Wednesday, April 30, 2008

So the tax cuts will give everyone more incentive to work. No, says the Treasury

Secret Treasury documents released under the Freedom of Information Act undermine one of the Government’s key claims in support of its tax package to be delivered in Tuesday week’s Budget.

Both the Treasurer and the Prime Minister have claimed that the $31 billion package will boost employment and provide an “incentive” for existing workers to put in more hours.

But the Treasury documents, released to the West Australian newspaper under Freedom of Information laws, reveal that the incentive will work in two directions.

The Treasury says that while an estimated 32,284 Australians will be induced to work more hours as a result of the package, a greater number – 32,895 will decide to work fewer hours...

Most of the Australians who cut their working hours will do so in order to ensure they get the full Low Income Tax Offset which will double in size over time from $750 to $1,500 and become available at a higher income.

The Treasury documents predict that a net 6,317 single women will cut their hours to take advantage of the new tax arrangements, as well as a net 2,662 married men and 1,298 single men.

Married women are the most likely to work extra hours as a result of the tax changes with a net 5,934 expected to put in more time, as well as a net 2,694 single parents.

On balance the Treasury documents say the change in the Low Income Tax Offset will cut the number of hours worked by existing workers while increasing the number of low-income Australians in work. The net result will be “a small overall increase in average hours”.

The Treasury says the decision to increase the 30 per cent income tax threshold to $37,001 over time will bring around 34,828 extra Australians into work, and the decision to boost the Low Income Tax Offset will bring an add an extra 28,568 Australians.

By contrast the decision to cut the 40 per cent tax rate to 37 per cent will have a scarcely noticable effect, increasing employment by just 724 people.

Independent calculations prepared for the Canberra Times suggest that the cost to revenue of creating each of the 724 jobs that would flow from the cut in the 40 per cent tax rate would exceed $3 million per job per year.

The Treasury says that taking all of Labor’s proposed tax changes together, the net increase in working time should total around 10 minutes per person per week.

It says that the increase “could amount to an additional 2.5 million hours of labour supplied each week - roughly equivalent in size to reducing the unemployment rate by around two thirds of a percentage point”.

The calculations performed for the Canberra Times suggest that each of those extra hours of work would be bought at a cost to public revenue of more than $70.


Tuesday, April 29, 2008

Tuesday Column: Rudd's really dud Budget promise

By all accounts Wayne Swan's first Budget, due in a fortnight, will be a shocker. And not only for people from the ACT. But there will be generosity amidst its meanness - a surprising amount of it reserved for those of us who are already very well off.

Want evidence?

Consider Labor's plan for First Home Saver Accounts, cobbled together a few weeks before the election and so poorly designed that after the election the Treasury told Labor it was unworkable.

The redesigned scheme, due to come into effect on July 1, works like this: Every dollar that first home savers put into an account - up to a maximum of $5,000 - will be matched by a government contribution of 15 cents.

Except for Australians earning more than $80,000 per annum. They will get a government co-contribution of 25 cents for every dollar they invest. Really. ...

Unless they earn more than $180,000 per annum in which case they will be blessed with a government contribution of 30 cents per dollar they invest.

That's right.

The Labor government has come up with a scheme that would grant Lauchlan Murdoch – the richest young person at last week's 2020 Summit – twice as much as the ACT's Sid Chakrabarti, one of the poorest.

Wayne Swan's announcement, in February this year, included a table to make the disparity clear. It says that a low to middle income earner putting aside $5,000 each year would get $750 from the government; a high income earner $1,500.

The Treasurer put the design up for discussion on the Treasury website and received more than 100 submissions. But curiously the Treasury hasn't made them public, although it said that it would and although it would be required to if asked under the Freedom of Information Act.

Its website now says it will release the submissions “following the Government’s announcement of its final policy decisions”, which probably means on Budget night when they will be beside the point.

Here's how the consumer organisation Choice delicately phrased its criticism in its submission: “We cannot see a clear policy rationale for the proposal to provide higher contributions to higher income earners.”

It added, either with tongue in cheek or to spell it out in case the Treasury officers were really dumb, “we are unaware of any evidence to suggest that sufficient savings are more difficult to achieve for higher income earners.”

What on earth could have possessed the Treasurer to come up with such an obviously bad policy, and why on earth did the Cabinet endorse it for delivery in the May Budget?

It is fairly clear why the Cabinet endorsed it. It it is a deliverable version of an undeliverable election promise. And the Prime Minister believes in delivering his election promises.

As Mr Rudd said last just week, “we went to the election committed to implementing this. We intend to proceed”.

Asked whether whether he agreed that the scheme gave the most money to the applicants on the highest incomes, the Prime Minister replied, “there would be some people who would argue that, but the reason we've called for submissions is to get the public's input into this.”

What possessed the Treasurer to come up with it? The consultation paper released by the Treasury in February gives the game away.

“First Home Saver Accounts will reflect the arrangements for superannuation,” it says. “The government contributions will vary from 15 per cent to 30 per cent depending on the account holder's marginal income tax rate.”

That is indeed how support for superannuation contributions works.

The government taxes those contributions at 15 per cent instead of the taxpayer's marginal income tax rate. That gives low income earners already paying 15 per cent no benefit, middle income earners paying 30 per cent a 15 per cent benefit, and high income earners paying 45 per cent rung a big 30 per cent benefit.

It isn't fair, and it was Labor that introduced it when it was last in office.

But the unfairness of that superannuation concession was disguised by the way in which it was it presented – as a 15 per cent flat tax.

The tax was flat, but the benefit was skewed to high income earners.

Wayne Swan attempted the same presentational trick when he announced his plan for First Home Saver Accounts just weeks before the November election. He said savers using the accounts would be eligible for a low tax rate of 15 per cent “rather than the ordinary tax rate they would pay”.

But by telling him after the election that his plan wouldn't work in that form and that he could achieve an identical result by paying money directly into the accounts of savers, the Treasury has made plain the ridiculous nature of what he proposed.

It is said by those who still defend the scheme that it won't favour the rich that much in practice, because they don't need to save to buy houses.

The counter argument, undeniably true, is that it won't favour the really poor at all because they can't afford to save to buy houses.

There's a chance that the design of the scheme will be modified before budget night, and newspaper articles like this one will help, along with the torrent of (presumably negative) submissions to the Treasury.

But that the idea got as far as it did says a lot about Labor's attention to detail as it was drawing up its election policies and the paucity of advice available to Treasurers in Opposition.

Its not the only dud policy about to be inflicted on us with the Budget.

The government has promised to lend up to $10,000 at a zero real rate of interest on a first-come first-served basis to a limited number of families who install solar panels on their roofs. The millionaires will get in first. As Kevin Rudd predicted when announcing the policy, it will “increase the value of their homes”.

And parents in receipt of Family Tax Benefits who spend money on books or computers in their home will get a tax refund of up to $750 per child to help with the expense. But not those parents who can't afford computers or books for their children. They'll miss out.

We will learn a lot about Wayne Swan and the Rudd Labor government on Budget night by examining exactly who they are generous to.

It'll be instructive.

HT: Jessica Irvine

See also Tuesday Column, Savings incentives don't boost savings, February 12, 2008

Government admits defeat on mortgage rates

The Prime Minister yesterday conceded he had lost control over mortgage rates as yet another bank lifted its rates independently of the Reserve Bank and in the face of opposition from the Treasurer.

Westpac declared late yesterday that it would lift its rate by 0.10 percentage points to 9.47 per cent, one working day after the National Australia Bank announced that it would lift its rate by 0.10 percentage points to 9.46 per cent.

The Treasurer Wayne Swan said that the NAB's Anzac Day announcement had been “a lousy thing to do.”

Asked about yesterday's follow-on rate rise from Westpac Mr Swan called on its customers to “vote with their feet” if they were unhappy and pointed to the government's bank switching package.

But the consumer group Choice said the package was “cold comfort” and that bank customers were unable to decide which one to move to because they all kept increasing their rates...

The banks have been leapfrogging each other since the start of this month when St George lifted its rate a full 0.10 percentage points above its nearest rivals declaring that it was facing big cost pressures.

Days later the Commonwealth Bank announced an increase of 0.12 per cent and then on Thursday and Friday last week and on Monday this week the ANZ, the National Australia Bank and Westpac each announced increases of 0.10 per cent.

These increases are completely independent of any instigated by the Reserve Bank which decided to leave rates unchanged this month.

They follow an unofficial go-ahead from the Governor of the Reserve Glenn Stevens who said last month that it would be be “unrealistic”not expect to banks to lift their rates independently in the current climate.

“I think that's just life in this environment,” he said.

The Prime Minister Kevin Rudd conceeded yesterday that he was powerless to stop the increases just as he was powerless to prevent petrol prices soaring and grocery prices increasing.

“There’s no silver bullet here,” he said.

“Working families are under financial pressure, not least from recent increases in mortgage payments, but also what’s happened with petrol prices and what’s happening with grocery prices. Our commitment is to do everything we can through the Budget to assist.”

He said preparing the Budget was “as tough as all hell”.

A spokesman for Choice, Christopher Zinn said the banks were beyond control. “Customers can't move between banks, not easily, and what the Treasurer says seems to have no effect.”

“I have no doubt that their costs are increasing as they say, but they are not being open with the public about the reasons for the timing of their increases. Why did one bank announce it on Thursday, another on Anzac Day and another on Monday? It looks as if they are using each other for cover ,” he said.

For more than a decade until the international financial crisis last year none of the big five banks had increased their rates independently of the Reserve.

Westpac's Group Executive for consumer financial services, Peter Clare said that the bank took its decision balancing the needs of its customers with the needs of its shareholders and staff.

“We are mindful that this additional rise will have an impact on some family budgets but we want to reassure the community that we have responsible lending practices in place that offer a number of options to help customers manage,” he said.

The National's standard variable mortgage rate has climbed almost 0.8 per cent since the start of the year.

Good at writing essays? Your Reserve Bank wants you


The Reserve Bank of Australia is pleased to again support an essay competition for university students to be conducted by the UNSW Economics Society.

The essay topic for this year is Housing Costs and Affordability in Australia.

Housing is an important component of household expenditure and household balance sheets. Essays should discuss:

. how housing costs and affordability have changed in Australia over the past two decades, and the factors that have contributed to these changes; and

. whether there is a role for government in improving housing affordability and if so, which policies you would recommend. Take care to explain the efficiency and equity implications of any policies you identify.

The competition is open to citizens and permanent residents of Australia who are currently enrolled in an undergraduate program at an accredited Australian university. Entries must be submitted by 22 August 2008.

For all enquiries about the competition, including detailed information about the rules, submission guidelines and prizes, students should visit the UNSW Economics Society Essay Competition web page:

Sunday, April 27, 2008

Sunday dollars+sense: Money can buy happiness

Guess what? Money does buy happiness. For years I and a number of other economic journalists have been saying that it doesn't - not really; not in a sustained way.

What we thought we knew was that as people got richer their happiness improved, but then fell back to about where it was before.

Japan was shockingly poor after the war and is now rich. But the surveys found its people little happier than they were before.

Increased wealth helps when countries are extremely poor, but after the basic needs have been met, it does little - so went the conventional wisdom...

It was actually a paradox, named the “Easterlin paradox” after a US economist Richard Easterlin who asserted in 1974 that more money OUGHT to make people happier, but didn't.

It ought to make people happier because it can buy many of the things that make people happy.

As the US economist Economist Robert Frank put it: “Would we really not be any happier if, say, the environment were a little cleaner, or if we could take a little more time off, or even just eliminate a few of the hassles of everyday life?”

His answer was that money could indeed make us happy, but that we chose to spend it on things that didn't, such as bigger houses and bigger cars. They made us feel good when we got them – because we were keeping up with the Joneses or getting ahead of the pack – but when everyone else got them we felt no better off than before.

Now for the shock. Easterlin's evidence was wrong. He can't be blamed for it. Happiness surveys were young at the time. After several decades of better surveys and better statistical techniques an Australian economist living in the US Justin Wolfers and a colleague this month published a persuasive demolition of the “paradox” and demonstrated that for every country - even Japan – more money did buy more happiness.

The problem with Japan was that question used in the surveys had changed over time, something they only discovered digging though old files.

In the United States, 90 percent of people in households earning more than US$250,000 say they are “very happy”. Only 42 percent of people in households earning less than $30,000 say so.

A few years back the London Financial Times published a headline about money and happiness saying that “The Hippies were Right”.

It looks as if they were wrong, after all.


Richard A Easterlin (1974) "
Does Economic Growth Improve the Human Lot?" in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc.

Richard A Easterlin,
Diminishing Marginal Utility of Income? Caveat Emptor,” Social Indicators Research, 2005, 70, 243-255

Robert H Frank (2004). "
How Not to Buy Happiness" Daedalus 133(2): 69-79

Robert H. Frank, Does Absolute Income Matter? Paper prepared for “The Paradoxes of Happiness in Economics” conference, Milan, Italy March 21, 2003

Robert H Frank, Has rising inequality hurt the middle class? Options Politiques, Mars 2001

Luigino Bruni, Pier Luigi Porta, Economics and Happiness: Framing the Analysis, Oxford University Press, 2005

Robert H Frank, Falling Behind: How Rising Inequality Harms the Middle Class, University Of California Press 2007

Peter Martin,
Money can Buy Happiness. Here's How. Sydney Morning Herald, September 1,2004

Andrew Oswald, "
The Hippies Were Right all Along about Happiness", Financial Times, January 19, 2006.

Andrew Leigh and Justin Wolfers, "
Happiness and the Human Development Index: Australia Is Not a Paradox", The Australian Economic Review, vol. 39, no. 2, pp. 176–84

Betsey Stevenson Justin Wolfers, Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox, NBER
April 15, 2008

David Leonhardt,
Maybe Money Does Buy Happiness After All, New York Times, April 16, 2008

Justing Wolfers,
The economics of happiness, various posts, Freakonomics Blog, April 2008


Saturday, April 26, 2008

2020: A (satirical) delegate's view

Meet Annette, a delegate from Monash Young Labor.

Parts 1, 2 and 3 of her adventures were here.

Now for Part four:

And part five:

And part six:

It looks as if there will be a part 7!

Wednesday, April 23, 2008

Advice from Australia's Treasurer: Shop at Aldi


They'll be making an ad out of today's CPI press conference:

TREASURER: What we’re trying to do is to get Aldi to set up more quickly and they haven’t been able to get the land because their major competitors gobble it all up. This is a measure about making sure another competitor gets into the grocery market in more locations, more quickly to deliver better prices. I’ll tell you what, how many people here shop at Aldi?

JOURNALISTS: (inaudible)

TREASURER: I can tell you this, out there in my electorate, a lot more do. You want to know why? Because they get a better price.

The Treasurer is right. When people ask me for (unlicenced) financial advice, shopping at Aldi is the first tip I give them.

(The second is to bring their own lunch to work, and the third is to switch their home loan to an organisation I am no longer able to recommend.)

Not only are Aldi's prices fantastic, but Aldi is a great company in other ways. The treat their employees well, paying above the industry standard, letting them sit down at work and offering paid maternity leave. And I have heard they treat their Australian suppliers well.

Nestle doesn't like them, which I take as another encouraging sign.

See also ALDI, Public Submission to ACCC Grocery Inquiry, March 11 2008

That $20 million cut to the ABS

It is real enough, but it isn't a razor gang cut as initially reported.

The government's razor gang may or may not announce cuts of that order in the Budget on May 13, but the ABS is getting in early.

The Bureau has told a Canberra journalist that the $20 million cut is an "independent savings drive", and that the efficiency dividend would only see it lose about $6 million, but they're going beyond to find bigger savings because their surveys have become more expensive to run.

Nevertheless, the cuts are pretty awful:
"In a measure expected to save $1.5 million, the sample size of one of the bureau's most keenly watched surveys, its monthly jobs survey, will be reduced by almost a quarter from about 30,000 households to 23,000 households.

This is expected to increase the uncertainty surrounding its estimates for employment and unemployment by 15 per cent."

There is good discussion of it at Andrew Leigh's blog, here.

What really annoys me is the way it was (barely) announced.

I make good use of the Job Vacancies Survey.

I should have paid more attention to this "note" at the bottom.


The Survey of Job Vacancies will not be conducted during 2008-09. The May 2008 issue of this publication, which is scheduled to be released on 26 June 2008, will be the final issue for 2007-08. The survey may be reinstated in 2009-10."
What sort of consultation did they do? ??

Tuesday, April 22, 2008

Where does you mortgage come from?

The story so far:

Once it probably came from the other depositors in your bank.

Then our demand for mortgages outgrew depositors funds (which in any event had shrunk) and many of our mortgages became funded from overseas, including some of those sold by banks and all of those sold by organisations such as Aussie, RAMS, Members Equity etc.

The foreigners - in Europe, China, wherever - bought bundled-up groups of "securitised" mortgages and agreed to come up with the money for a set period of time in return for the mortgage payments.

Then the foreigners got scared and stopped funding new Australian mortgages altogether and often stopped renewing their funding on existing ones.

The supply of foreign funding dried up.


- Joshua Gans and Chris Joye have one - which they got mentioned with approval at the 2020 Summit;

- Members Equity, run by union super funds, is getting funding directly from the super funds, which is a good deal for all concerned; and now

- The Reserve Bank is itself as good as buying mortgages by lending money against them in the place of foreigners, which is also a good deal all round, as Alan Kohler points out in Business Spectator and Crikey and below the fold:

"Apparently there’s now a free lunch.

The Reserve Bank’s cost of funds is 25 basis points under the cash rate, or 7 per cent, and in the past two days it has lent $1.1 billion to the banks at between 7.45 and 7.99 per cent on the security of residential mortgage backed securities (RMBS) discounted by a 10 per cent haircut.

The banks, in turn, get to lend that money at up to 200 points over the swap rate, or 9.5 per cent.

The RBA makes a profit on the deal and gets very good security at a discount; the banks make a profit because having increased their lending rates by more than the official cash rate, their spreads have widened enough for it to be worth going to the government pawnbroker for cash. As a result the RBA now holds $2.1 billion worth of RMBS on which it has lent $1.9 billion.

The RBA’s sudden increase in RMBS repurchasing is not happening, you understand, because the Australian banks are in trouble and can’t finance their loan books - it’s just a good deal for all and helps provide a bit of extra liquidity.

Except that this is so unusual, and is so at odds with the RBA’s stance of tightening monetary policy to combat inflation, that it either reflects a "locked up" residential mortgage market, as the treasurer of one investment bank suggested, or part of a coordinated global action by all central banks to flood the system with liquidity to restart the banking engine.

Indeed last night the Bank of England announced a similar, but much larger, special liquidity scheme, in which it will swap any amount of RMBS for government bonds.

Governor Mervyn King said "discussions with the banks" indicated that initial use of the scheme would be £50 billion ($A105 billion), but the Chancellor of the Exchequer,
Alistair Darling, later came out and said it could be more than that, and The Times suggested it could go as high as £100 billion.

Financial Times columnist Willem Buiter won the "prediction auction" with a bid of £250 billion, which he says the Bank of England will have to inject before victory can plausibly be declared.

The UK banks are in far greater non-trouble than Australian banks; in fact the UK mortgage market is in the process of collapse.

House prices are falling steeply and the wholesale, interbank funding market is paralysed.

In the US the Federal Reserve Board is still shovelling liquidity out to the banks under various swap and repo schemes that are also, like the new UK scheme, unlimited.

Basically central banks are underpinning the western world’s banking system at present and ensuring that loans are continuing to be advanced and a recession-inducing credit crunch does not result from the banks’ sudden, shocking, discovery of counter-party risk.

In normal circumstances, pawning RMBS like this would be both inflationary and morally hazardous (bailing banks out of their mistakes) but these are not normal times.

It is both a relief and scary that the central banks are doing it, and that even the Reserve Bank of Australia is repurchasing RMBS for 12 months. It confirms that the system is broken - and will be for 18 months according to CBA chief Ralph Norris - but it also confirms that the central banks are prepared to do whatever it takes to deal with the problem.

In Australia the RBA’s repurchasing over the past few days also surely marks a clear turning point of monetary policy.

This has been assumed from its speeches and minutes in the past week or two, with forecasters now generally slipping an early 2009 rate cut into their models - why would the RBA start giving cash to the banks for as little as 20 basis points above cash for 12 months if the cash rate wasn’t coming down?"


Monday, April 21, 2008

The cardboard box Summit.

That's what the lunches were presented in.

Much expense was spared.

Joshua Gans is back in Melbourne and offers his initial thoughts.

An extract:

"In the end, for me I will get just what I expected, a bunch of new connections and hopefully friends who share a common interest in wanting to make things better. I think the Government will get some more ideas, but importantly, will be held to account by those who spent considerable energy in trying to make things better. In the relative disorganisation of the Summit agenda and process, they have formed a coalition of the “best, brightest and now restless” who will not want to let things just be."

Below, Shane Wright of the West Australian offers a thoughtful critique:

Nine years ago, 55 per cent of the population voted against the idea of an Australian republic.

At the weekend, of 100 handpicked attendees to Kevin Rudd’s 2020 summit, just one voted against the proposition.

If that doesn’t highlight the difference between the 1000 or so “summiteers” and the rest of the population — and their views on the subject — then nothing does.

The concept of bringing together the nation’s “best and brightest” was the Prime Minister continuing the election campaign he started when made ALP leader back in December 2006 and which has yet to let up.

Everyone has been brought into the ALP tent, Mr Rudd has presented himself as an “ideas man” and now there’s plenty of concepts off and running. But just what are these ideas?

Many are reheated thoughts that were put into the freezer during the Howard years and have been slapped back into the oven because of the change in political temperature. Some would sit aside motherhood and apple pie. Nationwide harmonisation of regulations and standards is a nobrainer. Did we need a summit of 1000 to restate the obvious? Other concepts seemed more driven by ideology than key outcomes.

The future security panel’s brief should have been pretty clear, but instead one of the final suggestions printed for public consumption was to “ensure Australia’s commitment to gender equality is reflected in domestic and foreign policy”.

Then there were the concepts that seem almost impossible to police, such as a proposed ban on unhealthy food ingredients. Where does a food bar that perfectly suits the need of a marathon runner but which is just a love handle builder for kids sit?

There were some good ideas to come out of the weekend. The creation of a “community corps” whose members could pay off their HECS or HELP debts by working in rural and remote Australia would go some way to delivering some badly needed skilled employees to the regions.

A review of the entire business and personal tax system, with a focus on finding taxes to ditch or change, is way overdue.

But last time I checked, this sort of thing is actually core government business. In purely economic terms, the question has to be asked — do the costs of bringing together 1000 people for a weekend, the time spent by Mr Rudd and his front bench and the hundreds of departmental “volunteers” outweigh the benefits of some of the ideas that have been shaken out?

There’s nothing as stirring as John F. Kennedy’s plan to send a man to the Moon, except perhaps Mr Rudd’s own thought to develop a bionic eye. But the bionic eye sits well down on a list that includes harmonising State and Federal health infrastructure funding. Those concepts not ideologically driven are mostly bureaucratic incrementalism.

Mr Rudd has set himself to respond to all the proposals by year’s end. If he is to show the summit was about ideas and not just electoral appearances, he must be ruthless, focus on the few good concepts and get them running quickly.

Sunday, April 20, 2008

2020: The washup

Commenter Willowtree is unkind enough to observe:

"Australia will maximise its wealth, excellence and equity by driving up productivity growth to the leading edge of developed countries, by:

•Equipping all Australians through an education and training system that leads the world in excellence and inclusion

•Deploying Australia’s human capital efficiently and fairly including by overcoming the barriers that lock individuals and communities out of real opportunities

•Connecting through new collaborations across our education, business and innovation systems."

And here I was thinking it was just going to be a bunch of motherhood statements."

Ouch! That was pretty much what the processes adopted were bound to achieve: to weed out ideas that didn't already have wide support.

Except for the Health stream, which used a different process. It actually came up with some great suggestions.

Nonetheless the networking, and the informal nature in which it took place really was really useful.

The Summit wasn't a waste of time.

Below, I write about what the Economy stream came up with:

Kevin Rudd has been challenged to set up a national inquiry into Australia’s tax system - the first in more than 30 years.

Put forward by a group of delegates to the economics stream of the 2020 Summit including Lachlan Murdoch, Bernie Fraser and Fred Hilmer, the inquiry would examine both business and personal taxation at the state, local and federal levels.

It would be the first such comprehensive inquiry since the one set up by Prime Minister William McMahon and his Treasurer Billy Sneddon in 1972 and conducted by a retired NSW Supreme Court judge Justice Kenneth Asprey.

More recent inquiries, such as the one that paved the way for Australia’s Goods and Services Tax were limited to considering only a part of the tax system – in that case personal taxes at the Commonwealth level.

The inquiry would be asked to come up with a new tax system that was fair, simple, efficient, non-discriminatory and interacted constructively with the welfare system.

It was to have also been asked to ensure that its recommendations were “fiscally responsible”, but the group dropped that suggestion at the prompting of the business figure Lachlan Murdoch who said it would be too restrictive.

The inquiry would have only two years in which to report and would be asked to present interim reports before then.

Specific suggestions to be put before the inquiry would include cutting the reliance on income tax, eliminating transaction taxes such as payroll and stamp duties, and ensuring that the tax system is genuinely as opposed to merely theoretically progressive.

The inquiry would also be asked to hunt out and remove perverse incentives such as the one that encourages Australians using company provided cars to “drive to Cairns and back” in order to cut their rate of Fringe Benefits Tax.

The economy steam also called for a recasting of federation in which a new body - modeled on the Productivity Commission – would recast the roles of the state, local and federal governments in order to create a “seamless truly-national economy.”

The former NSW Premier Bob Carr, a delegate at the Summit, made it clear that he would only support such a recasting if the body in charge or it was not “as dopey as the Grants Commission”.

Bob Katter, the independent member for Kennedy in outback Queensland argued for the creation of two new Australian states, North Queensland and North West Australia in which to house a booming population and new primary producers.

“If you took out the capitals and coastal towns in the golden boomerang around the south and south east of the country you would still have 90 per cent of Australia left and hardly any people in it,” he said.

“It is immoral that we are not using that land and putting people in it. About 80 million of our neighbours go to bed hungry and yet we sink their boats when they try to come here. We need the put people into northern Australia.”

A group of delegates to the economics stream including the tucking magnate Lindsay Fox pushed for what they called a “ramrod” approach developing infrastructure, charging a single national entity with the job of “making it happen”.

“It takes nine months to have a baby, but to get approval from government can take four years,” he said.

A group organised by a former Treasury head Ted Evans suggested that the Prime Minister be required to set out long-term priorities with each annual each budget, something that he said would be needed as Australia moved to a more presidential system of government.


2020: It's out.

Initial Summit Report.

Pretty quick, hey.

Sunday dollars+sense: Too much testosterone

Wondering what there’s too much of in your share portfolio? It could be testosterone.

When the share market was climbing, testosterone was thought of as a good thing. A Cambridge University study just published has found that during the upswing the more testosterone in a (male) share trader’s saliva in the morning, the more money he had made by the end of the day.

The author, John Coates - himself a former trader - believes that as the share market climbed last year increasing amounts of testosterone were pumped into the traders’ bloodstreams, making them increasingly confident and increasingly likely to take risks - pushing up the market even further.

Until it collapsed...

Coates says that then an associated steroid named cortisol took hold. It made traders jumpy, messed with their memories and see danger where it wasn’t. It exaggerated the downturn.

“In the present crisis, traders exposed for months now to the noxious effects of cortisol may end up in a psychological state known as learnt helplessness,” Coates writes.

They would have functioned better if they had been women.

Terry Odean and Brad Barber at the University of California have been studying the difference between men’s and women’s trading behaviour for 15 years.

They find that men are far more likely than women to impulsively trade rather than simply hold, especially single men. Unmarried men (presumably with raging hormones) are about two thirds more twitchy - two thirds more likely to buy and sell than unmarried women.

It’s a bad strategy. When Odean and Barber examined the accounts of 66,400 traders over a period of six years they found that the women, who traded the least, made 1.4 per cent more than did the men.

More strikingly, the single women made 2.3 per cent more than did the single men.

If you are surprised about that, Odean and Barber can understand.

They say men are more sure of their ability: it’s why they make stupid decisions. Women are less sure - that’s why they are less likely to do things that are rash.

So, if your investment advisor is a male, should you change him?

Perhaps. But don’t take it too far.

In New York a former trader named Andrew Tong is suing his employer SAC Capital for allegedly directing him to take female hormones as a way of making his trading “less aggressive”.

It’s not clear why they would have bothered. They could have just hired a woman.

John M. Coates and J. Herbert, Endogenous steroids and financial risk taking on a London trading floor, PNAS, Apr. 22, 2008.

Brad Barber,Terrance Odean,
Boys will be Boys: Gender, Overconfidence, and Common Stock Investment, Quarterly Journal of Economics, February 2001, Vol. 116, No. 1, 261-292.

Zubin Jelveh


Saturday, April 19, 2008

2020: Speed Dating for economists

“Speed dating” and red stickers were among the tools used by economists to hammer out agreement during the first day of the 2020 Summit.

The 100-odd participants in the economics group were asked to first form a pair with someone they hadn’t met before and then come up with an idea they were both passionate about. After that the pair had to meet another pair and do the same thing, and then meet another group and form a group of eight.

One member of that group had to write a quick description of the surviving idea on a folded A4 sheet of paper, hold it aloft and then try to attract other people holding pieces of paper on which were written similar ideas.

“The sounds more chaotic than it is, but trust me it usually works,” the moderator assured them.

“What we are going to see is an organic grouping of people, and we will probably also see one or two of you lonely holding an idea above your head all by yourself as well.”

“That’s okay, we will come and talk to you. It will self-organise.”

“You have to get a market for the idea,” the moderator assured those who were unsure. “Stand up and search for people with common interests. Don’t make your interest too narrow or you won’t find any friends.”

Dignitaries including the former head of Westpac David Morgan, the head of the Industry Department Peter Boxall, Lindsay Fox, Lachlan Murdoch and Bernie Fraser played along.

The ideas were sorted into four, plus an extra group entitled “other” and then the participants divided into four. Using butchers’ paper and red dot stickers they refined their ideas and assessed their popularity arguing for what seemed a very long time over the wording.

The four groups will get together and share the ideas tomorrow.

2020 viewing

Parts 2 and 3 are excellent as well.

Saturday Forum: Our nation's capital is also the nation's poker machine capital

Welcome to Canberra, delegates.

We in the Australian Capital Territory have long prided ourselves on our support of progressive causes.

The only state of territory to vote for a republic at the referendum (and overwhelmingly so), more than 60 per cent of us regularly vote Labor after preferences are distributed.

We introduced Australia’s first Human Rights Act, we were the first to recognise same-sex unions (until the Commonwealth overruled us) and our Chief Minister Jon Stanhope is only one to have stood up to the former Prime Minister John Howard over his Anti-Terrorism Bill.

Our households are keen on green power, recycled water and banning plastic bags.

But suddenly, on the issues that matter to the new Prime Minister, we are getting left behind.

The new wave of causes being pushed by Kevin Rudd seem less than attractive to the man who is by now Australia’s longest-serving state or territory leader...

Jon Stanhope is vocal in his support of the ACT’s poker machine operators.

He has told our Legislative Assembly that when most people play the poker machines “there is no harm done to anyone”. “Imagine Canberra without our clubs,” he has said.

He won’t cut the number of machines and he won’t ban automatic tellers from the venues that house them.

Kevin Rudd wants to do both. He is having success with other states.

Queensland’s Premier this week cut the cap on poker machines and stopped them operating before 10.00am. Victoria said it would remove ATMs from pokies venues in 2012 when it ends the billion-dollar pokies duopoly enjoyed by Tattersall’s and Tabcorp.

But our leader offered nothing.

And he hasn’t been to the forefront on electoral reform.

Kevin Rudd has proposed capping the size of political donations. The NSW Premier Morris Iemma this week said he wanted to ban them altogether.

The ACT was in the uncomfortable position of being upstaged by NSW – the state whose electoral sleaze was laid bare on Four Corners this week in a program entitled “Dirty Sexy Money”.

In the ACT the money to run the local Labor Party’s election campaigns comes predominantly from the operators of poker machines. In no other state is the ruling party so funded.

Tim Costello, who will be chairing a forum that will discuss gambling at this weekend’s 2020 Summit says our Chief Minister is “brought to you by the gaming industry, he's an extension of the gaming industry”.

The latest Electoral Commission returns show why.

According to their figures, in the last financial year $238,552 of the ACT Labor Party’s $587,123 of income came from just one donor – the Canberra Labor Club, a money-making machine that operates more than 400 poker machines at its venues in Civic, Belconnen, Charnwood and Weston Creek.

The Canberra Labor Club is the seventh-biggest political donor in the entire nation, and by far the biggest in the ACT.

The Electoral CommissionA says the ACT ALP’s next biggest donor is the Woden Tradesmen's Club, which happens also to be an operator of poker machines.

ClubsACT says there is nothing surprising about these donations to the ALP. Its President David Lalor wrote in The Canberra Times last year that the Labor Club was “set up to support the ALP”, just as the Hellenic Club supports the Greek community, the Ainslie Football Club supports the AFL, and the Vikings Group the rugby union.

But the electoral commission records suggest that the Canberra Labor Club hasn’t supported the ALP by fund raising in the traditional sense. Neither in the last financial year when the threshold for reporting donations to organisations such as the Labor Club was $10,300 nor in the previous two years when the threshold was $1,500 did it report receiving any donations to advance the Labor cause.

Instead it has operated as a business, operating poker machines.

The purveyors of businesses such as the Canberra Labor Club are treated more gently here than they are anywhere else in Australia.

This graph, sourced from the industry-funded Australasian Gaming Council tells the story. The ACT has more poker machines per head than does any other state in the nation, even the supposed poker machine capital of NSW.

At 20.7 machines per 1,000 adults, we have more than NSW at 19.5 and almost half as much again as does Australia as a whole at 13.

On average each ACT resident pumps $746 into the machines each year, the second-highest spending rate in the nation, behind NSW.

And yet oddly, the ACT has taxed the purveyors of poker machines much less than has the typical Australian state.

Taxation figures released this week show that the ACT Treasury made $31 million from gambling machine tax last financial year – around $90 per resident.

But Australia-wide the total was $140 per resident. In NSW it was $160 per resident.

Our government has been prepared to both tolerate more poker machines per head than any other state and to raise much less revenue from them (although it did announce a tax increase in its last budget).

And it has been also extraordinarily protective of the special position of clubs such as the Canberra Labor Club when it comes to deciding where the poker machines should be housed.

Every other state of territory has allowed poker machines in its casino. Not the ACT.

Every other state or territory that does allow poker machines in clubs, also allows a fair few in its hotels. Not the ACT.

Whereas in Victoria the poker machines are evenly split between the clubs and hotels, and in NSW the clubs have three times as many as do the hotels, in the ACT the clubs have 5,000 poker machines to the hotels 100-odd, according to the Gaming Council.

The ACT Labor Party - predominantly funded by the purveyors of poker machines - allows more of them to operate more than would be allowed anywhere else, taxes them more lightly, and appears to protect the operators from competition.

The Chief Minister maintains that for most of us of us his support for poker machines is harmless. He has told The Canberra Times that he sees them as “an outlet” and has asked: “Who am I to deny people their pleasure?”

There is much that is good about the clubs that operate poker machines. They keep ACT residents from going across the border to Queanbeyan to play the pokies as used to happen before the pokes were allowed in almost 30 years ago.

Around 500,000 of us are members of the clubs, although many of us have joined for the food rather than pokies and would probably be happier if their spinning wheels fell silent.

The ACT’s clubs are required to spend 7 per cent of their poker machine revenue on sporting and other community activities, even if they are required to pay less tax than they would have to elsewhere.

And we should be able to cope with a high concentration of machines better than the residents of other states. We earn more.

For that reason the amount we spent on pokies is low as a proportion of income compared to other states, although it is creeping up.

No more of our gamblers are “problem gamblers” than is typical in the rest of Australia, according to the Productivity Commission.

But nevertheless, perhaps because of our high incomes, we’ve proven ourselves to be particularly bad at handling the money we gamble with.

The Gaming Council says the ACT has the highest gambling and speculation related bankruptcy rate in the country.

While our population is a mere 1.6 per cent of Australia’s total, we account for 4.8 per cent of Australia’s gambling-related business bankruptcies and 5.8 per cent of gambling related personal bankruptcies.

Our government could act to reduce this toll, as Kevin Rudd wants. It could eliminate the use of $10 and $5 notes in the machines and limit them to coins. It could ban ATMs, which in many Act clubs are sited just metres away from the machines.

It could wind back the number of licences, and push up the tax rate to the Australian standard.

Refusing to accept political donations from the gambling industry might be a big ask, given that it provides half the ACT Labor Party’s income, but outlawing political donations of any kind, as NSW says it wants to, might not be.

An end to political donations (or at least a limit on their size – perhaps to $2,000 per donor) would ensure that the Labor Party’s local business-funded opponents were never able to outspend it, and should be electorally popular.

Jon Stanhope hasn’t left it too late to show leadership on both issues, but the doors are closing.

In seven weeks time South Australia’s extraordinarily popular “No Pokies” politician Nick Xenophon will join the Senate. He will be keen to forge alliances to wind back the pokies industry nationwide. The Prime Minister has already indicated that he is on side, and the 2006 WorkChoices High Court case established that the Commonwealth had the power to override the states when it comes to regulating corporations.

Should there be any lingering doubt about the Commonwealth’s power in this area, it could start by imposing tougher controls on poker machines in the ACT, where it has undisputed ultimate authority.

The ACT Chief Minister could avert this possibility by showing that he is as serious about winding back the influence of poker machines as are the Premiers of Queensland and Victoria.

And in the ACT’s May Budget he could push the tax take from poker machines up to the Australian standard.

Without action, the ACT and the ACT Labor Party are at risk of being punished financially.

With less tax taken from poker machines than the Australian standard, the ACT is setting itself up for less compensation than other states when the Commonwealth or the Commonwealth and the states in combination take action.

And with more than $200,000 of the ACT Labor Party’s funds sourced from one donor in the poker machine industry it is setting itself up for a collapse in revenue should donations be limited.

It is a good time to wean both the ACT and ACT Labor off their poker machine addictions.

Related Posts

Labor - whose party is it?

Ban large political donations. Starting here, starting now.

The city the poker machines ate.


Friday, April 18, 2008

Rudd's dud plan for first home saver accounts

Jessica Irvine, in this morning's SMH:

"THE centrepiece of the Rudd Government's plan to increase national savings and make housing more affordable - its first-home saver account - is unfair, too complex and may not be available on time, according to a flood of submissions to a Treasury inquiry into the plan.

They say it is highly regressive, gives rich savers double the benefit of poor savers, makes no provision for a direct withdrawal of funds if someone's circumstances chang, its eligibility age of 18 is too high, and it may be too complex and costly for superannuation funds to set up by the proposed start date of July 1.

The Government has refused requests by the Herald to see the submissions, understood to number about 120, even though the deadline passed six weeks ago. The Treasury website said they would be treated as public documents unless otherwise requested.

But a number of submissions obtained by the Herald reveal a long list of criticisms from consumer groups, super funds and other financial bodies"...

Read the full thing:

Thursday, April 17, 2008

If Peter Costello was our economic brain, for 10 years Phil Gaetjens was his uber-brain

And then, last June, while walking from Canberra's Hyatt Hotel to Parliament House, he was hit by a car.

Danielle Cronin, the Canberra Times Health Reporter, takes up the story:

Former Treasurer Peter Costello’s top aide Phil Gaetjens, 53, is described as a “brilliant brain’’ with an “incredible mastery of details’’.

But Gaetjens draws a blank when he tries to remember the accident that almost claimed his life and the 10-day aftermath in Canberra Hospital’s intensive care unit.

He was hit by a car and critically injured when he crossed State Circle about 7pm on Friday June 29 last year. The accident captured national attention given his senior, strategic role in the second most powerful political office in this country.

“I recognise that [ICU staff] saved my life. It’s a bizarre circumstance because there you are in a life-threatening situation and you have absolutely no awareness of it because you’re unconscious,’’ Gaetjens tells The Canberra Times in his first extensive interview since the accident...

The father-of-one hopes this will encourage others to support the Intensive Care Appeal, which aims to raise funds for research in the field of medicine where a spilt-second decision can have profound consequences.

Gaetjens was hit by a car when he and friend Nigel Bailey – who was a senior economic adviser to Prime Minister John Howard at the time – were returning to Parliament House after they had a few drinks at the Hyatt Hotel.

The accident rocked sections of the Canberra community who were outraged when the driver, Nealle Andrew Simpson, was fined $2000 after he pleaded guilty to failing to stop to render assistance at the scene of an accident.

Gaetjens hasn’t heard from the driver and declines to drawn into the debate over whether Simpson got off too lightly.

“I have no memory at all of the accident. I don’t think, therefore, I am in a position to comment,’’ says Gaetjens who can’t recall what happened from noon on the day of the accident until he regained consciousness from a medically-induced coma about 10 days later.

Costello’s former media advisor David Gazard vividly remembers.

“I would have always described Phil as a mate,’’ Gazard says. “But when I got the phone call on that Friday night to say he’d been hit by a car [and] was in a coma, you suddenly realised how actually he was more like … family than anything else and how actually close I was to him.’’

Gaetjens is a lean man with shortly-cropped hair and a face relatively unmarked by the striations of time.

A small scar and dent on the right side of his skull are the only visible signs of the trauma. He suffered a fractured skull, multiple broken ribs on his left side and two fractures in the right shoulder. Gaetjens experienced problems with his pancreas.

“I had to have my stomach opened up while I was in intensive care to have some fluid removed,’’ he says.

Gaetjens spent about 10 days in the ICU. He says this period was hardest for his wife Catherine Piper and their son Jack who turns nine soon.

“Jack was a bit spooked by the whole thing but Cath, I think, felt comforted that as much was being done as possible and I think also realised that they were telling her as much as they could without … ever lifting expectations,’’ he says.

Costello was also impressed with the care provided to his long-time aide.

“The intensive care unit did an outstanding job in treating Phil … in 2007. I visited him on a number of occasions and saw the wonderful work they were doing. I personally thank the staff for their wonderful efforts,’’ Costello says.

Gazard describes visiting his “mate’’ when he was hooked up to machines and unconscious in the ICU.

“I was a weird place to go because there were all these people in comas in these beds but I was very impressed with the staff there. There was someone with him 24 hours a day,’’ Gazard says.

Gaetjens went back the ICU on Christmas Eve – this time as a visitor rather than critically-ill patient.

“I had said to Cath that I wanted to go to see where I was. The place was just nothing to me because I can’t remember a damn thing about it,’’ he says.

“I think they are very much unsung heroes in terms of what they can do for people. Just to be there especially on Christmas Eve, it was nice to be able to go back and show them that some people recover.’’

A few days ago, Gaetjens returned to the ICU and met up with some of the staff who looked after him.

Night ward clerk Kristin McClymont recalled “I got calls from some very important people wanting to know your condition’’. Registered nurses Felicity Cummins, Jo Lindbeck and Carly Silberberg were among those who monitored his vital signs around the clock. Senior registrar Dr Jill Van Acker treated Gaetjens when he came in on the first night which was “very busy’’ by all accounts. Dr Anne Leditschke was one of the intensive care specialists who oversaw the treatment of his extensive injuries.

“He’s made an excellent recovery. It’s very exciting to see someone sort of basically back to a normal level of functioning because, I mean, some of our patients aren’t so lucky,’’ Leditschke says.

“The other thing that we really get a big boost out of is when people come back and see us when they’re looking well because usually when they leave us here they don’t look like that.’’

After his stint in ICU, Gaetjens was transferred to the wards.

“Basically, you are on a bed lying on your back and I am a very light sleeper at the best of times so I found it very hard to sleep because I couldn’t roll over on to my left side because of my ribs and couldn’t roll over on to my right side because of my shoulder,’’ he says.

“I didn’t eat very much. And it really wasn’t … quite learning to walk again but you really did have to learn to be stable on your feet.’’

About a month after the accident, Gaetjens was discharged from hospital and moved into the Rehabilitation and Independent Living Unit for about two weeks.

He worked out in the gymnasium to regain movement in his shoulder. He went through a battery of tests to make sure his vocal chords were undamaged by the tube stuck down the throat so he could breath and to check if the head injury had affected his mental capabilities such as memory and ability to recall and understand words.

“Did they ask you what’s the meaning of fiscal conservative?’’ I ask. He responds with a hearty laugh: “no’’.

“Other people don’t seem to think there’s too much difference. Some people wanted me to change but I didn’t,’’ says the 53-year-old who has healthy sense of humour, which is self-depreciating in most cases.

His shoulder had taken some time to heal but he has suffered no other lasting physical problems from the accident.

But Gaetjens has gained a “lot more compassion’’ since the accident, saying he was struck by the level of support from loved ones, friends, colleagues and complete strangers. At least 100 emails and tributes were received as well as telephone calls and flowers.

“I remember the first Saturday I was home actually, I spent the whole Saturday afternoon just reading what was provided and it was very humbling,’’ he says.

“It was much, much appreciated. I hope I don’t have to burden anyone again.’’

He returned to Costello’s office in early September, working about three hour stretches on three days a week. Howard called the election a few weeks later.

“I always kept within my own tolerance even on the election campaign when I went back,’’ Gaetjens says.

“I was making sure that I never had to leave at a time because I was feeling tired. I was always left before that ever became a concern because again some of the people who had written to me said ‘don’t go back and do much too quickly because it will be to your long-term detriment’.’’

Gazard says he has made a “spectacular recovery’’.

“The relief that I felt … that he was going to be okay. You could see he was getting better and better,’’ Gazard says.

“Then in the subsequent days and weeks he recovered to the point where he was able to help out in a very substantial way with the campaign and you could just tell that we was really sharp again. It was great.’’

Howard lost his seat. The Coalition was swept from office. Costello now sits on the backbench, saying “I will be looking to build a career post-politics in the commercial world’’.

Gaetjens is tight-lipped on what the future will hold for his former boss. “I’m not going to get into that. Whatever his future is, I wish him all the very best because I certainly thought he was a great boss,’’ he says.

The senior political adviser was a public servant for 20 years before he joined Costello’s office in March 1997. In his role, Gaetjens played a part in hammering out 11 budgets, introducing the GST and fighting four federal elections.

He returned to the Treasury in January, taking on the role as chief adviser in the competition and consumer policy division. Its focus is on structural reform in infrastructure areas.

He misses the “relationships’’ within politics after moving from an office with 20 people to a department with hundreds of employees.

“It’s just different. It’s not critical of this organisation or anything like that. It’s just different – it’s a different atmosphere and it’s a different environment,’’ he says.

The husband and father is keen to craft a “long and happy future’’, saying there are “few more years of work left in me’’.

He hopes sharing his story will drum up support for the Intensive Care Appeal, which runs from April 14 to 27.

“What they do in one second or five seconds or 10 seconds can save a life,’’ Gaetjens says.

Leditschke, who has been a doctor since 1987, says the appeal raises money for crucial research.

“It’s really important because a lot of things we do we’re just starting to build up evidence for,’’ she says.

“A lot of things people have done historically because they seem like a good idea and there are new treatments emerging all the time. We’re meant to do research to make sure that they actually are effective and make a difference to people’s outcomes.

“There are a lot of little things that potentially might make a difference but we don’t now whether they do or not because we haven’t enough funds to ask the question.’’

A range of research projects are already underway at Canberra Hospital’s intensive care unit, including studies on blood sugar levels among patients and delivering dialysis to the critically ill.

“All of the staff in here are here because they care about trying to get people better, back to a good level of function. All of the guys work really hard and it’s a big team effort,’’ Leditschke says.

Putting up a basketball backboard for his son and heading to a Raiders game with his friends were among first things that Gaetjens did after he was discharged from hospital, according to Gazard.

“We all went out to a football game,’’ he says.

“He sort of sat there still with bald patches on his head. It was really, really good to get out and just be in a normal environment with him again and just that relief of kind of thinking ‘gee, it’s just good to see him again’.’’
He was ecstatic when his mate returned to work.

“The thing … you’ve got to understand is Phil is a brilliant brain. He is just a brilliant policy guy, has an incredible mastery of detail and the thought that could just be wiped out with a road accident was horrendous to contemplate,’’ Gazard says.

“We’re all really, really thrilled with his progress. I think he’s back to his dazzling best.’’

People who want more information about the appeal can visit or telephone 1300 650 254.

Wednesday, April 16, 2008

Australia's premier university - down $100 million

“We are hoping prices move back up.”

The Australian National University has lost $100 million from its investment portfolio as a result of the worldwide share market crash.

The ANU’s Vice Chancellor Professor Ian Chubb confirmed the figure to the Canberra Times yesterday after hinting at it during a vote of thanks to the Reserve Bank Governor Glenn Stevens at a guest lecture on Tuesday.

In thanking the Governor, Professor Chub - a neuroscientist by training – said he was merely “an amateur and an observer” when it came to finance.

He said he was “advised by his Chief Finance Officer on a regular basis these days with the following expression: don’t panic”...

The Vice Chancellor added: “And then he tells me the amount by which our shares and investments have dropped from one day to another”.

“I guess we’re $50 million plus off our book value at the moment, but I think it’s probably somewhere close to $100 million.

Professor Chubb said yesterday after checking that the correct figure was close to $100 million, meaning that the University had lost 8 per cent of its $1.4 billion investment portfolio.

The share market slide began in August 2007. This suggests that that the ANU’s investment portfolio is losing between $2 million and $3 million a week.

Professor Chubb said that none of the money was needed urgently. Some had been put away to meet superannuation obligations that would not fall due for decades. Other money had been put away for capital works which were pretty much on hold while the University waited to see what use could be made of the Higher Education Endowment Fund announced in the last Commonwealth budget.

Because the ANU hadn’t yet sold the shares that had fallen in price the losses had not yet been realised. If share markets started recovering the losses would diminish.

“We are hoping prices move back up,” the Vice Chancellor said.

The ANU’s investment portfolio includes shares and bonds and is not augmented with borrowings or derivatives.

Its loss of about 8 per cent is not as severe as that of the wider Australian share market whose ASX 200 index has fallen 12 per cent since August.

The investments are supervised by a university committee that meets every three months.

Professor Chubb told a conference of college and university housing officers yesterday that he was unable to rely on Canberra’s housing market to provide student accommodation and that this semester he turned away 700 students who wanted on-campus accommodation.

An extra 535 beds would become available in the area between the campus and the city in February 2009 and beyond that he wanted an extra 1,800 beds.

The ANU was borrowing or partnering with private firms to build the accommodation meaning that students were being charged more for accommodation than was “often desirable”.

But the alternative was not to build, which was not an option for a university like the ANU, which attracted students from outside the ACT.

The Vice Chancellor told the conference that the student income support system has not been properly reviewed since 1992 and was in urgent need for reform.

Forty per cent of full-time undergraduates said that paid work adversely affected their studies and one in four were taking out private loans to help meet living costs.

One in eight said they regularly went without food or other necessities because they couldn't afford them.

“Let me remind you that these are the people upon whose shoulders we place the future of this country – they are the ones we will come to depend on for our economic, social and cultural wealth. Is it anything but shameful?” Professor Chubb asked the conference.

Feel like some 2020 reading?

All of the public submissions to the 2020 summit are now up on line, all 8,637 of them.

"Sustainability" is the most popular topic, getting 1,322 submissions.

"Creative Nation" is the least popular, getting 455 submissions. Easy reading.

Plus, each of the 1,000 delegates has made a submission, but as far as I can tell they are not on the Australia2020 website yet.

RBA Governor: Sympathy but not sorrow

The Governor's delivery during yesterdays ANU lecture and during questions afterwards was flat and understated. Not at all like the more adventurous man who appeared before the Parliamentary committee two weeks earlier.

The ridiculous newspaper coverage that followed that appearance (pictured) seems to have affected him.

The head of the Reserve Bank has expressed sympathy for the Australians hurt by his interest rate hikes.

Asked during a guest lecture at the Australian National University what he had to say to the mortgage holders who had been hurt by the Bank’s 12 successive interest rate rises the Governor, Glenn Stevens yesterday momentarily abandoned his usual reserve and expressed sympathy.

“I would say that I acknowledge that mortgage holders are in many instances doing it tough,” he said.

“But if we don’t control inflation they will be doing it much, much tougher.”

“High inflation is a recipe for very high interest rates. That’s exactly what we are trying to avoid. We are trying to achieve is low inflation.”

Asked about a report on the front page on Sydney’s Daily Telegraph that branded him “Australia’s most useless man” for keeping interest rates high...

...Governor Stevens said he wouldn’t respond but that it was “important that people have confidence in the Reserve Bank to contain inflation and to do what’s right for the economy”.

“They can have confidence in that,” he said.

The minutes of the March Reserve Bank board meeting released yesterday make it clear that the board is aware of the damage high interest rates have been causing. They say that the current 12-year high is “exerting a significant restraining influence on both households and businesses”.

So concerned is the bank about the impact of high rates that it has “stepped up” its liaison with retailers.

That liaison suggests that sales have been flat three months.

In addition, housing finance has been soft “for the past few months”.

In his remarks at the ANU the Governor stressed that while some households were suffering as a result of high rates, almost all were still able to meet their mortgage payments.

“It is true that household debt has gone up a lot,” he said. “But as of December the proportion of housing loans in Australia which were running in arrears of 90 days or more was about 0.32 per cent, which is extremely low, extremely low.”

“For the most part so far households appear to have been managing that debt pretty well”.

Before delivering the annual Sir Leslie Melville Memorial Lecture the Governor told his audience that although it would deal with the worldwide liquidly crisis, the Australian financial system was in “good shape”.

“Nothing said here should be taken as carrying any implication to the contrary,” he said.

Whereas in the United States as many as 20 per cent of mortgages were “sub-prime” or of poor quality, here the proportion of “non-conforming” loans was only 1 or 2 per cent.

“And as far as I know even on those loans the arrears are a fraction of those in the US”.

The Bank’s board minutes reveal that it has cut its forecast for inflation in the wake of its February rate hike and that it expects inflation to decline over time.

The next inflation figures will be released in one week’s time. Even a high result is believed to be unlikely to lead the Bank to push up rates again.


Tuesday, April 15, 2008

Tuesday Column: Budget night - when will find out what new leadership means

The Rudd government is either a good one or merely good-looking. We will know four weeks from tonight.

We don’t know yet partly because much of what it has announced to date are inquiries (or summits). It is easy to have good intentions while looking into things.

It is harder to make decisions that actually take things away from people. Until now the Rudd government has shown little stomach for it, last month buckling under pressure not to “take away” bonus payments for carers and pensioners that were not even promised by it nor by the Coalition.

The content of the first Rudd-Swan Budget will be important for another reason.

History suggests that it will be the best budget they give us...

The first Howard-Costello budget was its best, the second was its second-best, and after that they got pretty awful.

The Treasury took a macabre delight in chronicling the descent.

In an analysis published in the latest edition of its Economic Roundup it says that whereas around one third of all the measures in the second Howard-Costello budget were designed to save money, by the end of their term only 1.5 per cent were.

But tax breaks, otherwise known as tax expenditures, soared since that second Howard-Costello budget, climbing 51 per cent in real terms and are on a track to climb higher still.

So what might we expect on May 13, and what will indicate whether the government is good or just good-looking?

I have compiled a list of the sort of things a good government would do as a matter of course. Many are straight-forwardly good administrative decisions; not necessarily designed to save money now, but designed to prevent more money being wasted in the future. None should be widely unpopular and none would involve breaking an election commitment (as would the otherwise good idea of abandoning the $31 billion of promised tax cuts).

The first is doing something to stop the concessional Capital Gains Tax rort exploding. An extraordinary 1.3 million of us are now landlords. An extra 50,000 are piling in each year. And why not? We can deliberately lose money on rent and mortgage payments (in order to cut our income for tax purposes) and then sell the property later for a profit, paying tax on only half of the capital gain we make.

Rudd and Swan can turn the upcoming tax cuts to their advantage by using them to wind back the rort. Right now only half of each capital gain is taxed, meaning that for people on the top two rates of 45 per cent and 40 per cent the effective rates of capital gains tax are 22.5 per cent and 20 per cent.

Why not freeze the rate of tax for capital gains at either 22.5 or 20 per cent plus the Medicare levy so that as the top rates of tax come down over time capital gains, and negative gearing will become less attractive relative to earning income?

Why not end the exceptional free kick given to the drivers of company-provided cars? And I do mean drivers. Early last year Deloitte Indirect Tax put out a press release headed “Drive your benefits further – before it’s too late”.

As it advised those enjoying company-provided cars, “increasing the kilometres driven can significantly increase your savings”.

“For example, an employee who has a car valued at $35,000 and drove 24,000 kilometres during the Fringe Benefit Tax year would have a tax liability of $6,720. Increasing the number of kilometres driven to more than 25,000 kilometres would reduce that employee’s liability to just $3,696 – a saving of more than $3,000.”

That’s right. The more you drive your employer-provided car the LESS tax you pay (and the bigger your engine – above 2500cc is best - the less tax you pay).

Australians are literally driving their employer-provided cars up and down hills, round and round in circles and backwards and forwards merely in order to pay less tax.

The Fringe Benefit Tax concession for motor vehicles is on track to cost $2 billion a year and according to the Australian Conservation Foundation is responsible for as much extra greenhouse pollution as a medium-sized coal-fired power plant. The special fringe benefits treatment for cars has to go.

As does the special treatment for four-wheel drives. Ordinary cars face a 10 per cent import duty. Gas-guzzling Standard Utility Vehicles built to lower safety standards only face a 5 per cent duty, apparently because they were once predominantly used by farmers. No government concerned about carbon emissions (or the safety of our city roads) would allow the rort to stand.

And then there are the rorts that overtly favour the rich.

Not for nothing is Family Tax Benefit B known as “pin money for millionaires’ wives”. Labor has quite sensibly promised plan to cap the payments for families earning more than $250,000 a year.

It should do the same thing with the pension, removing access to it for pensioners owning houses worth more than, say, $2 million. Welfare was never meant to be for those people.

A “boarding allowance” of up to $8,694 per student is paid to well-off rural parents able to send their children to a city boarding school. The main requirement is to live more than 4.5 kilometres from a bus stop.

As the Canberra education researcher Barbara Preston puts it, “many recipients of boarding allowances have no difficulty attending primary school, but when they attain secondary school age they become ‘isolated’ and incapable of catching the bus they took to school from age five”.

Their less well off neighbours manage to get their children to school, keep them in the region and miss out on thousands of taxpayer-funded dollars.

And then there’s the milk tax. Introduced eight years ago to cover the cost of a $2 billion payment to help dairy farmers adjust to deregulation it adds 11 cents a litre to the price of every bottle of milk. Milk is unimportant in the budget of well-off Australians but very important in the budget of families who are struggling. That makes it a very regressive tax, one that would cost only $233 million to end.

There are many, many more good decisions that the government could include in the budget, but these are the type that I will be looking for – ones that show that it is serious about governing properly and fixing up the mistakes of those who have governed sloppily in budgets past.

And here are some other suggestions from comments received below (please add extra ones to to this comments stream):

. Reverse the Howard Government's caving in to big pharma and restore the integrity of the PBS.

. End to the Fuel Tax Credit Scheme and for the aviation industry to pay the full fuel tax where they are currently only paying 3 cents per litre.

. End to the tax advantages of Managed Investment Schemes.

. Reverse the recent removal of super withdrawal taxes

. End tax advantages of salary packaging (preferably for everyone, but if not, for public servants)

. End salary sacrifice arrangements for super

. End tax concessions for recipients of superannuation income (same tax rates as anyone else)

. Impose a wealth ceiling on those claiming the age pension that INCLUDES the family home.

. Make eligibility for the age pension more generous for those who don't own their own homes but have a moderate amount of investment assets. (Most people are over-capitalised in the family home and undercapitalised elsewhere. There is also the equity principal that people in $2m homes in Sydney deserve the age pension less than a renter with a quarter of that in investments)

. Extend capital gains tax to the family home.

. Reintroduce death duties

. Redirect sports funding from elite athletes/AIS to projects that promote mass activity (eg a major footpath/cycleway building program). Subject elite athletes to a HECS-style repayment program.

. Consider imposing a levy on art auctions or sales to fund artists. Like sport, art should be self-funding.

. Impose a vacancy tax on homes that are left vacant because the owners have not advertised for tenants (mainly holiday homes). This may ease rental shortages in some regional areas.

. Impose a vacancy tax on undeveloped land in urban areas, particuarly that near transport infrastructure such as railway stations.

. Examine concept of depreciation more widely with a view to reducing tax benefits investors and others derive from it.

. Abolish concept of tax deductions in favour of direct subsidies equivalent to about 30% of income. This establishes equity between low, middle and high income earners who pay the same dollars for work related expenses but get unequal amounts back.

. Remove special pensioner concessions for power, phone, rates etc and include these in basic pensions.

. How about not exempting Defence from budget cuts? There seems to be a lot of spending money at will (Sea sprite, AWD, JSF, pick your acronym) and much of it pork barrelling. While the closure of ADFA was suggested, there must be more than that available.

. How about abolishing the states? And yes, I'm serious. There is some serious duplication that must cost the country some serious dollars. Yes, it keeps people like Mike Wran and Morris Iemma in a job (what else would they do, do you wonder?), but I'm not sure the cost is worth it.

. Include an 'I claim no tax deductions' box where taxpayers who tick it get either $500 or $1000 back. This could possibly also replace the 'low income tax rebate' as it is more generous.

The above could be based on a model where most employees either don't need to fill in a tax return or can do so in 5 minutes via either the internet or a prepaid envelope.

Further, I would make the tax return a single A4 sheet of paper that folds into an envelope to enclose the group certificate/payment summary.

And we need to some plain-English guidance to guide people to the right decision, eg:

( ) I claim no tax deductions for 2007-2008. I understand that by making this choice I will receive $1000 (or equivalent credit if tax is owing) as a no-claim bonus within 7 days. I do not need to answer any more questions, will not need to see a tax professional and can lodge this return immediately.

( ) I wish to claim tax deductions for 2007-2008. I understand that by making this choice I am not eligible for the $1000 no-claim bonus and must enclose evidence of all expenses claimed. I will need to answer further questions and may wish to exercise my right to see an accountant. Any refunds due will be paid within 60 days.