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




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

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




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



Thursday, November 12, 2015

For dopey career males like me.. When tax doesn't matter

Scott Morrison has got tax the wrong way around. A week ago he told bunch of bemused economists that income tax had "become the silent tax", as if that was a bad thing. He liked the line so much, he used it on Sky News a few days later, and then at a press conference at Parliament House. "With income tax, you pay it all year and often don't see what's getting taken out of your pocket," he told Sky. "You go to the automatic teller machine and you pull out your money and it doesn't say on there that you paid 19 cents in the dollar or 45 plus the Medicare levy, plus the deficit reduction levy." "This is a silent tax, it's a forgotten tax and this is something that is holding Australians back who want to actually work more," he told the press conference. Whoa. If income tax really was silent (and I don't think for a minute it is – it's on pay slips and group certificates) it wouldn't be holding anyone back from doing anything. It'd be a close to perfect tax, one that didn't change behaviour. It wouldn't be a drag on productivity because no-one would ease off work in order to avoid paying it. If only. As it happens, income tax is a bit like that for many men. They know what they are paying, but it doesn't stop them working. As Melbourne University's John Freebairn confided to delegates at the conference Morrison spoke at: "For dopey career males like me who are are no good at cooking and looking after children, our elasticity of labour supply is almost zero." Such men have nowhere else to go. High income tax rates aren't going to stop them working. "But women with children have lots other things they can do," Freebairn continued. "Their elasticity is pretty high. Setting labour tax rates high on dopey males like me has almost no distortion costs. But setting it high on smart young women thinking about starting families has huge costs." Women considering returning to work or putting in more hours after having children most certainly do factor in the tax they'll have to pay (they look it up) along with the extra childcare costs they will incur and the family tax benefits they will lose. The total, the so-called effective marginal tax rate, is often close to and in some cases surpasses 100 per cent of what they would earn, meaning work leaves them no better off. It most certainly does put them off working. It's a drag on the economy far bigger than than that faced by working men pushed into higher tax brackets that Morrison says they don't even know about. Removing distortions the tax system actually imposes ought to be at the heart of the changes we will make. Helpfully, the treasury ranks them in its tax discussion paper. The worst – by far – is stamp duty on real estate transactions. The treasury says it is three times as distorting as income tax. People really do stay put rather than move house in order to avoid paying it. The best tax, by far, is land tax. As Freebairn says, land can't go anywhere. Taxing it makes little difference to anything. The benefits from simply swapping stamp duty for land tax are immense, dwarfing the treasury's estimate of the benefits from swapping income tax for goods and services tax. As would be the benefits of more broadly taxing super-profits (despite the kerfuffle over the mining tax). Super profits flow from things that are stuck here. They derive from the minerals and petroleum that are stuck in the ground and from the monopoly position of businesses such as banks. People will continue to mine and operate banks even if extra tax cuts the profits to just a bit beyond ordinary, rather than super. If a super-profits tax was used to cut ordinary company tax, it'd be a double win. And if all income was taxed as income, income tax would distort very little. Right now fringe benefits and super contributions are taxed more lightly than wages. Yet they come from the same pot. As Freebairn says: "a dollar is a dollar is a dollar, certainly to the employer." Taxed evenly, people would no longer be encouraged to accept company cars and dine out in lieu of cash. And Morrison would rake in an extra $20 billion. There's a lot he can do to get Australia moving. The GST is the least of it. In The Age and Sydney Morning Herald

Sunday, November 01, 2015

If Lehman Brothers had been 'Lehman Sisters'... Harnessing the power of women

If Malcolm Turnbull wants to really unleash Australia's potential, he should hire Martin Parkinson.

Parkinson is the treasury secretary Abbott unfairly sacked against the wishes of his treasurer. Jetting in from a stint at Princeton University last week, Parkinson attended Turnbull's 61st birthday party in Sydney before returning to Canberra.

When he took over as treasury secretary in 2011, after a year away running the climate change department, he noticed that something was wrong.

"I realised that the nature of the policy discussions was quite masculine, whereas the nature of the policy discussions on issues – just as deeply technical and complex – in climate change were of a different style," he said later. "That's what made me start to think, what is going on here?"

What he did next is detailed in a riveting new book titled New Women, New Men, New Economy by corporate advisers Narelle Hooper and Rodin Genoff.

After seeking advice, Parkinson not only set targets for the proportion of women in the treasury senior executive (35 per cent by 2016, 40 per cent soon after) he set about changing what treasury valued to bring them about. When picking candidates for promotion or special projects, more weight was to be given to co-ordination and people skills and less to conceptual and analytic skills.

Because every enterprise needs both.

In example after example, Hooper and Genoff demonstrate that organisations that make good use of women perform better than those that don't.

When Credit Suisse examined the performance of 3000 companies in 40 markets over nine years it found that companies where women occupied half the top slots did 50 per cent better than those in which they didn't.

"It was such a consistent pattern that the researchers initially questioned their analysis and checked it again," Hooper and Genoff write. They were seeing what doctors call a dose effect. "The more women, the higher the performance".

McKinsey and Co reported this year that the 25 per cent of companies most likely to employ female executives did far better financially than the other 75 per cent. Those that were also racially diverse did better still.

Diversity matters because the more mindsets you can bring to creating something or solving a problem, the less likely it is you'll miss something out.

Google is renowned for being innovative, yet when it launched its YouTube app for iPhones in 2012, 5 to 10 per cent of the videos loaded upside down. Without knowing it, Google's mostly right-handed staff had designed an app for right-handers.

In other spheres, the consequences of excluding insights can be worse.

Neelie Kroes, the European Union commissioner for competition during the financial crisis, put it this way: "If Lehman Brothers had been 'Lehman Sisters', would the crisis have happened like it did?"

She said the answer was No. "Women managers are naturally more risk-averse and they think about the long term. Generally women have a better ear to listen and they are less likely to pretend to know everything themselves. They are team players with less ego."

This isn't to say that women are always better at making decisions than men. In some spheres women might be, in others women might not. The differences are nowhere near as important as the enormous and demonstrable benefits of using the skills of both.

The treasury's target goes beyond ensuring that 40 per cent of its executives are women (already 52 per cent of its staff are women). Its deputy secretary Nigel Ray told a senate hearing last month that the target was better described as 40-40-20: 40 per cent women, 40 per cent men, and 20 per cent of either.

To get it, the treasury runs unconscious bias training sessions and uses its formidable analytical skills to monitor gender splits in performance ratings, promotion and pay. It's adopted an "if not, why not" approach to requests for flexible work. The onus is now on the treasury supervisor to explain why a request for reduced hours or working from home can't be accommodated rather than on the worker to explain why it should be.

Smart companies like Rio and Qantas get it. Rio finds women use less fuel when they drive trucks. And the Irish-born openly gay Qantas chief Alan Joyce says if someone like him can run an Australian airline, anyone should be able to do anything.

Australia is going to have to use every resource it has if it's to make the most of the decades ahead. Parkinson gets it, and he is a first class economist and administrator to boot. Turnbull could do far worse than put him and his insights to work.

In The Age and Sydney Morning Herald