Monday, February 25, 2013

Tony Abbott you need to balance your books. Your time starts now

Guest columist Shane Wright, from the West Australian:

If the polls are to be believed, Tony Abbott will be running the country by mid-September.

For those ALP supporters hoping for some sort of miracle – be it delivered by Julia Gillard or Kevin Rudd – the current poll leads enjoyed by Mr Abbott this far out from election day give him an 85 per cent chance of winning.

Given that the economy and managing the Budget will be key features in the coming weeks and months, it’s time to have a careful look at what Mr Abbott, shadow treasurer Joe Hockey and shadow finance spokesman Andrew Robb are offering voters.

The Opposition has been deliberately cagey about its big ticket policies and their costs.

Its current plan is to release these costed policies in the 33 day period between the issuing of the parliamentary writs and polling day on September 14.

But Mr Abbott has been clear that many of the policies that went to the 2010 election will get another run around the electoral paddock.

At the last election, as Mr Abbott repeatedly mentions, the coalition offered savings of $49 billion. But the fact he also offered $38 billion in spends, for a net improvement to Budget of $11 billion over four years, is barely whispered.

Some of those savings have gone, swept away by time.

For instance, at the small end of the spectrum the Opposition planned to save $4 million by not proceeding with Australia’s bid for a place on the UN Security Council...

Abandoning a plan for a 50 per cent tax discount on interest income was going to save the Opposition almost $1 billion. Unfortunately, the Government has already ditched that.

But the march of time means there are also potential new savings from programs put in place by the Government that could be axed by an incoming Abbott Government.

Mr Abbott’s plan to get rid of the Schoolkids Bonus, which started last year, will deliver a $2.1 billion boost to the Budget bottom line.

The single biggest save announced in 2010, and to which the Opposition remains committed, is a freeze on public sector jobs.

Whatever you think about public servants they’re easy fodder for politicians of any stripe.

It’s unclear, however, how this will play out as some parts of the public service will be excused from staff cuts.

The major issue remains around the carbon price (and if you read the coalition’s "Our Plan" document you could be forgiven for thinking that is the only thing holding back Australia).

It’s easy to say the carbon tax will be gone within months, but so too will around $8 billion a year in revenue.

That revenue is going towards a variety of measures, the most costly of which is the increase in pension payments and the big lift in the tax-free threshold.

Mr Abbott has confirmed the pension increases will have to be wound back as will the tax-free threshold change.

Somehow, he is also offering tax cuts to all (but a reversal in the tax cut delivered by the tax-free threshold change) on top of the abandonment of the carbon tax.

He might have to mention to the States that their GST revenue will be down slightly because the carbon price pushed up prices.

The tax-free threshold change could have an impact on employment for low income earners (who are in the best position to increase hours and boost their overall income).

The mining tax, damp squib in terms of revenue it has so far turned out to be, will also go.

In terms of revenue right at this moment that is not of huge consequence to the Opposition (although a falling dollar would certainly beef up future revenue flows).

The Opposition has been upfront in dumping all policies linked to the MRRT including the $500 co-payment for superannuation to people who earn less than $37,000.

Except it hasn’t abandoned every policy tied to the mining tax.

It remains committed to keeping the increase in the superannuation guarantee to 12 per cent that will cost close to $1 billion a year by the end of the forward estimates.

(Yes, the super guarantee costs the government because it gets less tax as superannuation is taxed at a much lower rate than ordinary incomes.)

Though the Opposition won’t concede this point, its job has been made easier by some of the cuts delivered by the Government since 2008.

The changes to the Baby Bonus and Family Tax Benefit, the increase in the age pension age, the abolition of the dependent spouse tax offset, cracking down on wealthy parents who move income to their children, the changes to FBT on work cars … the structural base of the Budget has been improved no matter what coalition MPs argue (or have opposed it the Parliament).

This is where Mr Hockey and Mr Robb will have to make fiscal ground by cutting programs put in place by the Government, such as Medicare Locals, or implement their own structural saves.

At the same time they will have to add in their own policies that will cost money.

The Opposition is already committed to winding back one Government saving measure, the means testing of the private health insurance rebate, which will be a long term drain on the Budget.

Peter Costello’s biggest financial windfall, outside the mining boom, came from selling Telstra.

But Mr Hockey doesn’t have a business of such a size to flog off.

The Opposition is committed to selling Medibank Private (a policy it has held for more than five years) which, in better times, had a theoretical price tag of at least $4 billion.

There is the option to sell Australia Post which last year delivered a reasonable profit on the back of soaring parcel deliveries caused by the increase in online shopping.

If the post office was sold off with a banking licence then Mr Hockey could not only reap a financial windfall but also boost competition in the financial sector.

(Axing the NBN does not have a major impact on the Budget because of the way it is funded. However, selling it could produce a much needed financial fillip.)

There may be substantial unaccounted savings, however.

The Opposition’s border protection policy, if it works, would free-up billions in dollars that could be moved into other parts of the Budget.

However, no one knows for certain that the policy will work.

Defence is potentially a Budget destroying sector for both the Opposition and the Government.

Two mega projects must soon get the green light – and hit the Budget bottom line.

The Joint Strike Fighter and the submarine replacement program will together cost the Commonwealth tens of billions of dollars.

Mr Abbott is promising a three percent real annual increase in Defence spending "subject to improvement in the Budget".

Notwithstanding that no one can define what "improvement in the Budget" means, decisions to start paying for the JSFs and the submarines may have to be made earlier rather than later.

And as the JSFs have already proven, big Defence procurements are notorious for going way over budget.

We haven’t even added the thought-bubble of dam building across northern Australian. That’s dam building without any infrastructure to support it.

All of this is before we hit the economy proper.

There have been ongoing warnings from Treasury that tax receipts won’t flow like they did before the GFC.

Then add in the high Australian dollar (which is doing far, far more damage than any carbon tax), the global currency wars, any move in government bonds and a host of other factors.

All this awaits Mr Abbott, Mr Hockey and Mr Robb.

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The education prime minister fails stats, misleading us about literacy

Why not simply tell us the truth?

In launching a new school literacy program prime minister Julia Gillard appears to have committed a statistical howler.

Declaring that around 75,000 students failed to meet national minimum standards in the NAPLAN test last year she said, “without improvement that number could climb to more than 150,000 by 2025”.

The doubling is the result of extrapolating forward the change over one year for 13 years.

Responding to Fairfax Media the education minister’s office said the calculation was “a Commonwealth analysis based on Year 3 NAPLAN data and assumes the change seen between 2011 and 2012 continues out to 2025.”

Extending forward only the most recent change in a statistic is widely regarded as bad practice, likely to produce nonsense.

“One change does not a trend make,” said Deloitte Access director Chris Richardson, a former treasury economist.

If for example the Commonwealth had extended forward only the most recent change in employment (between December and January) it would have looked as if employment was on track to climb 124,800 in the coming year. But if it had extended forward the previous change (between November and December) employment would have looked on track to slide 45,600.

“It’s good practice to use all of the comparable data, not just one change,” said Mr Richardson. “The trend is your friend. To construct it you should use all the comparable data.”

NAPLAN data going back to 2008 show reading, spelling and grammar on an improving trend...

The proportion of Year 3 students failing to meet minimum reading standards fell from 7.9 per cent to 6.5 per cent. The proportion failing to meet minimum spelling standards fell from 7.5 to 6 per cent.

“We will make this reading blitz one of the aims of our school funding reforms,” Ms Gillard told parents and children gathered for the launch at her residence in Canberra. “We want to make sure that every child is assessed, every child's strengths and weaknesses on reading are known and every child gets the opportunity to become a great reader.”

The Federal Government will ask all schools, state and private, to sign up to an intensive four-year program in which year teachers from years K to 3 maintain a running record of each student’s progress and set out a reading plan which includes the sounding out of words as one of the teaching methods.

No specific funding is allocated for the program which will be “embedded in the work we are already doing for school funding reform”.

State education ministers welcomed the program saying it was along the same lines as work they were doing themselves.

“Our Early Action for Success strategy will see an additional 900 teachers employed across all school sectors. The first 50 literacy and numeracy specialists have already been placed,” said NSW minister Adrian Piccoli.

“Obviously any new idea will need to be consistent with Victoria's nation-leading commitment to early years literacy and numeracy,” said Victorian minister Martin Dixon. “It should also be noted that in Victoria's long experience, "blitzes" are never a substitute for long term implementation.”

In today's Sydney Morning Herald and Age

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Saturday, February 23, 2013

Stevens: Swan took my money, but he is doing okay

Friday's parliamentary hearing

Treasurer Wayne Swan overruled the Reserve Bank governor in a bid to use Bank profits to prop up the federal budget, a parliamentary inquiry has been told.

Governor Glenn Stevens told the inquiry he asked Mr Swan in writing last year to direct all of the Bank’s $1 billion 2011-12 profit to its critically short reserve fund, needed to absorb changes in the value of the banks foreign currency holdings.

Normally worth around $6 billion, the fund had dwindled to $2 billion.

“It’s a key part of our capital. It has been depleted considerably by the effects of the rising exchange rate,” Mr Stevens told the inquiry. “I believe the prudent and best course is to rebuild it as quickly as we can but I am not subject to the other pressures that the government is.”

Mr Stevens wrote to Mr Swan who denied the request and insisted on taking half of the profit as a dividend to help achieve a budget surplus in 2012-13, leaving around $500 million to bolster the fund.

“In the end it was his prerogative,” Mr Stevens said. “He was perfectly entitled to do it under the Act. He made a judgement, and I had to accept that judgement.”

Mr Stevens told the inquiry the next move in interest rates was far more likely to be down than up, but said he wasn’t in a hurry.

“There is a good deal of interest rate stimulus in the pipeline. It is having an effect. Housing prices have been rising since last May. Share prices have also risen quite significantly, and if anything by a little more than in comparable markets overseas. These are channels of monetary policy at work.”

Mr Stevens believed the Australian dollar was too high at around 103 US cents, but had no intention of intervening to bring it down...

“My sense is the dollar is somewhat too high, but we are not talking fifty per cent or anything like that,” he said. “You would need to be pretty confident it was seriously overvalued before you would launched a large scale intervention. We haven't done that in this episode although there are other episodes where we have.”

It was entirely possible the Australian dollar would stay at its present levels for some time.

“I know that won’t sound like much comfort, but I think that’s all I can tell you,” Mr Stevens said.

The governor backed Mr Swan’s decision to walk away from his promise of a 2012-13 surplus, saying if he the treasurer had persisted with the promise he could have damaged the economy.

“I think the surplus was always going to be hard to achieve this year. I would have found it a bit more surprising for him to have gone out and do drastic things.”

“You could imagine a world where the intention to achieve a surplus led to further cuts in spending and increases in taxes in the next few months. That would would have hurt the economy. There would have been nothing we could do with interest rates to offset that in the short term. We would have ended up with a weaker economy.”

His remarks dovetailed with those of the treasurer who told an Australian Business Economists breakfast that to engage in “austerity for austerity’s sake” would be “detrimental to growth in jobs and our economy”.

“The government won’t do it. We are determined to come to a surplus at a pace that’ll be consistent with strong growth and full employment,” Mr Swan said.

Mr Stevens doubted that the prime minister’s decision to call the election early had done any economic damage, saying such claims were rarely backed by evidence. If needed he would move interest rates during the campaign without regard for the consequences as he did in 2007.

In today's Sydney Morning Herald and Age

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Friday, February 22, 2013

Costings. Swan chucks Hockey a time bomb

Wayne Swan, just now:

I’m proud that we have established the Parliamentary Budget Office and today I’m announcing we’ll enhance its capacity to ensure budget transparency from all sides of politics, with additional funding to the PBO. This will enhance the capacity for costings to be prepared in the lead up to the election, removing any excuse for policies to be released like thought balloons rather than rigorously costed policies. Transparency would be further enhanced if the PBO were to prepare a post-election audit of all political parties, publishing full costings of their election commitments and their budget bottom line 30 days after an election. We will introduce legislation for consideration by the Parliament to enable this reform. This will remove the capacity of any political party to try to mislead the Australian people and punish those that do. It will avoid a situation we saw last election, where the Liberal Party thought they could con the Australian people. As a result of the reforms I am announcing their $11 billion black hole in the budget bottom line would have been uncovered regardless of the election outcome.

Here's why it's a time bomb

During the 2010 campaign both Labor and the Coalition withheld the release of their costings until days before the vote, denying Treasury the opportunity to check their calculations. When Treasury checked after the vote during negotiations over which party would form government it found errors in the in the Coalition costings it said amounted to $3.5 billion. Among the errors were double-counting, purporting to spend money from funds already allocated and booking as a benefit interest saved from a privatisation without booking as a cost dividends that would be lost.

The two Perth accountants who signed off on the Coalition’s policies were later fined and found to have breached professional standards by the Institute of Chartered Accountants.

Shadow Treasurer Joe Hockey had referred to their work as an audit, saying they had certified “in law that our numbers are accurate”.

In fact they had agreed with the Coalition to produce work primarily "not of an audit nature". They were to merely "review the arithmetic accuracy of the Liberal Party of Australia's costing estimates".

The 2010 election was unusual because Treasury was called in while the independents decided which party to support. In a more normal election the victor could avoid embarrassment by instructing the Treasury not to cost what it had promised in the campaign.

The legislation proposed by Mr Swan would force both sides of politics to be more careful in their costings, knowing they could be embarassed weeks after taking office.

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Thursday, February 21, 2013

So low are miner's profits, under Swan's first tax he'd be handing them money

The government would be their ATM, by design

So badly have collapsing commodity prices hit BHP and Rio that if the government had stuck with the original version of its mining tax it would be up for billions.

BHP’s profit has more than halved. Rio Tinto has lost $3 billion. Under either version of the super profits tax they would owe the government nothing.

But under the tax originally proposed by Kevin Rudd and Wayne Swan they and other mining companies would also be entitled to a refund of the royalties they had already paid state governments.

In Western Australia alone iron ore royalty payments amount to $4 billion per year.

This would have been paid to the companies whether or not they owed any super profits tax, meaning they would have received a cheque from the government.

"Would the government have been worse off in the past six months with the original resource super profits tax? Yes. That's a big fat yes," said Chris Richardson a former Treasury economist now at Deloitte Access who has advised the minerals industry.

The original tax was revised after Kevin Rudd lost the prime ministership in a Cabinet room negotiation between the heads of the three big mining companies and prime minister Gillard, treasurer Wayne Swan and resources minister Martin Ferguson.

“People are screaming that the revised tax is a disaster because it has hardly raised any money. But they would have been screaming more if we had the original tax - it would have cost the government money,” Mr Richardson said.

“Much of the bad press about the revised tax has been overdone. Yes, it was a hurried compromise, but any super profits tax would be struggling to make money at the moment because the miners aren’t making super profits"..

Mr Richardson is quick to point out that the unconditional refund of state royalties wasn’t a design fault of the original tax, it was a design feature. The original tax was intended to make things easier for miners in bad times and to grab more of their cream when times turned good.

It was announced at a time when they had plenty of cream. In May 2010 the iron ore price was $US160 per tonne. By September last year it had slipped to $US86 a tonne.

"It wasn't just that prices collapsed, it was that the dollar held up as well," says Mr Richardson. "Miners were hit both ways.”

“But since then prices have climbed back. We are about to enter a phase where the original tax probably would have raised the government more money than the redesigned one. I am not quite sure that we are there yet, but we are getting there.”

The minerals resource rent tax raised just $126 million in its first six months and is not expected to make anywhere near the $2 billion the government forecast, but Mr Richardson said the upturn in the iron ore price meant the government should make more in the second half of the financial year bringing the total earnings to around $700 million.

“Over the long term the original tax would have raised more than the redesigned one, there’s no doubt about that. For one thing it had a higher rate,” said Mr Richardson.

“But the revenue would have been more variable. Right now the government would have been helping miners out.”

In today's Sydney Morning Herald

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Jobs. Wages. That rate cut just got closer

The odds of a March interest rate cut have shortened following news of an astonishingly sharp decline in job advertisements.

The employment department’s monthly survey finds the trend in online job advertising has sunk to its lowest point since it began the survey in 2006.

Only 168,300 jobs were advertised online in January, down from 219,000 a year earlier. Queensland has experienced the biggest crash, followed by South Australia and Western Australia.

Job advertising is sliding in 36 of the 37 regions identified by the department. Only the NSW Blue Mountains is holding out against the trend.

Advertisements for jobs in the Newcastle and Hunter regions are down 40 per cent over the year, advertisements for jobs in the Southern Highlands are down 25 per cent and advertisements for jobs on the Central Coast down 22 per cent. Sydney job advertisements are down 13 per cent.

Nationally the strongest slides were in advertisements for technicians and trades workers (down 27 per cent) and machinery operators (down 26 per cent). In none of the eight groups identified by the department did job advertisements increase.

The Reserve Bank is cautious about accepting news about job advertising at face value because it believes employers are moving away from online advertisements to other means of hiring including networking sites such as LinkedIn and personal recommendations...

Separately wage estimates released Wednesday show growth has eased from an annual rate of 3.7 per cent to 3.4 per cent, well below the 4 to 4.5 per cent range that causes the Reserve Bank concern.

“Wage inflation has finally moderated,” said Westpac economist Justin Smirk. “The pressure from the mining boom is more modest than expected and there’s very little pressure in consumer-oriented industries.”

Wednesday futures trading lifted the implied probability of a March rate cut from 26 to 29 per cent.

A further rate cut would take the Reserve Bank’s cash rate to just 2.75 per cent, the lowest since records have been kept.

The Bank will decide after seeing the Bureau of Statistics capital investment survey due next Thursday. A survey showing mining investment slowing with little to replace it would add to the case for a cut.

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Monday, February 18, 2013

Good for most. Gillard's Robin Hood innovation plan

It takes tax deductions from those who don't need them

Prime Minister Gillard will paint herself as a leader able to make tough choices Monday in a speech saying only Labor would be prepared to take $1 billion from Australia’s richest companies in order to fund a jobs plan for smaller ones.

Her industry and innovation statement released Sunday will save $1 billion over four years by preventing firms with an annual turnover of $20 billion from accessing the generous research and development tax incentive. There are only 15 to 20 such firms, many of them in the mining industry. The benefit was equivalent to a 133 per cent tax deduction.

Ms Gillard will tell the Australian Workers Union conference her decision to raid the concession is typical of the tough decisions she is capable of making.

“We got rid of the dependent spouse tax offset and tax breaks for golden handshakes. We slashed tax concessions on super for high income earners, ditched the millionaires’ dental scheme and fringe benefits loopholes for executives away from home. We means-tested the private health insurance rebate,” her speaking notes say.

“On balance, it simply isn't necessary to fund the largest and most profitable Australian companies to innovate, when their resources to do this themselves are so clear and the market incentives for them so well established.”

“This is where savings should come from. Existing poorly targeted subsidies to highly profitable firms can be converted into evidence-based assistance for the small to medium sector.”

The savings will be used to build ten innovation precincts modelled on those in California’s Silicon Valley and Italy's Biella textile district...

Each will help direct a total of $236 million in Australian Research Council grants. Two were announced Sunday, a manufacturing precinct based in south east Melbourne and Adelaide and a food industry precinct based in Melbourne. The precincts board will be chaired by John Grill, the chief executive of the global resources and energy company WorleyParsons.

Corporations running investment projects worth more than $500 million will be required to produce plans showing how they will give local firms a chance to win contracts. Those running mega projects worth more than $2 billion will be required to embed so-calleed Australian Industry Opportunity Officers in their procurement teams.

The government also recommitted to the Venture Australia program, guaranteeing $350 million in funding over 14 years to entrepreneurs trying to commercialise new ideas.

In a five-part series published last year Fairfax Media revealed that some of Australia's best and brightest entrepeneurs were heading offshore because funding was drying up.

Niki Scevak, co-founder of startup incubator Startmate welcomed the recommitment was "great news". But Jonathan Barouch, founder of the social media application Roamz, labelled it a "last minute pitch in an election year". The government was "five years behind" where it should be.

The Australian Industry Group welcomed the package, while expressing concern about the loss of top-end R&T tax concessions. It hoped to work with the government to “minimize downstream impacts”. Coalition spokesman Sophie Mirabella said the precincts commitment was a re-announcement of a 2011 Labor promise.

In today's Sydney Morning Herald and Age

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"Get your economies moving". What Swan actually told the G20

Group of Twenty finance ministers concluded their two day summit in Moscow Sunday with a pledge to avoid a global currency war, but Australia's Treasurer Wayne Swan thinks they’ve missed the point.

In a forceful intervention near the end of the conference Mr Swan said much of the talk about “so-called currency wars” was “completely misguided”. It “unhelpfully reduced the focus on the G20’s critical agenda to boost growth and create jobs”.

What other finance ministers thought of as intervention to devalue currencies was more often the byproduct of completely appropriate moves to try and kick-start economies.

“Global growth with a ‘3’ in front of it simply won’t cut the mustard if we want to reduce the unacceptably high levels of unemployment,” Mr Swan told the summit.

“We all agree that countries shouldn’t be targeting exchange rates for competitive purposes, but what we should support is domestically-focussed policies in the major advanced economies aimed at boosting growth and jobs.”

“There is a big difference between indirect effects on market exchange rates from accommodative monetary policy and actually engaging in competitive devaluation.”

“Quite frankly, I think we’re seeing central bankers in the world’s biggest economies take unconventional measures to support growth and jobs because interest rates are already near-zero and fiscal policy is not providing enough support to growth".

“We need to see governments in many advanced economies get rid of the handbrake on growth that’s coming from damaging fiscal austerity.”

“You don’t need to slash and burn now to put your budget on a sustainable path over the medium term – in fact, cutting too hard now will rip the guts out of growth and leave you with higher debt later on.”

The summit ended with a communiqué committing members to “refrain from competitive devaluation”.

‘‘Politically-motivated devaluations can’t sustainably improve competitiveness, they don’t solve structural problems and they set off reactions,’’ said Bundesbank President Jens Weidmann. ‘‘The clear language in the communique underlines this unity and will allow the debate in the future to take place with a less excited tone.’’

The new commitment is probably aimed at telling the Japanese that while they can stimulate their economy, they shouldn’t target the yen, said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. ‘‘It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,’’ he said.

Japanese officials in Moscow insisted the fall in the yen was a byproduct - not a target -of their effort to revive the world’s third-largest economy, a view supported by Mr Swan.

Earlier he had told Bloomberg television the yen’s devaluation was ‘‘a matter for the market. The Japanese approach was “to stimulate their domestic economy. That is also good for the global economy.’’

Bank of Japan Governor Masaaki Shirakawa said the G20 communique was ‘‘absolutely in the same spirit as our monetary policy.”

‘‘The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices,’’ he said.

The ministers also pledged to crack down on tax avoidance by multinational companies.
The communique said members were determined to to stop firms shifting profits to pay less tax.

In today's Age



Monday, 18 February 2013


Wayne Swan is yet again in Wayne’s world. Wayne Swan’s call for developed countries at the G20 to take on more debt is ludicrous.

The Treasurer must recognise that if debt is the problem then more debt is surely not the answer. All countries must learn to live within their means and Australia is no exception.

Wayne Swan’s call is code and cover for Labor to keep on borrowing, and is the clearest sign yet that he is trying to justify the fact he has lost control of our nation's finances.

Julia Gillard and Wayne Swan have driven up Australia’s credit card to over a quarter of a trillion dollars.

Labor does not live within their means; it is just not in their DNA. They never have and they never will.


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Friday, February 15, 2013

Graphed. Why the budget is bleeding

Nominal vs real GDP growth. These are unusual times:

A profits squeeze of historic proportions lies behind the government’s deteriorating budget position according to the federal Treasury, which says things haven’t been as bad since the global financial crisis.

Appearing before the Senate’s economics committee Treasury head Martin Parkinson promised to reveal details of the final deficit or surplus for 2012-13 before the September election although he was not legally obliged to.

The election is due on September 14. The Treasury’s pre-election financial statement is due on August 22, but the final budget outcome isn’t due until September 30.

Under question from Coalition senator Mathias Cormann Dr Parkinson said although he wouldn’t have all the figures ready ahead of the election he should be able to produce a final figure for the underlying cash balance - the most watched measure of surplus or deficit - well ahead of the pre-election outlook.

If the government didn’t release it before the pre-election financial statement he would release in the statement.

“Nobody will be under any illusions, or shouldn't be under any illusions, that they won't know the underlying cash balance number in time for the election,” he said. “It will be, or should be, publicly available. The bottom line will be known.”

Australia’s budget position had deteriorated swiftly because commodity prices had crumpled while the Australian dollar remained high.

“We would traditionally have expected the exchange rate to fall as well,” he said. “The fact is the exchange rate has stuck up.”

“What that has meant is that for firms in sectors such as mining where revenues are in US dollars and costs are in Australian dollars, their margins are squeezed. It's a profit squeeze that is flowing through into particular types of revenue.”

Treasury's head of Australian macroeconomics David Gruen said income growth was its weakest relative to economic growth since the global financial crisis...

In the past year nominal gross domestic product had grown far slower than real gross domestic product. Nominal GDP is the dollar value of what’s produced and earned. It’s the measure that drives tax revenue. Nominal GDP grew just 1.9 per cent in the year to December, far below real GDP growth of 3.1 per cent.

"It is extremely unusual for the dollar value of the economy to grow slower than real value,” he said.

“Our quarterly national accounts data goes back to 1959. There are only two quarters in that time in which nominal GDP growth was that far below real GDP growth - both were in the global financial crisis.”

The only other times nominal GDP growth fell behind real GDP growth were in the economic slump of 1961 and the 1997 Asian economic crisis.

Sliding commodity prices knocked four per cent off Australia’s terms of trade in the three months to September, leaving the volume of goods Australia exported high, but slashing the amount it earned from those exports. Local prices were also depressed as as retailers and wholesalers cut margins in order to move goods.

Real GDP was likely to remain depressed for the two years.

Asked how long he thought it would take to achieve a surplus in the new environment Dr Parkinson declined to answer, saying the question invited him to express a personal view.

He would work with the Tax Office and “hopefully with the industry” to try and unpick why mining tax collections were so much lower than expected.

“The initial estimate for revenue drew heavily on information from parts of the mining sector,” he said. “We adjusted those estimates for the things that we could see had changed. What we couldn’t do was adjust the estimates for things we couldn't see.”

While he believed the executives produced “the best estimate at the time”of the values they intended to ascribe to their mines they had “no legal obligation” to use them.

“They gave us their best estimate, as we understand it, their best estimate at the time - but they until the point they were legally obligated for the tax, they had the opportunity to rethink it.”

In today's Sydney Morning Herald and Age

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Thursday, February 14, 2013

The mining tax. How our leaders let themselves be diddled

Gathered on one side of the cabinet table were the newly-installed Prime Minister Julia Gillard, her Treasurer Wayne Swan and her Resources Minister Martin Ferguson. On the other were the heads of Australia's three big mining companies: BHP Billiton, Rio Tinto and Xstrata.

Absent were the key people from the Treasury - the ones who really understood the tax being discussed.

As the then Treasury head Ken Henry later told a Senate committee: "We were not involved in the negotiations, other than in respect of crunching the numbers if you like and in providing due diligence on design parameters that the mining companies themselves came up with."

The smartest people were kept out of the room. They were ferried draft agreements and asked to examine them quickly. They were unable to test with the miners the propositions they were putting to the government.

The 1½-page heads of agreement signed by the ministers and executives on July 1, 2010, replaced the 40 per cent resource super profits tax with a much weaker 30 per cent minerals resource rent tax applying only to coal and iron ore. An "extraction allowance" cut the actual rate paid to 22.5 per cent. It would be paid only if the profits themselves reached a much higher hurdle.

And then there was the drafting error.

The agreement allowed "all state and territory royalties" to be deducted from the tax.

Ferguson thought the words referred to "royalty rates that applied, or changes to royalty rates that were scheduled to apply in the future, as at 2 May 2010''.

The interpretation made sense. Those were the royalty rates referred to in the original super profits tax. Agreeing to refund whatever any state government chose to charge in the future would expose the Commonwealth to an uncontrollable expense.

But read baldly, that's what the ministers had signed up to.

Western Australia promptly lifted its iron ore royalty from 5.6 per cent to 7.5 per cent. It now grabs money the ministers believed the federal government would get.

Appearing before the Senate, treasury official David Parker later tried to explain the less-than-precise drafting this way: "This is a document which is 1½ pages long. One could say that the heads of agreement is, to use a musical analogy, a rather staccato document."

The agreement allowed the mining companies to do more than deduct their royalty payments from the new tax. It allowed them to ''grow'' the amount they could deduct at the long term bond rate plus 7 per cent, if low profits meant they owed less resource tax than the royalty payments.

The concession means the miners are unlikely to pay much of the new mining tax for some time to come.

Julia Gillard and her ministers brought peace on July 1, 2010, but at a heavy financial price.

In The Age

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Confidence. Now even Coalition voters feel good

Coalition voters are suddenly confident about the economy, moving clearly into positive territory for the first time in two years.

The latest Westpac Melbourne Institute consumer confidence survey shows optimists among Coalition voters outweigh the number of pessimists by five percentage points, a reverse of the recent pattern in which Coalition voters have been strongly negative.

Labor voters remain extremely positive, with optimists outweighing pessimists by more than 20 points.

The lift among Coalition voters has been enough to hoist the overall consumer confidence index from around 100 points to 108 on a scale where 100 means the number of pessimists balance the number of optimists.

Westpac senior economist Matthew Hassan says the change is primarily the result of the carbon tax.

Ahead of its introduction in mid last year it pushed the confidence of Coalition voters (but not Labor voters) into a downward spiral.

“There was the point when there was a whole series of overlapping concerns around tax changes - the carbon tax, the mining tax, the global situation was getting worse and in Queensland things looked dire. The incoming government spoke about Queensland being the Spain of Australia"...

“At the same time low and middle income households likely to voter Labor were being showered with carbon tax compensation, exacerbating the wedge.”

"In all the time we've been doing this we've never seen as big a deviation. In terms of confidence, we had a divided nation. It was off the charts."

Mr Hassan said the improved confidence figures represented a return to normality. The carbon tax had not been as bad as expected, the share market had climbed, and interest rates had fallen.

Asked in the first week of February whether now was a good time to buy a major household item an extraordinary 59 per cent of Australians surveyed said yes. Only 16 per cent said no.

One quarter of those surveyed expected their own personal financial situation to improve in the year ahead. Only one in five expected it to get worse.

When asked about the economy over the year ahead optimists outweighed pessimists by 9 per cent. But when asked about the economy over the next five years, optimists and pessimists were roughly balanced.

HSBC Australia chief economist Paul Bloxham hailed the surge in confidence as a sign interest rate cuts were having their desired effect.

"This result is consistent with what we've had in mind, which is that the soft patch in the Australian economy may be behind us," he said.

Mr Hassan said the higher iron ore price meant news bulletins were no longer full of stories about the end of the mining boom. Housing prices had stabilised and started to climb.

“All of these things have come together. It's hard to pinpoint what's driving the new better mood and how it will be sustained, but certainly it's far better than anything we've seen over the past eighteen months,” he said.

It was possible Coalition voters were responding to the election announcement and were feeling more confident because they expected a change of government, but Mr Hassan said elections were usually accompanied by uncertainty, making the surge in confidence unusual.

In today's Sydney Morning Herald and Age

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Sunday, February 10, 2013

Skewed. Why Labor is finally rounding on super tax breaks

How skewed? Look closely:

The select few Australians earning more than $290,000 per annum - a mere 1 per cent of the workforce - rake in between them an astounding $2 billion in superannuation tax concessions according to Treasury calculations being used to guide the government as it hunts for budget savings.

Although there are are just 130,000 such Australians, they gain 6 per cent of all the Australian government superannuation tax concessions.

The high earners include executives on multi million dollar contracts who get a disproportionately large share of the $2 billion pool.

Asked twice at a press conference Thursday whether Labor’s present system of superannuation tax concessions was “fair” financial services minister Bill Shorten refused to answer. Asked twice whether the concessions were sustainable he also declined to answer and said he couldn’t speak about what might be in the May budget.

In 2009-10, the most recent year for which the Treasury has done a full simulation, the top 1 per cent of Australian earners received an average benefit of $19,200 each. By contrast an earner in the middle of the pack got $800.

Government support for retirement is somewhat more even than the simulation suggests. The worker in the middle of the pack also gets a part pension. But even so the Treasury simulation suggests the tax concessions offered to Australia’s highest earning men are worth twice as much as the combination of concessions and pension payments offered to men in the middle.

If the purpose of super is to take “pressure off the pension” as repeatedly claimed by Labor, Labor’s tax breaks do it in the daftest possible way. The biggest go to the relative handful of Australians who wouldn’t get the pension in any event.

So expensive are the tax breaks, and so fast are they growing, it would be cheaper to pay the aged pension to all Australians and abandon tax concessions altogether.

Labor created the system it is now belatedly trying to improve. In an odd turn of events the Coalition is pledging to maintain it, promising “stability and certainty” should it be elected in September. Tony Abbott says he “won’t move the goalposts”.

But without attention the costs are set to explode... Weighing in at $32 billion this financial year the superannuation tax concessions are on track to grow to $45 billion by the end of Tony Abbott’s first term in office. As a point of comparison defence spending is $22 billion, on track to climb to $25 billion.

Labor introduced compulsory super in 1985 and ramped up compulsory contributions from 1992 with next to no discussion about how the concessions would be paid for.

The decision to ramp up contributions once more (taken against the advice of the Henry Tax Review) was presented as if it was to be paid for by the new resource super profits tax, since replaced by the minerals resource rent tax which is at present raising a mere trickle of the billions expected.

The best-known of the costs is the ultra-low 15 per cent tax rate applied to salary paid into super up to a generous cap. Its a big advantage if you’re earning in excess of $180,000 and otherwise paying the top marginal rate of 45 per cent. It’s a substantial advantage if you’re on a middle income and otherwise paying a marginal rate of 32.5 per cent. But it’s no advantage at all if you are below the tax-free threshold and otherwise paying no tax.

In fact until July last year the 15 per cent tax rate was a penalty for low-income Australians who would otherwise be paying no tax. In an overdue move the government cut their rate of tax on super contributions to zero, meaning they are now at least made no worse off by the super contributions. (Using apparently inconsistent logic Tony Abbott says he will reverse the measure because it is funded by the mining tax.)

Wayne Swan has also belatedly boosted the super contributions tax rate for very high earners on more than $300,000. They will pay a still-concessional 30 per cent.

The biggest inequity and fastest growing cost associated with super is less well known. It’s the flat 15 per cent tax on fund earnings. Applying no matter how low or how high the member’s tax rate its benefits are so skewed that the latest Treasury simulation (for 2009-10) shows 11 per cent of the benefits going to the top 1 pc of earners.

Critics of the Treasury’s methodology say it exaggerates the benefit going to high-end earners because they would find other ways to minimise tax if they couldn’t use super. But they’ve certainly been rushing into super.

It’s increasingly common for high income earners to direct 20 or 30 per cent of their salary to super (well above the 9 per cent requirement) even if they have to pay full tax on the way in.

The Howard government’s 2006 decision to abolish tax on the way out for Australians aged over 60 led to an explosion in so-called do-it-yourself funds, where small business owners and others put in to super exactly what they want knowing the returns will only be taxed at only 15 per cent.

Practically non-existent fifteen years ago, self-managed funds now account for $439 billion. By contrast industry funds account for $267 billion, retail funds $371 billion.

There’s an expensive gorilla in the room and its getting bigger. Labor now recognises this and will act in the May budget. Given time in government the Coalition will recognise it too.

In today's Sydney Morning Herald and Age


Projected Super Tax Breaks

2011-12 $30 billion
2012-13 $32 billion
2013-14 $35 billion
2014-15 $40 billion
2015-16 $45 billion

Commonwealth Treasury, Tax Expenditures Statement 2012

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Fine words about Michelle Grattan

From Mark Baker:

"Readers, other journalists and even editors have at times faulted her for not taking a stick to politicians and policies as forcefully as they would like. But what can look like undue caution, even timidity, is mostly the product of a ferocious commitment to accuracy, balance and fairness. The dividend is that when she does take a stand it carries greater authority. Her method has earned a remarkable degree of trust and respect on both sides of politics."

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Friday, February 08, 2013

And the mining tax has raised... $126m

From Swan:

"Today, the Australian Tax Office has provided the Government with combined Minerals Resource Rent Tax revenue figures for the first two quarters of the 2012-13 financial year.

Combined revenue from the first two quarters of the MRRT totalled $126m.

It’s clear revenues from resource rent taxes have taken a massive hit from the impact of continued global instability, commodity price volatility and a high dollar.

Revenues across the board are down very substantially - MRRT is a profits-based tax that raises more revenue when profits are higher and less when they are lower.

The Government has always supported increased transparency in our tax system and we believe any revenue from the MRRT should be published – which is why I am making this information public after it was received earlier today.

The Assistant Treasurer is leading the Government's work to broaden transparency in the business tax system, including in relation to MRRT revenue, and remove any ambiguity from reporting requirements.

The information being released today was provided by the ATO following recent collections after it was satisfied disclosing two quarters’ instalments would not breach taxpayer confidentiality provisions of the Taxation Administration Act 1953.

The information provided by the ATO today is attached.

Senator Mathias Cormann has the background:

The government's MRRT kept shrinking. We were told by the government that they expected the MRRT to raise:

· $4 billion this financial year when the Prime Minister and the Treasurer first signed the MRRT Heads of Agreement,

· $3 billion this financial year in the most recent budget,

· Just $2 billion this financial year in the most recent Mid-Year Economic and Fiscal Outlook

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Wednesday, February 06, 2013

Civilisation. The pop-up coffee shop on my way to work

Yes, it's by the bike track:

Between David Street and Condamine Street, as you approach the Turner School going in.

The sign says "Sly Fox". And it sells watermellon.

#Canberra #Gotaloveit

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Reserve Watch: Why it's on standby to cut again

The Reserve Bank is on standby to cut interest rates once again if the economy falters.

In an unusual statement accompanying Tuesday’s decision to keep rates on hold Reserve Bank governor Glenn Stevens said there was a need for “accommodative stance” on rates.

Should it be necessary he had “scope to ease policy further”.

The Bank believes the mining investment boom is about to peak. Beyond that it sees very little to pick up the slack. Private investment is weak. Government projects have been curtailed to help the Commonwealth deliver a surplus and to help states cope with budget problems.

Only in residential investment were there signs of signs of growth, and to date they have been small and centred around the construction of units rather than houses.

The Bureau of Statistics house price index climbed 2.9 per cent in Perth during the three months to December, by 2.3 per cent in Sydney and by just 0.7 per cent in Melbourne.

Of critical importance to the Bank will be the official survey on investment intentions due at the end of the month. If it points to an imminent downturn in mining investment and to little new non-mining investment to take its place the Bank will be minded to act.

It meets five days later.

The Governor’s statement makes clear the Bank would not need to wait for confirmation that inflation is low before acting. It says both the headline and underlying inflation rates are close to 2.25 per cent, well below the centre of its target band. It expects inflation to remain near the centre of its target band for the next one to two years. Keeping inflation low are rising unemployment, “working to contain pressure on labour costs” and cost-cutting by businesses in the face of moderate demand growth. The Bank says these should keep inflation low, even as the effects of the higher dollar pass.

Mr Stevens says international economic conditions look better than they did when the board last met in December. The iron ore price has climbed a further six per cent to $US153 a tonne. But the Bank does not expect the high price to last, believing if high demand continues, low-quality high-cost mines in China will reenter the market knocking down the global price.

Domestic conditions are improving. The Bank says some categories of consumer spending have picked up and savers are starting to chase higher returns. But both consumers and businesses are cautious. The dollar, which is “higher than might have been expected” is weighing on business.

“The Bank sees scope for a stronger non-mining economy,” said UBS economist Matthew Johnson. “If it does not pick up, the Bank will cut to make sure it does. Our model currently suggests a 62 per cent chance of a cut in March.”

In today's Sydney Morning Herald and Age

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Monday, February 04, 2013

Who'd have thought? Michelle Grattan fronts own news conference

Just now:

Sunanda Creagh in The Conversation:

Political journalist Michelle Grattan joins University of Canberra and The Conversation

One of Australia’s best-known journalists, Michelle Grattan AO, will leave her role as political editor of The Age newspaper to join University of Canberra as a professorial fellow and become an associate editor for The Conversation.

A member of the Canberra parliamentary press gallery for more than 40 years, Ms Grattan’s new role at the university will include teaching and research projects in politics and political communication, lecturing, public commentary and strategic advice, the university said in a press release.

She will join The Conversation as Associate Editor (Politics) and Chief Political Correspondent.

“I am delighted to be associated with the university and look forward to contributing to its academic life, and especially to engaging with its students, while being able to continue to pursue political journalism,” Ms Grattan said.

University of Canberra Vice-Chancellor Stephen Parker said he was highly pleased to welcome Ms Grattan to the university.

“She will add to our contemporary and real-world teaching and research and be an invaluable source of advice,” he said.

Andrew Jaspan, editor of The Conversation and former editor of The Age said he was “truly delighted and honoured to be working again with Michelle”.

“I thoroughly appreciated her advice, professionalism and acute political savvy while working with her at The Age. She epitomises the very best in political journalism,” Mr Jaspan said.

“Stephen Parker, the VC at Canberra University, has made this happen and we are indebted to his commitment to quality journalism and academic leadership,” he said.

“And because we publish everything under Creative Commons, every other media outlet is free to share and republish Michelle’s journalism. As with any national treasure, she is too good not to be shared.”

Professorial fellowships are equivalent to becoming a full professor and are awarded to people who have made a significant contribution in their professional life.

Ms Grattan is a former editor of The Canberra Times, author of several books and has also reported for the Australian Financial Review and The Sydney Morning Herald.

She was made an Officer of the Order of Australia in 2004 for her contribution to journalism in Australia.

Jenna Price, lecturer in journalism at the University of Technology, Sydney, said Ms Grattan would make a great contribution to teaching the next generation of journalists.

“I think not only the students but also her new colleagues at the University of Canberra are fortunate in getting an academic and practitioner with real wisdom and experience,” said Ms Price, who worked under Ms Grattan at The Canberra Times.

“She not only brings recent experience but 40 years of focus and energy, unparallelled in Australia political reporting.”


Rates steady Tuesday. Here's why:

The Reserve Bank board is set to take a breather Tuesday after slicing almost $2000 from the annual cost of servicing a typical mortgage over the past year.

At their first meeting this year board members will be told they can afford to wait longer before assessing the impact of their two most recent cuts in October and December.

Those cuts sliced a further $75 from the monthly cost of repaying a $300,000 mortgage, and would have sliced off $94 had the banks fully passed them on. Over the past year the Reserve Bank cuts that have been passed on took $161 off the monthly cost of servicing a typical mortgage.

The Bank’s cash rate is now just 3 per cent - the lowest on record. The Bank believes any proposals for cuts from here on require a stronger and stronger justification as they would take the cash rate further and further away from normal.

Overseas developments in the two months since the board’s last meeting provide no such justification. The United States has survived negotiations over its so-called “fiscal cliff” and is on track to successfully navigate negotiations over its debt ceiling. British economic growth has turned negative, but no more so than expected. China’s outlook is improving, and Japan has new government keen to restart economic growth.

If sustained the latest boost in the iron ore price will help rather than harm the Australian economy. But the Reserve Bank expects it to fade and sees no signs of mining companies bringing forward or restarting stalled projects. It expects the Queensland floods to have only a minor impact on coal exports.

At home it sees tentative signs consumer confidence is lifting... House prices are climbing again, but slowly. Although the unemployment rate is climbing, the increase is modest. The high dollar is weighing on business confidence.

The latest inflation figures give the Bank plenty of room to act. Notwithstanding the introduction of the carbon tax Australia’s official rate of inflation has slipped to an unusually low 2.2 per cent, well below the centre of the Bank’s 2 to 3 per cent target band. But in the absence of new bad news from overseas or a deterioration in the Australian economy it can’t see a reason to act.

The Bank stands ready to cut rates again as soon as conditions worsen or developments such a further increase in the Australian dollar threaten Australian businesses, but it is prepared to wait until it sees the evidence.

The Coalition Sunday held out the prospect of prolonged economic uncertainty saying it would not release its costed election policies until August, ten days into the campaign for the September 14 election.

The declaration, by shadow assistant treasurer Mathias Cormann appeared to constrain a promise by opposition leader Tony Abbott to “release our costings after the government releases theirs, after the Budget and before polling day”.

Senator Cormann told Sky News the Coalition would wait until the Treasury released its pre-election fiscal outlook ten days into the official campaign.

“There is nothing unusual about that,” he said. “It will be in good time before the next election, after we know what the true position of the budget is based on advice from the treasury secretary and not Wayne Swan who hasn't got a very good track record. We will stick to our timetable, we will not be distracted.”

In today's Sydney Morning Herald and Age

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