Thursday, May 26, 2016

Forget about black holes, they're not there

This time last election the Rudd Labor government blew itself up with a document purporting to find a $70 billion black hole in the Coalition's costings.

There wasn't. The error-ridden claim was rated "false" in the first Fairfax-Politifact fact check and set the tone for the rest of the campaign.

Rattled, Labor had jumped at shadows. Twenty billion of its total shouldn't have been there and much of the rest was guesswork based on figures the Coalition hadn't yet provided, or had provided but Labor chose not to believe.

To repurpose the words of Thursday's Australian Financial Review headline: Labor was left with over-egging all over its face.

There's never any point in claiming the other side has a black hole early in the campaign, and hasn't been for more than a decade.

Here's how it has worked since the start of the century: 1. Each side makes promises. 2. Each side publishes an estimate of the cost of each promise over the next four years. 3. At the end of the campaign, when all the promises are public, each side produces a tally of what it proposes to spend (which it has usually proudly trumpeted) and what it proposes to save (about which it has usually been more quiet ).

And guess what? The proposed savings always slightly exceed the proposed spending, leaving the budget slightly better off over four years.

That's not to say that things will turn out that way. Last time the Coalition's costings pointed to a slight $1.5 billion-a-year improvement in the budget deficit. Instead, the projected deficit blew out from $7 billion to $37 billion. That's partly because company tax revenues didn't recover in the way that was expected, and partly because the Coalition never got to implement many of its policies. One was axing Labor's low-income super contribution. It was held up in the Senate for two years and then withdrawn in this year's budget because it was heartless.

But the tally of costings released at the end of the campaign almost always does add up and always puts the budget slightly ahead. There's never a black hole.

Which makes Tuesday's attempt by the Coalition's to find a hole in Labor's program a triumph of hope over experience. Where was Joe Hockey when they needed him? Neither the Coalition's Finance spokesman Mathias Cormann nor its Treasury spokesmen Scott Morrison were in their jobs back in 2013 when Labor self-immolated over its claim of a $70 billion black hole. So they cooked up their own, worth $67 billion.

Much of it was fiction. A whopping $19.27 billion, a quarter of the total, was a misreading of Labor's foreign aid commitment. Labor has promised to boost spending by less than $1 billion over the next four years. Cormann and Morrison penciled in $19.27 billion on the basis of an ill-defined commitment to restore cuts Tanya Plibersek made a year ago in a Newcastle radio interview. On Sunday she released the actual policy, but Cormann and Morrison didn't bother to update their spreadsheet.

They claimed Labor would spend $6.73 billion lifting compulsory super contributions to 12 per cent of salary even though the specifics of the promise weren't announced; specifics such as how quickly Labor would phase in the increase and whether it believed it could afford to do it in the next four years at all. The "commitment" came from an interview Bill Shorten did on RN Drive in which he talked about what he would like to do "over time, over the long run".

The mistakes, and there were many more, say much about the helplessness of government staffers when they are without the support of the bureaucracy. They would be well advised to install a pop-up on their screens reading: "What would treasury do".

But even were there no mistakes, the exercise of looking for a black hole would be pointless. It isn't until the end of the campaign when all the policies and the means to fund them are on the table that a spendometer make sense. And by then it's too late. Last time the Coalition released its tally on the Thursday, 1½ days before the vote.

I can already tell you what Labor's tally will say. Like the Coalition's last time it will show a slight improvement in the budget's position. And like the Coalition's it'll get a tick from the Parliamentary Budget Office when it issues the required report 30 days after the vote. Politicians are good at costing their own promises, bad at costing those of the other side.

If the black hole hunters were serious about bringing us the truth, they would change the law to require the PBO to publish a running total of promises, and also require it to make public the methods by which it arrives at the costings politicians quote.

In the meantime it would be nice if they shut up at the debate between Treasurer and shadow treasurer on Friday. The purpose of what they are proposing is much more important than whether the other side thinks the numbers add up.

In The Age and Sydney Morning Herald

Tuesday, May 24, 2016

Negative gearing report linked to Morrison ally

Research intended for use in a bid to discredit Labor's negative gearing campaign was commissioned after a meeting between Scott Morrison and a close friend and senior figure in Australia's property industry.

But the draft report contains a series of factual errors and makes bold claims of a "resale price cliff" and "social dysfunction" that have alarmed some in the real estate industry to whom it has been circulated. it has been circulated to in the real estate industry.

An email obtained by Fairfax Media shows Greg Paramor, the managing director of property company Folkestone, discussed the need for a study critiqueing Labor's policy with Brian Haratsis, the executive chairman of advisory firm MacroPlan Dimasi. Mr Paramor, who is a friend of Mr Morrison and former president of the Australian Property Council, made the request after his encounter with the Treasurer.

"Greg recently had the opportunity to meet with The Hon. Scott Morrison to discuss negative gearing," the email notes. "As a result of that meeting, Greg agreed to provide a report to the Treasurer – he asked Brian Haratsis to undertake a study on the impact of the proposed negative gearing changes."

The email, sent from an unnamed person inside Mr Paramor's company, was sent to senior industry figures last week.

It also asks for feedback as "the Treasurer is keen to get the report next week".

Entitled "Short Memory: Negative Gearing and Capital Gains Tax: Foundations of the New Australian Housing Model," the attached draft report is also presented with an alternative title: "Shortened Memory".

It claims Labor's policy would remove 205,000 dwellings from the rental housing stock over a decade, adding to housing stress. Asked why removing dwellings from the rental stock would add to housing stress when the dwellings would still be available for use, Mr Haratsis said the phrase was meant to refer to low-income rental dwellings.

The draft says Labor's policy would both make housing less affordable and create a "resale price cliff" as large numbers of apartments were sold at a loss. Mr Haratsis explained the apparent contradiction by saying the market was bifurcated and that different parts of it would react differently.

Mr Paramor confirmed to Fairfax Media he had recently met with Mr Morrison over the negative gearing issue but denied he had been asked for the research by the Treasurer.

"It [negative gearing] was one of the things we discussed," he said, but he "didn't know" why the leaked email from a member of his staff said the Treasurer was keen to get the draft report this week.

Mr Morrison's office said the Treasurer met with "many people from the community and the real estate industry who are raising concerns about Labor's negative gearing proposal".

The Treasurer's office denied he had asked for a report to be prepared or that he or his office had received copies.

The report also says Australian governments would need to stump up an extra $3.3 billion per year for social housing and rent assistance should Labor's policy became law, more than the $3.2 billion per year it would raise.

The total economic cost of Labor's policy would be $5 billion per year, a reference Mr Haratsis said has since been removed from the document after acknowledging that it was arrived at by adding up payments without subtracting receipts.

"I am writing this as we go, and there are a number of references that you are looking at that won't be there in the final," he said. "I want to go back and recalculate the numbers."

The draft also details unquantified costs including "increased levels of social dysfunction on the urban fringe" and an "increased carbon footprint for low income renters as affordable private rental stock in established areas shifts to the urban fringe".

Prepared in haste with what appears to have been a speech recognition program, the draft at one point refers to Labor's promise to "grandfather" the entitlements of existing investors as a promise to create "ground furthered" properties.

It says the change would result in "market chaos" because Labor had not defined what would be regarded as a new property and exempt from the charges and what would be regarded as an existing property.

"For example, is a refurbished building for residential purposes a new building?" it asked. Mr Haratsis conceded that the definition might be clearer in the legislation.

The leaking of the report potentially blunts another avenue of attack on Labor's plan to restrict negative gearing to new properties only and halve the capital gains tax discount to 25 per cent, which has been the subject of a fierce government scare campaign.

Mr Haratsis insisted it was his decision to initiate the report after his meeting with Mr Paramor, that he would fund the work himself and that it was planned for release next week - at which point "I could maybe give it to the Treasurer".

The report critiques organisations such as the Grattan Institute, which engages in "Robin Hood economics" and chooses to "ostracise high income individuals" instead of focusing on tax efficiency.

In The Age and Sydney Morning Herald

Monday, May 23, 2016

Negative gearing. Attack a squid and it spurts out ink

Attack a squid and it squirts out ink. That could be why we are suddenly awash with reports on negative gearing, some of them commissioned by the property industry and others by shadowy figures who won't reveal their identities.

"One of the problems is that any time anyone writes something of 20 pages or so, everybody takes it seriously irrespective of the quality and irrespective of the source," says John Daley, chief executive of the Grattan Institute, who produces scholarly work critiqueing negative gearing from a disinterested point of view.

On his board sits Lucy Turnbull, who is married to the Prime Minister; Ian Watt, who ran the Department of Prime Minister and Cabinet under Tony Abbott; and BHP chief executive Andrew Mackenzie. They are anything but Labor stooges and, in fact, the institute has been critical of both sides on negative gearing.

Yet in the media its findings are regularly swamped by those of consultants such as BIS Shrapnel, whose undisclosed client got it to produce work finding Labor's policy would push an 70,000 households into rental stress, and now MacroPlan Dimasi, who finds it will stress even more.

It's easy to forget the consultants are being egged on by the real estate industry rather than the renters about whom they express so much concern.

Outside of the industry there's not much disagreement that Australia's near-unique combination of unfettered negative gearing and capital gains tax concessions causes problems.

In his final speech to Parliament, Abbott's treasurer Joe Hockey said negative gearing "should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property." Scott Morrison, the present Treasurer said there was a case for curbing its "excesses" and Malcolm Turnbull actively considered a plan to cap it, according to experts who his office sounded out for reaction.

The best guess is Labor's rather timid plan to wind back negative gearing would do little to prices and not much more to rents. But it's hard to see through the ink.

In The Age and Sydney Morning Herald

Sunday, May 22, 2016

When milk is cheaper than water, something's wrong

The next time a well-heeled retiree complains to me about the budget's superannuation changes and "retrospectivity"...

Let me tell you about real retrospectivity.

Until a few weeks ago Australia's 6000 or so dairy farmers were paid around $5.60 per kilo of milk solids. Each kilo cost roughly $5 to make, leaving them with a small profit. The milk itself isn't solid, but the solids in it are measured in order to make the payment.

Then on April 27 their biggest customer (for many, their only customer) the sharemarket-listed Murray Goulburn slashed what it was prepared to pay from $5.60 to somewhere between $4.75 and $5. It wanted them to sell to it at a loss.

And it got worse. Here's the (ungrammatical) way Murray Goulburn put it in a missive to farmers: "Due to the timing of the reduction of the milk price from $5.60 kgms to a range of $4.75 to $5 kgms, this wimay 2ll result in suppliers having being (sic) paid more for their milk over the whole year."

It was making the cut retrospective, decreeing that it had started 11 months ago at the start of the financial year, even though it had been paying the farmers at the higher rate right up until then.

It meant the farmers who supplied Murray Goulburn, and the farmers who supplied its rival Fonterra, which followed a week later, suddenly owed it huge licks of money: money they had already been paid and spent.

Estimates put the instantly created debt at $120,000 per Murray Goulburn farmer. Within hours their bank managers started ringing, sometimes at night, reassessing the future of their farms. Some walked off and sent their cows to the abattoirs. Others had not a clue how they would survive. Some of Murray Goulburn's drivers are reportedly too scared to enter farms, frightened of what they might find.

Meanwhile at our supermarkets, milk is cheaper than water. We pay less than we've paid in decades, and our Prime Minister doesn't want to talk about it.

Here's Malcolm Turnbull on Monday, in the only comment I can find. While in Perth making an announcement about shipbuilding, he was asked whether Murray Goulburn and its competitor were thugs.

"The Australian Competition and Consumer Commission is dealing with the issues," he replied.

"We're in the course of strengthening Section 46 to ensure large companies treat smaller ones and smaller suppliers more equitably, but I'm not going to go beyond that. This is something the ACCC has in hand. Can I just say this is such an exciting announcement for Australia's future, these are jobs, this is defence, this is the technology that builds our future and I'd look forward to some questions on that."

What's happening to milk is what happened to iron ore. In both cases Gina Rinehart was involved (she was buying into dairy farms just before the milk price collapsed) and in both cases there was talk of a never-ending boom fuelled by China. The world's biggest economic powerhouse was going to keep demanding ever-increasing quantities of iron to build new buildings and ever-increasing quantities of milk as its citizens became richer and adopted western diets.

But, as it had with iron ore, China cultivated other suppliers in order to flood the market. Murray Goulburn's problem was that it had hired an evangelist. Gary Helou turned what had been a farmers co-operative into a public company and told the farmers to put in even more cows because the price was heading to $6. As a symbol of his faith in the future he drove a Mercedes-Benz and spent the company's money on an industrial scale, parting with $6 million to break an agreement to move into a specially built headquarters because he preferred to work nearer the centre of Melbourne.

When the board faced reality and sacked him, he walked away with more than $10 million. Murray Goulburn is legally entitled to demand back the money it has paid farmers. It runs the risk of going broke if it doesn't. The farmers are talking about a milk levy, but it wouldn't help. Increasing the price of a commodity there's too much of usually sends sales down, not up. Some of the states are offering emergency assistance loans, which will push the farmers further into debt.

We are limited in what we can do. Buying milk and cheese on the scale needed to help wouldn't be possible. Boycotting Murray Goulburn products would make things even worse. Our politicians want to talk about anything else. Enjoy your breakfast.

In The Age and Sydney Morning Herald

Friday, May 20, 2016

Don't trust the budget numbers. Treasury says so

About the only thing the Treasury believes about this year's budget is the economic forecasts. It certainly doesn't believe the deficit forecasts.

Temporarily unmuzzled by its political masters, the Treasury has revealed that the forecasts are propped up by $18 billion of budget measures still on the books but not yet through the Senate. Many date back to 2014. They are propping up their third budget.

They are propped up too by "the established practice of assuming that, once the economy returns to potential, it remains growing at that rate".

The practice assumes away problems. "Should Australia experience a significant negative economic shock, the fiscal position would be expected to deteriorate rapidly and not be consistent with the projections," the Treasury warns.

The most bizarre and unlikely assumption is that Australia's tax receipts will never climb above 23.9 per cent of GDP. It's a government-imposed figure which is the average between the introduction of the GST and the global financial crisis. There's no particular reason for it, and it makes budgeting nonsensical. When Australia's tax receipts eventually climb back up to that level it will be impossible to improve the budget by tightening up on tax concessions. As soon as that's done, other taxes would need to be cut in order to stay below the ceiling. The budget could be improved by eating into pensions, but not by eating into super concessions.

The Treasury is also worried about Australia losing its triple-A credit rating, far more so than it was able to admit in the budget papers that were signed of by the Treasurer. "It is crucial for Australia to maintain its top credit rating to ensure the Commonwealth's borrowing costs, and those across the economy more generally, are kept as low as possible," it says.

If the government's rating was downgraded, the ratings of the banks would also fall. Private estimates say it would add about $200 million to banks' interest bills.

The Treasury left its economic forecasts the same in order to avoid implying false precision, and perhaps also to avoid distracting from its central message, that the projections in the budget it helped produced just three weeks ago are less than believable. 

In The Age and Sydney Morning Herald

Lift tax or cut spending - budget update

Treasury and finance have warned both sides of politics that big spending cuts, or higher taxes, will be essential if the budget is to be returned to surplus.

And in a blunt message to their political masters, departmental secretaries John Fraser and Jane Halton say it is "crucial for Australia to maintain its top credit rating".

The warnings are contained in the Pre-Election Economic and Fiscal Outlook, which is prepared by the two top financial authorities without input from ministers and released shortly after the start of the campaign.

Coming so soon after Scott Morrison's May 3 budget, the major forecasts for gross domestic product, unemployment, wage growth and the consumer price index are unchanged, despite a recent interest rate cut, a fall in the iron price and weak wages and labour force data.

"Without considerable effort to reduce spending growth, it will not be possible to run underlying cash surpluses, say in the order of 1 per cent of GDP, without tax receipts rising," it says.

The government has imposed a ceiling on tax revenue of 23.9 per cent of GDP.

The heads of treasury and finance say that even if the government manages to spending back down to its long-term average, tax receipts would still need to climb to around 24.2 per cent of GDP by 2026-27, well above the average of the past 30 years, and well above the government's target in order to achieve a surplus of 1 per cent of GDP."

It says the budget forecasts are propped up by $18 billion of unlegislated so-called zombie measures from this year's and earlier budgets that have yet to pass through the Senate. If they remain stalled, the five-year budget outcome will be $18 billion worse than the budget papers suggest.

The document quotes tax commissioner Chris Jordan as saying that one of the budget measures, the tax cut for Australians earning over $80,000, is unimplementable without leglislation. The government says the tax cut is means it will start on July 1 as promised however income will be deducted from pay packets under the existing schedule. If later the measure is approved by the Parliament the schedule could be amended, or extra could be returned to high income earners in their tax returns.

Finance Minister Mathias Cormann said that wasn't a problem given that people would not be putting in their income tax returns for the 2016-17 financial year until next year. It was how previous Labor governments had handled similar tax cuts.

Shadow treasurer Chris Bowen said Labor backed the tax cuts but that the government had "clearly not done its homework".

"The dysfunction of having a budget brought down and then three weeks later, less than three weeks later, the secretaries of the departments reporting that a key measure might not be delivered says it all. This is a budget which veered from thought bubble to thought bubble."

Mr Cormann called on Labor to explain how it would fund its promises. The release of the document left it "no more excuses"

The department echos a warning from ratings agency Moody's last month that Australia's AAA rating was be at risk.

"Commonwealth government debt levels are projected to reach recent historical highs, both on a gross and net basis," it says. "These debt levels are not an immediate concern given historically low interest rates and a growing economy, but should Australia experience a significant negative economic shock or increased interest rates or debt levels rise above current projections over the medium term, the debt burden will impose an increasingly significant cost on the fiscal and economic outlook."

"It is crucial for Australia to maintain its top credit rating to ensure the Commonwealth's borrowing costs, and those across the economy more generally, are kept as low as possible."

Mr Morrison and Mr Bowen will face off in a debate next Friday.

In The Age and Sydney Morning Herald

Thursday, May 19, 2016

What kind of govt funds private schools better than its own?

Something is seriously wrong when private school students get more in government support than the government's own students. Just as it is when private superannuants get more in government support than the government's own pensioners.

Yet it's happening, and neither side of politics wants to talk about it.

You can check out examples in your own suburb by scouring the MySchool website.

In Balwyn, the government-run Balwyn Primary gets $7214 of government funds per student, while down the road the privately run St Bede's Parish Primary gets $7974, plus what it charges parents.

In Preston, Newlands Primary gets $10,362 but Sacred Heart gets $11,488. In Spotswood, Spotswood Primary gets $8008 while St Margaret Mary's gets $11397. In Ballarat, Ballarat North Primary gets $8158 while St Patrick's gets $8499.

That's by no means a complete list, and the schools I have mentioned are roughly matched for size and socio-economic status.

Right now, on average, Catholic and independent private schools get less per student than government schools, but if present trends continue they'll overtake government schools in four years. An analysis by a former president of the NSW Secondary Principals Council, Chris Bonnor, and education researcher Bernie Shepherd entitled Private School, Public Cost finds that by 2020 the typical Catholic student will receive $850 more than the typical government student, and the typical independent student $100 more.



It'll lend an entirely different meaning to the word "independent" and bury for good the argument that parents who pay extra to send their children to private schools are doing other taxpayers a favour.

So dependent are private schools already that 95 per cent get more in government grants than they spend on teachers' salaries. They either raise very little extra from parents (typically the case for Catholic schools) or raise a lot more and use it for facilities that are the envy of their public school neighbours.

It began quietly. For more than 100 years until the mid-1960s Australia treated private schools the same way as did other developed countries. It didn't fund them. Then prime minister Menzies broke the ice with grants for science labs and prime minister Whitlam with general grants linked to the achievement of targets. Prime Minister Howard turbocharged the process with a new formula that took no account of the money private schools got from other sources and a new kind of grant – for the establishment of new private schools.

In the space of a decade Australia gained an extra 127 private schools, some very small, and all entitled to establishment grants and ongoing public support.

Julia Gillard's 2011 Gonski review found a mess. "When considered holistically, the current funding arrangements for schooling are unnecessarily complex, lack coherence and transparency, and involve a duplication of funding," it reported. It recommended instead a "colourblind" approach. Every student would be entitled to the same amount of money, adjusted for need.

In public schools it would all be provided by governments, state and federal. Private schools attended by students from poor socio-economic backgrounds would be told to find 10 per cent themselves. Private schools attended by students from good backgrounds would have to find 75 to 85 per cent.

The one big problem was that Gillard had decreed that "no school will lose a dollar". It made Gonski expensive.

But after initially causing mischief (his education spokesman Christopher Pyne labelled the idea "Conski") Tony Abbott promised a "unity ticket". He would honour Labor's agreements with the states for at least four years, even though they lasted for six years.

After his election it was quickly forgotten. The money was forthcoming, for four years only, but the requirement for the states to put in their share and divide it in accordance with Gonski formula was dropped.

Labor had made it hard for him, even if he had had the best will in the world. First it had insisted that no school be worse off, hugely inflating the Gonski's cost, and then, because it couldn't work out how to fund that cost, it pushed all but $3 billion of the $9.7 billion out into the final two years of the agreements, where it wouldn't show up in the budget's forward estimates.

Uncertain of what to do as those final two years approached, Malcolm Turnbull at first suggested the Commonwealth abandon schools funding, leaving it all to the states, which would raise their own income tax, except for private schools, which for some reason he would continue to fund. Then he threw them an extra bag of money to buy a few years more time.

As the election approaches, Labor is talking again about funding the full Gonski, the expensive one where private schools don't lose a dollar. I'd hoped for more, but then I've yet to meet a Labor MP whose children aren't in private schools.

The Coalition seems not to have a policy at all, at least not yet.

Unless one of the parties develops a policy that's actually thought through, we're likely to drift into the next election with private schools more heavily government-funded than government schools and no-one thinking its at all unusual.

In The Age and Sydney Morning Herald

Tuesday, May 17, 2016

How we took on big tobacco - and won

Previously sealed documents reveal the tobacco giant Philip Morris lost its case against Australia over plain packaging because the international tribunal considered it an "abuse of rights".

Philip Morris sued Australia under the provisions of an obscure Hong Kong Australia investment treaty in 2012 after British American Tobacco and Japan Tobacco lost a challenge to the plain packaging legislation in the High Court.

As had its competitors in the failed High Court challenge, the manufacturer of Marlboro and Longbeach cigarettes argued Australia had confiscated its trade marks, turning from "a manufacturer of branded products to a manufacturer of commoditised products".

Philip Morris wanted the tribunal to order Australia to withdraw the law or to award damages of at least $US4.2 billion plus compound interest at the Australian bank cash management rate dating back to the to the law's introduction.

Its use of an outside tribunal rather than an Australian court to sue the government was unusual, in that it was making use of a provision available to foreign companies under trade agreements but denied to Australian companies.

The government spent more than $50 million defending the case, assembling a team including two Queens Counsels and two Senior Counsels and ferrying to Singapore witnesses including the former treasurer Wayne Swan and former judge Roger Gyles QC.

The 186-page judgement, unsealed on Tuesday, shows the tribunal rejected the claim at the first hurdle, finding Philip Morris had moved its Australian and Asian headquarters to Hong Kong for the express purpose of making the claim.

"The tribunal cannot but conclude that the initiation of this arbitration constitutes an abuse of rights, as the corporate restructuring by which the claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining treaty protection," the judgement finds.

A spokesman for assistant health minister Fiona Nash said she welcomed the decision which validated the government's decision to take on Philip Morris.

Originally rare, the use of so-called investor-state dispute settlement provisions in international treaties has ballooned in the past decade. Australia's Productivity Commission counted 42 in 2014.

Productivity Commission count of ISDS cases

Investor-state dispute settlement provisions have been included in Australia's recently-signed treaties with Korea and China and the 12-nation Trans-Pacific Partnership which has been signed but not yet ratified by the Australian parliament.

La Trobe University public health academic Deborah Gleeson said the victory would add to momentum for the spread of plain packaging legislation around the world, but she said it didn't mean that investor-state dispute settlement provisions weren't a threat to public health.

"If we ratify the Trans-Pacific Partnership transnational corporations based in the United States will gain an avenue to sue Australia. There's an exclusion for tobacco control measures, but no solid exclusion for other health measures."

Australia continues to face challenges to its plain packaging laws in the World Trade Organisation from tobacco-growing nations including Cuba, the Dominican Republic, Honduras and Indonesia. The Ukraine withdrew its challenge last year.

In The Age and Sydney Morning Herald

Monday, May 09, 2016

Negative gearing cuts 'a good thing' - RBA

The Reserve Bank has expressed concern about negative gearing and the tax concession for capital gains, saying any change that discouraged negative gearing might be "a good thing" from a financial stability perspective.

Labor has come under sustained attack from the Coalition for promising sweeping changes to Australia's negative gearing and capital gains tax regime to save $32 billion over 10 years.

But an internal bank memo released under freedom of information laws runs counter to Prime Minister Malcolm Turnbull's warnings that Labor's proposal to ban negative gearing except for new properties would deliver "a massive shock" to the property market.

Mr Turnbull repeated those warnings on day one of the campaign, saying that Labor's policy would hold back the Australian economy.

The Reserve Bank memo says negative gearing and capital gains tax rules affect property more significantly is more impacted than other investments by the negative gearing and capital gains tax rules "as it can be purchased with higher leverage than shares".

A move against negative gearing, the memo says, would trigger a large-scale sale of negatively-geared properties "only if the changes were not grandfathered".

Labor's policy plan would grandfather its changes, meaning properties that are negatively geared would remain so until they were sold, ensuring against preventing a rush of sales as negative gearers tried to offload homes.

The memo is a "Q&A" brief dated December 2014, meaning it was written before Labor announced its policy to wind back negative gearing and before the government pledged to continue it.


Extract from RBA memo


Since the December 2014 memo, Sydney house prices have climbed a further 11 per cent. Loans to investors account for 46 per cent of all money lent for housing.

The Coalition has positioned itself as the protector of Australia's existing negative gearing and capital gains tax regime, which it argues is largely used by average "mum and dad" wage earners, and signalled its willingness to launch a scare campaign designed over the issue.

But Labor argues its proposed changes will improve housing affordability, particularly for first homebuyers, while also improving the budget bottom line.

In Brisbane on Monday, Mr Turnbull stepped up pressure over Labor's capital gains tax policy as he described it as an attack on all investments and said it would make Australians invest and employ less.

"Bill Shorten wants to have less investment in Australia, can you believe that? He wants Australians to invest less and if they invest less, they'll employ less," he said.

"That's why he is putting up the tax on capital gains. That's why he is seeking to ban negative gearing, standing in the road of entrepreneurship."

Last week, Mr Shorten said he could not understand why the Turnbull government "was happy to give a tax cut to a millionaire, happy to give a tax cut to a billion-dollar company, happy to die in the ditch over the ability of property speculators to get paid by the taxpayer to subsidise their property investment. But there is no plan for housing affordability."

In Cairns on Monday, Mr Shorten hammered the government for wanting to hand business a $50 billion tax cut over 10 years - a key promise in the budget it released last Tuesday - and argued that more money should instead be spent on education funding.

The Opposition Leader was on the back foot, however, after his candidate in the seat of Melbourne contradicted party policy on turning back asylum-seeker boats and offshore detention, insisting five times that the ALP's policy was clear and would not change.

The Labor policy would restrict future negative gearing to investment income, meaning new investors would still be able to write off losses on properties and other investments, but only against investment income rather than wages.

Investors in new properties would be exempt and the discount on capital gains tax would be cut from 50 to 25 per cent, but only for new investors.

In a boost for the ALP, the bank says in the memo it isn't concerned about negative gearing in its own right, but about its interaction with the capital gains tax discount introduced by the Howard government in 1999.

The change meant "only half of any capital gains are taxed at your marginal rate, however the loss on the investment initially is 100 per cent tax deductible".

The lopsided arrangement "may encourage chasing of capital gains" and "investors bidding up housing prices".

The memo says negative gearers are more of a threat to the stability of the financial system than owner-occupiers because they are more likely to have interest-only loans and so won't have "as much of an equity buffer in the situation where prices fall".

The bank has made its views known previously in submissions to the financial system inquiry and House of Representatives home ownership inquiry, although not in such blunt terms. Q&A briefs are prepared by senior officers to arm officials such as Governor Glenn Stevens with answers to questions likely to be asked in parliamentary hearings or public functions.

A spokesman for Treasurer Scott Morrison said the note cited was a briefing memo, not an official RBA document.

"It was prepared in late 2014, well before the Australian Prudential Regulation Authority instituted measures that slowed housing credit growth considerably," the spokesman said.

"Nowhere has the Reserve Bank endorsed Labor's policy and Bill Shorten and other opponents of mum and dad investors who use negative gearing should be careful not to verbal the RBA."

Touring the inner-Sydney electorate of Grayndler on Monday Greens leader Richard Di Natale said he would go further than Labor and abolish the capital gains tax discount altogether.

In The Age and Sydney Morning Herald

Thursday, May 05, 2016

The more I look at Turnbull's budget, the more I like it

Malcolm Turnbull and Scott Morrison seem to have been guided by evidence. Tony Abbott and Joe Hockey cut back access to unemployment benefits and brought in work for the dole. Turnbull and Morrison have introduced "real work for the dole" and boosted payments to job seekers training for work.

Abbott and Hockey insisted that the wealthiest 1 per cent of Australians had the right to keep extraordinarily generous superannuation tax concessions that couldn't possibly be needed to encourage them to save, and that any attempt to wind them back would be retrospective. Turnbull and Morrison sought advice from experts and concluded that the very wealthy don't need assistance to save, and that there's nothing retrospective about imposing a tax rate of greater than zero on their returns from here on.

"You get to keep all your own money. It's your money, you earned it, good for you, congratulations," Morrison told the National Press Club in Canberra on Wednesday. "If you have more than $1.6 million in a superannuation account, you are in the top 1 per cent and you've worked hard to get there, that's fabulous.

"But $1.6 million is the limit, if you like, like a means test, on where you can access tax-free earnings in your retirement. From July 1 next year, there will be no more $5 million retirement income accounts receiving tax-free status. But it's their money, they earned it, they can put it wherever they like."

Turnbull and Morrison have taken ideas from the Henry tax review, the Murray committee of inquiry into the Australian tax system, the Grattan Institute, the Committee for Economic Development of Australia and just about every other inquiry into superannuation. And tested them.

Insiders report that Turnbull and Morrison's expenditure review process was different from Abbott and Hockey's. Whereas Abbott and Hockey latched on to ideas and went for them, the new team asked questions and tested answers.

For super the question was "what is its purpose?" The next question was "how do we most cheaply ensure that it does that and no more?" When an answer came back, it was rigorously tested and sent away for refinement in a process that seemed to go on forever. There weren't >many more Expenditure Review Committee meetings than for Abbott and Hockey's budgets, but they were conducted differently. It wasn't so much about "how can we pursue our agenda?" or "what can we get away with?" as "what's the best way of achieving these policy goals?" It made the process more difficult, and harder on the officials endlessly remodelling scenarios.

Like Labor, the government will cut the threshold at which high earners have to pay the Higher Income Superannuation Charge. It'll slip from $300,000 to $250,000. Like Labor, it'll tax the earnings of retirees with accounts worth more than $1.5 million ($1.6 million in its case). It's an incredibly light tax (15 per cent) and it'll hit the earnings of only part of the accounts of the top 1 per cent of retirees.

But it has established an important principle. As the Treasurer told the Press Club, "there's got to be a limit". The days of Peter Costello's pledge of tax-free earnings for all retirees are over.

The government has also gone further than Labor. It has imposed a $25,000 limit on the amount that anyone can have their employer pay into super each year, something that hurt only the top 3 per cent of earners, enjoying a salary more than large enough to enable them to save outside of super. And it will impose a very tight lifetime cap of $500,000 on the amounts that anyone can contribute to super over and above what their employers pay in.

Until now the cap has been $180,000 per year. That's not bad if you are excessively wealthy and want to lock away obscene amounts which will be taxed at a mere 15 per cent a year or zero in retirement. Labor had no plan to wind it back. The Coalition, in particular Scott Morrison, listened to the evidence and went where it led.

On work for the dole, it was the Treasurer and the Employment Minister Michaelia Cash who led the investigation: if the aim was to get young people into jobs, what was the most effective way of achieving it?

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The decision to cut the company tax rate came out of the same sort of process: if the aim was to boost economic growth, what would be the most certain way to achieve it?

Treasury modelling came up with a cut in company tax. Outside modellers, led by Janine Dixon and Jason Nassios of Victoria University, came up with new work which concluded that a cut in company tax would indeed boost the size of the economy, but it would shrink national income by sending money overseas.

The Treasury then responded, came up with its own estimates of the effect on national income (in the very long term it would boost it) and convinced the Expenditure Review Committee.

The point here isn't whether the Treasury or Victoria University was right. It's that the government sought and then re-sought evidence. Dixon says she is thrilled that the Treasury addressed her findings, even if it came to a different conclusion.

On international tax avoidance the committee shamelessly adopted the British government's plan, announced just weeks ago in its budget. It went further by giving Australia's poacher turned gamekeeper, Tax Commissioner Chris Jordan, an extra 1000 staff. They will be bright, expensive people with degrees in economics and data analytics. As with the commissioner, many will be poached from within the heart of the tax avoidance industry. It's legitimate to question how much avoided tax the measures will bring back home, but it's pretty clear that the government sought and adopted best-practice.

It's something I've seen rarely in all my time covering the Howard, Rudd, Gillard and Abbott budgets.

In The Age and Sydney Morning Herald

Tuesday, May 03, 2016

This budget calls for an act of faith

In the words of pop music legend George Michael: "You've got to have faith."

Both the Treasury and the Reserve Bank are more gloomy than they were a year ago. They say the economy will grow by only 2.5 per cent in the coming financial year, down from 3.25 expected last budget. Over four years, the budget outlook will be $22 billion worse.

So what are Scott Morrison and Malcolm Turnbull going to do? Scarcely anything when their measures are taken together. This financial year their revenue decisions (mainly tax cuts) have swelled the deficit by $1.7 billion. Their spending decisions have swelled it by a further $1.4 billion. That's $3.1 billion added to the deficit as a result of decisions made in the six months since the December budget update.

Over time they say the build-up of measures such as attacks >on tax avoidance and tougher rules for superannuation will move things in the other direction. Over the four years to 2019-20 they say their measures will have shrunk the deficit by $1.7 billion, which is the equivalent of nothing much in the context of $44 billion of deficits.

But we've got to have faith. The new "Ten Year Enterprise plan" of immediate tax cuts for small businesses, followed by cuts for big businesses that eventually deliver a uniform tax rate of 25 per cent, along with very modest cuts for high earners will "boost new investment, create and support jobs and increase real wages".

It's the sort of thing an advertising agency would say. It's exactly what the advertising agency that prepared a series of leaked scripts did say: the budget will promote jobs and growth, and there's Treasury modelling to prove it.

The budget papers say the modelling finds the measures will "permanently increase the size of the economy by just over one 1 per cent in the long term". It doesn't sound like much, and it's not. Treasury defines the long-term as two decades. That's a boost to the economy of less than 0.05 per cent per a year, if the modelling is credible.

It's hard to tell. Bizarrely, the government directed Treasury not to release the modelling during the budget lock-up where it could be examined along with the other budget documents. It'll be released instead on the Treasury website later Tuesday night, meaning it'll be examined the day after the budget rather than on budget day itself.

Most of the boost is said to come from the cut in the standard company tax rate from 30 to 25 per cent. When the Centre for Policy Studies at Victoria University modelled the effects earlier this year, it found that while it would boost economic growth, it would cut national income, a more important measure. Many Australian companies don't really pay corporate tax anyway. Their shareholders get back the tax they've paid through dividend imputation.

The main beneficiaries of the company tax cut will be overseas-owned companies, and not all of them will increase their investment as a result. Some will simply pocket the gift. Those that are already here will get a reward for something they were going to do anyway. The government will have to make up the lost tax by collecting more from other people, or so the argument goes.

It'll be economic models at 50 paces. There are reasons for thinking we won't have faith. Two years ago, Morrison's predecessor claimed victory at the G20 leaders meeting in Brisbane when he got his counterparts to agree to measures that would boost the global economy by 2 per cent. Since then global growth has shrunk. Modelling is inherently unreliable. It doesn't inspire faith.

Kevin Rudd and Wayne Swan learnt two big lessons from their failed attempt to sell the mining tax in 2010. One was that modelling isn't enough. The other was that success depends on the persuasiveness of the seller. Neither Swan nor Morrison is particularly persuasive.

Morrison now presides over the highest budget deficit of any Coalition treasurer, both in absolute terms ($37.1 billion over the year ahead) and as a proportion of GDP. 

It's happening because his government is cautious, both because of the upcoming election and because of the still fragile state of the Australian economy.

To their enormous credit, they haven't been cautious about superannuation. They're going to raise an extra $2.6 billion from Australia's highest earners (the top 4 per cent), give some of it back in super payments to the lowest earners (the bottom 28 per cent) and still come out in front. While they've only cut the threshold for paying the 30 per cent contributions tax from $300,000 to $250,000, the change will hit many more people than is widely realised.

It'll cut in not at $250,000 as it appears to, but at a figure of $250,000 calculated by lumping in salary with super contributions (typically 9.5 per cent of salary) and negating tax deductions including negative gearing. Yes, the Coalition supports negative gearing, but not when it is used by high earners to escape paying its extended super surtax. Some will be asking why.

Morrison and Turnbull have delivered something of a Labor budget. There's a Labor-style tax on tobacco, there's a (small) move against negative gearing, and an attack on super tax concessions for the rich. The biggest spending initiatives are measures that unwind parts of earlier Joe Hockey budgets – those that cut back projected payments to the states for hospitals and schools and restored funding to the Clean Energy Finance Corporate and the Australian Renewable Energy Authority.

If it all turns out like they think, we'll be grateful, but for now we'll need faith that the iron ore price will stay at or around $US55 a tonne for years to come. A few months ago it clipped $US38. We'll need faith that this time multinational technology giants will start paying tax, and we'll need faith that the Reserve Bank will keep cutting rates. The budget's factored that in.

In The Age and Sydney Morning Herald

How to read the budget papers

So, you've been handed your pile of budget documents. What do you read first?

That's up to you, but I always read the budget speech first. It is thin. It gives me an idea of what the Treasurer wants me to think are the main points.

Then there are two summary documents: Budget at a Glance and Budget Overview.

They are A4-sized, rather than A5. They also sum up what the government wants to point to.

But Budget Paper 1 (about as thick as a thumb) contains a lot of what you will need.

In it are..

This is more of the same really, but gives a very clear guide to the main measures, presented less politically.

It also includes projections for the budget deficit or surplus.

These four year projections (in the case below from 2013-14 to 2016-17) are called the forward estimates. You'll often hear the term "over the forward estimates". It means "over the next four financial years".

Note that the "underlying cash balance" is the one to look at. It's the language people speak these days. Don't bother with the fiscal balance:The first two years are "estimates". The last two years are semi-automatic "projections", usually made by plugging in standard economic variables rather than forecasting them.Statement 1 also contains the major economic forecasts, which are only for two years:

This is where all the economics are set out, and the reasons for budget measures spelled out. It is very interesting, if you're into that sort of thing.

The best table of all, my favourite in the whole budget is Table 1, which has all the economic forecasts together in one place:

This explains why the surplus and deficit have come to be forecast as they are. Former Department of Finance deputy secretary Stephen Bartos says "if you only read one table, make it the reconciliation table".The reconciliation table shows you the contributions to changes from the previous budget and MYEFO of

  • policy decisions, and
  • changes in economic circumstances

In other words,

  • How much the government decisions have improved or worsened things, and
  • How much the economy has improved or worsened things.

Another table tells you what is happening to net debt and the more important concept of net worth:Statement 3 also includes the deficit/surplus outlook, probably for a period of ten years, and the net debt outlook (at least graphed), for an even longer period.

It outlines the thinking behind the projections.

The Appendix headed "Sensitivity of Budget estimates to economic developments" is also very useful. it deals with questions like how likely is it the projections will be blown off course, and in which direction does the danger lie?(This is also examined with a longer term focus in a separate budget paper toward the end of Statement 1 entitled: Statement of Risks)

This outlines what's happening with taxes. There's even a (small) nod to tax expenditures at the end.

This is the final statement in Budget Paper 1 and is wonderful.

It confirms that government receipts (mainly tax) reached 25.2 per cent of GDP in Howard's last year in office. By Gillard's last year they had shrunk to 23 per cent.

The details are in a Budget Paper whose number keeps changing. Last year it was called Budget Paper 2.It is headed Budget Measures. But it includes everything, large and small. So the best bet is to find the key announcements of interest in the overview, and then to look up the details in Budget Measures, possibly by searching the pdf.

The Budget Paper entitled Agency Resourcing has the answer (Budget Paper 4 last year) as do the Portfolio Budget StatementsAgencies such as the ABC get money from more than one source (Communications and DFAT). This paper brings them together.Also helpful is a whole series of separate yellow documents, the Portfolio Budget Statements. They are not handed out at the front of the lockup but are in boxes in one of the corridors and available on memory sticks and for download. Get one for the portfolio you cover:

The Budget Paper 1 statement entitled Expenses and Net Capital Investment attempts to answer that question, looking at spending by function rather than department of agency. It shows how much is spent on defence, education, or broadcasting and so on whatever the agency. Useful for broad-brush stuff.You can practice here:

Good luck!

In The Age and Sydney Morning Herald

Monday, May 02, 2016

$80,000 is anything but average Mr Morrison


If Scott Morrison thinks that by offering tax cuts to Australians earning more than $80,000 he is helping average workers, he doesn't know what average workers earn.

Asked on Channel Nine about reports his budget will deliver election-eve tax cuts to Australians earning more than $80,000, he said he was going to clear the way for small and medium-sized businesses and "people out there earning average wages".

The average wage is $60,000. Most Australians don't get close to $80,000 and only around one quarter of them earn more than it. Put another way, the overwhelming majority of Australians, including those on average wages, won't be getting his reported tax cuts.

There's a logic to cutting tax for the highest-earning 25 per cent of Australians and not for the other 75 per cent. It's that $80,000 is where the second highest tax rate comes in. Morrison says over the next two years 300,000 Australians are going to move from just below $80,000 to just above it. While it won't make much difference to their total tax bill, because it will more highly tax only the few dollars they earn over $80,000, it will make them feel as if they are more highly taxed. And $80,000 is roughly the average wage for someone working full-time.

By misrepresenting a full-time figure as an average figure he spawned a myth: "that next year the average wage earner will be taxed up to 37 cents in the dollar on what they earn".

The upside, for him, is that the problem doesn't cost that much to fix; because it's nothing like the problem suggested. Relatively few people are at risk of earning more than $80,000 and relatively little of their income is above $80,000.

Lifting the second-highest threshold from $80,000 to $85,000 would cost just $600 million. Most of it would go to very high earners. Lifting the threshold further to $90,000 would cost $1.1 billion. The cost of lifting thresholds by that much at the lower end of the scale would be enormous, which is one of the reasons Morrison's predecessor Peter Costello rarely tried it.

Asked at Sunday's press conference whether ordinary Australians earning well below $80,000 would be getting tax cuts, Morrison said the answer would be revealed on budget night. It'll have to be no. There are too many of them.

In The Age and Sydney Morning Herald