Sunday, January 31, 2010

Australia's Prime Minister didn't know what was to be in Australia's Budget

I had thought that kind of thing could happen only in the UK:

IF PRE-BUDGET speculation leaves you feeling out of the loop, you're in good company. According to former Downing Street aide Derek Scott, the Prime Minister has been none the wiser, either.

In his book Off Whitehall, Scott reveals how Tony Blair was forced to beg Gordon Brown for a "hint" of what was in one of the Budgets. Blair, writes Scott, was reduced to pleading: "Give me a hint, Gordon."

But, unbelievably:

"Costello was always tight with information, and trying to get him to tell the Prime Minister's office what was in the budget was always an ordeal," Niki Savva writes.

"In 2003, Costello kept his budget tax cuts secret until the last possible moment. In 2006, the Prime Minister's office was not told about the superannuation changes until a few days before the budget was put to bed. Howard would ring his advisers seeking information on what was in the budget, only to be told they couldn't get it and he would have to ring Costello himself to ask for it."

Mr Howard saw the Coalition tax cuts for the 2007 election campaign only a few hours before the scheduled joint press conference to unveil them.

No wonder Australia turfed them out.

I am all in favour of ministers running their own departments...

But for Australia's Prime Minister not to know what was in Australia's Budget?

As someone once said, "head. meets. desk"

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I mentioned that I used to work in television news... (funny video)

Not for long, and always as part of another job - mainly being the ABC's Tokyo Correspondent.

My reports were NEVER like this:

HT: Mark Colvin

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Saturday, January 30, 2010

Rupert to the rescue - his little-known role in the creation of ABC News 24

Australia's new 24 hour news channel

Here's how it happened as I remember it, and I was at ABC TV at the time and following things closely:

Telstra and NewsCorp set up a jointly-owned company called Foxtel, and later brought in other owners.

In 1995 they were looking for a 24-hour news channel as part of their offering.

The ABC put in a tender which was verbally accepted.

But it wasn't an ABC-only tender. It was the ABC in partnership with Fairfax which produces the Sydney Morning Herald, The Age and other newspapers.

The venture spent a fortune on a beautiful new studio-newsroom at Gore Hill in Sydney which I toured... a working newsroom with computer editing and robotic cameras (which unnervingly had no viewfinders) - all way ahead of its time for 1995.

It set up live broadcast points from Fairfax newsrooms and money market dealing rooms etc, hired Katrina Lee and John Lombard as anchors, got Weather Bureau presenters to rehearse and work for free and actually produced weeks of test broadcasts that were beamed into Parliament House in Canberra.

(ABC news staff were generally wary of the whole thing - it involved a partnership with a commercial competitor.)

Then Rupert said 'no'.

Legend has it it was something an ABC executive said, implying that the deal wasn't final and the venture might go on the Foxtel competitor OptusVision.

Another legend is that he was upset about a forthcoming or just-broadcast Four Corners program about him.

And another is that the argument was about price. He asked a consortium of commercial TV stations to tender for a bare bones service, which they did at a fraction of the price, and named it Sky News Australia.

Rupert probably also didn't want to give a leg-up to two competitors.

But he did say no, and Telstra backed him - leading to the absurd situation where a government-owned carrier refused to carry the government broadcaster.

The ABC and Fairfax wrote off the expenditure, the staff were redeployed or terminated, the equipment sold and the building closed down.

(And the experience was sucked into a memory hole.  Last year an editorial in The Australian was able to claim that the ABC had lacked the foresight to do what Sky News Australia had done.  If only the editorial writer had known!  It wasn't the foresight it lacked, it was the ability.)

Fast forward to 2010.

Sky News Australia is quite good at what it does.  And now the ABC is about to launch a free 24-hour news channel without a commercial partner to make its unmatched resources available all the time to all Australians.

Good outcome, eh?

Were it not for Rupert, the new ABC service would be restricted to those Australians with pay-TV and would have compromised the ABC by partnering it with Fairfax.

Well done. And thanks.

"Independent, accurate, always there."

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Did Australia spend too much to avoid recession?

Gee, not compared to our peers

Here's the Harvard Business Review graphic.

Each circle on the map represents a nation'a GDP. The bailouts and the stimulus are displayed as a percentage of GDP in red and blue.

Click here to enlarge and explore.

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Friday, January 29, 2010

The 2009 Tax Expenditures Statement is out. And the winner is...

 ...owner-occupied housing, at $31 billion

Superannuation comes a respectable second, at $24.5 billion

It's here.

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Boy do I recommend this - Hayek vs Keynes: the video clip

Created by Russ Roberts - resources here

Download the MP3, use it to teach.

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Thursday, January 28, 2010

Expect the third Intergenerational Report Monday


Eggs, bacon, milk - breakfast gets cheaper

Craig James trawls the CPI so you don't have to:

"There are 90 expenditure groupings in the CPI (or as the ABS says “groupings of like items”). So it’s not surprising that some of the more interesting changes get lost.

• What is interesting in the latest CPI is that a raft of food products became cheaper over the past year. In part it reflects the drought as well as Government changes such as the removal of the milk levy that was used to fund the Dairy Industry Adjustment program. But the changes are notable – such as the largest annual fall in bacon and ham prices in 29 years; the biggest fall in diary prices in 37 years and the smallest increase in tobacco prices in 12 years.

• The tough advertising conditions over the past year produced gains for consumers with the smallest lift in newspaper & magazine prices in over a decade. In fact newspaper and magazine prices actually fell for the first time on record in the December quarter, down 0.3 per cent. But with business conditions lifting together with demand for advertising, the good conditions for readers may not last.

• On the other side of the coin, the price of furniture has continued to soar despite a stronger Aussie dollar. In fact furniture has recorded the biggest annual increase in over 18 years. Tools are also far costlier – rising at the fastest pace in 11 years. If ever there was a case for shopping around and comparing prices then it certainly applies for these goods.

• It is interesting how insensitive education fees are to economic conditions. Over the past nine years, secondary education fees have risen on average by 6.9 per cent – far higher than the 2.9 per cent average lift in the overall CPI. Clearly it gets down to supply and demand. Population is rising at the fastest rate in 40 years and class sizes are drifting higher, causing parents to compete hard for the best schools...

What do the figures show?

�� Dairy and related products – down 1.0 per cent over the year – biggest fall since inception in the CPI in 1973(37 years).

�� Bread and cereal products – up 1.4 per cent over the year – smallest rise in 5 years.

�� Bacon & ham – down 4.2 per cent over the year – biggest fall since inception in the CPI in 1981 (28 years).

�� Soft drink – up 1.6 per cent over the year – smallest gain in 4½ years.

�� Eggs – down 1.3 per cent on a year ago – second biggest fall in almost 4 years.

�� Tobacco – up 2.5 per cent on a year ago – smallest rise in 12 years.

�� Electricity – up 15.7 per cent on a year ago – biggest gain in 26 years (September 1983).

�� Newspapers & magazines – up 0.7 per cent on a year ago – smallest rise in 10½ years.


�� Furniture – up 5.7 per cent on a year ago – biggest increase in 18½ years (June 1991).

�� Tools – up 6.8 per cent on a year ago – biggest increase in 11 years.

�� Optical services – up 2.8 per cent on a year ago – biggest rise in 8 years.

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Remember the handmade toaster?


Wednesday, January 27, 2010

Golden Rules for Writing, Well

From Iain Campbell

1.Don't abbrev.

2.Check to see if you any words out.

3.Be carefully to use adjectives and adverbs correct.

4.About sentence fragments.

5.When dangling, don't use participles.

Here's the full, list.

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Monday, January 25, 2010

Rain CUTS traffic deaths

Counterintuitive, but that's what the evidence assembled by Andrew Leigh suggests.

He uses it to argue that the true cost of drought is higher than commonly realised.

Precipitation, Profits, and Pile-Ups

Andrew Leigh, Centre for Economics Policy Research Discussion Paper 629

In considering the economic impacts of climatic changes, economists frequently use annual national income as a proxy for social welfare. I show that such studies suffer from a significant bias, arising from the fact that such models typically ignore changes in mortality rates. Using panel data from Australia, I show that rainfall lowers traffic deaths, suggesting that the standard approach may underestimate the true economic cost of droughts.

Precipitation, Profits, And Pile-Ups

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Saturday, January 23, 2010

Guess what? Henry examined the evidence

A funny thing happened on the way to preparing the biggest-ever review of Australia's system of tax and government handouts.

The answers changed from under the committee.

The final report of the Henry Review, with the government since December, is 10 centremetres thick printed on A-4 paper. It'll look neater when it is bound and printed.

It would have also looked very different had it reflected the thinking of Ken Henry and his four-person team nearer the time they were appointed.

Back then in May 2008 Lehman Brothers hadn't collapsed, countries with low corporate tax rates such as Ireland and Iceland were seen as success stories... and Australia looked certain to face growing competition from ever-lower company tax rates as the next decade unfolded.

But by December 2009 Ireland and Iceland had lost their glamour and it had become clear that for the next decade international tax rates would be going up, not down, as governments attempted to pay down their debts.

The Committee that had placed considerable importance on lower corporate tax rates no longer cared as much.

Its research had suggested that Australia ideal corporate tax rate was somewhere between the present 30 per cent and a lower bound of 25 per cent. It had been inclined to recommend a cut toward the lower bound. Its final report is more lukewarm.

That's how it was for much of the Review itself. The committee would ask first what an ideal tax and transfer system would look like, as if it was starting with a blank slate. Then it would discover that in many areas what Australia already had looked surprisingly close to ideal, or - in areas such as the tax treatment of the family home - what Australia had was too entrenched to change.

But it wanted to go on the journey. And it was continually frustrated that the people who wrote to it would not. Submission after submission was about protecting or only slightly changing the system as it was; sometimes to protect vested interests, sometimes because of a lack of imagination. The National Tax and Accountants Association for example opposed the idea of removing the requirement for Australians to file tax returns. The committee recommended it anyway.

To get an idea of what ordinary Australians thought it held public meetings in all the cities and in Wagga Wagga and Geelong and found huge concerns about paperwork and complexity as well as a thread of unease about whether they would be properly looked after when they got old.

Aging turned out to be the dominant theme behind the committee's work, along with the globalisation of financial flows and the husbanding Australia's resources. That's why the opening chapter of the Review is in the form of a narrative that takes a broad sweep through the issues facing Australia in the decades ahead and the things that must be done to prepare for them.

One of those themes, perhaps not expected by the business figures who proposed the review at the 2020 Summit, is that the tax system needs to be geared to raise more money. The challenges of aging are not properly met and are going to get bigger.

One way to raise more money in the present environment is to grab a bigger share of the profits from the mineral wealth leaving Australia. The Review found the Minerals Council surprisingly receptive to the idea of a profits tax, to be called a Resource Rent Tax, at an indicative rate of 40 per cent. This is because over time it would replace the complex web of existing royalty charges levied mainly by the governments of Queensland, Western Australia and NSW, some by the volume of material exported, some on the income brought in and some on the "value added". A profits tax suits the industry better because it is only levied when there is a profit, and after all exploration and other expenses have been accounted for. At times it would bring in less money than the existing system of royalties and at those times would keep struggling mines open. But in the last financial year alone it would have brought in an extra $7 billion to $8 billion, more than enough to allow Canberra to compensate the states for losing royalties and about enough to fund Australia's universities.

This is one of the ideas in the Henry Review likely to get fast-tracked. Information about it has already been put before the Cabinet. But it's likely to face opposition from state governments, particularly Western Australia's, who would rather keep control of their own revenue, and from mining companies concerned about the transition. Would it apply only to future projects, as the miners want, or would it replace the existing state taxes immediately as the Treasury wants? The Henry Review has kick-started a debate that will get political.

That we are living longer concerned the committee so much it used the term "longevity risk" in its report to describe the unpleasant situation facing retirees around the age of 90 who discover that their super payments have run out. Private firms have largely deserted the field of providing income until death because increasing lifespans means they can no longer work out when death will be. They've pushed up premiums to the point where about the only people still trying to buy all of life cover are those likely to live especially long, forcing the insurers to push up premiums further. The Henry Review is attracted to the idea of the government offering all-of-life insurance in exchange for lump sum super payouts and has investigated the idea of it being made compulsory.

It is worried too about the prospect that 2.3 million of us will disabled by 2030. A Productivity Commission inquiry is underway and the parliamentary secretary for community services Bill Shorten is investigating a Medicare-style tax levy of about 0.4 per cent to provide the care and support we are likely to need. The Henry Review backs the idea, but deals with it in only a few paragraphs,deferring to the Productivity Commission's inquiry.

It finds no case for lifting super compulsory contributions as favoured by several government ministers, concluding that 9 per cent will be enough to give most Australians "a substantial replacement of their income, well above that provided by the age pension" when a complete generation has been through the system.

While lower-income earners might still have to rely on the pension, any increase beyond 9 per cent runs the risk of damaging their working incomes.

If it had its way it withhold access to superannuation until we reached the age of 67 to keep more of us in work. But the government ruled out that idea when the review floated it in May, although it adopted it for access to the pension.

That's left the review looking for other ways to keep us working longer. One, suggested by Treasury boss Ken Henry this week is a cut in the rate of income tax as Australians age. The committee is also very keen to cut the effective tax rate applying to mothers considering reentering the workforce. Part of doing that would be to kill Family Tax Benefit Part B. With the proportion of Australians of working age shrinking the committee wants nothing to stand in the way of Australians able to work and wavering.

The committee has persuaded Treasurer Wayne Swan that the tax concessions for super are a mess. Because contributions are taxed at a flat rate of 15 per cent a very high income earner on $180,000 gets a concession on income tax worth 31.5 per cent. Middle earners get 24.5 per cent and low income earners just 1.5 per cent.

Superannuation will however retain its tax-preferred status. Speculation that the review will tax all savings in the same way is wrong. But it will move in that direction. It finds that savings in banks face a real effective tax rate of around 50 per cent. By contrast savings in the form of property face a tax rate of around zero, and savings in the form of superannuation a negative tax rate.

The review recommends that all savings be tax preferred compared to wages and that the effective tax rates of different types of savings move closer together.

This will mean a lessening of the 50 per cent concessional rate applying to capital gains, but it will not mean as reported a return to indexation of capital gains for tax purposes.

The generous tax treatment afforded the family home will remain in place but in order to help compensate for that so too will stamp duty when homes are bought. Reports the committee has recommended replacing stamp duty with a land tax are wrong.

Stamp duty on insurance is set for the chop, the committee believing that insurance is a good thing and should not be discouraged.

Payroll tax, also despised in many quarters, would stay but be made more uniform with fewer exemptions. The committee finds that it's a good revenue raiser, one of the few the states have, and it's the exemptions that cause problems.

Other taxes are screaming out to be made more uniform. Alcohol is taxed differently according to whether it is in the form of wine or beer or spirits. In a blow to the relatively lightly-taxed wine industry the committee recommends a uniform tax per unit of alcohol.

Fringe Benefit Tax is applied to some employers but not others, with charities and churches able to pay their employees generously in cash that is not taxed. The review finds no logic in continuing the concession and says the government should support charities directly if it feels they need help. Dr Henry broached the topic this week asking "who on earth would think it sensible to levy tax on a worker whose bank balance is enhanced by the receipt from her employer of a payment called a wage, but to not levy tax on a worker whose bank balance benefits from the receipt of something called an expense?"

Another less-obvious example of a taxes screaming out to be made uniform are the charges for driving. At the moment we are charged at the pump and with registration whether or not we drive when roads are contested. But its only our driving when roads are congested that seriously costs money, both by delaying other drivers and adding to pressure to build new roads. The committee believes that in the same way that charging for using electricity removes the need to keep building new power stations, and charging more for peak power makes better use of the power stations we have, charging for road use when roads are clogged would drastically cut the need to spend billions building more roads.

The committee also knows that cars may soon no longer be powered by petrol. When that happens petrol excise revenue will collapse. The obvious replacement is revenue from actual road use and the technology to do it is within sight.

The unifying theme of the report now with the Treasurer is that taxes should make sense and ideally not get in the way of the things we want like foreign capital and Australians prepared to work. It's recommendations run into the hundreds but they shouldn't obscure the review's most important findings - that the bulk of the system we have works well and that in time it will be asked to do more.

Published in today's SMH and Age

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The Henry Tax Review: not quite as leaked

What's in

Voluntary simple tax returns
Longevity insurance
Medicare-style disability levy
Resource rent tax
Road congestion charges

What's not

Taxing the family home
Axing real estate stamp duty
Axing payroll tax
Boosting the 9% super levy
Tax indexation for capital gains

Voluntary simple tax returns, longevity insurance, a Medicare-style disability levy and incentives to keep Australians in work head a list of recommendations from the Henry Tax Review focused on aging alongside those designed to deal with increasingly mobile capital including a 40 per cent mining resource rent tax.

Contentious recommendations include pay-as-you-drive road congestion charges, fringe benefits tax for charities, and a uniform alcohol excise that would push up the price of wine relative to beer.

Many of the recommendations in the 10-centimetre thick report delivered to the Treasurer in December will cause the government trouble. Some ideas, such as lifting the age of access to super, have already been ruled out.

Many of the reported "leaks" have not made it into the final report, among them taxes on the family home, axing real estate stamp duty, abolishing payroll tax and reintroducing indexation for the taxing of capital gains...

The report opens with a narrative chapter that explains that Australia's tax system stacks up well but that it will be severely tested by the aging of the population and a growing shortage of workers.

Because Australians are living longer and private insurers have largely deserted the field of providing income until death it recommends the government consider selling longevity insurance in exchange for super payouts and raises the possibility that such insurance be compulsory.

It canvasses a Medicare-style disability levy of around 0.4 per cent as a means of providing care to the 2.3 million Australians expected to be disabled by 2030. It deals with this only briefly noting that a Productivity Commission inquiry is under way

The committee has found against lifting compulsory super contributions above 9 per cent believing that a higher rate would harm the working incomes of low-wage Australians.

It recommends removing barriers to Australians considering work, raising the possibility of lower tax rates for older Australians, and changes that would cut the effective tax rate facing mothers considering returning to work.

It finds that as a general principle the tax rates facing saving should be lower than those facing wages and notes that bank interest is taxed more heavily than other forms of saving, but stops short of recommending that all forms of saving be taxed the same.

Superannuation would retain its tax-preferred status, but the benefits would be more evenly spread so that high income contributors no longer did many times better than low-income ones.

Reporting that one of the chief concerns raised by the Australians who attended tis public meetings was paperwork it recommends changes that would make simple tax returns optional.

When it began its deliberations in mid-2008 the committee believed Australia's 30 per cent corporate tax rate would need to be sharply cut in order to remain internationally competitive, but by the time it reported it was less enthusiastic finding that the global financial crisis had blunted the prospect of overseas tax competition.

Its recommendation that existing state based mining royalties be replaced with a national profit-based Resource Rent Tax perhaps set at 40 per cent was yesterday labeled an "outrageous Canberra tax grab" by Western Australia's Treasurer Troy Buswell.

"The only valid point Ken Henry makes is that royalties could be higher but this would make us an outpost of Canberra," he said.

"We already subsidise rustbucket states like NSW and if the Commonwealth attempts to override our long-held rights to royalties there’s every chance that would continue at an even faster pace. There are a lot of votes and seats in NSW."

The BHP Billiton share price yesterday slid 97 cents on the news, the Rio Tinto share price $2.61.

The Treasurer has had the final report of the review for a month and plans to release it soon.

Published in today's SMH and Age

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Friday, January 22, 2010

We own the minerals, lets get a share of the profits from selling them

The Henry Tax Review has recommended scrapping the state-based royalty taxes applying to mining projects and replacing them with a uniform national resource rent tax set to raise billions more.

The tax, most likely to be set at 40 per cent, would be modeled on the existing Petroleum Resource Rent Tax that is levied on petroleum products including crude oil and natural gas mined in Commonwealth waters other than the North West Shelf and the jointly-developed area between Australia and East Timor.

Treasury calculations suggest that if the PRRT formula had been applied to resources such as iron ore and coal and to companies including BHP Billiton and Woodside Petroleum over the past three years it would raised an extra $14 billion...

In contrast to some of the state-based royalties the resource rent tax would not be levied until all of the exploration and development costs associated with a project had been paid for and would only be levied in those years when the project actually made a profit.

Treasury calculations show that had the system been in place in earlier in the early years of the last decade it would have actually raised less money than royalties because many mining projects were not making profits.

Treasury head Ken Henry yesterday defended special taxes on mining projects telling the Australasian Tax Teachers Association that while company tax partly taxed "profits extracted by foreigners from Australia’s natural and immobile resource endowments" Australia's special circumstances suggested the need for an additional tax.

"Many developed countries are either large economies, for which capital might not be so elastic in supply, or have few exploitable natural resources remaining," he told the conference.

The proposed resource rent tax would itself be tax deductible for purpose of calculating company tax.

Although it would be levied on a project by project basis, if it was like the the present petroleum tax it would allow companies to write off spending on new projects against profits from existing ones.

Making the case in an address to the Australian Minerals Council in September Treasury official David Parker said the Australian community "expects and should expect to receive a fair return from its natural resources."

The final report of the Henry Tax Review was delivered to the government in December.

Published in today's SMH and Age

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Prepare to pay more tax

Not now, but soon: Ken Henry

Treasury boss Ken Henry has dashed expectations that his tax review will pave the way for lower tax declaring that over time Australians will have to pay more.

Addressing the annual conference of the Australasian Tax Teachers Association Dr Henry said the tax system had to be prepared for the probability that "in order to finance the government-provided goods and services demanded by the community, revenue needs will grow strongly in the longer term".

"Generally, older people demand a lot more from governments especially in health and aged care services," he told the conference.

"Sure, policy reforms that improve the productivity of service delivery in age-sensitive sectors would ameliorate some of these expenses. But it would be prudent to plan on the basis that the tax system will, over time, have to generate revenues to meet substantially larger fiscal costs."

The Treasury Secretary's comments spell an end to seven years of back-to-back personal income tax cuts and suggest that much of his review is focused on strengthening the tax system so it can raise more...

However he said there was a case for cutting the tax rates applying to older workers on the ground that they otherwise mightn't work at at all.

"In theory, marginal tax rates should be lower where there are more people whose participation is most responsive to tax rates," he said. "Older people are less likely to be in the workforce due to retirement or working less hours."

As an example of the extra costs now facing government he said that in the two decades leading up to 1990 Australia's spending on pharmaceuticals stayed steady in real terms at $210 per head. Since then a new wave of "blockbuster drugs" has pushed the cost per head up to $678 with no sign of it slowing.

In a hint that his review has considered big and unsettling tax changes Dr Henry warned against the tax educators to be on guard against "vested interests" who he said had a history of "dressing up" their objections as concerns for exports and jobs.

"Consider, for example, our peculiar but long-standing acceptance of a monstrous challenge confronting our gold miners that justified extraordinary policy protection. Many of you probably wouldn’t remember that income from gold mining was fully tax exempt in Australia until 1991."

"The exemption lasted nearly 70 years, despite its having absolutely no support in tax theory. Even so, its removal was highly controversial.""

"Consider the intense opposition to the rather innocuous proposition that a worker should pay tax on his or her remuneration even if it is not labelled 'wages' or 'salary'. Who on earth would consider it sensible that an executive who receives some part of his remuneration in the form of a Porsche and a holiday apartment should not be required to pay tax on that income?"

"The fact is that until September 1985 all of Australia’s governments had, apparently, thought these things sensible. Indeed, even after the Fringe Benefits Tax had been legislated, the then Opposition went to the 1987 election campaigning for its repeal."

"Even though I had a deep personal involvement in the development of the FBT and its subsequent negotiation through the Parliament, I still find it hard to believe the intensity of the opposition to this rather obvious requirement of tax system fairness and integrity. Looking back, it seems incredible to me now that the Hawke Government was told by both the motor vehicle industry and its own industry department the FBT would lead to a complete shutdown of domestic production and the loss of hundreds of thousands of jobs. I find it incredible that such claims were made, yet I know it’s true that they were."

Dr Henry delivered his tax report to the Treasurer in December.

Published in today's SMH and Age

Changing Taxes for Changing Times - Ken Henry

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Thursday, January 21, 2010

Thursday column: Message to Australia's banking industry, real estate industry, super industry...

It isn't about you

You've got to hand it to Australia's Federal Chamber of Automotive Industries.  It knows when to stop.

After enjoying its biggest-ever pre-Christmas sales bonanza as buyers from all over the country who could even loosely describe themselves as businesses raced against the clock to take advantage of the government's 50 per cent business investment tax break, it said "thanks" but no more.

"This was game-changing. It restored confidence in the marketplace and stimulated additional demand," said Federal Chamber of Automotive Industries chief executive Andrew McKellar. But when asked whether the tax break should continue he said "no," it had been there in the industry's moment of crisis and that was enough.

He wouldn't even complain about the January 1 step down in the tariff on imported cars from 10 to 5 per cent.

Contrast that to the Real Estate Institute of Victoria and an audacious press release in the past week entitled "success of first home buyer assistance shows it should continue"... The gist is that the emergency help the industry got from the Commonwealth first home owners boost and the state first home owners bonus boosted first home owner sales, they're withdrawal is hurting first home owner sales therefore they should be made permanent or replaced with an exemption from stamp duty.

The Institute probably wonders why government doesn't take it seriously.

The so-called "Voice of Super," the Association of Superannuation Funds is heading down the same path.

In a creative announcement headed "make Budget provisions now and end speculation for a super 2010" it says "whatever the findings or recommendations from the Henry Review" the government should lift compulsory superannuation contributions to 12 per cent in the May Budget.

In fact there's no speculation about such a move and the Association knows well what the Henry Review has found.

It reported last May that 9 per cent would be enough to give most Australians "a substantial replacement of their income, well above that provided by the age pension" when a complete generation had been through the system.

It said that while lower-income earners might still have to rely on the pension with 9 per cent , any increase beyond that ran the risk of damaging their working incomes. It elaborated on but did not change that finding in the final report that is with the government.

The super industry, more than any other, has lived off government largess. What other industry gets customers herded into its doors by compulsion and also compelled to hand it a fresh nine per cent of their income each year regardless of performance? What other industry enjoys the benefit of tax breaks that keep pushing extra voluntary dollars its way and away from competitors?

The super industry has become so used to government generosity it thinks it's an entitlement.

But the government was generous for a reason, and it wasn't about it.

Which brings us to banks.

Quite rightly during the global financial crisis the government did everything it could to keep the banks working. Australia's financial system looked like seizing up.

In co-operation with the US Federal Reserve it kept the foreign exchange spot market open when traders themselves had walked away, it guaranteed the first $1 million of every deposit in every Australian financial institution and it offered to guaranteed the overseas borrowings of Australian financial institutions without limit and without restrictions on what they used the money for. Along the way Westpac, the Commonwealth, the National Australia Bank and the ANZ acquired better credit ratings for their foreign borrowings than many foreign governments.

And it permitted takeovers that would have normally raised questions. It allowed Westpac to swallow St George and the Commonwealth to swallow Bank West. Just as importantly it let Westpac grab the Rams home loan business and let the Commonwealth buy Wizard and 30 per cent of Aussie.

Then it started throwing money at first home buyers.

The banks' share of what became an expanding home loan market soared to 92 per cent.

It was prepared to do more. Had RuddBank got through the Senate it would have also taken precarious-looking commercial loans off their hands.

But it did none of these things in order to help the banks. It did them to help the financial system.

That's why Westpac's action in pushing up its mortgage rates 80 per cent more than Reserve Bank cash rate in December has so infuriated it.

Westpac and the others that partially followed it are like the Real Estate Institute expecting continued support even though the emergency has passed. Like the "Voice of Super" they seem to think that what is good for them and was once good for the nation will always be good for the nation. Westpac's "Bananas" video as good as said so.

In truth now that the crisis has passed the government has no duty to protect the profits of banks, car dealers or anyone else from the discipline of the market. It's likely to subject the banks to even greater discipline.

Expect an announcement in the Budget or during the election campaign about new government-sponsored competitor that will offer banking services through branches of Australia Post. The new head of Australia Post Ahmed Fahour once ran the NAB's Australian operations and had been set to run RuddBank.

He knows how to put the big Australian banks under pressure and he knows the government believes it owes them nothing.

Published in today's SMH and Age

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We feel more optimistic about our finances than at any time during the height of the boom

Rapidly improving job prospects and recovering share market wealth are propelling us to spend as we haven't in years despite three consecutive rate hikes and the prospect of more on the way.

The latest Westpac-Melbourne Institute survey finds 59 per cent of us agreeing that "now is the right time to buy a major household item", well up from last year's range of 42 to 55 per cent and the best result since mid 2007.

The survey was conducted as Australia's official unemployment rate slid to 5.5 per cent and came as the mining giant BHP Billiton announced record production of petroleum, iron ore, nickel and zinc, boosted by big gains in the price of iron ore, copper, aluminium and nickel.

"Our sentiment survey is saying that if people feel confident about their job prospects they can cope with the current level of interest rates," said Westpac economist Bill Evans.

Westpac's overall measure of consumer confidence surged 6 per cent in January to be up 34 per cent over the year.

Asked about family finances a larger-than-usual 41 per cent of those surveyed said they expected an improvement over the next 12 months. Melbourne Institute staff were unable to find a more positive result in records to hand dating back 14 years...

"I was expecting an improvement but this is a stunning improvement," said Mr Evans. "To think that confidence could be back above where it was prior to three rate hikes is very strong indication that households are dealing very comfortably with higher rates, which means they will have to go even higher.

A SuperRatings report released yesterday showed the typical fund had bounced back 12 per cent in the six months to December, taking the total gain for the year to 12.9 per cent, a turnaround on 2008 in which funds lost 19.7 per cent.

Westpac is expecting a further three interest rate hikes this year, one when the Reserve Bank board next meets in February and then two more before June or until confidence takes a hit.

"My view is you always reach a point when there is a non-linear response to a rate hike, like pulling on a brick with a piece of elastic. Eventually you get a result that surprises everyone, but I think its 0.75 to 1.00 percentage points away," said Mr Evans.

A further 0.75 points of rate hikes would add a further $142 to the monthly cost of servicing a $300,000 mortgage.

Among the groups Westpac and the Melbourne Institute found the most confident were mortgage holders who felt the best in 16 years Australians aged 18 to 24 who were the most optimistic in 14 years.

Labor voters remain more optimistic than Coalition voters although the gap is narrowing.

A separately-released Department of Employment skilled vacancies survey found a further jump of 1 per cent in vacancies since December pointing to further employment gains.

"Taken literally in isolation it points to further outsized outcomes of 30,000 to 40,000 extra jobs per month swiftly lowering the unemployment rate to 5.1 per cent," said TD Securities economist Annette Beacher. "While not my core view, the risks are tilted that way at the moment."

Published in today's SMH and Age

Consumer Sentiment Report January 2010

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Wednesday, January 20, 2010

This graph tells you the main thing you need to know about today's astonishingly good consumer sentiment report:

Saving jobs appears to trump higher rates.

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"Kraft snares Cadbury"


Tuesday, January 19, 2010

How fast is climate changing

It depends on where you live:

It's quite fast for us Australians.

Brian at Larvatus Prodeo outlines the new study in Nature.

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Yes, it's a decade of financial crisis, the comic book

It's here at the Financial Times. You might need to register.

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"Inflation's low, but we'll put up rates anyway"

That's how it will probably play out when this board meets on February 2

If the Reserve Bank board paid attention only to Australia's official inflation rate due for release next week it'd put up its feet and leave interest rates alone.

But the December quarter CPI, now expected to come in at just 0.1 per cent and 1.7 per cent for the year to December will scarcely figure in its calculations.

"It's the base, the starting point, but the board's job is to be forward looking,' says La Trobe University Professor Don Harding who has come up with the 1.7 per cent forecast for the Melbourne Institute.

"The board will look at it, see there's not much inflation in the system, say that's nice to know, but then say... the labour market is getting tight, retail sales looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up."

The TD Securities - Melbourne Institute inflation gauge compiled using the same price sampling techniques as the the Bureau of Statistics index, but monthly and more cheaply is usually in step with the Bureau's. The Institute says it's accurate to five one-hundredths of on per cent.

Which puts Professor Harding in an odd position. He thinks he knows what the official rate will be next Wednesday, he thinks it will look benign, yet believes the Bank will crank up rates again anyway.

The detail of Wednesday's result is likely to look particularly encouraging. Of the 90 price groups surveyed by the Institute in December an impressive 48 stayed steady, 23 increased and 19 actually fell, hardly a sign of widespread inflation. Around half the prices measured hadn't moved in six months; around two-thirds hadn't moved in three months.

"By December we almost unwound all of the sustained increase in inflation pressure that had been evident in the Australian economy for several years," Professor Harding concludes in his report, before conceding to The Age/Herald that what will matter is where the Reserve Bank board believes inflation is going rather than where it knows it has been.

Other analysts managed to read an uptick in inflation into Professor Harding's report.

"After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure," said TD Securities economist Annette Beacher.

"The long period of disinflation has clearly ended," said CommSec economist Savanth Sebastian. "Price pressures though mild are once again rising."

Australia's most-recent official annual inflation rate for the September quarter is 1.3 per cent.

A jump to 1.7 per cent when the December quarter figures are released would see the rate remain below the Reserve Bank's 2 to 3 per cent target band.

Published in today's SMH  and Age 

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Monday, January 18, 2010

Here they are, the first extracts from Rudd's new children's book...

It's not bad actually.

It (almost) ends...

Why did Rudd write it?


"It's a very practical measure to encourage literacy with the youngest Australians, and whatever we can do to encourage little ones to read and whatever we can do to encourage Mums and Dads and Grandmums, Granddads and carers to read to little ones, frankly, that is a good thing for the country and a good thing for them. If we don't get the basics right when it comes to a little one's education then, frankly, the problems get bigger and bigger later on. Getting the basics right, getting reading right, is really important for these little Australians' future."

Pure Rudd.

Proceeds to the Centre for Community Child Health at RCH Melbourne.

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Just because it looks like a "trend line" doesn't mean...

I've been critical of trend lines before.

The ones used by the ABS have particular problems.

But try this one on for size:

Note that the "trend line" ends the series going down.

But squint and look at just the purple line and it is apparent the series is broadly going up.

Possum says it is an "utterly ridiculous 4th degree polynomial curve".

Useful for Andrew Bolt who published it here to make it look as if global temperatures were not increasing.

He is up to other tricks as well and Possum is on to him.

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Sunday, January 17, 2010

Australia is BIG!


Saturday, January 16, 2010

What if Telstra could gouge us less?

The inquiry is really all about the line rental charge.  Right now Telstra is allowed to increase it every year by the rate of inflation, whether or not its costs have actually increased.  There are bugger-all costs by the way.  Telstra does this because it faces no competition in line rental and uses the extra revenue to cut prices where it does face competition. 

The capped 22 cent local phone call and the 50 cent payphone fee are up for grabs.

Communications Minister Stephen Conroy has ordered a snap inquiry into all of the price caps that apply to Telstra, including the critical fixed line rental charge.

While it is understood that his interest is in tightening rather than loosening the controls, Telstra says it will argue that it should be freed from price caps in areas where it now faces effective competition.

The current controls in place since 2005 stipulate that Telstra can not charge more than 22 cents for a local call from a fixed phone unless it does so as part of a "discount plan"... Local calls from public phones are limited to 50 cents.

The basic line rental charge has to be uniform throughout Australia and can grow no faster than the consumer price index . In addition the price of a "basket" that includes line rental, long-distance charges and calls to mobiles has to stay fixed in absolute terms, meaning that as line rental charges rise other charges have to fall.

Mobile calls are exempted form the caps on the ground that the industry is competitive.

The price controls were due to expire in mid-2009 and were extended a year while the government developed plans for its national broadband network.

The Minister's statement says "given that the NBN is in an early stage of development" he will extend the controls for a further two years after first asking the Competition and Consumer Commission to conduct a "limited" inquiry into the form they should take.

The ACCC has just two months to report and wants submissions by February 12.

Telstra said in a statement it was "keen to ensure that any controls take into account the increased level of competition in the marketplace".

Published in today's Age

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Melbourne - where the milk is surprisingly expensive

You could be forgiven for feeling short-changed as you're pouring your milk.

Milk drinkers in Sydney, Brisbane, Adelaide, Perth and Hobart have enjoyed substantial cuts over the past year of 9, 8, 12 and 17 cents per litre.

But in Melbourne the average fresh milk price has fallen half as much - by 4 cents per litre at the time when the other cities were getting their big cuts and then by a further 1.5 cents to make a total cut of 5.5 cents.

The figures are average prices collected by the army of shadow shoppers who visit supermarkets and corner stores on behalf of the Bureau of Statistics each quarter to compile the consumer price index.

Whereas in the first half of last year the average Sydney price of a standard 2 litre bottle slid from $3.61 to $3.41 - a drop of 10 cents per litre, in Melbourne it slid from a higher $3.69 to Sydney's starting price of $3.61 - a drop of just 4 cents per litre.

The first six months of 2009 are important because they are period when the government removed the 11 cents per litre levy introduced in 2000 to fund the Dairy Industry Adjustment Program.

Agriculture Minister Tony Burke asked the Competition and Consumer Commission to check that the price cut was passed on and said "people should be paying 11 cents a litre less for their milk shortly after the levy is removed".

A Freedom of Information Inquiry by the Age suggests the checking was limited. The ACCC wrote to eight outside organisations but prepared no document summarising their responses and no report to the Minister.

Coles, Safeway and Aldi passed on the cut in full on their own and other brands. But Coles has told The Age that weeks before the February price cut it passed on a 4 to 5 cent price rise from Parmalat, the Italian food giant that produces bands including Pauls, REV, SkinnyMilk and Physical, all of which "have a significant share of the Victorian milk market, but only have a minor presence in NSW".

Parmalat has confirmed the hike but says it represented a year of pent-up cost increases.

Published in today's Age

Graphic: Channel 4

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Friday, January 15, 2010

Welcome the world's first female stand-up economist

It's a new genre.

She's econgirl, Jodi Beggs.

Her blog is entitled Economists do it with Models

Her biggest and most recent outing was at the American Economic Association in Atlanta.

Here's the first of 3 videos:

And the other two:

Enjoy the weekend.

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