Wednesday, July 21, 2021

When COVID is behind us, we're going to have to pay more tax

The biggest unstated message from the intergenerational report released during the lull between lockdowns is that we will need more tax.

Not now. At the moment it’s a matter of throwing everything we’ve got at getting on top of the COVID outbreaks and worrying about how to (and the extent to which we will need to) pay for it later.

But when the economy is healthy again, taxes are going to have to rise, big time.

That the intergenerational report doesn’t say so explicitly might be because the government is sticking with its arbitrary and implausible guarantee that tax collections will never climb above 23.9% of GDP, which is the average between the introduction of the goods and services tax and the global financial crisis.

Or it might be because what’s needed sits oddly with legislated high-end tax cuts likely to cost $17 billion per year from 2024-25.

Among the drivers of increased government spending identified by the report is spending on health, at present 4.6% of gross domestic product, and on the report’s projections set to climb to 6.2% over the next 40 years.

We’ll want better health

To fund that alone the government will need to collect 6% more tax in 2061 than had spending on health stayed where it was as a proportion of GDP.

Perhaps surprisingly, most of the extra spending on health won’t be a direct result of the population ageing. It’ll be because health technologies are getting better and becoming much, much more expensive (à la the COVID vaccines). And because incomes are rising.

Rising incomes, the report explains, are the largest driver of government spending on health internationally.

That’s because for some things, including the provision of hospitals, private spending can’t cut it, no matter how well off you are.

After billionaire Kerry Packer suffered a massive heart attack while playing polo in 1990, he was rushed to Sydney’s Liverpool Hospital.

When the ANU election survey began in 1990, 54% of Australians surveyed regarded health as “extremely important” in determining their vote. It’s now 70%. In 1990 11% regarded health as “not very important”. It’s now just 2%.

The intergenerational report has spending on aged care climbing from 1.2% to 2.1% of GDP, which by itself means the tax take will have to be 4% higher than otherwise, but it was prepared ahead of the government’s final response to the aged care royal commission.

The interim response had 14 (mostly expensive) recommendations subject to “further consideration”.

The National Disability Insurance Scheme already accounts for one in 20 tax dollars collected and is set to overtake Medicare.

The report says the government’s response to the royal commission into disability care presently underway is likely to place “additional pressure” on costs.

We’ll need to spend more than projected

None of this extra spending is bad if it delivers value for money, and it’s what the public wants. But it is hard to reconcile with official projections in the report showing government spending climbing only 2.5% per year in real terms over the next 40 years, compared to 3.4% per year in the past 40.

Read more: Intergenerational report to show Australia older, smaller, in debt

The report gets there in part by an outrageous sleight of hand. It says JobSeeker and other payments will become tiny as a proportion of GDP because they will only climb with inflation (which is typically low) rather than wage growth or GDP growth (which is typically higher, and lines up with how the pension grows).

A moment’s reflection would show that if that actually happened for 40 years — which is what the treasury’s report assumes — JobSeeker would fall from 70% of the single age pension to a hard-to-justify 40%.

JobSeeker and age pension as projected in intergenerational report

Payment for a single, dollars per fortnight. JobSeeker indexed to IGR inflation projections, pension indexed to IGR wage projections.

We know it won’t happen because it hasn’t happened.

JobSeeker was boosted this year after only 20 years rather than 40 in order to make sure that sort of thing wouldn’t happen.

And we know there’s nothing to stop an intergenerational report using more realistic assumptions.

The 2015 report, released at a time when the Abbott government planned to adjust the pension in line with the more miserly JobSeeker formula, relaxed the assumption after 13 years because if it left it in place the pension would slide untenably below community expectations.

We’ll easily be able to afford more tax

There’s nothing wrong with paying more tax if it’s for things we want, like better health care, better aged care, better disability care and benefits we can live on.

The intergenerational report has government spending climbing by four percentage points of GDP between now and 2061. But it also has real GDP per person almost doubling, climbing 80%.

Even if that’s an overestimate and GDP per person grows by, say, 50%, and the need for tax grows by more than four points, we’ll easily be able to afford the extra tax, and we’ll want what that tax will buy. Expectations climb with income.

The present government will be long gone by the time the tax to GDP ratio reaches its “cap” of 23.9% of GDP (which the report expects in 2035).

The finance minister who came up with the cap, Mathias Cormann, is now head of the Organisation for Economic Co-operation and Development, in which the average tax take is 34% of GDP.

An obvious place to look for the tax is high-income senior citizens, at present enjoying tax-free super, refundable franking credits and special tax offsets.

Grattan Institute calculations suggest an older household earning $100,000 pays less than half the tax of a working-age household on the same amount.

Like the households of less well-off seniors, those households are highly likely to use the services tax provides.

To say we’ll need more tax is not to say the government needs to fund all of its spending with tax.

It is projecting budget deficits for the next 40 years. Budgets have been in deficit for all but a few of the past 100 years.

But it will need to cover much of it with tax to keep the economy in check. If we want what tax provides, we’ll be prepared to pay it.

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.


Saturday, July 03, 2021

The intergenerational horizon that recedes each time we approach it

On Monday, Treasurer Josh Frydenberg homed in on the real problem identified by his government’s intergenerational report – about the only real problem expounded on in the report.

It’s that by 2061 we will have far fewer people of working age for each person of traditional retirement age. Right now, Frydenberg explained, we have four people of working age for each Australian aged over 65.

Forty years ago we had 6.6. But in 40 years’ time, we will have just 2.7.

That’s a good deal fewer people to cut our hair, fix our computers, look after our needs in nursing homes.

It belongs to that unusual class of problems that money can’t fix, despite Frydenberg saying the financial implications are “sobering”.

Collecting more tax to spend on retirees or having them squirrel away more superannuation to spend in retirement isn’t going to create more people of working age.

This demographic issue exists because the large number of Australians born in the postwar baby boom are in or approaching retirement, and aren’t dying any time soon.

Four will become 2.7 whatever we do, unless we have more babies or attract more migrants and temporary workers. The only other factor would be if this generation died sooner.

The man who set up Australia’s system of five-yearly intergenerational reports and delivered the first two, the Coalition’s then treasurer Peter Costello, was fond of saying that while demographic change is slow, “demography is destiny”.

Every five years since he left office, his successors, Wayne Swan, Joe Hockey and Josh Frydenberg, have reissued the same sort of projections and graphs, and every five years they’ve sounded surprised.

Joe Hockey said Australians would “fall off their chairs” when they discovered their government wouldn’t “get anywhere near being able to reduce spending over the medium-term to the same level that exists today”, which was hardly the point.

If Australians had been paying attention, what might have surprised them more was how much less worrying the projections had become over time.

In 2007 Peter Costello said the number of working-age Australians for each Australian over 65 would shrink from five to 2.4 in 40 years’ time.

Wayne Swan’s projection, in 2010, was for the number to shrink to a less scary 2.7, and not until five years later than Costello’s warning. Hockey’s projection was less scary still – to 2.7, but a further five years out again.

Frydenberg’s projection this week was still 2.7, but a further five years out, to 2061. The demographic event horizon has receded each time we’ve approached it.

Doing the work of holding back the transition has been massive and unexpected immigration. Costello’s first intergenerational report in 2002 assumed net overseas migration of 90,000 people a year for 40 years. By 2010, net overseas migration had more than doubled to 244,000 people a year, and the intergenerational report assumed 180,000 a year for 40 years.

The 2015 report assumed 215,000 a year, and Frydenberg’s assumes 235,000 a year after borders reopen.

Migrants are young, as are temporary workers and foreign students. Eight in 10 are aged under 35 when they arrive. Although they themselves age, most bolster the working-age population for decades. Many work in nursing homes.

Ask John Piggott, director of the Centre of Excellence in Population Ageing Research at UNSW Sydney, whether this means migration is a something of a Ponzi scheme, with a continual flow of new migrants needed each year to stop the age structure collapsing, and he’ll tell you it’s the same for births. Each newly born Australian also ages, but from the time they enter the workforce they bolster the working-age population for decades to come.

And the divide between workers under 65 and retirees over 65 is losing its meaning, in part because the Rudd Labor government lifted the pension age to 67 and the Abbott government tried to lift it to 70, an idea that will doubtless be revisited.

At the time of the first intergenerational report in 2002 only 10 per cent of men and 3.5 per cent of women aged 65 and older were in paid work or making themselves available for paid work. Twenty years on, it’s close to 20 per cent and 11 per cent, proportions that grew through the coronavirus crisis.

If we really do become short of workers of traditional working age, we are likely to become more accepting of workers in their 70s. The increases in not just lifespans, but healthy lifespans, and a shift to service-sector and part-time jobs, will mean more people in their 70s will take work.

The financial problems spelled out in Frydenberg’s report are both less severe and more severe than Frydenberg acknowledged.

It says by 2060-61 healthcare will become the largest component of government spending, eclipsing social security and taking up 26 per cent of the budget. Government spending on health per person will more than double.

Yet what it also says is that most of the increase will be non-demographic – the government will spend more on healthcare for Australians of all ages, because treatments are becoming more expensive (and presumably better) and because we want them.

The report points to a budget problem. By 2061 government spending will exceed government revenue by 2.5 per cent of gross domestic product (GDP), and by 5 per cent on a less optimistic set of assumptions, but that’s only because of a self-imposed decision not to let the tax take climb.

For completely political reasons, the Coalition imposed an arbitrary cap on the tax-to-GDP ratio of 23.9 per cent of GDP a few elections back, a cap that will be reached in about 15 years.

“Some might suggest an easy way to paint a more optimistic picture of the budget position would be to remove the tax-to-GDP cap,” Frydenberg said on Monday. “But as we know, you can’t tax your way to prosperity.”

Prosperity, in the sense of being able to afford to pay increased tax, shouldn’t be much of a problem. The report says by 2061 real GDP per person is expected to be almost twice as high as it is now. We shouldn’t find it too difficult to shell out an extra few per cent of GDP in tax.

But other costs aren’t acknowledged. The report includes a chapter headed “environment” that refers to the costs of climate change and its impacts on agriculture and the resources sector, but includes not one financial measure of that impact.

The NSW intergenerational report, released just three weeks earlier, said more frequent and severe natural disasters could cost the state an extra $17 billion a year.

In the 2016 election. Labor was castigated for its failure to cost its climate change policy. Frydenberg has failed to cost the Coalition’s in 2021.

And there’s another big thing the report fails to acknowledge. Yes, the number of Australians of working age for each Australian of traditional working age will drop from four to 2.7 and yes, this will be a problem, but old people aren’t the only dependents.

Children are also dependents, and as the proportion of the population who are older dependents has been growing, the proportion who are younger dependents has been shrinking.

The total dependency ratio – the number of Australians of working age per Australian either over 65 or under 15 – was acknowledged in earlier intergenerational reports. It is unacknowledged in this one, but is expected to slip from 1.8 to 1.6 – a drop, but a less alarming drop than the aged-dependency ratio.

It’s also less alarming because we’ve been there before. During the 1960s, a time generally regarded as pretty pleasant, Australia had 1.6 people of traditional working age for each Australian either over 65 or under 16. There were a lot of children about in the 1960s but we managed to care for them.

A key difference, identified by tax and transfer specialist Miranda Stewart at the University of Melbourne, is that children are more likely to be cared for off-budget, especially off the Commonwealth’s budget, and so don’t force their way into the intergenerational report.

Much of their care is provided privately, either by the private payment of childcare fees and school fees or by parents, mainly mothers, doing it unpaid.

As with the resource costs identified in Frydenberg’s report, these resource costs are real. The point is, we’ve coped with them before.

This article was first published in the print edition of The Saturday Paper on Jul 3, 2021 as "Demography is destiny".


Thursday, July 01, 2021

Economy will be weak and in need of support after pandemic, say top economists in 2021-22 survey

Australia’s economy will limp along after recovering from the pandemic, failing to regain the growth it had either in the years leading up to the crisis or the much higher growth in the decades before.

That’s the consensus of the 23 leading Australian economists assembled to take part in The Conversation’s July 1 forecasting survey — a panel that includes former Treasury, Reserve Bank and International Monetary Fund officials and modellers and policy specialists from 13 Australian universities.

On balance, the panel expects year-average economic growth (the measure reported in the budget) to slide from 4% this financial year to just 2.2% by 2024-25, well below the average of 2.6% assumed in this week’s intergenerational report.

The panel forecasts much weaker business investment than does the budget and lower household spending, but higher wage growth and lower unemployment. It expects a flat share market, and slower growth in house prices.

Weaker economic growth

During the decade leading up to the COVID-19 crisis, economic growth averaged 2.6% per year. During the 27 years between the early 1990s recession and the crisis, it averaged 3.2%.

The panel’s average forecast of 2.2% by the end of the four-year budget forecasting horizon is lower than both the budget forecast of 2.5% and the 2.6% in the intergenerational report.

Economic modeller Janine Dixon expects growth of just 1.7%. She says after Australia has soaked up unemployment, its future economic growth can only be driven by population growth or improved productivity.

With population growth expected to be weak for several years, GDP growth will be weak unless dwindling productivity growth rebounds.

Read more: Intergenerational report to show Australia older, smaller and more in debt

Forecasting veteran Saul Eslake says on the other hand, for as long as borders remain closed Australia should enjoy an “artificial boost” to domestic spending of more than A$50 billion per year from Australians who can’t spend abroad.

The two most optimistic forecasts of 3% growth, from Angela Jackson and Sarah Hunter, are contingent on borders reopening and tourism and immigration restarting.

The panel expect extraordinarily strong growth in the United States of 5.2% throughout 2021 on the back of what panelist Warren Hogan calls massive government stimulus and a full-vaccination rate approaching 50%.

China’s growth is forecast to rebound to 7.9%, but will come under pressure from what panelist Mark Crosby describes as an attempt by some of China’s customers to diversify the sources of supply away from China.

Support from iron ore

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

Read more: The four GDP graphs that show us roaring out of recession pre-lockdown

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

There’s agreement that at some point the unusually high price will fall, with one panelist saying there might be “one more year to ride this wave, then who knows”.

Because the panel expects a higher iron ore price than the government in the year ahead, it expects a greater rise in nominal gross domestic product — the measure of cash pouring into wallets. The panel forecasts an increase of 5% this financial year compared to the budget forecast of 3.5%.

But it expects consumer caution to limit growth in household spending to 4.2%, much less than the budget forecast of 5.5%.

Unemployment to fall quickly

The panel expects unemployment to fall more quickly than the government does, to 4.7% by mid-2022, a low the budget didn’t foresee until mid-2023.

The unemployment rate is already 5.1%, something the May budget didn’t expect for a year. However, it is to some extent artificially assisted because jobs that used to go to temporary foreign workers and were not counted in the employment statistics are now being taken by domestic workers who are counted.

As foreign workers return to Australia, the process will unwind, putting upward pressure on the recorded unemployment rate.

Wage growth better than budget

The May budget forecast wage growth of just 1.5% in 2021-22 (less than forecast price growth), followed by only 2.25% in 2022-23 (merely matching price growth), in part because of legislated increases in employers’ super contributions.

The forecasting panel is more optimistic for the year ahead, being able to take account of the Fair Work Commission’s 2.5% increase in award wages announced in June.

Read more: Australia's top economists oppose the next increases in compulsory super

Warren Hogan calls 2.5% the new “baseline”, with some labour shortages forcing some employers to offer more.

Even so, the panel’s average wage growth forecast for 2021-22 is 2.2%, only marginally above expected price inflation of 2.1%.

Slower home price growth

The panel expects weaker home price growth in the year ahead, with the CoreLogic Sydney price index climbing 6.4% after a year in which it soared 11.2%.

Melbourne prices should climb a further 5.2% after a year in which they gained 5%.

The panelists say much will depend on how long mortgage rates remain at their record lows, what action authorities take to restrain lending and when immigration restarts.

Low rates for some time

Over the past year, the bond rate at which the Commonwealth government can borrow for ten years has jumped from 0.9% to 1.5% in accordance with moves overseas.

The panel expects further increases to a still-low 1.8% by the end of this year and to 2.2% by the end of next year.

Even so, the panel expects no increase in the Reserve Bank’s cash rate — the one that drives variable mortgage rates — for almost two years, until April 2023.

Former Reserve Bank head of research Peter Tulip, now with the Centre of Independent Studies, says the bank meant it when it said it said it wouldn’t lift the record-low cash rate of 0.1% until actual inflation was “sustainably within” its 2-3% target range, something that wasn’t likely until 2024.

Other panelists, including economic modeller Warwick McKibbin, believe those criteria might be met sooner, some as soon as mid-2022.

The Conversation, CC BY-ND

No take-off in investment

The panel doesn’t buy the government’s bold prediction of a jump in non-mining business investment in response to budget tax measures.

The budget predicts year-on-year growth of 12.5% in 2022-23 after 1.5% in 2021-22.

Instead, the panel predicts 3.7% in 2021-22 and 5.8% in 2022-23, citing low population growth and the likelihood that most investment that could have been brought forward by tax measures has already been brought forward.

Read more: Bounce-back in investment holds open possibility of good news

Former IMF official Tony Makin also points to the relatively high tax rates facing foreign investors and the increasingly restrictive approach of the Foreign Investment Review Board.

Other panelists cite lack of clarity about the rules governing investment in renewable energy and growing shortages of labour and materials as reasons to expect only restrained growth in business investment.

Markets steady

On balance, the panel expects the US-Australia exchange rate to stay where it is at around 76 US cents as it has for years, noting that much will depend on the iron ore price and the strength of the US economy.

On average, it expects no change in the Australian share market after 12 months in which the ASX200 has soared 24%.

The average hides sharp differences. Some panelists expect the ASX200 to climb a further 10%, while others expect it to fall 10%. One panelist, economic modeller Stephen Anthony, expects a collapse of 55%, saying it “smells like a blood bath is coming”.

Deficits forevermore

This year’s budget forecast is for a deficit of 5% of GDP after last year’s near-record 7.8% of GDP.

Asked at what point over the next four decades the budget deficit would shrink to 1% of GDP, three panelists replied “never”.

Six others said not before 2030. Only four nominated the decade ahead.

Read more: Intergenerational report to show Australia older, smaller and more in debt

Angela Jackson said any improvements in the budget position delivered by a better-than-expected iron ore price would be spent.

Saul Eslake saw no appetite for either the tax increases or spending cuts that would be needed to eliminate the deficit, adding that, fortunately, there was no “urgent requirement to do so”.

Unexpected times

Forecasts often don’t come to pass. This time last year, mid-pandemic in a rapidly evolving situation, the panel forecast unemployment of 8.8%, no share market growth and ultra-low wage growth of just 0.9%.

That these things didn’t happen was in part due to the role of such forecasts in persuading the government to respond in an unprecedented fashion, a point made by Treasurer Josh Frydenberg launching the intergenerational report on Monday.

Read more: No big bounce: 2020-21 economic survey points to a weak recovery getting weaker, amid declining living standards

This year’s forecasts, prepared in a less-hectic environment, might have more staying power. They point to a weak recovery and an economy reliant on government support for some time to come.



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.


Sunday, June 27, 2021

Intergenerational report to show Australia older, smaller, in debt

Australia will be smaller and older than previously expected in 40 years time after the first downward revision of official projections in an intergenerational report in 20 years.

The much lower projections in Monday’s fifth five-yearly intergenerational report will mean indefinite budget deficits with no surplus projected for 40 years, only 2.7 Australians of traditional working age for each Australian over 65 (down from four) and average annual economic growth of 2.6%, down from 3%.

“Intergenerational reports always deliver sobering news, that is their role,” Treasurer Josh Frydenberg will say launching the report Monday morning. “The economic impact of COVID-19 is not short lived.”

The report says the pandemic has slowed both Australia’s birth rate and inflow of migrants.

The 2015 intergenerational report projected an Australian population of almost 40 million by 2054-55. The 2021 update projects 38.8 million by 2060-61.

As a result in 2060-61, about 23% of the population is projected to be over 65, up from 16% at present and 13% in 2002.

Although in the future increased superannuation would take pressure off the age pension, superannuation attracts favourable tax treatment which cuts government revenue.

The combined total of age pension spending and superannuation tax concessions was projected to grow from around 4.5% of gross domestic product to 5% by 2061.

Health, aged care spending to soar

Real per person health spending is projected to more than double over the next 40 years, largely due to the costs of new health technologies.

By 2060-61 health is expected to be the largest component of government spending, eclipsing social security and accounting for 26% of all spending.

Aged care spending is projected to nearly double as a share of the economy, largely due to population ageing.

Read more: No Barnaby, 2050 isn't far away. The IGR deals with 2061

Mr Frydenberg will say that even in the face of these demands the government remains committed to its promise to limit the tax take to 23.9% of GDP. Tax receipts are not expected to reach this level until 2035-36.

“Growing the economy is Australia’s pathway to budget repair, not austerity or higher taxes. This is why we remain committed to our tax to GDP cap, ensuring our COVID support is temporary and persuing productivity-enhancing reforms.”

Net debt is projected to peak at 40.9% of GDP in 2024-25, before falling to 28.2% in 2044-45 and then climbing again to 34.4% by 2060-61.

While Australia’s population will be smaller and older, and debt levels higher as a result of the pandemic, had the government not spent at unprecedented levels to support the economy a generation of Australians might have been condemned to long term unemployment, seriously damaging the budget longer-term.

Other projections have real GDP per person a measure of living standards, growing at an annual average of 1.5%, down from an earlier-projected 1.6%

The result will still be a near-doubling of real GDP per person, from $76,700 in today’s dollars to $140,900 in today’s dollars in 2060-61.

Behind that projection lies an assumed lift in annual labour productivity growth to 1.5%. In the decades before the pandemic, annual productivity growth had been averaging 1.2% and had slumped to 0.4% in the year leading up to the pandemic?

Read more: Why productivity growth stalled in 2005 (and isn't about to improve)

The lift in productivity assisted by government policies that will help individuals and businesses “take advantage of new innovations and technologies” is expected to take ten years.

Not included in the extracts from Monday’s report released by the treasurer late Sunday are the closely-watched projections for net overseas migration and for spending on the national disability insurance scheme.

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, June 23, 2021

No Barnaby, 2050 isn’t far away. The IGR deals with 2061

Barnaby Joyce has an answer to those who say Australia should commit to net zero carbon emissions by 2050. He says 2050 is too far away to be sure of anything.

As he put it in February while a backbencher, “many of the politicians and commentators talking about a 2050 aspiration will be dead by then”.

The man he replaced as deputy prime minister, Michael McCormack, said much the same thing at about the same time.

He was “not worried about what might happen in 30 years’ time”.

While edging Australia ever closer to endorsing a target for 2050, Prime Minister Scott Morrison used the same line of reasoning.

Australia’s goal was to reach net zero emissions as soon as possible, and preferably by 2050.

Near enough to forecast

“But when we get there, when we get there, whether in Australia or anywhere else, that will depend on the advances made in science and technology needed to commercially transform not just advanced economies and countries, but the developing world as well.”

For all of these leaders, 2050 was simply too far into the future to have a sensible view about.

So what are we to make of what will happen next Monday?

Read more: Infographic: the language of Intergenerational Reports

Shortly after 10am Treasurer Josh Frydenberg will release a set of official projections that will go way out into the future, to 2061 rather than 2050.

It’ll be the fifth set of official projections going out 40 years — the fifth so-called intergenerational report.

The first, produced by Prime Minister John Howard and his treasurer Peter Costello in 2002, set out projections to 2042.

The Howard government mandated the five-yearly intergenerational reports as part of its Charter of Budget Honesty.

The idea was that it wasn’t good enough to examine the impact of government policies just a handful of years into the future, as happened each budget night. If problems were set to build up over time — say over 40 years — budgets wouldn’t give you a handle on them until it was too late.

The Charter of Budget Honest Act made clear that the intergenerational reports were to deal with more than demographic change.

The first identified increasing spending on new health care technologies unrelated to demographic change as the greatest threat to government finances.

Climate change feeds into the IGR

And that first John Howard and Peter Costello report included a sharp warning about climate change, noting that “early action to prevent environmental damage, rather than later action to remedy it, is likely to reduce long-term costs”.

In 2010 the third intergenerational report had an entire chapter on climate change. The report was entitled Australia to 2050.

The fourth (Abbott government) intergenerational report in 2015 was prescient in its warning about the Great Barrier Reef, describing protection of it as a “significant challenge over coming decades”.

Read more: 'Severely threatened and deteriorating': global authority on nature lists the Great Barrier Reef as critical

Frydenberg’s 180-page report will also include a chapter on climate change, one that looks beyond 2050.

It will doubtless include the sort of disclaimers all intergenerational reports have had — that projections on the basis of unchanged settings aren’t forecasts. Part of their purpose is to warn what will happen if settings aren’t changed.

The first warned that steadily-rising spending on new medical technologies along with a rapidly ageing population would boost the need for tax by 5% of GDP.

As governments took measures to wind back the growth in spending (including lifting the pension age) those needs shrank in future intergenerational reports, to about 3% of GDP.

Challenges manageable…

To date, each report has found we will have no difficulty finding the money.

The first pointed to living standards 90% higher in 40 years time.

The fourth, using the same metric of real GDP per person but assuming lower productivity growth, pointed to living standards 80% higher.

With so much uncertain, the assumptions in Frydenberg’s report will tell us a lot about where the treasury thinks we are going and what might need to change.

A big concern in the first report was that as the population of older Australians grew, the number of people of traditional working age available to serve each one would shrink, roughly halving.

…if we’re given notice

That concern was overstated somewhat because at the same time the number of young people who needed serving would shrink.

Twenty years on, it is clear that our population isn’t ageing nearly as quickly as had been expected, in part because we’ve been importing many more (relatively young) migrants than expected.

In the year before COVID net overseas migration reached 241,300 per year. The first intergenerational report had expected only 90,000 per year.

Read more: Why productivity growth stalled in 2005 (and isn't about to improve)

On the other hand our productivity growth — the amount produced per hour of work — has been abysmal. Before COVID it fell to 0.4% per year. The first intergenerational report assumed 1.75% per year.

And the first assumptions about wage growth seem positively quaint. The first intergenerational report expected 4.25% per year. Before COVID we got 2.1%

There’s no doubt that the assumptions and projections in Monday’s intergenerational report will also seem quaint several decades down the track. But it’s important to make them. The future arrives more quickly than we think.

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, June 22, 2021

Breaking up ABC HQ suits its competitors, not the ABC

Of all the Sydney-centric notions, the idea that the ABC would better represent Australia if it moved its programmakers from Ultimo in Sydney to Parramatta in Sydney is as Sydney-centric as you can get.

Newsflash: 79% of Australia lives outside of Sydney; and the ABC — more than any other organisation —  lives where they live.

The ABC has staff in 53 locations across the country from Esperance to the Eyre Peninsula, from Ballarat to Broken Hill, from Katherine to the Kimberley, from Launceston to Lismore.

From 6.35 each morning as many as 50 microphones broadcast live from 50 different locations, updating Australians on developments in the broader world and where they live in a way no other institution can match — certainly none I’ve worked for.

Yes, the ABC has a national headquarters, and it’s needed. It helps to have staff working on national programs near each other, rubbing shoulders, seeding ideas. It’s why corporations have national headquarters.

News Corporation recognises this. It’s moved Fox Sports into its Sydney newspaper headquarters. It’s moved the Melbourne part of Sky News into its Melbourne newspaper headquarters. In parliament house Canberra it’s moved its Sky News political reporters into its newspaper office to work alongside its political reporters.

Nine has done the same thing. It’s moved its Sydney newspapers in with Nine in Sydney, it has moved its Melbourne papers in with Nine in Melbourne.

None of these organisations has a fraction of the ABC’s ability to report from all across the continent. Nor to report from overseas. The ABC has staff in Tokyo, Bangkok, New Delhi, Nairobi, Port Moresby, Seoul and Jakarta, as well as Washington and London. It even has a newsroom in Parramatta.

But, just as is the case for the less geographically diverse organisations that chide the ABC for not reaching out, the work of these staff needs to be brought together in a central location.

Being in a central location doesn’t mean being of that location. When I worked for the ABC on national programs such as AM and 7.30 most of the colleagues I worked with in Sydney came from somewhere else. I was from Adelaide, the woman I reported to was from rural Queensland. Ultimo was a melting pot.

The ABC defended its decisions to centralise most of its Sydney operations in Ultimo and most of its Melbourne operations in Southbank — taken just 20 years ago — on the ground they would create “synergies”.

Catalyst would benefit from being together with the radio science unit, ABC radio news and online news would benefit from being together with TV news, ABC audio, film, tape and reference archives would be in a single easily-accessible location, and staff working on very different projects would rub shoulders seeding ideas.

These were all things that were said to the parliamentary committee inquiring into those co-location projects, and to some extent digitisation has made them less relevant. Archive material can be served up anywhere and people can rub shoulders virtually though Zoom.

But in another way the COVID-induced shift to working from home has made co-location even more important. There needs to be a compelling reason to come into the office. As in many enterprises, if the national headquarters doesn’t offer the top staff working together in the one space, it doesn’t offer much.

After months of pressure from the Sydney-based communications minister, the ABC said last week it would move 300 of its staff from Ultimo to Parramatta, to make it “easier to engage with more parts of Sydney”.

Minister Paul Fletcher said it was “a good first step”.

If it makes program producers more insular (makes it less likely that the makers of, say, The Money will rub shoulders with the makers of Saturday Extra) it’ll be a step backwards.

Depending on how the real estate transactions play out, it’ll probably cost the ABC money.

Regardless, it’ll cost the ABC time and focus and make programs harder to make, which might be what its more narrowly-focused competitors want.

First published in Pearls and Irritations


Monday, June 21, 2021

Top economists call to speed the switch to electric cars

Australia’s top economists overwhelmingly back government measures to speed the transition to electric cars in order to meet emission reduction targets.

An exclusive poll of 62 of Australia’s preeminent economists — selected by their peers — finds 51 back measures to boost the take-up of electric cars including subsidising public charging stations, subsidising the purchase of all-electric vehicles, and setting a date to ban the import of traditionally-powered cars.

Only 11 oppose such measures, three of them because they prefer a carbon tax.

Six of the 51 who supported special measures said they did so reluctantly, as their preferred alternative would be a carbon price or a carbon tax, rather than subsidising “one alternative out of many to reduce emissions”.

Cars account for roughly half of Australia’s transport emissions, making them about 8% of Australia’s total emissions.

Yet Australia’s take-up of electric vehicles is dwarfed by the rest of the world.

On one measure, all-electric cars accounted for just 0.7% of new car sales in Australia in 2020 compared to 5% in China and 3.5% in the European Union.

Australia has no domestic car industry to protect, meaning industry policy concerns needn’t hold back the transition.

Read more: Going electric could be Australia’s next big light bulb moment

Norway plans to outlaw new petrol car sales from 2025; Denmark, the Netherlands, Ireland and Israel from 2030; and California and Britain from 2035.

Asked whether Australia should take action to speed the transition, eight in ten of the 62 economists selected by the Economic Society said it should.

Economic Society of Australia/The Conversation, CC BY-ND

The results represent a departure for a profession whose usual advice is to avoid interfering with markets.

One participant, University of NSW professor Gigi Foster said an important question needed to be answered in order to justify government intervention: “what is the market failure here?”

The market failure was pollution, imposing costs on the community beyond the drivers of conventionally-powered cars and on the planet by pushing up global temperatures.

Broad support: subsidies for charging points

If it wasn’t to be dealt with by a carbon price, measures that sped up the switchover to electric vehicles could achieve some of the same effect.

By far the most popular measure of six presented to the panellists who supported government action was subsidising public charging points, backed by 84%.

The next most popular was removing the luxury car tax from electric-only vehicles. At present the 35% tax applies to cars valued at more than $69,152, and $79,659 for fuel-efficient vehicles.

43% supported making charging points compulsory in new homes and new car parks. 39% supported setting a date to ban the import of petrol and diesel cars.

Matthew Butlin, who chairs South Australia’s Productivity Commission, noted that much of Australia was not urban and unlikely to be served by charging points for some time.

Without government measures to speed the installation of remote charging stations, many buyers would be reluctant to go electric, even if most of their driving was in cities.

When they were in place, there would be a good case for banning the import of petrol and diesel vehicles, but not until then.

Read more: Could electric car batteries feed power back into the grid?

Others wanted to hold off on banning the import of conventionally-powered cars until Australia had a lower-emissions mix of electricity.

Macquarie University’s Lisa Magnani said that with three quarters of Australia’s electricity generated from coal, electric vehicles created considerable emissions.

The Grattan Institute’s Danielle Wood disagreed, saying “network effects” built a case for switching over early.

Network effects build on themselves

The more people switched, the more charging stations would be built and the lower electric vehicle prices would drop, driving more people to switch, and increasing the benefits of decarbonising the electricity supply.

The sooner Australia swapped over, the easier it would be to get to net zero emissions by 2050 without the need for a “cash for clunkers” style scheme to buy back polluting vehicles.

Setting 2035 as the date for banning imports of petrol-powered cars as recommended this year by the International Energy Agency would give buyers time to adjust while the charging infrastructure developed.

Read more: Want an electric car? Here's how to buy second-hand

Tax specialist John Freebairn said electric cars were already heavily subsidised by escaping the fuel excise used to fund roads, despite the efforts of some states to plug the gap.

Sydney University economist Stefanie Schurer argued on the other hand bulky and polluting sport utility vehicles were effectively subsidised because of the tax benefits they attracted when used for work.

Former Liberal Party leader John Hewson of the Crawford School of Public Policy said smoothing the transition had become urgent.

Smooth transition now “urgent”

It took only ten years from 1903-13 for the United States to switch from horse-drawn to petrol-driven vehicles, and technology take-up was quicker today, particularly in Australia.

Other economists surveyed noted that there was much that could be done to reduce harmful emissions in addition to going electric.

Sue Richardson said Australia should impose serious limits on the tailpipe emissions of new cars. Australia is unusual among developed nations in not having such a limit, making it a favoured market for high-emission cars.

Read more: The trucking industry has begun to turn electric; cars will take longer

Rana Roy said a better approach would be to limit transport itself through remote working and efforts to encourage walking and cycling. Subsidies for electric cars could send such moves backwards.

When responses to the survey were weighted by the confidence respondents had in them on a scale of 1 to 10, support of special measures to drive the transition remained about as strong, backed by eight in ten of the economists surveyed.

Economic Society of Australia/The Conversation, CC BY-ND

Detailed 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, June 16, 2021

The end of JobKeeper wasn’t a blip. It might have cost nearly 100,000 jobs

At its peak, more than 3.8 million Australians were on JobKeeper — three in every ten Australian workers.

Adding in those workers already employed by government, it meant four in every ten received a paycheck that originated from government, more than in Russia.

Yet when JobKeeper ended at the end of March, it looked like a mere blip in employment. The unemployment rate actually fell, for the sixth consecutive month.

The Bureau of Statistics said the cutoff had no “discernible impact”.

Treasurer Josh Frydenberg went further. The economy had “strengthened, even after the end of JobKeeper”.

Since the end of JobKeeper 132,000 people had come off income support.

The treasurer is right. After March the number of Australians on JobSeeker and related payments fell 9%.

Changed rules pushed people off benefits

But it’s possible for people to come off benefits at the same time as people are losing jobs, especially if something else is driving them off, as it was at the end of March.

At the end of March the coronavirus supplement that topped up unemployment benefits stopped. The payment dropped from $715.70 to $620.80 per fortnight.

And job seekers were once again required to search for a minimum of 15 jobs a month, climbing to 20 from July.

Read more: New finding: jobseekers subject to obligations take longer to find work

While burdensome for employers (if all of Australia’s job seekers actually apply for those jobs, employers will be lumbered with 17 million applications per month, climbing to 23 million) it’s also unhelpful for job seekers.

There’s evidence to suggest job seekers get real jobs sooner if they don’t have to go through charades.

The “dob in a job seeker” hotline will have further dissuaded them from applying for benefits.

These changes make the drop in the number of claimants understandable, much more so than the suggestion they got jobs, which in net terms they did not. Employment fell after the end of March, by 30,600 according to Bureau of Statistics figures which will be updated on Thursday.

As many as 97,000 fewer workers?

How is a drop in employment consistent with a drop in the unemployment rate?

The unemployment rate fell to 5.5% in April not because employment grew, but because 33,600 people who had previously identified themselves as unemployed dropped out of contention, changing their status to “not in the labour force”.

Had they continued to not work but continued to describe themselves as “unemployed”, the unemployment rate would have been 5.7%.

And it would have been higher still if those shifted to zero or reduced hours with the end of JobKeeper had been called unemployed. Employment fell 0.2%, but hours worked fell 0.7%.

Read more: Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment

My rough maths suggests this means the number of Australians actually working might have fallen by 94,100.

An analysis prepared by Melbourne University employment specialist Jeff Borland for the Fair Work Commission puts the number of jobs lost between 45,000 and 97,000.

He gets 45,000 by comparing the number of people who left employment between March and April this year with the number who left between March and April in previous years.

He gets 97,000 by comparing the average (rapid) growth over the previous four months as we emerged from recession with the growth between March and April.

One in 11 JobKeeper jobs

A touch over one million Australians remained on JobKeeper to the end, suggesting that as many as ten in every 11 of them kept their jobs when JobKeeper ended. One in every 11 might have lost their jobs.

The Australians most knocked around were the youngest. Since the end of JobKeeper, women under the age of 30 have on balance lost jobs while women over that age have continued to gain jobs.

Men under the age of 40 have lost jobs while men over that age have gained them.

The treasury’s deepest concern about jobs since the start of COVID (it mentions it right at the top of that section of the budget) has been scarring.

The unlucky young people who happen not to secure jobs during downturns can fail to secure them for years, being passed over by newer, fresher young people who are barely affected.

Even where these people get jobs, if they enter the market when the youth unemployment is five percentage points higher than normal, they can expect to earn roughly 8% less in their first year, and 3.5% less after five years. It takes about a decade for the effect to fully disappear, and it’s worse for women than men.

Vacancies, plus mismatch

Australia’s record-high vacancy rate (2% of all jobs were vacant at the end of March) makes it look as if scarring needn’t be much of a concern. But jobs are vacant for reasons.

It might be that the mix of jobs we will need is changing, or that employers can for the moment no longer rely on migration to give them the mix of skills they want. Or it might simply be that the general bounceback in jobs has been so fast that the right employers and the right workers are still working out how to find each other.

Read more: The four GDP graphs that show us roaring out of recession pre-lockdown

Many businesses will die as a result of the end of JobKeeper. Businesses are forever dying. Some have been kept alive for longer than they would have been, and some have exited JobKeeper into a changed environment.

We’ve managed to end JobKeeper without a catastrophe, but that doesn’t mean there hasn’t been damage, and it doesn’t mean young lives won’t be scarred.

After a textbook exit from a recession — the sharpest V-shaped recovery ever — it would be awful if we left a slice of young Australia behind.

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, June 09, 2021

Other Australians earn nothing like what you think. If you're on $59,538, you're typical

I’m guessing you earn less than A$200,000.

And I’m guessing you think you’re missing out. People keep telling you so.

On one side of politics Labor leader Anthony Albanese says anyone earning $200,000 dollars a year “can’t be described as being in the top end of town”.

On the other, Prime Minister Scott Morrison parries with interviewers when asked whether people on $180,000 to $200,000 (the biggest beneficiaries of his planned 2024 Stage 3 tax cut) are “high income”.

“They’re hardworking people working out on mines and difficult parts of the country,” he says. “They deserve a tax cut.”

Hardworking or not, Australians on more than $200,000 are rare. And an awful lot of them don’t work at all.

$200,000 is unusual

I’ve never quite understood why politicians are so keen to tell us such incomes are normal. It might be because they are on them. Each backbencher gets $211,250 plus a $32,000 electorate allowance (boosted by $19,500 if they turn down the use of a private-plated vehicle) plus home internet and travel allowances.

Very detailed tax office figures (updated on Monday) tell us what the rest of us earn, all 14.3 million of us.

Only 2% of those required to pay tax earned more than $211,365. Only 3% earned more than $188,667.

Everyone else — the other 97% — earned less than $188,667, most of them a good deal less, and many more earned even less and weren’t required to pay tax.

The typical taxable income (typical in the sense that half earned more than it, half less) was $59,538. If that’s what you’re on, you’re more likely to find people who earn close to what you do than anyone who earns more or less.

We can get an idea of how lonely it is at the top by examining the top 1%, those Australians with a taxable income of greater than $350,134.

There aren’t many of them, just 110,613 — 82,258 men and 28,355 women.

Only 39,209 have taxable incomes of more than $500,000, and of these only 14,467 have taxable incomes of more than $1 million.

Life at the top needn’t be taxed

You’re probably thinking there’s a difference between taxable incomes and actual incomes, and the tax office figures show you’re right.

15,358 Australians reported total incomes of more than $1 million. By the time they had applied legitimate tax deductions, the number had shrunk to 14,467.

Some of these million-dollar earners were able to shrink their taxable incomes very low indeed. 45 cut their taxable incomes to less than the tax-free threshold of $18,200 — meaning they didn’t have to pay anything, not even the Medicare levy.

Another eight managed to escape the Medicare levy even though their taxable incomes were above $18,200, and another 21 escaped income tax while paying the Medicare levy.

Read more: Yes, some millionaires pay no tax, but crimping deductions mightn't help

Many of these millionaires weren’t “hardworking” in the sense Morrison meant. Only 9,144 of the 14,467 Australians on taxable incomes of more than $1 million worked. Only 17,883 of the 57,120 Australians on more than $250,000 worked.

Only nine of the 45 million-dollar earners who cut their taxable incomes to less than the tax-free threshold worked. 27 received so-called franked dividends from companies that had paid tax, enabling them to cut their own tax bills or receive rebates from the tax office. On average, each received dividends of $2.25 million.

Many who aren’t taxed are generous

Seventeen of the 45 million-dollar earners received capital gains, on average $6.4 million each. 38 received interest, averaging $290,000 each.

Against that were set expenses, small and large. Three claimed for work-related car expenses averaging $27,340 each, 13 claimed expenses averaging $57,200 for assistance with tax affairs, eight claimed for previous losses from farms averaging $684,000 each, and eight for losses from other businesses averaging $408,000.

But by far their biggest expense was donations. 14 gave away a total of $161 million in gifts or tax-deductible donations — an extraordinary average of $11.5 million each.

Most of us aren’t like these people.

Most of us claim more modest deductions

Three-quarters of Australians in the tax system earn less than $89,173.

Those on that income typically claim between $1,500 and $1,900 in deductions (men claim more than women) and, thanks to negative gearing, claim losses on properties of between $1,800 and $2,600 (again, men claim more than women).

Such Australians typically report between $1,200 and $2,100 in capital gains (more for women than for men).

If higher-earning Australians are unaware of how most of us live, it’s understandable. Surgeons mix with other surgeons. On average each of Australia’s 4150 surgeons earns $394,303, making surgery our highest-paying occupation.

We mix with, and marry, people like us

And they increasingly marry each other. In 2010 the Productivity Commission found that 68% of Australia’s high earners were married to other high earners. A decade earlier it was 49%.

And high earners live near each other. The average income in Sydney’s Double Bay (Australia’s highest-earning suburb) is $202,598. The average income in Ruse in Sydney’s Campbelltown is $55,100.

People in Double Bay don’t drive through Ruse on their way to the city.

Read more: The Low and Middle Income Tax Offset has been extended yet again. It delivers help neither when nor where it's needed

In the United States it is often the other way around. There, low-income suburbs are more likely to be near the city, meaning that high-income Americans at least see them as they go in to town.

That most of us have little idea of what others earn suits those in charge when they propose tax cuts skewed to high earners.

They can con us that most of us will be better off, and those on high incomes can con themselves they are not already better off.

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.