t a desire to pass on an inheritance to their children.

Overwhelmingly, retirees are concerned about “outliving their savings”.

Frightened of outliving savings

The prospect of inferior aged care or a late health emergency compels most retirees to save far more than they are likely to need, just in case.

Many are unaware of how little end-of-life aged and health care can cost (“especially given the complexity of aged care means-testing arrangements”) and many more want to buy their way out of standard care because of the awful things they have heard, some of it in the aged care royal commission.

It makes Labor’s budget reply promise of more money for aged care and a nurse on each site 24/7 doubly attractive. It might stop us hanging on to absurd amounts of our super out of fear.

It might allow us to relax and enjoy what could be the best decades of our lives.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Tuesday, March 29, 2022

Budget 2022: Frydenberg spent big, but (on the whole) responsibly

Wes Mountain/The Conversation, CC BY-ND

So good, and so unexpected, has been Australia’s economic improvement over the past three months, it has wiped one-third of the projected 2022-23 budget deficit. Or it would have, had the government not decided to give away almost half (45%) the windfall.

That’s one way of looking at the difference between the projections in the December budget update and those presented three months later in Tuesday’s March budget. In December, the deficit for the coming financial year was to be A$98.9 billion.

Three months later, the budget papers say it would have been $38 billion lower, were it not for an extra $17.2 billion of spending and tax measures taken since the update and in the budget.

The measures leave the 2022-23 budget deficit at $78 billion, something set to shrink to $43 billion over the following three years, but with no help from savings in this budget.

The budget measures expand the deficit in each of the five years for which the government provides projections, by $30.4 billion in total.

Working the other way, improved economic circumstances shrink the deficit by $114.6 billion.

It’s a convenient way to examine the projections, but it’s unfair. Most of the improvement due to economic circumstances is the government’s own work.

An astounding $98.5 billion of the $114.6 billion improvement is because Australia’s extraordinary and unexpected success in driving unemployment down to a near 50-year low, with a further improvement forecast in the budget.

It is helping the budget in two ways. The government is spending much less than it expected on JobSeeker and Youth Allowance, and taking in more than expected in income tax from people it hadn’t expected to be in work.

It’s what former finance minister Mathias Cormann insisted would happen in 2020 when the first COVID budget threw the switch to massive spending.

By throwing everything it could at keeping people in work through programs such as JobKeeper, the government would “grow the economy” and grow tax revenue to push down the resulting government debt as a proportion of GDP.

The budget papers show it happening.

A year ago, net debt was expected to peak at 40.9% of GDP in mid-2025 before sliding as the economy grew. Now it is expected to peak earlier at 33.1% of GDP.

Net interest payments are expected to peak at a very small 0.9% of GDP in 2025-26 before slipping to 0.8% of GDP.

And there are reasons to think things will turn out better than forecast.

Unemployment, now down to 4%, is expected to fall only a little further to 3.75% within months and then stay there before climbing back to 4% in 2026.

But that’s because treasury has assumed unemployment can’t stay as low as 3.75% without sparking inflation – an assumption it concedes might be wrong, noting Australia has “limited recent experience” of an unemployment rate lower than 5%.

Forecasts conservative

Treasury has assumed the iron ore price, at present US$134 a tonne, falls back to US$55 in coming months. It has assumed the coking coal price falls from US$512 a tonne to US$130, the thermal coal price from US$320 a tonne to US$60 and the oil price from US$114 a barrel to US$100. Every one of these assumptions looks conservative.

Frydenberg admitted as much in the budget press conference, saying if commodity prices merely stay put for just the next six months instead of falling as assumed, the budget will be $30 billion better off.

About the only forecast that doesn’t look conservative is the one for wages growth.

At present an embarrassingly low 2.3%, the budget forecasts a jump in annual wages growth to 2.75% within months followed by a jump to 3.25% in 2023 and to 3.5% by June 2025.

The forecasts conveniently put wages growth back above forecast inflation of 3% in 2022-23, leaving Australians with only one more year in which the buying power of wages goes backwards.

In the budget fine print (page 60 of Statement 1) treasury concedes it’s none too sure about its forecast of wages growth we haven’t seen in a decade. It shares an alternative forecast that uses different assumptions to produce annual wages growth no higher than 2.5% – below inflation for a further two years.

Support measures (mostly) well designed

The cost-of-living measures are well-designed (with the exception of the six-month cut in petrol excise that will benefit most the high earners who typically spend the most on petrol). The one-off payment of $250 to Australians on benefits will go to those who do need it.

And the one-year boost of $420 to the low- and middle-income tax offset (bringing it to as much as $1,500) will only be available to Australians earning less than $126,000. They will get it after they put in their tax return from July – when they are most likely to need it – and then no more. It isn’t being continued.

Frydenberg has spent big in 2022 – but on the whole, responsibly. The budget forecasts and the unemployment numbers show his COVID support spending in 2020 and 2021 has paid dividends. They are forecasts for the true believers.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Thursday, March 24, 2022

Cut emissions, not petrol tax. The budget economists want

Overwhelmingly, Australia’s top economists would rather the budget funds measures to cut carbon emissions than cuts income tax or company tax.

They are also dead against rumoured cuts to petrol tax and the tax on beer.

The Conversation’s pre-budget survey of a panel of 46 leading economists selected by the Economic Society of Australia finds almost half want a budget deficit smaller than the A$99.2 billion expected for 2021-22 and the $98.9 billion forecast for 2022-23 in the December budget update.

Higher commodity prices and lower than expected unemployment – which is lifting tax revenue while also cutting spending on benefits – is set to produce a deficit tens of billions of dollars lower, perhaps as low as $65 billion, absent new spending.

But a substantial chunk of those surveyed (41%) want an unchanged or bigger deficit to boost spending in other areas, including an accelerated transition to net-zero carbon emissions and Australia’s defence.

Arguing for a deficit about as big as last year’s, former OECD official Adrian Blundell-Wignall said while spending on defence was important, so too was spending on supply lines to make Australia less dependent on other countries. Events in the Ukraine showed supply chains were as important as weapons.

Curtin University’s Margaret Nowak said the huge reconstruction needs following the floods in NSW and Queensland suggested there was no potential to reduce the deficit and good reasons why it might climb.

Arguing with the majority in favour of a lower deficit, independent economist Nicki Hutley said the government should bank rather than spend any improved psoition to reduce debt ahead of higher interest rates. It would need “reserves at the ready” to deal with economic and geopolitical uncertainty.

James Morley of the University of Sydney said with the economy on the road to recovery, more government handouts would be likely to be inflationary, making it harder for the Reserve Bank to keep inflation within its target band.

Asked to pick up to two spending or tax bonus measures from a list of twelve that would most deserve a place in the budget, more than 60% of those surveyed nominated spending on the transition to net zero carbon emissions.

University of Adelaide economist Sue Richardson said if she had the option, she would have picked “remove all subsidies to fossil fuels”. More than 90% of Australia’s energy now comes from fossil fuels. Reducing that – as the government has said it expects to do to get to net zero emissions by 2050 – will require a massive effort, “made much harder by starting so late”.

More than 32% of those surveyed backed increases subsidies for childcare, in part because it would allow more parents to do more paid work. More than 26% supported a temporary boost to JobSeeker and other payments; 13% supported increased defence spending; and 10.9% supported infrastructure spending and investment in domestic manufacturing.

Asked which of the measures should not be adopted, almost half (45%) picked a reduction in beer tax, and almost 35% nominated a reduction in fuel excise.

Saul Eslake said “gimmicks” such as cuts in beer or petrol excise failed to address the reality that Russia’s invasion of Ukraine had serious economic consequences for Australia, including reducing national income. Governments can’t “pretend this hasn’t happened”.

Instead, what governments could do was ensure Australia’s lowest earners don’t bear the brunt of that economic pain.

The best ways to do this were temporary increases in social security payments, or a one-off special payment, and tax rebates for genuine low earners.

Eslake would fund them from the extra tax that will flow from the companies and shareholders who will benefit from the higher commodity prices following Russia’s invasion.

UNSW Sydney’s Nigel Stapledon was sceptical about higher social security payments. Given Australia’s experiencing a near five-decade low in unemployment, and unprecedentedly high number of job vacancies, he said it was hard to justify a higher rate of JobSeeker.

Also high on the list of measures panellists felt should not be adopted were further company tax cuts (21.7%) and bringing forward the Stage 3 tax cuts income tax cuts directed at high earners and due to start in July 2024 (21.9%).

The budget will be delivered on Tuesday night.

Individual responses:

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, March 23, 2022

Why Australia’s Reserve Bank won’t hike interest rates just yet

The biggest question relating to the management of the economy right now has nothing to do with next week’s budget. It has everything to do with the Reserve Bank and the board meetings that will follow it.

The question facing the board – the biggest there is when it comes to how the next few years are going to play out – is whether to hike interest rates just because prices are climbing.

On the face of it, it seems like no question at all. It is widely believed that that’s what the Reserve Bank does, mechanically. When inflation climbs above 3% (it’s currently 3.5%) the board hikes interest rates to bring it back down to somewhere within the bank’s target band of 2-3%.

It’s what it did the last time inflation headed beyond its target zone in 2010.

But the inflation we’ve got this time is different, and failing to recognise that misreads the bank’s rationale for pushing up rates, and what it is likely to do.

Inflation, but not as we’ve known it

The Reserve Bank does indeed target an inflation rate of 2-3%. The target is set down in a formal agreement with the treasurer, renewed each time a new treasurer or governor takes office.

Just about the only tool the bank has to achieve its inflation target is interest rates. If inflation is below the target, it can cut interest rates to make finance easier in the hope the extra money will encourage us to spend more and push up prices.

If inflation is above the target, it can push up rates so it becomes harder to borrow and interest payments become more onerous, taking money out of the economy and giving us less to push up prices with.

Here’s how the bank itself puts it:

If the economy is growing very strongly, demand is very buoyant and that’s pushing up prices, we might need to raise interest rates to slow the economy, to get things back onto an even keel.

Note the qualifier: “if demand is very buoyant and that’s pushing up prices”.

Buoyant demand (spending) is most certainly not the main thing pushing up prices now. The main things are beyond the Reserve Bank’s power to control.

Petrol prices have skyrocketed because of an invasion half a world away. It’s also the reason the global prices of wheat, barley and sunflower oil are climbing.

Food processors such as SPC say higher oil and food prices combined threaten to push up the price of a can of baked beans more than 20%.

The price of a set of tyres is set to climb from A$500 to $750 because tyres are made from oil.

Everything that is shipped and trucked using oil is set to cost more.

And trucks and cars themselves are climbing in price because of a global shortage of computer chips.

And it might get worse. Last week China locked down the high tech hub of Shenzhen, said to be the source of 90% of the world’s electronic goods, among them televisions, air conditioning units and smartphones. It reopened the city this week after testing its 17.5 million residents for COVID.

It’s easy to see why prices have shot up, and easy to see why they might not come down for a while. What is harder to see is how pushing up interest rates to crimp demand, to force Australians to spend less, would do anything to stop it.

What’s missing is inflation psychology

It’s a view Reserve Bank Governor Philip Lowe seems to endorse. He said this month that what he is on the lookout for is “inflation psychology” – the view that price rises will lead to wage rises, which will lead to price rises in an upward spiral.

It used to be how things worked. Australians who are old enough will remember when, if they saw something at a price they liked, they rushed out to buy it before it climbed in price. Australians born more recently have learnt not to bother.

The old psychology could come back, but wages growth – which would have to be high if that sort of thing was to happen – has remained historically low at 2.3%, little more than it was before COVID.

When surveyed, trade union officials expect little more (2.4%) in the year ahead.

It is true that these days most Australians aren’t in trade unions. So the Reserve Bank seeks out the views of ordinary households. On average, those surveyed expect wage growth in the year ahead of just 0.8%, which is next to nothing. The psychology hasn’t taken hold.

Until it does, it is best to think about most of what has happened as a series of isolated externally-driven price rises that have dented our standard of living.

Pushing up interest rates to dent living standards further won’t stop them.

The Reserve Bank is right to be on the lookout for internally-driven, self-sustaining inflation. We will know it when we see it – but we’re not seeing it yet.

Asked on ABC’s 7.30 this week whether there was a role for higher interest rates in an oil crisis, a former Reserve Bank board member, Warwick McKibbin, said

the worst thing a central bank can do in a supply shock or an oil crisis is to target inflation, because by targeting inflation you push downward pressure on the real economy

He went on to say that if the bank did it without success and then kept doing it, it would bring on a recession. I am sure the bank doesn’t want to do that.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, March 16, 2022

It’s hard to find a case for a cut in petrol tax – there are other things the budget can do

Cutting petrol tax to bring down the cost of living used to be the political version of a joke. Failed US presidential candidates John McCain and Hillary Clinton both tried it in 2008. Their bipartisan advocacy of a “summer gas tax holiday” was derided as dumb, a turkey and a “metaphor for the entire campaign”.

When 230 economists released a letter opposing it in 2008, Clinton said: “I’ll tell you what, I’m not going to put my lot in with economists”.

Her opponent for her party’s nomination, Barack Obama, labelled it a gimmick and went on to win both the nomination and the presidency.

But it isn’t a joke now. There’s talk about it in the US, New Zealand has just cut in its fuel excise 25 cents to ease cost of living pressures, and Australia is considering a budget measure along the same lines.

What has happened to the price of petrol is shocking. In capital cities the unleaded price is about A$2.18, up from $1.60 at the start of the year. That means that whereas it might have cost $80 to fill up a Toyota Corolla at the start of the year, it now costs one third as much again – $109.

If you fill up fortnightly, as many people do, the extra impost is greater than if the Reserve Bank lifted its cash rate by 0.25% and pushed up the cost of payments on your mortgage.

If you own an SUV, by now Australia’s biggest selling type of new car, the extra impost will be greater. And (as with interest rates) there’s every chance petrol prices will climb further.

In New Zealand, where petrol costs more than NZ$3 per litre (A$2.80) the government has cut petrol excise by 25 cents per litre for three months, in the hope that by then the worst effects of the Russia-Ukraine war will have passed.

Australia taxes petrol lightly

Eagle-eyed readers will have noticed that even with the cut, New Zealand petrol prices will still be way above Australia’s. That’s because, like most developed nations, New Zealand charges more in tax for using roads than does Australia.

Until the cut on Tuesday, New Zealand petrol excise was a touch over NZ$0.77 per litre (A$0.72) compared to around A$0.43 in Australia.

Low by international standards

Retail unleaded price (Australian cents per litre) Department of Industry, Science, Energy and Resources

The goods and services tax charged on top of that in both nations brings the NZ excise to about NZ$0.89 per litre (A$0.83) compared to Australia’s A$0.48.

If these figures sound low, it’s because the price of petrol has soared. One of the peculiarities of taxes that are set in cents per litre (climbing only with inflation) is that when the petrol price jumps, the tax as a proportion of the total price shrinks.

A year ago fuel excises accounted for 40% of the cost of New Zealand petrol, and 35% of the cost of Australian petrol. At 28% and 22%, they’ve become self-cutting.

If we abolished fuel excise altogether, cutting the Australian unleaded price 22%, we would only bring the price back to where it was five weeks ago.

And then (as I imagine will happen in New Zealand after three months) the government would find it hard to reintroduce it.

It is finding it difficult to end the $1,080 low and middle earner tax break that was meant to finish two years ago.

The mess it has got itself in to both by hinting that it will cut the excise and by not ending the A$7.8 billion per year low and middle earner offset hints at a way out.

The offset is poorly designed. It is paid out as a tax refund after the end of each financial year, making it the opposite of the “stimulus measure” Treasurer Josh Frydenberg said it was when he last extended it. If he extends it again for the coming financial year, it won’t get paid out until the second half of 2023.

The petrol component of the fuel excise brings in A$5.8 billion per year. The government might be able to hang on to that and use the A$7.8 billion that would have been spent on the offset to support people now when they need it and when petrol prices are high, rather than a year into the future when they might not be.

The A$7.8 billion would be directed to Australia’s lowest earners, the ones who are being hit hardest by the horrendous petrol prices. Low earners (the bottom 40%) on average spend more than 3% of their income on petrol. High earners spend less than 2%.

Support shouldn’t be tied to petrol use

The support to low earners should be delivered in cash rather than as a subsidy to petrol prices. Recipients would be able to spend it on petrol should they need to, but would be able to spend it on other things.

If it was delivered as a petrol subsidy it would go disproportionately to the highest earning households for whom high petrol prices are a mere annoyance. High-income households spend more on petrol in absolute terms (on average 50% more) than low-income households.

If it is delivered as cash rather than a petrol subsidy it won’t blunt the push that high prices give for people will switch to more efficient cars and use petrol less by doing things such as working more from home.

It’s hard to find a case for a cut in Australia’s petrol tax, but it is easy to create a mechanism to help the people high prices are hurting. The budget is due in a fortnight.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.