Wednesday, December 30, 2015

Why we'll have to pay polluters to stop polluting, as soon as possible

Get set for a scorcher.

None of what you've been noticing is wrong, it really is much hotter than in your childhood.

And it's getting hotter. The US National Aeronautics and Space Administration says this year will almost certainly be the hottest on record, following on from last year which was the hottest year recorded.

So far, nine out of the world's hottest 10 years on record have begun with the number 2. That means they took place after the year 2000 rather than in the 1900s, when most of us grew up.

The good news is that the Paris talks showed our leaders are on to it. Ministers including Julie Bishop committed first to holding the increase in the global average temperature to "well below" two degrees (where most of the Arctic melts) and then to "pursuing efforts" to limit it to 1.5 degrees.

It's already one degree hotter than it was before industrialisation. The emissions pledges taken to Paris would have kept the increase to only about 2.7 degrees. That's why the ministers pledged to come back every five years with new and tougher targets and to explain how they are going to meet them.

The implications are jaw-dropping. The agreement says that to just hold the line at two degrees, emissions will have to peak as soon as possible and then slide so rapidly that by the second half of the century there will be "a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases". That means zero net emissions. That's what Bishop has signed us up to: zero net emissions, by the second half of the century.

It is trite to say that the Turnbull government's $2.5 billion Direct Action program won't achieve it. A legally required update released quietly by Environment Minister Greg Hunt late on Christmas Eve shows emissions actually climbing. But it is probably also true that the Gillard government's $9 billion a year carbon tax wouldn't have achieved it either, not unless the carbon price soared to extremely high levels...

What's needed is to quickly shift most of our cars, trucks, factories and heating away from fossil fuels towards electricity and to make electricity close to emissions-free.

The Australian National University's Frank Jotzo has done the numbers in a report prepared with ClimateWorks, a privately funded think tank. It says that to meet just the two degree target we will have to close all of our brown coal power stations by the early 2020s, and all of our black ones by the early 2030s.

It isn't the sort of task Gillard's carbon tax was set up to achieve, which is why Gillard herself also set up a "Contracts for Closure" scheme under which existing highly polluting plants would be paid to close, after putting in bids. She walked away from it after she realised all of the bids would be too high.

Hazelwood, in Victoria's Latrobe Valley, is the obvious candidate. Perhaps the dirtiest power station in the world, it spews out 60 per cent more pollution a unit of electricity than the NSW black coal stations north of the border. It spews out three times as much as gas-fired power stations.

But why would its owners close it? The coal is relatively cheap because it is next to useless for anything else. Much of it isn't even dried, adding further to emissions. As things stand the NSW black coal stations are far more likely to close than Victoria's more polluting brown coal stations.

And it would cost big money to rehabilitate the site. The inquiry into the 2014 fire at the Hazelwood mine put the cost of decontamination alone at $100 million. Besides, if Hazlewood closed first, the stations that remained would grab its market share. There's a pay-off for not being first.

Paying the stations to close (as Gillard proposed) would result in politically unacceptable and unreasonably high payments to the biggest polluters (as Gillard discovered). Knowing there will be another auction down the track, and then another, they will hold out for very high prices.

So Jotzo has come up with an ingenious solution. It's a Gillard-style auction, where polluting generators put in bids for how much they are prepared to accept to close. But there's a twist. The payment comes not from the government, but from the remaining generators, in proportion to their market share and the amount they pollute. If a big polluter such as Hazelwood loses the auction by asking for too much, it'll be on the hook for big payments to whoever wins.

There would be an incentive to bid low rather than high, and none of the remaining generators would be made too much worse or better off. They would grab market share, but they would pay for it in accordance with the amount they polluted.

The winning bidders would have to use their winnings to rehabilitate their sites and pay government-specified assistance to their displaced workers.

It's by no means a complete solution. Future auctions might operate differently. The point is we are going to have to do everything we can to turn Australia electric and to squeeze most of the remaining emissions out of electricity. The old debate about a carbon price versus direct action is losing its sting. What matters now is finding something that works, and finding it quickly.

In The Age and Sydney Morning Herald

 

Read more >>

Monday, December 21, 2015

Sunday rates aside, the Productivity Commission finds we set wages pretty well

The most important finding of the Productivity Commission's new report isn't that some workers should receive lower penalty rates on Sundays.

It's that almost everything conservative commentators say about the industrial relations system is wrong. It works well, it isn't creating wages explosions, and it isn't pricing people out of work.

"Economy-wide wage breakouts and associated stagnation – the horror of the 1970s – seem as dated as floppy disks," the commission says, in what may be a gentle dig at one of the ministers who commissioned the report, former workplace relations minister Eric Abetz.

Two years ago, as wage rises began to slide, Abetz warned of "something akin to the wages explosions of the pre-Accord era, when unsustainable wage growth simply pushed thousands of Australians out of work".

During the mining boom, wages in industries that needed workers grew extraordinarily fast, as would be expected, but other wages didn't. During the global financial crisis, wage growth slowed and, as a result, unemployment remained below 6 per cent. As unemployment climbed following the end of the boom, wage growth dived to historic lows, and unemployment fell.

Whatever else you want to say about Australia's wage determination system, its hard to argue that it isn't flexible.

The head of the International Monetary Fund's Australia division, James Daniel, was asked on a recent visit whether our industrial relations system was holding us back. He almost laughed. He replied that he had just come from leading the running in charge of Spain...

Work Choices, the Coalition's mid-1990s attempt to sweep away the old system, had little detectable effect on productivity, the Productivity Commission finds. It certainly thinks there's room for improvement. Fair Work Commission judges act like judges in courtrooms; they weigh up evidence presented to them. But for decisions about the minimum wage and other minimum standards, the Productivity Commission thinks a separate, non-judicial division should go further – it should undertake its own inquiries and pay for independent analysis.

The Fair Work Commission should remain. "Absent specific workplace legislation and oversight, employees would particularly suffer from unequal bargaining power," the Productivity Commission says. "Most stakeholders recognised this."

Far from threatening employment, minimum wages are likely to have a zero "or even positive" effect on jobs, if they are not set too high. The contention that increases in minimum wages lock people out of jobs – while obviously true if minimum wages were lifted to very high levels – hasn't stood up to the onslaught of real-world investigation, much of it recent.

The commission quotes with approval the work of Keith Hancock, who chaired the 1985 review of Australia's industrial relations system. When equal pay for women was introduced in the early 1970s, "so far as could be told from the employment statistics, there had been no adverse effect on the relative employment prospects of women", the review said. Women are today far more likely to be employed than before their pay lifted.

Australia's youth wages are unusually low by international standards, typically 44 per cent of the adult minimum wage, compared to 60 per cent in the United States. Yet youth unemployment is climbing. The commission finds it's been climbing more as a result of the increase in the general unemployment rate (because what happens to the general rate happens more to youth) than because young workers are paid too much.

The commission finds "compelling grounds" for penalty rates for overtime, night and shift work. Night work and rotating shift work has "proven adverse health effects". Public holidays are meant to encourage shared community activities. "As such, there are strong grounds for deterrence against their use for working, but with some flexibility to provide some services on these days," it says.

Weekend workers are also deserving of extra rewards. The commission says many employers would pay them extra on weekends, even if penalty rates didn't exist, to fill rosters.

But weekends are changing. Traditionally a time for socialising, there's now less of it and it is highly likely to be done while shopping. In one survey, 39 per cent of Australians nominated their shopping centre as their most important meeting place. Only 16 per cent nominated a park, and 19 per cent nominated a pub. For some stores, Sunday has become their most important trading day, accounting for 25 per cent of all sales.

Sunday rates are often 150 to 200 per cent of weekday rates, yet the commission finds those working on Sundays often have a work-life balance that isn't any less satisfactory than those who work on Saturdays, where the rates are nearer to 125 per cent.

They are certainly better off than workers on night shift, who receive penalties as low as 15 per cent. It recommends substituting Saturday rates for Sunday rates in the evolving leisure industries of hospitality, entertainment, retailing, and dining.

It would mean less Sunday pay for these workers, but more weekend-style services on the days we want them, and an easier life for cafe and store owners who often feel compelled to work themselves because they can't afford to pay many staff.

The government has shoved the proposal off to the Fair Work Commission, which will most likely implement it. It'll upset some people, but it's not what the report is about.

In The Age and Sydney Morning Herald
Read more >>

Saturday, December 19, 2015

MYEFO. Morrison's quiet emergency

Two years ago when Labor forecast a deficit of $18 billion, the Coalition declared a "budget emergency". Senior Coalition ministers and former Treasurer Joe Hockey billed it as a crisis, "Labor's debt and deficit disaster", and the Coalition's leader, Tony Abbott, would do everything in his power to bring it down.

After two years of Abbott government, the deficit forecast has more than doubled to $37.4 billion. Scott Morrison, who took over as treasurer after Abbott lost office to Malcolm Turnbull, confirmed the figure on Tuesday.

Net government debt was headed for a peak of $191.6 billion or 11.4 per cent of GDP in Labor's final budget. Two years later it is headed for $336.4 billion or 18.5 per cent of GDP, according to Morrison said. This was Abbott's self-professed "adult government". What happened?

There's no emergency, not any more. Just a slow and steady journey.

"There are no shortcuts," Morrison told the Perth press conference that launched the midyear budget update. Bringing down the deficit was like driving on a road with lots of delays.

"There will be plenty of people in the back seat – which often happens when I'm driving the family – saying 'are we there yet?'," he said. "That's natural. But our path back to budget balance is very similar to that. We need to take a very safe and careful route and one that does not put at risk the very important objectives we have on growth and on jobs."

By the end of the week Morrison was far more blunt. Eliminating the deficit quickly by slashing spending "would have absolutely tanked household consumption; it would have had quite a devastating impact on the domestic economy".

The right way to bring down the deficit was to help the economy to grow. If businesses and taxpayers spent more they would pay more tax. Mindlessly and quickly hacking into the budget could snuff out what growth there is in spending and make the budget worse.

It's a conventional and commonsense position, completely in line with Morrison's predecessors, Wayne Swan and Joe Hockey. And yet oddly, it seems to conflict with the views of the head of his own department...

John Fraser, who was brought in from the private sector to run the Treasury by Tony Abbott, told Morrison in a briefing note released under freedom of information laws that budget repair had become "essential".

"Regardless of how economic conditions evolve, Australia will be better placed to respond if the budget is in a stronger position," he said. "We therefore cannot wait for economic growth to fix the budget bottom line."

Damage

That's because waiting makes the outlook worse.

In May the government was set to rake in $398 billion this financial year and spend $429.8 billion.

The spending figure is little changed. It's a shade lower at $428.3 billion. But the revenue figure is far worse. It's $394.9 billion instead of $398 billion. Morrison has abandoned the line he used repeatedly after becoming Treasurer that he had "a spending problem, not a revenue problem". It's the other way around.

The iron-ore price was $US60 a tonne when the May budget was delivered. It's now US$40. At its peak four years ago it was $US180. Although the lower dollar offsets much of the lost income, companies such as BHP, Rio Tinto and Fortescue aren't going to the pay the tax it looked as if they would have just six months ago.

Petroleum firms are investing more than $160 billion in massive new liquefied natural gas platforms off Western Australia and Queensland, one of them Australia's biggest-ever infrastructure project. They were predicated on an oil price of $US100 a barrel. It had slid to just $US60 by this year's May budget. It's now US$36.

Former treasury economist Stephen Anthony says a 5 per cent fall in Australia's terms of trade takes $4 billion to $6 billion aper year from budget income. In the past six months the terms of trade have slid 6 per cent. Some but not all of the loss has been recouped by higher export volumes.

The government will collect $450 million less than it had planned this year in petroleum resource rent tax, $1.1 billion less in company tax, $1.35 billion less in superannuation tax (because of the weaker sharemarket) and $1.6 billion less in gross personal income tax. Employment is holding up, but wages are climbing at their slowest rate on record. Bracket creep, which Morrison also used to talk about a lot on taking the job, isn't much of a problem. We are not being pushed into higher tax brackets at the rate expected.

In the short -term, the missing revenue doesn't do much damage. Right now the government is spending aboutaround $1.08 for each $1 it brings in. It is borrowing to make up the difference. But borrowing to make up the difference and to pay the interest bills year after year eventually pushes the interest bills very high, so high they become a budget program in their own right.

Eight years ago the government paid nothing in net interest. It wasn't a cost. Then Labor ran deficits during the global financial crisis and interest payments began to climb (even though they were held back by extraordinarily low global interest rates). This year the bill will be $11.2 billion in interest. By way of comparison, the defence bill is $26.3 billion and the universities bill $9.3 billion. The government is shelling out almost half as much in interest as it is on defence and more than it is on higher education.

And that's if it's lucky. One of the risks identified in the update is that global interest rates might rise. At an all-time low of 2.6 per cent at the time of the May budget, the government's borrowing rate had already climbed to 2.9 per cent. If it climbed further to 3.9 per cent, an increase the update describes as "relatively modest" the interest bill would be $5 billion per year higher within a decade. Instead of being in surplus by 2025-26, the budget would slide back into deficit.

On Thursday the US Federal Reserve began lifting interest rates for the first time in nine years. It's likely to lifting them several more times in the years ahead. The era of low rates is ending.

Blame all round

Were it not for the slowdown in China, the budget would be in good shape. Wayne Swan's final budget forecast revenue of $428.9 billion in 2015-16, about the same as the $428.3 billion the government is now currently spending. Revenue grew at nothing like the pace expected because the price of the things China buys plummeted and Australian companies paid far less tax than expected.

The first Abbott budget would have helped put things right. It would have slowed spending growth by lifting age and disability pensions more slowly in line with the consumer price index rather than wages. It would have lifted the pension age from 67 to 70 in line with longer lifespans, and it would have indexed fuel excise so that the amount taken per litre climbed with inflation. But the Senate knocked back the first measure, has not yet passed the second, and only approved the third only after opposing it for a year.

But much of the damage has been done by Abbott. He abolished the carbon tax and the mining tax while keeping in place the spending on carbon tax compensation. In a frenzied rush to get money out of the door before the end of 2013-14 to make the last Labor budget look bad he handed Victoria $1.5 billion for the East-West Link road project despite what the Auditor-General says was "clear advice" that the money wasn't yet needed and that the project wasn't ready.

And he refused to tackle the fastest-growing hole in Australia's tax system: the tens of billions of superannuation tax breaks skewed to Australians who are already very rich. By taking on the recipients of pensions rather than the better-off recipients of tax breaks he showed that he didn't really regard the deficit as an emergency and made it easy for the Senate to knock back whatever he did propose.

Fixing the budget

Some of the cuts in the update will be painful. The government's claim that it can cut $225 million aper year from incentive payments for bulk billing without hurting bulk billing is fanciful. Others may never materialise. It's unlikely the government can raise an extra $700 million aper year from cracking down on welfare fraud. Back in May it promised to raise an extra $300 million.

But they are minor compared to what is needed.

It's important not to tank the economy, so the big cuts have to take effect slowly, as Joe Hockey planned in his first budget.

But in his own first budget and in the tax changes he will take to the election Scott Morrison will have at his disposal all of the arms of government instead of just some. Unlike Abbott, Morrison has made it quite clear he is prepared to crack down on superannuation tax concessions. The Senate will treat him seriously.

To succeed he will have to abandon his commitment not to lift the tax take. If he faced anything like an emergency, he would.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, December 15, 2015

MYEFO. Morrison believes we can't handle the whole truth, yet

It's looking like we'll never see a surplus.

The first Hockey budget said we would get one in 2018-19. The second said it would happen in 2019-20. Now Treasurer Scott Morrison's update says it won't happen until 2020-21.

Every year the surplus moves a year further away. It's like driving towards an unreachable horizon.

Rather than level with us about the state of the budget, Morrison and Finance Minister Mathias Cormann have chosen to make things look better where they can. Several zombie savings from the Coalition's first budget live on in the mid-year update, even though the government will probably never see the money.

The $5 hike in the Pharmaceutical Benefits Scheme co-payment is one. Health Minister Sussan Ley killed it right after the May 2015 budget, declaring she was "not going to waste time putting things through the Parliament that are going to be voted down by my colleagues". Worth $1.3 billion over four years, for the purpose of the update, it is still alive.

All up, more than $20 billion of neither dead nor alive measures remain in the mid-year update, $7 billion worth of which are in the last year of the forward estimates, 2018-19. This means that if they don't spring to life, that deficit will be $7 billion worse and a surplus still further away.

Even though the iron ore price has collapsed from about $US60 a tonne to $US37 since May, the update assumes $US39 instead of $US48, a figure that's meant to hold for the rest of the next two years. Westpac's Bill Evans thinks that's bold. After all, the iron ore price is sliding. If it did stabilise it would be somewhere below, rather than above, where it is now.

Morrison's decision to play down the bad news is understandable. He reminded us that we are about to go into Christmas. There is "fresh momentum emerging in our transitioning economy". It would be wrong to threaten it.

It would certainly be wrong to hack into the budget, and Morrison hasn't. The announced savings do little more than compensate for the extra spending announced since May. Seriously cutting in order to return quickly to surplus would "have consequences".

The Treasurer didn't spell them out. The worst would be to snuff out the emerging economic recovery and bring closer the prospect of a recession. The recovery we've had so far is fragile. Even the boost in employment is centred in one state if we are to believe the Bureau of Statistics.

While the update has boosted the outlook for employment (the unemployment rate should fall to 5.5 per cent by mid-2017), it has downgraded nearly everything else. The economy will grow by 2.5 per cent this year instead of the earlier forecast of 2.75 per cent. Next year it will grow by 2.75 per cent instead of 3.25 per cent.

We are going to have to address the deteriorating budget outlook soon, even if the outlook remains fragile. The best way to do it would be to introduce measures that will take effect slowly, in the future. Next year's tax white paper provides the perfect opportunity.

In The Age and Sydney Morning Herald
Read more >>

Monday, December 14, 2015

MYEFO. The truth will be ugly, but it's what we need

Expect the unvarnished truth on Tuesday, because there will be little point in lying.

Usually the budget and the mid-year budget update are designed to make things look good. That's why this year's budget included largely fictional savings of $67 billion over 10 years held over from the previous budget on the ground that the Senate might one day pass them. 

It's why at a time when the economy was growing by 2.5 per cent, the May budget forecast a jump to 2.75 per cent and then a leap to 3.25 per cent. It's why it assumed a dramatic leap to 3.5 per cent after that, and then assumed growth would stay that high each year and every year right through to 2020-21, even though it hadn't come within cooee of 3.5 per cent in every year but one since the financial crisis.

It'll end on Tuesday. If Malcolm Turnbull and Scott Morrison are wise they'll stop building unlikely Senate decisions into their forecasts and they will be honest about what is happening to revenue.

The May budget assumed an iron ore price of $US48 a tonne for the entire year. It's now $US38 and heading south. And that so-called spot price is calculated on a different basis to the price used in the budget. Comparing like with like, the iron ore price is close to $US35 and heading south, compared to the $US48 factored into the budget. Every $US10 fall in the price is said to rip $2.5 billion per year out of the budget as mining companies deliver lower than expected profits and pay less tax.

The LNG boom was supposed to start paying tax big-time when the big projects started moving gas. But the price of gas is tied to the price of oil. Since the budget it has collapsed from $US64 per barrel to $US35.

And wage growth has sunk to its lowest on record. If it stays near 2.3 per cent instead of climbing to 2.75 per cent as expected in the budget it won't be delivering the extra tax that was expected as more and more of us got pushed into higher tax brackets.

As well, Treasury is going to be more realistic about the future.

Until now, the "secret sauce" in every budget has been the projections...

The first two years of each budget's forecasts are what they seem to be: genuine forecasts. But the numbers following them are often dramatically better. That's because they are "projections", which means are not meant to be taken literally.

Here's how it works. Treasury forecasts economic growth of 2.75 per cent this financial year, climbing to 3.25 per cent next year. That's what it actually expected, and it will replace it with lower figures on Tuesday. Growth isn't yet above 2.5 per cent. But for the following five years it picked an outsized 3.5 per cent, which wasn't a forecast at all.

All of the projections for increased revenue and a steadily shrinking budget deficit from 2017-18 flowed from it. It's the main reason the budget deficit was projected to shrink to zero by the end of the decade. But it's an assumption rather than a forecast.

From two years out Treasury assumes unemployment will fall to 5 per cent over the course of the following five years, because that's the rate it believes unemployment would settle at if everything was working properly. In other words it assumes that things will come right.

For that to happen the economy needs to grow faster than normal for five years. Faster than normal was thought to be 3.5 per cent. It was anything but a forecast, and it's now out of date. So slowly has the economy been growing, partly because of a slowdown in population growth, that Treasury said in November it would revise down the figure to nearer 3 per cent.

The combined effect will be bigger deficits stretching out further than we have previously been told.

Tony Abbott and Joe Hockey would have found it difficult to handle. Only six months ago they were telling us the big budget challenges were behind us. Turnbull and Morrison will embrace it. Like anyone new taking over a job done less than competently, they'll want us to see the full horror of what they inherited.

And they'll want to use it in a way Abbott and Hockey never did to prepare us for tough medicine. Persuading high income earners to part with billions of dollars in unjustified tax concessions would be difficult if everything was rosy. Persuading the states to tax the land on which family homes sit would be difficult if the Commonwealth's finances were on a sure footing.

The mid-year update has come exactly the right time for a government attempting to convince us that things are going to have to change. We need to see a problem before we'll accept a solution. Tuesday's statement will outline the problem. The tax package the government will take to the election will be part of the solution.

In The Age and Sydney Morning Herald
Read more >>

Sunday, December 13, 2015

Creepy and foolish. Why most research findings are wrong

Perhaps the creepiest science experiment ever conducted was called Personal Space Invasions in the Lavatory: Suggestive Evidence for Arousal.

It examined the behaviour of men at urinals. (Yes, I know I discussed urinals in a previous column; I'm not going to make a habit of it.)

The researchers hid in a toilet stall and used a periscope to observe the behaviour of men standing up attempting to urinate. When the men had, another man standing beside them they took longer to start, 6.2 seconds after unzipping their flies compared with 4.9 seconds. When another man (someone helping out with the experiment) stood behind them, they took even longer – 8.4 seconds.

And they finished up more quickly too. It's not comfortable when someone's invading your personal space.

I don't doubt for a moment that it takes men longer to start when someone is standing next to them. But the experiment had two major flaws. One is the researchers knew what they were looking for. The other is that they timed only 60 men.

The Australian Bureau of Statistics employment survey is conducted on about 25,000 men and 25,000 women each month, and even it gets things spectacularly wrong. National employment didn't grow by 71,375 in November as reported, it probably grew by less than 6000. And it didn't soar by 121,000 last August and then sink by 172,000 last September either. The spikes and troughs were artefacts, brought about by the way the survey was conducted. Little things such as the order in which questions are asked make an enormous difference, as the Bureau has discovered to its cost.

Yet we are repeatedly asked to trust the results of studies conducted only once on tiny numbers of people.

One of my favourites is the gourmet grocery store jam study...

The Californian researchers set up a jam tasting booth, which at times had only six varieties on it, and at other times 24. When the booth offered 24 varieties, customers were less likely to end up picking one to buy at a discount. Too much choice made it hard to choose. But the survey involved only 242 people. Would it stand up if it had been conducted again in a different location by different researchers?

There are reasons to think it might not.

In the mid-1990s some New York University psychologists performed scrambled sentence tests on 60 students. Half were asked to unscramble sentences containing ordinary words. The other half were given words specifically related to ageing, such as old, lonely, and grey. As the students walked out, a researcher with a stopwatch timed how long it took them to reach the lift. Those who had been "primed" took longer. It became an accepted psychological truth.

Except that when other researchers performed the experiment two decades later using infrared detection instead of a stopwatch, the effect disappeared. As with the stopwatch in the lavatory, the people doing the experiment had been able to tilt the results in the direction they wanted.

Three years ago, University of Virginia researcher Brian Nosek embarked on an epic "reproducibility project", an attempt to reproduce 100 of the results reported in leading psychology journals throughout 2008. His shocking finding, almost a decade later, is that fewer than one-third stand up.

And in most of those that do stand up, the effect is weaker than first reported. And not only in psychology. In all disciplines, from physics to economics to medicine, findings seem to get smaller each time an experiment is repeated. Drugs that seem effective when first tested appear to get weaker with each successive test.

Nosek thinks he knows why. Low sample sizes mean its very hard to get a finding that is statistically significant. When it does happen, it's often the result of chance. But it gets written up as a result. There's usually no attempt to get a second result. If there is, the cards will almost always fall the other way, making it less-impressive.

I have no doubt that many of the findings I have reported during the past few decades have been wrong. I've latched on to them because they've been written up in prestigious journals, and because they have seemed right. I shouldn't have. It's the outcomes that seem right that we should most distrust. Not because they are necessarily wrong, but because the researchers who found them wanted to find them. Next year I'll be less trusting.

In The Age and Sydney Morning Herald
Read more >>

Thursday, December 10, 2015

Jobs growth is nothing like the 71,375 Michaelia Cash trumpets

No one can accuse Employment Minister Michaelia Cash of failing to take advantage of an opportunity.

Presented with official employment figures that were literally incredible (impossible to believe), she took them at face value and trumpeted them in tweets and in a press conference as a triumph for her government.

There were 71,375 more Australians in jobs last month and 301,725 more in jobs over the year, and since January the unemployment rate has tumbled from 6.4 to 5.8 per cent.

"It equates to around 2500 jobs per day," she told the press conference. "Over the calendar year, it's the highest jobs growth since 1989."

She could have added that it equates to one new job every 12 seconds, which it does if the jobs were only offered in working hours. It's even more than the 56,100 new jobs created in October, and way above the long-term average of 15,000 per month...

 

 

But it's not the real thing. The Bureau of Statistics makes that pretty clear. It's had a run of misfortune with its sample rotations.

The employment survey is massive - 26,000 houses and flats each month, representing about 50,000 people. But they are not always the same people each month. Every survey one-eighth of the survey is "rotated out" and a new one-eighth is "'rotated in". It stays for eight months.

Occasionally, the one-eighth that is rotated in is very different from the one-eighth that is rotated out, making the number of people in work appear to either jump or fall, even if the employment status of everyone in the survey hasn't changed.

It happened in October, and the bureau was upfront about it. It said then that only half of the reported jump in employment would have been seen if it had examined just the participants present in both surveys.

Now it has happened again, for the second month in a row. The bureau says that if it had restricted itself to comparing like with like, employment would have climbed a mere 5300 in November, a fraction of what was reported.

The dollar soared more than three-quarters of a cent on the news, climbing back up above 73 US cents. The traders weren't waiting to find out the truth, which is probably that employment is growing, but more slowly than we are being told.

The minister was asked whether she had concerns about the reliability of the figures. She said she did not.

In The Age and Sydney Morning Herald
Read more >>

Wednesday, December 09, 2015

Off the table: why the GST won't be lifted to 15 per cent

So out of favour is the idea of increasing the GST that by the time the government releases its tax options paper in the new year, a 15 per cent GST might not even be on it.

The thinking in Canberra is that there's no point listing it as an option if the Turnbull government has no intention of doing it.

Prime ministers Abbott and Turnbull undertook to examine the GST at the request of the states, and the Treasury is still doing so. It's continuing to carry out an analysis of winners and losers which won't be complete until the new year, but the end result is already apparent.

There's a load of trouble in it for the Commonwealth. It is far more difficult to compensate the losers than it was back in 2000 when the GST was introduced. Back then the tax-free threshold was only a third as big as it is today, meaning there were few Australians who couldn't be compensated with tax cuts. These days most self-funded retirees pay no income tax, meaning they can't be compensated with tax cuts either.

About half of what was raised would have had to be given back, and probably more when those who missed out started complaining.

Extending the GST to fresh food was never going to happen. Extending it to private schools and private healthcare would have penalised Australians who looked after themselves, or that's the way it would have been portrayed. Schools, hospitals, parents and patients would have their hands out. All to enrich the states, who wouldn't have thanked the Commonwealth; or to cut the income tax rates of consumers, who wouldn't have thanked it either.

Fifteen years on, few Australians remember the tax cuts that accompanied the introduction of the GST, but they remember the GST.

Scott Morrison has formed the view that the states are perfectly capable of fixing their own financial problems without him shouldering the political burden of pushing up the GST. If they wanted, they could impose and increase land taxes, the most efficient of them all. Land can't escape.

Without an increase in the goods and services tax, there's a good chance the states will look at land taxes, especially as neither Morrison nor Turnbull is keen to give them back the money Joe Hockey ripped out of their budgets in his first.

With an increase in the GST effectively off the table, the real talk about tax can begin.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, December 08, 2015

Lifting the GST to 15 per cent is far harder than it seems

The agenda paper prepared for Thursday's treasurers' meeting ought to come with a big red stamp that reads "danger".

All but one of the options listed for boosting the GST are fraught. Each requires "compensation".

If the GST was lifted to 15 per cent, households earning up to $100,000 would need to be completely compensated. Households earning up to $155,000 would need to get back "at least half of the extra GST revenue".

It would end up costing "at least half of the extra GST revenue".

The real danger is that "at least half" would be only the beginning. If the treasurers so much as mention compensation in public, they run the risk of being heard to make commitments.

"Making commitments now risks overcompensation for households and adding significantly to the cost of household assistance," the paper warns.

Lifting the GST to 15 per cent would raise $32.5 billion, the Treasury says. But $16 billion to $17 billion of it would be given back in compensation, which would be messy...

Some Australians would get increased cash benefits: pensions, family payments and the like. Others would get tax offsets. The retirees who neither pay tax nor get get benefits would get a seniors concession allowance. Others who missed out would get a "transitional payment".

And this time it would be harder to convince people the compensation would last. When the Howard government introduced the GST in 2000 it pushed up family allowances to compensate. Fifteen years on, the Turnbull government is planning to wind back those increases because it faces budgetary problems.

The only option for boosting GST revenue that wouldn't need compensation is extending it to financial services. It wouldn't raise much either, but the people it would hit most would be too well off to need compensation.

Victoria's option of lifting the Medicare levy from 2 to 4 per cent of income is simple by comparison. It would raise $15 to $16 billion, about the same as would the GST hike rise after compensation, but because the low-income earners are already excluded from the levy, it could be done without paying anyone anything.

It's looking like a long meeting.

In The Age and Sydney Morning Herald
Read more >>

$58,784 per year? You need how much for a comfortable retirement?

The closer we get to taxing superannuation properly the more we are going to hear about how important it is and how much we are going need to live on in retirement.

Don't believe it. It's almost all propaganda, almost all paid for with money taken out of our superannuation accounts.

The latest scary figure, produced by the Association of Superannuation Funds, is $58,784 per year. That's how much it says a 65-year-old couple needs to live on in order to enjoy a "comfortable" retirement.

It's absurdly high. The fine print shows such a couple would spend $40 a week on alcohol, $80 a week on dining out, almost $200 a week on food and groceries, $136 a month on the phone and internet, $4000 a year on holidays within Australia, and $14,000 every five years on a holiday abroad.

Plus this: the best part of $250 a month on new clothes and shoes, $80 a month on hairdressing, $54 a month on pest control and/or an alarm service, and $350 a month on private health insurance.

At the risk of stating the obvious, after tax and rent or mortgage payments most working Australians couldn't afford such comfort. How did such a figure come to be defined as the gold standard used to justify steady increases in compulsory super contributions and to attack plans to tax them properly?

Part of the answer is that the super industry really doesn't care about the living standards of Australians who are working or about the extra tax they have to pay because super funds aren't. Its chief concern is the $2 trillion in funds it has amassed to date, and the tens of billions of dollars of it that stick to its fingers each year in management fees.

Its so-called "comfortable" retirement standard was originally called "comfortably affluent but sustainable". That's right, the word "affluent" got edited out along the way. The University of NSW team that built it never intended it to apply to the bulk of retirees. For them they created a second standard, "one which affords full opportunity to participate in contemporary Australian society and the basic options it offers". They labelled it "modest but adequate".

The word "adequate" has also disappeared along the way, leaving the false impression that what's affluent is normal and that anything else isn't adequate...

It's needlessly scaring us. A new survey by State Street Global Advisors finds that before retirement most Australians believe they won't have enough to live on, but that after retirement most are happy: two-thirds say their standard of living is no worse and a significant minority say it is better.

The truth is that living costs plummet on retirement. Most retirees no longer face a mortgage, a saving of 30 per cent. Most no longer pay tax, no longer have children living at home, and no longer habitually save up to 10 per cent of each pay packet.

They also no longer incur the substantial costs of heading out of home and going to work: petrol, parking, work clothes and the temptations of the office cafeteria. And they have more time to shop and cook, meaning they get better value and pay less for food. So comfortable are retirees spending far less than the industry says they need to, that most actually save.

In his earlier incarnation as social services minister Scott Morrison revealed that in their first five years in retirement 57 per cent of pensioners either build up their savings or keep them steady. In their last five years 67 per cent do so. A Productivity Commission survey released last week finds that only 5 per cent of retirees stop saving when their income drops on retirement.

But outrageously inflating the cost of living for retirees is only the first of the industry's tricks. The second is to imply that all of it has to come from super.

The astonishing truth, outlined by Morrison in a speech as Treasurer last month, is that super accounts for only 15 per cent of the assets of Australians over the age of 65, and only 20 per cent of their income.

As the Grattan Institute put it in a recent report: superannuation is the least important part of the retirement incomes system. Retirees have much more invested in real estate than super, and "at all ages, incomes and wealth" more invested in other financial instruments than in superannuation.

"It is unreasonable to expect superannuation savings alone to fund a comfortable living standard in retirement," the institute says. It follows that it is unreasonable to believe that the super system needs to grow or stay as it is in order to provide decent retirements.

Labor is blind to evidence when it comes to superannuation. In thrall to the legend of Paul Keating and the myths propagated by the industry he helped create, it wants to lift compulsory contributions from 9.5 per cent of salaries to 12 per cent. Morrison is more clear-eyed.

Some retirees are genuinely poor. They are the ones paying rent. The Productivity Commission says they typically have to dole out $240 a week and are vulnerable to eviction. Shamefully, when Kevin Rudd lifted the age pension in 2009 he all but ignored the finding from his pension review that rent assistance was far too low. It remains unindexed at $120 a fortnight.

There may well be other Australians for whom retirement is uncomfortable, notwithstanding the pension of $20,498 for singles and $30,903 for couples. But for most it's OK, no worse than working. There's no need to hand a $2 trillion industry tax concessions in order to help them.

In The Age and Sydney Morning Herald

 

 

Read more >>

Monday, December 07, 2015

Free to fail in Malcolm Turnbull's new $1.1 billion innovation plan

Businesses will be given the freedom to fail and get back up on their feet quickly under new US-style bankruptcy laws announced as part of Prime Minister Malcolm Turnbull's innovation statement. 

The changes will allow businesses to trade while insolvent and cut the period in which bankrupts cannot run other businesses to just one year.

Declaring that Australia placed too much emphasis on penalising and stigmatising failure and not enough on celebrating success, the $1.1 billion package acknowledges that "sometimes entrepreneurs will fail several times before they succeed and will usually learn more for failure than success".

At the moment most bankruptcies last three years, in which time the directors are unable to start another company. Directors are at present personally liable for insolvent trading. The new law would allow trading while insolvent where the business appoints a restructuring adviser to work on a turnaround plan.

Mr Turnbull said the change would take Australia "some way, but not all the way" to the American Chapter 11 bankruptcy code.

"It [Chapter 11] has a very heavy involvement of the courts," he said. "We generally don't want to be as legalistic or materialistic as the Americans, but this is something that's been very carefully considered over many years, most recently by the Productivity Commission."

The laws will also relax the "same business test" that denies tax losses if a company changes its business activities, introducing a more flexible "predominantly similar business test".

In an idea borrowed from the Cameron government's successful Seed Enterprise Investment Scheme in Britain, new laws will provide a 20 per cent non-refundable tax offset worth up to $200,000 for investors in startup businesses plus a 10-year exemption from capital gains tax if they hold shares in the company for three years. The changes will come into force in July 2016.

The government will also loosen the restrictions on tax breaks for so-called early stage venture capital limited partnerships, allowing investments of up to $200 million rather than $100 million and no longer requiring investors to sell when the company's value exceeds $250 million...

The Turnbull government will create a $200 million dollar CSIRO Innovation Fund that will more than restore the $110 million removed from the science agency's budget in 2014. It will also establish a Bio-medical Translation Fund to co-invest up to $250 million in partnership with the private sector.

The government will simplify university research funding by collapsing six funding programs into two. Equal weighting will now be given to potential income from commercialisation and research excellence.

In an attempt to deliver an "ideas boom"  the government will spend $84 million over four years, upgrading teachers' skills and introducing new computer coding programs for students in years 5 and 7.

It will set up a new independent statutory board known as Innovation and Science Australia that will report to Industry Minister Christopher Pyne, and a new innovation and science committee of the cabinet that will report directly to the Prime Minister.

Launching the statement, Mr Turnbull said Australia consistently ranked last or second last among OECD countries for collaboration between researchers and business.

"Companies that embrace innovation, that are agile and prepared to approach change confidently and with a sense of optimism are more competitive, more able to grow market share and more likely to increase their employment," he said. "We are absolutely committed to ensuring that our students have the skills to find high-wage and rewarding jobs regardless of their qualifications or career path."

About half of the $1.1 billion in funding over four years will be directed to restoring funding cuts and guaranteeing the future of long-term projects, among them the $520 million Australian Synchrotron nuclear facility and the $294 million Square Kilometre Array multi-nation radio telescope project. 

The government will direct $1.5 billion over 10 years to the National Collaborative Research Infrastructure Strategy, a grant that had been under a cloud as part of negotiations with the Senate over the higher education changes. Universities will receive an extra $127 million in research funding over the next four years.

Mr Turnbull said the government itself was taking a risk in attempting to encourage investors to take risks.

"One of the aspects of the political paradigm I am seeking to change is the old politics where politicians felt they had to guarantee that every policy would work; they had to water everything down so there was no element of risk," he said. "If some of these policies are not as successful as we like, we will change them. We will learn from them. Because that is what a 21st century government has got to be. It has got to be as agile as the start-up businesses it seeks to inspire."

In The Age and Sydney Morning Herald

 

 

Read more >>

Wednesday, December 02, 2015

GDP. Jump in exports hides weak economy

The Australian economy performed better than expected in the three months to September, but no-one is celebrating.

The biggest rebound in exports in 15 years pushed up the September quarter growth rate to 0.9 per cent, a result not bettered for three years. But were it not for the unusual jump in exports, the economy wouldn't have grown at all.

Domestic demand shrank in the September quarter, with inflation-adjusted spending in NSW, Queensland, Western Australia, the Northern Territory and Australian Capital Territory turning down, and spending growing only in two states: Tasmania and South Australia. Spending in Victoria was flat.

"Today's national accounts show an economy in transition," Prime Minister Turnbull told parliament.

"We have had the great stimulus from the terms of trade, and the mining industry will continue to be strong and productive, but that big investment hit has come and it has gone."

Private investment slid 2.9 per cent in the quarter and 4.3 over the year. Public investment slid 9.2 per cent in the quarter and 7.9 per cent over the year. Household spending climbed 0.7 per cent in the quarter and a respectable 2.7 per cent over the year...

 

 

Treasurer Scott Morrison said businesses were "consolidating" and preparing to invest.

"We do obviously want to see business investment in the non-mining sector grow in the future and we believe that will occur in the years ahead, but only if as a country we remain focused on policies that support growth and jobs," he said.

The annual economic growth rate of 2.5 per cent is well down on the 2.75 per cent the treasury says is needed to absorb unemployment and is no faster than the 2.5 per cent recorded a year ago. During the mining booms growth ranged from 3 to 5 per cent.

 

 

Shadow treasurer Chris Bowen said the economy was weaker than the figures suggested.

"Without strong mining exports, the economy would have clearly struggled to generate much growth at all in the September quarter," he said.

In Perth Reserve Bank governor Glenn Stevens said not too much should be read into the number.

"Let's not overplay the significance, but the economy is growing, and I think you would still say the outlook is for continued moderate growth," he said.

The national accounts show Australia's terms of trade slipping a further 2.4 per cent in the quarter and 10.5 per cent over the year. A measure of export prices relative to import prices, the terms of trade directly impacts on the budget through its effect on the incomes of exporters.

The forecasts in the May budget were built around an iron ore price of $US48 per tonne. Futures trading has marked it down to less than $US40 a tonne, suggesting a downgrade when the budget update to be released on December 15.

Each $US10 fall in the price of iron ore is thought to cost the government around $2.5 billion per year in lost revenue.

In The Age and Sydney Morning Herald

 

 

Read more >>

Tuesday, December 01, 2015

Older Australians too cautious, says Productivity Commission

There's such a thing as too much caution.

Older Australians could enjoy far higher standards of living and could cut their reliance on the aged pension if they just ate into just a portion of the $1 trillion tied up in their homes, a new Productivity Commission study has found.

But it says few of them are interested.

Contrary to the myth that retirees fritter away their superannuation lump sums in order to get the pension, the study finds that most are too cautious with their money, engaging in too much "precautionary saving" and dying with their houses and savings intact.

"When faced with lower incomes, older Australians are more likely to cut expenditure than draw down on their wealth, Productivity Commissioner Karen Chester said. "This means not accessing the wealth embedded in their family home."

Entitled Housing Decisions of Older Australians, the report includes the results of a specially commissioned survey of 1500 older Australians. Only 15 per cent expect to downsize to smaller homes while only one to 2 per cent used reverse mortgages to tap into the value of their homes.

Downsizing is difficult, and not necessarily affordable. Those that try run the risk of losing some of their pensions if the transaction makes them money.

Many over 60s continue to save throughout their retirement, even when their only income was the pension, and even near the end of their lives ...

Around 40 per cent of single pensioners and 33 per cent of couples live on less than the Association of Superannuation Funds of Australia benchmark for a "modest lifestyle", suggesting that the benchmarks are too high.

The study finds that the greater availability of in-home care is turning residential aged care into "end of life service". The typical admission age is 83 years and climbing, with average tenure only two to three years.

In The Age and Sydney Morning Herald

 

 

Read more >>

No revenue problem, Treasurer? We're about to learn the truth

About that revenue problem ... the one we don't have.

Since the May budget, expected revenue has slipped by $4.6 billion for 2015-16, and $8 billion for 2016-17. Projected spending has hardly grown at all.

Deloitte Access, which has calculated the figures ahead of this month's mid-year budget update, reckons this year's deficit will be $5.2 billion worse than forecast ($40.3 billion rather than $35.1 billion), and next year's $8.3 billion worse than forecast ($34.1 billion rather than $25.8 billion). Subsequent years will be $11.4 billion and $12.7 billion bigger.

By any measure, the government has a revenue problem. Any measure but the treasurer's, that is.

Within days of taking the job three months ago Scott Morrison infamously declared that revenue wasn't a concern. The budget he was inheriting had "a spending problem, not a revenue problem".

It would be odd if it was true, given that the first Hockey budget took a stick to spending and more or less left revenue alone. Morrison has been softening the language since, most recently redefining the concept of a revenue problem. "A revenue problem I would define as not taxing people enough," he told Sky News last month. "I don't think that we have that problem."

"Our problem at the moment is that Australians aren't earning enough – not that they're not paying enough tax, but that we're not earning enough."

He is right about earnings. Since the Coalition took office private sector wage growth has slid from 2.7 per cent to 2.1 per cent – a record low.

Not only are Australians not earning as much as expected and not paying as much tax as expected, they are less likely to be pushed into higher tax brackets than was expected ...

Deloitte Access says pay-as-you-go tax collections will be $2 billion lower than expected this financial year and $2.6 billion the next.

Company tax collections will be $4.4 billion lower this year and $7 billion less the next. Lower than expected profits will mean lower than expected share prices and superannuation returns.

Superannuation taxes will raise just $7 billion next year – only slightly more than half the sum of $12 billion collected a few years back.

This week Morrison has been fine-tuning his language ahead of the December update. "What you will get from this government is a very honest and sober view about where we are heading," he said on Monday. "But an optimistic view which is based on realism."

When the bad news is presented in two weeks' time, it'll be delivered without a solution. The mid-year update isn't a budget, or even a minibudget. Aside from some measures to boost innovation, it'll let the problems sit.

One of the those problems may well be a set of projections that shows the budget never returning to surplus. The treasury has downgraded its long-term economic growth projections, making an automatic return to surplus harder. Without a return to surplus (or without a downturn in global interest rates) the government can't cut its steadily growing interest bill on borrowings.

Once close to zero, net interest on borrowings is now $11 billion per year, roughly half what the government spends on Medicare. As each new deficit requires more borrowing, it'll keep growing, hitting $13 billion in 2018-19. Unless something happens to drive it down, budgets will become increasingly constrained in what they can do.

By letting the state of Australia's finances sink in over the summer break and not proposing solutions until the release of the tax green paper early in the new year Morrison and Turnbull will focus our minds on the importance of getting tax right. What matters is not so much an immediate revenue fix (although that would be nice) but plugging the holes that are about to get bigger.

The tax concession on superannuation contributions will cost the government $17.35 billion this financial year. By 2018-19 it will cost $20 billion. The treasury believes it would grab most of it if it taxed contributions at marginal rates. Very little would leak elsewhere, in part because most super contributions are compulsory. The concession on the earnings of super funds costs $16 billion, but by 2018-19 it is set to almost double, costing $30 billion.

Left unchecked, these extraordinarily generous concessions will make our tax system increasingly leaky, especially as more and more high wealth Australians retire and move into the phase of life where they pay no tax whatsoever on their super fund earnings, no matter how big.

I am often asked why I am always on about super these days (something the government is also on about). Why not attack other tax concessions or lift tax rates on something else? It's because the concessions on super are huge; bigger than anything else apart from concessions on the family home, and growing far faster.

They can be wound back in a way that creates winners. Low-income Australians will be better off if super is taxed at marginal rates with a rebate, and they are the people compulsory super is meant to be for. Wise financial managers pay attention to revenue as well as spending. In a few days' time we'll discover how important that is.

In The Age and Sydney Morning Herald

 

 

Read more >>

Twelve days. Low inflation keeps true-love's costs low

In Australia, inflation is just 1.5 per cent.

While some prices are climbing (cigarettes cost 5 per cent more than they did a year ago) others are plummeting. The electronics chain Dick Smith has cut the value of its stock 20 per cent ahead of a Christmas discounting spree.

But in the United States inflation is far lower, so low that price of the items named in the song Twelve Days of Christmas has climbed only 0.6 per cent.

It's the lowest increase since 2002.

PNC Asset Management has been computing the index since 1984. Especially sensitive to changes in the price of gold, musicians and poultry, at times it has jumped 16 per cent in a single year. But this year the price of gold rings is steady, and most wages haven't moved.

Costing no more than they did a year ago are the eight maids a milking, the nine ladies dancing, the eleven pipers piping and the twelve drummers drumming.

Only the ten lords-a-leaping have scored a pay rise. Sourced from the Pennsylvania Ballet, they are asking for an extra 3 per cent...

French hens, calling birds, and geese-a-laying all cost no more than a year ago, although the price of partridges has soared 25 per cent and the price of turtle doves has climbed 11.5 per cent.

"While the economy continues to chug along on a sustainable path, low commodity prices are keeping consumer costs down," said PNC chief investment officer Jim Dunigan in a statement. "True-loves should be thrilled that they can have their goose and better afford the gas to roast it."

The total cost of the true-love's basket is $US2855. Buying the items over the internet brings it down to $US1620.

 

2015 PNC Christmas Price Index

☆ Partridge: $25 (up 25%)

☆ Pear tree: $189.99 (up1.2%)

☆ A partridge in a pear tree: $214.99 (up 11.5%)

☆ Two turtle doves: $290 (0.0%)

☆ Three french hens: $181.50 (0.0%)

☆ Four calling birds: $599.96 (0.0%)

☆ Five gold rings: $750.00 ((0.0%)

☆ Six geese-a-laying $360 (0.0%)

☆ Seven swans-a-swimming $13,125 (0.0%)

☆ Eight maids-a-milking: $58 (0.0%)

☆ Nine ladies dancing: $7,552.84 (0.0%)

☆Ten lords-a-leaping: $5,508.70 (up 3%)

☆ Eleven pipers piping: $2,635.20 (0.0%)

☆ Twelve drummers drumming: $2,854.80 (0.0%)

Total: $2855 (US dollars)

Source: PNC Asset Management

In The Age and Sydney Morning Herald

 

 

Read more >>

Monday, November 30, 2015

No surplus in sight: Deloitte says budget billions worse as revenue crumbles

The Australian budget is facing deficits $38 billion worse than forecast and on present settings will never return to surplus, an authoritative new analysis has found.

Released just a fortnight before treasurer Scott Morrison officially updates the budget in the mid-year review, the Deloitte Access Budget Monitor finds this year's deficit will be about $40.3 billion rather than the forecast $35.1 billion, the next year's $34.1 billion rather than $25.8 billion, and the deficits in 2017-18 and 2018-19 $11.3 billion and $12.7 billion worse.

It comes days after Treasury revised down its long-term economic growth projections, a downgrade not fully reflected in the Deloitte Access report.

"That line on the budget graph that shows the deficit disappearing, it never gets there on our projections," Deloitte Access partner Chris Richardson said.

Declining Chinese economic growth and sliding commodity prices are set to drag down company tax collections with receipts $4.4 billion less than expected in 2015-16 and $7 billion less in 2016-17.

Superannuation tax collections will be $2.2 billion less than forecast. At $7 billion in 2015-16, they will be only slightly more than half the $12 billion collected in 2007-08 before the financial crisis.

Historically low interest rates will keep interest income "subdued", and a surge in deductions related to negative gearing will hold back net rental income...

Record low wage growth will cut pay-as-you-go tax collections by $2.1 billion in 2015-16 and $2.6 billion in 2016-17. The report says the low wage growth is a "double disappointment" because it will also blunt the effects of bracket creep, meaning fewer workers than expected will move into higher tax brackets and push the budget back towards surplus.

On the positive side, rapidly growing real estate prices will boost capital gains tax receipts and the lower dollar will boost customs duties through higher import prices.

Deloitte Access expects the economy to be 2.5 per cent smaller than forecast by Treasury by 2018-19, a loss of $48 billion.

"You may think we paint a grim picture of the remaining task of budget repair," the report says. "But you would be wrong. Among the wildly optimistic assumptions underpinning our own figuring are that the Senate passes in full the savings still before it within a year from now, the states roll over on the cuts they face and sing kumbaya, and that the Beatles get back together. Oh, wait …"

If the Senate does not pass the stalled budget measures the deficit will be another $67 billion worse than expected during the next 10 years.

Mr Richardson said while he wouldn't describe the budget repair task as urgent, both sides of politics had "strikingly mismanaged" Australia's finances and repair kept getting harder.

The forecasts came as the BIS Shrapnel consultancy released a report predicting further big declines in mining investment. The report says after sliding 11 per cent in 2014-15, mining investment will slide 25 per cent this year and a further 25 per cent next year.

"This sharp fall in investment is occurring at a time of weaker prices, forcing the high-cost producers to rethink their mine plans and the nature of operations," it says. "This paradigm shift is not expected to be temporary. Some high-cost producers were forced to place their operations in care and maintenance while low-cost producers pushed forward to carve out a greater share of the market."

BIS Shrapnel says the industry will lose a further 20,000 jobs during the next three years on top of the 40,000 direct losses since the investment peak.

Treasurer Scott Morrison said the government would continue to make progress in cutting the deficit "despite the significant headwinds of falling commodity prices and the transitioning of our economy from the strong investment phase of the mining boom".

"We are not in denial about the challenges that we face globally or at home," he said. "We are just getting on with the task of strengthening the budget and growing our economy."

"Had we stayed on Labor's spending path the budget would be almost $80 billion worse off over this budget year and the forward estimates. "

Labor treasury spokesman Chris Bowen said Mr Morison had been wrong to claim that the budget "did not have a revenue problem".

Deloitte's forecast of $38 billion in additional deficits came on top of a doubling of the budget deficit in the past year.

The government will finalise the numbers for its mid-year update in the next two weeks after the release of the September-quarter national accounts on Wednesday. The mid-year update is not expected to include major changes to taxation, which will be held over until the green paper and the white paper to be released in the new year.

In The Age and Sydney Morning Herald

 

 

Read more >>

Sunday, November 29, 2015

Just a nudge. Why Malcolm Turnbull is embracing behavioural economics

There's something odd about the urinals at the Netherlands airport. Each one has what appears to be a fly embossed in the porcelain right at the point designers want men to hit.

Normally pretty bad at aiming with precision, men can't resist trying to hit it and wash it away. So much so, that adorning the urinals helped reduce "spillage" 44 per cent.

Cass Sunstein loves telling the story. In Australia to help prime minister Turnbull launch his own behavioural economics unit, Sunstein used to run the US office of information and regulatory affairs under President Obama. It was known as Obama's 'Nudge Unit', for good reason. Sunstein co-authored the book Nudge, and is an expert in using behavioural economics to change behaviour.

Three years ago Australia's present cabinet secretary Arthur Sinodinos ridiculed the idea in a press release entitled "Nanny state wants to nudge you!". But that was when Gillard was in power. Turnbull likes nudges. Their best selling point is that they are cheap.

Sunstein explained on Monday that in the US poor children were eligible for free school meals so long as their parents signed up. But whether because many were too busy or too embarrassed millions of children missed out.

So the authorities allowed schools to automatically enrol any child they thought might be eligible. Parents who wished could still take their children out.

The result was an extra 12 million children obtaining meals to which they were legally entitled...

>"It was just a nudge," he said. "We switched the default."

Sunstein also tackled low college enrolments among low-income students by sending each a text message just before the deadline. Low-income enrolments jumped 5.7 per cent.

The ideas don't just come out of his head. They are the result of incredibly large real world trials. When the US Internal Revenue Service wanted to increase the honesty of businesses reporting sales it tried adding an extra signature box to the top of the form. Reported sales boomed.

Critics say that nudges engineer outcomes, but so too do badly designed forms, such as ones that don't have signature boxes at the top. It's just that they do it thoughtlessly.

In Australia the Tax Office has been doing it thoughtfully for half a decade.

If you are late paying your tax this year you'll get a letter that says: "When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia's way of life."

The words weren't chosen at random. They were the result of real time experiments trying out different combinations of words on millions of taxpayers.

This year the letters are in different coloured inks: first blue, then amber (signalling a warning) then red. Cheryl-Lea Field, the deputy commissioner in charge of debt recovery, says this simple change has pushed up the number of recipients paying within 30 days from 30.3 to 36.8 per cent. The number making partial payments has jumped from 44 to 50 per cent.

And she's sending reminder texts to perennial late payers. The most effective include the taxpayer's name ("Peter") and arrive just before the payment is due. Last year an extra 65,000 paid by the due date, at a cost of only 9c per text.

The office has even has discovered the power of "thank you" texts. Late payers feel their effort has been appreciated and pay more quickly next time.

Her phone staff no longer use inflexible scripts. They used to have to ask "can you pay today" even after the caller had made it quite clear they couldn't. Now they are allowed to listen and help draw up payment plans.

There's even an online calculator to help late payers draw up plans themselves. And it'll soon come with gentle warnings, pointing out where, in the view of the software, the plan could be too optimistic.

In September President Obama signed an executive order requiring all US agencies to make use of behavioural insights. NSW premier Mike Baird has set up his own behavioural insights unit using staff and ideas borrowed from the British PM David Cameron. And now Malcolm Turnbull's on board. On one level they are doing no more than requiring agencies to think about how they interact with us. On another they are asking agencies to manipulate us.

It's something we're used to: advertisers have done it for years. Turnbull wants to even the score.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, November 24, 2015

They're not going to push up the GST. Super is where the action is

It's getting near the time when Scott Morrison and Malcolm Turnbull will need to make decisions about tax, and I'm not talking about the GST.

The big GST decision, on whether to lift it to 15 per cent, is already as good as made. The Treasurer and Prime Minister won't do it. Nor will they extend the goods and services tax to food, to health or to education, although they might yet extend it to financial services.

Extending it to health and education would be unfair. People such as me who use public schools and public hospitals without charge would pay no extra tax, while others already paying dearly would be asked to pay an extra 10 per cent. And, in all likelihood, the government would feel obliged to further fund private schools and the private health system to compensate. Extending the GST to fresh food was never going to happen. It would hit low earners the hardest, and these days it's almost impossible to compensate them.

When the GST was introduced in 2000, most low earners paid tax. But not now. In the past 15 years, the tax-free threshold has tripled to $18,000. And most self-funded retirees no longer pay tax. It's no longer possible to compensate them by cutting tax rates. And because many of them don't receive cash payments (that's why they are called "self-funded"), it's not possible to compensate them by boosting payments either.

Lifting the GST to 15 per cent or fully taxing food would be incredibly difficult if they wanted to compensate the least-well off, and Australians insist on it. New Zealand lifted its GST from 10 per cent to 12.5 per cent in 1989 without compensation, but it couldn't happen here.

And they'd be doing it for the states. Under existing laws, the GST flows to them. But the states aren't even agreed they want more GST. With NSW in favour, and Victoria against, and the money not flowing to the Commonwealth in any event, there's little reason for it to go out on a limb putting the case for collecting more...

Except for financial services. They weren't properly taxed when the GST was introduced, because they were hard to define. The financial service is the margin the bank adds to a product such as a mortgage, rather than the mortgage itself. If Australia managed to do it, it would raise an extra $4.7 billion a year without the need to compensate low earners (financial services are disproportionately used by high earners).

And it could use the promise of extra money for the states to persuade them to phase out some of their truly objectionable taxes, such as those that single out insurance and commercial property transactions.

Morrison and Turnbull's big decisions concern superannuation. Right now, most wage earners pay just 15 per cent on their contributions, even if they are on the top marginal tax rate and earning $200,000-plus. (At Labor's last gasp, it introduced an extra tax for the small number of Australians on $300,000-plus, taking their rate to a still-concessional 30 per cent.)

The best way to tax contributions would be to tax everyone at their marginal rate. Very low earners would pay nothing, very high earners would pay 45 per cent, and so on. It would rake in an extra $15 billion a year, an amount that would climb over time.

If they were feeling generous, they could give some of it back, perhaps a flat 10 or 15 percentage points up to a limit, through a rebate paid into funds.

But they would have to go further. Earnings, as well as contributions are lightly taxed, a benefit that accrues overwhelmingly to high earners with large balances. The standard rate is just 15 per cent, although funds are able to roughly halve it by the way they structure their investments. When the fund is used to pay out retirement benefits, the tax rate on earnings drops to zero. Not only are the payouts not taxed, no matter how big, but the earnings used to generate those payouts are completely untaxed, no matter how much is under management.

Unless Morrison fixes it, the hole will get bigger and bigger as more and more Australians retire and enjoy completely untaxed investment earnings.

Fixing it will make him enemies. Neither the big institutions that control the private funds nor the unions and employers that control the industry funds will want to pay more tax, and retirees will claim that taxing their investment earnings is retrospective.

But there's a way out. It's the one the government has already used to push up the pension age. Rather than declaring that the investment earnings of retirees will be taxed now, Morrison could declare that the investment earnings of future retirees will be taxed in, say, 15 years. Nothing would be retrospective. Anyone who had already retired could keep their zero tax rate until they died. Future retirees would have plenty of time to prepare.

Squibbing this decision will condemn Australia to an ever-widening hole in its tax system and show that Morrison and Turnbull aren't serious about fixing it.

I think they are.

In The Age and Sydney Morning Herald

 

 

Read more >>

Tuesday, November 17, 2015

Immigration: The economic case for open borders

This is about the worst time to write that we should open our borders.

One of the suicide bombers who took part in the Paris attacks was a refugee, or at least had the passport of someone who was let in as a Syrian refugee.

The assistant speaker of the NSW Parliament has called on the Prime Minister to close our borders to Islamic refugees, at least until we have a better idea of who we are letting in. Yet, the case for opening our borders, as part of a staged process, in concert with other countries, is extraordinarily strong.

Worldwide, the best guess is that if all borders were opened and people could move where they liked, global income would double. By way of comparison the gains from removing barriers to trade such as tariffs amount to only a few per cent of global GDP.

Harvard economist Lant​ Pritchett says even if the barriers to immigration were loosened just a bit (enough to boost the US labour force by 1 per cent) global income would grow by more than all the world's official foreign aid combined. US economist Alex Tabarrok​, writing in the October issue of the The Atlantic, describes immigration as the greatest anti-poverty program ever devised. 

But what would freer immigration do for us, at the receiving end? We can take it as read that it would improve the lives of those who moved here. That's why they'd do it.

In a draft report released on Friday, the Productivity Commission presented the preliminary results of modelling it is conducting on the effects of immigration on income per head. It said that without any further immigration, Australia's real income per head would climb 42 per cent by 2060. With immigration, continued at its present rate, income per head would climb 50 per cent.

Immigration makes us richer. Without further immigration the proportion of the population aged 65 and older would swell from 14 to 28 per cent and the number of workers would shrink. Continued at present levels, immigration would hold the proportion at 22 per cent.

Australian National University professor Bob Gregory believes the government's first intergenerational report got immigration wrong. It said that immigration was of little use in stopping the population from aging, because immigrants themselves aged. Gregory says while this is true in the very long-term, from decade to decade the effect is enormous...

Immigrants are typically young, but not too young, between the ages of 18 and 40 – exactly the age range in which they are the least likely to use government services and most likely to pay for them.

So big has been the economic boost from increased immigration over the past decade that Gregory compares it to the mining boom. He says it eclipses the potential boost from lifting productivity, except while the mining boom came and went, the boost from increased immigration will last.

It is already beyond our control. Immigration soared way beyond what planners expected in the first half of the last decade, and then dived at the start of this one, making a mockery of the former prime minister John Howard's famous declaration that we would decide who came here and the circumstances in which they came.

New Zealanders can move here without limit under an agreement signed decades ago. In better times, 45,500 a year moved here. Now, with the New Zealand economy looking better and ours worse, it's only half that.

An astounding 345,600 foreign students live here with the ability to work (down from 434,000 when times were better), 188,000 workers live here on temporary 457 visas (down from 202,000), and 143,900 work here while on holidays.

All of these programs are uncapped, all give the people who use them the inside running on permanent migration, and all eat away at the fiction that we control our borders. Loosening control further is likely to help, rather than harm us, so long as it boosts immigration.

It's true that immigrants put a greater strain on our cities and on our environment, but we have scarcely begun to manage those things properly. Charging for road use and carbon emissions would be a start. And by contributing to Australia, immigrants give us the resources to build more infrastructure and protect our environment, if we have the will to do so.

Immigration boosts incomes because it allows people to move to where they can reach their full potential. Imagine a world in which the citizens of Ballarat were walled in and prevented from taking advantage of the opportunities in Melbourne. Imagine that the citizens of Melbourne gave them aid and bombed their enemies, telling them they would do anything to help them, other than letting them in.

Even worse, imagine that we locked up the citizens of Ballarat who tried to reach Melbourne, preventing them working, deliberately wasting the greatest resource on earth.

When the father of modern economics, Adam Smith, wrote The Wealth of Nations, he was referring not to wealth in the form of gold or silver, but to the wealth embodied in people able to exercise their full potential.

Yes, we would need to free up immigration slowly in concert with other countries, perhaps as part of trade agreements, and yes, we would need to be on the lookout for terrorists and criminals, just as we need to be on the lookout at home.

But the benefits of freeing up immigration dwarf those of anything else imaginable. In time, I think we'll see these benefits.

In The Age and Sydney Morning Herald

 

 

Recommended reading

. The real benefits of migration - Tim Harford, Financial Times, October 27, 2015

. The Case for Getting Rid of Borders—Completely - Alex Tabarrok, The Atlantic, October 10, 2015

. If People Could Immigrate Anywhere, Would Poverty Be Eliminated? - Shaun Raviv, The Atlantic April 26, 2015

. Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? - Michael A Clemens, Journal of Economic Perspectives, Summer 2011

. Let Their People Come: Lant Pritchett, Center For Global Development, Washington 2006

. What makes a terrorist? - Alan B. Krueger, Vox, 11 September, 2007

. Open Borders: The Case website

 

Read more >>