Thursday, May 30, 2013

Australia, you're standing in the middle of a very delicate transition

So says the OECD

The next Australian government should be prepared to push the budget even further into deficit if the economy weakens, the OECD says.

In a new assessment of Australia the Paris-based organisation says confidence is “fragile”, the business situation “relatively discouraging” and growth outside the mining sector “timid”.

“If activity worsens significantly, the authorities should not hesitate to ease fiscal policy,” it says in its latest economic outlook released Wednesday.

The pronouncements of the Organisation for Economic Co-operation and Development are widely thought to reflect the views of the Australian Treasury. The Treasury stations an officer in Paris to work with the OECD full time and consults closely with OECD staff when they visit Australia.

The Australian chapter of the report paints a picture of an economy transitioning away from growth driven by mining investment. But it says “the new drivers of growth are yet to emerge”.

In the meantime the outlook is uncertain. Economic growth should slip to 2.6 per cent this year before recovering to 3.2 per cent next year. But if the new drivers of growth do not emerge the government should ease the budget conditions that are themselves weighing on economic growth.

In another potential insight into the Treasury’s thinking the OECD says Australia would be well advised to boost the goods and services tax, cut the company tax rate and “improve the effectiveness of housing taxation,” an apparent reference to the tax-free status of the family home and to negative gearing...

Opposition leader Tony Abbott has promised to commission a taxation white paper with no topic off limits should he win office. The terms of reference for the Rudd government’s Henry Tax Review precluded discussion of the goods and services tax.

The OECD says the advanced economies should strengthen throughout 2013 and 2014 helped by very low interest rates, improving financial market conditions and slowly recovering confidence.

The United States is likely to recover the fastest recording economic growth of 3.2 per cent by the end of 2014. The so-called eurozone will grow by only 0.1 per cent in 2013 and 1.5 per cent in 2014.

Japan should grow unevenly, recording unusually fast growth of 3 per cent in 2013 followed by a return to tepid growth of 0.5 per cent in 2014.

“The global economy is moving forward at multiple speeds,” OECD chief economist Pier Carlo Padoan says in the report. “Each path carries its own mix of risks”.

In today's Canberra Times, Sydney Morning Herald and Age

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Wednesday, May 29, 2013

How is Australia the best address on earth? Play with the sliders

Go here:

Pick what's important to you, and see how we do:

Australia, as seen by the OECD Better Life Index

"Australia performs exceptionally well in measures of well-being, as shown by the fact that it ranks among the top countries in a large number of topics in the Better Life Index.

Money, while it cannot buy happiness, is an important means to achieving higher living standards. In Australia, the average household net-adjusted disposable income is 28 884 USD a year, more than the OECD average of 23 047 USD a year. But there is a considerable gap between the richest and poorest – the top 20% of the population earn six times as much as the bottom 20%.

In terms of employment, over 73% of people aged 15 to 64 in Australia have a paid job, above the OECD employment average of 66%. Some 79% of men are in paid work, compared with 67% of women. People in Australia work 1 693 hours a year, less than most people in the OECD who work 1 776 hours. Almost 14% of employees work very long hours, much higher than the OECD average of 9%, with 21% of men working very long hours compared with just 6% for women.

Having a good education is an important requisite for finding a job. In Australia, 73% of adults aged 25-64 have earned the equivalent of a high-school degree, close to the OECD average of 74%. This is truer of men than women, as 76% of men have successfully completed high-school compared with 71% of women. This difference is higher than the OECD average and suggests women’s participation in higher education could be strengthened. Australia is nonetheless a top-performing country in terms of the quality of its educational system. The average student scored 519 in reading literacy, maths and science in the OECD’s Programme for International Student Assessment (PISA). This score is higher than the OECD average of 497, making Australia one of the strongest OECD countries in students’ skills. On average in Australia, girls outperformed boys by 9 points, in line with the average OECD gap.

In terms of health, life expectancy at birth in Australia is almost 82 years, two years higher than the OECD average of 80 years. Life expectancy for women is 84 years, compared with 80 for men. The level of atmospheric PM10 – tiny air pollutant particles small enough to enter and cause damage to the lungs – is 14 micrograms per cubic meter, considerably lower than the OECD average of 21 micrograms per cubic meter. Australia also does well in terms of water quality, as 91% of people say they are satisfied with the quality of their water, higher than the OECD average of 84%.

Concerning the public sphere, there is a strong sense of community and high levels of civic participation in Australia, where 94% of people believe that they know someone they could rely on in time of need, higher than the OECD average of 90%. Voter turnout, a measure of public trust in government and of citizens’ participation in the political process, was 93% during recent elections; this figure is the highest in the OECD where the average is 72%. There is little difference in voting levels across society; voter turnout for the top 20% of the population is 94% and for the bottom 20% it is 92%, a much narrower difference than the OECD average gap of 12 percentage points and suggesting there is broad social inclusion in Australia’s democratic institutions

In general, Australians are more satisfied with their lives than the OECD average, with 84% of people saying they have more positive experiences in an average day (feelings of rest, pride in accomplishment, enjoyment, etc) than negative ones (pain, worry, sadness, boredom, etc). This figure is higher than the OECD average of 80%."

In the Sydney Morning Herald:

Australia has scored the unofficial title of the best address on earth for the third year running in an OECD survey of what constitutes good living.

The so-called Better Life Index ranks the 34 developed nations that make up the Organisation for Economic Co-operation and Development on eleven criteria it says contribute to good living.

When all eleven are given equal weight Australia is rated the best developed nation in the world, narrowly beating Sweden and Canada.

But the OECD says there is no such thing as an absolute Number 1. It allows users of its website to weight the criteria as they see fit.

If work-life balance is given the most weight, Australia becomes one of the worst developed nations in which to live. The organisation says more than 14 per cent of Australian workers put in more than 50 hours a week, way above the OECD average of 9 per cent. Men do it much more than women, 21 per cent working long hours compared to 6 per cent of working women. Denmark has the best work-life balance. Only 2 per cent of its workers put in more than 50 hours per week.

The OECD rates Australia number one when it comes to “civic engagement”. More than 70 per cent of Australians say they trust their political institutions. Around 93 of registered voters turn up to vote, the highest proportion in the OECD. It says while voter turnout “is indeed compulsory and strongly enforced, it is nevertheless a useful measure of citizen engagement”.

Australia is also the second-healthiest of the developed nations, beaten only by New Zealand. Some 85 per cent of Australians describe their health as good. Australia’s life expectancy at birth is 82 years, almost a year longer than the United Kingdom’s and more than three years longer than the United States...

Australia’s household income is mid-range, although comfortably above the OECD average. Access to housing is rated as the fourth-best. Australian households spend an average of 19 per cent of their income on keeping a roof over their heads, slightly less than the OECD average of 21 per cent. But the quality of the housing is just about the world’s best. At 2.3 rooms per person Australia is beaten only by Canada.

Australia’s natural environment is rated eighth-best. Sweden, the United Kingdom, Norway, Iceland, Denmark, Germany and Finland are rated higher. The organisation says urban air pollution is getting worse.

Australians are nonetheless happy. When asked to rate their general satisfaction with life on a scale from 0 to 10, Australians come up with an average score of 7.2, way above the OECD average of 6.6. And the score is pretty consistent across the nation. Men and women are equally happy. Australians without secondary education are only a little less happy than Australians with university degrees, reporting an average score of 7.1 instead of 7.4. Around 84 per cent of Australians report having more positive experiences than negative ones in an average day.

Two thirds of Australians reported having helped a stranger in the last month, well above the OECD average of 48 per cent.
94 per cent of Australians believe they know someone they could rely on in a time of need, also above the

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Credit cards. The RBA outregulates itself

Here's how:

Sometimes a regulator can be too safety-conscious. The Reserve Bank has outed itself as one such regulator saying its rules governing access to the credit card system are so restrictive they exclude the Bank itself.

In 2004 the RBA stripped Visa and Mastercard of the right to decide for themselves who could issue and receive their cards saying the system had to be open to any “authorised deposit-taking institution” supervised by the Australian Prudential Regulation Authority or to any member of a new class of “specialised credit card institutions” regulated by APRA.

The RBA’s problem is that it isn’t such an institution. It provides banking services to the Commonwealth government and many of its agencies, but it is unable to issue Visa cards and Mastercards in the same way as other banks. And it would like to. If it could Australians might be able to pay their taxes by quoting their card numbers or to pay ASIC fees.

One possibility would be to submit to regulation by APRA, but the Bank would find that a little strange. Another would be to use one of the private banks to deal with the card companies on its behalf, an only-slightly-more dignified solution it is using for the moment...

Instead its consultation paper released Tuesday proposes revoking the access regime, allowing Visa and Mastercard to once more decide who they allow to issue and accept cards in their name, knowing that as an organisation with an impeccable credit rating it is likely to be on the list.

The paper makes the point that Visa and Mastercard are not what they were. A decade ago they were owned by the banks and keen on restricting access to their infrastructure. Each is now a public company, keen on expanding its business.

The change would make it easier for non-banks to issue so-called “popup cards” which can be used just once, sometimes as part of promotions in the travel industry, sometimes so that employers can have greater control over their employees expenses.

The Bank also proposes a third course which is to keep the access regime in place but to broaden it to include “all entities conducting banking business in Australia,” a definition that includes itself.

Removing all restrictions would allow retailers such as Coles and Woolworths and also big service companies such as Qantas and Telstra to issue cards in their own right, without partnering with a bank.

The Reserve Bank has asked for responses by July 8.

In today's Sydney Morning Herald and Age

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Tuesday, May 28, 2013

Construction after the boom. Builders say it looks okay

Australia’s mining investment boom has probably peaked but the ride down doesn’t look too frightening, according to the Australian Construction Industry Forum.

The Forum’s semi-annual forecasts compiled with the help of ACIL Allen Consulting and Deloitte Access Economics show engineering construction plateauing rather than collapsing, slipping 2.5 per cent this financial year, then 0.8 per cent in 2013-14 and 0.6 per cent in 2014-15.

"New projects are still being commissioned," said Forum executive director Peter Barda. "Just not as many and not as big."

"There is no doubt that in some sectors demand is off and prices are down but there is still ongoing demand for the things we've got to sell."

“We are pretty confident looking out three to five years. Beyond that it is difficult. Firms can and do make sudden decisions to stop what they are doing. But for the moment the world has not stopped, the world continues to need energy and minerals and we continue to be lucky enough to be in a position to provide them at a globally competitive price.”

While engineering construction firms would need to get used to lower or zero growth at a still exceptionally high level of activity, residential and commercial construction was set to climb.

"There has been little investment in shopping centres for some time, since before the global financial crisis. All of sudden the big institutional investors who own the shopping centres are starting to think they look shabby. They are facing competition from online retailers and from big box retailers, and they are starting to spend to smarten them up"...

Things were also picking up in warehousing and logistics.

"The way that supermarkets and others wants products delivered is changing. It's like mining, the name of the game is building facilities that shave factions of a cent per tonne kilometre off the transport cost.”

The Forum expects non-residential construction to climb 7 per cent in 2013-14 and then 1.2 per cent in 2014-15.

Residential construction is expected to climb 7 per cent in 2013-14 followed by a further 7 per cent in 2014-15. NSW will grow much faster than the rest of the nation, and Victoria much more slowly after recent strong growth.

Not all of the construction workers displaced from mining projects would find work in building construction because the skills were different. But building construction was much more labour intensive.

“I doesn't take as many people to bring a mine to market as it does a shopping centre,” he said.

“Generally speaking you don't find too many people who want pretty railway lines, but people do want pretty showrooms, and pretty homes.”

In today's Sydney Morning Herald and Age

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Sunday, May 26, 2013

Why we'll learn to love the higher GST

You think it'll stay at 10 per cent?

Hands up if you think the GST is going to stay at 10 per cent.

If you believe that I bet you also believed in the tooth fairy, in the Australian government when it said would only use the Tax File Number for tax, in Julia Gillard when she said she wouldn’t increase the Medicare levy and in John Howard when he said he wouldn’t introduce a GST in the first place.

Things change. The GST hasn't, yet. But it was designed to.

Think about the agony that went into building it. More than a million Australian businesses were forced to become tax collectors. They are made to complete Business Activity Statements, to install special computer codes on their cash registers and to hang on to money due to the Tax Office they would rather spend. A University of NSW study finds it the most expensive of the taxes for businesses to collect, costing each business an average of $12,000 per year.

But now that it is in place, the extra cost of raising it is next to nothing.

All that’s needed is a small change to the line of computer code in each cash register. The real work has already been done.

Imagine a building constructed with super strong supports in the expectation that one day an extra story will be placed on top. The building is ready, and one day the extra story most probably will be placed on top because it’s a very cheap way of getting extra space.

The Treasury has ranked Australia’s twelve most important taxes in terms of the trouble that would be caused by increasing each one a little more.

The most trouble are mining royalties, insurance taxes, payroll taxes and company tax. Just about the easiest, right at the cheap end, is the GST. It is already in place and by international standards it is low.

New Zealand lifted its GST from 10 per cent to 12.5 per cent and then to 15 per cent. Introducing it was difficult. Lifting it was easy. The United Kingdom began with 10 per cent and now has 20 per cent. Germany has 19 per cent, France 19.6 per cent. China has 17 per cent.

Taxes are always their most unpopular before they are introduced...

Remember the fringe benefits tax, the capital gains tax, the carbon tax? Each was talked about in apocalyptic terms before it was introduced. Afterwards each is close to popular, certainly little remarked upon.

Labor’s Kim Beazley looked silly when he continued to promise to roll back the goods and services tax. Tony Abbott looks just as silly continuing to pledge to roll back the carbon tax.

Experts have a saying: “An old tax is a good tax”. That’s why our GST will inevitably be lifted. It is old, it is relatively low, and we will need more.

And it does little damage. Boosting income tax at the present rates would discourage people from working, especially mothers already facing big costs returning to work. Boosting company tax would frighten away some of the foreign investment we will need as the mining boom winds down. But boosting our present rate of goods and services tax would do little to dent spending. That’s what the overseas experience suggests.

It would unfairly disadvantage low income Australians. They spend almost all of their incomes on goods and services. High income Australians escape some of the tax by spending overseas and saving for retirement. But compensating low earners isn’t difficult. We did it most recently with the carbon tax.

The GST takes in $50 billion a year. Boosting it to 12.5 per cent would take in an extra $12.5 billion (less after compensation). Boosting it to 15 per cent would take in an extra $25 billion.

It is money we will need. Health and aged care costs are set to more than double as a proportion of GDP over the next four decades. No-one seriously suggests not paying those costs.

And we are rich enough. The question is how. What is the least-damaging way of raising more tax? At times Tony Abbott and Joe Hockey have put forward another (apparently less painful) solution - cutting government waste. But it is not clear there is enough waste to cut. The budget papers show the government spends no more of Australia’s national income than it did ten years ago.

Treasury boss Martin Parkinson put it starkly this week. He said we would need to either pay more tax to government or expect less from the government. The GST is about the best means of paying more.

In today's Sun Herald

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Friday, May 24, 2013

Jump in my car. Why Ford was heading south

Ford was always going to fold. Management expert Roy Green served on the prime minister’s manufacturing taskforce and her manufacturing leaders advisory group. He says it was the “weak link” in the Australian manufacturing chain - the only firm with plainly dismal prospects.

Professor Green believes in targeted government support to help Australian industry, but he believes that of all the car industry, Ford was the worst possible candidate for support.

“The dollar was climbing, buyers were demanding more options, and Ford stuck to business as usual,” he said.

Toyota is fully integrated with its overseas parent. At times more than half of its Australian production is exported. When the dollar is low Toyota makes more cars in Australia, when it is high it makes more cars offshore.

Holden is nimble. Its parent, General Motors allows it to export. It sends rugged cars to South Africa, it makes police cars for the United States.

But Ford Australia has hardly ever sent anything offshore. Its most spectacular failure is the stuff of legend. With no experience of such things it won the contract to make the Ford Capri sports car for the United States in 1989. It leaked. Production stopped after just 67,000 cars and its foreign parent has looked askance at it ever since. All of Ford’s factories worldwide use the same set of global car platforms. Except for Australia’s. It’s as if the foreign parent has been cutting it adrift.

Its orphan status mightn’t have mattered if it was selling decent numbers in Australia. In 2012 it sold just 14,036 Falcons and 5733 Falcon utes. A decade earlier in 2002 it shifted 54,629 Falcons and 17,883 utes...

It has faced the same problems as its two competitors. For the quarter of a century to January 2010 the Australian dollar averaged 72 US cents. For the last two years it’s been mostly above 100 US cents. That means that a foreign car that would have once cost $40,000 to import now costs less than $30,000. And the tariffs are lower. They collapsed from 10 per cent to 5 per cent in January 2010. And the fleet market changed. Employers once ordered Fords and Holdens in bulk. They’ve been shifting to so-called “user chooser” leases where the person who drives the car gets to chose it. With so much on offer from overseas, users haven’t been choosing Ford.

With one exception Ford has sat tight. The exception is the Ford Territory, Australia's only locally-made four wheel drive or SUV, a stretched upwards version of the Falcon. It has taken off as SUV sales have taken off, although it accounted for only 15,000 of the 300,000 SUVs sold last year.

The other car makers look like better bets. They might well survive the decade. Some of Australia’s component makers are the best in the world. They might survive even if car manufacturing folds.

The best thing the government can do now for Ford is to cut off the drip - to use that part of the latest $32 million package it hasn’t handed over to encourage perhaps an Indian or a Chinese car maker to take it over. The idea is being promoted by economist Nicholas Gruen who worked on the Hawke Labor government’s Button Car plan. He says they might have the drive to make something work.

In today's Sydney Morning Herald and Age

Ford by numbers - The Crunch, Fairfax data blog

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Wednesday, May 22, 2013

Mining. The invesment boom has peaked, it's probably downhill

Today's evocative graph from the Bureau of Resources and Energy Economics:

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Here's to you, Martin Parkinson (lyrics)

Joe Hockey hung the Treasury boss Martin Parkinson out to dry today. Offered two opportunities to endorse him in the role he declined.

Mr Hockey pointedly refused to express confidence in the present head of the Treasury Dr Martin Parkinson who would be head of his department should Mr Hockey become Treasurer.

He had “deep reservations” about the numbers presented in the budget.

When told Dr Parkinson had taken ownership of those numbers saying they were the work of the Treasury rather than the Treasurerhe said he “would have expected Dr Parkinson to say nothing different” because he was “quite appropriately a servant of the government”.

Mr Hockey’s “starting point” was to “give public servants the benefit of the doubt about their intentions and their preparedness to work with us”.

Here's the song. Music by Simon and Garfunkel. Lyrics by the ever-clever Stephen Long:

And here's to you, Martin Parkinson

Swanny loves you more than you will know (wo wo wo)

God bless you please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey

We'd like to know a little bit about you for our files

We'd like to help you learn to help yourself

Look around you all you see are Coalition eyes

Tough pre-election outlook, or you go

And here's to you, Martin Parkinson

Swanny loves you more than you will know

wo wo wo

God bless you please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey

Hide the revenue in a place where pollies never go

Put it in your pantry with your tax reform

It's a little secret just the Parkinson affair

Most of all, you've got to hide it from the spivs

Coo coo ca-choo, Martin Parkinson

Swanny loves you more than you will know

wo wo wo

God bless you, please, Martin Parkinson

Hockey holds a place for those who sway

Hey hey hey, hey hey hey

Sitting in the Treasury on a Sunday afternoon

Looking at the candidates' debate

Laugh about it, shout about it when you've got to choose

Every way you look at it you lose...

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Pay. More. Tax. Or expect less - Parkinson

Simple? simple.

Australians will have to either pay more tax or expect poorer government services, the head of the Treasury has warned.

Dr Martin Parkinson told a post-budget function in Sydney the share of the economy devoted to tax had suffered its most dramatic slide since the 1950s.

“From its pre-crisis level of 23.7 per cent the tax-to-GDP ratio fell to 20.1 per cent in 2010-11,” he said. “This reflects both successive large cuts to personal income tax rates and a fundamental change in the relationship between the nominal economy and tax receipts.”

Weak tax collections were set to continue. Mining companies had become more economically important and paid less a low proportion of their profits in tax, around 5 to 10 percentage points less than for the corporate sector as a whole.

“Just to be clear, this is not a judgement about what the effective tax rate paid by mining companies should be, Dr Parkinson told the business economists. “It is simply a statement of fact.”

Non mining companies would soon need to take the place of miners in driving economic growth, but there was a risk the transition would “not be seamless”.

Right now their growth was “not much bigger than the recession of the early 1990s”.

Dr Parkinson's assessment came as the Fitch ratings agency endorsed Australia's AAA credit rating, describing the nation's public finances as “very strong”...

“We view Australia's public financial position as a source of strength,” the firm's global director of sovereign ratings Art Woo told investors in Sydney.

Its propriety measure of “general government debt” representing the amount owed by all levels of government came in at 26 per cent of gross domestic product. This was below Norway's and way below that of nations such as the United States which had general government debt of 100 per cent of GDP.

Dr Parkinson said Australia's weak tax take was colliding with growing expectations of government and the rapidly rising costs of healthcare and the aging population. Reforms to improve productivity would help to some extent and would be needed whichever party won the election.

“We have a big gap between what the community demands of government and what it is prepared to pay,” he told the business economists. “We have to think about savings or new sources of revenue.”

“I am not saying we have to find extra sources of tax. I have never said that. But we cannot just keep promising to spend more and more.”

“Long run our receipts bounce around at about 24 per cent of GDP. If we are to deliver surpluses over time such that we can deal with the demographic challenge we have got to keep outlays to 24 per cent or we have got to increase taxation. It's a mathematical truism.”

The Treasury secretary declined to be drawn on whether he whether he would support an increase in the goods and services tax.

Treasury will soon release its assessment of the 'structural' or 'underlying' budget position. Shadow treasurer Joe Hockey will make the structural deficit a key part of his address to the National Press Club on Wednesday arguing the budget position is weaker than it seems. He will again refuse to release detailed policy costings until the Treasury's updated pre-election fiscal outlook to be released during the campaign.

Dr Parkinson said the Treasury's views were those in the budget. If the pre-election outlook had been released on budget night it would have had exactly the same as the outlook in the budget.

In today's -Sydney Morning Herald and Age

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Monday, May 20, 2013

Baby bonus. The needless, dangerous birth boom coming soon

"On Wednesday June 30, 2004 a total of 490 births were recorded.

On the next day, the first day of the baby bonus, the number of recorded births jumped to 978."

Treasurer Wayne Swan is being urged to smooth the “sudden death” end of the baby bonus, due to slump from $5000 to $500 on March 1.

When the bonus was first introduced on July 1, 2004 Australian labour wards experienced their busiest Thursday in three decades. A record 1,005 babies were born on July 1, compared to only 500 the day before, which one of the quietest Wednesdays on record.

Melbourne University economist Joshua Gans found the babies born in July 2004 were significantly more likely to be “overcooked”. Around 680 babies were born weighing more than four kilograms in that month, 140 more than in a typical month. His concern this time is that births will be brought forward.

“Frankly, I think this is worse,” he said from Canada where he is now works. “The delay increased birth weights and I recall one study that showed that could be beneficial. But in this case we are likely to suffer from earlier births meaning lower birth weights.”

Asked at the National Press Club on Wednesday whether he was worried mothers might try to bring forward births to get the bonus Treasurer Wayne Swan replied with a four-word answer: “No, I am not”.

Professor Gans and Dr Andrew Leigh of the Australian National University found mothers varied the timing of their births using cesareans and inductions. Only 42 per cent of births in the final week of June 2004 were cesareans or inductions. The rate jumped to 52 per cent the following week.

“The rates of vaginal birth stay basically flat suggesting that this isn't anything to do with misreporting or crossing your legs, this is all to do with these elective procedures being put off,” Dr Leigh said at the time.

“What worries is that this is coming because the government has set up an incentive to change the timing of your birth. It is a very weird thing and not at all something that seems to be in accord with good public policy.”

Dr Leigh is now a Labor member of parliament, presently parliamentary secretary to the prime minister.

He told Fairfax Media on Sunday he stood by his findings and was working within the government on the question...

The sudden drop in the baby bonus has not yet been legislated and could be converted to a smoothed phase out without costing money.

Dr Leigh and Professor Gans wrote to the then health minister Nicola Roxon in 2008 urging her to smooth the last planned increase in the bonus. Their pleas were rejected, in part because of “something about the fiscal year,” according to Gans.

“That doesn’t apply this year. No one has ever been able to explain to me why you can't do it more gradually,” he said.

“As I understand it, there are continual political calls for academic research to be more relevant and useful. So we do that research and it is, at best, ignored and, at worst, apparently unwelcome.”

Doctor Andrew Pesce, an obstetrician and gynaecologist at Sydney’s Westmead Hospital said while expectant mothers did ask to have the date of their deliveries optimised, he had never known one to do it in circumstances where it would endanger the child.

“If the baby has some prematurity problems she is probably going to spend a whole lot more than the baby bonus on special care nursery costs,” he said.

In today's Sydney Morning Herald and Age

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Every day it's a getting closer, more GST

Labor managed to have a tax review without talking about it. The Coalition has promised not to touch it in its first term.

But NSW Premier Barry O'Farrell says it’s time for a “dinkum” discussion. He says we should consider lifting the rate of the goods and services tax beyond 10 per cent.

The rate can only be varied if all of the states agree and if the Commonwealth parliament passes legislation. Opposition leader Tony Abbott has said he will allow consideration of the GST in the tax review he will commission should he win the next election, but that any changes would be put to the people first at a subsequent election.

Mr O'Farrell said a higher GST could be used to remove "anti-economic" state taxes such as those on payrolls and investment.

"People know the current tax system is failing. There are regressive taxes that we can only eliminate if we are compensated, and the best way to do that is through the GST," he told Sky News on Sunday.

"All options should be on the table, broadening the base, looking at the rate and also the rebates back to the states"...

Assistant Treasurer David Bradbury said the Coalition would face mounting pressure from Liberal states to increase the rate.

"What Mr O'Farrell did was open the curtains on this so-called tax review, which we know is going to be nothing other than a GST review." he said. “All options should be on the table means up with the rate, out with the base. It means tax on things like fresh food, it means health, it means education."

Victorian premier Denis Napthine poured cold water on the idea of a coordinated move saying a tax review was not high on his list of priorities.

‘‘I am more interested in getting funding for East West Link Stage 1, that is my first priority and then getting on with the Metro Rail tunnel and Port of Hastings,’’ he told reporters on Sunday.

Victoria wanted a fairer share of the national GST pool rather than a higher rate.
Although forbidden from considering a change to the GST the 2010 Henry tax review published a table showing that increasing the rate of would be one of the least damaging ways of raising more tax. The least damaging was an increased resource super profits tax.

Shadow Treasurer Joe Hockey confirmed Sunday the Coalition would support the government’s decision to means test the private health insurance rebate. “We will legislate as an emergency measure,” he told the ABC. As recently as February he had been promising to restore the full rebate. “We would like to see that means test gone because we believe in a universal health system,” he said at the time.

In today's Sydney Morning Herald and Age

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Friday, May 17, 2013

Abbott's shame. Long may this letter be remembered


Why Abbott will have to clean up Labor's super tax mess

Here's my advice, written before I knew he was thinking along similar lines.

Accepting the bulk of Wayne Swan's budget cuts will only get Tony Abbott and Joe Hockey so far. Within their first term if elected they will have to confront the one truly enormous and growing budget cost Swan has barely tackled..

The cost to tax of the staged increase in compulsory superannuation contributions from 9 per cent of salary to 12 per cent was to have been funded by the mining tax.

Now scarcely functioning (and set to be abolished by the Coalition) the mining tax will raise just $200 million this year and a total of 5.5 billion over five years if it survives.

By contrast the existing super tax concessions cost $32 billion per year according to the Treasury figures in the budget. That figure is disputed by some in the superannuation industry, but what is not disputed is that it is set to grow.

The budget papers show it climbing from $32 billion to an astonishing $50 billion per year by 2016-17, an extraordinary increase of 60 per cent.

By then super tax concessions would cost more than the pension ($48.5 billion) and more than Family Tax Benefits and Medicare combined ($21 billion and $23.6 billion).

And the ramping up of the costs will have only begun...

The first increase in compulsory super contributions from 9 per cent of salary to 9.25 happens in July. It will be funded by employers, most probably out of wage increases they would have otherwise paid.

But that's not a cost to the budget. The cost to the budget is that those contributions will be taxed at only 15 per cent, instead of the standard rate for wage increases. For middle earners subject to the Medicare levy the standard rate is 34 per cent. (Only Australians on salaries in excess of $300,000 will be slugged more than 15 per cent, and one year after announcing the hike to a still-generous 30 per cent the government still hasn’t produced the legislation.)

The first increase in compulsory super will be followed by a second, to 9.5 per cent in July 2014. The increases won't stop until July 2019 when the lightly-taxed total reaches 12 per cent of salary. Only then, at the end of the decade, will the budget cost level off.

The government hasn't said how much compulsory super will cost the budget by the end of the decade but it if it asked, Treasury would give it an answer.

It'll fall to Abbott and Hockey to wind back what will then be the largest cost to the budget other than grants to the states. The simplest solution, suggested by Melbourne University tax expert John Freebairn is for employers to deduct tax from super contributions at pay-as-you-go rates just as they do for wages. The earnings of super funds and the payouts could be untaxed, for even greater simplicity.

It's a bold solution that should be easy to sell. Something like it will become necessary for whoever is in charge of the budget after the September election.

In The Age

Recommended Reading:

Future Challenges: Australia's Superannuation System Martin Parkinson, November 28 2012

"With the Commonwealth budget coming under increasing pressure over the next few decades, the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny. This scrutiny will be even more important to the extent that existing concessions are seen to favour some at the expense of the majority."

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Wednesday, May 15, 2013

Budget 2013-14. Will we hit the debt ceiling?

Probably. The next Treasurer will have to lift it.

Me on RN Drive, May 15, 2013

13 minutes, play or RIGHT CLICK to download mp3

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Budget 2013-14. Me on the radio, the morning after

Me on Life Matters, Wednesday May 15

25 minutes, play or RIGHT CLICK to download mp3

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Swan's numbers. Why he is cautious, this time



Projected outcomes, May 2012

2011-12 $44.4 billion deficit

2012-13 $1.5 billion surplus

2013-14 $2 billion surplus

2014-15 $5.3 billion surplus

2015-16 $7.5 billion surplus


Projected outcomes, May 2013

2011-12 $43.4 billion deficit

2012-13 $19.4 billion deficit

2013-14 $18 billion deficit

2014-15 $10.9 billion deficit

2015-16 $0.8 billion surplus

2016-17 $6.6 billion surplus

In the face of enormous pressure to return the budget to surplus quickly, Wayne Swan has run the other way.

Extra spending this financial year and the next will boost the 2012-13 deficit by a further $2.4 billion and the 2013-14 deficit by $720 million.

Only in the following two years will the cuts in the budget overwhelm the extra spending, pushing down the 2014-15 deficit by $6.2 billion (to a small projected surplus) and pushing down the 2015-16 deficit by $12.3 billion (to a substantial surplus).

The Treasurer has adopted what he calls this "sensible, calm and responsible approach" in part because of a fear the economy could not take a sharp shift to surplus, a concern shared by shadow treasurer Joe Hockey, who told an investment conference last month the Coalition would not "go down the path of austerity simply to bring the budget back to surplus".

Mr Swan puts it this way: "Just because the global economy took an axe to our budget does not mean we should take an axe to our economy."

Changed economic conditions have ripped $60 billion from the four-year total of expected tax collections since the last budget update in October.

The budget papers include a graph making the point that if tax collections had remained as high as in the final year of the Howard government (23.7 per cent of gross domestic product), the budget would still be roughly in balance.

Swan is clawing back two-thirds of the missing $60 billion by making $43 billion of savings, most of which increase over time instead of biting now when the economy is weak.

Emblematic is the freezing of the thresholds beyond which Australians can't get the family tax benefit. The freeze will hurt no one in the coming financial year but then will raise $207 million in 2014-15, $400 million in 2015-16 and $609 million in 2016-17. The $94,316 cut-off for the family tax benefit part A seems generous now, but it will seem less generous over time as income growth pushes more and more people beyond it.

The decision to increase tobacco excise in line with average weekly earnings rather than the much slower growing consumer price index is another measure where the impact will start low and then grow.

The extra Medicare levy, to be locked in a fund labelled DisabilityCare Australia, won't bite at all in the coming financial year. But from mid-2014 it will take $3.3 billion from incomes, then, two years later, $4.2 billion. Set at 0.5 per cent of incomes, it will climb as incomes climb.

The phasing out of the net medical expenses tax offset as recommended by the Henry tax review will save only $175 million in its first year. But it will save $510 million per year by 2016-17.

So much do the measures Swan has put in place grow over time that he reckons he can fund 10 years' worth of the national disability insurance scheme and the schools improvement program with them.

But the projections aren't worth much coming from a Treasurer who, more than most, is acutely aware of how much things can change in just one year...

The budget documents make clear that any numbers produced beyond the next years are "projections" rather than forecasts. The difference is that "projections" assume standard rates of economic growth rather than forecast what it will be. By definition, "projections" don't encompass the possibility of recessions. If Australia did manage to last another 10 years without a recession, on world-record 21 it already lasted, it would indeed be a world-beating economy and would certainly able to afford DisabilityCare and the Gonski education payments.

Much depends too on an assumption that as mining investment fades mining production will ramp up to fill the gap. Investment detracts from tax collections, production builds them. But it is a guess about what will happen assuming demand from China remains high.

The projections assume an Australian dollar "around US103 cents".

This was where it was when the budget was being finalised, but it isn't where it is now. It fell below US100 cents on Tuesday and may well stay there, highlighting how difficult it is to forecast a week ahead, let alone a decade into the future.

And some of the measures involve guesswork. Tightening the tax rules to prevent multinational corporations shifting profits offshore and related tax measures are said to raise $4 billion over the next four years. But the assumption is multinationals will agree to pay the extra tax and won't find new ways not to.

If all goes as planned, government debt will peak at $192 billion, instead of the previously forecast $145 billion. The total is 11 per cent of GDP, instead of the previously expected 9 per cent. Net debt would be eliminated in 2021-22, one year later than previously expected.

In The Canberra Times, The Sydney Morning Herald and The Age

Australia's economic future is strong but uncertain, according to the Treasurer. The massive resource investment boom is shifting to a boom in production and exports. The rest of the economy is "transitioning towards broader sources of economic growth".

But while the opportunities are "great" and the future "bright", the transition "will not be seamless".

The prices Australia gets for its exports have slipped 17 per cent in the past 18 months when expressed as a proportion of the prices the nation pays for its imports, the budget papers say.

The Treasury is expecting only a small further decline in the year ahead - just 0.75 per cent in 2013-14, followed by 1.75 per cent in 2014-15. It isn't particularly confident in the forecast, observing that the prices of key non-rural exports remain "highly volatile".

One scenario modelled on worse-than-expected export prices has employment growing at 1 per cent instead of 1.5 per cent.

The economy would grow at 2.75 per cent instead of 3 per cent and tax collections in 2014-15 would be $5.6 billion lower.

This time last year, Treasury forecast an unemployment rate of 5.5 per cent. Now it is forecasting 5.75 per cent, an outcome in part reliant on those "highly volatile" assumptions.

The department is hoping investment in housing surges in the year ahead to fill some of the gap left by mining investment.

After sliding in 2011-12 and growing at just 0.5 per cent in 2012-13, a 5 per cent improvement is expected in 2013-14. Business investment will not be of much help. Treasury expects its growth rate to slide from 10.5 per cent this financial year to 4.5 per cent in 2013-14.

Inflation, which had been a deep concern for the Treasury this time last year, and had been forecast at 3.25 per cent fuelled by the carbon tax, is now just 2.25 per cent.

That's the figure the department is targeting for the next two years, punting on the dollar staying high and underlying household demand being weak enough to force retailers to continue to discount in order to shift goods.

Business profits should remain very weak in 2012-13, slipping 0.75 per cent before recovering to record 4.75 per cent growth in 2013-14 and 5.5 per cent in 2014-15. Even after the recovery, profits will rise at much less than their historical pace of about 7 per cent a year.

The Treasury blames the high dollar, which it says is having "an acute and enduring effect on profits" as companies "squeeze margins to remain competitive".

The department's central forecast is the economy will muddle through. Economic growth will be 3 per cent this financial year, 2.75 per cent in 2013-14, and 3 per cent in 2014-15.

But it makes a point in the budget papers of saying the forecasts can turn sour - they are "always subject to a margin of error".

It says its biggest forecast errors last year concerned business and housing investment.

Ratings agencies Moody's and Standard and Poor's reaffirmed Australia's AAA credit rating on Tuesday night, saying the budget made only slight changes to previous projections and the country's debt level remained low.

In The Canberra Times, The Sydney Morning Herald and The Age

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Tuesday, May 14, 2013

BUDGET 2013-13 Where to find stuff

I'll surface at 1930 AEST

. National Times live video coverage from 1920 AEST

. Budget documents  from 1930 AEST

. ABC News 24 from 1930 AEST

. ABC Metro Radio from 1930 AEST

. ABC NewsRadio from 1930 AEST

. Me, this time last year


Sunday, May 12, 2013

Not rich? Why we've no idea what we actually earn

Michael was outraged. Earlier in the week I had written that anyone earning more than $210,100 a year was ultra-rich, in the top 1 per cent.

“How exactly does one draw the conclusion that earning $210k a year makes you ultra-rich, especially as I am assuming this is before tax?” he asked.

“This equates to approximately $140k net after tax as income.”

“Assuming a $600k mortgage (appropriate to this level of income) and two children in private schools plus additional outgoings this leaves a balance of only $21k for holidays and other incidentals and/or saving.”

I wrote back assuring him that, however difficult his circumstances, 99 per cent of Australians earned less than he did in 2010-11, the most recent year for which the Tax Office has figures.

Compared to them he was indeed income-rich.

Most of us seem to know next to nothing how we are really doing compared to everyone else.

Here is a test. What do you think was the average income reported to the Tax Office in 2010-11?

I’ll make it easier. You can exclude all the (mainly) low earners who don’t pay tax.

The average income earned by the Australians who did pay tax was $66,720.

If it seems as if almost everyone you know earns more than that, that could be because you don’t get out enough.

Labor MP for the Hunter Joel Fitzgibbon doesn’t get out enough. He infamously claimed a few weeks back that families on $250,000 were ''struggling''.

''Coal miners in my electorate earning $100,000 $120,000 $130,000, 140,000 a year are not wealthy,” he said.

In fact the same Tax Office statistics show the average income for the postcodes in his electorate centres around $60,000 - way below those of the people he mixes with.

And those averages hugely overstate what most people actually earn.

Astoundingly, roughly three quarters of Australian taxpayers earn less than the average. That’s less than the average. Only one quarter earns more.

The true midpoint, the income above which half of us make more and below which half make less, is $45,212.

Why do most of us take home so much less than the average? Because the average is an artifact - it is pushed up by a few truly enormous incomes at the very top.

(Think for a minute about Gina Rinehart, the world’s richest woman. Her income boosts our average income but not our typical income. If she moved overseas our recorded average income would slide but our typical income would not.)

It’s actually not that fair to single out Joel or John. None of us get out enough.

We tend to live near people who earn something near what we are earning. If they earn slightly more than us we think we’re behind. If they earn slightly less we think we’re ahead. But we don’t look far beyond them.

It’s not only that we live in suburbs where people tend to earn the same as each other. The average income in Rushcutters Bay is $203,270. The average at Ruse in Campbelltown is $46,700. It’s also that Sydney’s high-income suburbs are clustered together. Near the city and harbour are Sydney’s high earning suburbs. Further away in the south and west are the low-income ones. Those of us who live near the centre don’t even need to drive through the further flung suburbs to get to work.

In the United States it is often the other way around. The low-income suburbs are near the city, meaning that high-income Americans at least need to drive past them as they go in to town.

At work we are also likely to be closest to the people who earn the sort of wage that we do.

Surgeons earn an average of $341,600 according to the Tax Office. They associate with other surgeons. Hairdressers earn an average of just $27,600 (many are part time). They too hang around with other hairdressers.

They are also increasingly likely to marry each other. The Productivity Commission reported this year that two-thirds of Australia’s high earners were married to other high earners. A decade earlier the proportion was 50 per cent.

It’s even worse when you consider aspirations. Believing we might one day move up a notch or two we are keen to defend the interests of those above us. The shadow treasurer Joe Hockey nailed it two years ago when he attacked a budget measure with the potential to hurt very high earners.

“$150,000 a year for a family is certainly not rich Australia,” he said. “Besides I want people to aspire to earn $150,000 or more.”

That’s the problem. We think others earn more than they do, we aspire to earn more than we do, and many of us have no idea how well off we are.

In today's Canberra Times and Sydney Morning Herald

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What'll be inside the budget. Pain, and yet another attempt at a surplus

Whether that's wise or not

Good news will be scarce on budget night, but there will be something - at least for smokers.

Wayne Swan and Penny Wong had been considering a further 25 per cent rise in the tobacco excise that would have raised an extra $1.25 billion a year. Recommended by their National Preventative Health Taskforce it would have pushed the price of a pack of 30s above $20. But the government that famously took on big tobacco late last year in a war over plain packaging got cold feet. In the leadup to the budget it decided it had offended smokers enough, some of whom might still vote for it.

That means there won’t be another run of the infamous headline: “Beer up, Cigs up,” in part because the government has also rejected a plea from the Foundation for Alcohol Research and Education for a flat tax on alcohol that would have raised an extra $1.5 billion per year.

Just about everything that is in the budget will hurt, except perhaps for the lower interest rates that will almost inevitably flow from a raft of unpopular decisions.


A decade ago John Howard launched a reelection campaign from a lectern that read “Keeping Interest Rates Low”. He won, despite starting behind in the polls.

“Keeping interest rates low” is about the only slogan left for Swan and Wong as they try to sell Tuesday night’s budget. There will be no money for handouts (in fact they are grabbing money back) and they won’t be able to promise a surplus, at least not until the final year of their four-year set of financial projections.

But they will be able to promise a set of conditions that will as good as guarantee a further rate cut and perhaps a series of further cuts well into the life of the next government.

The banks will most likely get into the act themselves by cutting off their own bat, just as they did shortly after the last Coalition government was elected in 1996. They did it then not because they liked the change of government (although they probably did) but because upstart competitors such as Aussie Home Loans were stealing their customers by offering cheaper deals. The global financial crisis removed Aussie and its ilk (it is now owned by the Commonwealth Bank) but the conditions are ripe for new competitors to attack the banks again. The Reserve Bank believes they are charging more than they need to. As soon as a competitor comes in with something better, they will cut in order to compete without waiting for the Reserve. As a sign this is getting close on Friday the ANZ cut its standard mortgage rate by 0.27 points, more than the Reserve Bank’s 0.25 point cut. That hasn’t happened in years.

The Reserve Bank itself believes the resource investment boom is about to peak. “Once it has passed, the decline in mining investment – and the effect of the still high level of the exchange rate and ongoing fiscal consolidation – will weigh on economic growth,” its assistant governor Christopher Kent said recently.

The Reserve is desperate to find something, anything that will take the place of resource investment in driving growth and providing jobs. The high dollar has been making it hard for non-mining businesses to take up the slack.

That’s where “ongoing fiscal consolidation” comes in. It’s code for budget cuts. Dr Kent says it will “weigh on economic growth.”

The Bank has only one lever to boost the economy when something weighs on economic growth and it’s ready to use it.

That’ll be even further good news for the one-third of Australian households with mortgages. When Labor came to power the typical standard variable mortgage rate was 8.30 per cent. It’s now 6.20 per cent making a householder on a $300,000 mortgage an extraordinary $456 per month better off. Two more interest rate cuts in the months ahead would push the total gain well north of $500 per month.

It’s not the easiest of ways to sell a budget full of pain but Swan and Wong will try.

The levy

Never in living memory has a government gone into an election flourishing a bipartisan agreement to lift a tax. Tuesday’s budget will lift the Medicare levy from 1.5 per cent to 2 per cent of income from July 2014 with the grudging support of the opposition. The National Disability Insurance Scheme was to have been funded out of higher general tax revenues, but they are increasing nowhere near as fast as they would need to.

The increase will raise $3.3 billion per year, nowhere near enough to fund the $6 billion or more the scheme will cost the Commonwealth, and possibly a good deal more over time, but it’s a start.

It’ll cost an Australian on an average income an extra $250 per year, but only from mid-next year.

The missing FTB boost

From mid this year the government had been planning to boost the Family Tax Benefit Part A by up to $300 for families with one child and $600 for families with two or more. It was to be part of a $3.6 billion“Spreading the Benefits of the Boom” package funded by the mining tax.

It will be be withdrawn now that it is clear the mining tax isn’t raising anything like what was expected...

The government is hoping the 1.5 million families the withdrawal will hurt don’t miss what they never quite got, but they will be left with less to spend than they otherwise would have, a prospect that led Myer boss Bernie Brookes to dub the proposed hike in the Medicare levy “not good for our customers,” an epithet for which he later apologised.

But this measure will hit his customers one year earlier.

The missing tax cut

The carbon tax might have hurt, but many Australians were handsomely compensated. From or before July 2012 pensions were boosted, income tax was cut, family tax benefits and the tax-free threshold were lifted and extra payments were directed to low-income Australians.

A bit extra was due in 2015 to when the tax-free threshold was to climb further to compensate Australians for an expected increase in the price of carbon as the scheme linked to Europe’s

But European carbon price has collapsed. Instead of the expected $29 a tonne it is now less than $5, meaning there is unlikely to be an increase to compensate Australians for.

We’ll miss out on the extra $1.59 a week from 2015. But in return the carbon component of our electricity prices will fall.

And the Coalition wasn’t going to give it to us anyway. It has promised to scrap the carbon price and all of the compensation that isn’t set in stone within months of taking office.

More cuts

It won’t be enough. Swan and Wong will need to cut still further to make room for the National Disability Insurance Scheme and Gonski education reforms and contain the deficit. Not all of the unpleasant news is out there.

We do know about a tightening of so-called thin capitalisation rules will limit the ability of multinationals to borrow in Australia to in order to make more lightly taxed profits overseas. It’ll net Swan and Wong a bit over a billion per year.

The baby bonus and the child care rebate may also be back for another trim. A year ago Mr Swan announced that second and third children would only attract a bonus of $3000, instead of $5000. Complaints quickly died down despite the opposition's unfortunate reference to China's one-child policy.

Also in the gun are the generosity of Medicare and the Medicare Safety Net, and the public service which is certain to be slugged with another “efficiency dividend”.

The changes already announced to Superannuation were and the government says it will go no further. It is also giving every sign it will keep the Schoolkids Bonus although logic would suggest it should go because it was partly funded by the mining tax, and the Coalition plans to remove it anyway.

An ever-receding surplus

A year ago Wayne Swan rose to his feet declaring “the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies”.

He won’t be saying that this year. The money’s not there. Whether it hurts the economy or not we are about to pay the price.

In today's Canberra Times, Sun Herald and Age


Swan’s vanishing surplus. How he’ll share the pain:

From mid 2013

A planned boost to Family Tax Benefit A axed. A family earning up to up to $78,000 with two children under 12 would lose $600.

From mid 2014

An extra Medicare levy lifting the total from 1.5% to 2%. An Australian on $50,000 would pay an extra $250.

From mid 2015

A planned boost to the tax free-threshold axed. It was to have been worth $83 for incomes up to $65,000.

Also at risk

. Tax rules for multinationals

. Access to the Medicare Safety Net

. Access to the Baby Bonus

. A public service “efficiency dividend”

Wayne Swan will deliver his sixth budget at 7.30 pm Tuesday night

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