Wednesday, April 29, 2009

Is Victoria falling apart?

Maybe. It's been underspending on infrastructure:

Victoria's transport, electricity, water and communications infrastructure may be in the worst condition of any state's other than South Australia's according to a new landmark study conducted by Engineers Australia.

The study examines spending on ew engineering construction adjusted for population and inflation over the last 20 years.

It finds that while Victoria's annual infrastructure spending has climbed 121 per cent in real terms since 1988, the national total has soared 190 per cent.

"When normalised by population, Victoria's infrastructure expansion path began below Australia's in 1988 and tracked consistently below Australia's throughout the two decades since," says policy analyst Andre Kaspura in the report...

Engineers Australia conducted the study because it found it was almost impossible to tell from most budget documents how much infrastructure each state has.

"Somewhere within the Victorian government the answers would be known, but the information isn't public," said Mr Kaspura.

New South Wales is the only state to make public its estimates of its infrastructure stock each year in its budget time, along with the ACT.

"We have had to cobble together a national picture using Bureau of Statistics figures on new engineering construction each year and adjusting them for population and prices."

Mr Kaspura conceded that his picture could be misleading because it took no account of the fact that Victoria was more compact than other states and so needed fewer kilometres of roads, pipes and wires.

He said even so Victoria's relative underinvestment was profound and the gap was widening.

In 1988 Victoria accounted for 19.8 per cent of Australia's engineering construction. By 2008 Victoria's share had fallen to 15.3 per cent.

In the last two years Victoria's spending on infrastructure had shrunk 8 per cent while national spending grew 17 per cent.

"Victoria's spending on roads per 100,000 people has been lower than national spending in all but one of the last 20 years while its spending on water and sewerage facilities and on bridges, railways and harbours has been below the national average for each of the last 20 years.

Its spending on electricity and gas infrastructure kept pace with national spending until 2002 when it fell sharply below accelerating national spending.

"There is now a substantial gap between Victoria and the rest of the nation," said Mr Kaspura.

The gap has widened as infrastructure provision has been privatised. In 1988 more than 80 per cent of Victoria's new engineering construction was publicly funded. By 2008 it was more than 60 per cent privately funded.

Queensland and Western Australia have invested in infrastructure much faster than the rest of the nation with Queensland distinguished from the other states by having most of its infrastructure publicly funded.

NSW kept pace with the rest of the nation until 2005 when it began to fall sharply behind.

The Rudd government has before it a report from an Infrastructure Australia committee chaired by Sir Rod Eddington examining more than 90 projects submitted for Commonwealth funding including Victoria's massive $38 billion transport plan.

It hasn't yet indicated when it will announce the winning projects.

Victoria's budget is next Tuesday May 5. Australia's is the following Tuesday May 12.

The May 12 budget will present things differently

But it's okay. It's a good thing.

Instead of 2 years of "forecasts" followed by 3 years of "projections" based on (at times unrealistic) historical long-term trends, it'll include an extra year of forecasts and then realistic projections.

Wayne Swan and Ken Henry have detailed the changes in letters to state Treasurers, reproduced below.

2009-10 budget forecasts and projections

Opera is 15!

And it is celebrating with a cartoon

HT: Life Hacker (click to enlarge)


Tuesday, April 28, 2009

If it's an offence to sell alcohol irresponsibly...

Why not loans? It soon will be

MORTGAGE brokers, bank employees, payday lenders and retailers offering credit will face fines and even jail under new "responsible lending" rules set to become law in November.

The provisions, in draft legislation unveiled by Corporations Minister Nick Sherry will for the first time require all credit providers to be licensed and will make it an offence to supply unsuitable credit that can't be repaid.

The maximum penalty will be five years' jail and a fines of up to $220,000 for an individual and $1.1 million for a corporation.

The new laws will bring under Commonwealth control a range of practices that were previously state-regulated and will regulate others for the first time...

The Australian Securities and Investments Commission will be given an extra 200 staff in order to oversee credit providers.

"I can assure you that we will be extremely proactive in administering these laws and vigilant in their enforcement," said ASIC Chairman Tony D'Aloisio.

"We will have to register some 10,000 entities. Around 5.7 million households have some sort of debt. Around 2.9 million have a home loan; 750,000 have an investor loan and 2.3 million households have a credit loan."

Banks, credit unions and building societies yesterday attacked the new provisions as "heavy-handed", saying they would result in higher loan fees and a longer delays in approvals.

"While the Federal Government is suggesting this will improve consumer
confidence, the real question for the Government is what will this do for the
confidence of the main body of credit providers, which is much needed in the
present economic circumstances," said Bankers Association Acting Chief Executive Tony Burke. "The penalty regime is disproportionate."

Abacus, which represents credit unions and building societies, welcomed the new laws for replacing ineffective state regulations but warned they ran the risk of "burying" responsible lenders in bureaucracy.

"Focus the legislation on the poor behaviour of dodgy lenders and brokers - don't drive up the cost of borrowing with ineffective red tape," said Abacus chief executive Louise Petschler.

Senator Sherry was unapologetic, saying the Rudd government intended to crack down on irresponsible lending, and "dodgy providers of credit finance and dodgy advisers".

"For example margin lending has been of significant contention over the last 18 months. There have been individuals who only had their own home as the asset to support the lending to buy shares, and/or had a very low income. It will be practically very, very difficult for individuals to enter into margin lending with these new laws."

As previously foreshadowed Australians with mortgages of up to $500,000 will be able to apply to change their credit contract if they get into financial difficulty, an increase in the threshold from $312,400.

The Bankers Association said the provision was unnecessary as its the banks' own hardship principles already went further and did not apply a threshold.

"It is important that customers understand that if they are experiencing any problems in repaying their loans, they should contact the bank as soon as possible," Mr Burke said.

The government plans to introduce the bill in June after a four-week public consultation period and expects it to be passed in September.

* Actually there are several arguments as to why not loans. Nick Gruen spells them out.

Also if it is to be done ASIC is arguably the wrong body to do it. Is less conflicted when it comes to regulating finance providers, has a better record of getting good outcomes for consumers, and will have to deal with the "non-finance" bit of many transactions (eg the house itself) anyway.

And by adopting national rather than state regulation we lose the ability
to try things out. The Minister Nick Sherry acknowledged how useful this could be when he said in launching the new scheme:

"Payday lenders will be covered by this legislation. I think three states have a 48 per cent cap. That will be retained.

What we are doing is adding this new responsible lending principle for the first time. Those states that don't have a 48 per cent cap, we're going to ask them not to impose a 48 per cent cap, and then we will assess the outcomes; we'll look at what has happened in the states that have a 48 per cent cap and those that don't, with a responsible lending provision that has come into force, and we'll look at what the outcomes are and determine whether it is appropriate to maintain that 48 per cent cap.

It's a good example, I think, of a practical way to assess the evidence in an area where there was strong disagreement between the various people, organisations who were consulted."

But these are quibbles.

Expect a tough one

Swan says so

WAYNE Swan has ramped up expectations of a horror budget on May 12 warning of "very tough calls" and "decimated government revenues" in the face of the most challenging conditions in 75 years.

The language - the Treasurer's strongest yet - came as he wrote to his state counterparts outlining changes to the budget forecasting methodology brought on by the prospect of recession and as Access Economics warned there would be no new tax cuts for a decade.

The latest Access report declares Australia already in recession and warns that Victoria's economy will shrink for two successive years.

Endorsing the thrust of the report Mr Swan said it confirmed "the brutal impact of the global recession on jobs, growth and revenues," while also applauding the quality of the Government's stimulus measures to date...

The Access Report says the government will have little room for further stimulus packages as it faces a downswing in revenues "deeper and sharper than in the recessions of the early 1980s and early 1990s".

Access says plummeting commodity prices will strip $40 billion per year from national income pushing the 2009-10 Commonwealth budget deficit north of $50 billion, a record in absolute terms, and pushing state budget deficits up to a combined $10 billion.

"We have laboured this point many times before, but forgive us for making it again," Access says in its report. "The boom was brilliant for tax collections, particularly from big companies. They surged so much federal Budgets could promise big income tax cuts topped up with extra family benefits and still see a lift in the size of the surplus."

"With that money disappearing fast, Canberra now faces ugly policy choices."

"The tide has gone out, and the Budget has been swimming naked."

Access says the income tax cuts already legislated for this July and next July will spend money the government will no longer have, meaning Australia may have to wait almost a decade for further tax cuts.

"That's unless we truly have the courage to tackle middle class welfare. Will the pensioners get the extra money they have been promised, or will we get an education revolution? Do we maintain the big increases in middle class welfare in Family Tax Benefit B, or will there be a national broadband network?" Access asks.

Mr Swan has wound down expectations for the May 12 Budget saying it will only have "room for money to go where it is really needed".

The comments suggest that the promised increase to the base pension rate may be wound back and that expected action on paid parental leave, superannuation and the First Home Owners Grant may also be less generous or accompanied by harsh income tests.

The Treasurer has to decide on the future of $7,000 to $14,000 First Home Owner Boost before it expires on at the end of June. He has before him the report of the Harmer pensions review, the Henry retirement incomes review, and the Productivity Commission inquiry into parental leave.

He is understood to be examining means-testing health benefits including the uncapped Medicare Safety Net, curtailing access to the Baby Bonus and Family Tax Benefit B and fully-taxing contributions to superannuation funds.

Yesterday he wrote to state counterparts including Victoria's Treasurer John Lenders advising a change in the way the budget's forecasts will be presented in order to accurately reflect the outlook for an economy "expected to enter recession".

Instead of presenting forecasts for just one year ahead and "projections" for a further three years based on long-term trends, the budget will present forecasts for two years ahead and then projections based on the growth rates actually expected.

The usual practice of using long-term trends would present a "misleading picture".

The letter says the Treasury expects below-trend growth during 2009-10 and 2010-11 and then above trend growth beyond that "as the momentum of recovery builds".

It suggests that the Treasury is more pessimistic than Access Economics which says in today's report that the economy will bounce back by 2.4 per cent in 2010-11 after shrinking during the financial year ahead.

Access expects Victoria's economy to shrink in 2008-09 and 2009-10 as the stat's consumers "dive into their foxholes and the forward pipeline of commercial and engineering construction starts to thin".

It expects the national unemployment rate to peak at 8.5 per cnet in 2010 putting almost one million Australians out of work.

In the balance

Swan's "tough calls"

. the base pension increase
. super tax concessions
. paid parental leave
. first home owners boost
. Medicare safety net
. Family Tax Benefit B

The May 12 Budget deficit is expected to top $50 billion.

Sunday, April 26, 2009

John Vincent is dead. He can't be.

My family told me the news, casually, when I was back in Adelaide two weeks ago.

I felt a jolt. Some of me vanished. "No!" I wanted to shout - an eternal source of love, fun and optimism had vanished.

My feelings were mirrored everywhere.

Here's fellow blogger Lee Hopkins:

"John Vincent is dead.

As I type this the tears are rolling down my face. I hurt, I hurt so bad. I want to cry, to shout, to punch, to kick, to belittle my stepchildren, to pick a fight with my wife, to scream at the top of my lungs, to howl from the rooftops in psychic pain.

The man who was an integral part of my youth, who helped me define who I was and who I wanted to be, is dead. The man who would live forever in my mind is dead."

Probably neither of us have met John Vincent, though I went to see him at a fanstastic free scratch concert he put on by the beach at Glenelg when the scheduled band couldn't turn up, though he made me laugh and I felt I knew him, though I played his "Monday's collection day" song on The World Today to illustrate a story about garbage, and tried to look up his phone number in Adelaide to tell it was on (and indirectly that I loved him), though I happened to be listening to him at 9.05 on the morning my mother died as I drove into the hospice for our last hour together, and that his optimism and love of life and the sun on that day made me know the world had a good heart.

"Radio announcer" may have been his job description, but what he put out was some of himself, with the message: take this, I am yours. It was usually "hello listener" - he was in communion with you.

This MP3 is a tiny fragment that has survived recorded. I would love to know of others.

Everyone felt they knew him, but no-one felt the need to intrude. What we got was what there was, over and over and over again.

'To be honest, he was just a big kid who didn't take life so seriously and told us never to grow up," recalled his daughter Heidi Vincent in her eulogy. '

'Comedian and former SAFM colleague
Adam Hills visited Vincent in hospital when he was here to perform at the Adelaide Fringe last weekend and had his audience yell a greeting to Vincent's comic pseudonym, "Ken Oath".

"I was telling him that he was the person who taught me that you can be funny and be positive at the same time," Hills said.'

John Vincent taught me a lot about radio, and doubtless inspired me to get into it. I could make a lot of people happy in a way that would never be measured or even more broadly acknowledged. My good works would be hidden in plain view, just as his were.

And he wrote brilliant songs...

The Garbo song - "Monday's collection day" is one of my favourites. Couldn't find it on the web, but the lyrics are etched in my brain:

"Keep Australia beautiful
Up goes the cry
If we're not more neat and tidy
we'll have garbage eight feet high
It'll stretch all the way from Perth
across to Syd-en-eye
So when you dispose of rubbish
don't pass your garbos by"

"Cos Monday's collection day,
crash go the bins,
all the city's garbos
cart away our sins..."

And Take Me Back To Innamincka, The Ten Days of Christmas, How ya going Santa Claus, Rosie, The Watermelon song.

Sort of cultural.

Culture lovers have put up O.S. and Junk Mail on youtube. Thanks. I love the interviews at the beginning of each:

And here's his big hit - Tuneless flaming Jungle Music:

As clever and fun-filled as the songs were, it was his humanity that mattered.

He never let us down, unlike his contempories with humanity Leon Byner and Bob Frances.

I can't believe he isn't still here. I am reminded of the remark about Peter Allen - "Why did he have to die? It was so unlike him."

Adam Hills of Spicks and Specks fame will host a rock and roll radio quiz night in his honour at the Arkaba on Tuesday May 19.

Here's a video of his final performance:

To know him was to love him. We all knew him.

Friday, April 24, 2009

Does the Australian Labor Party hate competition?

"It acts that way.

The last Labor government merged the OTC with Telstra to create a dominant megaommunications company, merged Qantas with Australia Airlines to create a dominant mega-airline (specifically leglislating to block ACCC scrutiny) and began the process of privatising the Commonwealth Bank (think how much more interest-rate competition we would have now if the Commonwealth Bank had remained outside of the NAB-ANZ-Westpac cartel).

This Labor government seems hell-bent on destroying what banking competition was left.

In recent months it has waved through takeovers by the cartel of St George, Bank West, Aussie and RAMS.

The head of the ACCC said the other day he would look dimly on future requests for bank mergers. Brave of him.  He'll lie down on a track to prevent the moping up now that the horses have bolted.

So what is the government doing to protect what little competition is left?...

Bugger all.  It's euthaniasing it.

1. The big four can raise as much money as they like, government-guaranteed. The smaller banks and non-banks can too - in theory. But the government threatens to charge them so much to do that none have taken up its "offer".

2. The big four also need to hold much less capital as backing for each mortgage, which as Stephen Bartholomeusz explains, "forces down their returns on equity relative to the majors and therefore forces up their cost of equity. So, their debt funding is more expensive, where they can raise it, and their equity is more expensive."

3. And now Rudd's getting together with the big four (only) in the RuddBank, to help Westpac-Commonwealth-ANZ-NAB out of tight spots.

Great for them; appalling for credit unions, the Bank of Queensland, Bendigo Bank and whatever competition is left, and as a result appalling for us - something the Rudd government would recognise if it understood the benefits of competition.

Here's a good idea (from Christopher Joye) - stop offering the big banks government guarantees and guarantee instead the underlying assets - mortgages and commercial loans - whichever institution takes them up.

It'd establish a level playing field. Surely Labor doesn't want the playing field tilted?  Surely Labor doesn't want to stifle the benefits of competion?  Surely Labor can see that there are benefits?

And guess what? Britain has just adopted the Joye model in this week's Budget. Britain has a Labor government - one that understands and welcomes the miracle of competition.

Ever the optimist, I'm looking forward to Australia's Budget.  Perhaps it'll prove my observations premature.

Could Australia's unemployment rate hit 10 per cent?

It has jumped from 3.9 per cent to 5.7 per cent in just over a year.

But double figures?

The Treasurer thinks it's possible.

Here's what Michelle Gratttan asked him just before he left for a G20 meeting:

Q: Is there a risk that unemployment could hit double digit figures?... There’s no guarantee we won’t get back to those early ’90s levels?

A: There’s no guarantees when you are in the middle of the most savage global recession since the Great Depression.

Here are two reasons why the Treasurer could well expect a double-digit unemployment rate.

1. History suggests that a jump of 5 percentage points is typical in an Australian recession:

2. Bill Mitchell has done the numbers using the IMF's forecasts for Australian GDP which have it shrinking 1.4 per cent this year and inching forward 0.6 per cent next year.

He comes up with an unemployment rate of 10.04 per cent:


Thursday, April 23, 2009

2020 - Ahh, those were the days

More from Steph here and here.

And this:


Time for the Opposition Leader to refresh his lines

It's getting urgent

Here's Malcolm Turnbull on Darwin's ABC today:

QUESTION: So what would you do? What is one thing that you could name that would significantly improve the capacity of Australians to weather the storm affecting the globe?


Well, firstly, what we have to do is not borrow money for extravagant and poorly targeted spending. So you’ve got to remember that the more money you borrow today, the higher the taxes and higher interest rates are going to be in the future. So making every dollar count, getting the best bang for the taxpayers’ buck is vital.

We would bring forward the tax cuts for July 1 this year and July 1 next year to provide real incentive..."

Can anyone see a problem here?

It nearly is July 1. Even if this government or a government led by him tried to bring the July 1 tax cuts forward at this stage, they would be lucky to succeed by even a week.

That part of his prescription came with a built-in use-by date.

It has arrived.

Malcolm Turnbull himself appears not to have noticed.

Not that his prescription is entirely vacuous. His idea was to backdate the bringing forward of tax cuts to January 1. (Stick with me, I know that sounds silly.)

The point is that if it happened now it would be a lump sum, a "sugar hit" - everything he has derided.

"I've set up this inquiry see, but I'm ruling out its ideas right now"

- Wayne Swan to Ken Henry

What? Less than edifying. Set up the Henry Review, ask it to come up with ideas, then as it prepares to report take one of its best ideas and say - over my dead body.

David Uren:

"WAYNE Swan has poured cold water on the Henry tax review's ambition to reform dividend imputation, declaring himself a supporter of the system.

Following threats of a backlash from lobby group National Seniors if the imputation system were tampered with, the Treasurer said yesterday he was puzzled by reports it was under threat.

"I personally think dividend imputation has delivered an enormous benefit to the Australian economy," he said.

"It, like all other issues in the tax system, is being reviewed by Dr Henry in his review. But from my perspective it has played a very important role in our economy and I think it's a very worthwhile initiative."

Treasury secretary Ken Henry has made dividend imputation one of the central issues his review is tackling."

In related tax news...

Many of Australia's biggest businesses aren't certain how much tax they pay, according to a survey of 79 of Australia's biggest corporations.

The companies between them reported tax payments amounting to almost 10 per cent of Australian taxes paid, but the survey's director, PriceWaterhouseCoopers tax partner Tim Cox says their uncertainty means they probably accounted for more.

"In many cases they found taxes such as excises that are embedded in the cost of products and transaction taxes such as stamp duty difficult to identify. Our survey most likely understates the taxes they pay," he said.

The typical number of taxing points per corporation was 24, but one identified as many as 67.

A mere 5 taxes accounted for 87 per cent of all the money raised from the businesses. In contrast, more than 40 taxes raised the rest.

"The complexity of the system is out of conrol for the size of our economy," said Mr Cox. "We've got as complex a system as anywhere in the world except the United States and yet we are a relatively small economy - it's blown out of proportion."

He called on the Henry Tax Review to recommend axing many of the smaller nuisance taxes, but he was worried that it would recommend replacing them with extra consumption taxes.

"The last thinkg we need are new consumption taxes that create new sets of complience costs," he said. The best thing to do was to gradually increase the Goods and Services Tax, "but to be honest the government doesn't want to hear".

"Whether there is a way of changing the government's mind remains to be seen, but you wouldn't be optimistic."

As well as between them paying almost one tenth of all the Australian tax collected, the companies surveyed acted as collection agents for another tenth. The cost of complying with the the tax laws amounted to an average surtax of 2.9 per cent on top of the taxes actually paid, with the smaller firms paying disproportionately more.

Payroll tax, often seen as the scourge of Australian business, isn't particularly high by overseas standards.

"People go on about payroll tax but, if you look at what's paid and compare it to other countries, direct labour taxes are quite low," said Mr Cox.

"Direct tax in the form of company tax is far more important and out of proportion to what's paid overseas."

"It's a problem because it means right now government revenues are plummeting with corporate income, and it is also a problem because corporate tax is front of mind - companies pay attention to it when deciding whether to set up here."

Corporate income tax accounted for 65 per cent of the tax paid by the corporates surveyed, far more than the global average of 37 per cent, and more than in any other country surveyed by PwC with the exception of India.

The total corporate tax take was broadly similar to that in other countries.

Wednesday, April 22, 2009

Affordable housing? That's what they wanted before the crisis

Now they want a set of skyhooks

Jessica Irvine in today's Sydney Morning Herald:

"Labor has undergone an about-face on housing policy. The contrast between pre-election posturing and the reality in government is stark.

On July 27, 2007, the Labor opposition hosted a "housing affordability summit" in the main committee room in Parliament House. About 150 housing experts from all over the country braved Canberra's winter chill to discuss solutions to the housing affordability crisis.

I was there. There was little agreement on what needed to be done, but summiteers were unanimous in what shouldn't be done. Everyone agreed that increasing the first-home owners grant would simply result in higher house prices.

Labor seemed convinced and produced a discussion paper quoting the chief economist at ANZ, Saul Eslake, saying: "Anything which puts additional cash in the hands of buyers … results merely in more expensive houses."

Tuesday, April 21, 2009

Focus: Three weeks until Budget night

...and not even Wayne Swan knows what'll be in it

Three weeks to go, and the excitement emanating from Canberra's Treasury building is palpable. The second Kevin Rudd and Wayne Swan Budget will be the most-watched such event in years, certainly far more important than any of the record 12 Budgets handed down by their predecessors John Howard and Peter Costello.

Partly that's a result of the most serious financial and economic crisis in a lifetime, and partly that's a result of the freedom and the imperative it has given Treasury officers and the Treasurer himself to come up with genuinely good ideas without the ususual regard to politics or convention.

Wayne Swan's first Budget, like most of Peter Costello's, was more of a management exercise, directed at responding to circumstances (in that case an avalanche of revenue) rather than changing them. It ticked off on delivering a series of election promises, many of them of doubtful economic worth, and invented a number of new funds in which to stash the growing surplus.

But it contained one element of genius. Wayne Swan had returned from a meeting with his United States counterparts shaken by what he had heard. Late in the day he decided to take out insurance against a collapse in the world's biggest economy by making the budget cuts more gentle than had been planned. The Treasurer's foresight helped delay the onset of Australia's recession.

This time it will be a matter of getting Australia out of recession. And just about every option is on the table...

Many of the small decisions have already been made, but the big ones are still up in the air, to be determined over the next fortnight with the economic forecasts indicating how bad things are likely to get and the financial forecasts indicating how little money there will be to play with.

Wayne Swan's second Budget won't be primarily a political document in the same way as was his first one which ticked off on election promises, and in the same way as were the recent Peter Costello budgets which distributed largess.

Its contents will be determined primarily by what's needed and by the most effective way to deploy limited resources, with any political measures relatively unimportant add-ons. Indeed many political measures, much of Labor's "program" is likely to be postponed. This will be partly because the government won't have the money to implement them, and partly because it won't have the thinking time.

Finance Minister Lindsay Tanner explained in an interview with The Age in February that the financial crisis had taught him there was limit to how many decisions the key economic ministers could make.

"When you are in Opposition you have virtually no resources and you are used to thinking of Government as infinite; its people, resources, its brain power, its capacity to dream up ideas, to get answers, provide briefing papers, get teams working on problems."

"One of the things you realise when you are in government is that they are not infinite. Because it's the same small group of people at the top who ultimately have to make the decisions - who have to be informed and make decisive calls - there's only so much capacity that those people have to absorb, to think, to toss around," he said.

The sidelining of politics and the awful economic environment make the government unusually receptive to good and bold economic ideas, giving the Department of the Treasury more influence than it has had in decades.

This isn't to say that the Treasury will dictate what it in the Budget. That isn't its role and both the Treasury and the Treasurer know it. But it does mean that the Treasury will be properly listened to and have its expertise used in a way that hasn't happened since the early Costello budgets.

Even before the crisis Treasury was finding things had changed. After visiting Rudd and Swan in Brisbane on the Sunday and Monday following the November 2007 election departmental officers joyously reported that they had been listened to more in those two days than Howard and Costello had listened to them in two years.

Even so, some measures can be ruled out of next month's Budget.

The already-legislated tax cuts due to take effect in July this year and July next year are unhelpful. Promised only in order to match the Coalition during the election campaign, much of them go to the people least likely to spend them.

Australians earning more than $80,000 will get a key tax rate cut from 40 per cent to 38 per cent and then to 37 per cent. Battlers earning less than that get no rate cuts, just some indexation of cut-in points.

Good policy would suggest abandoning this wasteful, expensive and permanent drain on government finances, but it won't happen because the changes are already law.

Nor are there likely to be further stimulus payments. The first ones weren't bad ideas. The government needed to money out of its doors quickly. But just about every major study has found that bonus payments and tax cuts are fairly ineffective ways to stimulate the economy and that direct government spending is better. As well there is growing discomfort with the payments, even among the recipients, as Rudd and Swan would know from monitoring radio talkback.

The best forms of stimulus are ones that achieve other goals, producing a double benefit.

The promised pension changes fall into this category, although it is likely that not all pensioners will welcome them. Bundled with a boost to the single-rate pension may be a tightening of the means and assets tests. The Howard government's increasing generosity meant that even the owners of multi million dollar homes could get a part pension. And when they had one - worth even as little as one dollar a week - they were entitled to every increase offered, meaning that unless the rules change a $30 per week increase in the single pension will deliver such a person a part-pension of $31 per week. The Harmer Review, in Wayne Swan's hands since March, canvasses changes.

It will be hard to boost the single pension without also boosting the NewStart unemployment benefit. Currently more than $50 per week below the single pension the government has described as inadequate, it is getting lower year by year because the different ways in which the two benefits are indexed. Unless the formulas are changed, by 2050 NewStart will be only one half the single pension, and by 2100 less than one-fifth of it.

The case for boosting NewStart is overwhelming, especially as the Employment Minister has declared that Australians are losing jobs though no fault of their own and other Ministers have conceded that they could not live on the higher single pension. The extra payment would be spent more completely than would any other.

But at this stage the economic ministers have made no decision to boost NewStart. That will either come later or they will wear the embarrassment of being asked on budget night whether they could live on an unchanged NewStart of $32.38 per day.

Mr Swan not only has before him the Harmer Pensions Review, but also the first report of the Henry Tax Review which deals with superannuation. While the Review was instructed not to touch tax-free payouts for the over 60s, it was given a free hand to recommend other changes. Mr Swan might tighten up on some of the particularly brazen super tax loopholes as part of his pensions package, or he might wait until after releasing the report to reform superannuation properly.

Other bold measures open to the Treasurer include proposing that each state abolish payroll tax and offering them partial compensation. Payroll tax isn't bad in its own right - it is one of the few sources of income state governments have, but it is riddled with exemptions and inconsistencies. Australia's state governments add more by the month as they exempt employers in order to attract new projects. Abolishing payroll tax would give big employers breathing space, be seen as supporting employment, and make coping with the tax system simpler.

The money lost would have to be made up somewhere. A bold government would commit to doing it by increasing the GST in small increments once the economy began to recover, encouraging Australians to bring forward spending. Mr Swan and Mr Rudd might not be that bold, but if they were they would probably get away with it.

There is also much money the Budget can save by hacking into middle and upper class welfare. The uncapped Medicare Safety Net overwhelmingly goes to the well-off Australians who can afford to spend up big on medicine and to the specialists who put up their fees because it is there. Means-testing it would deny no-one access to medicine and would reign in an unlimited liability. The $1 billion-plus Private Health Insurance Rebate is apparently sacrosanct, but means-testing it would force Australians who can easily afford to pay for their private health insurance to do it themselves instead of taxing the rest of us. The $150,000 means test Labor imposed on Family Tax Benefit B is ridicously high. A $100,000 ceiling would do much more to reign in costs.

The Budget challenge is to boost the economy now ensuring that as things recover budget spending can be wound back.

It will almost certainly extend the First Home Owners boost due to expire in the middle of the year. But it it is clever it will do it by turning the payment into a loan, to be repaid. If it is very clever it will adopt that sort of thinking widely.

The Budget deficit is likely to be frighteningly big. One government figure is talking about $35 billion. But we are likely to accept that if we know it will be used to get us through the downturn and will disappear as things recover.

The Treasurer and the Treasury's challenge is to come up with measures that do both.

Building the Budget

What's certain:

. extending the First Home Owners boost

. boosting the single pension

. delivering scheduled tax cuts

What's likely:

. axing middle-class welfare

. tightening superannuation tax rules

. boosting unemployment benefits

What's not:

. a further round of bonus payments

. a small budget deficit

Wayne Swan will deliver the second Rudd Budget on May 12.

Monday, April 20, 2009

Krugman: "There is now no way to view the people who ruled us these past 8 years as anything but monsters"

He is right.

Thank heavens it is over.

It had better be over.

They're back - the concept of death duties and taxing the family home

They should be

Capital gains tax exemptions would be scrapped, the sales of family homes taxed, and a form of death duties reintroduced as part of a radical scheme to be put to government designed to save $40 billion and fund tax cuts worth $4,000 per taxpayer per year.

The scheme, outlined by the Australia Institute in a paper to be released today, would be costless and would plug tax loopholes overwhelmingly directed Australia's very rich.

The Institute says the top 1 per cent of Australian taxpayers receive 39 per cent of the nation's capital gains and so benefit disproportionately from concessions such as the low tax rate and exemption of the family home.

Capital gains are taxed at only half the income tax rate, benefiting high income Australians even further...

An Australian earning $180,000 who can take half of that income as a capital gain saves $18,700 in tax. By contrast an Australian earning less than $14,000 on the zero tax rate gains nothing by taking income as a capital gains.

The Institute finds the 50 per cent discount costs the Budget $10 billion a year and the exemption for the family home $30 billion.

It recommends abolishing the discount and removing the exemption for family homes above a threshold which it says should be twice the median house price, currently $450,000. The change would mean that Australians who sell their houses for less than $900,000 could continue to bank their profits tax free, but profits made from selling houses from about the $1 million mark and higher would be taxed as income.

The paper argues that the tax exemption for millionaires' homes has fueled the property bubble, encouraged unproductive investment, and imposed further costs on renters who have to pay more tax they should in order to make up the shortfall. However it notes "the political obstacles to including owner-occupied housing in the tax base are formidable".

Noting that its proposal would "raise the cry that savings and investment will
be discouraged" it says if that is a concern "the solution does not lie in the lighter taxation of certain favoured forms of capital income, but in reform of the way capital income is treated in general."

It also proposes a form of death duty known as "deemed realisation on death" that would require capital gains tax to be assessed and paid when a property or shares changed hands on death.

"Currently in Australia, death does not trigger CGT unless the asset is realised; if it is not realised, the cost base is passed on to the beneficiary who only pays tax if and when the asset is sold. In this way the tax can be avoided in perpetuity," the Institute says.

Families that had trouble raising the money to pay the capital gains tax could defer it, with interest accumulating at the long-term bond rate.

Many of the capital gains tax concessions applying to super funds and small businesses would also be abolished, establishing a "level playing field" with the large corporations that are already required to pay the tax in full.

The Institute rejects the change that its changes would harm foreign investment, noting that foreign investors are already exempt from capital gains tax and would remain so.

It is putting forward its changes for consideration in the Budget process and also by the Henry Tax Review which reports in December.

Properly Taxing Capital Gains:

- abolish the 50% discount
- abolish small business concessions
- tax home sales above $900,000
- deem realisation on death
- keep foreign investment tax-free
- cut income tax by $40 billion

The Australia Institute, Reforming capital gains taxation in Australia, April 20, 2009

Saturday, April 18, 2009

So how are they going to lay down all this fibre?

Won't they have to dig up everywhere?

And won't the cost be GINORMOUS?

I reckon it won't.

Here are 3 reasons why: (you might find the third unsavory if you are uncomfortable around toilets)

1. Virtually every time Telstra has dug up a street in recent years it has laid down fibre alongside copper wires. It costs next-to-nothing, and it is there just in case. The streets of Mount Gambier and Orange are apparently full of it.

It is known as "dark fibre" because it isn't yet lit. It is waiting for a purpose.

If Telstra does take part in the government-led Fibre-To-Premises consortium, it will tip in this valuable but otherwise useless pre-existing fibre in return for equity. It will get money for nothing (equity actually).

2. Getting fibre to houses and businesses in actually pretty easy, where there are power poles...

In the ACT the electricity authority part-owns Transact which hangs fibre cables off the electricity poles and then slings wires into houses. It doesn't use the Telstra wires. As I wrote once, the Telstra sockets remain intact, unloved and unused on skirting boards througout Canberra.

What goes in to each house is actually new copper wire, from junction boxes such as this one I photographed this morning, but the cost would be the same for stringin in a fibre - not that much. The total cost of the Transact service is reasonable Indeed, phone calls from Transact  to Transact customers (that bypass Telstra) are free.

3. But in places such as Gungahlin in the ACT and Elizabeth, north of Adealaide the electrical wiring is underground - because those new cities  were "modern" and underground wiring was thought then to be modern.  There are no poles from which to sling wires. Getting any new service into the houses is difficult. So what to do?

Use the sewerage pipes. I mean it. Have the fibre coming into each toilet bowl.  Japan and the US are already doing it. There is plenty of room within each sewage pipe, and every home already has the sewer connected. The fibre swims in the sewage and a tiny robot clears the pipes to give it lots of room - an added bonus.  It is much cheaper than digging new trenches.

Speed-of-light communication to most Australian businesses and houses could be easier and cheaper than many people believe.

Friday, April 17, 2009

Who's suffering? Not you, not me..

If you are still feeling wealthy despite the record collapse in Australian wealth, you may not have had that much to start with.

A Reserve Bank analysis published yesterday finds that while the benefits of Australia's decade-long explosion in wealth were spread widely, the costs of the year-long downturn have been borne disproportionately by Australia's very wealthy.

The Bank says Australia's distribution of wealth and income remained broadly stable as wealth soared up until the end of 2007.

But Australians in the mining states of Western Australia and Queensland did the best of all, enjoying extraordinary rates of growth in wealth of 20 per cent and 15 per cent per annum, mainly as a result of fast-growing property prices. By contrast wealth in Victoria and NSW grew at a more sedate 6 per cent per year.

The collapse in wealth throughout 2008 has been more narrowly based...

The Bank says it has been driven primarily by the share market, which collapsed 47 per cent and by superannuation, which collapsed in value 23 per cent. House prices collapsed more modestly, and mainly in the higher-priced suburbs.

The bank says real estate prices shrank 13 per cent in the top suburbs, only by 5 per cent in the cheapest ones.

It believes that wealthiest fifth of Australian households each lost an average of $348,000 during the past year. Each of the other households lost a smaller $33,000. Expressed another way, the Bank says the wealthiest one-fifth of Australian households accounted for 72 per cent of the total wealth destroyed.

Separately-released Reserve Bank figures point to increasing caution in the use of credit cards. The number of credit card purchases fell in January to be down 1.7 per cent over the year. In dollar terms the average credit card balance grew by just 2 per cent in the year to January, well below the rate of inflation and the slowest growth rate on record. Credit card cash advances dived 12 per cent.

"The new era of consumer conservatism is well and truly here to stay," said CommSec economist Savanth Sebastian. "The possibility of recession and concerns over job security will continue to weigh on spending decisions. The global economy is expected to remain in recession territory over the next year and as a result consumers will stay conscious of the need to spend within their means."

Bank impaired assets and bad debts grew strongly in the December quarter, climbing from 0.52 per cent of loans to 0.74 per cent, but total assets climbed far faster, by 5 per cent, as borrowers flocked to banks at the expense of non-bank lenders.

The National Australia Bank yesterday backed down on a decision to cut the interest rate charged on its teenage-directed smart junior saver account by the full 0.25 percentage point Reserve Bank cut in official interest rates.

"We got it wrong, we have listened, we acknowledge this is one we needed to review and we have reversed our decision," said NAB personal banking chief Warren Shaw.

The Bank had cut the rate paid to its teenage depositors despite passing on none of the cut to its borrowers.

NAB was not alone in slugging its depositors while failing to pass on the Reserve Bank's cuts to its borrowers. The ANZ and Westpac each cut their main variable deposit rates by the full 0.25 percentage points while passing on only 0.10 percentage points to mortgage holders.

Thursday, April 16, 2009

You'll get mail. From the Tax Office.

Australians employed through labour hire firms are not only at at greater risk of losing their jobs that directly-employed Australians, they're now also far more likely to receive a letter from the Tax Office.

The Office revealed yesterday it will be requisitioning names from 34 labour hire firms and computer consultancies to match against individual taxpayer records.

Among the firms targeted will be Drake Australia, Hudson Global Resources and Manpower Services.

It is targeting these firms not because it believes that they are avoiding tax, but because it believes there is a higher-than-normal risk that their 30,000 clients are.

Where ABN numbers and amounts of tax paid do not match other data held by the Office it will write to the clients directly explaining that they have been identified as "potentially having difficulty passing the personal services income tests"...

The campaign, accompanied by enforcement actions follows earlier campaigns directed at buyers of luxury cars and high wealth individuals.

In a document lodged with the Privacy Commissioenr the Office says it will seek data relating to the past two financial years and will destroy it within 14 days of days of deciding to take no further action.

It says it anticipates full co-operation from each of the labour hire firms and believes the data is readily at hand.

The move comes as the Tax Office faces increasing pressure to deliver on Budget forecasts in the midst of an economic downturn.

The Treasury is finding revenue difficult to forecast this year and over estimated takings in its mid-year Budget update.

What have we got? 12 per cent less.

Australian wealth held in the form of shares, investments and property is collapsing at the fastest rate on record, shrinking an extraordinary 12 per cent in the past year.

Treasury calculations released to economic modelers Wednesday suggest that the average Australian lost an inflation-adjusted $26,400 during 2008 - 11.8 per cent of his or her buying power.

"This quantifies the collateral damage from the global slump," said CommSec economist Savanth Sebastian who crunched the Treasury numbers to come up with the 11.8 per cent figure.

"It's the biggest fall in records going back 48 years. It's the only time wealth has fallen for four continuous quarters"...

The average Australian's real estate, share market and financial wealth amounted to $223,985 in December, down from around $250,000 a year before.

The Treasury does not break down the total wealth estimate into individual components.

The collapse comes at the end of a decade in which wealth per Australian roughly doubled.

Mr Sebastian said it was possible that wealth had began climbing again since the December quarter.

"Household prices improved in the early months of the year and share market jumped sharply in March, he said. "Things could improve going forward."

Separately released Residex data showed house price growth in every city but Perth in the first three months of the year, with Melbourne Prices up 0.5 per cent over the three months and 1.6 per cent in March.

Perth prices plunged 1.9 per cent in March, to be down 3.9 per cent Over the quarter. Perth prices are plunging at an annualised rate of 16 per cent.

The Westpac-Melbourne Institute leading index deteriorated further in February pointing to bleak economic outlook as the government frames the May Budget.

The index is made up of indicators thought to point to conditions three to nine months ahead, including overtime worked, manufacturing materials prices and productivity.

It is now running at an annualised rate of minus 5 per cent, well below its long term average of plus 3 per cent.

"The rate of deterioration of the index is truly remarkable," said Westpac chief economist Bill Evans. "The consistent run of negative reads is comparable with Australia's previous recessions which began in 1961, 1974, 1982, and 1990."

"A comparison with the last recession is disturbing. During that recession the annualised growth rate of the index reaching a low point of minus 3.4 per cent. In this cycle we are already at minus 5.1 per cent."

"We are forecasting that the economy will bottom in 2009. The rapid deterioration in the index points to downside risk to that forecast."

Wednesday, April 15, 2009

Your landlord's not that mean

...and doesn't much care for negative gearing

Negative gearing is disappearing as a tax strategy for landlords, and it seems it won't be missed.

Falling interest rates and rising rents over the course of the financial crisis have made it increasingly hard for landlords to make deliberate losses in order to offset their other income for tax purposes, and the government's Henry Review has the practice under the microscope.

But if we are to believe what landlords themselves have told a research project conducted for the Australian Housing and Urban Research Institute, they won't much mind.

The in-depth telephone and face-to-face interviews with 20 to 40 landlords from each Australian state paint pictures of "amateurish" and "emotional opportunistic" decisions dictated by circumstance and familiarity rather than economics.

"This very amateurism can be problematic policy-wise, because investors are not easily susceptible to policy levers," say the researchers from Swinburne, Monash Queensland, Western Sydney and NSW universities...

"But it can also be a positive, in that many such investors appear not to be as reactive to market fluctuations or poor short-term returns as more professional investors."

Only one of the investors interviewed nominated negative gearing as the chief reason for deciding to become a landlord.

Many did it in order to have somewhere to live when they retired or to be near other members of the family. They distrusted complex investments and could understand "“bricks and mortar".

Most were primarily concerned what they called the "long term" returns or "capital gains". Many year-to-year outcomes were not that important.

"I have only made a tax loss of about two grand maximum a year over the whole time I have been a landlord. I have been telling myself that the negative gearing is important, but now I think about it, it doesn’t sound as if it is," said one.

"Negative gearing isn't essential. It is a bonus," said another.

Some actively opposed the concession saying that "governments do enough" without it. Others thought it wouldn't last but took advantage of it nonetheless.

"I think it’s crazy, but I’m in it if it’s there,” said one.

"You sit back and rub your ears and say goody,” said another.

Launching the Henry Review consultation paper in December the head of the Treasury Ken Henry said he "still wears the scars" from an short-lived experiment with limiting the negative gearing tax concession in the mid-1980s.

The views of landlords themselves suggest that this time they might be more receptive. The changing financial environment has forced more and more into "positively gearing" - actively making money, as an alternative to attempting to make deliberate losses.

But the interviews also paint a picture of landlords reluctant to raise the rent.

"I've got the same tenant as when I bought it. She’s a pensioner. I’m not interested in an extra $20 or $40 a week - it's nothing to me as what it would be to her," said interviewee.

"There’s a lady who is a sole parent with five kids and she fell over herself to rent the place. She is still only paying $230 and she rang me up two weeks ago and said it’s about time you put the rent up. And she’s the tenant! I nearly drove off the road," said another.

While stressing that landlords were not driven by any sense of a moral imperative the researchers report that many were aware of their role in providing a social service and took it seriously.

Kinder, gentler landlords

"I'm a bricks and mortar person. I know it doesn't have the returns, but I can see my investment."

"We actually don't believe in negative gearing, so it wasn't as if we went and found something we could negatively gear - it was just coincidental."

"I intend to retire in a few years and I looked at Bendigo as a good place to retire and my wife is happy with that too."

"I work on trust. I've told the tenants if there's any repairs need to to be done, to do it, nothing over two or three grand - to treat it like their own home."

"If a tenant moves out you immediately lose a week's rent. Even if you get someone straight in you've lost the re-renting fees, so I don't tend to raise the rent."

Australian Housing and Urban Research Institute, Understanding what motivates households to become and remain investors in the private rental market, March 2009

Tuesday, April 14, 2009

Japan and China hold the keys to Australia's future

A leading advisor to China's central bank has dashed hopes of an early economic recovery saying its economy has yet to bottom.

Fan Gang, a member of the bank's monetary policy advisory committee is quoted in official Chinese media as telling a weekend forum that it will take at least two or tree years for China's economy to recover.

The warning came as Australia's Treasurer Wayne Swan described China’s growth prospects as "absolutely critical to Australia’s exports and commodity prices".

Mr Swan returns to Canberra from Brisbane today to work on the second Rudd Budget to be delivered in four weeks on May 12...

"It comes as the global economy is facing its worst conditions in 75 years," the Treasurer said yesterday. "But we are determined to deliver a responsible Budget that gets the balance right between supporting growth and jobs now and putting in place the building blocks we need to prosper after the global recession ends."

Fan Gang said the major economies were still in the early stage of recessions which would weigh on China's exports for years to come. China was running down inventories and scaling back manufacturing capacity. The process would take at least another 2 years.

The comments are are odds with a more optimistic assessment delivered by China's Premier Wen Jiabao who pointed to an increase in new loans to a record high and a jump in industrial output in March of 8.3 per cent.

They come ahead of critical economic growth figures for the March quarter due later this week.

Australia's biggest customer Japan reported Monday that its wholesale prices were plunging at their fastest rate since 2002, pushing it into its second bout of deflation this decade.

Japan's wholesale prices fell 2.2 per cent over the year March, a deeper fall than the 1.6 per cent recorded in in the year to February.

Analysts say it is inevitable that consumer prices will turn down as well encouraging Japanese consumers to further put off spending, deepening Japan's downturn.

In contrast to its last domestic downturn, its export industries will be ailing at the same time, providing no relief for Australian resource exporters.

Monday, April 13, 2009

It's time to stop guraranteeing bank borrowing

Treasurer Wayne Swan is under increasing pressure to abandon his policy of guaranteeing bank borrowing amid claims it is allowing the big banks to hold monetary policy to ransom.

Christopher Joye, who headed Prime Minister John Howard's 2003 Home Ownership Task Force says the guarantee has given Australia's four biggest banks "de-facto control" over interest rates.

Last week all four refused to pass on to mortgage holders the full 0.25 percentage point Reserve Bank' interest rate cut and one passed on nothing at all.

"The notion that our vital monetary policy lever has been suffocated in this way is deeply disturbing," said Dr Joye. "One frequently noted strength of Australia - the assumption that there was more interest rate ammunition left to deploy - looks to have been eviscerated."

Smaller banks and non-bank lenders that would have once provided competition are unable to offer lower rates because they are charged roughly twice as as the big four to use the borrowing guarantee...

St George, BankWest, RAMS, Aussie and Wizard are among the lenders swallowed by the big four.

Bendigo Bank, said Thursday it could not afford to pass on any of the Reserve Bank's 0.25 per cent cut because it had been priced out of using the funding guarantee.

"Small banks and institutions such as ours are effectively denied access to affordable funding," said Bendigo chief Rob Hunt yesterday.

"It's threatening to create a two-tier economy in which the second tier struggles to get funding."

"The risk is it make the recession deeper and longer than it needs to be".

Dr Joye, who runs the funds management firm Rismark said the government should stop guaranteeing bank borrowing and instead guarantee individual new mortgages.

"It should offer each good-quality new mortgage its AAA govenment rating in return for a fee. That way it would just as cheap for cheap for banks and non-banks to fund them. It would reintroduce competition. The government already knows how to identify good mortgages. It's Office of Financial Management does so when it invests in them," he said.

Mr Hunt backed Dr Joye, saying there was an urgent need to reestablish a "level playing field".

"We supported the quick action the government took in November to get the big banks reliable access to funding. We recognised that it would lead to distortions, but we accepted that systemic stability was paramount."

"Now that the system is stable, the government needs to reconsider its pricing regime if it wants to reestablish a competitive system."

Dr Joye said the big four were beginning to use their government borrowing guarantees in a ways the government had not intended.

"It is well known that one of the majors is restricting credit for housing in order to buy banks in China," he said. "This seems highly questionable in the midst of a credit crisis."

"Given the poor track-record of Australian banks overseas - think of NAB in the US and AMP in the UK - there is a compelling case that these taxpayer-subsidised utilities should stick to their knitting."

Canada’s banking system was judged the world’s safest by the World Economic Forum and guarantees confirming mortgages rather than institutions.

Dr Joye said the switch would save the government the $4 billion it plans to spend buying residential mortgages and could also save it the $2 billion it plans to spend on the so-called "Rudd Bank" if it was also applied to good-quality commercial mortgages.

How big is one trillion?

We need to get used to this

The BBC helps out:

"A million seconds is 11 days;

A billion seconds is around 32 years;

And a trillion therefore is 32,000 years"