Thursday, October 31, 2013

Spot the carbon tax. Our cost of living has flatlined

It's that undramatic

One year on from the carbon tax Australia’s cost of living has flatlined.

New calculations by the Bureau of Statistics show the cost of living for so called working families almost plateaued in the year to September, climbing just 0.9 per cent. The increase is less than half the official inflation rate of 2.2 per cent and less than one third the rate at which wages are climbing.

The Bureau says its living cost indexes are climbing more slowly than the official rate of inflation primarily because they include mortgage and bank interest charges which are excluded from the consumer price index.

Discount mortgage rates have plummeted from around 6.1 per cent to 5.1 per cent over the past year, slicing about $180 per month off the typical cost of repaying mortgage.

“These figures show the cost of living barely climbing, said BT Financial chief economist Chris Caton.

“And they include the effect of the carbon tax.”

“Many Australian families are getting compensated for that tax. That is, they are being compensated for prices that are scarcely climbing"...

If you are being compensated, it is fair to ask whether your cost of living is really increasing much at all.”

The Bureau’s breakdown shows the cost of living facing households not headed by employees has climbed 2 per cent over the past year, also less than the rate of inflation. Households facing a 2 per cent increase in their cost of living include those headed by aged pensioners, those headed by self-funded retirees and those headed by people on benefits such as NewStart.

“It ought to stop all of the talk about a spiraling cost of living,” said Dr Caton. “But I don’t think it will. For me those stories are mainly media and political beat ups.”

“They cherry pick. It's always electricity, its petrol when it suits them, and then its just one or two other prices. If you look comprehensively across the range of everything consumers purchase, inflation is low and it's been low for a long time.”

Electricity prices are climbing at their slowest pace in six years, advancing 6.1 per cent in the year to September, well down on the annual increase of 18.5 per cent recorded with introduction of the carbon tax one year earlier. Average food prices fell 1.6 per cent over the year to September.

Dr Caton said there was little on the horizon that might push prices up. “A fall in the dollar might put some pressure on prices, but they are less responsive to currency movements than they used to be. Consumers are wary about spending, and new technologies are making price discovery easier. Retailers can’t apply the sorts of margins they once used to without shoppers finding out, and buying goods more cheaply elsewhere.”

The 0.9 per cent increase in the cost of living facing working Australians is a big come down from the 3.9 per cent recorded two years ago after a year in which mortgage rates had been climbing.

In The Age

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Saturday, October 26, 2013

Radical, gutsy and quick. What to expect from the Commission of Audit

Saturday column

Joe Hockey’s new Commission of Audit will be the most comprehensive in almost two decades. It’ll examine everything the government does.

And what’ll it say?

Well if it’s anything like the last one established by Peter Costello 17 years ago it’ll recommend further inquiries.

Truely. Here are extracts from that last Commission of Audit report delivered to Costello in 1996:

. “The government should undertake a fundamental review...

. “The Government should review its policy...

. “The Government should initiate further work...

And so on.

Why did the Commission recommend further work rather than do it itself?

It didn’t have the time.

It kept saying so, using phrases like:

. “Because of the very tight deadline for completion of this report...

. “In the limited time available...

. “Because of this time constraint...

And so on.

Costello had given it just three months.

If there’s one lesson Hockey might have learnt from the last time the Coalition asked a Commission to examine its entire financial operation, it’s not to give it only three months.

Hockey has listened. He has given it three and a half.

The Commission’s first report examining the scope of government, the efficiency and effectiveness of spending, the state of the Commonwealth’s finances and the the effectiveness of budget controls is due on January 31.

That’s right, January 31. Even working through Christmas with “a lot of resources” the Commissioners will have to tackle really big questions at a breakneck pace.

Their second report, examining infrastructure and public sector performance, is due two months later.

The thinking behind the speed is impossible to fathom. Hockey himself wants the report to be “thorough and comprehensive”. The Henry Tax Review was given more than a year. I’ve a suspicion the lightning-fast timetable wasn’t his.

To keep to it the Commission will have to take shortcuts. The most obvious is to purloin the findings of its predecessor.

But some of those findings will unsettle the Coalition, if the not Commission itself...

The first Commission was chaired by Professor Bob Officer, an expert in corporate finance from the Melbourne Business School. It took no prisoners. This one is chaired by Tony Shepherd, the president of the Business Council, which is a lobby group for Australia’s top 100 business leaders.

The Officer Commission wanted the government to “urgently review assistance to business and higher income earners”.

It fingered the export market development grants scheme (which survives to this day), the 150 per cent research and development tax concession (only recently closed by Labor) and the non means tested childcare cash rebate (which the Henry Tax Review also wanted means tested and still isn’t).

Its broader concern was that money was being shovelled to businesses and high income earners by means of scarcely visible tax concessions rather than direct payments. That’s how the government shovels outsized support to the superannuation accounts of high earners and the family homes of Australians who are already rich. By contrast measures that support poorer Australians are easy to see in the budget and always in the line for the cop. Just this week the government announced plans to axe the Low income Superannuation Contribution. The more expensive support delivered to high income super accounts was spared.

“The government should comprehensively review all existing tax expenditures programs,” the Commission recommended. It should convert those that were actually worthwhile into direct grants so the public could see where its money was going.

And that was just the start of its attack on privilege. It turned its guns on politicians themselves. Peter Costello was infuriated. Politicians super should be “structured in a similar way to arrangements for senior executives in the rest of the workforce”. It took eight years and campaigning by the new Labor leader Mark Latham for the Howard government to reluctantly act. It replaced the parliamentary super scheme with much like that applying to other other people, but only for new politicians. Howard, Costello and Latham himself continue to receive a super benefit costing around 78 per cent of their salaries for the rest of their lives.

The Commonwealth should abandon its support for private schools. The states could fund them if they wanted to (and there are good reasons why they might, every privately schooled student is a student less the states have to teach). In fact the Commonwealth would get out of school education altogether, keeping responsibility only for tertiary education which it wouldn’t directly fund. Instead it would fund scholarships which students could use to buy education from universities and TAFEs which full fees. Much of what the Commonwealth does in the field of health would be handed to the states as well.

And the Commonwealth would less fully fund pensioners. For obscure historical reasons their payments are linked to 25 per cent of male total average earnings. The government would instead linking them to a lower measure (median total male and female earnings) or lift them only in line with the consumer price index or not lift them at all except following regular reviews which would consider “all relevant circumstances, including budget pressures”.

The unemployed would get no joy from their campaign for higher NewStart benefits. The Commission saw sense in giving them a good deal less than the pension to make sure they weren’t lulled into staying unemployed.

And leaders such as Tony Abbott who wants to build “roads of the 21st Century” would be told bluntly Australia had enough infrastructure. There was “no evidence of overall infrastructure inadequacy”. (Although it should be noted that is a view the Commission might not hold if it revisited the question. What was true in 1996 might not remain true in 2013.)

The Officer Commission was radical, gutsy and quick - so quick it never got the chance to flesh out its ideas. Perhaps that’s why the Coalition has made its successor quick. It might be frightened of what it will find.

In The Sydney Morning Herald and The Age

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Friday, October 25, 2013

Axing the mining tax would save the Coalition money (so it says)

As unlikely as it seems, axing the Minerals Resource Rent Tax tax will save the Coalition a fortune. In fact its the most lucrative of the policies it took to the election.

Treasurer Joe Hockey put a $13 billion price tag on it on Thursday as he unveiled the draft legislation that would abolish the tax. That’s a $13 billion benefit to the government from axing the tax. Axing the mining tax itself will cost the government $3.5 billion in the years to June 2017. But axing what it says are the associated measures will make it more than $17 billion.

Among those measures, whose repeal is included in the MRRT repeal bill, are the Schoolkids Bonus, the Low Income Superannuation Contribution, the Income Support Bonus, a more generous asset write off for small businesses and accelerated depreciation for business vehicles.

All were to funded by either the mining tax or by Labor’s “spreading the benefits of the boom” package. The Coalition’s position is that the boom is receding and the tax will be no more. Everything Labor tied to extra income from mining would go as well.

With one exception. Labor’s staged increase in compulsory super contributions costs the government money because it means a greater proportion of each salary will be lightly taxed...

The Coalition will keep the staged increase but delay it for two years.

Its an exception that will help high income earners more than low income earners, made doubly hurtful because the Coalition is withdrawing the low income super contribution. It says it wants to withdraw it from July 2013, which would make the snatching of the bonus retrospective. What is more likely is that the legislation won’t get through the Senate until after it changes in July 2014 giving low earners another year.

The mining tax (and the measures the Labor said mining would fund) might last another year.

In The Age

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Wednesday, October 23, 2013

Well done Joe Hockey. The $500 billion debt limit

"The debt ceiling is like a personal credit card limit, only sillier"

It’s called “clearing the decks” and there isn’t a chief executive who hasn’t at least thought about doing it.

If you are appointed when things look dodgy, you act as if they are even more dodgy: you write off losses (in this case lift the debt ceiling) by more than you need to knowing you can blame it on your predecessor. If things turn out to be not that bad, you end up looking good. If things do turn that out bad, you won’t look that bad.

The government’s debt ceiling is like a personal credit card limit, only sillier. Unlike a credit card limit it need not take account of ability to repay. It is a political limit imposed at by the parliament rather than an outside constraint imposed by the lender. As such it is is vulnerable to politics as the United States discovered to its cost this month in a standoff which threatened to prevent the government borrowing the money it that it needed to function. Labor’s Wayne Swan had to lift the ceiling four times - to $75 billion, then to $200 billion, then $250 billion and finally to $300 billion. On some of those occasions his opposite number Joe Hockey made things difficult for him. “Enough is enough,” he said in May.

Hockey is treasurer himself now, and he doesn’t want to go through the torture of having to going back to parliament each time he needs a bigger limit...

So he has asked for a very big one - $500 billion, the need for which he can blame on his predecessor. Hockey made the point that he is not proposing to lift the debt, merely the debt limit to give himself headroom free of political sniping should he need it.

His Commission of Audit is looking like a partly-owned subsidiary of the Business Council of Australia. It’ll be chaired by the Council’s president Tony Shepherd and its secretariat will be run by the Council’s director of policy Peter Crone. It’s an enviable double for the big business lobby group. It’ll be examining what fields the Commonwealth should abandon, what it should contract out and what it should privatise. They are topics the Council already has views.

In The Sydney Morning Herald and The Age

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Monday, October 21, 2013

Housing. We are supporting the already-rich

High income Australians are the overwhelming beneficiaries of government support for housing a new report has found, turning on its head the popular perception that it’s low income Australians who get the greatest subsidies through rent assistance.

“Only 25 per cent of renters get any support from the government,” says Jane-Frances Kelly the cities program director at the Grattan institute.

“They get none of the support that homeowners get. Even landlords get more.”

Entitled Renovating Housing Policy the report finds that homeowners receive an annual $36 billion per year in subsidies from the government, landlords around $7 billion per year, and renters less than $3 billion.

“We are not arguing that renters should get lots of government subsidies, but we were just really struck by the level of support for owners given that there are so many reasons for these people to own their own houses anyway,” Ms Kelly said. “It’s hard to see why they need that kind of level of subsidy.”

Home owners enjoy an exemption from capital gains tax, an exemption from the land tax faced by landlords, special treatment in applying the pension assets test and an exemption from tax for what is known as imputed rent.

“If a landlord is renting out a place, the landlord pays tax on that rental income,” Ms Kelly said. “Homeowners enjoy the same sort of benefit. It’s as if they pay themselves rent. But they are not taxed on it"...

“We are certainly not recommending that we start to tax those imputed rents, there are very few countries in the world that do that, but the size of that support should be recognised when it comes to calculating how the government skews the housing market.”

The Grattan Institute report finds the scale of the support for owners pushes up house prices, making it harder to for younger and poorer Australians to get into the market.

“Support for owner-occupied housing used to be roughly even across all income groups. Now the highest-income owners get government support of roughly $8000 per year whereas the lowest income owners get a little over $2000.”

The report finds the skewing of support to ownership rather than renting forces people to live further away from the centre of cities than they would like and makes it hard for them to move because they face stamp duties.

“If you are living out on the fringes you often can easily access only small minority of jobs rather than those in the centre. It means employers face a thinner labour market and workers are locked into jobs they might rather not have.”

Ms Kelly said Australian social norms and the state-based rules governing rent give tenants little security. This further drives Australians into owning rather than renting making them less mobile and responsive to the jobs market.

The report recommends that state governments eliminate stamp duty, replacing it with a broad based annual tax on all properties as the Australian Capital Territory has started to do. It recommends a reexamination of the biggest tax breaks for landlords - negative gearing and discounted capital gains tax rates. And it recommends that state governments reform tenancy rules to make them more like those in Europe with long leases that which allow tenants to modify their properties and own pets.

In The Sydney Morning Herald and The Age

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Shocking. The carbon tax has pushed prices...

Prepare for a price shock.

Australia’s inflation rate is out on Wednesday and the market is expecting 1.8 per cent.

That’s an annual rate of 1.8 per cent - a September quarter result so breathtakingly low it’s close to the quarterly rate of 1.4 per cent for the previous September quarter.

The September quarters are the big ones. They are when electricity price rises hit the index. That one year on from the carbon tax a September quarter inflation result could be so low throws into an entirely different light Tony Abbott’s claim that the price impact of the carbon tax would be “almost unimaginable”.

“Almost undetectable” might be a better description. Earlier this month energy consultant Hugh Saddler of Pitt & Sherry told Fairfax Media it had been “almost impossible” to see the impact of the carbon price when it was introduced, and it would be no easier to to see what happened if it was removed.

The Bureau of Statistics agreed.

“The ABS is not able to quantify the impact of the introduction of carbon pricing, compensation or other government incentives and cannot produce estimates of price change exclusive of the carbon price,” it said in a statement. “Similarly, the ABS will not be able to quantify the impact of removing the carbon price (if that were to occur).”

The near invisibility of the “great big new tax on everything” creates both political and administrative problems for Abbott. And a minefield for businesses.

The political problem is that it’s hard to get the public outraged about a tax which is part of the furniture. Sure, there was a bump in energy prices when the tax came in the September quarter 2012, but it’s hard to tell how much of that was due to the tax and how much was due to the rapacious behaviour of the utilities we have been enduring for years. And the carbon tax bump is in the past (it won’t be part of the annual inflation figure to be released on Wednesday). The ongoing contribution of further adjustments to the carbon price is small by comparison.

The administrative problem is that it’s hard to be sure you have removed what you can’t see...

Abbott promised last week that if he succeeds in axing the tax “Australian households will be better off to the tune of $550 a year”.

The estimate derives from work done by the Treasury but it isn’t the Treasury’s. The department was asked in 2011 to predict the impact of a $23 per tonne emissions tax. It came up with $9.90 per week per household, around $515 per year. Abbott his team scaled that up for the increase in the carbon price from the middle of this year and the increase scheduled for the middle of next and came up with an impact of $550.

But as best as we can tell the boost to prices from the carbon tax turned out to be lower than the Treasury forecast. That means any fall in prices resulting from axing the tax would also be lower, if suppliers act on the way down as they did on the way up.

(Environment minister Greg Hunt’s claim that the saving would be “$3000 per family over the next six years” is silly. It’s hard enough to know what the saving would be over one year.)

There’s an apparent acknowledgement in Hunt’s draft repeal legislation that things aren’t as straightforward as they seemed.

During the campaign he promised that the Australian Competition and Consumer Commission would establish a special unit charged with monitoring and enforcing reasonably expected price reductions following the abolition of the carbon tax.

It would ensure that “businesses pass on the benefits of lower input costs to consumers in the form of lower supermarket prices and lower prices for other goods and services.”

The draft mentions by name only four types of goods, none of them sold in supermarkets. They are natural gas, electricity, synthetic greenhouse gas and synthetic greenhouse gas equipment. The minister would be able to specify other types of goods later, but the exclusion of supermarket goods - so prominent in the Coalition's advertising - suggests it is coming to the realisation that the tax pushed up their prices by so little that there’s little point in making sure they are brought down.

Woolworths reports that its average food and liquor prices were 2.9 per cent lower in the financial year that followed the carbon tax. The Treasury had expected it to nudge up food prices 80 cents per week.

The minefield for businesses caught up in the law is that if they engage in “price exploitation” by not cutting their prices by what the ACCC thinks is enough they can be fined up to $1.1 million plus damages. Worse still, Abbott says the tax will vanish from July next year even if the legislation axing it isn’t passed until later, after the new Senate meets that month. Not knowing what they are liable for and not knowing what they will have to pass on sits uneasily with a clause in the law gagging them from making “false or misleading representations about the effect of the carbon tax repeal”.

If political positions weren’t so entrenched Abbott and Hunt could just leave the tax in place. It’s causing minimal damage, it’s kicking goals (per capita household electricity and gas consumption is down 3 per cent) and it’s an old tax. Google “old tax” and “good tax” and see what you find.

In The Sydney Morning Herald and The Age

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China. Fast now, slow later - Treasury

China will be by far the biggest economy in the world within 17 years but it’s growth rate will have slowed to a trickle, according to a new Treasury analysis.

Labelled a working paper and posted on the Treasury website with the annotation that its conclusions are “those of the authors and do not necessarily reflect those of the Australian Treasury” the study uses measures of labour productivity and long term population growth to produce economic growth projections for six major regions of the world and six individual countries.

It finds China’s growth rate will plummet from an average of 10.5 per cent in the first decade of the century to 8 per cent this decade, then to 4.3 per cent, 2.4 per cent and 2 per cent between 2040 and 2050.

India, whose growth rate had been expected to overtake China’s, will do so as its growth slows from 7.5 per cent last decade to 6.5 per cent this decade, then 6.1 per cent, 4.5 per cent and 3.3 per cent.

Growth among developed nations will slip from 2.1 per cent per annum to 1.6 per cent before settling at 1.7 per cent from 2040...

The authors, Wilson Au-Yeung, Nghi Luu and Dhruv Sharma from Treasury’s international division and Michael Kouparitsas from Treasury’s domestic division, say the projected slid in growth rates need not concern Australia because its potential trading partners woill be quite big.

“Our analysis suggests that the economy of the emerging and developing region is currently larger than
the economy of the advanced region,” they write. “This reflects the rapidly shifting weight of global
economic activity to fast-growing economies of Asia.”

“We project that Asia will become the world’s largest economic region by 2020. Underlying this is the expectation that the combined economies of China and India will become larger than the advanced economies by the middle of the 2030s.”

They expect China to overtake the United States as the world’s largest economy by the start of the 2030s.

China’s economic growth rate will slow as its population growth rate slows. Chinese productivity is expected to climb from around 20 per cent of US productivity where it is today to 50 per cent by the middle of the century and then to 70 per cent.

In  The Sydney Morning Herald and The Age

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Sunday, October 20, 2013

Political expenses. It's the white lie that's the worst one

Sunday Column

Of all the lies told in the parliamentary expenses scandal the most dangerous is the white one - the one designed to make it look as if it’s the rules themselves that are to blame, not the politicians who have abused them.

Foreign minister Julie Bishop tells it beautifully.

“I believe that there is a very grey area between what is official business and what is an event that could be characterised in another way,” she told the ABC’s AM program.

“When we are invited to events, most of the time it's in our capacity as a parliamentarian. If someone wanted to characterise it because I knew the people for example, well is that a social event?”

As unlikely as it seems, she was talking about a wedding.

The truth is that for back benchers the rules are unflinchingly clear.

Ordinary members of parliament can claim travel for only four purposes - meetings of their parliamentary party, “electorate business”, “parliamentary business” (such as representing the parliament or sitting on committees) and “official business” (defined as properly constituted meetings of government advisory bodies or functions representing a minister or presiding officer).

That’s it. Anything else - certainly a wedding, a ski trip or a trip interstate to take possession of a rental property, anything else is off limits. To suggest otherwise is to suggest the person making the claim can’t read.

And to suggest that things are alright because the finance department has paid the claim is absurd.

Coalition MP Don Randall did it while stonewalling over the $5259 he spent on the “electorate business” of a trip to Cairns with his a family member. Cairns is 3446 kilometres from his electorate.

He said the claim was "appropriately acquitted with the Department of Finance".

Anyone familiar with self-assessment will know that paying a claim isn’t the same as approving it, or even examining it...

The Tax Office pays almost everything we claim automatically. It simply checks that the numbers add up. Years later it might come after us in an audit, but until then it treats as as adults who can wear the consequences of our actions.

Randall later conceded that he was wrong - payment doesn’t mean approval. He said he would refund the payment “to ensure the right thing is done by the taxpayer and to alleviate any ambiguity”.

Ambiguity? Randall sits on the committee that oversees MP’s behaviour. Like George Brandis, the attorney general, his claims have been referred to the police. They are not alone in seeing ambiguity where others see clear rules. Few in politics, and few near the very top of politics, seem able to grasp the obvious truth - that for the most part there’s a clear boundary between what is right and wrong. There isn’t a “very grey zone”.

That those at the top can’t grasp that truth says something about them and also something about the blindness that sets in when people ascend to positions of power.

It isn’t just me saying that. The moral blindness that accompanies power has been well documented.

Dutch psychologists Joris Lammers and Adam Galinsky are leading the way. A few years back they divided sixty students into two groups. One they “primed” to feel powerful by asking them to remember occasions when they had power. The other, they primed to feel powerless.

Each was asked to take part in an experiment in which they could cheat. The group that felt powerful cheated more.

Then they asked each group what they thought of people who cheated on travel expenses. Bizarrely the powerful group not only cheated more but came down harder on cheaters. Lammers and Galinsky entitled their study Power Increases Hypocrisy.

In order to be sure, they carried out the experiment again and again in different contexts. In one they asked whether it was okay to break the speed limit to get to an appointment on time. The powerful group was more likely to say no, but also more likely to say it would speed. In another they asked whether it was okay to omit from a tax return income earned from a second job. The powerful group said it was not, but was also more likely to say it would do it.

They were sexual hyprocates as well. Lammers and Galinsky emailed magazine readers anonymous questionnaires. The higher they were in their organisation's hierarchy, the more likely they were to confess that they had been unfaithful.

Power corrupts, and it appears to do it through a kind of blindness that allows powerful people to think the rules apply to other people, not them. It’s our leaders who are at fault in the politicians expenses scandal, not the rules they are breaking.

In The Canberra Times and The Sun Herald

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Saturday, October 19, 2013

For Hockey's ears only. Treasury shuts the door on FOI

So far, for now

So worried is the Treasury about its ability to establish “an effective working relationship” with its new Treasurer Joe Hockey that it is attempting to block access to its incoming government brief under freedom of information laws.

It’s a turnaround from Treasury’s position in 2007 when it released a redacted version the incoming government brief prepared for Labor’s Wayne Swan.

“Release of the incoming government briefs would interfere with the establishment of an effective working relationship between the Treasury and Treasurer,” the department says in a letter to news organisations refusing FOI requests released late Friday.

“The need to develop a trusting relationship is particularly important in the early days of a new government, to set the tone for the future working relationship of the whole department,” the letter says.

Disclosure “would not be conducive to establishing a productive, trusting and effective relationship with the Treasurer and would adversely affect Treasury’s effectiveness as a central policy agency.”

The letter advises media organisations of their rights of appeal.

Peter Timmins, a lawyer specialising in freedom of information litigation, said he wasn’t surprised...

“That’s the way the bureaucracy has been moving for some years,’ he said. “They are increasingly speaking about the need to offer frank and candid advice. Former Attorney General Nicola Roxon used the phrase herself in setting up an inquiry into the laws earlier this year. The inquiry found that the existing laws did protect frank and candid advice, but the attitude of the bureaucrats has been hardening.”

Mr Timmins said he doubted whether Treasury would win an appeal. Some of the information in the brief, such as that dealing with economic conditions, would be uncontentious and could easily be released without compromising Treasury’s ability to talk to its minister.

In The Sydney Morning Herald and The Age

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11 out of 10. Coalition costings pass muster, for now

It's better than last time

The Coalition has received a clean bill of health on its election costings, with the Parliamentary Budget Office finding that if anything it understated the boost they will give to the budget.

The finding is in stark contrast to that of Treasury and the Finance Department three years ago which found errors and questionable assumptions in the Coalition’s policy costings amounting to $11 billion.

The Office is required to produce an independent assessment of the costs of each of the major parties promises within 30 days of a change of government.

If finds the Coalition’s policies will save the budget $7.15 billion over four years, rather than the Coalition's $6.09 billion the Coalition had claimed. The figure is an “underlying cash balance” measure of the kind most widely used to describe whether a budget is in deficit or surplus.

But looking further ahead the Office sees problems. It says the promise to more generously index military superannuation pensions will grow from around $30 million per year to peak at $460 million in 2046-47. The saving from delaying the by two years the scheduled increase in compulsory superannuation will climb from the claimed $875 million per year to a peak of $1.15 billion before sliding to just $80 million per year from 2023-24.

Other savings penciled in by the Coalition are unlikely to come in as early as it and the Office have assumed...

It has booked savings this financial year from abolishing the Schoolkids Bonus and axing the Regional Infrastructure Fund, measures which might not pass through the Senate.

Treasurer Joe Hockey said the finding “once and for all puts to bed the lies from the Labor party over numerous years that there was a black hole in the Coalition’s costings”.

Shadow Treasurer Chris Bowen said the true state of the government’s books wouldn’t be know until Treasury released the mid-year budget update due in December.

He said the analysis confirmed that over three million low income earners would lose the Low Income Super Contribution and that the public service would be cut at the rate of one job an hour for the rest of the financial year.

In The Sydney Morning Herald

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Wednesday, October 16, 2013

The US debt crisis. Apparently we have plans in our back pocket

Yea, sure

Apparently we have "back-pocket plans". Treasurer Joe Hockey said so in a US television interview.

But it's hard to know what those back-pocket plans are, mainly because we have no idea what would happen if the US failed to pay its debts. Would it push up the Australian dollar, would it push it down, would it send so much money flooding into Australia that foreigners were virtually paying us to take on our debt or would it dry up the flow so we couldn't borrow at all?

It's hard to know because it's unthinkable. The US is the world's biggest economy. Of course it can make the payments on its debts. Of course it will. Financial markets have pushed down the price of the US Treasury bills due to expire in the next few weeks as a precaution but after a few months the price returns to normal. Even money market traders - by nature excitable - aren't getting too excited.

My soundings tell me the officials Hockey says have ''back-pocket plans to deal with whatever arises'' aren't getting too excited either. US government debt is to international finance what the English language is to communication. It's the global standard. If it didn't exist it would have been invented. It's where savers put their money.

There's no fallback and there's no time to find one...

And nor is there an actual deadline. On CNN there's a ''debt ceiling deadline'' clock in the corner of the screen, counting down the hours, minutes and seconds until 3am AEDT Friday, when the US is said to breach its self-imposed ceiling. But if the deadline passes and Congress doesn't relent and increase the ceiling, nothing will happen at first.

Some time later, on November 1, the US has some big bills to pay: $67 billion in social security cheques and military pay and interest on government bonds.

It might need to reprioritise if it's to avoid breaching the debt ceiling, perhaps delaying some of the payments or replacing them with promises to pay later. There's no hard and fast date. Even if the US did miss some debt payments, its lenders might choose to look the other way. It has missed payments before. Everyone knows it's good for the money. It has to be.

In The Sydney Morning Herald

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Lessons from the Economics Nobel. We're less expert than we think

Wednesday column

Whether you’re standing in a queue at the supermarket, wondering whether to change lanes on the Harbour Bridge or making a big decision such as whether to buy or sell shares, take some time out of your day today to give thanks to the winners of this year’s Nobel Prize for Economics.

Eugene Fama, Robert Shiller and Lars Hansen have helped you in ways you might not even realise - all the more so because on the surface it seems they have been merely disagreeing, as economists often do.

We owe the greatest debt to Fama, passed over by the Nobel committee for decades until Monday night.

He demonstrated rigorously that if the supermarket crowd is big enough or if there are enough cars on the highway you will get no advantage from changing lanes. Anyone who could have been helped will have already helped themselves.

His groundbreaking 1969 study examined what happened to the price of shares as soon as there was a new piece of information that could have moved the market. It did, near instantly. Anyone trying to buy the day after good news (or by extension minutes after, or these days microseconds after) would be wasting their time. The good news would have already pushed up the price.

At one level it’s reassuring. There’s no point in switching stocks. At another level it is profoundly disturbing, so disturbing that most of us find it hard to accept the implication - no-one, not even the experts our super funds pay well, can pick stocks. All of the information that would have helped them guess how prices will move has already moved prices. Their guesses about what will happen next are no better than random.

Which isn’t to say that the experts don’t look good. SuperRatings says in the year to August Australian fund managers made an incredibly impressive 15.9 per cent. Over the same period the total share market climbed 21.7 per cent. Without putting too finer point on it, our fund managers would have done better had they sat on every share in the S&P/ASX 200 index and done nothing. Of course some of their investments are outside of the ASX 200 and in some years they outperform the market, but the point confirmed in study after study after 1969 is that on average stock pickers do no better than the market. More disturbingly still, the experts that do outperform in one year tend to underperform the next. Past performance is literally no guide to future performance, both for stocks and for the people who pick them.

And the mere process of chopping and changing appears to leave us worse off. In the American Economic Review Ilia Dichev of the University of Michigan used 20 years of data to compare the returns investors actually made buying and selling stocks to those they would have made had they had simply hung on to a basket of stocks.

In 18 of the 19 international stock markets he examined investors had harmed themselves by buying and selling. In Australia in the 20 years to 2004 the overall market grew in value 12.3 per cent a year. The amount Australian investors actually made was 11.7 per cent.

I am prepared to accept you find this hard to believe. It’s as if we are hardwired to believe in expertise...

But Fama’s findings have long since counted where it mattered. He ushered in a new era of index-linked funds management where funds did indeed do no more than sit on the index and have saved themselves the expense of hiring experts to advise them how to outdo it.

His work could be said to have stood the test of time, were it not for apparently contradictory finding of Robert Shiller, with whom he shares the Nobel Prize.

Shiller found that there are indeed predictable patterns in share market and other prices, but they are predictable over years rather than months or days. What is unpredictable in the short term turns out to be predictable in the long-term. If you think that’s odd, try drawing a graph of a wave that moves slowly up and down over the time and then make it wiggle unpredictably day to day. There are times when share prices are high relative to the underlying dividends (Shiller coined the phrase “irrational exuberance”) and long periods when prices are low. Working out why this should be so is where the third winner Lars Hansen comes in. He developed and is using a heavy-duty technique called the generalised method of moments.

Australian economists Richard Holden at the University of New South Wales and Justin Wolfers at the Brookings Institution summed up the findings online as being that financial markets are efficient (Fama), except when they’re not (Shiller), and that we have empirical evidence to prove it (Hansen). But the insights run deeper. Learning about markets and things such as our behaviour in queues tells us much about ourselves - our weaknesses , our strengths, our foibles and our incredible ability through the use of disciplines such as economics to come close to making sense of it.

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

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Thursday, October 03, 2013

About that trade balance. It's been wrong and getting wronger

Suddenly it's been fixed up, and it's worse

Suddenly Australia’s trade balance has turned nasty - not because of anything we’ve done, but because of what we’re now counting.

Until this week the official count for the past financial year showed four of the twelve months in surplus. A massive series of revisions means none are now in surplus and the total deficit is approaching $18 billion rather than the previously-believed $11 billion.

Its both a warning not to take too seriously talk of a deficit or a surplus (something some of our politicians are cottoning on to when discussing the budget) and also an insight into how thoroughly the Australian Bureau of Statistics is attempting to do its job.

The fine print at the end of Wednesday’s trade figures explains that until now the Bureau has only taken account of imports worth more than $1000. That’s the threshold above which it’s compulsory to complete a Customs declaration. It’s also the threshold above which parcels delivered by the post are subject to goods and services tax.

Work done by the Productivity Commission on the value and volume and under-the-radar imports has enabled it to include a guestimate of monthly totals for the first time. And its done it right back to 1998. Those early revisions don’t amount to much. Amazon and eBay were in their infancy. But since 2010 the total has been climbing rapidly, from around $4 billion per year to close to $8 billion.

Retailers are certain to jump on the figure and say it shows how much they are being undermined by untaxed and unchecked parcels from overseas...

The Bureau believes around around 90 per cent of the newly-included low value imports are consumption items.

But $8 billion still isn’t much out of total retail sales of $260 billion. And many of the items would still be imported even if the parcels were opened and taxed.

More disturbingly for tax collectors the ABS hints that many of these physical imports are about to vanish. The next frontier will be “intangible” imports - ebooks, music, software, online subscriptions, gambling - all delivered without a single parcel crossing the oceans. It’ll be hard for the ABS. It’ll be hard for the Tax Office too.

In The Sydney Morning Herald and The Age

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Wednesday, October 02, 2013

There won't be any more (rate cuts this year)

It's over. Fix your rate if you want

In the words of the immortal Charlie Rich, “there won’t be any more”.

The Reserve Bank is done with cutting rates. Expressed in words the market will understand: there’s scarcely any easing bias left.

Earlier this year the Bank was ending each of the monthly reports that follow its board meetings with a statement that, “the inflation outlook as currently assessed may provide some scope for further easing, should that be required to support demand”.

Not any more. And not because the inflation couldn’t easily accommodate a further rate cut.

It’s because things are turning out as the Reserve Bank hoped they would. The housing market is picking up, just as the Bank intended when it started cutting rates. The dollar is much lower (even after the recent lift it’s down 10 per cent in the six months). Business and consumer confidence is climbing. And the overseas outlook is more positive than it’s been in years, notwithstanding what will most probably be only a short-lived government shutdown in the United States.

When you are getting what you want it’s wise to give thanks. And not push further.

China, Europe, the United States and even Japan are looking better than they did. Overseas measures of business and consumer confidence are lifting, as are the measures of home. While there’s not yet the roaring optimism of the pre-GFC days, it’s entirely possible it’ll come. The Bank believes that’s now more likely than a return of self-fulfilling pessimism.

Sydney home prices are up 10 per cent in the year to date, Melbourne home prices up 7.1 per cent...

While to some that’s a cause for concern, to the Reserve Bank its a necessary consequence of its four most recent interest rate cuts working. Housing demand is interest rate sensitive. When it picks up prices pick up. That’s the surest way the Bank can tell its cuts are getting traction.

By themselves the higher prices don’t worry the Bank. If they were associated with lower lending standards or a rush to greater leverage it would be concerned. But there’s little evidence they are just yet, and there’s unlikely to be evidence for some time. If there are such signs, further down the track, the Bank might might have to push up interest rates, but it’s a problem for the future. (And as far as the Bank is concerned, it’s a an easier to manage problem than the stagnation it had thought it was facing.)

There won’t be any more rate cuts this year, and the way things look right now there won’t be any more next year. Glenn Stevens pointedly reminds us in his governor’s statement that the full effects of earlier cuts “are still coming through, and will be for a while yet”. The Bank’s rule of thumb is 18 months. It cut rates in October, December, May and August. It’s rule suggests each of those cuts is yet to fully work its way through the system.

In today's Sydney Morning Herald

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