Tuesday, June 30, 2015

Trans Pacific Partnership. Why we don't know what we are giving away

The US Senate has given the green light, and Australia is set to buckle. If you don't yet know what TPP stands for, listen up. Our government could sign it within weeks. Only then will we really know what's in it.

That's right. As with the China-Australia Free Trade Agreement and the Japan-Australia Free Trade Agreement, the content of the Trans-Pacific Partnership will remain secret right up until the day it is signed. Afterwards, our parliament will be able to look at it, but not to change it. Alice is inside the looking glass.

A Senate committee reported on the processes surrounding the TPP on Thursday. It said the parliament would be presented with an all-or-nothing choice. It could examine the TPP (after it had been signed) and either vote for or against it, but not change a word.

The Department of Foreign Affairs and Trade was a lone voice at the hearings supporting the present arrangement (even it relented afterwards, allowing members of Parliament to see a copy of the draft TPP in a locked room on the condition that they made no copies themselves, took no notes and breathed not a word to anyone outside the room).

It said anyone who had wanted an input into the agreement could have sent it a submission. But it missed the point. It's hard to know that you need to write a submission if you don't know what's being proposed...

Trish Hepworth of the Australian Digital Alliance said most people when they hear there is going to be a trade agreement don't think: "Oh my goodness,  I run a library; there is a trade agreement; this is going to mean I cannot digitise newspapers past 1955 anymore." Yet she said that is what happened as a result of Australia-US Free Trade Agreement.

The department runs consultation sessions with community groups, providing "over 1000 stakeholder briefings on the TPP alone since 2011", but they have been curiously bereft of information. Alan Kirkland from the consumer group Choice said the meetings take the form of "tell us your views". The Australian Industry group said attending them is like "voicing concerns blindfolded".

It matters because these days so-called trade agreements are about far more than trade. The Productivity Commission insists on calling them "preferential" rather than "free trade" agreements, arguing that they often impede trade. Australia's 1800 agreements overlap and interfere with each other in ways that are hard to see through. In order to get preferential entry to the United States under the US agreement, Australian firms are not allowed to use more than a certain percentage of materials that come from other countries such as New Zealand, even though New Zealand goods are allowed into Australia duty-free, and so on.

A study of the Australia-US free trade agreement 10 years on found it had most probably cut rather than boosted Australian trade. Beforehand we were told it would be worth billions.

Many businesses won't use them. "The paperwork to qualify was so enormous it wasn't worth the effort," said one of the respondents to a Chamber of Commerce survey.

Until four years ago the Stafford Group made Anthony Squires suits at Preston in Melbourne. It had suited up every Australian prime minister from Menzies to Rudd. It was happy to pay duty on the fabric it imported, knowing its New Zealand competitors had to pay it too. Then a changed interpretation of the rules meant New Zealand manufacturers were able to use duty-free cloth to make suits for Australians (although not for New Zealanders). Stafford appealed to prime minister Gillard, was turned down, and moved production to Fiji.

The Trans Pacific Partnership agreement being negotiated between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam holds out the promise of actually breaking down barriers. But the leaks suggest its provisions will be inconsistent with those of existing agreements, creating still more red tape. The Chamber of Commerce and Industry begged the Senate inquiry for a "one in, one out" rule under which obsolete agreements would be cancelled as soon as new ones came into force. It calls the mess we've got: "the noodle bowl".

Last week the US Senate gave President Obama fast-track authority to quickly conclude the Trans Pacific Partnership talks. Leaks published by Wikileaks suggest the big changes for Australia would relate not to trade, but to intellectual property and so-called investor-state dispute settlement. The Coalition's John Howard successfully resisted the incorporation of ISDS provisions into the Australia-US agreement in 2004. This time the US is more insistent. It says there will be no agreement without them.

ISDS clauses allow foreign firms (but not local firms) to sue the Australian government in foreign tribunals over decisions they don't like. A tobacco company is doing it now using the terms of an obscure Hong Kong Australia agreement. The Productivity Commission says the number of ISDS cases worldwide has grown from almost none in 20 years to around 600 today. The Chief Justice of the High Court says they are a threat to national sovereignty.

The Medical Journal says the leaked intellectual property changes seem designed to keep pharmaceutical prices high.

Trade minister Andrew Robb accuses critics of the as -yet-unseen agreement of being anti-trade. But they're not. There's no greater believer in free trade than the Productivity Commission, and few organisations more enthusiastic than the Chamber of Commerce and Industry. It's the new layers of red tape that worry them, and the add-ons – changes to Australian law that wouldn't stand a chance of making it through Parliament if they were proposed and debated in in their own right.

In The Age and Sydney Morning Herald

Sunday, June 28, 2015

Income tax. It's having a birthday

We are about to celebrate a birthday, a 100th anniversary perhaps even more important than the landing at Gallipoli. The Income Tax Assessment Act 1915 grew out of Gallipoli. It was a temporary measure designed to help us through a temporary emergency. It's been helping us ever since. This year's returns will double as birthday cards.

Before 1915 the Commonwealth didn't levy an income tax. It got by with customs duties. The states had such taxes, but they hadn't had them long. The dirt poor states tried them first – Tasmania in 1880 with a tax that applied only to income from dividends, and South Australia in 1884. South Australia's became the template for everything that followed.

These days we regard it as obvious that Australians on high incomes should face a higher tax rate than Australians on low incomes. South Australia did it first, by levying its tax on all income but offering a generous tax-free threshold. It taxed income from property at twice the rate of income from wages, crudely ensuring that the better-off faced higher rates.

And we regard it as obvious that individuals should face tax, not households. South Australia broke new ground in the British Commonwealth by taxing married women as if they were individuals rather than as part of their husband's household. In Britain they were lumped in with their husband's possessions along with "infants, lunatics, idiots and the insane".

The Commonwealth entered the field because it had to. Its spending had blown out from almost nothing to one fifth of Australia's national product. With ships not delivering goods, its revenue from customs duties had evaporated. And the war was going badly, requiring even more spending for an unknowable length of time. In the words of tax expert Julie Smith, who has written what may be the definitive history of Australian taxation, it needed to conscript capital as well as labour.

The Labor government of Andrew Fisher proposed the tax and the opposition led by Joseph Cook agreed, with reservations. "This measure is entirely novel and of far reaching importance," Cook told Parliament. "We are blazing a trail against time."

When introduced, the bill was only 22 pages long. But it wasn't easy to follow. Australian National University tax expert Miranda Stewart says almost no-one, perhaps only the man who designed it, truly understood it.

Instead of applying fixed marginal tax rates at different levels of income, the first Commonwealth income tax continuously varied the rate right up to an upper limit of 60 per cent.

"For personal exertion income it was it was three pence and three eight-hundredths of one penny, increasing uniformly with each increase of one pound sterling of taxable income by three eight-hundredths of one penny," Professor Stewart told a conference this year.

Attorney-General Billy Hughes told Parliament the formula for wages was simple compared to the one for property income.

"There is a difficulty in that formula which I am unable to express other than in terms of higher mathematics," he admitted. "I am credibly informed it has something to do with the perturbations of the curve."

The Commonwealth expanded the income tax in the Depression to fund welfare and took over its administration from the states, borrowing another idea from South Australia. Employment was pretty informal back then. It was hard to track down workers and get their money. So South Australia instead imposed a withholding tax on their wages. Employers were made to hand over money on behalf of groups of their employees. The "group scheme" was Australia's first pay as you go tax. The word survives in what until recently were called "group certificates" issued by employers to employees after the end of each financial year.

During the Second World War the Commonwealth grabbed all of the state income taxes for itself ("temporarily") and expanded their scope to provide welfare for soldiers, unemployment benefits, widows' pensions and child endowment. It labelled the extension a "social security contribution", a term that lingered until the Menzies government killed it off in the 1960s.

These days income tax accounts for more than half of the Commonwealth's revenue, and 40 per cent of the revenue amassed by all Australian governments. It pays for our entire social security system, for Medicare, and for the federal spending on hospitals, universities and schools and public order and safety.

We complain at times (although not when we get our refunds) but we couldn't live without it. It's 100 years young, and it's here to stay.

In The Age and Sydney Morning Herald

Wednesday, June 24, 2015

Free trade agreements 'preferential' and dangerous, says Productivity Commission

The Productivity Commission has launched a scathing attack on Australia's latest series of free trade agreements, saying they grant legal rights to foreign investors not available to Australians, expose the government to potentially large unfunded liabilities and add extra costs on businesses attempting to comply with them.

The assessment comes after trade minister Andrew Robb successfully concluded agreements with Japan, Korea and China, and on the cusp of final negotiations to seal a so-called Trans Pacific Partnership with eleven Pacific-facing nations including the United States, Japan, New Zealand and Singapore.  

On Wednesday, the US Senate voted to give President Barack Obama special negotiating powers that will remove one of the last impediments to the partnership.

The Productivity Commission has devoted a special chapter of its Trade and Assistance Review released on Wednesday to the agreements, which it described as "preferential" rather than "free" trade agreements.

It claims that by favouring some countries over others and excluding firms sourcing substantial inputs from other countries from special treatment, they "add to the complexity of international trade and investment, are costly and time-consuming to negotiate and add to the compliance costs of firms and administrative costs of governments."

According to the Commission, the Japan and Korean agreements were concluded without a rigorous and independent assessment of whether costs would exceed benefits.  There was also no mechanism in place to monitor the outcomes of the agreements after they come into force, it said.

"Without such a detailed assessment it is not possible to form a view as to whether the aspirational goals typically ascribed to the formation of preferential agreements are commensurate with real-world impacts," the Productivity Commission said in its trade review. 

Leaks about the text of the Trans Pacific Partnership suggested it will "include obligations on pharmaceutical price determination arrangements in Australia and other TPP members of an uncertain character and intent".

"The history of intellectual property arrangements being addressed in preferential trade deals is not good." 

Also, investor-state dispute settlement clauses included in the Korean and Chinese agreements and planned for the Trans Pacific Partnership "depart from national treatment principles by affording substantive appeal rights to foreigners not available to domestic firms," the Commission warned, saying this could create the risk of "regulatory chill" where Australian governments will be cautious about enacting new laws for fear they are challenged in foreign tribunals.

The safeguards and carve-outs for environmental and health legislation included were of "uncertain effect, lack transparency and have inadequate parliamentary scrutiny", exposing the government to "potentially large unfunded contingent liabilities dependent on decisions by international arbitration tribunals", the Commission found. 

The cost to Australia of defending an action brought against it by Philip Morris Asia under an investor-state dispute settlement clause over its plain tobacco packaging legislation were "unknown, unfunded and likely to be substantial."  
In The Age and Sydney Morning Herald  


Tuesday, June 23, 2015

The prodigal nation. Australia about to blow its carbon budget

Australia is about to make one of the most important and potentially costly decisions in its history. There are signs it'll stuff it up.

We have already promised to do our part to limit the rise in global temperatures to 2 degrees. It's a commitment we can't get out of, and nor have we tried. All the nations we compare   ourself to have signed up to it, including those with conservative governments such as Britain, Canada and New Zealand.

What's at issue in the next few weeks is how we do it. Australia is being asked to make a specific commitment ahead of the Paris climate summit later this year. The US has done so. It plans to cut carbon emissions by between 26 and 28 per cent relative to 2005 levels by 2025. Europe plans to cut emissions by 40 per cent on 1990 levels by 2030. China plans to stabilise emissions by 2030.

Australia faces a choice. It can either wind back its emissions quickly, meaning it'll need to do less in the future, or it can wind them back slowly, making the future task harder. Guess which way it is leaning.

It's giving every indication of wanting to place the burden of adjustment on the next generation. It's giving every indication of wanting to do little now so that its successors have to do more later. It's an odd response from a government that (most of the time) understands accounting. It quite rightly savaged Labor for always wanting to boost foreign aid to the UN millennium goal, but 'not yet'. And it savaged Labor for promising to spend awfully big on health and education, but in the future. Labor signed up to agreements that would have given the states big grants for hospitals and schools just beyond the budget horizon, at a time when it had no idea how to fund them.

Now the Coalition is preparing to be just as reckless...

The decision to keep the global temperature increase to 2 degrees gives the world a 'carbon budget'. The budget, calculated by the Intergovernmental Panel on Climate Change, is 1700 gigatonnes of carbon dioxide and equivalents. If any more than that is emitted between 2000 and 2050, global temperatures are likely to climb by more than 2 degrees. If less is emitted they will climb by less. Australia's share of that budget beyond 2013 is 10.1 gigatonnes, around 1 per cent of what's left.

We've got a choice. We can use up that budget quickly and then plan to emit next to nothing in future years, or we can wind back emissions now and use up our budget more slowly.

The Climate Change authority has recommended big action upfront and big action later. It says that's what we will need to keep within our budget. It wants a 30 per cent cut in emissions relative to 2000 levels by 2025. It says that's broadly compatible with what Australia's peers are pledging. Beyond that it wants a further cut of 10 to 30 per cent by 2030.

"If Australia were to pledge the recommended 30 per cent target at the Paris conference this would likely be considered the behaviour of a good global citizen, and go some way to answering those who have questioned Australia's commitment to climate change policy," it said in its report in April. "It would also give Australia the right to expect other countries to behave in like fashion."

Anything less would be the prodigal option. It would give Australia an easy life now in the knowledge that when its budget was spent, life would become tough. It would impose a burden on our children we are not prepared to wear ourselves. It would be the kind of behaviour the Coalition says it abhors when it comes to government debt.

As it happens, the actions we would need to undertake now aren't that scary (just as the actions needed to stop government debt climbing aren't that scary). What is scary is what will be needed if we wait. The Melbourne consultancy ClimateWorks has just launched a web-based calculator. You can visit it at 2050pathways.net.au/calculator and play with the sliders.

My own experiments on the website show that nuclear power would do little to keep us within our budget. That's because it wouldn't produce much electricity by 2050. Switching from coal to renewable energy would do a lot. In fact in my experiments I couldn't keep within the budget without doing it.

Australia's commitment at Paris will have to be credible. It won't be enough to say: "yes we have a plan to keep within our budget, but we are not going to wind back our use of coal, at least until we have to stop". The other nations attending the talks know about calculators. They know what's profligate and what's not.

Australia is expected to announce its decision in July at the major economies forum in the United States. It is still able to get it right. It is still able to show the rest of the world it governs responsibly.

In The Age and Sydney Morning Herald

Monday, June 22, 2015

PM's audit chief Tony Shepherd says it's time to better tax super, capital gains

The head of Tony Abbott's Commission of Audit has broken ranks with the Prime Minister on the question of superannuation, saying it's time to ask whether the multi-billion dollar system of tax concessions is achieving its aim.

Tony Shepherd has also called for a doubling in the rate of capital gains to bring it into line with income tax and help bring negative gearing under control.

Mr Shepherd, a former president of the Business Council, was handpicked by Mr Abbott to lead the examination of government spending which recommended Medicare co-payments and tighter eligibility for the pension.

Speaking to the Committee for the Economic Development of Australia in Canberra, Mr Shepherd said the Commission of Audit had not been asked to examine tax, but he said if it had it would have recommended an increase in the rate and coverage of the goods and services tax, something he described as "a no-brainer".

Superannuation tax concessions "definitely" had to be reviewed, he said.

"The idea of these concessions was to lift the rate of self-funded retirees. But it's been stubbornly fixed at 20 per cent for a long time," Mr Shepherd said. "The incentives do not appear to be working to encourage growth in the number of self-funded retirees.

"It is definitely something that has to be reviewed, and I believe that some of those concessions should be modified."

Mr Abbott has promised no changes to superannuation tax concessions in this term of parliament or the next, accusing Labor of wanting to "trouser" superannuation money by winding back concessions.

"I agree that that it should be looked at, and it should be looked at in the context of the whole retirement income question, including age pension," Mr Shepherd said. "You would need to be careful on the incentives side that you didn't deplete the 20 per cent that you've already got."

On capital gains tax, the former head of the business council said the 50 per cent discount should go, pushing the capital gains tax rate up to the income tax rate.

"I'm personally in favour of putting the rate up to the income tax rate," he said. "I can't see any reason for treating it differently, and I think it probably leads in some respects to a greater emphasis on negative gearing. I can't see any reason for treating capital gains any different from income tax."

The headline rate of capital gains tax was cut to half the income tax rate by then prime minister John Howard in 1999. It made negative gearing much more attractive and sparked a climb in house prices.

Mr Shepherd said he thought the budget forecasts for revenue and economic growth were optimistic, adding: "I pray they are correct".

In The Age and Sydney Morning Herald

Tuesday, June 16, 2015

One rule for super. The tax expenditures they dare not touch

It's the simple question that goes to the heart of what was wrong with the Coalition's first two budgets: Why was it OK to cut back Family Tax Benefits, but not superannuation tax concessions?

What was so different about them that meant a government concerned about the deficit targeted one but not the other?

An immediate answer is that the Coalition promised in the election not to touch super. But the promise only applied to its first term. It also promised not to touch pensions and got around that by announcing changes that would take place only after the next election.

The real answer, or at least the real justification, lies somewhere else. It is that Family Tax Benefits and super tax concessions are different. One costs the government cash. It can be seen in the budget and so it is ripe for cutting. The other is merely a "tax expenditure". It is money the government made sure it never got in the first place.

But the dividing line between the two is far less clear than you might think. The Family Tax Benefit was once a tax concession. Note the use of the word "tax" in its title. Embedded in the tax system as a concession for decades, it was taken out and made an explicit payment by the Fraser government in 1976. Instead of going to the breadwinner (usually the father) it was paid directly to the mother as an allowance - a worthwhile change but one that made it a budget line item, ripe for cutting when the time came.

There's an arbitrariness about which government programs are structured as expenditures and which are structured as tax concessions and turned invisible. In which column does the Private Health Insurance Rebate sit? Try to work it out. I'll tell you at the end of this column...

If the super tax concessions had been turned into explicit payments, doled out each year in the budget so it was obvious who they were going to and how they were increasing, how long would they have lasted? We don't need to guess. We know...

Part of the Gillard government's support for super was delivered as a payment. It was called the Low Income Super Contribution. The Coalition announced plans to axe it in its first budget in 2013 saying it couldn't be afforded. It left the tax breaks available to higher earners untouched. The contribution ends in 2019.

On coming to office in 2007, Labor's Wayne Swan announced plans to set up first home saver accounts that would operate in the same way as super except that instead of the support being delivered as a tax concessions it would be delivered as payments: more for high earners, less for low earners, the same as for super. The plan was ridiculed into oblivion.

"To whom it may concern. I would like to know why an income earner of $180,000+ will receive most contribution from the government while a low to middle-income earner receives the least," was one of the nicer emails the treasury received.

Classify a program as an expense and it'll be subject to rigorous and appropriate scrutiny. Classify another one as a concession and it'll remain off the books, largely unnoticed. Pensions are one of the government's biggest and fastest-growing expenses. But super tax concessions are almost as big and growing more quickly, without the angst.

Grants for public housing are quite rightly examined to see whether they are being put to the best use. But the negative gearing tax concession continues (with government support) even though it no longer funds houses the way it used to. At the turn of the century, 1 in every 6 new investor loans went to build a house. Now it's 1 in 14.

The Howard government's Commission of Audit was on to the double standard. It said tax expenditures were "usually uncapped, open-ended and their costs can rise rapidly". It asked Howard to "comprehensively review all existing tax expenditures". After the review he should "examine the scope to convert remaining tax concessions to outlay programs".

Howard did nothing. Towards the end of its life, his government jaw-droppingly made every dollar earned in the super accounts of retirees over 60 entirely tax-free, taking tax expenditures into new dimension.

Three elections later, the Abbott government's Commission of Audit didn't even examine tax expenditures. Its terms of reference limited it to examining "each dollar spent".

Australia's 25 biggest tax expenditures cost between them $122.2 billion, around one quarter of the Commonwealth budget. The International Monetary Fund says we spend more on them than the USA, more than Britain, more than Greece, more than Italy - more than any of the 16 nations it examined. The Treasury tots them up each year in a Tax Expenditures Statement few people read.

The biggest go to the family home, then to super, the GST and charities. A government genuinely concerned about getting value for money and balancing its budget would impose sunset clauses on the lot then review them portfolio by portfolio over a period of (say) five years. Those that aren't axed it should consider turning into visible grants.

Oh. The Private Health Insurance Rebate is classified as a direct payment. I bet you couldn't work it out and you had to guess.


The twenty-four biggest tax expenditures

  1. Capital gains tax main residence exemption - discount component $25.5 billion

  2. Capital gains tax main residence exemption $20.5 billion

  3. Concessional taxation of employer superannuation contributions $16.3 billion

  4. Concessional taxation of superannuation entity earnings $13.4 billion

  5. GST exemption for certain foods $6.4 billion

  6. Capital gains tax discount for individuals and trusts $5.8 billion

  7. GST treatment of financial services $4.45 billion

  8. GST treatment of education $3.95 billion

  9. GST treatment medical and health goods and services $3.55

  10. Concessional taxation of non-super termination benefits $2.7 billion

  11. Tax exemption for Family Tax Benefit payments $2.22

  12. Statutory effective life caps for writing off assets $1.945 billion

  13. Exemption from interest withholding tax on certain securities $1.86

  14. Medicare levy exemption for residents with low taxable incomes $1.71

  15. Tax exemption of the Private Health Insurance Rebate $1.57

  16. Exemption for public & not-for-profit ambulance and hospitals $1.4 billion

  17. Exemption for other public benevolent institutions $1.36 billion

  18. Concessional excise for aviation gasoline and turbine fuel $1.23 billion

  19. GST exemption for residential and community care services $1.11 billion

  20. Tax deduction for gifts to registered charities $1.1 billion

  21. GST exemption for child care services $1.09 billion

  22. Non-refundable research and development tax offset $1.07 billion

  23. GST exemption for water, sewerage and drainage $1.05 tax billion

  24. Tax deduction for capital works $960 million

Source: 2014 Tax Expenditures Statement, Commonwealth Treasury/p>

In The Age and Sydney Morning Herald


Sunday, June 14, 2015

So Abbott doesn't like power stations. Who does?

So Abbott doesn't like power stations. Who does?

Everything about the electricity industry is ugly, and dangerous; from the mega stations that spew out smoke and ash in the Hunter and La Trobe Valleys to the high voltage cables and substations that spark fires and ominously hum, to the poles and wires that interfere with trees on their way to our homes.

But windmills, near farms?

It takes a special kind of hysteria to get worked up over windmills. Or a special sense of entitlement. Here's Abbott on Thursday: "When I have been up close to these wind farms there's no doubt not only are they visually awful but they make a lot of noise."

Noise, appalling looks and danger are what those of us who live in cities have long gotten used to. Some of us live near railway lines, some under flight paths, some near substations. It's the price we pay for progress, the entry ticket for a seat in the 21st century.

But Abbott, and his mate Hockey, are delicate petals.

Here's Hockey, a few months back: "We get some beautiful landscapes in Australia and frankly putting up those towers is just, to me, quite appalling".

"I drive from Sydney to Canberra on Sundays to go to parliament and I just look at those wind farms around Lake George and I am just appalled at the beautiful landscape that has been ruined."

Ruined. By windmills. The treasurer adds that he would be "equally appalled" if the authorities put coal-fired power stations there, but I've never heard him or Abbott speak out against coal-fired power stations. And I've never heard his party back an inquiry into coal in the same way as it has backed 10 inquiries into wind in the past 5 years.

The latest, in the Australian Senate, has heard harrowing tales. Bill and Sandy Rogerson live at Glenthompson near the Grampians in Victoria. They live with "constant humming and vibration". Bill wakes up suddenly at night with palpitations and feels his "heart is going to jump out of his chest". One of their sheepdogs can't lift its head if it is housed in the woodshed near the turbines. When it does get up it "runs around madly like its brain is scrambled".

Their lambing rate has fallen. Some of their lambs are born "with flexural leg deformities similar to that found in foals raised near wind farms in Portugal".

From windmills. It's all there in their submission to the inquiry, along with 460 other submissions.

Never mind that the Association of Australian Acoustic Consultants told the inquiry there was no evidence people were affected by the so-called infrasound around windmills, unless they know it's there. "In every study conducted to date, that has been the case," it said.

Never mind that after years of study the National Health and Medical Research Council concluded there was "no consistent evidence that wind farms cause adverse health effects". Never mind that afterwards someone persuaded it to spend another $2.5 million of its budget on yet more studies.

Never mind that there are other forms of power generation that actually do damage health about which we do nothing.

Jacinta Morahan is a doctor. She lives at Anglesea on Victoria's Great Ocean Road. She wrote to the inquiry about the Alcoa open cut mine and coal-fired power station next door, detailing the amount of sulphur dioxide and carcinogenic particulates pumped into the lungs of residents and visitors. Her point was that wind farms aren't in the same league.

And as they open, coal plants will close.

On the very morning Abbott was telling broadcaster Alan Jones that windmills are "visually awful" the owner of South Australia's only two coal-fired power plants announced plans to close up shop. They can't compete with the cheaper power provided by wind. One of them hasn't been turned on for a year. Until last weekend there were concerns about how South Australia would cope without any coal-fired plants. They are much better than wind at the fine tuning the electricity system needs to ensure supply meets demand.

By coincidence there was a fire at the one operating Port Augusta plant on the Queen's birthday weekend and the state managed just fine with no local coal plants whatsoever. It has had its dress rehearsal.

Other coal plants are likely to close in NSW. Wind plants mightn't be perfect, and they mightn't be beautiful, but they are far less offensive than what they'll replace.

In The Age and Sydney Morning Herald

Wednesday, June 10, 2015

Hockey is wrong, houses are becoming unaffordable

Residents have become a minority in a market they once dominated.

The latest figures released on Tuesday show would-be owner-occupiers accounted for just 48.4 per cent of the money borrowed for home loans in April - the lowest proportion on record.

Investors accounted for the other 51.6 per cent.

The figures were released as the Treasurer Joe Hockey told a Sydney media conference that housing was still affordable, saying if it wasn't, "no one would be buying it".

The figures suggest that housing is becoming increasingly unaffordable for would-be residents who find themselves outbid by investors armed with the tax advantages associated with negative gearing.

As recently as the early 1990s owner-occupiers accounted for 84 per cent of new home lending, leaving investors with less than 15 per cent.

When the Howard government halved the headline rate of capital gains tax in the late 1990s, investors accounted for 33 per cent of the money borrowed.

The tax change made negative gearing much more attractive and brought about a surge in investment which reignited after the global financial crisis. Investment lending overtook residential lending in August 2014.

In April intending residents borrowed $12.6 billion to buy homes while investors borrowed $13.5 billion. The figures exclude refinancing.

They show that it is indeed possible for house prices to climb beyond the level where would-be residents can buy them. And houses are being bought by investors who are betting that prices will climb higher still.

A "bubble" is what happens when prices are driven by speculation about what will happen to prices rather than by what genuine participants are prepared to pay.

The Treasury secretary thinks the Sydney housing market is already in a bubble, as is part of Melbourne.

"It's unequivocally the case in Sydney. Unequivocally," he told the Senate last week.

"Frankly, whatever the data says, just casual observation can tell you it's the case."

Bubbles usually burst. In exceptionally well-managed cases they deflate slowly. Hockey seems keener to deny there's a bubble than to deflate it slowly.

One of the safest ways to deflate the bubble would be adopt the Greens' proposal of denying negative gearing tax deductions to new investors. Existing investors wouldn't stampede for the doors and sell, but new investors would become more scarce, giving genuine residents a chance to get a foot in the door.

The parliamentary budget office says it would save the budget $4 billion a year. No-one who is presently negatively gearing would mind, and air would leave the bubble.

In The Age and Sydney Morning Herald

Tuesday, June 09, 2015

On the road to $5 million. Abbott's love affair with high house prices

It's 2055 and you're searching for a house. Tony Abbott is still the prime minister. He has just turned 98 and is finally considering retirement. But for the past 40 years he has been as good as his word. "I do hope that our housing prices are increasing," he said back in 2015. "I do want housing to be affordable, but nevertheless, I also want house prices to be modestly increasing."

They have indeed been increasing modestly, in each and every year by the average of what they had increased in the previous 25 years.

The agent has found you a beauty. It's typical a Melbourne home, slap bang in the middle of the price distribution at the so-called median. It costs $5 million.

That's right: $5 million. Right now a typical Melbourne home costs $569,500. If prices climb for another 40 years as they have for the past 25, a typical Melbourne house will cost $5 million.

Of course we will be earning more by then. The intergenerational report assumes that wages will climb by 4 per cent per year all the way through until 2055. It's a heroic assumption. Wages have been increasing at nothing like that pace lately. If they do, the average Victorian on a full-time wage will earn $363,470, which sounds like a lot. But it won't be, compared to the cost of a house.

Right now the typical Melbourne home costs 7.5 times the average full-time wage. Back in 1990 it cost 5 times that average wage. By 2055 it would cost 13 times the average wage...

Rising prices mean sliding affordability. Beyond a certain point they have to. It's what made Abbott's claim that he wants both affordable housing and rising prices so silly.

It used to be said that house prices couldn't climb to the level where owner-occupiers couldn't afford to buy them. But it's no longer true. John Howard severed the link in September 1999. A simple change to the Tax Act created a whole new class of buyers for whom occupying the house wasn't the point. They could make big money by using houses as investments, getting someone else to live in them, and selling them later at a profit. From September 1999 only half of any profit they made was subject to tax.

This meant they could afford to pay more than the properties were worth, more than people could comfortably pay to live in them. If their interest payments exceeded their income from rent and they had to record a loss, so much the better. They could use the loss to write down other income and cut their tax. They would make it up later when they sold for a (largely untaxed) profit.

Before the change negative gearing wasn't that common. In 1999 only 650,000 landlords recorded losses. Within five years the number had passed 1 million. It's now 1.3 million, accounting for 1 in every 10 taxpayers. And their losses are no longer small. The average loss has jumped from $4000 to almost $10,000.

The flood of negative gearers has pushed prices to levels that once wouldn't have lacked support. In the decade before 1999 Melbourne prices rose by an average of 4.8 per cent per year. In the 15 years after they've climbed 7.6 per cent per year. They'll keep climbing for as long as negative gearers (who don't much care about prices) outbid owner-occupiers.

Although indifferent to high prices, negative gearers are very concerned about whether or not prices will continue to rise. Their business model depends on housing becoming less affordable. Without the assurance of future price rises, it collapses. Which is why the prime minister's remarks last week gave them comfort. He effectively committed the government to doing whatever it could to ensure that one type of investment always increased in price.

The governor of the Reserve Bank has repeatedly warned that asset prices can go down as well as up. Abbott has negated that warning, for one class of asset.

If investors believe him they'll switch out of risky assets such as shares and businesses into property. And those already in property will gear up further. Already, around 30,000 own five or more properties. Abbott has blown air into the bubble.

It's a furphy to suggest greater housing supply will allow Abbott to keep both of his promises: more affordable housing and modestly increasing prices. If greater supply does make housing more affordable it will do so by cutting prices. Abbott can't have both. And negative gearing is a particularly cumbersome means of increasing supply. Before Howard's tax change, one in every six new investor loans went to build houses. It's now one in 14. Negative gearers are keener to outbid owner-occupiers for existing homes than than they are to build new ones.

The more they succeed in pushing up prices the more Australians will rent. The latest census shows 29.6 of households renting. A decade earlier it showed 27.6 per cent.

What's odd about Abbott's support for negative gearing is that when it comes to foreign investors, he is cracking down hard. Most foreigners are prevented by law from competing with Australians to buy existing houses, and Abbott's determined to apply the law. Around 200 cases are under investigation, 40 coming from tip-offs from members of the public who have 'dobbed in' owners they think might be foreign. Foreign buyers do indeed help push up real estate prices and deny owner occupiers a chance, but that's exactly what negative gearers do. And since 1999 they've had a taxpayer subsidy to do it.

Never before have we had a prime minister who explicitly backs higher house prices. Never before have we had one who effectively promises less affordable housing in the decades ahead and a greater proportion of the population forced to rent. Never before have we had one prepared to make an election issue out of it. "Do not trust this man with your house price," he thundered against Bill Shorten last week. Shorten should respond in kind. Should we trust Abbott with house prices?

In The Age and Sydney Morning Herald

Tuesday, June 02, 2015

The Parliamentary Budget Office is corrupting rather helping political debate

What happened on Q&A last week was just the tip of the iceberg. And I am not talking about tampons. I'm talking about real ambushes, the kind that are genuinely unfair.

Joe Hockey was asked to respond to modelling that said his budget would cost some families $21,000 over four years.

"Well, hang on. I haven't seen this modelling," he replied. Most of Australia hadn't. Bill Shorten's office had released results from the work it had commissioned from the National Centre for Social and Economic Modelling without releasing the work itself.

"You're asking me about something I haven't seen, the government hasn't seen and most of the media haven't seen," Hockey quite rightly pleaded. "I don't know what the assumptions were ... I have seen lots of economic modelling. What you put in and what comes out, you don't want to see. I want to see what's going into this sausage machine."

His point wasn't that there was anything wrong with the centre's modelling (as far as he knew), it was that without knowing which measures it had included, which measures it had excluded and what it had assumed about wages and so on, he was being asked to wrestle with a column of smoke.

And not only Hockey. The previous day Labor had asked journalists to report on what it said were the centre's findings, without showing them its report. They could ask questions of the centre, but weren't allowed to see what it had written.

Perfectly timed for the start of the parliamentary week, Labor's tactics gave it a weapon to use against the government while depriving the government of a weapon to use against it. That it later relented and released the report doesn't excuse its behaviour.

It's not the first time. In April, Labor announced a new policy on superannuation that it said had been "costed by the Parliamentary Budget Office" as saving $14.3 billion over 10 years. But it wouldn't release the costing. How the office arrived at it, or even if it had, was a matter of conjecture...

The Parliamentary Budget Office costs us $7 million a year. It employs 35 people. It was set up to give us confidence that the promises made by our politicians would cost what they said they would cost. But the rules governing it allow politicians to hang on to its work, even while they are quoting it, misrepresenting a cost that may have been arrived at by one means as if it had been arrived at by another.

Every costing concluded by the PBO is given a reliability rating ranging from "low" to "highly reliable". But Labor won't say what rating the costing of its super policy got or how the costing was arrived at. When asked, it says that the Coalition didn't release the costings it commissioned during the 2013 election. 

And it's right. The Coalition released 80 or so policies during the campaign, almost all of them costed by the PBO and to the best of my knowledge none of them publicly released.

At times the charade was farcical. The Coalition claimed that cutting the public service workforce by 12,000 would save $5.2 billion. It said the PBO had said so. But how was the figure arrived at? Which financial year did the savings start from? Did they include the savings on rent? Did they include superannuation savings? So heavy was the pressure on the Coalition to answer the question, and so keen was the Coalition to deny Labor the opportunity of seeing what its numbers meant, that it resorted to showing the document to selected journalists on the proviso that they could look at it for a few minutes, take only a few notes, and take no photos before it was whisked away.

Then at the death knell, on the Thursday before the poll, it released a few pages of numbers. No details, no clues as to how the numbers were arrived at.

Instead of allowing us to understand what our politicians had been promising us, our investment in the Parliamentary Budget Office allowed them to treat us like mugs.

After the election the full costings were published in accordance with a rule that requires the PBO to give a full accounting within 30 days. We did get to see them, but too late.

It can easily be fixed. And it's in the Coalition's interest to fix it so that Labor doesn't do next time what it did last time.

The rules should be changed to require the PBO to release a costing document as soon as the party that commissions it quotes it. Until then, it should be completely confidential. The PBO should also be able to continue to do confidential work for politicians right up until polling day, something it cannot do at the moment once the election is under way.

It's not only the Coalition that should listen. It's also Labor in Victoria. It is about to set up Victoria's Parliamentary Budget Office. It's too important to get wrong.

In The Age and Sydney Morning Herald